Q2 2021 Charlotte's Web Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings, Inc. Second quarter Conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Thursday August 12, 2021, I would now like to turn the conference over to Cory Pala Director of Investor Relations. Please go ahead.
Thank you Jessica and good morning, everyone. Thank you for joining us for our 2021 second quarter earnings Conference call for Charlotte's Web Holdings, Inc.
My name is Cory Pala director of Investor Relations and leading the call. This morning is Charlotte's web CEO, Danny Elsner, along with incoming CFO West Boysen West replaces former CFO Russ Hammer, who has recently retired.
Our earnings press release financial statements for the second quarter, along with our MD&A can all be found in the Investor Relations section of our website and filed on SEDAR Dot com on today's call Daniel will share some high level comments on the quarter with an update on the business and some color around recent correspondence with the FDA at Westwood highlight our financials, we will take questions from our analysts at the <unk>.
And of this car prepared remarks, a replay of this call will be available through the next week accessible for the details provided in our earnings release, a webcast replay of this call will also be available for an extended period of time accessible through the IR section on our website at Charlotte's web Dot com.
A reminder to our listeners that certain statements made on this call, including some answers. We may provide certain questions may include content that is forward looking in nature, and therefore subject to risks and uncertainties and other factors, which could cause actual future results or company performance to differ materially from implied expectations such risk surrounding forward looking statements are all outlined in detail within the company's regular.
Tori filings on SEDAR Dot com.
In addition, during this call we will refer to supplemental non ifr S accounting measures, including adjusted EBITDA, which do not have any standardized meaning prescribed by <unk>.
Adjusted EBITDA is therefore defined in our press release as well as the N DNA as filed on SEDAR and with that I will now hand over the call to Charlotte's Web Chief Executive Officer, Danielle Sir.
Thanks, Corey good morning from Denver, Colorado, and thank you for joining our call with me. This morning is Wes <unk>, our new CFO West brings a significant amount of M&A and international experience to Charlotte's web. He was appointed CFO. Following Russ Hammer his decision to retire I want to thank Russ for helping to build the infrastructure team and processes, especially during the day.
<unk> and the independent MC, we wish them well and its much deserved retirement.
To set the context for Q2.
I want to provide a little bit of perspective 2021 year to date has been characterized by advancements within the CBD category with notable progress made behind key three key themes first a recovery in brick and mortar retail traffic second continued competitive consolidation within the CBD category and <unk>.
Third legislative progress on the regulatory front for CBD first brick and mortar retail began to recover in Q2 with category sales improving across most channels. According to the Bright-field group consumer data between Q1, and Q2 reflects a shift of about four to five percentage points from online to brick and mortar channels.
Channels with the greatest net benefit where CBD retail dispensaries, natural food and vitamin shops and pharmacies SEC.
The competitive consolidation within the CBD category continued and accelerated in Q2. According to the Bright-field group. The CBD category competitive competitive set is down about a third from its peak a year ago spins data supports the accelerating contraction in the natural channel in Q2 with a 15% reduction in <unk>.
<unk> brands, which is an acceleration versus a 7% reduction noted in Q1, we expect this trend to continue with a core group of brands emerging.
Finally on the regulatory front, we have seen progress legislatively with several recent developments advanced to establish a legal pathway for dietary supplements containing CBD and other hemp derived products first the house of Representatives Bill 841 was reintroduced by representative Schrader and grip it in Q1.
Which would legislate tamp illustrated with products as dietary supplements HR 841 continues to gain additional co sponsors on a bipartisan basis with a hearing on the build plan by the committee of jurisdiction in the back half of this year in May Senator Merkley, Paul and Wyden introduced a bill to the.
Senate Senate Bill $60.98, named the hemp access and consumer Safety Act. It contains additional language to allow CBD in food and beverage. This was followed by the Booker Schumer widened cannabis reform Bill, which is called the cannabis administration, an opportunity Act, which also includes our legal pathway for CBD.
