CHARLOTTE’S WEB HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

TABLE OF CONTENTS

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during Charlotte’s Web Holdings, Inc.’s (the “Company”) most recently completed fiscal year, the Company qualifies as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, which the Company refers to as the “U.S. Securities Act,” as modified by the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act.” As an emerging growth company, the Company may take advantage of specified reduced disclosure and other exemptions from requirements that are otherwise applicable to public companies that are not emerging growth companies. These provisions include:

The Company may take advantage of these exemptions for up to five years or such earlier time that the Company is no longer an emerging growth company. The Company would cease to be an emerging growth company if it has more than $1.07 billion in annual revenues as of the end of a fiscal year, if the Company is deemed to be a large-accelerated filer under the rules of the Securities and Exchange Commission (the “SEC”) or if the Company issues more than $1.0 billion of non-convertible debt over a three-year period.

You should rely only on the information contained in this document or to which the Company has referred you. The Company has not authorized anyone to provide you with information that is different. You should assume that the information contained in this document is accurate as of the date of this Amendment No. 1 to this Registration Statement on Form 10 (“Amendment No. 1 to the Registration Statement”) only.

Once this Registration Statement becomes effective (the “Effective Date”), the Company will become subject to the reporting requirements of Section 13(a) under Securities Exchange Act of 1934, as amended (the “Exchange Act”) and will be required to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and the Company will be required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(b) of the Exchange Act.

Smaller Reporting Company status

The Company is a “smaller reporting company” as defined in 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 stock 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 30^th.

Use of Names

In this Amendment No. 1 to Charlotte’s Web Holdings Inc.’s Registration Statement, unless the context otherwise requires, the terms “we,” “us,” “our,” “Company” or “Charlotte’s Web” refer to Charlotte’s Web Holdings, Inc. together with its wholly-owned subsidiaries.

Currency

Unless otherwise indicated, all references to “$” or “US$” in this Amendment No. 1 to the Registration Statement refer to United States dollars, and all references to “C$” refer to Canadian dollars.

TradeMarks, Trade Names and Service Marks

This Amendment No. 1 to the Registration Statement contains certain trademarks which are protected under applicable intellectual property laws and are the Company’s property. Solely for convenience, the Company’s trademarks and trade names referred to in this Amendment No. 1 to the Registration Statement may appear without the ® or ™ symbol, but such references are not intended to indicate, in any way, that the Company will not assert, to the fullest extent under applicable law, its rights to these trademarks and trade names.

Disclosure Regarding Forward-Looking Statements

This Amendment No. 1 to the Registration Statement contains statements that the Company believes 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 of the Company. All statements other than statements of historical fact included in this Amendment No. 1 to the Registration Statement regarding the prospects of the Company’s 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 under the heading “Risk Factors Summary” and in “Risk Factors” in this Amendment No. 1 to the Registration Statement.

Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Amendment No. 1 to the Registration Statement, 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 Amendment No. 1 to the Registration Statement.

Industry and Market Data

This Amendment No. 1 to the Company’s Registration Statement contains data concerning the Company’s industry and the markets in which it operates that is based on publicly available third-party sources as well as industry and forecast data prepared by Company management on the basis of its knowledge of the hemp and CBD industries, gained through its experience and participation in the industry. Company management believes that this data is accurate and that its estimates and assumptions are reasonable, but there can be no assurance as to the accuracy or completeness of this data. The Company has not independently verified any of the data from third-party sources referred to in this Amendment No. 1 to the Registration Statement or analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying economic assumptions relied upon or referred to by such sources.  None of these third-party sources has provided any form of consultation, advice or counsel regarding any aspect of, or is in any way whatsoever associated with this Amendment No. 1 to the Registration Statement. Such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Disclosure Regarding Forward-Looking Statements” and “Risk Factors” in this Amendment No. 1 to the Registration Statement.

Risk Factors Summary

Investing in the Company’s securities involves risks. You should carefully consider the risks described in “Risk Factors” beginning on page 49 before deciding to invest in the Company’s securities. If any of these risks actually occurs, the Company’s business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of the Company’s securities would likely decline, and you may lose all or part of your investment. Set forth below is a summary of some of the principal risks the Company faces:

Risks Relating to the Regulatory Environment

Risks Relating to the Company’s Business and Industry

Risks Relating to the Company’s Securities

General Risk Factors

Glossary of Key Terms and Definitions

In this Amendment No. 1 to the Registration Statement, unless otherwise indicated or the context otherwise requires, the following terms shall have the indicated meanings. Words importing the singular include the plural and vice versa and words importing any gender include all genders. A reference to an agreement means the agreement as it may be amended, supplemented or restated from time to time.

“2014 Farm Bill” means section 7606 of the Agricultural Act of 2014.

“2018 Farm Bill” means the Agricultural Improvement Act of 2018.

“Abacus” means Abacus Products, Inc., a wholly-owned subsidiary of Charlotte’s Web Holdings, Inc. that was continued under the laws of British Columbia.

“Abacus Shares” has the meaning ascribed thereto under the heading “Business – Corporate Structure – Intercorporate Relationships.”

“Abacus Subsidiaries” means the wholly-owned subsidiaries of Abacus being Abacus Health Products, Inc., Abacus Wellness, Inc. and CBD Pharmaceuticals Ltd.

“Abacus U.S.” means Abacus Health Products, Inc.

“Aidance” means Aidance Scientific, Inc.

“Arrangement” has the meaning ascribed thereto under the heading “Business – Corporate Structure – Intercorporate Relationships.”

“Arrangement Agreement” has the meaning ascribed thereto under the heading “Business – Corporate Structure – Intercorporate Relationships.”

“Articles” means the terms and provisions of the Company’s notice of articles and articles, as amended.

“associate” when used to indicate a relationship with a person or company, has the meaning set forth in the Securities Act (British Columbia), RSBC 1996, c 418, as amended, including the regulations promulgated thereunder.

“BCBCA” means the Business Corporations Act (British Columbia), S.B.C. 2002, c. 57, as amended, including the regulations promulgated thereunder.

“Board of Directors” or “Board” means the board of directors of the Company, as constituted from time to time, including, where applicable, any committee thereof.

“Canadian Securities Laws” means the securities legislation and regulations, and the instruments, policies, rules, orders, codes, notices and interpretation notes, of the securities regulatory authorities of any applicable jurisdiction, or jurisdictions collectively, in Canada, as well as applicable stock exchanges (including the TSX).

“Cannabis” means Cannabis sativa L.

“Cannabis Act” means the Cannabis Act (Canada).

“CBCA” Colorado Business Corporation Act.

“CBD” means cannabidiol, a phytocannabinoid derived from the Cannabis plant.

“CBN” means cannabinol, a phytocannabinoid derived from the Cannabis plant.

“CDA” means the Colorado Department of Agriculture.

“CDPHE” means the Colorado Department of Public Health and Environment.

“Certified B Corp” means an entity certified by B Lab, an independent nonprofit organization, as meeting rigorous standards of social and environmental performance, accountability and transparency. This does not refer to a particular form of legal entity.

“cGMP” means current good manufacturing practices.

The “Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

“Common Shares” means the common shares without par value in the capital of the Company.

“Company” or “Charlotte’s Web” means Charlotte’s Web Holdings, Inc. and its subsidiaries, Charlotte’s Web, Inc., Abacus Products, Inc., Abacus Health Products, Inc., Abacus Wellness, Inc. and CBD Pharmaceuticals, Ltd.

“Compensation Committee” means the compensation committee of the Board.

“CPG” means consumer packaged goods.

“CSA” means the U.S. Controlled Substances Act, 21 USC § 801 et. seq.

“CSE” means the Canadian Securities Exchange.

“CW” means Charlotte’s Web, Inc., a wholly-owned subsidiary of Charlotte’s Web Holdings, Inc. that was re-domiciled in and amalgamated under the laws of Delaware.

“CW Labs” means the Company’s Charlotte’s Web Labs.

“DEA” means the U.S. Drug Enforcement Agency.

“DEA IFR” means the interim final rule issued August 21, 2020, concerning the USDA IFR implementation of the 2018 Farm Bill, where the DEA IFR purports to clarify that material that exceeds 0.3% delta-9 THC remains controlled in Schedule I of the CSA.

“DSHEA” means the Dietary Supplement Health and Education Act of 1994.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Exchange Ratio” has the meaning ascribed thereto under the heading “General Development of the Business — History and Development of the Company; Three-Year History — Financial year ended December 31, 2020.”

“FDA” means the U.S. Food and Drug Administration.

“FD&C Act” means the Food, Drug, and Cosmetic Act, Title 21, Chapter 9, United States Code.

“FinCEN” means the Financial Crimes Enforcement Network.

“FinCEN Memo” has the meaning ascribed thereto under the heading “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.”

“FPI Condition” has the meaning ascribed thereto under the heading “Description of the Registrant’s Securities to be Registered — Conversion Conditions.”

“FSHE” means full spectrum hemp extracts containing naturally occurring CBD.

“FTC” means the Federal Trade Commission.

“GRAS” means Generally Recognized as Safe.

“hemp” means any part of the Cannabis plant having no more than three-tenths of one percent (0.3%) concentration of THC on a dry-weight basis.

“Hemp” means the plant Cannabis sativa L. 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.

“IND” means Investigative New Drug Application.

“IND Preclusion” refers to 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.

“IPO” means the Company’s initial public offering that closed on August 30, 2018.

“Legacy Option Plan” means the CWB Holdings, Inc. 2015 Stock Option Plan.

“LOFT” has the meaning ascribed thereto under the heading “Business – General Development of the Business – History and Development of the Company; Three-Year History - Financial year ended December 31, 2019.”

“LTIP” means the amended and restated Charlotte’s Web Holdings, Inc. 2018 Long-Term Incentive Plan.

“Marijuana” or “marihuana” means all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. The terms “marijuana” or “marihuana” do not include Hemp or hemp, or the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.

“NDI” means New Dietary Ingredient.

“NI 51-102” means National Instrument 51-102 – Continuous Disclosure Obligations of the Canadian Securities Administrators.

“NI 52-110” means National Instrument 52-110 – Audit Committees of the Canadian Securities Administrators.

“ODA” has the meaning ascribed thereto under the heading “Regulatory Framework — United States Regulatory Matters — State Regulation of Hemp — Oregon.”

“Odd Lot” has the meaning ascribed thereto under Item 11 - “Description of the Registrant’s Securities to be Registered— Take-Over Bid Protection.”

“PVS” or “Proportionate Voting Shares” means proportionate voting shares in the capital of the Company.

“R&D” means research and development.

“Regulation S” means Regulation S as defined under the U.S. Securities Act.

“RSAs” means restricted stock awards of the Company.

“SEC” means the Securities and Exchange Commission.

“SEDAR” means the System for Electronic Document Analysis and Retrieval.

“Shareholders” means the holders of Shares.

“Shares” means Common Shares and PVSs.

“Stanley Brothers” means, collectively, Josh Stanley, Joel Stanley, Jesse Stanley, Jon Stanley, Jordan Stanley, Jared Stanley and J. Austin Stanley.

“Stanley Brothers USA” has the meaning ascribed thereto under the heading “Business – General Development of the Business – General.”

