Q3 2021 Charlotte's Web Holdings Inc Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to Charlotte's Web Holdings, Inc. Third quarter conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you requirement either assistance. Please press star zero for the operator.

This call is being recorded on Monday November 15th 2021, and I would like to turn the conference over to Cory Pala Investor Relations. Please go ahead.

Thank you Sylvia and good afternoon, everyone. Thank you for joining us for our Q3 earnings Conference call. My name is Cory Pala director of Investor Relations and leading the call. This morning is Charlotte's web C E O D elsner and CFO West voicing.

Our earnings release was issued at market close and our financial statements and MD&A. It can be found on the Investor Relations section of our website and they have been filed on SEDAR Dot com.

On today's call Daniel will share some high level comments on the financial results with an update on the business and the CPD category and West will highlight the details of our financials, we will take questions from our analysts at the end of our 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.

Available for an extended period of time accessible through the IR section on our website at Charlotte's Web Dotcom, a reminder to our listeners that certain statements made on this call, including some answers. We may provide to certain questions may include content that is forward looking in nature, and therefore subject to risks uncertainties and other factors, which could cause actual future results of our company performance.

Different from implied expectations such risks surrounding forward looking statements are all outlined in detail within the company's regulatory filings on SEDAR Dot Com. In addition, during this call we will refer to supplemental non I F. R. S accounting measures, including adjusted EBITDA, which do not have any standardized meaning prescribed by ifr S. Adjusted EBITDA.

It is therefore defined in our press release as well as in the M. D E as filed on SEDAR.

With that I now hand over the call to Charlotte's Web Chief Executive Officer, Danny Elsner go ahead.

Thanks, Corey good afternoon from Denver, Colorado, and thank you for joining our call.

Prior to reviewing our Q3 results I want to share three key takeaways for the quarter and year to date.

First is the CBD category expands the product segments are evolving from a manufacturer push to a consumer poll.

But he has become a significant category and continues to evolve the U S. CBD industry is estimated to grow at a $4 $7 billion by year end 2021 up two and a half per cent.

The segment within which shows flip competes will grow to $3 billion by year end up 0.7%. According to the bright field group and I quote there's a shift away from higher ticket items in CPD like tinctures toward products sold at lower price points, such as gummies and drinks, which is masks.

A growing adoption and increased usage of CBD because of this shift even with equal to or greater volume being sold overall the growth that these lower priced formats has meant lower revenues for many companies across the industry relative to prior years unquote.

We are experiencing this mix impact in our results driven by the growth of gummies topical and pet which are priced on average 30% to 70% lower than our tinctures. Our perspective is that despite near term mix impacts. The CPD category has become a substantial industry in the U S with ample room for growth.

It requires a consumer centric lens that alliance portfolio offerings to evolving evolving behaviors. This is our approach.

Due to the lack of regulation the CPD channel development is different than originally forecasted the F. T. M channel. This forecasted you represent 66% of total CPD category sales while E. Commerce was forecasted represent about 15% of CBD sales today, there's a lot of regulation the FTM channel.

Represents about 6% at the current CBD sales while E. Commerce represents about 38% of CBD sales consumers that going where CPD is being sold and ecommerce dispensaries.

And vitamin shops, and health care practitioners, where we are increasingly shifting our focus five.

Finally, there isn't increasing need for science to establish the regulatory landscape for hemp and cannabis globally, there's a rapidly evolving consumer acceptance of hemp and cannabis globally and regulators country by country are establishing regulatory guidelines to manage these new categories.

Science and research on the effects from the plant the products and the usage are an increasingly important requirement for companies with global ambitions.

Respected brands with science credentials have a competitive advantage and navigating the global regulatory environment. Our roadmap for long term success is built upon advancing the science and expanding our global footprint across the sector I'll speak more to each of these momentarily.

Now shifting to our third quarter results Q3, total net revenue was down five 8% versus year ago to 27 million 720, $23.7 million due to product and channel mix as well as some temporary supply chain disruptions. Despite the decline in revenue.

New.

Q3, total unit volume sales were actually higher versus year ago, driven by a consumer shift to new lower priced formats like gummies topical in pet.

We estimate that the Q3 net revenue impacts of mix was approximately $1 $1 million.

Although this mixed shift results in lower average revenue per unit. The number of unit sales continue to increase Charlotte's web has strategically developed a portfolio of products that follows the needs of key consumer segments and our market share gains across every channel we compete within demonstrates we are.