Dietary supplements at the end of July the House Representatives approved an amendment in the 2022.
Appropriations package that encourages regulation, allowing CBD as a dietary supplement and food ingredients. This along with the three built shows the intent of Congress through bipartisan support in both the house and the Senate to establish a legislative framework within which the FDA would regulate hemp and it's.
Derivatives.
Our legislative approach to enable a framework within which the FDA can regulate full spectrum hemp extracts as a dietary supplement has become important and necessary I will comment on this further at the end of today's call.
Now shifting to our second quarter results net revenue increased 11, four versus year ago to $24.2 million. It was driven by our <unk> business, which increased 37, 7% versus year ago as consumers began returning to brick and mortar retail shopping and the addition of the abacus.
Acquisition to our portfolio despite consumers transitioning back to retail our DTC DTC E. Commerce sales held onto the gains made at the beginning of the pandemic a year ago, and even increased slightly up 1% in Q2 versus a year ago.
In Q2, DTC represented 65% of our total revenue and <unk> represented 35%. This is a four point increase for <unk> from 31% in Q1 of this year and is consistent with the bright field estimate.
For the second quarter DTC net revenue for the second quarter of 2021, DTC net revenue was up 1% to $15.7 million in terms of DTC Kpis overall traffic was down almost 25% versus a year ago, reflecting the return to retail other kpis delivered strong results versus a year ago.
Conversion was up 27% subscriptions were up 43% and our subscriber user base grew more than 50% versus a year ago. These loyal consumers drive a significantly higher lifetime value for Charlotte's web and demonstrate a strong consumer engagement with our brand, which our DTC channel will capitalize.
Ongoing forward.
Within our <unk> segment net revenue increased 37, 7% versus a year ago. In Q2 net revenue gains were realized in our largest and most established channels natural was up 9% healthcare practitioners were up 159%. In addition, we established distribution in emerging.
New channels alternative retail was up 59% and pet was up 67%.
In our established channels, we're leveraging the acquisition of the abacus business by unlocking incremental distribution with legacy Charlotte's web doors for newly acquired abacus products as well as accessing legacy abacus distributions for Charlotte's web products, we're taking advantage of this cross selling benefits across all of our channels.
In addition, we're beginning to expand into distribution into new retailers and new channels in Q2 for the first time Charlotte's web is expanding into fit the fitness segment directly through a multi year exclusive agreement with lifetime of national healthy lifestyle brand now offering Charlotte's web and CBD medic credit.
<unk> products.
At 140 of lifetime clubs in total we expanded our retail distribution over 500, new doors in Q2, including new doors in the pet channel and our alternate retail channels the.
This strong performance has translated into market share gains food drug and mass market share increased six points to 25% driven by distribution gains and double digit velocity increases year over year. The natural channel market share was $14 five up half a share point versus a year ago driven by them.
Digit increases in unit velocities.
On a gross revenue basis, both our ingestible and topical segments grew in Q2 versus year ago total Ingestible gross revenue increased by 1% versus a year ago led by gummies up 65% offset by capsules down, 1% and tinctures down 21% our gummies business is the large.
<unk> in the category and demonstrates our ability to successfully transform our portfolio to meet the needs of an evolving consumer.
Total Q2 topical gross revenues increased 202% versus year ago, primarily due to the acquisition of abacus in June of 2020 topical has contributed 20% of total gross revenue and contribute versus contributing just 8% year ago and contributing 18% in Q1 of 2021.
Looking forward, we expect this trend to continue as topical sales become an even bigger part of our portfolio I will now pass the call over to Wes for an overview of our financial performance.
Good morning, everyone. Thank you again for joining US do you need already provided some color on Q2 revenue so I won't repeat it but what I would add that the 11, 4% revenue growth doesn't fully reflect the increase in unit volume due to the contribution coming through <unk> sales <unk> as wholesale pricing, which.
It's lower revenue per unit.
So demand for growth from childhood switch products is higher than our revenue may suggest this quarter due to channel mix.
