Q2 2022 Charlotte's Web Holdings Inc Earnings Call
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thousand Q2 revenue would have been 19.8 million an increase of 2% over Q1 2022 Turning to our B2B business The second quarter B2B Revenue was 5.9 million down 2.9 million from 8.5 million just last year Revenues in our B2B channel contributed 29.7% of the total revenue in the quarter If we did not take the nine hundred thousand dollars specific revenue reserve discussed in my prior comments our B2B revenue for Q2 would have been 6.5 million which would have been an increase of 4.1% compared to our Q1 B2B revenue As of the second week of July Charlotte's Web Market share in food and drug mass retail was 22.4% up.04 Sharepoints year over year versus Q2 2021 We have made share gains in the natural specialty channel gaining over 1 percentage point to 15% versus a year ago according to spends data Turning to the second quarter B2C B2C revenue our e-commerce business revenue was 13.3 million down 2.4 million or 15.3 percent from 15.7 million in the same quarter last year the decline is Primarily attributable to lower web traffic which was partially offset by the
by a 41.8% year-over-year increase in active subscribers, going from 17,000 subscribers to this year, 25,000. And e-commerce conversion rates were strong at 15.6%, up 1.9 percentage points versus a year ago. For reference, most CPG branded outside of CBD have conversion rates of just 2 to 3%.
On a sequential basis, our DTC business grew $100,000 from Q1 of 2022. Charlotte's Web continues to maintain the largest e-commerce business in the CBD industry, and increasing our online traffic and conversion are key priorities for us.
This is our largest revenue channel contributing 70.3% of the company's total net revenue in the quarter.
Even though we are far from satisfied with our revenue during the second quarter, we are cautiously optimistic that we have stopped these declines in revenue and have even seen a slight increase in Q2 revenue as compared to Q1 of this year once the increase in the specific return allowance is removed.
Turning to the gross margin, gross margin in the quarter was 49.4% versus 65.5% in Q2 of 2021.
The reason for the low gross margin in this year's quarter was that we took the $900,000 specific return allowance against revenues. And 1.9Million of inventory provisions during the quarter. Excluding these 2 items gross margin was 61%. We continue to model gross margin percentage in the high 50% to low 60% range.
depending on product mix in future quarters.
Turning to SG&A expenses.
As a result of our cost reductions taken in late 2021 in the 1st, half of this year expenses were 17.3M. Down 7.9M are 31.5% compared to the same quarter in the prior year.
With further cost reductions taken in July , including reductions in certain administrative expenses and headcount, we are well positioned for annualized SG&A run rate of below 70 million by Q4 of this year.
The net loss for the quarter was $7.9 million or $0.05 per share versus a loss of $5.9 million or $0.04 per share a year ago.
Adjusted EBITDA was negative 5.4 million versus negative 5.1 million before Q2 of last year. However, this decrease is only 100,000 from the Q1 of 2022.
which was negative 5.3 million.
We would have seen a significant improvement over Q1 adjusted if we had not incurred the 900,000 dollars specific return allowance against revenues and the 1.9Million of inventory provisions staring the quarter.
Total cash used from operations for the first six months of 2022 was 4.3 million as compared to 16.2 million in the first half of 2021.
In the second quarter of 2022, we generated $400,000 of operating cash flow as compared to using $4.7 million in Q1 of 2022.
We expect to continue this trend of positive operating cash flow in the 2nd, half of 2022 due to introductions and operating efficiencies. Combined with anticipated quarter over quarter revenue growth in the back half of the year.
Cash and working capital at June 30 was 14.8 million and 64.6 million, respectfully. Compared to 19.5 million and 75.6 million at December 31st, 2021. And relatively unchanged from the first quarter of this year.
As of the date of this call, our cash has increased to approximately $17 million due to additional collections from the IRS reference.
That happened after June 30th, 2022.
As you are aware, we terminated the JPM credit facility in July and are now in discussion with lenders on a new, more flexible credit facility that we expect to close in the near future. This is Luanne
I will now turn the call over to co-founder and COO Jared Stanley.
Thank you, Greg. I would like to start by echoing Jock's sentiments to the opportunity in front of us.
As we stabilize our business to positive cash flow, we will ensure we can properly capitalize on our strategy.
