Q3 2022 Charlotte's Web Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Charlotte's Web Holdings, Inc. Third 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 today November 15th 2022, and I would now like to turn the conference over to Cory Pala Investor Relations. Please go ahead Corey.
Thank you Michele good morning, everyone. Thank you for joining us for our 2022 third quarter earnings Conference call for Charlotte's Web Holdings, Inc.
Our Q3 earnings press release and financial statements were issued this morning and have been posted on the Investor Relations section of our website and filed on SEDAR Dot Com in Canada.
As well as in the U S with the SEC.
We are hosting today's quarterly call from London. Following last night, signing about 57 million debenture investment and the Charlotte's web by BH.
<unk>, which we announced in our press release this morning.
On today's call. In addition to discussing our results for the quarter, we will provide commentary on this announcement with BHG along with other recent wins.
We will take questions from our analysts at the end of our prepared remarks and.
And a replay of this call will be available through the next week accessible via the details provided in our earnings release and a webcast replay of this call will be available for an extended period.
First of all through the IR section of our website at Charlotte's web Dot com.
As a reminder to our listeners that certain statements made on today's call, including some answers. We may provide to certain questions may include content that is forward looking in nature, and therefore subject to risks and uncertainties and factors, which could cause actual future results of our company performance to differ materially from implied expectations such risks surrounding forward looking statements are outlined in.
Detailed within the company's regulatory filings on SEDAR Dot com.
And SEC Gov.
In addition, during the call we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which does not have any standardized meaning prescribed by GAAP. Please refer to the earnings release contained in the form 8-K that we filed this morning for a description of adjusted EBITDA as well as a reconciliation of such measures to their respective and most directly comparable GAAP financial measures.
Now I'll hand over the call to Charlotte's Web Chief Executive Officer, John quarterly.
Thank you Cory and good morning, everyone. Thanks for joining our call.
Corey said, he Jared and I are in London, Greg is in Colorado for this call.
Before handing the call to Greg for a review of our third quarter I want to spend a few minutes highlighting this morning's announcement about the a T and other recent news.
This morning, we announced gross proceeds of $56 $8 million seven year debenture convertible into 19, 9% ownership of Charlotte's web shares by the.
Conversion price is $2 per share on the T. S X.
This is a premium of more than 100% to a 10 day daiwa for relatively low cost of capital. The debenture carries a 5% interest rate with a step down to one 5% upon federal regulation of CBD in the U S. We believe this is an outstanding deal for our shareholders.
Vishal, it's what this investment provides substantial liquidity at a great price.
Excluding the gross proceeds under debenture.
This show is approximately $70 million.
This capital allows us the choice to invest behind our key strategic imperatives growing our revenues.
Our asset light international footprint, innovating, our product portfolio, including launching a broader sports formats.
Pursuing our science and broader botanical wellness opportunities.
Winning in Washington D C.
To be clear, we will continue to be disciplined in our investments and stewardship of our capital.
On October 12th Charlotte's Web was named the official CBD of Major League baseball and the groundbreaking announcement. This marked the first major professional sports league to form a strategic partnership agreement with C. W.
MLP is arguably the most prestigious professional sports league in the world and their reach and exposure is incredible.
This is a multi year strategic partnership one of those rare a game changing moment in our company's history.
Validation of solid sweat made possible by our NSF certification as the first and only CBD company with a broad spectrum hemp extract NSF certified for sport for our daily edge, Tincher, which proudly displays the iconic MLB batter logo and official CBD partner at the MLP.
On the packaging.
Daily edge underwent strict independent testing to uniquely neat MLP scientific benchmarks and no bad substances policy shall.
Its web and major League baseball will fill a major gap in the sports channel four and NSF certified for sport portfolio of CBD products.
<unk> now has the premier brand presence at Mlps jewel events, including the all Star game post season, where L series through marketing media and communication Activations that connect to the leaks massive 175 million fan base of 180 million social media followers.
And 111 million broadcast viewers and millions of active email subscribers I imagine you would have seen our brand in stadiums or captured on the screen. During the recent playoffs and world series, So much more to come next season.
Which for US started the day after Houston one.
We will collaborate on the joint high impact media plan, including local penetration through club channels customized brand engagements ticket and unique fan experiences and alignment with fitness events throughout the year.
C Media education is also a shared priority that will come to life through a CBD wellness agenda that educates coach's performance trainers doctors and all stakeholders Charlotte's web in MLD will also come together for social impact underscoring our shared values and commitments to our communities.
One of our significant revenue headwinds as the decline in traffic to our ecommerce site. We've talked about this with you before the partnership is a critical piece to our plans to help address this our sports portfolio will be immersed in the enormous and loyal MLP community.
The excitement over the initial announcement delivered an earned media equivalent to over $20 million and counting.
Put that in the context of Vogtle multiyear rights the commitment and you can understand why we're so thrilled.