“taxes” means, with respect to any entity, all income taxes (including any tax on or based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings or profits) and all capital taxes, gross receipts taxes, environmental taxes, sales taxes, use taxes, ad valorem taxes, value added taxes, transfer taxes, franchise taxes, license taxes, withholding taxes or other withholding obligations, payroll taxes, employment taxes, Canada or Québec Pension Plan premiums, excise, severance, social security premiums, workers’ compensation premiums, employment insurance or compensation premiums, stamp taxes, occupation taxes, premium taxes, property taxes, provincial Crown royalties, windfall profits taxes, alternative or add-on minimum taxes, goods and services tax, customs duties or other taxes of any kind whatsoever, together with any interest and any penalties or additional amounts imposed by any taxing authority (domestic or foreign) on such entity or for which such entity is responsible, and any interest, penalties, additional taxes, additions to tax or other amounts imposed with respect to the foregoing.

“THC” means delta-9 tetrahydrocannabinol.

“TSX” means the Toronto Stock Exchange.

“USDA” means the United States Department of Agriculture.

“USDA IFR” means the interim final rule dated October 31, 2019 issued by the USDA in respect of commercial production of Hemp in the United States.

“USDA FR” means the final rule published January 19, 2021 and effective March 22, 2021, issued in respect of commercial production of Hemp in the United States.

“U.S. GAAP” means United States generally accepted accounting principles.

“U.S. Securities Act” means the United States Securities Act of 1933, as amended from time to time.

“Warning Letter” has the meaning ascribed thereto under the heading “Regulatory Framework — United States Regulatory Matters — FDA Regulation.”

ITEM 1. BUSINESS

Corporate Structure

Name, Address and Incorporation

Charlotte’s Web Holdings, Inc., a benefit company under the BCBCA and a Certified B Corp headquartered in Denver, 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, preferred shares and Proportionate Voting Shares of the Company. See “Description of the Registrant’s Securities to Be Registered – Description of the Company’s Securities” for more information about the Company’s current share capital. The Company’s Common Shares are listed on the TSX under the symbol, “CWEB.” The Company’s Common Shares are also quoted on the OTCQX in the United States under the symbol, “CWBHF.”

The Company’s head office is located at 1801 California Street, Suite 4800, Denver, Colorado, United States 80202 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 Amendment No. 1 to the Registration Statement.

Public Benefit Company Status

In August 2019, at the annual general and special Shareholder meeting, 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 promoting 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. 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.”‎

Benefit companies also are required under the BCBCA to publish on their websites 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, 2020, 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, 2020.

The Company’s public benefit, as provided in its amended and restated 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.

Intercorporate Relationships

The following diagram shows the Company’s subsidiaries as at December 31, 2020, and the date hereof, and relationships among Charlotte’s Web and its wholly-owned subsidiaries. See Exhibit 21.1 to this Amendment No. 1 to the Registration Statement for a list of subsidiaries of the Company.

The Company was created to indirectly acquire and hold all of the shares of common stock of CWB Holdings, Inc., the corporate entity initially created by the Stanley Brothers in 2013. See “General Development of the Business of the Company” below.

Charlotte’s Web, Inc. was incorporated under the name Stanley Brothers, Inc. under the laws of Delaware on June 15, 2018 and is a wholly-owned subsidiary of Charlotte’s Web Holdings, Inc. CWB Holdings, Inc. was incorporated under the CBCA on December 8, 2013 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. pursuant to a merger agreement and the resulting entity, a wholly-owned subsidiary of Charlotte’s Web Holdings, Inc., changed its name to Charlotte’s Web, Inc. (the “Reorganization”).

Effective as of June 11, 2020, the Company and Abacus completed an arrangement pursuant to an arrangement agreement (the “Arrangement Agreement”) whereby the Company acquired all of the issued and outstanding subordinate voting shares of Abacus (the “Abacus Shares”) after conversion of all outstanding proportionate voting shares of Abacus into Abacus Shares (the “Arrangement”). Abacus was a corporation governed by the provisions of the Business Corporations Act (Ontario) (“OBCA”) resulting from the amalgamation under the OBCA of 1194137 Ontario Inc. and Silver Circle Compact Disc Books Inc. completed on October 30, 1996. Abacus was then known as World Wide Interactive Discs Inc. and changed its name to World Wide Co-Generation Inc. on February 13, 2004 and to World Wide Inc. (“World Wide”) on July 17, 2007. On December 21, 2018, Abacus, Abacus Health Products, Inc. (“Abacus U.S.”) and World Wide Subco Inc. (“MergerSub”) entered into an agreement and plan of merger dated December 21, 2018 among Abacus (formerly World Wide), MergerSub and Abacus U.S (the “Merger Agreement”) pursuant to which Abacus U.S. and MergerSub agreed that MergerSub would merge with and into Abacus U.S. under the Delaware General Corporation Law, with Abacus U.S. being the surviving corporation. As a result of the merger of MergerSub and Abacus U.S. and the transactions contemplated under the Merger Agreement (collectively, the “RTO Transaction”), upon closing on January 29, 2019, the securityholders of Abacus U.S. became securityholders of Abacus and Abacus U.S., as the surviving corporation under the merger, became the operating subsidiary of Abacus. On January 28, 2019, in connection with the RTO Transaction, Abacus changed its name to Abacus Health Products, Inc. On August 24, 2020, Abacus Health Products, Inc. continued from the OBCA to the BCBCA and changed its name to Abacus Products, Inc.

General Development of the Business

General

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% American farm grown and manufactured into hemp extracts ‎containing naturally occurring phytocannabinoids including CBD, cannabichromene (CBC), cannabigerol (CBG), cannabinol (CBN), terpenes, flavonoids ‎and other beneficial hemp compounds. The Company’s Charlotte’s Web Labs (“CW Labs”) R&D science division is located at the University ‎at Buffalo in New York which is part of the State University of New York (SUNY) system of 64 ‎universities. 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 14,000 retail outlets 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 Amendment No. 1 to the registration statement.

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 Hemp. The Company is engaged in research involving a broad variety of compounds derived from Hemp. Where such research indicates that a product with 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 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 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’s current product categories include tinctures (liquid product), capsules, gummies, sprays, pet oils and treats, and topical products.  The Company’s products are distributed through its e-commerce website, third-party e-commerce websites, select distributors, health practitioners, and a variety of brick-and-mortar specialty retailers.

The Company grows its proprietary hemp on farms leased in northeastern Colorado and sources high quality hemp through contract farming operations in Kentucky and Oregon.

The Company continues to invest in R&D efforts to identify new product opportunities. Management is working to expand the Company’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 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, the Company has 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. 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 a 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 potential therapeutic uses of cannabinoids.

History and Development of the Company; Three-Year History

The Stanley Brothers founded CWB Holdings, Inc. (predecessor to CW) on December 8, 2013. CWB Holdings, Inc. was initially formed under the 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.‎

Between 2016 and 2017, the Stanley Brothers made the decision to expand cultivation activities into Kentucky and Oregon to diversify CWB Holdings, Inc.’s Hemp farming operations for the purpose of (i) hedging production against weather-related events, and (ii) accessing services of experienced hemp farming operations with a view to maintain access to an additional supply of Hemp.

In November 2016, CWB Holdings, Inc. introduced its first capsule product line, and in February 2017, CWB Holdings, Inc. launched a new product called PAWS, for canine use.

In June 2020, Charlotte’s Web and Abacus completed the Arrangement and the Company acquired all of the issued and outstanding Abacus Shares. Abacus U.S. was formed in September 2014 as a subsidiary of Aidance, a developer and manufacturer of topical dermatology products founded in 2004. Leveraging the resources and know-how of Aidance under licensing rights and manufacturing and services agreements, Abacus U.S. pursued in 2015 the development of a line of topical pain relief medications. The commercialization of products under the CBD CLINIC™ line started in the third quarter of 2016 to healthcare practitioners throughout the United States that specialize in pain management, particularly in the chiropractic industry. By January 2017, Abacus U.S. was selling CBD CLINIC™ products directly to approximately 100 practitioners. During the year, Abacus U.S. also began selling its CBD CLINIC™ products through national distributors that sell to practitioners, mainly chiropractors and massage therapists. By December 2018, an estimated 10,000 practitioners had become customers and resellers of CBD CLINIC™ products.

In 2017, Abacus U.S. introduced three analgesic massage oils under the CBD CLINIC™ line and, later in 2017, Abacus U.S. developed a pain stick that allowed the user to apply the medication without needing to touch the ointment with one’s hands. Sales for the pain stick grew quickly following its launch in the fourth quarter of 2017.

Also in 2017, Abacus U.S. began developing its CBDMEDIC™ line of products, to be sold to retailers and directly to consumers. Abacus U.S. launched the commercialization of these products in the third quarter of 2018. Abacus U.S. then began selling its CBDMEDIC™ products to retail pharmacy chains and directly through its e-commerce platform.

Financial year ended December 31, 2018

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 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. Under the IPO, the Common Shares were offered for sale by Canaccord Genuity Corp., as lead underwriter, together with GMP Securities L.P., PI Financial Corporation, and Cormark Securities Inc. (collectively, the “IPO Underwriters”) pursuant to an underwriting agreement (the “IPO Underwriting Agreement”) dated August 23, 2018 entered into among the IPO Underwriters, Charlotte’s Web Holdings, Inc., CWB Holdings, Inc. and the following individuals and entities: Aiko Trust, CK&J Irrevocable Trust, Master and A Hound Irrevocable Trust, Paulina Irrevocable Trust, Tristan 2 Arlo Irrevocable Trust, Blue Water Irrevocable Trust, J. Austin Stanley, Arvesa Corp., Kristi Fontenot, Little Sis Trust, Lynn Kehler, Proverbs 31 Woman Irrevocable Trust, M, C and C Special Needs Trust, Graham Carlson and Old Faithful Trust (collectively, the “IPO Selling Shareholders”). Pursuant to the terms of the IPO Underwriting Agreement, in consideration for their services in connection with the IPO, Charlotte’s Web Holdings, Inc. and the IPO Selling Shareholders paid the IPO Underwriters a fee equal to 6.0% of the aggregate gross proceeds of the IPO (C$0.42 per Common Share), for an aggregate cash commission of C$6,006,000 and broker warrants exercisable for two years from the closing date to purchase Common Shares equal to 3.0% of the number of Common Shares sold under the IPO at an exercise price equal to C$7.00. Under the terms of the IPO Underwriting Agreement, the Company indemnified the IPO Underwriters for certain customary matters in connection with the IPO.

In connection with the Company’s IPO, on August 30, 2018, the Company completed the Reorganization whereby CWB Holdings, Inc. merged into Stanley Brothers, Inc. and the resulting entity, a wholly-owned subsidiary of the Company, changed its name to Charlotte’s Web, Inc. To effect the Reorganization and acquire Charlotte’s Web, Inc.: (i) CWB Holdings, Inc. merged into Stanley Brothers, Inc., a newly-formed wholly-owned Delaware subsidiary of the Company, and the surviving Delaware corporation was named “Stanley Brothers, Inc.” (the “Merger”); and (ii) as consideration for the Merger, the shareholders of CWB Holdings, Inc. exchanged their shares in CWB Holdings, Inc. for shares in the Company as follows:

The rights of dissent of the holders of common stock of CWB expired on August 18, 2018, and no notices of dissents were received.

In order to effect the Reorganization, in accordance with the CBCA, Delaware General Corporation Law and Stanley Brothers Inc.’s restated certificate of incorporation, CWB Holdings, Inc. obtained the approval of its board of directors and a majority of the outstanding shares of capital stock held by CWB Holdings, Inc. shareholders entitled to vote.

On August 30, 2018, the Reorganization occurred and CW became a wholly-owned subsidiary of Charlotte’s Web Holdings, Inc. On August 30, 2018, the Common Shares commenced trading on the CSE under the symbol “CWEB.”