Products consumers prefer.

Our supply chain disruption was primarily related to macro supply chain challenges, which impacted our revenue by about approximately $1 million. These supply chain challenges were substantially resolved in October.

Excluding supply chain and mix in Q3 net revenue would have been slightly up on a year on year basis regarding segment splits DTC represented about 64% of our total revenue down from 67% year ago. During the pandemic, while beta beta increased to 36% of our total revenue.

Charlotte's web outperform key competitors during the quarter in terms of share increases velocity increases and distribution increases. In addition, we delivered P&L improvements on Q3 across key financial metrics, including direct gross margin percent gross margin operating expense and adjusted EBITDA.

West will cover this in more detail after following my channel lithium.

Within our PDP segment Q3, net revenue increased one 3% versus a year ago on higher unit sales and new distribution in pet topical and gummies. The increase in revenue was modest on a year on year basis, due to product mix and supply chain product delays, resulting in out of stocks in some customer shipments.

Shifting into Q4 or.

Our natural channel curious ingestible products and is affected by the consumer transition to higher unit sales of gummies versus tinctures, our net revenue in the natural channel was down 15% versus a year ago. However, we outperformed the total natural channel, which was down 18% as a result, we gained share against our competitive set according to spins.

The health care practitioner channel was soft during the quarter. Following a strong inventory build in Q2, but we are taking replenishment orders in Q4 and continue to see more practices reopening.

And the F T M channel, which carries primarily topical products revenue increased 50 50.

54% year on year, According to Nielsen our F. T M market share increased five percentage points versus year ago to 23.4% the pet channel.

Revenue increased the most up 321% versus a year ago, driven by increased velocities distribution expansion and new product launches in terms of distribution expansion. We added 461, new doors across total b to b channels in Q3, including 200, new doors in pet one.

Under the new doors, and ultimate retail and 100, new doors in F. T. M year to date, we've added a total of 1400 38 doors, excluding the health care practitioner channel disrupt presents a 10% increase in b to b retail doors a year to date.

Further and importantly, we are planning a significant increase in our distribution nationally and in California. In Q4, following the legalization of CPD through the recent Assembly Bill 45.

Shifting to D. T C. R e-commerce or E. Commerce net sales were down nine 3% year over year due to product mix and higher discounting and a competitive DTC market as consumers transition back to bricks and motor.

In terms of Kpis Q3 traffic and average order value went down 10% and down 7% respectively versus year ago. However, our year over year conversion was up 21% and subscriptions were up 47%, which drove our subscriber user base increased 47% versus.

A year ago. These.

These loyal subscription 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 on going forward.

Looking at the total business on a year to date basis total net revenues for the first nine months are up four 3% versus year ago outperforming key competitors and outpacing the total category across e-commerce and B to B.

Going forward, we expect to continue to grow our revenues and expand our market share leadership behind innovation and distribution expansion.

At the end of Q3, we launched new products in pet and Gummies. In addition to our new to the market C. D G and C. B N all sprays.

In Q4, we're increasing distribution in the dispensary and specialty channels. In addition to expanding retail distribution in California on the back of a 45.

In a dynamic U S category that continues to evolve Charlotte's web has delivered sequential quarterly improvements in our adjusted EBITDA year to date. We've also been taking actions to build our organization that is fit for purpose to ensure our operating expenses are in alignment with our top line as we head towards break even adjust.

EBITDA at the end of the year now I'll turn the call over to west to provide the financial details for Q3.

Good afternoon, everyone and thank you again for joining us today.

Danny mentioned, our Q3 year over year revenue comp was impacted by mix shift and supply chain disruptions, partially offset by higher unit volume sales.

I'm pleased to report that profit and operating margins improved as a result of increased volumes as well as efficiencies as our production and fulfillment center became operational.

We have achieved much in the past you in terms of infrastructure improvements.

And streamlining our operations and we will continue to benefit as we grow.

Operating numbers have continued to improve in the back half as we previously projected with year over year and quarter over quarter improvements in adjusted EBITDA.

Turning to Q3 gross margin and profit.

Gross profit increased by one 1% year over year to $14 $9 million.

On an improved gross margin of 62, 9% in the quarter compared to gross margin of 58, 7% last year.

In general we expect consolidated gross margins in the low sixty's, depending on product and channel mix.

Turning to operating expenses.