Lastly, I want to reemphasize. The key point. This is a partnership not a pure play Reits deal MLP as a shareholder and CW MLB participates in revenues of our co branded products after a threshold surpass and our interest to go CW This business and our shareholder value are completely aligned.
The third major announcement, we recently made is the partnership with til Ray for the manufacturing and distribution of Charlotte's web products in Canada.
Jared has led these discussions with til right. So I'll, let him share more details in his remarks, but importantly, this is a perfect example of executing on our light asset model for international expansion with leading domestic partners by leveraging well established infrastructure co production and route to market capabilities. This is clearly a repeatable.
Model for multiple international markets going forward.
Beginning of the year I said that we'd be entering new channels, we have entered into the employer benefits insurance channel and our partnership with F. N b offering CBD for benefits programs that supports employee wellness, our new vertical and an industry first for CBD.
Most recently, we entered into the spirits channel partnering with southern Glazers wine and spirits America's leading wine and spirits distribution company 44 U S States.
And of course, our most high profile, new verticals sports and we're entering it with the most venerable partner Major League baseball.
We also expanded our reach in consumer access by adding new distribution partners, including Cardinal health, serving thousands of pharmacies and some fast so covering the central U S retailers Stark covering the New York Tri State area as well as relationships across the country and go puck in the instant delivery channel.
Our international plans also continue to progress most recently with til right in Canada, as well as smaller agreements and several Latin and Central American markets as well of course as greater China.
These new distributors in verticals have yet to impact <unk> revenues, while we know that traffic to our ecommerce site converts to purchases and loyal subscribers each bodes well for returning the company to growth.
To summarize these last 11 months since I became CEO I've seen fundamental changes that Charlotte's web starting with lowering our operating costs and stemming our cash burn so an overhaul of our retail channel sales team compensation and route to market to.
Of laying down a strategy for growth for our broader botanical wellness future leveraging our IP via partnerships.
So MLB and yesterday to securing our liquidity to selectively fueled the execution of this strategy.
I'll now hand over the call to Greg to review the financial results for the quarter, and then had jarrod to provide additional commentary on Canada, and the U K as well as ongoing progress in Washington D. C and finally, some updates on our innovation pipeline and strategy I'll close with the latest progress against these initiatives as we outlined in our.
Last earnings call before opening the call for questions.
Greg.
Thank you Chuck.
In our third quarter net revenue was $17 million. This was down from $18 9 million in the last quarter and $23 7 million in the same quarter last year.
Revenue was lower in both D to C e-commerce, and B to B retail businesses.
When looking at our current revenues, we need to start with the micro headwinds.
The first macro headwind is natural and food drug mass retailers are reducing shelf space.
With total CBD distribution points down, 20% to 22% versus the previous year.
Charles Schwab has maintained more shelf space than the competitive set because our products have the highest velocity in the category with total district distribution points down approximately 14% versus the previous year.
As a result, we continue to be the market leader, despite lower <unk> revenues.
The second headwind, which we all are seeing.
Has led to a significant depth and frequency of price promotions and percentage of revenue done on deal, which has climbed euro year over year.
In the third quarter.
We achieved a positive two eight point unit share gain across total U S natural versus a negative two eight point unit share change for all other brands as of the second week of September of this year Charlotte's web market share.
Food drug mass retail was 18, 6%.
As consumers continue to shift to.
Two other product formats, primarily gummies in Q3, gummies represented 37% of Charlotte's web revenues, an increase of seven percentage points versus the prior year.
E Commerce traffic remains the largest constraint on our B to C revenues as Jacques discussed in his comments earlier.
And lastly, the last headwind finally, the channel mix between B to B and B to C has hurt us giving.
Relative absolute dollar declines as B to C. Generally has higher prices than b to b and higher gross margins.
But even with these headwinds we maintained our market share leadership.
On the <unk> side, we had lower year over year shipments to our largest customers largely reflecting the factors noted earlier.
<unk> net revenue was $5 $3 million, a decrease of $3 3 million or 38, 1% year over year.
The reorganization of our sales force and transition from direct sales to a distributor led route to market has impacted our revenue performance as well.
We have made significant strides in signing new distributors. However.
The timing on signing two orders to shipments to stocking on retail shelves takes months. So we are not benefiting from these significant new distribution wins yet.
Do you just see net revenue was 11 8 million a decrease of $3 4 million or 22, 5% due to lower traffic on our ecommerce site.
But the conversion rates improved one one percentage points year over year to 13 point too.
2000 14.3.
This continues to be encouraging as it demonstrates that if we bring audiences to our brand world and ecommerce site, we convert them to consumers at the best in class rates.
This bodes well for us as we activate our MLB partnership.
Q3 gross margin of 52, 5% is primarily related to lower net revenue and product mix.
Our lower gross margin Skus for the company as they are sourced by our co manufacturers. While pictures are produced in house at our facility.
Overall lower revenues also mean, our fixed overhead costs are under absorbed creating higher period costs in our cost of goods sold line.
We usually model gross margins in the high <unk> to low 60 percentage range for quarter Lee revenue above $22 million.