On September 6, 2018, the Company closed a non-brokered private placement offering of 802,246 Common Shares at C$7.00 per Common Share for total gross proceeds of C$5,615,722.

The Company announced on October 16, 2018, that it had surpassed 3,000 retail locations across the United States, up from 2,000 locations as at the 2017 financial year end.

On December 20, 2018, the United States Congress approved the 2018 Farm Bill. Under the 2018 Farm Bill, Hemp was permanently removed from the CSA and out of the jurisdiction of the DEA. Hemp became an agricultural commodity governed by the USDA.

Financial year ended December 31, 2019

On January 3, 2019, the Company announced that a Chief Executive Officer transition was planned in 2019 to support the Company’s continued evolution. The Company announced that the Board began the search process to find a successor Chief Executive Officer, and that the Company’s current Chief Executive Officer, Hesaam Moallem, would continue in the role until his successor has been appointed. Hesaam Moallem resigned as a director to support the transition.

Effective January 15, 2019, Eugenio Mendez joined the Company in the newly formed role of Chief Growth Officer. Effective January 28, 2019, Stephen Lermer joined the Company in the newly formed role of Chief Operating Officer.

On January 15, 2019, the Company reported its 2018 harvested hemp results, announcing a 10 times growth in harvested hemp as compared to its 2017 grow season. In addition, the Company announced that it had received certification from the U.S. Hemp Authority™, which requires meeting or exceeding stringent self-regulatory standards for cGMP and passing an annual third-party audit.

On April 9, 2019, the Company filed a (final) short form base shelf prospectus with the securities regulatory authorities in each of the Provinces of Canada, except Quebec, which would allow the Company to qualify the distribution by way of prospectus in Canada of up to C$500,000,000 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 would be established in a prospectus supplement, which will be filed with the applicable Canadian securities regulatory authorities in connection with any such offering. On April 10, 2019, 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.

Adrienne “Deanie” Elsner joined the Company as President and Chief Executive Officer effective May 15, 2019. Ms. Elsner was also appointed to the Board effective May 15, 2019.

On May 7, 2019, the Company announced an expansion of its canine-focused pet products, launching 12 new SKUs comprised of hemp-extract infused chews, flavored and unflavored oils and a topical balm.

On May 8, 2019, the Company announced that it had surpassed 6,000 retail locations across the United States and that it was shipping to four national brand grocery and drugstore retailers.

On May 15, 2019, the Company closed an underwritten public offering of 7,000,000 Common Shares of the Company sold by certain Shareholders of the Company at a price of C$20.00 per Common Share for total gross proceeds of C$140,000,000. The offering was conducted pursuant to the terms of an amended and restated underwriting agreement among the Company, a syndicate of underwriters led by Canaccord Genuity Corp. and including Cormark Securities Inc., Eight Capital and PI Financial Corp., and the selling Shareholders dated May 13, 2019. The Company did not receive any proceeds from the sale of Common Shares by the selling Shareholders under the offering. In connection with this offering, the Company filed a prospectus supplement dated May 13, 2019 to the final base shelf prospectus of the Company dated April 8, 2019. On May 24, 2019, the underwriters exercised their over-allotment option in full to purchase an additional 1,050,000 Common Shares from the selling Shareholders at a price of C$20.00 for aggregate gross proceeds to the selling Shareholders under the exercise of the over-allotment of C$21,000,000.

On May 30, 2019, the Company’s Common Shares were voluntarily delisted from the CSE and as of market open on May 31, 2019, the Common Shares commenced trading on the TSX under the symbol “CWEB.”

On June 3, 2019, the Company announced a new product line of hemp extract-infused CBD gummies, made with whole plant extract and featuring synergistic functional ingredients to support specific health-related functions including everyday stress, sleep and recovery from exercise or active lifestyles.

The Company announced on June 19, 2019 that it had planted 862 acres for 2019, a 187% increase from 300 acres planted in 2018, to meeting growing demand.

On July 16, 2019, the Company announced that Tony True joined the Company as Chief Customer Officer, to lead sales strategy and forecasting, customer development and relationships and retail execution.

On July 18, 2019, the Company announced that it had entered into a research initiative with Rodale Institute and Natural Care to pioneer regenerative organic hemp farming, with research to be conducted at Pocono Organics, a start-up regenerative organic farm in Long Pond, Pennsylvania.

The Company announced on July 29, 2019 that The Kroger Co., America’s largest grocery retailer, began carrying Charlotte’s Web products in multiple states, with a plan to roll out to a total of 1,350 store locations in 22 states (Arizona, Arkansas, Colorado, Georgia, Illinois, Indiana, Kansas, Kentucky, Michigan, Missouri, Montana, Nevada, Oregon, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, Washington, Wisconsin, and Wyoming). As of July 29, 2019, Charlotte’s Web was shipping to 5 mass retailers covering 22 states. Combined with specialty retailers, Charlotte’s Web retail distribution in the United States surpassed 8,000 locations.

On July 30, 2019, Charlotte’s Web announced the extension of its research initiative with the Centre for Discovery in New York State to further develop hemp genetics for optimal growing in the region. The project allowed for expansion within the Eastern Appalachian Region and determination of hemp varieties for growth in regional microclimates and local terrain.

On August 8, 2019, the Company announced expansion plans, including the lease of a newly constructed 136,610-square-foot industrial building located at 700 Tech Court in the Colorado Technology Center in Louisville, Colorado. The new cGMP facility (the “LOFT”) would enable the Company to prepare for production, distribution, quality control and R&D expansion to meet increasing demand from the consumer and national retailer channels. In addition, Charlotte’s Web announced a staged build-out of the facility during the third quarter of 2019 and continuing over a two-year period, to allow for production and distribution capacities to align with product demand growth.

On August 15, 2019, Richard Mohr resigned as Chief Financial Officer of the Company and was succeeded by Russell Hammer.

On August 21, 2019, the Company announced that its Shareholders approved an amendment to the Company’s Articles to convert to a benefit company under the BCBCA to reflect the Company’s commitment to using business as a force for good and a catalyst for innovation.

On August 27, 2019, Abacus announced that it entered into a spokesperson and licensing agreement (the “Gronkowski Agreement”) with Rob Gronkowski, a sports celebrity. The Gronkowski Agreement includes a commitment by Gronkowski to support Abacus’ existing products. Consideration for the Gronkowski Agreement and related agreements included payment of an upfront fee, potential future royalties, and an issuance of 302,835 Abacus Shares and warrants to acquire 35,666 Abacus Shares at a price of $15.00 per share (converted to warrants to purchase Common Shares per the terms of the Arrangement), exercisable on or before August 29, 2024. Additional warrants are issuable on an annual basis during the term of the Gronkowski Agreement.

Effective September 7, 2019, the Company changed auditors from MNP LLP to Ernst & Young LLP.

On September 24, 2019, the Company announced that The Vitamin Shoppe, Inc. (NYSE: VSI), an omnichannel specialty retailer of nutritional products, commenced selling the new line of Charlotte’s Web gummies in 738 stores across 45 states, expanding Charlotte’s Web’s product offerings carried by The Vitamin Shoppe to include oil tinctures, liquid capsules and gummies.

On October 9, 2019, Charlotte’s Web announced a relationship with Nielsen Holdings PLC (NYSE: NSLN), a market intelligence company, to provide greater visibility and insights into market-leading trends in the CBD market.

On October 25, 2019, Abacus announced an agreement with Gillette Stadium and Patriot Place (the “Gillette Stadium and Patriot Place Agreement”) to promote awareness of its CBDMEDIC™ brand. The three-tiered partnership includes elements of branding, activation and hospitality for the 2019 and 2020 seasons.

Jacques Tortoroli was appointed to the Board of Directors of the Company effective November 14, 2019 and was appointed to the Audit Committee and Compensation Committee.

On December 3, 2019, the Company closed an underwritten public offering of 5,000,000 units (“2019 Units”) at a price of C$13.25 per 2019 Unit for gross proceeds to the Company of C$66,250,000. Each 2019 Unit was comprised of one Common Share and one half of one Common Share purchase warrant (the “2019 Warrants”), exercisable for a period of two years following the closing date at an exercise price of C$16.50. The 2019 Warrants are listed on the TSX under the symbol “CWEB.WT.” The 2019 Warrants were issued pursuant to a Warrant Indenture between the Company and Odyssey Trust Company, as warrant agent, dated December 3, 2019. The offering was conducted pursuant to the terms of an amended and restated underwriting agreement among the Company, Canaccord Genuity Corp., Cormark Securities Inc., Eight Capital and PI Financial Corp. dated November 25, 2019 (the “November Underwriting Agreement”). In connection with this offering, the Company filed a prospectus supplement dated November 27, 2019 to the final base shelf prospectus of the Company dated April 8, 2019. Pursuant to the terms of the November 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$0.66 per Common Share), for an aggregate cash commission of C$3,212,500.

During 2019, Abacus secured distribution of its products in several key retailers with CVS Pharmacy, Inc. being the first in February. Weis Markets, Inc., Pharmacare, Inc., Kinney Drugs, SuperValu, Inc., Topps Friendly Markets, Harmon Stores, Inc., Bed Bath & Beyond Inc., Giant Eagle, URM Stores, Inc., Road Runner Sports, Inc., Fruth Pharmacy, Inc., Hartig Drug Stores, Diebergs Markets, Inc., Valu Merchandisers Company, and Walgreen Company, d/b/a Walgreens were added throughout the year.

Financial year ended December 31, 2020

Eugenio Mendez resigned as Chief Growth Officer on January 1, 2020.

On January 31, 2020, the Company announced that Jared Stanley, Company Co-Founder and Vice President of Cultivation Operations, was promoted to Chief Cultivation Officer.

Stephen Lermer resigned as Chief Operating Officer of the Company on January 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 current Good Manufacturing Practices, cGMPs, as outlined by the 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.

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.

On March 4, 2020, the Company announced the results of its 2019 hemp harvest as compared to its 2018 harvest. The Company advised of a 245% increase in total dried biomass to 2.34 million pounds, a 22% increase in CBD potency, and a 10% increase in yield per acre. The Company estimated that it harvested 36 thousand kilograms of CBD, with a 33% reduction per milligram of cost.

On March 13, 2020, the Company announced the establishment of CW Labs, an internal division for R&D, substantially expanding on the Company’s efforts around the science of hemp derived phytocannabinoids, terpenes and flavonoid compounds. For additional information on CW Labs, see “General Development of the Business of the Company – Industry Overview.”

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 the Arrangement Agreement with Abacus, pursuant to which the Company proposed to acquire all of 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. The Company received a waiver for certain financial covenants for the three months ending September 30, 2020 and December 31, 2020.

On March 30, 2020, David Panter joined the Company as Chief Operating Officer.

On May 20, 2020, the Company announced that it had been issued U.S. utility patent U.S. 10,653,085, its second U.S. patent for hemp genetics. The patent is for ‘CW1AS1’, a new hemp variety created by the Company’s co-founder Joel Stanley and Senior Director of Cultivation R&D, Bear Reel.

On June 9, 2020, the Company announced its sponsorship of ValidCare’s scientific study to address some of the FDA’s prior public questions about the potential impacts of CBD on humans. ValidCare will be conducting a human trial study to ascertain if daily use of full spectrum hemp-derived CBD or CBD isolate has any impact on the human liver. In its report to Congress dated March 5, 2020, the FDA requested additional science-based data from the CBD industry. The ValidCare study was intended to provide third-party scientific data intended to directly address some of the FDA-specific questions.

Effective as of June 11, 2020, the Company and Abacus completed the Arrangement 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 are 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, is 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 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.