This is very encouraging and reflected in the market share gains we made this quarter.
Turning to Q2 gross margin and profit in terms of gross profit for the quarter year over year increases in both revenue and gross margin resulted in a 38% increase in gross profit for a total gross profit of $15.8 million.
Compared to $11.5 million in Q2 last year.
<unk> gross margin came in at 65, 5% for the quarter a significant 12 six point increase from 52, 9% reported in Q2.2020.
So greater transparency the Q2.2020 gross margin.
Two 9% included inventory provisions of $2.5 million.
For discontinued products prior.
Prior to this adjustment Q2.2020 gross margin was 64, 6%.
For modeling purposes, we expect second half consolidated gross margin in the mid sixties range.
On sales mix and increasing into 2022 from production and fulfillment cost improvements.
New facility becomes fully operational.
We expect improved manufacturing efficiencies as volumes ramp up and this is very encouraging.
Now turning to operating expenses.
Total opex for the second quarter was $25 million down 15, 2% from $29.5 million a year ago.
Q2 last year included approximately $5.2 million of onetime expenses related to the abacus acquisition and legal fees. Excluding these items for better comparison Q2, 2021, net opex increased modestly by approximately 3%.
Our opex level also reflects the success of our expense reduction program.
We implemented in Q3.2020 to reduce our opex by 10% from the Q3.2020 peak to bring our costs more in line with pandemic impacted revenue levels.
We have been ahead of plan with our Opex run rate down 11, 7% in Q2 from Q3.2020 run rate.
We recorded a net loss of $5.4 million for the quarter compared to a net loss of $14.4 million a year ago. This is a 63% improvement reducing our loss by $9 million.
On an adjusted EBITDA basis, we recorded a loss of $3.9 million.
31, 1% year over year improvement versus Q2, 2020, adjusted EBITDA loss was $5.7 million.
We are modeling smaller losses through the remainder of 'twenty 'twenty, one as we hit towards adjusted EBITDA breakeven at the end of this year and into 2022.
So to summarize the P&L, we delivered higher revenue increased our gross margin and reduced opex, which improved our adjusted EBITDA and reduced net losses.
This is what we want to see continued directional improvements across the board.
Moving onto Capex, our capex spend during the second quarter was approximately $1.6 million.
Primarily related to completing the final phase of our R&D production and distribution facility.
As this facility becomes fully operational this year.
We will be able to reduce some production costs and improve margins.
Total capex in the first half of 'twenty 'twenty, one was $3.3 million and we expect Capex investment for the full year to be between seven and $9 million.
We look forward to hosting an investor day to showcase the capabilities and efficiencies of our new R&D production and distribution facility in the near future.
Turning to liquidity.
Use of cash during the second quarter included $6.5 million in operations compared to $7.9 million in Q2 of last year.
Total cash used for the first half of this year was $25.7 million for context, approximately two thirds of cash used during this period was nonrecurring.
Cash at the end of Q2 was $27.1 million, which excludes.
Short term Irish tax receivable of $10.9 million.
With reduced losses through the remainder of 2021.
As we head towards adjusted EBITDA breakeven at the end of this year and into 2022, we believe that we are sufficiently capitalized to deliver on our plan.
We also maintained zero debt.
And an unused line of credit extendable to $20 million.
Turning to guidance I am comfortable that we will continue our quarterly revenue and market share growth, but having been with the company is short time I'm going to hold off on providing specific revenue guidance for the year.
In summary.
Expect a positive revenue and margin trends evident in the second quarter to continue I.
I will now turn the call back over to Denise for her closing remarks.
Thanks, Wes I'll conclude today's prepared remarks with some additional color around our recent formal correspondence with the FDA as well as providing an update on other international regulatory progress.
Since passing the 2018 farm Bill there has been significant attention on the FDA to resolve our regulatory pathway for full spectrum hemp extract with naturally occurring CBD.
