CWBHF Charlottes Web Holdings Inc (QX)

Effective as of November 14, 2022, Charlotte’s Web Holdings, Inc. (the “Company”) entered into a subscription agreement (the “Subscription Agreement”) with BT DE Investments, Inc. a wholly-owned subsidiary of BAT Group (LSE: BATS and NYSE: BTI), providing for the issuance of an approximately US$56.8 million (C$75.3 million) convertible debenture (the “Debenture”) that is convertible into 19.9% ownership of Charlotte’s Web common shares at a conversion price of C$2.00 per common share of the Company on the Toronto Stock Exchange (TSX). The Debenture will accrue interest at an annualized rate of 5.00% until such time that there is federal regulation permitting the use of cannabidiol, a phytocannabinoid derived from the plant Cannabis sativa L. (“CBD”), as an ingredient in food products and dietary supplements in the United States. (The term “federal regulation” is defined as the date that federal laws in the United States permit, authorize or do not prohibit the use of CBD as an ingredient in food products and dietary supplements.) Following federal regulation of CBD, the annualized rate of interest shall reduce to 1.5%. The maturity date for the Debenture shall be November 2029. The Subscription Agreement contains customary representations and warranties and covenants. The Debenture will be issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 of Regulation D promulgated under the Securities Act.

BAT will be entitled to convert the Debenture into common shares of the Company at any time following issuance. Upon conversion of the Debenture, BAT will be subject to an 18-month lock-up on share dispositions, subject to certain customary exceptions.

The interest under the Debenture will be settled on maturity or earlier conversion, through: (a) the issuance of common shares of the Company, or, (b) if mutually agreed by the Company and BAT, through the payment of cash. The number of common shares of the Company will be determined as of the conversion date based upon (i) if the Common Shares are listed on the Toronto Stock Exchange or any other national securities exchange in the United States or Canada (a “Stock Exchange”) at the time of conversion, the market price (as determined in accordance with the policies of the Stock Exchange) of the common shares or (ii) if the Common Shares are not listed on a Stock Exchange at the time of conversion, at the fair market value of the common shares determined by an independent financial advisor appointed by the Company and consented to by BAT. Completion of any conversion of the Debenture will be subject to customary closing conditions, including but not limited to regulatory and any applicable stockholder approvals. The Company, however, is not entitled to pre-pay the Debenture in whole or in part.

The Debenture will be subject to redemption by BAT for an amount in cash equal to all principal and then outstanding unpaid interest at the date of redemption if the Company materially breaches the terms of the Debenture, which remain uncured within 20 business days after the giving of notice of such breach. If the Company’s enters into or commences operations or activities in violation of the laws concerning cannabis in such jurisdictions, BAT, BAT will be entitled to elect to sell or otherwise transfer the Debenture or call it for redemption for cash within 90 days following the expiration of the 30-day negotiation period. In such event, the Company may redeem the Debenture for the lesser of all principal and then outstanding interest or the aggregate value of the percentage ownership interest in the Company (assuming conversion of the Debenture into common shares of the Company as of the date of repayment).

Concurrently with the issuance of the Debenture, the Company and BAT entered into an investor rights agreement. The IRA provides BAT with certain rights, including the right to nominate 20% of the members of the Company’s board of directors (the “Board”) for so long as BAT and its affiliates’ partially diluted ownership of the Company’s common shares is at least 15% (with a stepdown in BAT’s nomination rights to 10% of the members of the Board). BAT’s nomination rights terminate upon BAT and its affiliates’ partially diluted ownership of the Company’s common shares declining below 10% for, subject to certain exceptions in the IRA, a 30 day period.

Other than the agreements described in this Item 1.01 of this Form 8-K, there are no other agreements or relationship between the Company and BAT.

The foregoing description of the Subscription Agreement, Debenture and Investor Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of each of the agreements, which will be filed as exhibits to the Company’s Annual Report on Form 10-K.