Ms. Jean Birch was appointed to the Board of Directors of the Company effective July 10, 2020 and was appointed to the Compensation Committee and Audit Committee.

On August 26, 2020, Abacus and Rob Gronkowski amended the Gronkowski Agreement to allow for a hiatus of the obligations of the parties under the Gronkowski Agreement, such obligations to be resumed in the future.

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. 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 Charlotte’s Web’s socially conscious founding principles, and formalizes its commitment to environmental, social, and governance issues for stakeholders. In connection with the certification process, and as approved by the Shareholders of the Company at the August 2019 annual general and special meeting, the Company converted to a “benefit company” in accordance with the BCBCA effective July 24, 2020.

Mr. Shane Hoyne resigned as a member of the Board of Directors of the Company effective August 31, 2020.

On September 3, 2020, William West’s term as a director ended and Mr. West ceased to be a director of the Company.

On September 3, 2020, John Held was appointed Board Chair, replacing Joel Stanley, who remained as a director.

Ms. Susan Vogt was appointed to the Board of Directors of the Company at the Company annual meeting of Shareholders on September 3, 2020 and was appointed to the Governance and Nominating Committee and the Audit Committee.

On November 19, 2020, the Company announced collaboration between its CW Labs science division 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.

On December 9, 2020, the Company announced that CW signed an exclusive distribution agreement in Israel with Israel-based InterCure Ltd., which owns one of Israel’s largest and most established medical Cannabis producers, Canndoc Ltd. (“Canndoc”). See “Business of the Company — Third-Party Suppliers, Service Providers and Distribution — International Expansion.”

January 1, 2021 to December 21, 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 has 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 in order to transition to board positions with Stanley Brothers USA.

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 the Validcare study. 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.

On March 25, 2021, the Company announced that it had secured a successful resolution of its trademark infringement and false advertising claims against AAXLL Supply Co LLC (“AAXLL”), owner of the Balance CBD brand. The Company filed a complaint against AAXLL on April 17, 2020 in which it alleged that AAXLL infringed Charlotte’s Web’s rights in its CHARLOTTE’S WEB trademark and had misrepresented that certain AAXLL products shared a terpene profile with hemp cultivars developed by Charlotte’s Web. Pursuant to the judgment, AAXLL acknowledged that Charlotte’s Web owns all right, title and interest in and to the CHARLOTTE’S WEB mark and agreed to be permanently enjoined from using the mark in connection with advertising and promoting CBD products.

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.‎

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. The Company is the only hemp CBD brand supporting the University of Colorado REACH Center’s ‎milestone study. ‎

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 three and six months ended June 30, 2021, the Company issued 278,200 Offered Shares at an ‎average price of $4.61 per share for gross proceeds of $1,282,502. For the three and six months ended June ‎‎30, 2021, share issuance costs were $443,474 for net proceeds to the Company of $839,028.

Following the Company’s annual general Shareholders’ meeting on June 9, 2021, the elected Board of Directors ‎are Adrienne Elsner (Chief Executive Officer), John Held, Jacques Tortoroli, Jean Birch, and Susan Vogt. ‎

On June 15, 2021, the Company announced that Wessel Booysen has joined the Company as Chief Financial ‎Officer (CFO).

On June 18, 2021, Tim Saunders was appointed to the Board of Directors and was appointed to the Board’s Audit and Corporate Governance and Nominating Committees.

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 will 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 gummie 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 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”.

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 10, 2021, the Company announced the addition of two new oral spray products, Charlotte’s Web Calm Spray and Sleep Spray with CBG and CBN.

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.” Charlotte’s Web will prioritize this first CW1AS1 harvest for Original Formula available exclusively for medical patients in Canada.

On December 16, 2021, the Company announced that Adrienne Elsner had resigned from her position as 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. In conjunction with these changes, David Panter ceased to serve as the Company’s Chief Operating 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.

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Business of the Company

The business of the Company consists of the farming, manufacturing, sales, and marketing of products of CW and the acquired products of Abacus. As of December 31, 2020, 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. Generally, this section describes the business of the Company, which includes CW products and acquired products of Abacus as one.

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 improve life, naturally. 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 the ‎‎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.‎

The Company has established CW Labs, an internal division for R&D substantially expanding on the Company’s ‎efforts around the science of hemp derived phytocannabinoids, terpenes and flavonoid compounds. Among other ‎things, CW Labs aims to foster science-based innovation regarding the potential therapeutic uses of these compounds. CW Labs is currently engaged in randomized control trials addressing hemp-based ‎solutions for several need states. For additional information on CW Labs, see “General Development of the ‎Business of the Company – Business of the Company – Industry Overview.” ‎

The acquired products of Abacus increased the Company’s presence in the pain market. Annual national economic ‎cost associated with chronic pain is estimated to be $560-635 billion in the U.S. (Institute of Medicine, Relieving ‎Pain in America, 2011). The global market for pain management products, including prescription and non-‎prescription analgesics, reached over $50 billion in 2009 according to an August 2010 article published in the ‎journal Nature Reviews Drug Discovery. According to a 2016 report published by Transparency Market Research, ‎the global pain management therapeutics market is expected to reach $83 billion by 2024.‎

Market growth in the topical pain therapeutics market has been driven by the demographics of the growing geriatric ‎population and increasing emphasis of the baby boom generation on anti-aging and longevity. Topical over-the-counter (“OTC”) pain ‎remedies target common sources of pain such as sports injuries and common muscle strains. Allied Market Research reports that ‎sales in the topical pain therapeutics market will grow at compound annual growth rate of 7.4% from $7.4 billion ‎in 2017 to $13.26 billion by 2025.¹

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”, “CW”, “CBD CLINIC”, “CBDMEDIC” and “Harmony Hemp” trade names. The Company’s current product categories include human ingestible products (tinctures, capsules, gummies and sprays), topicals, and pet 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.

During the financial year ended December 31, 2020, revenue derived from the Company’s human ingestible products accounted for 82% of the Company’s total consolidated revenue (86% during the year ended December 31, 2019), topical products accounted for 13% of the Company’s total consolidated revenue (9% during the year ended December 31, 2019) and pet products accounted for 5% of the Company’s total consolidated revenue (5% during the year ended December 31, 2019).

Human Ingestible Products – 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. The Company currently has 25 ingestible liquid products as described below.

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¹ Allied Market Research (2018). Global Topical Pain Relief Market: ‎Opportunities and Forecasts, 2018-2025 Allied Analytics, LLP, Portland, OR

Human Ingestible Products – Capsule

Ingestible capsule products have standardized amounts of FSHE. Original capsule products were in the form of a dry powder, inside a hard-capsule shell. Dry capsule products combine FSHE with common industry raw materials, including rice bran, maltodextrin, microcrystalline cellulose and fractionated coconut oil. The capsule itself is derived from hydroxypropyl methylcellulose. In 2019, CW innovated its capsule offering, introducing liquid capsules that deliver the same quality ingredients. 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. The Company currently has seven capsule products as described below.

Human Ingestible Products – 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. The Company has 17 gummy products as described below.

Topical Products

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. The Company currently has 102 topical products as described below.

Pet Products (Hemp Extract for Dogs)

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 wellbeing of companion animals and horses that are given animal health supplements by their owners, and to protect and enhance the animal health supplement industry. A review of those companies certified by NASC shows that Charlotte’s Web is one of only a few hemp companies to be certified under the NASC’s quality standards. 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 or added to food. In addition, the Company has a hemp infused balm for dogs with sensitive skin.

The Company currently has 18 pet products as described below.

Key Success Factors of Product Offering

Charlotte’s Web’s founders, the Stanley Brothers, have garnered substantial international media and legislative attention over the past several years.

In addition to the power of the Charlotte’s Web brand and substantial goodwill generated from the Company’s legislative efforts and media exposure, the following are also significant competitive advantages of the Company:

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. On April 20, 2018, the USPTO refused the registration of two trademark applications sought by the Company, based on the Trademark Examiner’s interpretation that the marks were not in lawful use in commerce under Sections 1 and 45 of the United States Trademark Act and because the goods identified in the application were not in compliance with either the CSA or the FD&C Act. The Company has filed a request for consideration and may also rely on common law theories of trademark protection and enforcement in cases of actual or suspected trademark infringement of the trademarks it wishes to protect. 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 “Risk Factors – Risks Relating to the Company’s Business and Industry – The Company’s intellectual property may be difficult to protect.”

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 more than 80 acres of irrigated farmland in three states for the 2020 growing season and harvested 157,000 lbs. In 2017, 2018 and 2019, the Company produced 63,000 lbs., 675,000 lbs. and 2,340,000 lbs., respectively, of hemp. The Company anticipates that it has enough hemp inventory to meet its future sales projections and potential for new revenue streams to further monetize parts of its supply chain for two years or more. In 2021, the Company’s primary focus in cultivation has been on international market entrance through cultivation and in R&D, plant breeding and regional plant variety trials. The Company is planning 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 family-owned and/or leased farms. 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 cultivators 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.

Colorado

The Company currently leases land upon which it operates multiple farms across northeastern Colorado, allowing for required organic crop rotation among locations and providing flexibility to expand the number of acres farmed. The Company’s first harvest in 2014 proved a new concept in large-scale hemp cultivation for the proprietary variety which is used to create the Charlotte’s Web products. Since 2014, the Company has continuously scaled and innovated its cultivation techniques and technology. The Colorado farming operations are operated solely by the Company’s personnel to provide the lowest cost of goods sold without compromising high quality standards, while at the same time creating plants, seeds and cultivation practices. The cultivation division also operates a small number of greenhouses used for seed and clone production in northeastern Colorado.

The Company believes the availability of leased land in northeastern Colorado is sufficient to meet its future growing requirements in the region.

Kentucky

In 2015, the Company began cultivation in Kentucky, the second leading hemp producing state in the United States, behind Colorado. The Company operates in Kentucky in partnership with local farmers. During 2015 and 2016, the crops grown were intended for both seed and the development of mechanizing harvest techniques through the modification of current modern agriculture equipment. The Company is in constant communication with these farms concerning its seasonal growing requirements. The estimated acreage and availability is determined during the year prior to planting and the final acreage for the yearly lease is determined early each year and contracted for accordingly. The Company believes the availability of leased land in Kentucky is more than sufficient to meet its future growing requirements.

Oregon

The Company established a strategic partnership with a third-generation farming family that has been farming in the region since 1950. The Company extended its contract for the 2019 grow season and minimally extended in 2020. All farming is done with oversight by the Company to ensure quality standards and specifications are met. Acreage for future expansion continues to be readily available.

Canada

The Company conducted research trials in 2019 and 2020 in its successful attempt to register three varieties under ‎Health Canada’s list of approved cultivars. These varieties are being cultivated in the Okanagan Valley in central ‎British Columbia and will be used for the Company’s supply chain to enter the Canadian market through an asset ‎light approach. The Company will not own inventory in Canada but will license its brand, processes, products ‎and formulations to licensed Canadian entities in exchange for a royalty on the Company’s branded sales in ‎Canada.‎

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, developed by the Stanley Brothers, 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.

Breeding Division

The breeding division supports the Company in a myriad of ways, but its 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 is not a fully scalable process and does 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, and Oregon cultivation teams on the development of new, more scalable processes to mechanize harvesting without sacrificing quality. With capital investments in 2019 made in each state, 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 is optimized to efficiently execute the Company’s core competencies in R&D, product development, quality control, and product delivery.

The Company believes it has sufficient capabilities to meet its core production requirements in the near-term. The new facility also has been designed to accommodate incremental manufacturing capacity as business needs require, including the strategic internalization of contract manufactured items.