The FDA has indicated publicly it wants to ensure consumer access to safe CBD containing products. They have had several public meetings on this topic and they opened a docket over two years ago to obtain information from stakeholders on these products. In addition to preparing and then withdrawing our formal draft and fourth in the <unk>.
<unk> spent discretion policy.
During this period of time, the CBD category has grown to become $3 billion to $4 billion in annual sales with thousands of brands and train, but it remains unregulated.
After two and a half years it has become increasingly more parent that in the fda's own words potential legislation might be appropriate to enable a framework for under which the FDA can regulate full spectrum hemp extracts as dietary supplements.
The second quarter of 2021, we put this thesis to test by formally submitting a new dietary ingredient notification to the FDA for our full spectrum hemp extracts as they have been recommending the FDA responded with an objection letter to our MDI notification their response substantially based on their drug preclusion.
Revision reveals that legislation is required to enable the FDA to establish a regulatory oversight for full spectrum hemp extracts as dietary supplements.
Both the house and the Senate have introduced bills that would recognize hemp CBD as a dietary supplement and we are encouraged by this progress.
Our experience with the FDA shows that this legislative legislation is a critical step in securing a regulatory environment to protect consumers and to establish guidance for manufacturers. It is our intent to stay at the forefront of this issue by working to establish a safe and transparent legal framework.
To regulate this category, we believe that given our vertically integrated supply chain and our leadership in this category. We are uniquely positioned to work with Congress and with the FDA to establish a regulatory framework for the benefit of the hemp wellness industry.
And finally, we've been previously discussed and our intent to extend our footprint, making moves to expand geographically within the sector, which I'll follow up I know for you <unk>.
Internationally, we're focused on the U K, the EU, Canada, and Israel through valuable strategic partnerships rooted in R&D quality manufacturing and distribution in the U K and the EU. We are diligently working with the evolving regulatory statues and have successfully submitted our U K and EU novel Foods applications.
We have successfully passed the first leg of the regulatory process in the EU and currently a weight validation by the UK regulatory body. In addition, we're working with several distribution partners to establish our turret.
Territorial reach as regulations mature.
In April of 'twenty 'twenty, one we secured health, Canada approval to bring proprietary Charlotte's web CBD genetics to Canada, having been accepted to the list of approved cultivars. We now have successfully planted our first international hemp crop of our proprietary patented hep cultivars.
Agriculturally rich Oak and Noggin Valley in British Columbia, Canada, We believed that our proven full spectrum products, coupled with our leading brand trust will be highly advantage in the Canadian market. We already have a large waiting list of consumers in Canada, where we have never actively marketed our products we are.
And an asset light model approach the Canadian market, developing our Canadian supply chain and expect to.
Spec product to be commercialized in Q1 of 2022.
In Israel, we have continued to develop our exclusive partnership with <unk>, a division of Intercare and await reclassification of CBD as a dietary supplement following the establishment of the new Israeli government.
Our recent build to legalize recreational cannabis did not pass. However, we currently expect that separately hemp could be declassified through the ministry of health by the end of this year in the interim we are exploring pathways to market through food drug and mass as well as pharmacy dispensaries through the Israeli medical cannabis program. We currently expect.
To have products selling in Israel by the front half of 2022.
In the territories, where medical cannabis is federally permissible, including Canada and Israel. We are investigating both CBD hemp as well as cannabis wellness opportunity is through asset light partnerships to leverage our brand and genetics with that I will wrap up and ask the operator to open the calls to questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you were here three tuned prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please.
Press the star followed by the cheap choosing speaker phone please lift the handset before pressing any keys.
Your first question comes from Gerald Pascarelli with Cowen. Please go ahead.
Hi, good morning. Thank.
Thank you very much for taking the questions.
Hi, Cherilyn.
Hey, Danny So can we just start on the top line, obviously it looks like at least in BBB debt trends did improve.
The duration of the quarter.
As were like halfway through <unk> now can you offer any time.
Color on how your top line is running you did from a total company perspective.
Or by E Comm, and <unk> just to give us.
