Q2 2024 Charlotte's Web Holdings Inc Earnings Call

August 8, 2024

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Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings conference call. At this time, all lines are in listen-only mode.

Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session.

Operator: Good morning ladies and gentlemen and welcome to the Charlotte's Web Holdings 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.

Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 8th, 2024. I would now like to turn the conference over to Cory Pala, head of investor relations. Please go ahead.

Operator: Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Cory Pala, head of investor relations. Please go ahead.

Operator: If at any time during this call, you require immediate assistance. Please press star zero for the operator.

Operator: This call is being recorded on Thursday, August 8th, 2024.

Cory Pala: I would now like to turn the conference over to Cory Pala, Head of Investor Relations. Please go ahead.

Operator: This call is being recorded on Thursday, August 8th, 2024. I would now like to turn the conference over to Cory Pala, Head of Investor Relations. Please go ahead.

Cory Pala: Thank you. Good morning, everyone.

Cory Pala: Thank you. Good morning, everyone. Thank you for joining us. Thanks for our 2024 second quarter earnings conference call for Charlotte's Web Holdings Inc. Our earnings press release was issued this morning and posted on the Investor Relations section of our website, along with our financial statements. And our 10 key report for the quarter is also available and has been filed on CDR Plus.ca in Canada and on EDGAR with the SEC. CEO Bill Morachnick and CFO Erica Lind are leading our call this morning. On this morning's call, we review the financial results for the quarter and provide some color around the business and the outlook.

Cory Pala: Thank you. Good morning, everyone.

Cory Pala: Thank you. Good morning, everyone. Thank you for joining us for our 2024 second quarter earnings conference call for Charlotte's Web Holdings, Inc.

Cory Pala: Thank you for joining us for our 2024 second quarter earnings conference call for Charlotte's Web Holdings Inc. Our earnings press release was issued this morning and posted on the investor relations section of our website along with our financial statements. And our 10-Q report for the quarter is also available and has been filed on CDAR Plus..ca in Canada and on EDGAR with the.

Cory Pala: Thank you for joining us for our 2024 second quarter earnings conference call for Charlotte's Web Holdings, Inc. Our earnings press release was issued this morning and posted on the investor relations section of our website, along with our financial statements. And our 10-Q report for the quarter is also available and has been filed on CDAR Plus..ca in Canada and on EDGAR with the.

Cory Pala: Our earnings press release was issued this morning and posted on the Investor Relations section of our website, along with our financial statements, and our 10-Q report for the quarter is also available and has been filed on CDARplus.ca in Canada and on EDGAR with the SEC.

Cory Pala: CEO Bill Morachnick and CFO Erika Lind are leading our call this morning. On this morning's call, we'll review the financial results for the quarter and provide some color around the business and the outlook. Afterward, we'll answer some questions submitted by our analysts. A replay of this call will be available through the next week, accessible via the details provided on our Earnings Press website. Additionally, a webcast replay of this call will be available for an extended period, accessible through the Investor Relations section of our website at charlottesweb.com.

Speaker Change: CEO Bill Morachnick and CFO Erica Linder leading our call this morning.

Speaker Change: On this morning's call, we'll review the financial results for the quarter and provide some color around the business and the outlook. Afterwards, we'll answer some questions submitted by our analysts.

Cory Pala: Afterwards, we'll answer some questions submitted by our analyst. A replay of this call will be available through the next week. Accessible via the details provided on our earnings press release. Additionally, a webcast replay of this call will be available for an extended period, accessible through the IR section at our website, as Charlotte's Web.com.

Cory Pala: A replay of this call will be available through the next week, accessible via the details provided on our Earnings Press website. Additionally, a webcast replay of this call will be available for an extended period, accessible through the IR section of our website at charlottesweb.com. As a reminder to our listeners, certain statements made on today's call, including 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 or company performance to differ materially from implied expectations.

Cory Pala: A replay of this call will be available through the next week, accessible via the details provided on our earnings press release.

Cory Pala: Additionally, a webcast replay of this call will be available for an extended period, accessible through the IR section at our website at charlottesweb.com.

Cory Pala: As a reminder to our listeners, certain statements made on today's call, including 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 or company performance to differ materially from implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filing. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including Adjusted EBITDA and Adjusted Gross Margin, which do not have any standardized meaning prescribed by GAAP.

Cory Pala: As a reminder to our listeners, certain statements made on today's call, including answers we may provide to certain questions, may include content that is forward-looking in nature and therefore subject to risk and uncertainties. And factors which could cause actual future results or company formats to differ materially from implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to the earnings press release that we follow this morning for description of these measures, as well as a reconciliation to the respective and most directly comparable GAAP financial measures.

Cory Pala: Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings.

Cory Pala: In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP. Please refer to the earnings press release that we filed this morning for description of these measures, as well as a reconciliation to the respective and most directly comparable GAAP financial measures.

Cory Pala: Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filing. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including Adjusted EBITDA and Adjusted Gross Margin, which do not have any standardized meaning prescribed by GAAP. Please refer to the earnings press release that we filed this morning for a description of these measures, as well as a reconciliation to the respective and most directly comparable GAAP financial measures. Now, I will hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick.

William Morachnick: And now I will hand over the call to Charlotte's Web Chief Executive Officer, Bill Morrashnik. Good morning, and thank you for joining us today. So let me first summarize our second quarter results issued this morning. Q2 revenues were lower year over year, but increased slightly over Q1, as e-commerce and retail sales both grew quarter over quarter. Our B2B retail business segment has been improving up 8.8% over Q1. Supported by increased distribution, new products, retail partners, and a more simplified integrated and focused approach we've been taking with our retail partners and channels. In our direct to consumer or D2C business, we completed the important migration to our new e-commerce platform in June.

Cory Pala: Please refer to the earnings press release that we filed this morning for a description of these measures, as well as a reconciliation to the respective and most directly comparable GAAP financial measures. Now, I will hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick.

Cory Pala: And now I will hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick.

Bill Morachnick: Good morning, and thank you for joining us today. So, let me first summarize our second quarter results, which were issued this morning. Q2 revenues were lower year over year but increased slightly over Q1 as e-commerce and retail sales both grew quarter over quarter. Our B2B retail business segment has been improving by 8.8% over Q1. This is supported by increased distribution, new products, retail partners, and a more simplified, integrated, and focused approach we've been taking with our retail partners and channels.

Bill Morachnick: Good morning, and thank you for joining us today. So, let me first summarize our second quarter results, which were issued this morning. Q2 revenues were lower year over year but increased slightly over Q1 as e-commerce and retail sales both grew quarter over quarter. Our B2B retail business segment has been improving, up 8.8% over Q1. Supported by increased distribution, new products, retail partners, and a more simplified, integrated, and focused approach we've been taking with our retail partners and channels.

Bill Morachnick: Good morning and thank you for joining us today. So let me first summarize our second quarter results issued this morning.

Bill Morachnick: Q2 revenues were lower year over year, but increased slightly over Q1 as e-commerce and retail sales both grew quarter over quarter.

Bill Morachnick: Our B2B retail business segment has been improving, up 8.8% over Q1, supported by increased distribution, new products, retail partners, and a more simplified, integrated, and focused approach we've been taking with our retail partners and channels.

Bill Morachnick: In our direct-to-consumer, D-to-C business, we completed the important migration to our new e-commerce platform. It's important for me to note that during the migration, we had to temporarily pause online promotions during periods in June to better facilitate the transition. And this resulted in softer sales and overall revenue growth for June. However, I'm pleased to report that the new platform has been performing well and is already delivering encouraging results in July. In general, the ongoing headwinds in the CBD market will remain for 2024, and the industry is hindered by a lack of federal regulatory action and a related emergence of inconsistent competitive alternatives, which creates ongoing consumer confusion.

Bill Morachnick: In our direct-to-consumer, or D2C, business, we completed the important migration to our new e-commerce platform in June. It's important for me to note that during the migration, we had to temporarily pause online promotions for periods in June to better facilitate the transition. And this resulted in softer sales and overall revenue growth for June. However, I'm pleased to report that the new platform has been performing well and is already delivering encouraging results in July. In general, the ongoing headwinds in the CBD market will remain for 2024, and the industry is hindered by a lack of federal regulatory action and a related emergence of inconsistent competitive alternatives, which creates ongoing consumer confusion.