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 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 the only national 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.

The Company employs cGMP at each stage of its production. cGMP refers to the current Good Manufacturing Practices regulations enforced by the FDA.² 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.

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.

² See 21 C.F.R. Part 111.

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 were introduced in late 2014, with 2015 representing the first year of meaningful sales volume, primarily through direct-to-consumer online sales. After commencing interstate shipping in March 2015, sales have continued to show a steady growth trend. The Company’s products were sold in chiropractic and doctors’ offices, gyms, massage therapy offices, salons, animal clinics, and pet stores. As of December 31, 2020, the Company’s products were sold in over 14,000 retail locations across the United States, including national grocery, drug, mass market, pet, natural, and specialty retailers. In addition, the Company’s products are sold in over 8,000 health care practitioners’ offices across the United States.

The Company distributes its products within the United States and, on a limited basis, internationally. Retail distribution has evolved from a strategy focused on gaining broad distribution within the natural channel, to now focusing on gaining distribution in major food and mass market accounts. The Company targets accounts where the brand is most likely to succeed with retail shoppers.

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 and natural channels; and (ii) contracted broker teams that assist in driving brand representation in larger food accounts. 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. As the Company continues to develop increasingly sophisticated supply and production capabilities, it will target strategic retail accounts that contribute to the broader acceptance of the brand and category. 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 mass market 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 including: Thrive Market, Inc., Erewhon, Inc., Fresh Thyme Market, New Seasons Market LLC, Lassens Natural Foods & Vitamins, LLC, and Sprouts Farmers Market, Inc. The Company has also shipped its products to national retail grocery and drug chains including The Kroger Co., Albertsons Companies, Inc., Vitamin Shoppe, Inc. Publix Super Markets, Inc., Petco Health and Wellness Company, Inc., and CVS Pharmacy, Inc.

The Company continues to sell its CBD CLINIC products into the practitioner market comprising chiropractors, acupuncturists, physical and massage therapists and continues to grow the total number of health care practitioners in the CBD CLINIC network. The market for the CBD CLINIC products can be characterized as a business-to-business (B2B) market and is primarily served through national distributors. The Company currently works with over 10 national distributors to supply this market. 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 utilizes e-commerce to reach consumers and guide them through the hemp and CBD buying process. This strategy allows access to consumers in the United States and has been instrumental in the Company’s success in growing the product line. The Company believes consumers (millennials through baby boomers) 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 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’s e-commerce database at the end of 2020 consisted of over 1,000,000 (up from 670,000 at year end 2019) “opting-in” email customers, with new enrollments averaging 28,400 customers per month.

The Company concentrates its activities in the digital space through:

Revenue for the three months ended December 31, 2020 increased 17.9% compared to the same period in 2019. During 2020 the Company implemented a competitive pricing realignment strategy across its product portfolio resulting in increased unit sales and expanded market share in the second half, offsetting some of the headwinds created by COVID-19. Presently the Company holds the number one market share position across major retail channels including Total US Food/Drug/Mass retail aggregate, Total US Natural specialty retail, and e-commerce, based on market share data from the Nielsen Company (US), LLC (“Nielsen”), SPINS, LLC (“Spins”) and Brightfield Group (“Brightfield”), respectively.

The Company’s sales are executed through customized strategies depending on the channel of sale. For example, in specialty food accounts, a combination of sales brokers and reps 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. This external sales team is managed by key management personnel within the Company. Depending on the size of the account, some locations are deemed to be “national accounts” that receive additional support from the Company’s internal national accounts team. This allows the Company’s brokers and independent sales teams to manage over 1,000 independent specialty food locations, while still achieving the same level of support that is expected in the Company’s larger chain retail customers.

Large retail customers are covered by the Company’s internal national accounts team with experts assigned to the accounts to develop the specific sales strategies necessary for the Company’s products to succeed in this market. Medical accounts such as doctors, chiropractic, holistic and integrative health groups are supported by distributors directly linked to the industry and managed by the Company’s internal sales team.

Currently, the majority of orders are fulfilled through a Company-operated LOFT fulfillment center located in Louisville, Colorado. The Company is also using third-party logistics providers to secure a rapidly-scalable fulfillment and business continuity solution.

As public familiarity with hemp-derived CBD wellness products continues to increase, the Company may target several new distribution channels within the U.S. and certain international markets that have significant future expansion potential. Management believes there is a significant emerging opportunity to market premium hemp and botanical wellness products to the mainstream consumer marketplace. Management believes public recognition of the benefits of hemp products has increased dramatically in recent years, and consumers are seeking natural products for their general wellness benefits. Target markets include sports and recreation, holistic health and wellness, and healthy aging. Initial channel opportunities include vitamin and supplement retailers and natural grocers. Key retail partners will include major food, mass market accounts, general retail accounts, health care practitioners and specialty and natural channels.

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. Charlotte’s rapid and significant improvement in her wellness ignited a movement for hemp legalization in the United States. Sadly, Charlotte passed away on April 7, 2020 in the midst of the COVID-19 pandemic. In response, the State of Colorado issued an executive order proclaiming April 7^th Charlotte Figi Day in Colorado. Market data from leading third-party analysts such as Nielsen, SPINS, and Brightfield Group, shows that Charlotte’s Web is the market share leader in certain CBD categories and, the Company believes, the most widely recognized hemp extract with naturally occurring CBD in the world.  Subsequently, the value of the Charlotte’s Web brand equity is a significant contributor to the value of the Company because it uniquely represents the founders’ story of establishing a mission-based company of giving back and providing high quality solutions for people to control their wellness journey.

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:

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 deliver upside demand and repeat purchases from existing customers by enabling scheduled monthly 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, the Company entered into the Gronkowski Agreement and the Gillette Stadium and Patriot Place Agreement which have driven national brand awareness of the CBDMEDIC brand. In addition, CBDMEDIC is an Arthritis Foundation Impact Sponsor with the goal that the Company might serve as champions and active supporters in the Arthritis Foundation’s dedication to provide encouragement and assistance to the arthritis community.

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.

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, will enable the Company to prepare for production, distribution, quality control and R&D expansion to meet increasing demand from the consumer and national retailer channels. This facility was used for supply chain activities commencing in Q2 2020 and manufacturing and operations commencing in Q3 2020. CW Labs also currently operates out of an office in Buffalo, New York.

Competition

The Company plans to invest significantly in strengthening the Charlotte’s Web brand in the global marketplace ‎and solidifying the brand as “The World’s Most Trusted Hemp Extract™.” 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), CBD MD, Medterra, Pet Relief, Canopy ‎Growth (Martha Stewart CBD) and Garden of Life. ‎

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 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 an agreement (the “Name and Likeness Agreement”) entered into between the Company, CW 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, 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 July 31, 2022 on a royalty-free basis. Each party to the Name and Likeness Agreement will have 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. 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.” 

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.

On January 12, 2020, the Company announced that CW has been granted U.S. Utility Patents for its hemp genetics by the 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.

The Company now has earned a total of four Utility Patents covering hemp varieties as it advances the science of hemp horticulture.

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 and/or term of the patent.

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.”

Employees and Human Capital

As of December 31, 2020, the Company had 306 employees. Of these employees, 127 were employed in manufacturing operations positions, 86 were employed in sales and marketing positions, 58 were employed in general and administrative positions, 10 were employed in cultivation positions, and the remaining employees were engaged in R&D aspects of the business. As of November 30, 2021, the Company had 281 employees. Of these employees, 119 were employed in manufacturing operations positions, 76 were employed in sales and marketing positions, 54 were employed in general and administrative positions, 5 were employed in cultivation positions, and the remaining employees were engaged in R&D aspects of the business. Of the 281 employees, 269 were full-time employees.

The Company prides itself in hiring talented individuals with a complementary mix of professional experience and industry knowledge. The Company believes it has an advantage in attracting these employees with its strong reputation as a leader in the sector. 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, technology, finance, customer service, 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) media events ‎similar to what has historically occurred with the Company including CNN, Today Show, the New York Times and ‎Forbes; (ii) email, social media and blogs; (iii) use of subject matter experts; (iv) legislative participation; and (v) ‎public speaking engagements at key industry events. In addition to these active outlets to build brand awareness, the Company plans to support word-of-mouth endorsements and testimonials from its customers who are advocates for its ‎brands and products.‎

Growth from the Existing Product Portfolio Through Marketing Initiatives

The Company’s marketing mix is being optimized in order to connect with more consumers and guide them through the buying process. A collaborative, integrated effort with content and public relations teams is underway with the objective to optimize search engine results and leverage social media and display advertising platforms. The Company is working to segment and analyze customer data in order to enhance the customers’ experience to convert browsers into buyers and drive repeat purchases. The Company is also targeting major food and mass market accounts as additional distribution platforms. These accounts are expected to enable the Company to gain broader distribution, open new consumer segments, and drive growth through increased awareness, consideration and purchase.

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. To achieve an international reach, the Company is exploring either partnering with distributors, brokers and/or manufacturers in these international locations or the Company may create its own foreign licensed subsidiaries to transact business in these regions. The Company will be constantly weighing the trade-off of each option against the impact on sales volume opportunities and profitability ratios in its decision-making process. 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. The Company anticipates that it will make final decisions as to its proposed international expansion once its regulatory review of potential jurisdictions is complete.

On December 9, 2020, the Company announced that the Company 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.

Canndoc has been a pioneer in pharmaceutical-grade Cannabis for more than 13 years. 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 Canndoc or another subsidiary of InterCure Ltd. Charlotte’s Web and InterCure Ltd. also are considering future distribution agreements in certain European countries. The two companies will also explore opportunities such as clinical trials, product development and manufacturing in Israel.

Founded in 2008, Canndoc is an IMCA (Israeli Medical Cannabis Agency) permit holder for the manufacturing of medical Cannabis in Israel. Canndoc has provided medical Cannabis for more than 40,000 patients, establishing its position as a venerable player in this global industry, demonstrating significant expertise across the entire value chain from research, cultivation, and processing, to product development and advanced GMP clinical trials pipeline initiation.

Improved Distribution

At the end of 2020, the Company’s products were sold in approximately 14,000 retail locations and over 8,000 health care practitioners. The Company distributes its products in the United States and, on a limited basis, internationally. Expansion is expected to continue both in the United States and internationally. Future distribution channels are planned to continue to expand into national retailers (including grocers and drug chains), vitamin and supplement retailers and natural food stores.

Strategic Complementary Companies and Alliances

The Company continually leverages its global relationships and network of industry participants and advisors to actively source, identify and evaluate acquisition opportunities. The Company expects to selectively pursue compelling acquisitions that leverage and complement the Company’s strengths in sales, marketing, new product development, quality, production, and distribution. Certain criteria will be employed in pursuing potential acquisition candidates and partnerships including: (i) brand, product, and channel synergies; (ii) attractiveness of product sector; (iii) integration synergies; (iv) production capabilities; (v) distribution network; (vi) geographic reach; and (vii) financial performance. The Company expects to fund strategic initiatives through a combination of cash flow, debt and/or equity, if available.

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.”

United States Regulatory Matters

The business of the Company consists solely of the business of Charlotte’s Web, Inc., therefore when used in this ‎section, references to the “‎Company”‎ are references to Charlotte’s Web, Inc. and the Company as a whole unless ‎the context otherwise requires.

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, the 2018 Farm Bill and the CSA. 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 2014 Farm Bill and currently applicable provisions of 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,³‎ 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, 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. While some states, including recently California, 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, other states restrict hemp cultivation and sale to state medical or adult-use marijuana ‎program licensees or remains otherwise unlawful under state criminal laws. 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.