Total opex for the third quarter was $23 $9 million down.

<unk> 15, 6% from $28 $3 million a year ago.

As a reminder, our plan was to reduce expenses by at least 10% from the run rate of Q3, 2020, and we have exceeded all go.

We recorded a net loss of zero point $9 million for the quarter compared to a net loss of $6 $5 million a year ago.

This is at 86% improvement, reducing our loss by $5 $6 million.

On an adjusted EBITDA basis, we recorded a loss of $2.8 million, the 58% improvement versus prior year, and a 30% improvement sequentially.

As Q2 of.

2021.

So to summarize the P&L for the quarter.

Revenue declined due to mix and macro supply chain disruptions, partially offset by increased unit volume sales.

We expanded gross margin on a year over year basis.

We reduced our opex and improved adjusted EBITDA and net losses on both a sequential.

And year over year basis.

Total capex year to date was $4 $1 million, primarily related to completing the final phase of our R&D production and distribution facility.

We expect Capex investment in Q4 of between $1 million to $2 million, bringing.

Bringing our total expected capex for the year to approximately $5 million to $7 million.

Turning to liquidity.

Total cash used for the first nine months of this year was $31 $7 million.

For context.

<unk> two thirds of cashews during this period was nonrecurring.

Cash at the end of Q3 was $21 $1 million not including the need to IRS tax refund of $10 $9 million. In addition, we have no long term debt and has access to a $10 million line of credit with JP Morgan with the potential to extend.

And $220 million.

And so as we are approaching break even adjusted EBITDA.

We believe that we are sufficiently capitalized to deliver on our plan.

As <unk> stated, we expect to continue to grow revenues and expand our market share as we head towards adjusted EBITDA breakeven under Ifr is at the end of this year.

I'll now turn the call back over to Denise for her closing remarks.

West to close the call today I want to update you on our advancements in regulatory international and science.

On the regulatory front, we continue to see legislative movement at both the state and federal levels. We're very pleased with the passing of California Assembly, Bill 45, which we actively help to shape. Our current retail partners represent more than 1000 locations in California, and we're in the process of expanding our distribution and the current core.

Uh huh.

Federal legislation H R. 841 has gained further bipartisan support with a hearing on the build plan before the end of the year ultimately through support in both the house and the Senate. We expect the government will be able to establish a legislative framework under which the FDA would regulate we look forward to working with the FDA in the coming months.

Finally, this morning representative Nancy Mace of South Carolina introduce new federal Legislative legislation in cannabis and CBD name. The state's Reform Act. We're encouraged by this legislation because it shows congressional intent for cannabis and CBD.

This legislation does schedules cannabis protects each state's existing laws expunged as non violent and federal cannabis offensive and imposes a 3% federal excise tax.

Importantly for the CPD category. It also addresses some of the gaps within the farm Bill of 2018, specifically if the physician CPD is a dietary supplement and opens up food and beverage for CBD with the FTA regulating dosing and safety, we look forward to partnering on this legislation.

Regarding international we are advancing our international agenda rooted in strong partnerships to support an asset light approach. This quarter, we harvested our first ever international hemp crop in Canada, our yield, but 20% above plan and we believe we have achieved some of the lowest cost per milligram of CPD ever.

Produced in Canada, we expect to have products ready to launch and market by mid 2022.

In Israel, we continue to develop our exclusive CBD partnership with Canada, one of the fastest growing cannabis companies outside of North America. Israel maintains one of the highest per capita consumption of medical cannabis in the world and we believe there will be strong consumer demand for high quality CBD in the future we expect to have part.

Available in Israel in 2022.

In the U K and EU, but working to expand our current footprint and we'll provide further updates as the regulatory landscape develops.

Finally, we continued to advance the research and science behind cannabinoid two our CW Labs Research division as we communicate with regulators at the F D. A and in other countries, we see science as a competitive advantage and a critical enabler enabler to global expansion.

In summary, we have built an organization that's fit for purpose.

While we are expanding our global business and we are well positioned for long term growth going forward with that I will open up the call for questions.

Thank you ladies and gentlemen, if you do have any questions. Please press star followed by one on your Touchtone phone you will then hear a three Tom prompt acknowledging your request and if you would like to withdraw your question simply press Star followed by two and if you're using a speaker phone. We do ask that you. Please lift the handset before pressing any keys.

Please go ahead and press Star one now if you have any questions.