Bill Morachnick: In our direct-to-consumer or D-to-C business, we completed the important migration to our new e-commerce platform in June .

William Morachnick: It's important for me to note that during the migration we had to temporarily pause online promotions during periods in June to better facilitate the transition. And this resulted in softer sales and overall revenue growth for June. However, I'm pleased to report that the new platform has been performing well and is already delivering encouraging results in July.

Bill Morachnick: It's important for me to note that during the migration, we had to temporarily pause online promotions during periods in June to better facilitate the transition.

Bill Morachnick: And this resulted in softer sales and overall revenue growth for June . However, I'm pleased to report that the new platform has been performing well and is already delivering encouraging results in July .

William Morachnick: In general, the ongoing headwinds in the CBD market remain for 2024, and it's hindered by a lack of federal regulatory action and the related emergence of inconsistent competitive alternatives, which creates ongoing consumer confusion. Perhaps more prominent this year have been the inflationary impacts on consumer discretionary spending. As the premium-priced CBD brand, we believe that Charlotte's Web sales have been impacted more than some of our competitors in the first half of the year. As you may recall, we took price action against inflation during the first quarter of this year with a permanent 25% reduction across our leading hemp CBD extract oils to help consumers maintain access to these products.

Bill Morachnick: In general, the ongoing headwinds in the CBD market remain for 2024, and it's hindered by a lack of federal regulatory action and a related emergence of inconsistent competitive alternatives, which creates ongoing consumer confusion.

Bill Morachnick: Perhaps more prominent this year have been the inflationary impacts on consumer discretionary spending. As the premium price CBD brand, we believe that Charlotte's Web sales have been impacted more than some of our competitors in the first half of the year. As you may recall, we took price action against inflation during the first quarter of this year with a permanent 25% reduction across our leading hemp CBD extract oils to help consumers maintain access to these products.

Bill Morachnick: Perhaps more prominent this year have been the inflationary impacts on consumer discretionary spending.

Bill Morachnick: As the premium price CBD brand, we believe that Charlotte's Web sales have been impacted more than some of our competitors in the first half of the year.

Bill Morachnick: As you may recall, we took price action against inflation during the first quarter of this year with a permanent 25% reduction across our leading hemp CBD extract oils to help consumers maintain access to these products.

William Morachnick: As you can imagine, it takes some time for the price reduction impacts to filter through, but we continue to see volume increases with these products that can eventually offset the price decreases and result in overall margin growth. Now, regarding gross margin, as we've approached the completion of our insurface manufacturing capabilities in Q4, this is going to allow us to better address pricing around gummies, which is our largest revenue product segment. I want to also note that in Q2, we introduced more affordably priced CBD isolate topical products, which we launched in over 800 Walmart stores across several states.

Bill Morachnick: As you can imagine, it takes some time for the price reduction impacts to filter through, but we continue to see volume increases with these products that can eventually offset the price decreases and result in overall margin growth. Now, regarding gross margin, as we approach the completion of our in-source manufacturing capabilities in Q4, this is going to allow us to better address pricing around gummies, which is our largest revenue product segment. I want to also note that in Q2, we introduced more affordably priced CBD isolate topicals products, which we launched in over 800 Walmart stores across several states.

Bill Morachnick: Now, regarding gross margin, as we approach the completion of our in-source manufacturing capabilities in Q4, this is going to allow us to better address pricing around gummies, which is our largest revenue product segment.

Bill Morachnick: I want to also note that in Q2 we introduced more affordably priced CBD isolate topical products which we launched in over 800 Walmart stores across several states.

Bill Morachnick: Sales of these products are performing well, and we're very excited about the significant growth potential they represent. One final comment to summarize the quarter is on the actions that we've taken regarding operating expenses. With the impact of external headwinds on our growth, we've been proactively reducing our operating costs to better align with revenue. Following actions that we took in the first quarter to reduce 2024 SG&A, we took further expense reductions after the close of Q2.

William Morachnick: Sales of these products are performing well, and we're very excited about the significant growth potential they represent.

Bill Morachnick: Sales of these products are performing well and we're very excited about the significant growth potential they represent.

William Morachnick: One final comment to summarize the quarter is on the actions that we've taken regarding operating expenses. With the impact of external headwinds on our growth, we've been proactively reducing our operating costs to better align with revenue levels. Following actions that we took in the first quarter to reduce 2024 SG&A, we took further expense reductions after the close of Q2. These actions reduce cash burns to provide us with the runway we need to execute on our return to long-term growth. The full impact of these actions will continue to decrease our SG&A throughout the second half of this year and beyond.

Bill Morachnick: One final comment to summarize the quarter is on the actions that we've taken regarding operating expenses.

Bill Morachnick: With the impact of external headwinds on our growth, we've been proactively reducing our operating costs to better align with revenue levels.

Bill Morachnick: Following actions that we took in the first quarter to reduce 2024 SG&A, we took further expense reductions after the close of Q2.

Bill Morachnick: These actions reduce cash burn to provide us with the runway we need to execute on our return to long-term growth. The full impact of these actions will continue to decrease SG&A throughout the second half of this year and beyond.

Bill Morachnick: These actions reduce cash burn to provide us with the runway we need to execute on our return to long-term growth.

Bill Morachnick: The full impact of these actions will continue to decrease our SG&A throughout the second half of this year and beyond.

William Morachnick: We're extremely encouraged that, with our newly refined cost structure, we can see a clear path to cash flow break even. This will allow us to preserve our well-funded cash on hand so we can take advantage of several different growth catalysts on the horizon. These include ongoing optimization of our D2C and V2B platforms, strategic expansion of our product portfolio, and the continued achievements happening with the Fluria, which I'll touch on later.

Bill Morachnick: We're extremely encouraged that with our newly refined cost structure, we can see a clear path to cash flow breakeven. This will allow us to preserve our well-funded cash on hand so we can take advantage of several different growth catalysts on the horizon. These include ongoing optimization of our D2C and B2B platforms, strategic expansion of our product portfolio, and the continued achievements happening with DeFloria, which I'll touch on later. So, to review our Q2 results and financial position further, I'll now hand over the call to our CFO, Erica Lee.

Bill Morachnick: We're extremely encouraged that with our newly refined cost structure, we can see a clear path to cash flow break-even. This will allow us to preserve our well-funded cash on hand so we can take advantage of several different growth catalysts on the horizon. These include ongoing optimization of our D2C and B2B platforms, strategic expansion of our product portfolio, and the continued achievements happening with DeFloria, which I'll touch on later. So to review our Q2 results and financial position further, I'll now hand over the call to our CFO, Erika Lind.

Bill Morachnick: We're extremely encouraged that with our newly refined cost structure, we can see a clear path to cash flow breakeven.

Bill Morachnick: this will allow us to reserve our we-fed cash on hand so we can take advantage of several different growth catalysts on thehorizon

Bill Morachnick: These include ongoing optimization of our D2C and B2B platforms, strategic expansion of our product portfolio, and the continued achievements happening with DeFloria, which I'll touch on later.

Erika Lind: So, to review our Q2 results and financial position further, I'll now hand over the call to our CFO, Erica Lind. Thank you, Bill. As Bill mentioned, stringent expense and cash flow management have been top priorities in the current environment. Executing further on this business pillar, in the first quarter, we initiated substantial SG&A reductions for 2024 with the goal of a $15 million increase for the full year compared to 2023. In Q2, we identified additional cost and operating efficiencies and took further expense reduction actions after the close of the quarter. We have reorganized, streamlined, and reduced our overhead costs.

Bill Morachnick: So to review our Q2 results and financial position further, I'll now hand over the call to our CFO , Erica Lind.

Erica Lee: As Bill mentioned, stringent expense and cash flow management have been top priorities in the current environment. Executing further on this business pillar, in the first quarter, we initiated substantial SG&A reductions for 2024 with the goal of a $15 million increase for the full year compared to 2023. In Q2, we identified additional cost and operating efficiencies and took further expense reduction actions after the close of the quarter. We have reorganized, streamlined, and reduced our overhead costs.