I'd like to give a brief update on the core initiatives we are executing on.
I'll start with our new product verticals.
On our last call, we discussed the opportunity we see in beverages and cosmeceuticals.
While these remain priorities for us and we have intellectual assets created in both verticals,
We do see a significant opportunity prioritized in our innovation pipeline, the Charlotte's Web Sports Line.
The CBD sports category is gaining great momentum with MLB's recent second quarter public announcement to approve CBD sponsorships.
which, as we believe, was a landmark change for a professional sport and is expected to be followed by the other leagues.
This forward-thinking move by the oldest professional sports league in the U.S. signals the value of CBD to audiences across the nation.
In the absence of federal regulation, the sports leagues themselves are carving out guidelines and a set of standards for their players that all consumers can benefit from.
That being said, CBD usage is not uncommon amongst professional athletes, as attested recently by one of the NBA's greatest forwards of all time, Kevin Garnett, when he publicly attested that many players are using CBD, and to great benefit, during the recent Sports Business Journal panel.
In fact, he went further by saying he uses Charlotte's Web.
All of us here know the more people we help, the more we grow our top line. And professional athletes and their fans make up an immense market.
Major League Baseball alone, celebrating its 150th year, boasts more than 170 million fans in the U.S. and 10 million in Canada, with growing fan bases in Mexico and Asia.
The needs of athletes are the needs of the Charlotte's Web user, but for a higher degree of performance. The needs of athletes are the needs of the Charlotte's Web user, but for a higher degree
Exercise recovery, regular sleep cycles, and focus make the difference between winning a championship and going home empty handed.
beyond the athletes themselves, the millions of sports fans attuned to the products that professional athletes use are also looking for high-level quality and trusted products.
Charlotte's Web has been catering to everyday and elite athletes alike since its founding given the benefits of our tinctures and gummies.
Recently, the company was named the official CBD partner of Angel City Football Club and the leading Los Angeles market and the first partnership with a sports team for Charlotte's Web. Currently, Charlotte's Web-owned CBD Medic has established partnerships with professional soccer star, Carly Lloyd.
The new Charlotte's Web Sports Line will launch later this year, pending receipt of Certified for Sport by NSF, with non-detectable amounts of THC at less than 9 micrograms per serving, or what CW calls in our portfolio, THC-free.
Charlotte's Web already provides THC-free options and uses an NSF-registered manufacturing facility.
The NSF product certification has already commenced and we expect approval in the not-too-distant future.
I would like to give a brief international update on Canada and UK.
international update on Canada and UK. Canada, wow.
What amazing progress in Canada recently, where nine members of a scientific advisory board with Health Canada have unanimously agreed CBD is safe for human consumption.
and doses of 20 milligrams to 200 milligrams a day.
Currently, this is specific to a 30-day period until longer studies are completed.
While there is still some information gaps, this is a major milestone in the CBD category and shows the progress and leadership position Canada has taken to ensure safe consumer access to CBD products and support for CW's products into this important market.
We commend Health Canada's proactive efforts on confirming the general safety of CBD consumption.
But the unanimous agreement is not surprising to us, as Charlotte's Web has over four years of safety and preclinical toxicology data that supports safe human consumption within the dosing range suggested by Health Canada.
We can speculate the gates are opening in Canada to a larger consumer base.
and we are currently establishing our supply chain to enter the market to take full advantage of the Canadian CBD market changes.
Last fall, we completed our first harvest in Canada to support domestic production of our products.
This year, we will be harvesting our early maturing varieties in the Okanagan Valley and completing a variety trial in the northern growing region to expand our leading cultivation efficiency and CBD potency for the future.
Our hemp biomass aligns well with our Canadian forecast and is suitable to launch products in Canada with success.
We are expecting to be in the market both in medical and retail channels by early 2023.
This has taken a bit longer than expected due to the regulatory process, but we are moving forward with confidence to execute brilliantly.
Let me now move to UK.
As you may know, CW was one of the first companies to be validated by FSA for our full spectrum original formula tincture.
As of August 2nd, we are additionally validated for our CO2 extract tinctures and capsules while awaiting evidence validation on our Gummy portfolio.
The FSA validation means our applications are complete and awaiting formal scientific review on its safety profile.
More importantly, this validation means CW products can be sold in the UK market in the interim.