With variances, primarily depending on product mix in future quarters.
Turning to our sales general and administrative expenses. This is an area, where we continue to see lower year over year cost as a result of our organizational actions taken in January and July and our continued focus on reducing discretionary spending.
SG&A reported in Q3 was $11 million down from $24 3 million in Q3 of 2021.
However, this also reflects a $4 $1 million credit taken in the quarter related to the pandemic related employee retention credit for which we have filed amended tax returns.
Excluding the credit SG&A expenses were $15 1 million still a substantial 38% decrease year over year.
We have brought our fiscal year 2022, SG&A expenses, well below $70 million, which is more than a $30 million annualized savings compared to fiscal year 2021.
As a result, our net operating loss of $3 9 million for the quarter was a $5 5 million or 58% year over year improvement despite lower revenues.
Adjusted EBITDA for the third quarter of 2022 was positive $600000, an improvement of $5 5 million as compared to adjusted EBITDA of negative $4 8 million in Q3 of 2021.
Prudent expense control this year with strict management of our balance sheet, along with the collection of the IRS refunds resulted in net used cash in operations in the first nine months of 2022.
$2 6 million, which is 5 million was used in the first quarter. This compares to $23 3 million of cash used in operations. During the first nine months of 2021.
$2 6 million, which is 5 million was used in the first quarter. This compares to $23 3 million of cash used in operations. During the first nine months of 2021.
Cash at September 32022 was $16 5 million compared to $19 5 million on December 31, 2021, and up from $14 8 million on June 32022.
With this morning's announcement of the bat debenture investment of $56 8 million or cash on a portfolio basis is now above $70 million and working capital as of today is now over $100 million.
With that I will now turn the call over to our co founder and CEO Jared Stanley.
Thank you Greg.
Thank you Greg.
As we stabilize our business to positive cash flow, we focus on growth through market expansion and regulatory hurdles.
Briefly update the core initiatives, we are executing in these areas star.
Starting with our sports vertical.
<unk> web broad spectrum tincture NSF certified for sport resulted in a groundbreaking partnership with major League baseball and has a tremendous validated for Charlotte's web and for the CBD category in general.
From a regulatory perspective, the partnership is helpful in putting Charlotte's web at the forefront of the D. C pushed for CBD as a dietary supplement MLR.
MLB didn't weighed on the FDA chose NSS is the gold standard for now.
<unk> for sports certification means that our product is free of 280 banned substances and it would be highly unlikely to fail a drug test when using our product label claim.
We educated NSF on CBD using THC study results from 'twenty to 'twenty 2021.
And this move the needle.
Our daily it's tincture was able to become the first broad spectrum extracts NSF certified for sport because of our market leading science.
We expect to rollout additional products from the sports line in Q2 and Q3 of 2023.
Each product will undergo the same rigorous NSF certification process.
We are launching with need state gummies, followed by topical.
And in 2024, we have a robust innovation pipeline focused on beverages.
We are working closely with NSF as their topical standards for CBD are currently being established we.
We applaud them for their vision to uplift quality in CBD and unlock these potential products for athletes.
The NSF certified for sport distinction gives us a competitive advantage in the market.
We now have the playbook and an approved NSF extract ingredient to drive innovation and bring our products to an entirely new consumer base we.
We are excited to see how this portfolio will play out.
I would like to give a brief update on recent announcements of strategic alliance with Canadian category Captain silhouette.
This is the first of its kind agreement for Charlotte's web to license its brands intellectual property and formulations to a trusted partner like <unk>.
This will ensure a successful launch of Charlotte's web core products made available in the medical and recreational channels in Canada.
First.
<unk> will be launching tinctures, and the medical market with gummies and tinctures to follow in the recreational market.
This is expected in 2023 and followed by topical <unk>.
Their leadership has aligned core values to Charlotte's web and we are excited about what this formidable relationship will hold for Canadian consumers.
Furthermore, creating the company's supply chain in Canada before the contemplated introduction of new natural health product regulations preparers, Charlotte's web products for availability through traditional pharmacies and mass retail in Canada. Once such regulations are passed.
And finally this relationship will provide us potential export to other international geographies through Canada, including countries in the European Union.
With that let me transition to Washington.
With regards to regulation, our DC strategy is going as planned.
We expected 2022 to be the year to establish our presence and ignite HR 841 effectively into 2023.
As you May recall HR 841 is the hemp and hemp derived CBD market stabilization Act, which if passed will regulate CBD through the fda's, new dietary ingredient pathway.
Our accomplishments since July of 2022 include the rehiring of page Vickie mother of Charlotte, who resurrected her 501 C. Four called coalition for access now.
Page in Charlotte started the CBD category and Theres No voice more credible in D C and pages to represent everyday Americans, who are using C. CBD.
CBD.
Charlotte's web is the guiding supporter of the coalition, which has engaged both public affairs group and the Hickey and strategies are top lobbying in PR strategy firm to represent our voice in Washington.