Some color on how on how trends are faring given.
We're going to be a little bit tougher.
We're going to be tougher comps as we get into the back half of the year any color you could provide there would be helpful.
Thank you.
Yeah, absolutely Gerald that it's it's a great question I think from a from a company standpoint, Charlotte's web is uniquely advantaged in that category because we're the only company that has.
Products.
In every segment in CBD and we're the only company that participates in every channel those those those segments are being sold in and so the benefit of our portfolio is that we can pivot and shift with where the consumer is going and certainly that's the case this year through the first half of this year. Our net revenue is up in total.
11% year to date.
And that is in large part because of our BD business as mentioned Q2, <unk> was up about 38% that's coming through our biggest stablish channels like medical natural and we're seeing a really nice uptick in our new alternate channels and so I'm actually pretty bullish on our <unk> business in the back half of the year as we look at where the consumer.
There is we have access to those channels and we have products that they want and so I would expect <unk> to continue on the trajectory. It's on in terms of DTC or front half has been a little challenge from a traffic standpoint, and I think that is a return to retail and we're seeing that across the board. However.
We're now working diligently to reach out to new consumers in our DTC model and again, we've got one of the most developed DTC models in the industry and so we're going after new consumers and new ways of selling.
We'll be piloting our expanding our pilot of that very shortly in the next month and so I'm actually excited to see an acceleration of DTC in the back half of the year on total I would expect to be outperforming the category in terms of total growth for the company.
And the exact number is going to depend on how the channel opportunities develop in terms of new products, we launched in the front half of the year THC free product, which we feel really good about in the back half of the year Youre going to see us expand our gummy portfolio and gummies right now represent just shy of about 30% of our business.
We think we've got all the pieces working we've got the segments, where the consumers are shopping we have access with the products and we're bullish about the top line for the rest of the year.
That's great color. Thanks, Danny.
Next question is just on gross margin it definitely came in higher.
Than I was expecting.
And I'm trying to reconcile the 65 and a half like understanding that there was an inventory provision.
Which was impacting the year over year like when you look at your when I look at your sales mix the negative mix associated with such faster.
To be growth and it doesn't sound like there was any pricing taken.
And like I think sequentially the margin expanded by over 700 basis points.
Maybe just any additional color.
That you can provide on the strong margin and then west maybe based on your commentary on the production and fulfillment center is that coming online is that still scheduled to come online in the back half of this year or is that getting pushed out now.
Through through this year.
Into the first half of next year, just like a clarification question.
I'll provide a little bit of context, and then flip the question over to west.
We have been transparent about our desire to work hard on our gross margin, we've put a lot of initiatives in place to reduce our costs and one of the big reasons for doing that.
The manufacturing and distribution standup was to ensure we had the opportunity to control our costs in a much more aggressive way and so what youre seeing in our gross margins in Q2.
We believe is the baseline of what we will be going forward with opportunity to improve and so that's the whole business model that we've built is that I'll, let wes speak to the specifics of what to expect.
Joe Good morning.
Are things, maybe let me provide some more color and help you unpack that number.
If you look at the $12 six point increase in gross margin so last year at 52.
9%.
265, 5% for this Q2 of this year.
That included the inventory provision.
As you rightfully said of $2.5 million fully expiring product.
And so prior to this adjustment Q2, 'twenty 'twenty gross margin was 64, 8%.
Maybe something else it would be helpful. As well Jared is historically, we've guided gross margin in the 60% to 65% range, obviously, depending on the product and channel mix.
And so we are modeling now for the second half of this year consolidated gross margin in the mid sixties range and you're absolutely right. It's based on some of the supply chain savings and yes, we do anticipate the new facility coming becoming fully operational later this year.
And in those improved manufacturing efficiencies, we'll see as volumes ramp up.
Perfect. Thank you for the color.
I will pass it on.
Your next question comes from Scott Fortune with Roth Capital market Partners. Please go ahead.
Yes, good morning, and thanks for the call or the questions here, Danny you want to talk about kind of a new product innovation.