CW one of the few brands to have this distinction.
Our focus for growth with our UK partner Savage Cabbage has been to drive PR and brand awareness using these milestones as a launch point.
We have seen an 81% increase in traffic to our distribution partner site and a 14% growth from Q2 over Q1, with Q3 tracking even stronger.
These signs are incredibly positive in the brief time we have had in the market. We also see tremendous upside upon landing brick and mortar retailers upon full scientific review from FSA.
We also understand the intellectual assets held within our vertically integrated supply chain.
By owning each step of our process supported by our more than four years of safety and toxicology studies on our extract ingredients
We believe these assets allow CW to eventually seek potential biotech partnership to pursue an investigative new drug, or IND, to follow an FDA approved path.
We are exploring this as part of our strategy to become a broader botanical wellness solutions company, leveraging and continuing commitment to our leadership in dietary supplements.
Lastly, I would like to give an update on Washington, D.C. and our federal advocacy.
On our last earnings call, I stated we were in Washington in early February where we got a lay of the land to enhance our lobbying strategy.
I am pleased to announce this strategy now lies in our strategic initiatives for the company and will be prioritized for CW to lead in DC.
We have brought back to the company Paige Figge, mother of Charlotte and true founder of Charlotte's Web.
Paige joins us with intelligence and passion, and there's no one more credible than Paige to lobby for a regulated CBD landscape to provide safe consumer access.
As a first step, Paige has resurrected a 501c4 she founded in 2014 called Coalition for Access Now.
Paige's success in leading Coalition for Access Now can be seen in her previous work reforming CBD laws state to state and passed federal bills such as the Charlotte's Web Medical Access Act of 2015 which gained 78 co-sponsors.
Coalition for Access Now is working with a top lobbying firm in DC in support of the coalition.
They initially targeted and contacted 22 house offices.
met with 12 of these offices before August recess.
The meetings were extremely positive. We are expecting support from the members coming off August recess, and we look forward to supporting the coalition to progress HR 841.
With that, I'll hand it over to Jock.
Thanks, Jared.
I want to share progress against the same revenue priorities I discussed on my first call with you.
First, we are penetrating new industry verticals and expanding our retail presence.
A new watershed partner with SDM places
employer wellness programs. Offering CW as an option for employees in their employer plans is a massive accomplishment.
SPM estimates that up to 50,000 employees will participate in this program in the 1st year.
We also entered the Instant Needs Rapid Delivery Channel in a new partnership with GoPuff that launched in July and is rolling out nationally to 2.4 million consumers.
In other verticals, in retail or entering the spirits vertical with a partnership in Chicago market, C.W. will be on shelf providing wellness alternatives to ABV choices.
We are in discussions with distributors to further our presence in this untapped vertical.
In partnership with Cardinal Health, we have now reached thousands more independent pharmacies.
As you know, pharmacy is the second largest distribution channel, the 20 percent share in CBD, behind only e-commerce, which holds a 40 percent share of distribution.
We entered the fitness and body care vertical through partnerships with Lifetime and Massage Envy.
A new partnership announced earlier this morning with Hanson Faso Sales and Marketing Inc. for expanding access to thousands of retail doors across channels via their distribution relationships just in the Midwest alone.
This relationship aims to significantly increase the number of sales reps for Charlotte's Web at Retail.
For perspective, Hanson FASO works with KD with 15,000 customers, Unifi with 43,000 customers, and many more distributors and direct retailers.
And today we're announcing the launch of upcoming months of CW Sportsline of T3 products.
who identified sports as an untapped opportunity for us entering into a partnership with ACFC in Los Angeles and couldn't be more enthusiastic with the move from MLB. We look forward to the opportunities ahead to lead this category.
This is impressive progress since our last earnings call. Our new business pipeline is robust with more to come in the months ahead.
It confirms we have the right new leadership with a passion for growth and executional solve problems.
New distributor partnerships, as well as direct discussions, will strengthen our access to other new verticals like hospitality, travel, duty-free retail, and leisure.
These new customers, distributors, and brokers are significant pieces in moving the business forward.
And very little of these are reflected in our Q2 revenues.
Full distribution and all available doors will take some time.
Improving our execution in store will take some time, but we're on track to growth. It's still a long game, but our right to win is clear.