So far we have made four trips to D C to meet with congressmen and Senators and we have the how the fifth trip scheduled this month.
Additionally, we've met directly with the co author of HR 841 Congressman Griffith.
He has emphasized the interest and intent to reintroducing this legislation in 2023 and getting on the house's agenda.
Our progress has been significant and adding five new co sponsors to the bill since our engagement in July .
The last milestone puts us in a great position to be driving this agenda post January 3rd when our new Representatives take office.
The election results this year were anything but predictable while it looks like the house and Senate will be controlled by different political parties.
We do not see this as a deterrent in fact quite the opposite.
We've not experienced opposition to CBD on either side and we believe this bipartisan bill will give our divided legislature a clear win.
HR 841, as one leg of our strategy forwards the regulatory landscape for CBD as a CPG company.
I would like to give a brief update on another pillar of our botanical wellness strategy.
The investigative new drug or IND passed through the FDA.
We are bullish on landing the regulatory landscape for our CPG business and simply put we're not waiting we're speculating on what Congress may or may not do is looking forward to further unlock shareholder value and an FDA approved path through the investigational new drug path.
Let me give a brief update on <unk>.
As we discussed in our previous earnings call. We are exploring an investigational new drug pathway to seek approval from the FDA to advance into clinical trials.
This can sound confusing as Charlotte's web as a consumer packaged goods or CPG company.
Not a biotech company.
If you recall CW submitted a new dietary ingredient notification dossier to the FDA in 2021.
The foundational requirements of this dossier are based on robust safety and toxicology studies.
These same studies are also required for IND submission for advancement into phase, one and phase two human clinical trials.
We further stated in the previous earnings call that CDW has the intellectual assets to partner with a biotech company.
And we were referring specifically to our patented genetics safety and toxicology studies and our quality control systems.
These assets are second to none in the industry and positions Charlotte's web to meet the requirements to seek an IND and.
And create a separate value proposition to shareholders.
Ultimately Charlotte's web is looking to reclaim its birthright and CBD wellness by creating a path that will garner physician advocacy and bring this company back to truly making medicine again.
I would like to remind all that a foreign company GW pharmaceuticals was fast tracked into phase III human clinical trials at the same time Charlotte's web was launched launching a CPG company.
<unk> back then the only approved regulatory environment that existed at the time in the United States.
This was when CBD was a controlled substance until passage of the farm Bill in December of 2018.
Now we are fully capable and clear to seek the IMD drug path with the FDA.
We look forward to sharing the ongoing progress with you as we drive this new vertical. This is an exciting time that taps into the company's pioneering DNA and spirit.
With that I'll hand, the rest of the time over to Jack.
Thanks, Chad before wrapping up I wanted to give you more color on why we see MLP as a game changing partnership and a tipping point for the CBD industry.
The big leagues have been talking about CBD for their athletes for the last few years, but didn't see a path it wasn't until MLP with their first mover and safety mindset and Charlotte's web with its scientific studies and quality controls came together that that door to professional sports could be unlocked.
The credibility that comes from the NSF certification for sports distinction allows us to move into this broad spectrum product portfolio into other important sectors like hospitality Big box travel Emts law enforcement et cetera, including sports Adjacencies.
Beyond the exposure in stadium the impact of professional athletes embracing CBD and frankly, Charlotte's web truncates education needed to move consumers from awareness to consideration to purchase.
As I said earlier the earned media since announcing MLB on October 12, validates our ability to reallocate paid media dollars historic.
Two MLP.
Just a couple of data points we.
We saw 25% increase in traffic on Charlotte's web dotcom that they hear the announcement.
We sustained the increasing consumer engagement through social media clicks on digital ads and continued press coverage of Charlotte's web, becoming the official CBD of major League baseball.
Aaron media advertising equivalent of over $20 million continues to grow as the interest in the partnership grows.
Media in the form of National and local broadcast radio podcast local digital out of home and more yielded millions of impressions.
We've acquired one thousands of new customer emails into our database of new purchases since the announcement.
And those purchases arent just buying the sports to ensure they are buying across the current product portfolio, a promising sign moving forward.
With every MLP marketing execution will continue to widen and deepen the top of the funnel.
With 45 million Americans, taking CBD the headwinds of the lack of FDA regulations have caused an influx of bad players selling synthetic compounds as natural cannabinoid.
The result is a bifurcated market caught between vape shops, and wellness platforms. The passiveness of the FDA and creating a strong regulatory framework for the CBD industry as resulted in opening itself up to bad actors looking to make a quick buck at the expense of consumer safety.
In the interim the daily edge product is an ethic example of self regulation and certification.
This should signal to Washington that its time for the FDA to step up and take the lead.
The result would be a standardized experience and what constitutes CBD and which products and what companies make the cut.
Charlotte's web imagine a world, where there was a strong CVT CVD regulatory infrastructure supported by transparent education on what CBD is.
What it can do and what is not allowing athletes and consumers the power of freedom to make personal choices on their wellness journey.