Erika Lind: As Bill mentioned, stringent expense and cash flow management have been top priorities in the current environment. Executing further on this business pillar, in the first quarter, we initiated substantial SG&A reductions for 2024 with the goal of a $15 million increase for the full year compared to 2023. In Q2, we identified additional cost and operating efficiencies and took further expense reduction actions after the close of the quarter. We have reorganized, streamlined, and reduced our overhead costs.

Bill Morachnick: Thank you, Bill.

Erica Lee: As Bill mentioned, stringent expense and cash flow management have been top priorities in the current environment.

Erica Lee: Executing further on this business pillar, in the first quarter we initiated substantial SG&A reductions for 2024 with the goal of a $15 million increase for the full year compared to 2023.

Erica Lee: In Q2, we identified additional cost and operating efficiencies and took further expense reduction actions after the close of the quarter. We have reorganized, streamlined, and reduced our overhead costs.

Erika Lind: This will materially impact the second half of 2024 and should significantly reduce our cashburn to a manageable and sustainable level. We expect to enter 2025 with a cost structure that aligns to a break-even level of approximately 65 million in annual net revenue. This is down from a break-even level of approximately 85 million at the start of 2024. With a return for growth in 2025, we can more readily achieve cash flow neutrality.

Erica Lee: This will materially impact the second half of 2024 and should significantly reduce our cash burn to a manageable and sustainable level. We expect to enter 2025 with a cost structure that aligns to a break-even level of approximately $65 million in annual net revenue. This is down from a break-even level of approximately $85 million at the start of 2024. However, with a return toward growth in 2025, we can more readily achieve cash flow neutrality.

Erika Lind: This will materially impact the second half of 2024 and should significantly reduce our cash burn to a manageable and sustainable level. We expect to enter 2025 with a cost structure that aligns to a break-even level of approximately $65 million in annual net revenue. This is down from a break-even level of approximately $85 million at the start of 2024. However, with a return toward growth in 2025, we can more readily achieve cash flow neutrality.

Erica Lee: This will materially impact the second half of 2024 and should significantly reduce our cash burden to a manageable and sustainable level.

Erica Lee: We expect to enter 2025 with a cost structure that aligns to a breakeven level of approximately $65 million in annual net revenue. This is down from a breakeven level of approximately $85 million at the start of 2024.

Erica Lee: With a return toward growth in 2025, we can more readily achieve cash flow neutrality.

Erika Lind: Now let's turn to the financial results for the quarter. For the second quarter of 2024, net revenue was 12.3 million, down from 16 million in the prior year. However, this was up over Q1 revenue of 12.1 million. While only a modest increase, it is the first time we have reported a quarter-over-quarter increase in a second quarter since 2021. In our D to C business, e-commerce net revenue was 7.8 million, a decrease of 2.9 million versus the prior quarter. The decline was primarily driven by lower comparable online traffic websites to our web store. However, D to C net revenue was up 0.6% versus Q1.

Erica Lee: Now let's turn to the financial results for the quarter. For the second quarter of 2024, net revenue was $12.3 million, down from $16 million in the prior year. However, this was up over Q1 revenue of $12.1 million. While only a modest increase, it is the first time we have reported a quarter over quarter increase in a second quarter since 2021. In our D2C business, e-commerce net revenue was $7.8 million, a decrease of $2.9 million versus the prior quarter.

Erika Lind: Now let's turn to the financial results for the quarter. For the second quarter of 2024, net revenue was $12.3 million, down from $16 million in the prior year. However, this was up over Q1 revenue of $12.1 million. While only a modest increase, it is the first time we have reported a quarter over quarter increase in a second quarter since 2021. In our D2C business, e-commerce net revenue was $7.8 million, a decrease of $2.9 million versus the prior quarter.

Erica Lee: The decline was primarily driven by lower comparable online traffic to our web store. However, D2C net revenue was up 0.6% versus Q1. This was only a modest increase, but it may have been higher if not for a temporary pause in online promotions in June as we migrated to a new e-commerce platform. And now, with the migration complete and our promotions, paid media, and search improved, we have an encouraging early long-term outlook for this channel. Turning to our B2B business, retail net revenue is $4.4 million, down from $5.3 million in the prior year. Our CBN launch was excellent, and sales velocity has been very good.

Erica Lee: Now let's turn to the financial results for the quarter.

Erica Lee: For the second quarter of 2024, net revenue was $12.3 million, down from $16 million in the prior year. However, this was up over Q1 revenue of $12.1 million.

Erica Lee: While only a modest increase, it is the first time we have reported a quarter over quarter increase in a second quarter since 2021.

Erica Lee: In our D2C business, e-commerce net revenue was $7.8 million, a decrease of $2.9 million versus the prior quarter.

Erika Lind: The decline was primarily driven by lower comparable online traffic to our web store. However, D2C net revenue was up 0.6% versus Q1. This was only a modest increase, but it may have been higher if not for a temporary pause in online promotions in June as we migrated to a new e-commerce platform. And now, with the migration complete and our promotions, paid media, and search improved, we have an encouraging early long-term outlook for this channel.

Erica Lee: The decline was primarily driven by lower comparable online traffic to our web store. However, D2C net revenue was up 0.6% versus Q1. This was only a modest increase.

Erika Lind: This was only a modest increase. It may have been higher if not for a temporary pause in online promotions in June as we migrated to a new e-commerce platform. And now, with the migration complete and our promotions, paid media, and search improved, we have an encouraging early long-term outlook for this channel.

Erica Lee: It may have been higher if not for a temporary pause in online promotions in June as we migrated to a new e-commerce platform.

Erica Lee: And now, with the migration complete and our promotions, paid media, and search improved, we have an encouraging early long-term outlook for this channel.

Erika Lind: Turning to our V2B business, retail net revenue was 4.4 million, down from 5.3 million in the prior year. Similar to recent quarters, lower revenues are primarily related to the overall CBD category decline at retail due to certain retailers discontinuing or reducing total shelf space for CBD products over the past year. Despite the retail category declines, our distribution improvements in the first half of this year produced positive results. And combined with our CBD, CBN, Stay Asleep retail placements, we have increased our overall retail distribution by 10% within the natural channel during the second quarter. As a result, our V2B net revenue increased 8.8% compared to the prior quarter.

Erika Lind: Turning to our B2B business, retail net revenue is $4.4 million, down from $5.3 million in the prior year. Similar to recent quarters, lower revenues are primarily related to the overall CBD category decline at retail due to certain retailers discontinuing or reducing total shelf space for CBD products over the past year. Despite the retail category declines, our distribution improvements in the first half of this year produced positive results, and combined with our CBD-CBN stay asleep retail placements, we increased our overall retail distribution by 10% within the natural channel during the second quarter.

Erica Lee: Turning to our B2B business, retail net revenue is $4.4 million down from $5.3 million in the prior year.

Erica Lee: Similar to recent quarters, lower revenues are primarily related to the overall CBD category decline at retail due to certain retailers discontinuing or reducing total shelf space for CBD products over the past year.

Erica Lee: Despite the retail category declines, our distribution improvements in the first half of this year produced positive results.

Erica Lee: And combined with our CBD-CBN stay-asleep retail placements, we have increased our overall retail distribution by 10% within the natural channel during the second quarter. As a result, our B2B net revenue increased 8.8% compared to the prior quarter.

Erika Lind: As a result, our B2B net revenue increased 8.8% compared to the prior quarter. Q2 retail sales growth was supported by top retail accounts in the natural channel that began to carry our new CBN Stay Asleep gummies. Our CBN launch was excellent, and sales velocity has been very good. Despite declines in the overall CBD category this year, Charlotte's Web has generally outperformed the category at reach.

Erika Lind: Q2 retail sales growth was supported by top retail accounts in the natural channel that began to carry our new CBN Stay Asleep gummies. Our CBN launch was excellent, and sales velocity has been very good. Despite the climbs in the overall CBD category this year, Charlotte's Web has generally outperformed the category at retail. Our reported Q2 gross margin was significantly impacted by a non-cash inventory provision of 3.8 million related to a one-time wholesale hand biomass sale. Inventory provisions are exposed to cost of goods sold, which reduced our reported gross profit and margin. This resulted in a Q2 gross margin of 21%.

Erica Lee: q two retail sales growth was supported by top retail accounts in the natural channel that began to carry our new cbn stayasleep gumies our cbn launch was excellent and sales of velocity has been very good

Erica Lee: Despite declines in the overall CBD category this year, Charlotte's Web has generally outperformed the category at retail.