The Company’s activities related to the production, marketing and sale of its products comply with the 2014 Farm ‎Bill and/or 2018 Farm ‎Bill, as currently 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. While the FDA’s current position is that CBD is a drug and CBD-containing products require an IND to be administered in clinical trials and FDA approval prior to introduction into interstate commerce for sale, the FDA is also currently evaluating ‎whether, and how, Hemp-based CBD dietary ‎supplements and food can be lawfully sold in the U.S. 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 is under active consideration by the FDA as of the date of this Amendment No. 1 to the registration statement, as indicated by the FDA’s January 2021 statement whereby the agency reaffirmed that it is actively evaluating the regulatory frameworks that apply to Cannabis-derived products intended for non-drug uses, and whether any new FDA regulations are warranted. 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.

³ Agriculture Improvement Act of 2018 (section 10113) (defining hemp under the Agricultural Marketing Act of 1946, 7. U.S.C. 1621).

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 IND Preclusion. However, the removal of Hemp and its extracts, ‎including CBD, from the CSA pursuant to the 2018 Farm Bill, and the FDA’s indication that it is considering using its ‎authority to issue a regulation that could specifically allow Hemp-derived ingredients in foods and supplements, ‎are major developments toward resolving these regulatory barriers. 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

Furthermore, on May 28, 2020, the FDA submitted draft guidance to the White House Office of Management and Budget relating to research considerations for Cannabis and Cannabis-derived compounds, which reflects the FDA’s continued steps to consider the safety and advancement of Cannabis-derived compounds. In a trade press article regarding this guidance, FDA confirmed that it is “working toward a goal of providing additional guidance and [has] made substantial progress,” while also reiterating the need to obtain additional data on the safety, effectiveness, and quality of CBD products.⁵ At the request of the Biden Administration, the FDA has since withdrawn its draft guidance. It has not yet indicated whether or when a new guidance document will be submitted.

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.

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.

‎

⁴ World Health Organization Expert Committee on Drug Dependence, Cannabidiol (CBD) Pre-Review Report, November 10, 2017.

⁵ https://www.foodnavigator-usa.com/Article/2020/06/05/FDA-says-it-s-made-substantial-progress-on-CBD-regs-CV-Sciences- ‎weighs-in-on-food-vs-pharma-path-man-sues-CBD-firm-after-failing-drugs-test.‎

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. 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 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.⁶‎ ‎The 2014 Farm Bill authorizes 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 met. The scope of the 2014 Farm Bill is limited to ‎cultivation that is: (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.⁷‎ ‎The various state Hemp programs have different requirements ‎regarding the registration of cultivators and ‎processors, the involvement of institutions of higher education, and ‎permissible commercialization.‎⁸‎ ‎Activities determined to be compliant with the 2014 Farm ‎Bill are protected from federal ‎interference by the Appropriations Rider. The Appropriations Rider generally prohibits the ‎federal government’s ‎use of funds in contravention of the 2014 Farm Bill and specifically prohibits 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 or 2018 Farm Bills], within or outside the [s]tate in which the . . . hemp is grown or ‎cultivated.”‎ The Appropriations Rider has been renewed on several occasions, including most recently on September 30, 2021 through H.R. 5305 which extended the applicability of the Appropriations Rider through December 3, 2021 or until the enactment into law of a new appropriations act or law, whichever is earlier. ‎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 includes all parts of the Cannabis plant, and ‎distinguishes hemp from marijuana on ‎the basis of the concentration of THC. Any plants that exceed the 0.3% ‎THC limitation are considered marijuana (a ‎Schedule I controlled substance), and thus are not compliant with the ‎‎2014 Farm Bill. Activities determined to be outside ‎the scope of the 2014 Farm Bill are not protected by the ‎Appropriations Rider and may be subject to federal enforcement ‎action. Notwithstanding the passage of the 2018 ‎Farm Bill and the publication of the USDA IFR, the hemp cultivation and ‎research provisions contained in the 2014 Farm Bill ‎remain in effect until January 1, 2022, as extended by the Consolidated Appropriations Act, 2021. ‎Many states relied on their existing pilot program regimes—either in choosing to continue operating under the 2014 ‎Farm Bill 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 2018 Farm Bill, ‎variances in these ‎‎jurisdictions’ laws and regulations on Hemp are likely to persist. ‎Compliance with state law ‎remains imperative under both ‎the 2014 and 2018 Farm Bills.

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.

‎

⁶ See http://www.ncsl.org/research/health/state-medical-marijuana-laws.aspx.‎

⁷ https://www.ams.usda.gov/rules-regulations/hemp/state-and-tribal-plan-review.‎

⁸ Id.

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%. ‎

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 (“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 70 state and tribal hemp production plans. The status of the USDA's review of plans, ‎including which states have adopted to continue under the 2014 Farm Bill, 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. ‎‎

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 makes clear that the FDA will continue its work to educate the ‎public on CBD’s perceived safety risks and that the FDA is taking steps to solicit additional public ‎feedback, data, and research on the science, safety, and quality of CBD products. These new steps ‎include re-opening the public docket so that FDA can obtain additional scientific data on CBD, which will ‎include a process by which confidential and proprietary information can be shared with the FDA and kept ‎protected. Additionally, former Commissioner Hahn’s statement reiterates that the FDA will continue to monitor ‎and police the CBD products marketplace and is evaluating the issuance of a risk-based enforcement ‎policy that provides greater transparency and clarity regarding factors the FDA intends to consider in ‎prioritizing enforcement decisions. ‎

Much of former Commissioner’s Hahn statement was also included in the FDA’s congressionally mandated ‎report on CBD, which was also submitted on March 5, 2020. The report confirms that the ‎FDA is actively considering pathways to allow the marketing of CBD as a dietary supplement, which may ‎include notice and-comment rulemaking and interim risk-based enforcement policies. The report signals 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. The report acknowledges that ‎the FDA is receiving inquiries about whether “full spectrum” and “broad spectrum” Hemp products can ‎currently be marketed and sold pursuant to the Farm Bill. The FDA’s current position is that products containing CBD require approval as a new drug. The ‎report does not set a timeline for ‎agency action, but it does signal the FDA’s clear interest in a pathway for the use of CBD in dietary ‎supplements. Further to this point, 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.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 calls 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 help build a robust evidentiary foundation to inform public health ‎decisions regarding CBD. The FDA further notes 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.”‎ ‎ However, it is unclear whether the new FDA Commissioner appointed under the Biden Administration will take the same ‎stance on CBD as former Commissioners Hahn and Gottlieb. ‎

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.‎ A similar warning was issued to another online CBD retailer on July 22, 2021.

On October 16, 2021, the FDA published a “Cannabis-Derived Products Data Acceleration Plan,” a portfolio of pilot initiatives and parternships 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.

‎ 

In addition, on December 17, 2020, the 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.

‎‎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, the DEA IFR is currently in the notice-and-comment stage of federal rulemaking. To ‎date, more than 3,300 public comments have been submitted, so it is possible that the DEA IFR will be modified and ‎improved before becoming a final rule. Many of the comments, which are being 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 2014 and 2018 Farm Bills and are not impacted by the DEA IFR.

H.R. 841‎ and S. 1698

On February 4, 2021, Rep. Kurt Schrader (D-OR-5) and Rep. Morgan Griffith (R-VA-9) introduced H.R. 841. This is the second year they have introduced this bill. 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. Prospects for such passage are improved by the fact that the prior version of H.R. 841, introduced during the 116th Congress (2019-2020), won the bipartisan support of 30 co-sponsors and was referred to the House Committee on Energy and Commerce. However, the bill failed to win passage prior to the congressional session ending.

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.

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.” Prospects for the passage of H.R. 841 and S. 1698 are unclear.

In addition, on July 14, 2021, Senators Chuck Schumer (D-NY), Ron Wyden (D-OR), and Cory Booker (D-NJ) released a discussion draft of the “Cannabis Administration and Opportunity Act” (CAOA). The bill removes marijuana from Schedule I of the Controlled Substances Act and establishes 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. To date, the bill has not been formally introduced, and its prospects are uncertain.

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. As of the date of this Amendment No. 1 to the Registration Statement, the States Reform Act has four Republican co-sponsors, and the backing of several industry advocacy groups. H.R. 5977’s prospects of passage are unclear.

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; labeling and packaging requirements; and conditions of intended use for the product. H.R. 6134’s chances of passage are unclear.

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 both the 2014 and the 2018 Farm Bills, 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 after the 2018 Farm Bill is fully implemented. In ‎addition, states take varying approaches to regulating the production and sale of hemp-derived CBD. While all states have removed lawfully produced hemp from their controlled substance laws, only ‎certain 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. For example, Kentucky, Tennessee, Indiana, Florida, Colorado, and other ‎states have passed laws that explicitly exempt hemp extracts such as CBD from legal prohibitions applicable to ‎controlled substances such as marijuana. In other states, sale of CBD, notwithstanding its origin, may be explicitly authorized only under state medical or adult-use marijuana program licensees. 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. 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) Registration issued ‎April 3, 2021 in respect of Indoor Commercial Industrial Hemp ‎Registration — 3,000 sq. ft.; (ii) Registration issued March 22, 2021 in respect of Indoor Commercial ‎Industrial Hemp ‎Registration — 18,600 sq. ft.; (iii) Registration issued February 3, 2021 in ‎respect of Outdoor ‎Commercial ‎Industrial Hemp Registration — 120 acres; (iv) Registration issued February 12, 2021 in respect of Outdoor Commercial ‎Industrial Hemp Registration — 1 acre and 11,200 sq. ft. 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.‎

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, 2014.‎¹² In 2013, responsibility for establishing ‎regulations pertaining to the cultivation of Hemp, including registration and inspection, was delegated to the CDA.¹³‎ ‎The CDA adopted rules and regulations that set forth requirements for registration, inspection, and testing.¹⁴ ‎ ‎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 fee¹⁵. 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.¹⁶ 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.¹⁷ ‎

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.‎¹⁸ 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.”‎¹⁹ 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.”²⁰ ‎

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. ‎

¹² Colo. Const. art. XVIII, § 16.

¹³ Colorado Senate Bill 13-241. (63) 8 CCR 1203-23.

¹⁴ Id.

¹⁵ Id.

¹⁶ Id.

¹⁷ Id.

¹⁸ See C.R.S. §§35-61-101, et seq.

¹⁹ 8 CCR §1203-23(1.12).

²⁰ 8 CCR §1203-23(1.3).

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 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 becomes 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.

Kentucky

Kentucky established a robust agricultural pilot program in 2013,²¹‎ 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 regulations²² 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”²³‎ set forth under the 2018 Farm Bill. Kentucky’s definition of marijuana²⁴ ‎ ‎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.‎²⁵

Following the implementation of the 2018 Farm Bill through the USDA FR, Kentucky has 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 will become effective January 1, 2022.

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.

²¹ Ky. Rev. Stat. §§ 260.850-.869.

²² 302 Ky. Admin. Regs. 50:010-080.

²³ Ky. Rev. Stat. § 260.850(5) (73) Ky. Rev. Stat. § 218A.010(27).

²⁴ Ky. Rev. Stat. § 218A.010(27).

²⁵ Ky. Rev. Stat. § 218A.010(27)(c)-(f).

‎

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,‎²⁶‎ pursuant to which an “‎industrial hemp commodities or product”‎ ‎includes CBD and other compounds derived from hemp.²⁷ Further, all cannabinoid products from hemp must be ‎tested for their THC and CBD content and microbiological contaminants.²⁸ 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 to²⁹ 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 is currently under review.