It's often said the price of stagnation is more costly than the price to evolve.
We are evolving and on the tipping point of growth.
Our financing or announced earlier today it gives us the capital to thoughtfully invest behind our strategic initiatives. Following our actions to simplify the business reduce costs and to position the company to grow cash at these revenue levels.
The MLB partnership uniquely validates CW or quality or brand trust and our mission with a megaphone, reaching audiences and relevant ways 12 months a year.
In a way that we simply couldnt do on our own.
These two game changing deals grabbed the headlines and deservedly, so but our evolution is more than this we are advancing CBD as a dietary supplement in D C and leveraging our science and IP to open new verticals.
We've reorganized Charlotte's web grounded in our strategic plan focused on innovation, new channels expanded distribution and brand awareness to drive new consumers to our E Commerce platform.
To that end, we're very excited about the new structure of our E. Commerce team, we brought on Mary Cooney to lead our direct to consumer business Mary comes to us from Avon as the head of E Commerce business with a long career at Barnes and Noble's as well.
Helping to create and grow their ecommerce platform.
As we move into 2023, we continue to best optimize our organization and resources to drive our forward momentum into next year and beyond.
The C B U S. CBD industries estimated that nearly $5 billion a year, but.
But we don't play in the entire space that estimate encompasses.
Not all segments are going to survive regulation Delta is an obvious example.
We participate in roughly 60% of the total market in the segments that are sustainable and that we can win and grow in over the long term.
With our new NSF per sport, we're effectively creating a new category for professional sports.
Once we launch beverages in Kosmos <unk> will add another 10% to the overall market to our opportunity.
With the addition of potential I N D path, we add validation to unlock true value of the hemp plant.
We're in this for the long game and with disappointing substantial capital infusion, we again set ourselves apart from our competitive set with the right to win.
B E T. Our founders and MLP now represent our three largest shareholder groups.
I look forward to sharing more news with you soon about progress into some of these key channel channels.
Both the new business verticals and regions.
With that I'd like to ask the operator to open the call up for questions.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
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Standby for your first question.
Yes.
Your first question will come from Harrison Davis of Cowen. Please go ahead.
Great. Thanks, so much for taking my question.
Our questions. The first one for me just on the bats agreement.
Congrats on on the financing there.
Just curious if you could share any specifics around potential for additional strategic overlap beyond the board feet that bats is going to have.
Whether it would be.
Best practices sharing or potential to use any of the distribution assets and secondly, just could you offer some more specifics around.
How you intend to use that cash and if there are any restrictions on what you use.
Okay.
Yeah Harrison is Jack Thanks for the question. So first of all there are no restrictions on the use of cash.
From the deal.
We intend to use the cash thoughtfully and choice fully and <unk>.
That's invest the proceeds as appropriate over time.
Against the strategic initiatives that we outlined drawing the revenue continuing to work in D C and pursue broader botanical wellness platform.
You know.
It's day, one of our partnership with B E T. But you know, we see where they're going and what their strategy is and it's aligned around botanical wellness and and we're excited about that and what we could do together in the future, but right now it's it's day one and.
So that's where we stand today.
Okay. That's helpful.
Interesting to see where that goes and I guess last one for me.
Seems like a couple of quarters ago, I'm not sure if I'm getting this right, but it seemed like the transition the consumer transition into those cheaper form factors like gummies had kind of been stabilizing.
Hmm.
Is there a change in that or I guess, how are you seeing that and maybe if you look out 12 to 18 months.
What percentage of your business do you expect to be of your E. Commerce. Your DTC business do you expect to be in guidance. Thanks.
Yeah, I mean, just let me give you some data so in for Q3.
And B to B, we saw tincher volume decline about 50%.
Whereas gummy volumes are up 6%.
And so we continue to see that consumer shift.
And what we're really what we're really poised to do Harrison is as we've looked at our portfolio we've looked at our Skus.
<unk> and whether they are indeed, a b or an e-commerce.
It's pretty clear to us that what we really want to focus on is sort of those lower entry price point formats and sizes. Indeed, a b and then as you know.
As we see consumers.
Consumers and come into the brand world transition them into our e-commerce platform to upsize, both on price and on formats and have them be loyal consumers.
And two our subscription service as well you know you have to believe that inflation is playing some part in this as well.
But we're continuing to see that shift in it.
Think in a perfect world, we'd come back to a little bit more.
Of of a format, where teachers aren't as big as as they've been I don't think that'll come back, but I think opportunities for us in innovation, particularly in the sports line will give the consumers more choice at different price points to enter and continue into the brand world that we have.
Great. Thank you very much I'll jump back into queue I appreciate it.
Your next question comes from Scott Fortune of Roth Capital Partners. Please go ahead.
Good morning, or afternoon wherever you may be.
Congrats on all the expansion of the distribution in new channels to start.
That said in mind here.
It's Dan plugged in to really try and grow the top line in the U S alone.
Obviously the <unk>.