Erika Lind: Our reported Q2 gross margin was significantly impacted by a non-cash inventory provision of $3.8 million related to a one-time wholesale hemp biomass sale. Inventory provisions are expensed as cost of goods sold, which reduced our reported gross profit and margin. This resulted in a Q2 gross margin of 21%. However, this was a non-cash item and is not part of normal business operations.

Erica Lee: Our reported Q2 gross margin was significantly impacted by a non-cash inventory provision of $3.8 million related to a one-time wholesale hemp biomass sale.

Erica Lee: Inventory provisions are expensed to cost of goods sold, which reduced our reported gross profit and margin.

Erika Lind: However, this was a non-cash item and is not part of normal business operations. For better business transparency, our gross margin was 52.2% excluding the one-time non-cash inventory provision. This compares to a gross margin of 56.5% before the provision in Q2 last year. We continue to model gross margin in the low fifties for the remainder of the year, reflecting the Q1 price reductions in our oil tinctures, partially offset by improved production costs. As our in-house production for gummies comes online later this year, we anticipate further improvements in production costs and therefore margin. SG&A for the second quarter decreased 25% year over year, reflecting some of the expense reductions we took into one to right size the business.

Erica Lee: This resulted in a Q2 gross margin of 21 percent. However, this was a non-cash item and is not part of normal business operations.

Erica Lee: For better business transparency, our gross margin was 52.2% excluding the one-time non-cash inventory provision. This compares to a gross margin of 56.5% before the provision in Q2 last year. We continue to model gross margin in the low 50s for the remainder of the year, reflecting the Q1 price reductions in our oil tinctures, partially offset by improved production. As our in-house production for gummies comes online later this year, we anticipate further improvements in production costs and, therefore, margin.

Erika Lind: For better business transparency, our gross margin was 52.2% excluding the one-time non-cash inventory provision. This compares to a gross margin of 56.5% before the provision in Q2 last year. We continue to model gross margin in the low 50s for the remainder of the year, reflecting the Q1 price reductions in our oil tinctures, partially offset by improved production. As our in-house production for gummies comes online later this year, we anticipate further improvements in production costs and, therefore, margins. SG&A for the second quarter decreased 25% year-over-year, reflecting some of the expense reductions we took in Q1 to right-size the business.

Erica Lee: For better business transparency, our gross margin was 52.2 percent, excluding the one-time non-cash inventory provision. This compares to a gross margin of 56.5 percent before the provision in Q2 last year.

Erica Lee: we continue to model gross margin in the low fiftysfor the remainder of the year reflecting the q one price reductions in our oil tachctures partially offset by improved production costs

Erica Lee: As our in-house production for gummies comes online later this year, we anticipate further improvements in production costs, and therefore margin.

Erica Lee: SG&A for the second quarter decreased 25% year-over-year, reflecting some of the expense reductions we took in Q1 to right-size the business. As I stated earlier, we took additional cost mitigation actions in July based on the Q2 results. This will provide a reduction in SG&A for the year of more than 20 million compared to the prior year. This compares to an operating loss of $10.7 million in the prior year. The net loss for the quarter was $11 million, or $0.07 per share.

Erica Lee: SG&A for the second quarter decreased 25% year-over-year, reflecting some of the expense reductions we took in Q1 to right-size the business.

Erika Lind: As I stated earlier, we took additional cost mitigation actions in July based on Q2 results. This will provide a reduction in SGNA for the year of more than 20 million compared to the prior year. Our Q2 operating loss was 12.1 million, which includes the non-cash inventory provision of 3.8 million. This compares to an operating loss of 10.7 million in the prior year. Net loss for the quarter was $11 million or 7 cents per share. This is compared to a net income of 2.8 million or 2 cents per share in Q2 of last year, which was favorably impacted by non-cash gains of 14.9 million related to financial instruments and ownership valuation in the Dysphoria venture.

Erika Lind: As I stated earlier, we took additional cost mitigation actions in July based on Q2 results. This will provide a reduction in SG&A for the year of more than 20 million compared to the prior year. Our Q2 operating loss was $12.1 million, which includes a non-cash inventory provision of $3.8 million. This compares to an operating loss of $10.7 million in the prior year. The net loss for the quarter was $11 million, or $0.07 per share.

Erica Lee: As I stated earlier, we took additional cost mitigation actions in July based on Q2 results.

Erica Lee: This will provide a reduction in SG&A for the year of more than $20 million compared to the prior year.

Erica Lee: Our Q2 operating loss was $12.1 million, which includes the non-cash inventory provision of $3.8 million.

Erica Lee: this compares to an operating loss of ten point seven million in the prior year

Erika Lind: This is compared to a net income of $2.8 million, or $0.02 per share, in Q2 of last year, which was favorably impacted by non-cash gains of $14.9 million related to financial instruments and ownership valuation in the DeFloria venture. Despite our lower revenue and gross margin, our significant expense reductions have improved our cash flow. However, cash flow for the quarter was negative $6 million.

Erica Lee: Net loss for the quarter was $11 million or $0.07 per share.

Erica Lee: This is compared to a net income of $2.8 million or $0.02 per share in Q2 of last year, which was favorably impacted by non-cash gains of $14.9 million related to financial instruments and ownership valuation in the DeFloria venture.

Erika Lind: Despite our lower revenue and gross margin, our significant expense reductions have improved our cash firm. Cash flow for the quarter was negative $6 million. We are lapping the receipt of the IRS Employee Retention Credit in the prior year. This year we experienced an increase in the conversion of biomass to extract that, coupled with lapping the employee retention credit, would have made the cash firm flat compared to the prior year.

Erica Lee: Despite our lower revenue and gross margin, our significant expense reductions have improved our cash burn.

Erika Lind: We are lapping the receipt of the IRS employee retention credit in the prior year. This year, we experienced an increase in the conversion of hemp biomass to extract that, coupled with lapping the employee retention credit, would have made the cash burn flat compared to the prior year. At the close of the second quarter, we had $32.5 million. Now add cash of $32.5 million and working capital of $38.5 million, with our substantial expense reductions and prudent cash management.

Erica Lee: Cash flow for the quarter was negative $6 million. We are lapping the receipt of the IRS employee retention credit in the prior year.

Erica Lee: This year we experienced an increase in the conversion of hemp biomass to extract that, coupled with lapping the employee retention credit, would have made the cash burn flat compared to the prior year.

Erika Lind: At the close of the second quarter, we had 32.5 million, had cash of 32.5 million, and working capital of 38.5 million. With our substantial expense reductions and prudent cash management, we believe that we have sufficient capital to meet our near-term objectives and return to revenue growth. And so, with an increased runway, our new e-commerce platform and focus to turn around objectives.

Erica Lee: At the close of the second quarter, we had $32.5 million.

Erica Lee: We had cash of $32.5 million and working capital of $38.5 million. With our substantial expense reductions and prudent cash management, we believe that we have sufficient capital to meet our near-term objectives and return to revenue growth.

Erica Lee: We believe that we have sufficient capital to meet our near-term objectives and return to revenue growth. We are increasingly optimistic looking forward. I will now turn the call back over to Bill. Thank you, Erica.

Erika Lind: We believe that we have sufficient capital to meet our near-term objectives and return to revenue growth. And so, with an increased runway, our new e-commerce platform, and focused turnaround objectives, we are increasingly optimistic looking forward. I will now turn the call back over to Bill. Thank you, Erika.

Erica Lee: And so, with an increased runway, our new e-commerce platform, and focused turnaround objectives, we are increasingly optimistic looking forward. I will now turn the call back over to Bill. Thank you, Erica.

Erika Lind: We are increasingly optimistic looking forward.

William Morachnick: I will now turn the call back over to Bill. Thank you, Erica. All right, so let's talk about the progress that we've made in our key focus areas.

Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.

Bill Morachnick: All right, so let's talk about the progress that we've made in our key focus areas. And let's start with D2C.

Bill Morachnick: All right, so let's talk about the progress that we've made in our key focus areas. This new platform provides improved software integrations, advanced target marketing tools, and a superior customer relationship management capability. With this transition to the new e-commerce platform, we can offer a consistent, streamlined user experience, effective campaign performance, and agility to increase market speed. On the B2B front, we've also been executing well against our retail business pillar, which is to be a most valuable partner with retailers and distributors.