And your first question will be from Gerald Pascarelli with Cowen. Please go ahead.

Hello, Hi team. Thanks, Thanks, very much for taking the questions.

I just had a question on your topline how trends are running into.

Enter into your fiscal <unk> now that we're halfway through the quarter here any color you can provide on the run rate maybe relative to where you closed out re queue.

It sounds like Youre, certainly going to get.

Some incremental distribution opportunities in California, I don't know what that is expected to hit for Q and a meaningful way or if that gets pushed out to your fiscal 'twenty two.

Any questions or any any color you can provide on.

On some of the tier ones that you have here going forward would be helpful. Thank you.

Yeah, absolutely. So first we are expanding our distribution expand we are expanding our distribution footprint in Q4, it's not just in California. It's actually nationally. We are we're on track to have a very nice bump in our distribution that.

It will significantly expand our doors before the end of the year that will go into Q4 and is on track to go into Q4 in terms of each of our Q4 top line, we're anticipating a return to growth in Q4 and so we.

We are bullish about.

How we're going to end the year, we're excited about the distribution, we have and we're really excited about the new products. We just launched at the end of Q3 that will wrap around into next year and so I think the distribution provide some nice tailwind going forward.

Okay.

Perfect. Thanks, Danny.

Next one for me is just on <unk>.

On the drivers behind your revenue.

Hear you loud and clear on the negative mix associated with things like gummies and topical to pad.

As you look at the landscape because these are lower priced products is the pricing environment more rational for these form factors relative to teachers I guess, what I'm trying to get at is whether or not youre seeing price compression or price competition.

Or if youre comfortable with with your current job price cap levels. Thanks.

Yes, I think God given given the growth that we're seeing in the category right now I think our competition is heating up everybody is trying to fight to get revenue in the door and we're definitely seeing that through some increase.

This compression in DTC and a couple of other channels primarily DTC.

For us as we look at this there's just not as many players who have successfully innovated into these new platforms.

For example, in and gummies or or pet or frankly, even in some of the topical as we have in the market. So.

As you drive innovation, you meet consumers' needs in a new way I think you have a competitive advantage and that you've reduced some of their direct competitors in that space, we're definitely seeing price compression, but probably a little bit less on those newer innovations.

Some of the more established products.

Just for perspective that it's just at a gross level. So take this with a grain of salt and I on a gross revenue basis.

Our gummy business in Q3 was up 28% our topical business was up 3% and our pet business was up 71% now that's all against a tincture business that was down 26%. So you see how the mix is negatively impacting us that sad gummies has been relatively stable at the same law.

For the most part almost.

Almost throughout the entire year. So I think we're hitting the first tier of mixed stabilization.

With much less of a dramatic drop I think going forward.

Perfect. Thank you very much for the color I will I'll hop back in the queue.

Thank you next question will be from Scott Fortune at Roth Capital. Please go ahead.

Good afternoon, and thanks for the questions.

Real quick Jamie can you elaborate on the California Assembly, Bill 45, and the legalizing digestible hemp CBD in the California market and more importantly, what's kind of the F. T M or the retailers' response, and timing you mentioned a little bit for new adjustable products on the shelves in California from that and then explore.

As you are and the opportunity overall in California, four for Charlotte's web what's your sense of other states adopting similar regulations to that of California as potential growth drivers as we look at the 2022 here.

Yeah, absolutely Scott I'll, I'll, I'll unpack that a little bit of time. So on the first part of this the impact of of AB 45, We finally have the opportunity to go talk to a number of our food drug and mass retailers and they've been receptive, but as you know the national retailers as retailers, especially.

Our are hesitant to step in front of the FDA from a regulatory standpoint, so I don't see F. T M necessarily opening up for us in California overnight, although we will continue to push on it.

I'll tell you the thing that does get exciting for us in California is we have a thousand customers in California that are already existing customers in our base. The only reason why they didn't carry our injectables in California was because of the California legal environment.

It will already begin to close the gap on some of those retailers in Q4 of this year, but you'll see a big part of those retailers close in Q1 of next year. So we're bullish in terms of what this means for us in California for perspective, California, and Canada represents about 38% of the total sales across the country.

California is the biggest economy in our country and getting in California on side definitely.

Helps us with other states now I'll get to the third part of your question, which is really what's the impact of California for the rest of the states. Currently there's about 13 states in the country that currently do not have CBD legalized in state so having a state in an economy like California endorsing CPD legality from.