<unk> seen the THC free being rolled out there, but it seems on your call you called out the really the mix of gummies really increasing while the tinctures come off.
A continuing kind of shift.
You think for the consumers that you were targeting more gumbi's versus the tincture and how does that relate to kind of the margin profile.
You see going forward and expectations of these new products moving forward here.
Yeah. It's a great question, so a big part of how we run our new innovation is to identify the consumers were targeting and adjust products and develop products that specifically meet the needs that they're looking for and so for US we lunched gummies in August of 2019, because we saw the opportunity in the dietary supplement space and new.
Within CBD hemp extracts that was going to be something that was going to translate over and.
And so we were the first to do that in the category today. Our gummies are the biggest segment in the category.
<unk> fact is in the natural channel our sleep gummies are the most popular sleep product not sleep hemp product, but sleep product available in the natural channel. So we know we're producing good products and we know we're producing products in a format that consumers prefer our cable now will be to figure out who are the consumers going forward and how does that.
Product portfolio from a format standpoint adjust to meet their needs as we look at gummies, we saw an acceleration of gummies and our portfolio all through 2020 and through Q1 of 'twenty 'twenty, one and 'twenty Q2.2021 the.
The gummy growth has begun to slow a little bit and I know, 65% growth doesn't sound like slowing, but when youre comparing it to triple digits from the previous year, we see it stabilizing a little bit more and our tincture decline stabilizing and so Scott I don't have the exact answer for you in terms of how these segments Ulta.
<unk> Pan out what I do have is a set of capabilities and infrastructure that enables us to adjust in a really agile way to meet the needs of the consumer regardless of where she's going I believe dietary supplements will be defined by gummies and I believe this category Gummies will remain a very big segment in the category.
And we're certainly doing our part to expand our portfolio in the back half of this year with a couple of new offers across our channels. So we're bullish on gummies as you can expect when you launch a new product.
<unk> the infrastructure in house financially as not as feasible and so our gummies have been product mix dilutive from a gross margin standpoint in the early days because of our dependency on a co man manufacturing network, but we have gotten more aggressive about getting our gummy Cogs improved and.
<unk> plans to see a really nice ramp up in that.
Into 2022, hopefully before the end of 2021, but that is coming around the corner and we're really quite excited about what that will be in our portfolio going forward.
I appreciate the color on that and then just want to focus on the international kind of up on Canada. The opportunity there as more competitors look to get to U S. There seems to be less competition up there.
Mentioned the opportunity, but can you highlight.
Can it be a full broad portfolio that you can offer in Canadian market right away.
How are you kind of looking at that as you rollout on the international side of things with your product mix.
Yes, Canada for US is both an opportunistic move because the hemp CBD category is relatively underdeveloped, although it's a very strong cannabis THC market a lot of the CBD product that exists in the Canadian market is actually derived from the cannabis plant the THC plant coming in with this.
CBD specific genetic.
Is really quite advantage and when you combine that with our patented.
Patented cultivars in genetics, we think that we've got something consumers are definitely going to want.
But Canada is not just a revenue play for US Canada is an incredibly strategic market for us because on the international front, we're able to access other international geographies from the Canadian market. Both in terms of finished goods biomass and extract and so for US Canada is a revenue opportunity as.
Well as an export opportunity and that's in large part why we are entering that country as we look at the market in Canada as well as the market in Israel. Both of those countries appear to be moving towards federal federally legal THC as well as CBD and so those are two markets, where I feel like our portfolio a pilot can.
Take route and we can expand our portfolio to take advantage of a federally permissible environment. So our portfolio in Canada out of the gate in Q1 will be hemp CBD it will be.
We will have a good representation, but we won't have a full portfolio, we'll have about 4% to seven products that will have in the marketplace controlled given the size of the market, but what I'm excited about is the opportunity to expand beyond that and look more broadly into cannabis wellness and so for US Canada is a is a larger pilot of things to come more.