Bill Morachnick: All right, so let's talk about the progress that we've made in our key focus areas, and let's start with D2C. The key component underlying our e-commerce business pillar to create an excellent consumer experience was the migration to our new e-commerce platform, which we launched in June .

William Morachnick: And let's start with D2C. The key component underlying our e-commerce business pillar to create an excellent consumer experience with the migration to our new e-commerce platform, which we launched in June. This was a top priority for the company. This new platform provides improved software integrations, advanced target marketing tools, and a secure customer relationship management capability. With this transition to the new e-commerce platform, we can offer a consistent, streamlined user experience, effective campaign performance, and agility to increase market speed. It's already proving to be a game changer for us, with July revenue improving over June and D2C.

Bill Morachnick: The key component underlying our e-commerce business pillar to create an excellent consumer experience was the migration to our new e-commerce platform, which we launched in June. This was a top priority for the company. This new platform provides improved software integrations, advanced target marketing tools, and a superior customer relationship management capability. With this transition to the new e-commerce platform, we can offer a consistent, streamlined user experience, effective campaign performance, and agility to increase market speed. It's already proving to be a game changer for us, with July revenue improving over June in D2C.

Operator: If at any time during this call, you require immediate assistance. Please press star zero for the operator.

Operator: This call is being recorded on Thursday, August 8th, 2024.

Cory Pala: I would now like to turn the conference over to Cory Pala, head of investor relations. Please go ahead. Thank you, good morning, everyone. Thank you for joining us. Thanks for our 2024 second quarter earnings conference call for Charlotte's Web Holdings Inc. Our earnings press release was issued this morning and posted on the investor relations section of our website, along with our financial statements.

Bill Morachnick: This was a top priority for the company. This new platform provides improved software integrations, advanced target marketing tools, and a superior customer relationship management capability.

Cory Pala: And our 10 key report for the quarter is also available and has been filed on CDR plus.ca in Canada and on Edgar with the SEC CEO Bill Morachnick and CFO Erica Lind are leading our call this morning. On this morning's call, we review the financial results for the quarter and provide some color around the business and the outlook. Afterwards, we'll answer some questions submitted by our analyst.

Bill Morachnick: With this transition to the new e-commerce platform, we can offer a consistent, streamlined user experience, effective campaign performance, and agility to increase market speed. It's already proving to be a game changer for us with July revenue improving over June in D2C.

William Morachnick: There's obviously a lot more to do, and we continue to refine and optimize the platform, but it is encouraging to see the immediate impact we are already experiencing.

Bill Morachnick: There's obviously a lot more to do, and we continue to refine and optimize the platform, but it is encouraging to see the immediate impact we are already experiencing. On the B2B front, we've also been executing well against our retail business pillar, which is to be a most valued partner with retailers and distributors. We are intently focused on profitable growth in key B2B channels, which includes a range of retail partners as well as healthcare practitioners. Strong distribution and retail relationships have been a foundation of Charlotte's web market share leadership.

Bill Morachnick: There's obviously a lot more to do and we continue to refine and optimize the platform, but it is encouraging to see the immediate impact we are already experiencing.

William Morachnick: On the V2B front, we've also been executing well against our retail business pillar, which is to be a most valuable partner with retailers and distributors. We are intently focused on profitable growth in key V2B channels, which includes a range of retail partners as well as healthcare practitioners. Strong distribution and retail relationships have been a foundation of Charlotte's Web market share leadership. To further support these critical relationships, we've been aligning closer with retailers and new innovations and marketing integrations tailored to the unique needs of our retail partners. These collaboration efforts are intended to enable attractive opportunities for retail expansion with new wellness products and formats.

Cory Pala: A replay of this call will be available through the next week. Accessible via the details provided on our earnings press release. Additionally, a webcast replay of this call will be available for an extended period accessible through the IR section at our website, as Charlotte's Web.com. As a reminder to our listeners, certain statements made on today's call, including answers we may provide to certain questions, may include content that is forward looking in nature and therefore subject to risk and uncertainties.

Bill Morachnick: On the B2B front, we've also been executing well against our retail business pillar, which is to be a most valued partner with retailers and distributors.

Bill Morachnick: We are intently focused on profitable growth in key B2B channels, which includes a range of retail partners as well as healthcare practitioners. Strong distribution and retail relationships have been a foundation of Charlotte's web market share leadership.

Bill Morachnick: We are intently focused on profitable growth in key B2B channels, which includes a range of retail partners as well as healthcare practitioners.

Cory Pala: And factors which could cause actual future results or company formats to differ materially from implied expectations. Such risks surrounding forward looking statements are all outlined in detail within the company's regulatory filings. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA and adjusted gross margin, which do not have any standardized meaning prescribed by GAAP.

Bill Morachnick: Strong distribution and retail relationships have been a foundation of Charlotte's Web Market Share leadership.

Bill Morachnick: To further support these critical relationships, we've been aligning closely with retailers on new innovations and marketing integrations tailored to the unique needs of our retail partners. These collaboration efforts are intended to enable attractive opportunities for retail expansion with new wellness products and formats. To this end, we were successful in working with Walmart as a retail partner for the first time. More to come on that in a future quarter. We know that our current as well as prospective new consumers can experience our brand throughout a wide range of shopping experiences.

Bill Morachnick: To further support these critical relationships, we've been aligning closely with retailers on new innovations and marketing integrations tailored to the unique needs of our retail partners. These collaboration efforts are intended to enable attractive opportunities for retail expansion with new wellness products and formats. To this end, we were successful in working with Walmart as a retail partner for the first time. We worked with them to develop competitively priced CBD topicals in smaller formats and formulated with CBD ice.

Bill Morachnick: To further support these critical relationships, we've been aligning closely with retailers on new innovations and marketing integrations tailored to unique needs of our retail partners.

Bill Morachnick: These collaboration efforts are intended to enable attractive opportunities for retail expansion with new wellness products and formats.

William Morachnick: To this end, we were successful in working with Walmart as a retail partner for the first time. We work with them to develop competitively priced CBD topicals in smaller formats and formulated with CBD isolate. The good news is that we've had positive momentum in early adoption of the Walmart customers to these new affordable products. In addition, the medical channel, which is displayed resilience, also represents a promising area for strategic repositioning and stands out as one of our more lucrative V2B channel opportunities.

Bill Morachnick: To this end, we were successful in working with Walmart as a retail partner for the first time.

Cory Pala: Please refer to the earnings press release that we follow this morning for description of these measures, as well as a reconciliation to the respective and most directly comparable GAAP financial measures.

Bill Morachnick: We work with them to develop competitively priced CBD topicals in smaller formats and formulated with CBD isolate.

William Morachnick: And now I will hand over the call to Charlotte's Web Chief Executive Officer, Bill Morrashnik. Good morning and thank you for joining us today. So let me first summarize our second quarter results issued this morning. Q2 revenues were lower year over year, but increased slightly over Q1, as e-commerce and retail sales both grew quarter over quarter. Our B2B retail business segment has been improving up 8.8% over Q1. Supported by increased distribution, new products, retail partners, and a more simplified integrated and focused approach we've been taking with our retail partners and channels.

Bill Morachnick: The good news is that we've had positive momentum in early adoption by Walmart customers of these new affordable products. In addition, the medical channel, which has displayed resilience, also represents a promising area for strategic repositioning and stands out as one of our more lucrative B2B channel opportunities. More to come on that in a future quarter.

Bill Morachnick: The good news is that we've had positive momentum in early adoption of the Walmart customers to these new affordable products.

Bill Morachnick: In addition, the medical channel, which has displayed resilience, also represents a promising area for strategic repositioning and stands out as one of our more lucrative B2B channel opportunities. More to come on that in future quarters.

William Morachnick: More to come on that in future quarters.

William Morachnick: Supporting another core pillar, reinforcing and amplifying CW's influential voice, we are leveraging our traditional and digital marketing capabilities to drive our brand equity across the entire on-the-channel shopping continuum. We know that our current as well as prospective new consumers can experience our brand throughout a wide range of shopping experiences. So we want to ensure that we are maximizing synergy between our DTC and B2B channels. So whether consumers first see a digital ad that brings them to our website, but they end up purchasing a portion of their future show its web products from one of their favorite retailers or healthcare providers, we just want to ensure that they have a well-informed, consistent, and pleasant experience.