An ingestible standpoint, I think goes a long way to help those states move forward, just like Florida helped us in California, and we helped pattern, California, a lot with what we were able to accomplish it in Florida will be able to go back to his other states now and begin to advance what Florida in California have done in terms of this category. So we.

Definitely see California, helping us theres about five or six states, who currently have this and balanced going forward and so we think one at a time the states are going to drop off and the FDA will be put in a position where they have to regulate and so we're bullish about what California means for us in the near term, we're bullish about what it means for.

US across the states and we loved the fact that at 38% of the cannabis sales today.

It could have a very nice disproportionate impact to our revenue and top line going forward.

That's great appreciate the color and then the second question is a little bit of housekeeping side of things.

You've built out that production and fulfillment facilities here you've added a lot of the automation. How are you looking at kind of now the right size of the business now to drive EBITDA profitability.

Limited capex kind of needed to deploy moving forward here curious, how you're weighing growth initiatives with that kind of the profitability side for the business.

Yeah. Good morning. This is worth speaking thank you for the question.

As Denny mentioned, we are excited to move towards positive adjusted EBITDA at the back end of this year and going into next year and it's really a combination of executing against several optimization plan. So from an expense perspective as you know we've recently consolidated a couple of hours.

Multiple locations into a new production and fulfillment facility, we've essentially incurred most of the capex not much would be needed going forward.

We have relocated our corporate offices from both of them to a more cost effective Denver office.

And then lastly, what I would add to the manufacturing efficiencies that we continue to push for is our operational streamlining as Denny referenced the fitful purpose ambition.

Okay I appreciate that Codell hop back in the queue. Thanks.

Thank you next question will be from Pablo exotic at Cantor Fitzgerald. Please go ahead.

Thank you Jamie just a question on the on the regulatory play with things that I know, it's hard to handicap. These things, but in terms of as we try to put 81 versus a separate congressional deals either Schumer draft of the 19 eighties Bill how does that work I mean, the nature of putting one go out he had on its own or will you.

No the sponsors really ought to be able to say no wait a minute Tampa CBD helped with both of these motor larger comprehensive reforms in standalone, but it would be important to be able to do you have any views on that thanks.

Yeah.

Pablo Thanks for the question absolutely.

I think as we mentioned what all of these things point to is the congressional intent is to get CPD over the finish line that.

And that comes also with cannabis and so these.

These things for all they they want all move independently and they weren't all.

They can't stand alone only one can stand, but what you have and you've mentioned them you've got schumer's Bill you've got Macy's Bill you've got 841, which is a group of bipartisan house and Senators.

Behind it.

And you've got a couple of other ones, they're all coming from different partitions of the Congress and they're all trying to get at the same thing which is legalize this sector regulate this category protect the consumer and so I think I'm encouraged I'm really encouraged by a 41 I was way encourage by that before.

I I I heard about Representatives Macy's Bill in her press conference. This morning, and so I think it shows that there is bipartisan support and that's really positive for all of us, but very very positive for CBD CBD can move on without cannabis, but it's very curious that these candidates bills are advancing with CPD regulatory built in.

So I'm excited about that.

Thank you and just a couple of follow ups. When we took all of you know these downgrade in terms of categories from our insurance to our gummies. Another four months is that the same consumer or are these new formats, bringing new consumers and I'm sure, there's not a black and white, but I'm just trying to understand whether it's different consumers looking for a different need states or all the way that he just asked.

Same people just trading down.

Yeah, It's a great question and the answer to the question in terms of mix. It's actually both we're seeing our current consumer base adopt more forms and almost built.

Health resin Ah Ah around how they consume CPD, that's amazing to witness and where were leveraging those insights to sell more but equally we're seeing an increase in consumer purchase individual consumers coming in and purchasing new consumers coming in and purchasing.

This category now they're coming in they tend to be a little bit younger than our current consumer and theyre buying forms that they're a little bit more familiar with like gummies.

But that said once we get those consumers in and and the segment has stabilized a little bit in terms of percent of total contribution they represent.

Really well positioned to grow because from here, we can bring value to those segments and begin to drive up both the top line in terms of of of revenue per.

Per unit as well as the CPD and and the offer for consumers and so we see this as a short term impact as our tincture. It kind of right sizes, but are really really really good positioning for Charlotte's web as we look to build into the future.

And one last one if I may on the subject of brands and I know, we've talked all of these before but.