Second, growing existing customers' business and expanding velocities.
This has been the most challenging priority for us, and it comes full circle to my opening comments on execution. We and our customers just aren't sufficiently activating a store and in media to bring foot traffic to retail.
We haven't had enough feed on the street to ensure our products are on shelf in the right locations with the right amount of facings contractually granted.
We haven't done enough to educate in-store salespeople, trainers, and managers about Charlotte's Web and CPD.
And we haven't done enough sampling programs.
During my days at Bacardi we used to say, nothing better than liquid to lips, and so it is true here. Thanks for watching and have a great week!!
That's why we're moving towards a distributor model and away from a largely direct sale model.
We simply can't resource a direct model to execute brilliantly.
While we're gaining new distribution relationships and availability, we're also assessing our existing distributed relationships that simply aren't moving the needle.
Improvement through substitution with bigger and better partners that are motivated to grow our and their business is what we're looking for.
That's how we gain resources to merchandise our facings, ensure shells are restocked finely, and activations executed.
We know CW products have a 3 to 6x higher velocity than other CBT brands.
yet they still go on the shelves.
We, like the rest of the CBD players, have too often used price promotion rather than working in lockstep with our customers to build demand and incremental velocity at retail.
Thirdly, D to C traffic has continued to decline year over year.
I want to remind you that our e-commerce is number one in the industry by far in 70% of our revenues.
and it should be even bigger. To do that, we've got to stem and reverse the trend in traffic. Here too, I underestimated the work needed and time it will take to bring new consumers into our ecosystem.
But we have it.
We are testing new content and paid media platforms to increase awareness and relevance in culture so that we can convert them to consumers on our e-commerce site. We are being more strategic with the depth and frequency of promotional pricing campaigns.
The simple truth is the average lifetime value of an e-commerce consumer is enormous. That means growing our traffic.
by leveraging a QR code, for example, for education and ease of entry into our ecommerce platform.
Investing in a relaunch of a new cw.com in 2023 to improve user experience and ease of shopping.
supporting our unparalleled customer care team to help consumers in their shopping journey.
And finally, integrating P2P and D2C on marketing, messaging, and activation to facilitate consumer shopping from and to retail and ecommerce and in glove with retail partners.
With that said, we are seeing some positives. Our active subscriber brace increased 42% year over year.
Our conversion rates were up 190 basis points to 15.6 versus Q2 last year.
which are significantly better than typical CBG conversion rates.
Simply said, when we bring people in, they become loyal consumers with high lifetime values.
We're expanding our penetration in international markets.
We continue to make progress in this priority, laying foundations for the right route to market through regional and local partners, consistent with our asset light model.
Jared discussed the UK and Canada in his remarks. In addition, we also announced the groundbreaking partnership for Greater China, including plans for first ever CW Retail Store Experience Center in Hong Kong coming in 2023.
We plan to shortly announce new expanded partnerships in several other regional markets.
International development and asset-like models are the right strategy for us, and our ability to leverage our unaided awareness in so many markets we aren't even present in yet.
The International truly is a long game play.
Finally, choice for innovation.
Our final priority is innovation. Our view hasn't changed. Cosmeceuticals and beverages remain in untapped formats for us that combined are more than half a billion dollars annually according to data from the Brightfield Group.
Whether we're delaying our launches until late 2023. Why? We've prioritized sports for obvious reasons.
We simply don't have the human of financial resources to also launch into these other categories at the same time to ensure success in the market.
So in conclusion, I'm delighted that we are working on a renewal of the name and likeness agreement with our founders, the Stanley brothers, which we expect to be signed later this month. The agreement furthers the collaboration with and benefit from the brothers as our true grand ambassadors.
No one in the industry has what they bring. After all, they founded it. And there are significant shareholders who are aligned with our commitment to winning the long game.
I look forward to our ongoing relationship, as all shareholders should.
Charlotte's Web remains the market leader in total share. CW.com remains the largest e-commerce business with over a three share, 30% higher than our nearest competitor.
and e-commerce represents 40% of the total CBD industry sales. Think of the opportunity as we build traffic and conversions.
Charlotte's Web is the leader in the P2P market, and it's only a 2% share.