Bill Morachnick: Supporting another core pillar, reinforcing and amplifying CW's influential voice, we are leveraging our traditional and digital marketing capabilities to drive our brand equity across the entire omni-channel shopping continuum. We know that our current, as well as prospective, new consumers can experience our brand throughout a wide range of shopping experiences. So, we want to ensure that we are maximizing synergy between our D2C and B2B channels. So, whether consumers first see a digital ad that brings them to our website, or they end up purchasing a portion of their future Charlotte's Web products from one of their favorite retailers or healthcare providers, we just want to ensure that they have a well-informed, consistent, and pleasant experience.

William Morachnick: In our direct to consumer or D2C business, we completed the important migration to our new e-commerce platform in June. It's important for me to note that during the migration we had to temporarily pause online promotions during periods in June to better facilitate the transition. And this resulted in softer sales and overall revenue growth for June. However, I'm pleased to report that the new platform has been performing well and is already delivering encouraging results in July.

Bill Morachnick: We know that our current, as well as prospective new consumers, can experience our brand through a wide range of shopping experiences.

Bill Morachnick: So, we want to ensure that we are maximizing synergy between our D2C and B2B channels.

Bill Morachnick: So, whether consumers first see a digital ad that brings them to our website, or they end up purchasing a portion of their future Charlotte's Web products from one of their favorite retailers or healthcare providers, we just want to ensure that they have a well-informed, consistent, and pleasant experience.

Bill Morachnick: So, whether consumers first see a digital ad that brings them to our website, but they end up purchasing a portion of their future Charlotte's Web products from one of their favorite retailers or healthcare providers, we just want to ensure that they have a well-informed, consistent, and pleasant experience.

William Morachnick: Now turning to our pillar focused on increased access and federal regulatory oversight. We have previously shared how we've been supporting industry partners and stakeholders engaged in pushing forward the regulatory process at the congressional level. Let me quickly update you on where we left off. We aim to support active FDA engagement to the draft Senate and House bills. These bills were introduced after the FDA pivoted to congressional legislation as the resolution to regulatory questions around CBD. A police report that we have recently received an updated draft legislation of the Wyden-Paul Senate bill with FDA comments included.

Bill Morachnick: Now turning to our pillar focused on increased access and federal regulatory oversight. We have previously shared how we've been supporting industry partners and stakeholders engaged in pushing forward the regulatory process at the congressional level. Let me quickly update you on where we left off.

William Morachnick: In general, the ongoing headwinds in the CBD market remain for 2024 and it's hindered by a lack of federal regulatory action and the related emergence of inconsistent competitive alternatives, which creates ongoing consumer confusion. Perhaps more prominent this year have been the inflationary impacts on consumer discretionary spending. As the premium-priced CBD brand, we believe that Charlotte's web sales have been impacted more than some of our competitors in the first half of the year.

Bill Morachnick: The Turning to Our Pillar focused on increased access and federal regulatory oversight.

Bill Morachnick: We have previously shared how we've been supporting industry partners and stakeholders engaged in pushing forward the regulatory process at the congressional level.

Bill Morachnick: We aim to support active FDA engagement on the draft Senate and House bills. These bills were introduced after the FDA pivoted to congressional legislation as the resolution to regulatory questions around CBD. I'm pleased to report that we have recently received an updated draft legislation of the Wyden Paul Senate bill with FDA comments included. This is S2451, the Hemp Access and Consumer Safety Act.

Bill Morachnick: Let me quickly update you on where we left off.

Bill Morachnick: We aim to support active FDA engagement through the draft Senate and House bills.

Bill Morachnick: These bills were introduced after the FDA pivoted to congressional legislation as the resolution to regulatory questions around CBD.

William Morachnick: As you may recall, we took price action against inflation during the first quarter of this year with a permanent 25% reduction across our leading hemp CBD extract oils to help consumers maintain access to these products. As you can imagine, it takes some time for the price reduction impacts to filter through, but we continue to see volume increases with these products that can eventually offset the price decreases and result in overall margin growth.

Bill Morachnick: I'm pleased to report that we have recently received an updated draft legislation of the Wyden Paul Senate bill with FDA comments included.

William Morachnick: This is S2451 the hemp access and consumer safety act. Industry stakeholders we support, including the Coalition for Access Now and the Industry Working Group One Hemp, are actively engaged. Once the final drafts are introduced, we are hopeful the legislative process can advance.

Bill Morachnick: Industry stakeholders we support, including the Coalition for Access Now and the Industry Working Group, 1HEM, are actively engaged. Once the final drafts are introduced, we're hopeful the legislative process will move forward. One final comment I'd like to make today pertains to the FDA IND pathway being pursued by DeFloria, which is our collaboration with British American Tobacco and Ajna Bioscience. I am pleased to report that DeFloria is completing the processing of its Phase I clinical trial data in preparation for an IND filing with the FDA.

Bill Morachnick: Industry stakeholders we support, including the Coalition for Access Now and the Industry Working Group, ONEHEM, are actively engaged. Once the final drafts are introduced, we're hopeful the legislative process will move forward. One final comment I'd like to make today pertains to the FDA IND pathway being pursued by DeFloria, which is our collaboration with British American Tobacco and Ajna Bioscience. I am pleased to report that DeFloria is completing the processing of its Phase I clinical trial data in preparation for an IND filing with the FDA.

Speaker Change: This is S2451, the Hemp Access and Consumer Safety Act.

Bill Morachnick: Industry stakeholders we support, including the Coalition for Access Now and the Industry Working Group, OneHamp, are actively engaged.

William Morachnick: Now, regarding gross margin, as we've approached the completion of our insurface manufacturing capabilities in Q4, this is going to allow us to better address pricing around gummies, which is our largest revenue product segment. I want to also note that in Q2, we introduced more affordably priced CBD isolate topical products, which we launched in over 800 Walmart stores across several states. Sales of these products are performing well, and we're very excited about the significant growth potential they represent.

Bill Morachnick: Once the final drafts are introduced, we are hopeful the legislative process can advance.

William Morachnick: One final comment I'd like to make today pertains to the FDA IND pathway being pursued by Defloria, which is our collaboration with British American Tobacco and Agina Bioscience. I am pleased to report that Defloria is completing the processing of its Phase One clinical trial data in preparation for an IND filing with the FDA. Phase one was conducted to determine the safety and tolerability, as well as the pharmacokinetic and pharmacodynamic effects of the botanical compound to inform a phase two clinical trial program. which would follow with no objection later from the FDA. We look forward to providing further updates as appropriate in the coming months as we continue to monitor Florida's progress.

Bill Morachnick: one final comment i' like to make today pertains to the fb a i nd pathway being pursued by to floria which is our collaboration with british american tobacco and oa bioscience

Bill Morachnick: I am pleased to report that DeFloria is completing the processing of its Phase I clinical trial data in preparation for an IND filing with the FDA.

Bill Morachnick: Phase one was conducted to determine the safety and tolerability, as well as the pharmacokinetic and pharmacodynamic effects of the botanical compound to inform a phase two clinical trial program. We look forward to providing further updates as appropriate in the coming months as we continue to monitor Florida's progress. With that update, Cory will now share the questions submitted by our analysts.

Bill Morachnick: Phase one was conducted to determine the safety and tolerability, as well as the pharmacokinetic and pharmacodynamic effects of the botanical compound to inform a phase two clinical trial program, which would follow a no objection letter from the FDA. We look forward to providing further updates as appropriate in the coming months as we continue to monitor Florida's progress. With that update, Cory will now share the questions submitted by our analysts.

William Morachnick: The full impact of these actions will continue to decrease our SG&A throughout the second half of this year and beyond. We're extremely encouraged that with our newly refined cost structure, we can see a clear path to cash flow break even. This will allow us to preserve our well-funded cash on hand so we can take advantage of several different growth catalysts on the horizon. These include ongoing optimization of our D2C and V2B platforms, strategic expansion of our product portfolio, and the continued achievements happening with the Fluria, which I'll touch on later.

Cory Pala: Which would follow a no objection letter from the FDA.