Yes, the first part would be how would you get you know these drive your performance with Abacus was have you done as much as you had wished her or can we all blame it on COVID-19 the delayed plans there as well.

And those multiples have been done and then a second part to that question I keep struggling with idea of how far can you stretch the Charlotte's web brand Uh huh.

This will be the consumer segments or negotiations or need states and I wonder if that's a that's a limiting factor for you going forward. Thanks.

Absolutely and so first in terms of abacus and has it performed the way we wanted it to or core are we happy with where it is the answer to that is is now and it's and it's because of the pandemic because of the supply chain challenges in this because of the speed by which we could evolve that portfolio.

New consumers needs I'll give you for an example, when we bought abacus, we saw opportunities in a number of different channels, where it wasn't represented and we knew we had distributions. So we saw the cross sell opportunity as significant we still do unfortunately, it took us longer to develop products to go into those channels for example in natural.

We had to change out some of the ingredients streams as we changed out those ingredients streams, we had to get new ingredients streams and to do pilot testing, so COVID-19 and the supply chain disruption just slowed everything down.

In terms of customers and their willingness to move on nonessential categories, it's slowed that down and so no from that standpoint, I'm not pleased with where we are today, but I'm really excited about where we are as we kick into the.

The front half of 2022, because youre going to see us do a lot to bring those brands under our portfolio brand architecture and push very hard under one unified message. So I'm excited about what's ahead of us and I think we've done a good job to hold it together in terms of how far can you stretch Charlotte's web.

I agree with you that any one brand.

Can stretch only so far but because charlotte's web is more than just a brand. It's it's it's it's it's a it's a designation of trust with our consumers. We actually have done a lot of research around brand stretch and we feel like there is lots of room in the kind of cannabis and the and the hemp.

Well Miss Arena that that brand has tremendous opportunity to take advantage of so that brand has a lot of adjacencies across CPD and cannabis wellness to expand in addition, we have a portfolio of brands that can get after other segments for Charlotte's web really can't go today and then beyond that.

Now we've got the option purchase agreement with the Stanley Brothers their brand recreate gives us a whole new opportunity to tap into a different consumer set and a different set of need states and so for me the unifying brand around all of these is either Charlotte's web branded Charlotte's web on the inside as a trusted credible in.

<unk> stream for hemp the consumer can trust and then we can build the brand around the consumer segments and we've got the portfolio of brands that go after those segments, which means.

That we have ample room for growth in this sector. We just have to get our portfolio organized to get after it.

Got it thank you.

Absolutely.

Thank you next question will be from Michael Lavery Piper Sandler. Please go ahead.

Thank you and good afternoon.

Hi, Michael.

You talk about the mix headwinds, but can you just help us understand the look ahead you you still have 37% of your portfolio from tinctures.

The 30 from Gummies and if this momentum is going to continue that.

That negative mix headwind hasn't gone away. So what are you assuming for it in terms of like the next quarter or two are you talking about returning to growth.

Much does it account for this piece of the equation.

Absolutely. So when we talk about mix and mix headwinds I just want to give you a perspective of kind of the big step downs, we've taken over the last year of quarters, and then where we are today. So over you know kind of through 2020, we were watching or percent of of gummies on a percentage.

[noise] basis go from what was Q1 of last year about 18% of our portfolio to today, it's about 30% of our portfolio at the same time, our tinctures went from 55 to about 37 in the last three quarters, including Q3 of this year, we've stabilized gummies at about 28%.

30% of our portfolio. So we think that's a plateau that holds if I look at it and adjacent category outside of Hampton, CPD and I look at vitamins and supplements gummies represent about 40 or 50% of the revenue mix in those categories. So I don't think we're off tremendously here I think the one thing about tinctures that.

We have to keep in mind is that consumers, who are looking for the highest delivery of CPD delivery method that they can control in terms of how many milligrams. They take for whatever condition, they're trying to address tinctures or really the best platform for that and so we've seen tinctures dropped as a percent of our total.

Portfolio, but tinctures are but one way that you get CBD as a format into consumers. We think it will stabilize I would guess somewhere in the 35 ish range and and Youll see the formats continue to evolve, but gummies will become a bigger part of our portfolio, but my my guess is in the next zero to 5% ish.

Points over the next year or so.

Okay. That's helpful. I guess just to put it another way can you give a sense of.

You called out the.