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. ³⁰ The Food and Drug Administration 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.‎³¹ 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 ‎has taken 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. 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 the case for any cannabis or cannabis-derived ingredients.”³² 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.”‎

²⁶ See Oregon Revised Statutes § 571.300 et seq.; Oregon Administrative Rules § 603-048-0010 et seq.

²⁷ OAR § 603-048-0010 (11)(a).

²⁸ Id. at § 603-048-2320, 603-048-2340.

²⁹ OAR § 603-048-0100(4).

³⁰ https://www.fda.gov/about-fda/fda-basics/how-did-federal-food-drug-and-cosmetic-act-come-about.

³¹ U.S. Food and Drug Administration, Mission Statement: https://www.fda.gov/about-fda/what-we-do.

³² 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.

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 (such restrictions 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.”‎ 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. As discussed below, the FDA takes the position that CBD was not marketed in a food ‎or dietary supplement prior to the conditions for the IND Preclusion rendering effective.

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 "new dietary ingredients" notify the Food and Drug Administration about these ingredients. 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 due to an exclusion provision (CBD isolate is a drug) and due to safety concerns. 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 does not impact 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 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.³³ ‎ ‎ ‎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.” ³⁴

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 the facility and listed ‎each of the Company’s FDA ‎products with the FDA on the FDA website, whereby a National Drug Code ‎‎(“NDC”) number was issued ‎for the product. The Company currently has approximately 40 ‎products that have been issued an FDA ‎NDC number. 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. The FDA has not recognized CBD as GRAS for human consumption, although certain hemp seed ‎derivatives may be considered GRAS.‎^{35 ,36} 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. ‎

In October 2017, the Company received a warning letter from FDA regarding claims being made for its products ‎and citing to FDA’s position concerning the IND Preclusion (the “‎Warning Letter”‎). The Company responded in two ‎phases: (1) one letter identifying corrective actions made to its website and marketing related to product claims; ‎and (2) a separate letter responding to FDA’s comments on IND Preclusion and establishing the Company’s ‎position that CBD is not precluded from being a food or dietary ingredient since it was marketed in a food or dietary ‎supplement prior to substantial clinical investigations being instituted and being made public.‎

³³ 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.

³⁴ See 21 CFR 201.10(c)(4), Drugs; statement of ingredients.

³⁵ 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.

³⁶ 21 CFR § 1308.35 (a)(2). The DEA’s final rule on legal hemp materials and products spec ifically excludes materials used for human consumption.

On May 23, 2018, the Company received a response from FDA noting the changes to the Company’s website and ‎marketing, but also indicating the FDA did not agree with the Company’s position that CBD is not precluded from ‎being a food or dietary ingredient since it was marketed in a food or dietary supplement prior to substantial clinical ‎investigations being instituted and being made public. As stated above, the Company does not agree with the ‎FDA’s position regarding the legality of CBD as ingredients in foods and dietary supplements. The Company has asked FDA to elaborate on the basis for its position in a July 11, 2018 letter to ‎the agency, since FDA’s May 23, 2018 response did not provide any such basis. To date, the Company has not ‎received a direct response to its July 11, 2018 letter.

On December 20, 2018, the FDA released a statement from former Commissioner Scott Gottlieb, which restated ‎FDA’s current position, opining that products containing CBD ingredients may not be sold as food or dietary ‎supplements. The statement also contained, for the first time, a clear path toward FDA’s permanent and formal ‎acceptance of hemp-derived CBD as a food or dietary supplement ingredient. For the first time, the FDA has ‎indicated that it is considering using its authority to issue a regulation that will specifically allow hemp-derived CBD ‎in foods and supplements.‎

Statements from the FDA issued in July 2019 made clear that the FDA is “‎[p]aving the way for regulatory clarity[.]” ³⁷ ‎ FDA “‎is ‎committed to evaluating the regulatory frameworks for non-drug uses, including products marketed as foods and ‎dietary supplements[.]” ³⁸ Importantly, FDA “‎recognize[s] that there is substantial public interest in marketing and ‎accessing CBD in food, including dietary supplements . . . [and that] [t]he statutory provisions that currently prohibit ‎marketing CBD in these forms also allow the FDA to issue a regulation creating an exception, and some ‎stakeholders have asked that the FDA consider issuing such a regulation to allow for the marketing of CBD in ‎conventional foods or as a dietary supplement, or both.”‎ ³⁹

As it continues down this path, the FDA is “‎[l]istening to and learning from stakeholders[.]” ⁴⁰‎ The FDA held a public ‎hearing on May 31, 2019 to obtain scientific data and information about the safety, manufacturing, product quality, ‎marketing, labeling, and sale of products containing Hemp or Hemp-derived compounds. Numerous hemp ‎industry stakeholders and consumers shared their perspectives and have met with ‎the FDA’s CBD Working Group, which is reviewing the use of CBD as a food and ‎dietary supplement ingredient.

On July 16, 2019, the FDA issued a consumer update on its efforts to address “‎unanswered questions about the ‎science, safety, and quality of products containing CBD”‎ through the feedback from the May 31, 2019 hearing and ‎information and data gathered through a public docket.‎⁴¹ ‎Specifically, the FDA noted concerns regarding potential ‎liver toxicity, questions about cumulative exposure to CBD over time, the effects of CBD on special populations ‎‎(e.g., the elderly, children, adolescents, pregnant and lactating women), and the safety of CBD use in animals ‎including pets. On October 16, 2019, the FDA issued another consumer update cautioning against the use of CBD, ‎THC, and marijuana during pregnancy or while breastfeeding due to the current lack of comprehensive research ‎studying the effects of CBD on the developing fetus, pregnant mother, or breastfed baby. ⁴² ‎ On November 25, 2019, the ‎FDA provided another consumer update stating there is limited available information about CBD, including about ‎its effects on the body.‎ ⁴³ The FDA also sent another round of warning letters to companies marketing CBD products ‎with disease claims. Some letters were jointly issued by the FTC. In addition, the agency reiterated its position that CBD cannot be added to food and dietary ‎supplements and stated that it is “‎not aware of any basis to conclude that CBD is GRAS [Generally Recognized as ‎Safe] among qualified experts for its use in human or animal food.” ⁴⁴ ‎ As stated above, the letters 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”.

³⁷ Amy Abernathy, M.D., Ph.D., et al., “FDA is Committed to Sound, Science-based Policy on CBD,” fda.gov, https://www.fda.gov/news-events/fda-voices-perspectives-fda-leadership-and-experts/fda-committed-sound-science-based-policy-cbd.

³⁸ Id.

³⁹ Id.

⁴⁰ Id.

⁴¹ Id.

⁴² U.S. Food and Drug Administration, “What You Should Know About Using Cannabis, Including CBD, When Pregnant or Breastfeeding,” https://www.fda.gov/consumers/consumer-updates/what-you-should-know-about-using-cannabis-including-‎cbd-when-pregnant-or-breastfeeding. ‎

⁴³ U.S. Food and Drug Administration, “FDA warns 15 companies for illegally selling various products containing cannabidiol as agency details safety concerns,” https://www.fda.gov/news-events/press-announcements/fda-warns-15-companies-illegally-selling-various-‎products-containing-cannabidiol-agency-details.

⁴⁴ Id.

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 makes clear that the FDA is taking steps to solicit additional public ‎feedback, data, and research on the science, safety, and quality of CBD products. These new steps ‎include re-opening the public docket so that FDA can obtain additional scientific data on CBD, which will ‎include a process by which confidential and proprietary information can be shared with the FDA and kept ‎protected. Additionally, former Commissioner Hahn’s statement reiterates that the FDA will continue to monitor ‎and police the CBD products marketplace and is evaluating the issuance of a risk-based enforcement ‎policy that provides greater transparency and clarity regarding factors the FDA intends to consider in ‎prioritizing enforcement decisions. ‎

The Company believes it is clear from former Commissioner Hahn’s statements, and also from FDA’s prior guidance, that 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.‎

Much of former Commissioner Hahn’s statement was also included in the FDA’s congressionally ‎mandated ‎report on CBD, which was also submitted 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.”‎ The report confirms that the ‎FDA is ‎actively considering pathways to allow the marketing of CBD as a dietary supplement, which may ‎include ‎notice-and-comment rulemaking and interim risk-based enforcement policies. The report signals 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. The report 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. Largely, the ‎report does little to address the current regulatory ambiguity for ‎hemp derived extracts with naturally occurring CBD and does not set a timeline for ‎agency action, but it does signal the FDA’s interest in a ‎pathway for the use of CBD in dietary ‎supplements. Further to this point, 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.‎ ‎ As noted above, while the FDA has stated that it has made ‎‎”substantial progress” toward the goal of providing additional ‎guidance on CBD products, in more recent ‎statements the FDA has noted that it is still in the process of gathering data ‎on the safety profile of CBD ‎to inform public health decisions. To this end, on October 16, 2021, the FDA published a “Cannabis-Derived Products Data Acceleration Plan,” a portfolio of pilot initiatives and parternships 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. It is unclear whether the new FDA ‎Commissioner appointed ‎under the Biden Administration will take the same stance on CBD as former Commissioner ‎Hahn, or ‎continue the progress toward a clear regulatory pathway for CBD products, in particular for dietary ‎supplements ‎and food products. ‎

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, notwithstanding that ‎Cannabis and the cannabinoids contained therein have been consumed as food by ‎human beings for centuries even if not specifically marketed as CBD or other cannabinoids. 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. A ‎determination that Hemp products containing CBD or other cannabinoids were not present in the food supply, ‎marketed prior to October 15, 1994, are not otherwise permissible for use as a dietary ingredient, may have a ‎materially adverse effect upon the Company and its business. Moreover, 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. ‎

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.‎

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:‎

In January 2019 the Company received U.S. Hemp Authority Certification. The U.S. Hemp Authority is an industry ‎self-regulatory organization. The U.S. Hemp Authority Certification program provides education on standards and ‎best practices for the hemp industry and continued certification requires an annual third-party audit. ‎

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. ⁴⁵ According to the GRAS ‎definition, ⁴⁶ ‎ 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.

⁴⁵ 21 C.F.R. 170.30.

⁴⁶ ‎21 C.F.R. 170.30(e)(i).

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’ export requirements with respect to Hemp. The Company makes decisions as to international expansion upon completion of this 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, Argentina, Brazil, Canada, Italy, Puerto Rico, and Uruguay, 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

The Company has limited sales to consumers with a medical exception in Canada under an exemption to import. Although the Company’s products are not marijuana, they are regulated as Cannabis pursuant to the Cannabis Act and associated regulations. Therefore, their importation and sale in Canada is governed by Health Canada, which has the authority to grant exemptions and issue import permits on a case-by-case basis. The Company requires each Canadian purchaser to obtain licenses and permits authorizing the importation of Cannabis under the Cannabis Act and associated regulations and to provide an import permit from Health Canada for each order delivered to Canada, which permit indicates that Health Canada has permitted the legal importation thereof by the purchaser.

The Company does not conduct its business with the “intent to conceal or convert” such proceeds as contemplated under Section 462.31 of the Criminal Code (Canada). The business of the Company in Canada is the lawful production and sale of CBD pursuant to applicable regulatory regimes, which business if conducted in Canada, would not be an offence in Canada. The Company has considered the foregoing provisions and is satisfied that its activities will not violate the Criminal Code (Canada).