Speaker Change: We look forward to providing further updates as appropriate in the coming months as we continue to monitor the Florida's progress.

Cory Pala: With that update, Cory will now share the questions submitted by our analysts. Yes, today for better effectiveness.

Bill Morachnick: With that update, Cory will now share the questions submitted by our analysts.

Cory Pala: Yes, today for better effectiveness, we've changed the format for our call, and we've had our analysts who are on the call today submit their questions earlier today, allowing us to provide more time to provide some fulsome and thoughtful answers. So our first question comes from Luke Hannan at Canaccord Genuity. He's asking, on Walmart. Luke would like us to go through the process of how we were able to get on the shelf at Walmart and whether there is potential to expand the presence nationwide.

Cory Pala: Yes, today for better effectiveness, we've changed the format for our call, and we've had our analysts who are on the call today submit their questions earlier today, allowing us to provide more time to write some fulsome and thoughtful answers. So our first question comes from Luke Hannan at Canaccord Genuity. He's asking, on Walmart. Luke would like us to go through the process of how we were able to get on the shelf at Walmart and whether there is potential to expand the presence nationwide.

Cory Pala: We've changed the format for our call, and we've had our analysts who are on the call today submit their questions earlier today, allowing us to provide more time to provide some full cement options. So our first question comes from Luke Hannan at Khan Accord Genuity. He's asking on Walmart, Luke would like us to go through the process of how we were able to get on shelf at Walmart and is there potential to expand the presence nationwide. Okay, yeah, thanks, Cory. Thanks, Luke. So with Walmart, it's a really exciting initiative for us and hopefully for Walmart as well.

Cory Pala: So our first question comes from Luke Hannan at Canaccord Genuity.

Speaker Change: on Wal-Mart.

Luke Hannan: Luke would like us to go through the process of how we were able to get on shelf at Walmart and is there potential to expand the presence nationwide.

Bill Morachnick: Okay, yeah, thanks Cory. Thanks Luke.

Cory Pala: Okay, yeah, thanks, Cory. Thanks, Luke.

Speaker Change: Okay, yeah, thanks Cory, thanks Luke. So with Walmart, yeah, it's a really exciting initiative for us and hopefully for Walmart as well.

Erika Lind: So to review our Q2 results and financial position further, I'll now hand over the call to our CFO, Erica Lind. Thank you, Bill. As Bill mentioned, stringent expense and cash flow management have been top priorities in the current environment.

William Morachnick: The thing about Walmart, it's not a mystery of what they're looking for when they decide to work with the new partner and list new products. This is a comprehensive list, but you can imagine, as Walmart chopper, they're looking for high quality products at attractive prices, good gross margins for them, and partners that they can trust, which is a really critical component. And they want to see a high rate of turnover or consumer offtake or velocity. We check all those boxes in spades. So getting listed in the account, I always look at that. I've been, I started my career in trade sales for a major CPG company about 40 years ago, and a lot of things have changed since then, but a lot of things happen.

Bill Morachnick: So with Walmart, it's a really exciting initiative for us and hopefully for Walmart as well. The thing about Walmart, you know, it's not a mystery of what they're looking for when they decide to work with a new partner and list new products. This isn't a comprehensive list, but you can imagine, as a Walmart shopper, they're looking for high-quality products at attractive prices.

Bill Morachnick: to think about walmart it's not a mystery of what they're looking for when they decide to work with a new partner or listennew products

Erika Lind: Executing further on this business pillar, in the first quarter, we initiated substantial SG&A reductions for 2024 with the goal of a $15 million increase for the full year compared to 2023. In Q2, we identified additional cost and operating efficiencies and took further expense reduction actions after the close of the quarter. We have reorganized, streamlined, and reduced our overhead costs. This will materially impact the second half of 2024 and should significantly reduce our cashburn to a manageable and sustainable level.

Bill Morachnick: This isn't a comprehensive list, but you can imagine, as a Walmart chopper, they're looking for high-quality products.

Bill Morachnick: Good gross margins for them. Partners that they can trust, which is a really critical component, and they want to see a high rate of turnover or, you know, consumer offtake or velocity. We check all those boxes in spades. So getting listed in the account is something I always look at. I've been, I started my career in trade sales for a major CPG company about 40 years ago. And a lot of things have changed since then, but a lot of things haven't. So those same criteria that I just listed out were the same challenges that I had way back in my career.

Bill Morachnick: At attractive prices.

Bill Morachnick: Good gross margins for them, partners that they can trust, which is a really critical component, and they want to see a high rate of turnover or, you know, consumer offtake or velocity.

Bill Morachnick: We check all those boxes in spades, so getting listed in the account, I always look at that. I started my career in trade sales for a major CPG company about 40 years ago.

Erika Lind: We expect to enter 2025 with a cost structure that aligns to a break-even level of approximately 65 million in annual net revenue. This is down from a break-even level of approximately 85 million at the start of 2024. With a return for growth in 2025, we can more readily achieve cash flow neutrality.

William Morachnick: So those same criteria that I just listed out with the same challenges that I had way back in my career.

Bill Morachnick: And a lot of things have changed since then, but a lot of things haven't. So those same criteria that I just listed out were the same challenges that I had way back in my career.

William Morachnick: I think where the game really begins is what happens after you're in store. So we're starting with Walmart in 827 locations across five states. That means we're penetrating about 17-18% of the current Walmart footprint. So we still have 80% to go. So what I'm really excited about is we now get a chance to demonstrate how well our products are going to perform, and we've got a really comprehensive, fully integrated marketing plan to ensure attractive consumer offtake. And high velocity numbers that I think Walmart's going to be very excited about. Our early indications in these initial 827 stores are quite strong.

Bill Morachnick: I think where the game really begins is what happens after you're in the store. So we're starting with Walmart in 827 locations across five states. That means we're penetrating about 17, 18% of the current Walmart footprint. So we still have 80% to go.

Bill Morachnick: i think where're the game really begins is what happens after your in-store

Bill Morachnick: so we're starting with walmart in eight hundred and twenty-seven locations across five states

Bill Morachnick: That means we're penetrating about, you know, 17, 18 percent of the current Walmart footprint.

Bill Morachnick: So what I'm really excited about is we now get a chance to demonstrate how well our products are going to perform. And we've got a really comprehensive, fully integrated marketing plan to ensure attractive consumer offtake and high velocity numbers that I think Walmart is going to be very excited about. Early indications in these initial 827 stores are quite strong, so we're meeting the mutually defined criteria of what success looks like thus far.

Speaker Change: So, we still have 80% to go.

Bill Morachnick: So what I'm really excited about is we now get a chance to demonstrate.

Bill Morachnick: how well our products are going to perform and we've got a really comprehensive fully integrated marketing plan

Erika Lind: The decline was primarily driven by lower comparable online traffic websites to our web store. However, D to C net revenue was up 0.6% versus Q1. This was only a modest increase. It may have been higher if not for a temporary pause in online promotions in June as we migrated to a new e-commerce platform.

Bill Morachnick: to ensure attractive consumer offtake.

Bill Morachnick: high velocity numbers that I think Walmart's going to be very excited about.

Erika Lind: And now with the migration complete and our promotions, paid media, and search improved, we have an encouraging early long-term outlook for this channel.

Bill Morachnick: our early indications in these initial eight hundred and twenty- seven stores are quite strong so we're meeting mutually defined criteria of what success looks like thus far and we're just getting started

William Morachnick: So we're meeting the mutually defined criteria of what success looks like thus far, and we're just getting started.

Bill Morachnick: And we're just getting started. Um, um, Walmart.com is a big opportunity within the Walmart ecosystem, and that's something that excites us very much as well, given that we have a really well-structured and thought-out omni-channel strategy. We see the.com component of any major retailer fitting in very nicely with our strategy. So, highly enthusiastic about where we go.

Bill Morachnick: And we're just getting started. Obviously, Walmart.com is a big opportunity within the Walmart ecosystem, and that's something that excites us very much as well, given that we have a really well-structured and thought-out omni-channel strategy. We see the.com component of any major retailer fitting in very nicely with our strategy. So, highly enthusiastic about where we go.