Negative sequentially last few quarters and in your remarks, you said the strategic transition from direct sales to direct to the distributor model will take some time, but can you provide a little bit of color on timing now kind of expectations for regaining top line growth I mean, I know, it's a priority initiative years that just kind of.
Your sense of what you have in place the opportunity can be larger in 'twenty, three but kind of the near term timing of it to really start to inflect.
Yeah. It's a great question Scott look you know typically these this shift from direct customer sales to distributor led route to market.
Signing a new distributor sometimes can take six months, if not longer before they are actually youre actually seeing product in shelf through their pipe.
We've been able to condense that that timeline for sure. The reality is as I said earlier, you know we didn't see really anything in Q3 with that with respect to the shift in route to market strategy. It will impact Q4 modestly and you really start to see the benefit of these new distribution part.
<unk> and these new distribution channels into retail you know so.
Certainly as we get into 'twenty, three and beyond and we're not done we're continuing our discussions with the.
The host of other potential distribution partners as well, particularly thinking about new new industry verticals, where we haven't participated in yet like hospitality like travel. So the NSF certification is opening up new doors and new verticals for us that you will see we will see the benefit from in 'twenty three.
And beyond.
I appreciate that color and just kind of a follow on that Jack I know you did.
Deal with MLP, you're probably paying a lot of the marketing dollar a bit how do you look at your kind of sales and marketing.
<unk> spend to support all the new partnerships that you're bringing on to help drive.
Growth going forward, obviously, the announcement of the $50 million investment here will help.
Just kind of how can we look at kind of your sales and marketing spend are a priority to really drive that top line growth and support.
Well you know it.
Said this last time, we talked I think and we said you know when we had the announcement with MLB, we're very much shifting our marketing spend from what we spent it on arguably not very efficiently or effectively.
Putting that money into MLP.
Not only the rights fees, but and as I mentioned in the remarks, local activations radio podcasting, but really leveraging the microphone that MLP gives us and partnering with them on a media plan to take advantage of our content throughout their platforms and then and then support that through local.
Activations around games around the jewel events that we have a right to participate in as a brand. So that that's the focus you know new partnerships and distribution.
That doesn't support marketing or you don't need marketing dollars to do that but what it does do is put feet on the street that they pay for to be able to merchandise when they go and call on accounts and that's been a big problem for us with the direct.
It's a customer way that we were doing <unk> in the past is that we don't have the feet on the street to make sure our products, we're showing up on shelf showing up in the right way.
And and these distributor partners give us give us that that our workforce. If you will to be in stores literally on a day to day basis to make sure our product is restocked and looks great on shelf.
In addition to that we will be able to do more in terms of activations in the vial displays P. O S. T O P material, so really problem more prominently put our products in front of consumers. We're also doing a test with one of our customers to bring our products out from behind the locked in.
T cabinets and I'm confident that what we'll find is that velocities have improved because we've removed consumer friction from buying those products and so we're encouraged by all of this it's just not showing up in our P&L, yet and over the next year and beyond.
We should be seeing the benefit of that in our topline and then our overall financial performance.
Okay and one last quick follow up you mentioned.
Provide a little more color on near term.
<unk> said the softness.
Executing the transition right from a going on but I heard in your comments, you're seeing a little bit of the consumer challenge inflationary pricing how much is kind of the softness tied to maybe transition versus the consumer side of things right now.
Yeah look I think there is clearly a shift in the consumer has been shifts in the consumer to the tincher format, which as you know at a high price point into more affordable priced formats I don't I don't that's hurting our revenue because of the mixed price right.
<unk> mix issue is depressing revenues in that regard.
But for me, it's really more about our execution and some of the things I just mentioned.
Last question.
We really you know this is a year, where we re laid a foundation for the company across up and down the P&L in the organization in our strategy and resetting to be able to grow as we go forward.
And I can't wait to get to 2023 and beyond at this point.
Got it I appreciate the color. Thanks.
Your next question comes from Derek <unk> of Canaccord Genuity. Please go ahead.
Yeah, Thanks, and congrats on the investment this morning.
I was just wondering on the pricing side, given that the price compression or at least the consumer shifts towards more of the value added products.
Are you starting to see some of the smaller.
Well I guess they are all smaller with some of the competitors in this space start to go away just given those challenges that they probably can't they probably can handle them.
Yeah, well you know great question Derek.
Our remarks, I think in Greg's remarks, we talked about.
In food drug and mass and in the natural channel the shrinkage of facings on shelf in store.
Some of those customers and in those in those channels and you know.
That is that's taking products that don't turn off the shelf right. So so our competitive set is losing shelf space at a much higher rate than we are.
We believe that when you when you're sitting in my experience as well is that in in an interesting times their consumers tend to flock to quality and what we've really.
Through the MLB relationship through the NSF certification, it's another stamp of quality right why we deserve to be the premium priced product in the category.
And that's only going to be helpful to us right as we go forward. So we do expect a contraction of competitors and quite frankly, you know when you look at the market you know the single biggest increase in the market is in vape shops, and gas stations and we're never going to play there, that's not where charlotte's web should be.