While the Company has imported to special access medical exemption holders in Canada since 2016, it also worked within the rules and regulations of Health Canada under the hemp program in seeking registration on Heath Canada’s List of Approved Cultivars (“LOAC”) to cultivate its proprietary hemp genetics in Canada. Two years of research trials took place in Manitoba, Canada to gather compliance data for the Company’s LOAC application submitted with Health Canada on November 19, 2020. In 2021, three of the Company’s proprietary hemp cultivars were approved for registration on Health Canada’s 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, clearing 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.

Despite Canada being one of the first countries to federally legalize the sale of Cannabis, the hemp CBD wellness category is underdeveloped in Canada, with limited offerings of quality full-spectrum hemp extract products. ⁴⁷  

Currently, Health Canada treats hemp CBD under the same regulatory regime as Cannabis THC. The Canadian hemp industry is lobbying the Canadian federal government to change the regulations for hemp CBD to a natural health supplement that could be added to food, drinks, cosmetics, and other wellness products. Hemp CBD products could then be sold in all types of retailers across Canada. In September 2020 a report prepared by the Institute of Fiscal Studies and Democracy concluded that if Ottawa regulated CBD like regular health products it would open an annual market worth more than C$2 billion with immense potential for exporting CBD to other countries. ⁴⁸

ITEM 1A. RISK FACTORS

The following specific factors could materially adversely affect the Company and should be considered when deciding whether to make an investment in the Company. The risks and uncertainties described in this Amendment No. 1 to the registration statement are those the Company currently believes to be material, but they are not the only ones the Company faces. If any of the following risks, or any other risks and uncertainties that the Company has not identified or that the Company currently considers not to be material, actually occur or become material risks, the Company’s 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 the Company’s 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 before making an investment decision.

Risks Relating to the Regulatory Environment

The regulatory environment surrounding Hemp is uncertain, varies among jurisdictions, and is subject to change.

⁴⁷ Institute of Fiscal Studies and Democracy (IFSD) at the University of Ottawa: “Assessing the Economic Impact of Regulating CBD Products as Health Products” September 14, 2020.

⁴⁸ Ibid.

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 70 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:

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 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. However, some states are continuing to ‎operate under the 2014 Farm Bill through the 2021 growing season. 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 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.

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. 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.

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 scope of 2014 and 2018 Farm Bill-compliant hemp programs relative to the 2014 Farm Bill and the ‎‎2018 Farm Bill 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.

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:

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 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 Company’s acquisition of Abacus may expose it to unknown regulatory compliance risks.

While the Company believes Abacus has conducted its business in material compliance with the United States regulatory regime governing industrial Hemp, the Company may be subject to regulatory action as a result of the Abacus business, whether as a result of a differing interpretation of applicable law by the FDA or other regulatory body, or as a result of regulatory compliance issues unanticipated by the Company.

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" notify the Food and Drug Administration about these ingredients. 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 is otherwise approve by the FDA as dietary ‎ingredients. 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 CBD is used in a drug and FDA has determined that CBD was not marketed as a dietary supplement or conventional food before it was authorized for investigation as a new drug. There is no guarantee that federal legislation, regulation, or judicial action will override FDA’s determination and permit the use of CBD as an NDI. If FDA’s determination is not modified, this would have a materially adverse effect upon the Company and its ‎business. ‎

The FDA Interpretation of IND Preclusion could harm 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 has been 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. If the FDA were to enforce the IND Preclusion based on its interpretation, this would materially and adversely impact the Company’s business and financial condition.

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 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 outlines 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 a third such warning letter to a third company on July 22, 2021. ‎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 they have a number of other enforcement means available to them, 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. ‎

Although the Company believes that the departures of Commissioner Gottlieb and Commissioner Hahn will not ‎have a significant long-term impact on the development of a regulatory regime permitting Hemp-derived ‎compounds in foods or dietary supplements, there can be no certainty that the new Commissioner appointed by the ‎Biden Administration will continue on that same path. If the new FDA Commissioner were to halt current initiatives ‎of the FDA regarding CBD, such as a potential rulemaking or enforcement policy guidance, this could delay the ‎development of such a regulatory regime and 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 websites and through social media companies such as Twitter. A seventh enforcement action against a CBD company was announced in May 2021. 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 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 domestically and in the United States 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.

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 2014 and 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 in Canada or the United States, then the Company expects that it would have access to raise equity and/or debt financing privately. 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.

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 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.

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.

Risks Relating to the Company’s Business and Industry

The consequences of COVID-19 and the governmental response to contain the pandemic could negatively impact the Company’s business and results of operations, financial condition, and share price.

Management has continued to closely monitor the impact of the COVID-19 global pandemic, with a focus on the ‎health and safety of the Company’s employees, business continuity and supporting its communities.‎

In response to, or as a result of, the current COVID-19 pandemic and emergence of variants, the Company may experience, among other things, voluntary or mandated temporary closures of one or more of the Company’s facilities; temporary or long-term labor shortages; temporary or long-term adverse impacts on the Company’s supply ‎chain and distribution channels; the potential of increased network vulnerability and risk of data loss resulting from ‎increased use of remote access and removal of data from the Company’s facilities; difficulty in complying with covenants under its current or future debt agreements; required reallocation or adjustment of resources, which may ‎impact the Company’s business plans and product offerings. In addition, the direct or indirect impacts of ‎COVID-19 may extend to disrupt the Company’s suppliers, partners, manufacturers, farmers, customers and other ‎stakeholders, which in turn could materially adversely affect the Company’s business, results of operations or financial condition. Any change or disruption in operations could impact and have a material adverse effect on the Company's operations and/or results from operations. In addition, the re-introduction of voluntary or mandated efforts ‎to slow the spread of COVID-19 could impact the Company’s operations and sales. If portions or all of the Company’s, ‎or its retail-partners’, operations are further disrupted or suspended as a result of preventative or reactionary ‎measures in response to the ongoing spread of COVID-19, it could have a material adverse impact on the Company’s ‎profitability, results of operations, financial condition and share price. Further, there continue to be significant economic and social impacts of the COVID-19 pandemic, including rising inflation rates, continued levels of higher unemployment, among other impacts; any of which may have an impact on consumer behavior, including use of the ‎Company's products, as well as a reduction in retail purchases, which may have a material adverse impact on the ‎Company’s profitability, results of operations, financial condition and share price.‎

Among others, the Company has identified the following as potential continuing direct or indirect impacts and risks ‎to its business and operations due to the COVID-19 pandemic:‎

On September 9, 2021, in an effort to prevent the spread of COVID-19 and the highly contagious Delta variant, President Biden announced executive orders that included a mandate for private-sector businesses with 100 or more employees to require COVID-19 vaccination or weekly testing as soon as the Occupational Safety and Health Administration (“OSHA”) issues its Emergence Temporary Standard (“ETS”). The OSHA published the ETS on November 5, 2021. The Company is monitoring the status of the ETS and will review it upon release to understand and comply with any legal obligations. The Company endeavors to ensure that current health and safety protocols in place across the Company’s facilities remain in compliance with applicable local, state and federal guidelines. 

Given the uncertainties associated with the ongoing COVID-19 pandemic, including ‎the uncertainty surrounding the remaining duration and outcome, COVID-19 variants and vaccine efficacy, the Company is unable to estimate the full impact of the COVID-19 pandemic on its business, financial condition, results of operations, and/or cash flows; however, the impact could be material. During the quarter ended ‎June 30, 2021, the Company’s business-to-business sales continued to be negatively impacted as a ‎result of the COVID-19 pandemic. The uncertain nature of the impacts of the COVID-19 pandemic ‎may affect the Company’s results of operations for the balance of fiscal 2021, and may impact the ‎Company’s future sales, product costs and provisions of inventory going forward. The continued ‎uncertainty surrounding COVID-19 and the impacts COVID-19 variants may have on the Company ‎and its stakeholders may result in, among other things, disruptions to operations (including the Company's ‎supply chain and sales channels), reductions in business activity, increased funding costs and funding pressures (as applicable), a decrease in the market price of the Company's Shares, a decrease ‎in asset values, additional write-downs and impairment charges, lower profitability, and a reduction in demand for the Company's products, any of which could have a material adverse impact on ‎the Company's financial results, position, and prospects.‎

The accuracy of the financial projections prepared by management in connection the Arrangement with Abacus may prove inaccurate and there can be no assurance that the financial projections in connection with the Arrangement will be realized.

In approving the Arrangement, the Board considered, among other things, certain projections, prepared by management, with respect to each of the Company and Abacus following the completion of the Arrangement (the “Projections”). All such Projections were based on assumptions and information available at the time such projections were prepared. The Company does not know whether the assumptions made will be realized.

The likelihood that the assumptions will be realized may be adversely affected by known or unknown risks and uncertainties, many of which are beyond the Company’s control. Further, financial forecasts of this type are based on estimates and assumptions that are inherently subject to risks and other factors such as company performance, industry performance, general business, economic, regulatory, market and financial conditions, changes to the business, financial condition or results of operations of the Company and Abacus, as well as the factors described in this “Risk Factors” section and under the heading “Disclosure Regarding Forward-Looking Statements”, any of which may impact such forecasts or the underlying assumptions. As a result of these contingencies, there can be no assurance that the financial and other Projections will be realized or that actual results will not be significantly higher or lower than projected.

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.

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.

The Company’s quality control systems may not prove successful.

The quality of the Company’s products are 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 brand (and those brands associated with the Company, such as 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 any of 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 August 1, 2022.

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 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.

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.

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 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 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, and 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.

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 in a new and growing industry.

The number of competitors in the Company’s market segment is expected to increase, both nationally and internationally, 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 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’s success will depend on its ability to keep pace with any changes in such markets, especially in light of legal and regulatory changes. 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 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.

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 Cannabis 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.

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 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) product innovations within existing categories and growth into adjacent categories and continued growth of existing products in existing categories; (ii) further penetration into new markets and geographies; and (iii) 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:

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.

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. 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, see “General Development of the Business of the Company – History and Development of the Company; Three-Year History.” The Company received a waiver for certain financial covenants for each of the three months ended September 30, 2020 and December 31, 2020.

The Company also owes approximately $770,000 as at December 31, 2020, pursuant to notes issued regarding the acquisition by Abacus Wellness, Inc. of the principal assets of two companies owning the Harmony Hemp brand on February 10, 2020. Pursuant to such acquisition, Abacus U.S., and therefore the Company, is obligated to pay the remaining purchase price payable for Harmony Hemp, which remaining amount is represented by such notes.

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 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 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.

On April 20, 2018, the USPTO issued a Final Office Action refusing registration of two trademark applications submitted by the Company based on the Trademark Examiner’s interpretation that the marks were not in lawful use in commerce under Sections 1 and 45 of the United States Trademark Act and because the goods identified in the application were not in compliance with either the CSA or the FD&C Act. The Company filed a Request for Reconsideration of the refusals in March 2019. Despite USPTO’s aforementioned position and refusal for registration, the Company may rely on common law theories of trademark protection and enforcement in cases of actual or suspected trademark infringement of the trademarks it wishes to protect.

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 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.

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 ‎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 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.

‎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.‎ ‎

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. 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.

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 half 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.

The Company anticipates requiring substantial 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 expects to require substantial additional capital in the near future to continue operations at its cultivation and production facilities, dispensaries, 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 fail to raise additional capital, as needed, its ability to implement its business model and strategy could be compromised.

Even if the Company obtains financing for its near-term operations, it expects that it will require additional capital thereafter. 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; and (iv) 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, convertible debt and real estate sale/leaseback transaction. 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 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 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, societal and industry factors 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.

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 Abacus Subsidiaries). 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 6.9% equity interest in the Company. 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 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.