Broadly in the international geographies.
I appreciate that's great detail, thanks, Denny I will jump back in the queue.
Thank you.
Okay.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Your next question comes from Derek <unk> of Canaccord. Please go ahead.
Hi, Good morning, again, I'm filling in for Derik.
Just a couple of questions.
Interested in your Capex initiatives for the upcoming year I know you already talked about what Capex looks like after Q2, the rolling off.
Some color on next year I appreciate it.
Sorry can we just get your name one more time I thought it was Derek but you said it's.
You're sitting in for Derrick.
That's right I'm as associate focus.
Yeah very good nice to meet you good morning.
I think the way you should look at the Capex for you to go is probably start off by saying.
We finalized and wrapped up.
Final phase of a new facility.
The R&D production facility out in Lewisville.
And if you look at the year to date spend on Capex, we sitting on.
$3.3 million and so we do expect for the balance of this year.
Capex to be in the range of $7 million to $9 million.
Which is slightly lower than the previous guidance we gave.
Eight to 10 million U S dollars.
Okay. That's very helpful. Thank you.
Just one further question regarding demand are you seeing any impact at all from the Dallas number again in terms of a partner, even if our DTC M ATV.
I'm, sorry, I missed the back half of that we have seen an impact from what.
Any impact in terms of demand softness from either from the Delta variant either for DTC or <unk>.
Yes, so we have an opinion about the delta variant and as many of you know the Delta variant is.
<unk> that has come into the CBD hemp extract market as a result of the lack of regulation and so it's a loophole that a number of our competitive peer companies have taken advantage of the Delta variant specifically Delta did it sorry to interrupt just to clarify you're talking about the covid virus.
Very not Delta eight which is another very contentious issue is that thank you.
That's correct, yes, yes, but happy to have okay I apologize.
Going back to the pandemic, Okay I apologize.
So.
Apologies so in terms of the pandemic at this point.
We are watching it very closely.
And we are holding.
Our business and our expectations for the years consistent with what we were thinking.
If something should happen and should there be another lockdown of course, that's going to change our guidance at this point, we don't see that happening.
And as we look across the country, we're watching the numbers very closely if it does happen.
And incredibly unfortunate if it does our portfolio is well positioned to take advantage of that opportunity in terms of having a well developed DTC channels, our direct to consumer 65% of our business during the pandemic last year, our DTC channel jumped up to be as much as 70, 172% of our business in specific quarters and so.
Again, I think the benefit of Charlotte's web is we're able to shift our portfolio to be where the consumer is and should another lockdown happen, we will pivot to the channel where we can gain consumers.
<unk> doubled down on DTC, so that would be how I would respond to the covid again.
That's perfect. Thank you so much.
Mhm.
Your next question comes from Michael Lavery Piper Sandler. Please go ahead.
Thank you and good morning.
Barney.
Apologies if I might've missed this I did have two joined late but.
In the FDA letter.
Responding to your MDI.
Notification.
They call out a couple of things.
Where they felt like they needed some more information still and didn't have everything they seem to have been looking for can you give a sense of how much that suggests maybe their position isn't.
Sort of definitive or conclusive.
They were to get for example, some of the underlying the underlying data that forms the basis for the.
I have no idea how you pronounce it.
The link at all 2000, Twenty's study or some of these other things where they look like they've got some sort of voids. They want to fill in just the data is that potentially something that influences, where they may land or does this seem like they've got a pretty final position.
Thanks for the question, Michael when you think about the FDA.
Start with.
We were disappointed in strongly agreed with our strongly disagreed.
With not just the conclusion that they advance but the reasoning.
Their conclusion, because their their letter back to us contained.
Significant amount of factual inaccuracies and so the first thing I would tell you to do is on our website in the IR section we've posted our response to the FDA.
And we laid out in excruciating detail.
Why we think they need to correct. The record in terms of what we submitted and what they concluded now that said they drew a conclusion based on two.