Is and will ever be.
And so when regulation happens, which is what John was alluding to earlier that all goes away that all goes away. The total market may contract, but that's okay. Because we will just have a bigger share of the true marketplace for CBD.
Hind wellness behind quality and behind the amplification of awareness that MLP gives us as we go forward. So.
I'm Super excited about the future I think this will all shake out hopefully next year, but there was one brand that deserves to stand.
And it will and that Charlotte's web and as we build out our portfolio of international markets. It again in a really smart efficient financial way.
You know that's going to provide some some additional top line growth over time as well so.
I hope that answers your question.
Yes, no. It does and then just on the on the shift that you've seen and continue to see.
<unk> shares towards gummies.
Is there anything you can do to drive a higher margin within that gummy product line is it looks like it's going to continue to be a bigger and bigger portion of your revenue.
Yeah, I mean, clearly at the moment, we have co mans on gummies, but Jarrett Ken can fill in a little bit of color. There, yes look actually it's a great question.
What we're currently focusing on is transitioning our current gummies, two certified organic or legacy coming as we call them the <unk>.
Leap calm and recovery. We've also identified a co man that has lower Cogs and we expect those cogs to flow through to a higher gross margin.
In early 2020, sorry to mid mid 2023.
And keep in mind, the legacy Gummies sleep alone column recovery these make up the.
Lions share of Charlotte's web revenue in the gummy portfolio.
Got it and would there ever be a scenario, where you instead of using co menu that could be this in house.
Yeah look I mean, that's a good question and its certainly of interest to us.
Setting up gummy manufacturing is very expensive the right equipment. It adds a lot of complexities, we have the infrastructure to do it.
And we will have to weigh that option and are over the coming years.
The other thing Derik I would say is as you know we return to growth. When we returned to growth you know that'll just give us incremental incremental leverage as we renew co man arrangements and continually looking for.
Alternative options that don't compromise quality, but can drive down the price of of our Cogs.
Okay. That's a good point, okay. Thank you very much.
Youre welcome.
Your next question comes from Pablo <unk> of Cantor Fitzgerald. Please go ahead.
Okay.
Good morning, congratulations on all the announcements.
Look on the political side, just a few questions around HR 841, right. So for example.
How much under the radar you said people talk a lot about safer there, but not about notice much HR 41 in my opinion.
Is there any potential for somebody.
The components of each already 41 to go into <unk> plus in the lame duck session.
Can you talk about how a bipartisan issue.
You know in terms of the Senators you talked about is senator Mcconnell ever made any comments around HR 841, what would make you wait to include in the future to farm build revision so unless the total question with <unk>, but if you can just expand on HIV 41. Thanks.
Yes.
Let I'll, let Jared NCS is closest to a possible Pablo let me give you some color.
First of all the election results I think we all thought that Republicans were going to take both both the house and the Senate.
There is a very divided.
We have a very split Congress right now and what's the split Congress now.
And we've been through this with safe plus Ken.
Cannabis has the it's still a conflict it's not doesn't have the it has opposition specifically on the Republican side.
We saw the Democrats make some really awesome announcements that would.
Pushed it forward it could have been just a push to bring in voters looks like that pushed probably worked but an 841, we just have no opposition.
We believe it's better could it go enter the lame duck, possibly but we believe it's better as a standalone as opposed to coming into cannabis and having the opposition that Canada is still house, which CBD, we just havent havent had the opposition.
Right and I don't know if you can talk in terms of Senators can you mentioned Senate publicly supported HR 41, I mean I'm not aware for example is another micron on supporting it but can you can you talk about that if you got yes. Good question I won't say any of their names, but we are actively working with senators to be drafting the.
The companion Bill to HR, a 41 for the Senate, which is our next stop so that's been an awesome progress, but it's too early to be coming out with their names.
Okay. Thank you.
And then on the distribution front Jack.
<unk> see if you're going to expand you know you talked about 22% down at central points of sale Charlotte's web only down 14%.
Channels are we talking about domains to generalize MCM natural if you're going to be more specific and then in terms of all the announcements you've made major league and all those other things.
When do you think we can see Walmart or Costco come through or do you see or are they going to wait for the HR 41 pretty much.
Yeah.
Great Pablo look we've touched on this before.
We're going to be having meetings with the kind of the retailers you've talked about two reasons as we said the MLP and the NSF certification for sports products.
For us not only opens up sports if you will right, but opens up adjacencies in other industry verticals that heretofore Havent havent wanted to take CBD, including the big box retailers. So our position is simply you know if it's good enough for MLP. It should be good enough for you and why wouldn't you.
Stock our products on your shelves. So so those conversations will be happening, we're getting through the holidays here, but but into early next year. Those are exactly the conversation we want to be having which is why not now right and not wait for for FDA approval.
So we will see in terms of the share of shelf and losing facings.
As we said it's in the STM channel it's in it's in the night.
<unk>.