I think it was million and some change headwind in the <unk>.

Quarter from that shift.

Is it something similar for Q or do you think you're you're over or that it's going to get worse.

Just the way you're modeling it in your plans.

Yeah.

Q4 of last year was gummies represented about 24% of our business so expecting about a 30% of our of our sales are in Q4 similar to what we've seen on a year, you're only going to see about four or five point increase versus where it was last year. So it will diminish in terms of a headwind, but it's going to continue to be there has new consumer.

He's come in on a format. That's that's more familiar where actually as we look at Q4 because of our distribution expansion, we're seeing a nice uptick on our broader portfolio.

Including all of our segments and so I think distribution gains.

It will help us.

Kind of with some of these headwinds, but you are going to see about a 25% to 30% change right.

Five last year's percent of our portfolio to about 30%. This year about a five point change and gummies and Q4 consistent with the year.

Okay. Thanks.

Just on the regulatory and I guess really THC side, you gave some color on the latest news from from Congress.

A little bit more indirect read through for how that might impact the CBD, but what I hear correctly that it's also the THC opportunity you have your eye on and can you just give us a sense of how big your ambitions there might be and when.

What.

You would expect the.

You know how the Stanley brothers relationship might evolve or just kind of what your roadmap might look like.

Yeah, absolutely and so if the option purchase agreement has the opportunity to be activated as a federal legalization and so we are watching the federal side of cannabis very closely because we believe that the total available market for us in the cannabis wellness.

Sector is a three to four time increased our total available market and so today if the available market is $7 million to $10 million, we think our cannabis wellness play could mean $30 million to $40 million of a new market that we can tap into so we are watching that very closely equally we think that CVD theres opportunity.

Both in the segments, we're competing in today, but also a broader set of segments that we have intention at getting after and so for us.

The growth what was most important for US is is there ample room to grow yes. The second most important thing do we have the portfolio of brands that can tap into that growth across the segments and we think the answer is yes, and then third is the adjacencies beyond this category that lets us expand our portfolio even further in the answer to that is apt.

Pollute Lady I said, what I'm watching federal.

Legislation on cannabis, we're watching federal legislation on CBD, while we're pushing both the state and the federal front and I'm bullish about what this means for us it's.

It's a good time to be in the category and I think that Ah I think this could open up for Charlotte's web in a in a really handsome way.

Okay. Thank you very much.

You bet.

Thank you once again as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone.

And your next question will be from Jason Denburg. That's P. I financial please go ahead.

Hi, and thanks for for them.

Listen to my question.

Just wanted to talk.

Talk about your recent launch of oral sprays.

Specifically could.

Could you talk about the margin profile of this product relative to your other.

The other form factors and as well I know its direct to consumer right now.

You know what would be your expectation in terms of number of doors this product.

Could go into in terms of whether you had any initial talks or just in terms of what you would expect given your previous product rollouts.

Yeah, absolutely Jason that are are are oral spray line is the first of its kind launched.

In Q4 of this year.

And it's our first product that brings new cannabinoid.

Our front.

One is with a C b on and one is with CPG. So we're excited about what it can do for US we chose deliberately to test it on our DTC channel first and foremost to see if there was consumer interest in this new platform. We are big believers that oils as a segment don't go away, but very potentially we've got a few.

Find more consumer.

Accepted behavioral ways to consume them.

<unk> is a way to do that we also love the absorption model of the spray and our consumer feedback on it. So far has been really quite positive in terms of how is it going so far it's early days, but I can tell you that.

Excited about the sales expectation, it's exceeding our internal benchmarks and as we go to launch it we will launch it in our early adopter channels as we look into next year, we've got a clear some hurdles are revenue and volume standpoint first.

To make sure. This is something we would all want to land behind but we see really nice opportunity in a channel like natural going forward in terms of our margins. It's a great question. The margins on this product are about the mid sixties today again, that's an optimized and end on scale. So we feel like if.

We prove out the business prop on this and see the revenue numbers, we want to see that we'll be able to scale that and push that a little bit further but right now they're mid sixties. So so complimentary to our gross margin percent today in the P&L.

Okay, Great that's great color.

In terms of.

Hum.

In production can you just talk about in terms of.

Hmm.

How aggressive do you want to get into the key market and and sort of what that timeline might look like.

Absolutely our intention is to be launching.

Our products into Canada by mid 2022, so we've now harvested R. R. R.