Two examples one was they can't move forward with an NDA as a dietary supplement because CBD is precluded because it's already a drug and as you know six months prior to the hemp Bill being signed into law December 2018.
A drug was approved as a CBD isolate the second reason why they objected to our MDI was that.
They express safety concerns and I think that's the part that we're looking for a correction on because regarding safety. The conclusion strong just don't appear to be based on the data we provided in our MDI. So so that's what we're trying to get them focused on in terms of.
What does it mean.
I think what you're getting to is is the industry has been caught in a little bit of a catch 22, because the FDA has not been clear about the process by which they want companies to go through to gain regulatory clarity and Congress has been pointing to the FDA to take responsibility for.
This and so our decision was full transparency to force the issue to just see who has the next decision and with the FDA objecting to our MDI. It becomes very clear that the regulatory process to get establish has to start with Congress legislated in the FDA.
To regulate the dietary supplement for CBD, and then FDA can regulate within and so I'm confident there is a way to do this over the last 18 months, we've met with the FDA.
About eight to 10 different times in Europe, and our meetings were very constructive I've got a great deal of respect for the FDA, but I think they're in a bit of a catch 22, because they've approved a drug and they can't seem to move away from that precedent and so Congress has to act and I think once Congress acts the FDA can be very clear about the process.
The process is scientific it's intense theres a ton of data that we've got to do to submit for it.
And I feel really good having gone through this knowing what they're looking for but now we need Congress to act and when that happens I think the category will be able to submit and dice and the whole thing will begin to open up does that answer your question.
A bit I guess.
Maybe some of what I'm getting at is which is.
I guess some of first of all how much is the FDA, maybe a movable force I mean, it feels like.
Pick your poison I, you know who would you rather do.
I mean, I don't know that Congress is Macao Tommy stores, So I suppose.
Never want to give up hope on any option that may exist, but.
Maybe to your point, if you are calling out some ways.
Theres inconsistency is with the data you provide and what they seem to draw the conclusions.
And you've got.
A precedent with.
Red East race in Monaco, NK sort of parallel for full spectrum extra extract and CBD isolate.
I guess why give up on the FDA and is that still something.
You feel like could change.
You know I just know if you watch.
So it doesn't take long to figure out that they're just as quick to do nothing.
Yeah.
Yeah, I think that's I think it's a fair conclusion.
So to be clear, we're not giving up on the FDA. We have every intent to continue to engage with them and work with them and we've not ever said.
Externally nor internally.
Would not be going through the NDA process again going forward, we have every intent to progress the regulatory environment.
Per the regulation that the FDA has laid out so that will be an active part of how we move our business forward.
I think the Congress Congress comment is is I'm curious, but I wanted to just broaden the perspective on this this is not just the CBD hemp industry Challenge. This is a THC sector challenge because what we're going through.
With with hemp extracts with naturally occurring CBD is exactly what the cannabis industry is going to have to do following us and so this is not congress, maybe or maybe not engaging on the hemp CBD industry. This is congress looking at a category today that is roughly <unk>.
<unk>, 7% to $20 billion in total in the U S across 11 states, where cannabis is legal in CBD participate and so some kind of resolution has to be landed for how both of these categories are regulated and the FDA has to have clarity and perspective.
About how they want companies to produce safe products for consumers in a way that is holding manufacturers to a very high level of standard and so we're doing this brought ourselves we're doing this for our category. We're doing this in support of our consumers, but it's the whole sector that is going to put the pressure for Congress.
To act and push the FDA to move forward and we will continue to push both fronts.
No and I mean, it's a great point that theres the THC equivalent here too that's just maybe a little bit of a.
A time bomb coming so no great color and thanks for the update there.
Absolutely.
There are no further questions at this time. Please proceed.
Okay, well. Thank you everyone for participating in today's call. This is probably the busiest earnings call day, we've had with several competing.
Earnings calls happening at the same time.
So we really appreciate you, making the time and participating we will look forward to speaking to you again in mid November following our Q3.2021 results. Thank you and have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.