And you know the good news for Us is <unk>.
Some of those some of those facings that these other brands are going away that the stores are no longer stocking.
Thus an opportunity with the sports line when we launch middle Middle of next year to take that incremental shelf for the sports line and put it side by side with our existing portfolio and the beauty of the sports product is nobody can compete with US there is no competitive set and therefore, we determined.
Size, we determine the value and then we have that if you like monopoly for for a period of time and its on us to take advantage of that as we talk to customers going forward.
Alright, just a quick.
Follow up and I know that the experiences are not comparable but one of my questions have received from investors was the <unk>.
See Aurora deal that indeed M D N amount to much why is this different I mean, I think I know the answer to that question, but maybe you can share it in this public forum.
Yeah. So it's a great question and we've talked about this and I've talked about a lot. This is not a pure play Reits deal you know.
<unk> deal is a strategic partnership I mean, they they have a right to participate in revenues. After a certain threshold is reached on the co branded product. They are a shareholder of the company and they have absolute alignment on what our products do and why they're they've opened up to CBD and our products.
And and so you know, it's not a rights deal or we cut them.
Cut a check and see your three years from now when it's time to renew this is an active participation in partnership with MLB that is unlike any other deal and I'm.
And I'm not going to do a rights deal.
I don't believe in those and they don't return on the investment and this is a way. This is the type of deal that you know that we wanted to do they agreed they saw the upside and the value that we can create together for Charlotte's web in them as a shareholder and more importantly, the benefit that they believe this will.
Due for their their players and and up and down the ranks of professional professional baseball. So it's a very different deal and it's a very strategic partnership and.
And I'm excited by it and it's the types of deals that the only type of deal that I do of this nature.
That's great and one last one if I may ask.
In terms of discussions we thought we'd be.
Yes.
Why not an equity stake I mean was that considered I mean, obviously <unk>.
19, 9% stake in organic ground here as the convertible debenture I don't know how much you can share about that but I'm trying to understand why they went that route.
And I'll leave partly touched on it in the near term. Besides the cash inflow what are the other benefits of working with the government.
Distribution opportunities overseas or in the U S.
Research if you can expand on that thanks.
Yeah, well clearly you know and I'll, let Jared touch on this a little bit, but clearly there are interest in science and in terms of botanical wellness.
It is interesting for us.
Clearly you know they have a strategy.
As Dave articulated and I don't want to speak for <unk>.
But clearly they are interest in transforming to a better tomorrow as they say it is an integral part of of why they've done this transaction and why they believe in Charlotte's web because of our IP and because of the <unk>.
<unk> that we can drive over time, you know distribution will suit you know over time again as regulations open up in different jurisdictions around the world I mean, they're in over 140 countries I think if I remember correctly. So.
We'll see in terms of commercial opportunities, but but you know right now it's really about.
They felt that this was the best vehicle in which to invest in the company and again I don't want to speak for them, but.
No.
We're excited that they've chosen us and we're excited with the structure and we're excited about the liquidity.
We're gonna be really continue to be prudent stewards of our new found cash.
And and be selective in what we spend against an invest against two to get this company back to growth as we as we go forward.
Thank you.
Your next question comes from Chris Damas of BC <unk> Research. Please go ahead.
Yes, thanks for taking my question.
Pablo's question kind of covered most of it but just for argument's sake MLP account for say forever. These astro is to use your product right.
He wants to use bio steel.
You can use it.
Well the symbolic deal or.
Attachment to it.
Well no I don't understand the question, but the deal with MLB clearly is one where the teams and the team ownership.
Are aware and informed obviously the trainers the physicians.
Players themselves. So yeah, I mean, I think the idea is that you will see Charlotte's web used by the teams and by players as we go forward. So it's not symbolic that being said the teams on the rights to their own stadiums MLB owns the rights to the inventory.
The dual events and that's why we're participating with MLD and the jewel events.
And then activating locally around the games during the regular season in different cities that are of interest to us, but it's not symbolic I mean, they they they believe.
And what we said, which is that you need the balance of wealth.
Health of mind to be in balance with the health physically.
And theyre committed to doing that they are committed committed to wellness options for their players that give them. The highest degree of comfort you can that they won't fail a drug test for banned substances, yes, and I'd add Brian that.
A color to that while the while the teams.
Teams can do these types of deals it's still has to go through MLB, which chose the NSF certification process.
Any products that those those teams would be recommended would have to be in NSF product and we happen to have the exclusive official CBD of major League baseball. So.
It does certainly put us into a competitive advantage and certainly a strong head start.
Ladies and gentlemen that is all the time, we have for questions. This morning, I would now like to turn the conference back to Cory Pala for any closing remarks.
Okay, well. Thank you for joining us everybody that was a very long call.
I appreciate your time, we've had some tough earnings in 2022, but we've also had some recent singles and we've loaded the bases.
So we're all hoping for.
Looking to hit a home run in 2023 or four years and we've got our eye on the ball.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask that you. Please disconnect your lines.
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