Our our cultivars we are in the process of driving them and we will start to extract and turn those into products in the front half of next year and launch mid mid year next year, Canada is important for us.

Kind of two standpoints, one is Canada as a market is federally legal for cannabis and CBD and so it gives us an opportunity to run if you will a bit of a pilot on how do we enter in CBD and potentially expand out beyond into cannabis wellness. The other thing.

And the best for US is that its strategically positioned we can export out of Canada and so we.

We feel like we've got cultivars that had been bred for purpose for Canada. They're early maturing them, we had a really nice harvest. This year, our first year out of the gates and so we see Canada as being a bit of a launching ground for us to enter other countries around the world as the regulatory environment.

Ends up.

Great. Thanks very much.

Absolutely.

Thank you next question will be from Derek delay at Canaccord Genuity. Please go ahead.

Yeah, Hi, thanks.

Just wondering in terms of.

I would imagine it's more the natural house stores, but the stores, which sell all different product types, where there'd be tinctures capsules tops topical et cetera.

What percentage of those sales do topical as makeup.

Boy, It's a great question. So if we just talk about the natural channel stores sure.

Eric because I think those are the early adopters I think that's the channel you're talking about right natural more so than anything else.

Yes, correct. Okay. So in those in those channel and that channel today tinctures represent about 40% of the sales gummies represent about 40% of the sales.

Capsules and topical each represent about 10% each of the sales and so that's how the split is today.

What's interesting about that channel is it really is the place where our early adopters are and so you'll see the broadest portfolio in those channels and I think the more cutting.

Cutting edge innovation launching into that channel. So that's the reason why we like the channel I think we'd like to see where consumers are with these new innovations.

So so going forward you know if we would assume at some point the FDA kind of getting the approval on.

Injectables is that a similar split to what you would expect them going forward and mass market.

Yeah, probably not I I I I I would expect gummies it probably in that range, probably in the 35% to 40% range, but I think topical becomes a bigger part of the total portfolio and so the splits aren't going to be that dramatic I would guess gummies somewhere in the 35 to 40 person.

That range in F T M Tinker.

Tinctures, probably somewhere in that 25% range.

Topical somewhere in the 20% range and capsules I would guess 15, 10% to 15% range. So you'll see it shift a little bit I think that consumers already using more topical that that's the only category, that's really carry today and national ft and.

And so and so I don't think that behavior goes away I think it gets complemented by segments and I think a more acceptable segment for that consumer base is probably going to be more likely gummies, which is why we are excited about the potential for vertical integration because I think we have the opportunity to really take advantage of them.

Getting after the Cogs profile and improving some of those margins.

Okay.

Helpful and then a second question.

In terms of their their ruling in California.

In your view or where I guess and in discussions with retailers and in other states.

Do you expect other states or other retailers to take a similar approach to California, and sort of move to allowing ingestible to be aligned with your nose within those states or those stores.

Yeah, we're definitely using it as a platform to leverage against other states and to help educate state legislators that today have not legalize this category, what California, what Florida, and what New York have done which is put a you know a really nice and and I think constructive regulatory.

Roy framework around how they're going to how they're going to legalize it and so we're using it with other legislature's state legislatures in terms of our customer base, we are absolutely having conversations with customers and it's a funny time in the category because today the growth in this category is not coming through F. T M, but when the F D a regulates to the growth.

The growth is going to come almost exclusively from F. T. M. So you have to pushed the nut forward in all of these channels.

That are a little bit more fragmented while you hold the relationships with F. T. M. Together FTM retailers are very very interested in carrying a smaller portfolio of brands call. It.

10 10 brands.

And they're very interested in what the market share leadership is of those brands from that standpoint, it's why we stay so we remain focused on market share leadership, because as F. T. M opens up we will be at the top of the list for F. T M and when FTM opens up the growth will be explosive and so.

It's kind of a balancing act with getting after the channels, where the revenue is today and readying yourself, where that revenue is going to be tomorrow.

Okay and that makes sense. Thank you very much.

Thank you.

Thank you.

We have now reached the end of our call time, I would like to turn it back to Mr power.

Well, thank you Sylvia and thank you everyone for joining us today on our Q3 call. We look forward to speaking to you again, when we update you on our year end results.

In March of next year. Thank you. This concludes our call.

Thank you ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.

Yeah.

Yeah.

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Uh huh.

Yeah.

Okay.

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Yeah.

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