Pharmacy is the second largest CBD channel and note on new distribution partners with Cardinal Health into more pharmacies and SVM expanding us into insurance benefits channel.
In a broadly $5 billion marketplace, 67% or so $3 billion of existing share is with thousands of lesser quality brands.
That presents our right to win without regulation and without industry growth.
As we progress our growth opportunities, we continually assess our operating costs, most recently again last month, to better position us to be operating cash flow positive later this year based on our revenue outlook.
Ending Q2 slightly cash positive to Q1 is encouraging evidence of this commitment.
While others certainly see the current state of regulation as a threat, we simply see new opportunities every day. Our progress on regulatory front, as Jared mentioned, is exciting.
I've never been more challenged, yet more enthusiastic about our tremendous potential. We must sustainably grow the business by executing on our strategic priorities.
Charlotte's Web is a unique company that's built an industry into a global wellness movement.
Charlotte's Web is CBD.
We know what it takes to push forward through evolutionary times to execute successfully and we'll do just that. Never losing sight that we are playing the long game.
With that, thanks for your participation, and I'll turn the call over to your questions.
Thank you. Ladies and gentlemen, we will now begin a question-answer session. Should you have a question, please press star followed by the number one on your touchtone phone. If you have a question, please press star followed by the number one on your touchtone
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One moment for your first question.
Your first question today is coming from Scott Fortune with Ross Capital Partners. Please go ahead.
Good morning and thanks for the questions. I want to start kind of what you're seeing. Seasonality in the second quarter is usually a very strong quarter in this space and this category. I wanted you to get a sense of the challenges for more macro consumer side with inflation or the category or higher price ticket items that you're kind of seeing the flatter growth, especially with the initiatives you put in place here before leading into the second quarter. So if you're interested I oil watch over all.
CBD market in general and the health of the growth from that standpoint going forward here.
Yeah, Scott, thanks for the question. I'll take the question. You know, if you look at the Brightfield data, right, they're estimating that the market's going to grow about 6%. This year, and, you know, if you then overlay their optimism around what regulatory would mean, you know, they project the market will double. So, you know, there is growth projected by Brightfield in the category, you know, as I said earlier.
For me, the immediate opportunity is gaining share in the $3 billion marketplace that exists today. That is an opportunity for us against other competitors. I think, as I said earlier, we're looking at sequentially improving our top line as we go through the rest of the year. I don't sense that we're seeing an impact of inflation on demand. I think, again, it's more about our execution in retail and we're addressing
You've announced some new initiatives, kind of a shift a little bit in the strategy, going more distribution from that standpoint, but can you provide a little more color on kind of some initiatives you put in place to drive sales and marketing earlier this year? What channels you're focused on and just kind of, you know, you haven't really seen the increase there gaining market share. You said there's not enough resources really to focus on that. What are you seeing as you mentioned, playing focus in California? What was, what kind of...
to market is that you know as I and I'm sure you walk into different stores at retail we don't always show up where we should we don't always show up with as many facings as we have a right to and and we're not driving enough sort of trial and consumer engagement to to the category into Charlotte's Web so by having a distributor model it gives us you know access to their feet on the street there are reps that are in the trade every day
and able to ensure that if we're out of stock, we're restocked on shelf.
And it allows us the ability to do better executions and activate in stores, whether it's through. Promotion, whether it's to, you know, education, whether it's through sampling programs, we just don't have we haven't had the resources to do that excellently. And, you know, this model shift more of a distributor. Arrangement allows us to get that incremental feed on the street if you will to ensure that we show up brilliantly in store and at retail. Thank you.
I appreciate it. Thank you. We'll jump back in the queue.
As a reminder, should you have a question, please press star followed by the number 1.
please press star followed by the number one.
Your next question today is coming from Pablo Zunich with Fitzgerald. Please go ahead.
Just a question regarding Canada. I know it's early days. It's so far just a proposal so I guess we shouldn't get too excited about it. But as the market begins there, we expect also some of the problems we've seen in the US. You know that you have too much fragmentation, low barriers to entry. I mean yes, it would be nice that you can buy CBD over the counter and not just a dispenser is without a distinction.
But could we see the same problems with the US or will there be more clear guidelines that will give you some protection in that market? Thanks. We'll know at the state we got for shortly.
I'll turn it over to the... Let me... I can handle that question, sure.
You know, I don't think we will see the same issues that we see in the US. And first, it is a really good question, but you have to keep in mind CBD is a schedule to control substance in Canada today.
And these guidelines are saying, hey, this is safe, and what is Health Canada's next approach and response to regulating the category, which is the major difference than what the FDA, the position the FDA has taken, which is no position to regulate the category.
Today, there's actually tremendous upside in getting our brand into Canada, even without the transition from the medical and retail channel from dispensaries. The reason I say that is because...
Canada in the cannabis market is around a $5 billion market.
CBD only products of that market make up around 150 million. But put this into perspective in the market today in Canada, gummies, which is what Charlotte's Web does on about approximately a third of its portfolio in revenue. And gummies in Canada does just over 30 million, but that 30 million is made up by less than 10 brands and arguably five or six brands.
So even today, with a brand coming into Canada, and because it's such a highly regulated category, we're not competing against the thousands of current brands in an unregulated FDA market. And we see very much a transition from the medical and retail to a Health Canada regulated market. So we're speculating that this is going to be the model that's set forth.
and that the FDA would hopefully follow suit from health candidates guidelines.
Thank you, that's very helpful. And just one last one.
We are hearing and you tell us if you're hearing the same thing that maybe the farm bill, there may be some adjustments to it that they cap on CBD on hemp on THC, maybe increase from 0.3% to 1%. We are hearing some CBD companies talking maybe or entering Delta 8 and offering other products. What are your views on that? Is that likely to happen? And what would be your response to a new product portfolio to interview?
Sure. Well, the increase of THC that's potentially being proposed on the cultivation only. The increase of THC is being proposed on the cultivation only.
And we believe that's a bit of a long shot. We have a saying, and when you're lobbying for something when you ask for too much of it, you get none of it. And we believe that changing the federal statute from 0.3 to 1% is a bit of a Hail Mary. And we believe that changing the federal statute from 0.3 to 1% is a bit of a Hail Mary.
that we believe that's a bit of a long shot. We have a saying and, you know, when you're lobbying for something, when you ask for too much of it, you get none of it. And we believe that changing the federal statute from 0.3 to 1% is, you know, a bit of a hellmary. But...
As far as Delta 8 and people that are actively marketing and selling THC products derived from hemp, we have a position that we are against within our company, and we believe that it will support federal regulation and give more pressure to the FDA to drive a process for the CBD category. In that process, we are in support of HR 841.
which establishes the NDI process, which is Charlotte's Web's new dietary ingredient notification, which was submitted to the FDA in March of 2021. And we believe our portfolio sits best within a naturally occurring full spectrum and impact extract with products that less than 0.3% THC. And we believe that less than 0.3% THC.
Thank you. And maybe one last one. Just when we think about Europe , I know you've talked about, I think the UK and other markets there, but from outside, it seems that it's quite difficult to build distribution. And if you find a partner there, you're working on a very basic B2B format. So pricing is not that great. Maybe a bit more polar in terms of how you can penetrate that market. What is it too late to some extent?
Sure. I don't think you want to handle this, John .
Journal, alternating channel with
I'll add the small part of it, which is the reason it's slow to access this market is because similar to what Canada has done, Europe and UK are asking for validation and applications and they're using science-driven data and safety to ensure product registration, which then will open up doors into the market.
It is a bit of a Wild West and there's a ton of you know clutter out there because currently You know if you're in Europe your some people are actively marketing and selling CBD products whether it's in the form of You know vape pens or flower smokeable flower.
But we as a publicly listed company are going through the proper steps to ensure our product is
is validated, legal, and then registered within those jurisdictions to open up broader distribution for the future.
I was just going to add below that I do believe that our asset light strategy on route to market and international markets is the right one. Having distribution partners who know the market, know the culture are successful and have route to markets with substantive clients is the way to go and we remain stewards of the brand and how the brand shows up. But we do have unaided, number one in many markets in unaided awareness.
There are no further questions at this time. Corey, you may proceed.
Okay, well, thank you, Miranda. I would like to thank all of our shareholders for participating today on the call. We appreciate your support and patience, and we'll look forward to updating you in mid-November following our Q3 results. Thank you. We thank you for participating and ask that you please disconnect your lines.