William Morachnick: We also, obviously, Walmart.com is a big opportunity within the Walmart ecosystem, and that's something that excites us very much as well. Given that we have a really well structured and thought out on the channel strategy, we see the dot com component of any major retailer fitting in very nicely with our strategy. So highly enthusiastic for where we take.

Bill Morachnick: um

Erika Lind: Turning to our V2B business, retail net revenue was 4.4 million, down from 5.3 million in the prior year. Similar to recent quarters, lower revenues are primarily related to the overall CBD category decline at retail due to certain retailers discontinuing or reducing total shelf space for CBD products over the past year. Despite the retail category declines, our distribution improvements in the first half of this year produced positive results. And combined with our CBD, CBN, stay asleep retail placements, we have increased our overall retail distribution by 10% within the natural channel during the second quarter.

Bill Morachnick: We also, obviously, Walmart.com is a big opportunity within the Walmart ecosystem, and that's something that excites us very much as well.

Bill Morachnick: given that we have a really well structured and fought out on nthe channel strategy

Bill Morachnick: We see the dot-com component of any major retailer fitting in very nicely with our strategy, so highly enthusiastic for where we take this.

William Morachnick: And Luke's second question is on our new e-commerce platform. He's asking how successful has any side been in terms of KPIs that we might be able to share for performance to date. Okay, thanks, Cory. Thanks, Luke again. I'll grab that one. So, as you all know, it's extremely, extremely early days. So, we just are getting out of the gate with July, the first full month where we've gone to this new e-commerce platform, which is just one component of an overarching e-commerce digital marketing infrastructure that we're deploying along with the company's strategies. I mentioned it in my thoughts before that the early indications are very, very encouraging, but I don't want to get too much into the detail around KPIs just yet because a month doesn't indicate a false trend.

Cory Pala: And Luke's second question is on our new e-commerce platform, and he's asking, how successful has the new site been in terms of KPIs that we might be able to share for performance to date?

Cory Pala: And Luke's second question is on our new e-commerce platform and he's asking how successful has a new site been in terms of KPIs that we might be able to share for performance to date?

Erika Lind: As a result, our V2B net revenue increased 8.8% compared to the prior quarter. Q2 retail sales growth was supported by top retail accounts in the natural channel that began to carry our new CBN stay asleep gummies. Our CBN launch was excellent and sales velocity has been very good. Despite the climbs in the overall CBD category this year, Charlottes Web has generally outperformed the category at retail. Our reported Q2 gross margin was significantly impacted by a non-cash inventory provision of 3.8 million related to a one-time wholesale hand biomass sale.

Bill Morachnick: Okay. Thanks, Cory, and thanks, Luke, again. I'll grab that one.

Bill Morachnick: Okay. Thanks, Cory. And thanks, Luke, again. I'll grab that one.

Bill Morachnick: So, as you all know, it's extremely early days. We just are getting out of the gate with July, the first full month that we've gone live with this new e-commerce platform, which is just one component of an overarching e-commerce and digital marketing infrastructure that we're deploying, along with accompanying strategies. I mentioned in my thoughts before that the early indications are very, very encouraging. But I don't want to get too much into the detail around KPIs just yet because a month, you know, doesn't indicate a fullsome trend.

Bill Morachnick: Okay, thanks, Cory. And thanks, Luke, again. I'll grab that one. So.

Bill Morachnick: So, as you all know, it's extremely early days. We just got out of the gate with July, the first full month that we've gone live with this new e-commerce platform, which is just one component of an overarching e-commerce digital marketing infrastructure that we're deploying, along with accompanying strategies. I mentioned it in my thoughts before that the early indications are very, very encouraging, but I don't want to get too much into the detail around KPIs just yet because a month, you know, doesn't indicate a fullsome trend, but let me hit on the things that objectively are working far better than they were before.

Bill Morachnick: As you all know, it's extremely early days, so we just are getting out of the gate with, you know, July , first full month where we've gone to this new e-commerce platform.

Bill Morachnick: Which is just one component of an overarching e-commerce digital marketing infrastructure that we're deploying, along with accompanying strategies.

Bill Morachnick: I mentioned it, I mentioned it in my thoughts before that the early indications are

Erika Lind: Inventory provisions are exposed to cost of goods sold, which reduced our reported gross profit and margin. This resulted in a Q2 gross margin of 21%. However, this was a non-cash item and is not part of normal business operations. For better business transparency, our gross margin was 52.2% excluding the one-time non-cash inventory provision. This compares to a gross margin of 56.5% before the provision in Q2 last year. We continue to model gross margin in the low fifties for the remainder of the year, reflecting the Q1 price reductions in our oil tinctures, partially offset by improved production costs.

Bill Morachnick: Very, very encouraging.

Bill Morachnick: But I don't want to get too much into the detail around KPIs just yet, because a month doesn't indicate a fulsome trend. But let me hit on the things that objectively are working far better than they were before.

Bill Morachnick: But let me hit on the things that objectively are working far better than they were before. One of the things, I mean, I think all of us are online e-commerce shoppers, and one of the most frustrating experiences you can have is when pages take a long time to load. And that was certainly the experience we had with our site prior to the conversion. We are now operating, and we haven't even optimized it, but our page loads are at a little bit more than 2x the speed that they were prior.

William Morachnick: But let me hit on the things that objectively are working far better than they were before. One of the things, I mean, I think all of us are online e-commerce shoppers. And one of the most frustrating experiences you can have is when pages take a long time to load. And that was certainly the experience we had with our site prior to the conversion. We are now operating, and we haven't even optimized it. But our page loads are at a little bit more than 2x the speed that they were prior. And what you'll see happen as a result of that, and this is what we're seeing again in these early days, is that our, it creates not just a better desktop, but a better mobile experience.

Bill Morachnick: One of the things, I think all of us are online e-commerce shoppers, and one of the most frustrating experiences you can have is when pages take a long time to load. And that was certainly the experience we had with our site prior to the conversion. And what you'll see happen as a result of that, and this is what we're seeing again in these early days, is that our... It creates not just a better desktop experience but a better mobile experience and a significant drop in bounce rates.

Bill Morachnick: One of the things, I mean, I think all of us are online e-commerce shoppers, and one of the most frustrating experiences you can have is when pages take a long time to load.

Bill Morachnick: And that was certainly the experience we had with our site prior to the conversion.

Erika Lind: As our in-house production for gummies comes online later this year, we anticipate further improvements in production costs and therefore margin. SGNA for the second quarter decreased 25% year over year, reflecting some of the expense reductions we took into one to right size the business. As I stated earlier, we took additional cost mitigation actions in July based on Q2 results. This will provide a reduction in SGNA for the year of more than 20 million compared to the prior year.

Bill Morachnick: We are now operating, and we haven't even optimized it, but our page loads are at a little bit more than 2x the speed that they were prior.

Bill Morachnick: And what you'll see happen as a result of that, and this is what we're seeing again in these early days, is that our platform creates not just a better desktop experience but a better mobile experience. And we're seeing a significant increase in conversion and a significant drop off in bounce rates. And I think a lot of that is being driven so far by the speed with which we're able to load.

Bill Morachnick: And what you'll see happen as a result of that, and this is what we're seeing again in these early days, is that our

Bill Morachnick: It creates not just a better desktop, but a better mobile experience, and we're seeing a

William Morachnick: And we're seeing a significant increase in conversion and a significant drop-off in bounce rates. And I think a lot of that is being driven so far by the speed with which we're able to load. The other thing it's going to do for us moving forward is our previous platform required a ton of custom coding as well as in-house engineering that was really just around maintaining the site. In the Shopify environment, we move rapidly away from a custom coding environment into a full suite of tools that we can access through APIs that will allow our e-commerce team to focus much more on the consumer experience and not just the stability of the site.

Bill Morachnick: significant increase in conversion and a significant drop-off in bounce rates. And I think a lot of that is is being driven so far by the speed with which we're able to load.

Erika Lind: Our Q2 operating loss was 12.1 million, which includes the non-cash inventory provision of 3.8 million. This compares to an operating loss of 10.7 million in the prior year. Net loss for the quarter was 11 million or 7 cents per share.

Bill Morachnick: And I think a lot of that is being driven so far by the speed with which we're able to load. In the Shopify environment, we move rapidly away from a custom coding environment into a full suite of tools that we can access through APIs. What excites me more than the results thus far is what we're going to see in the coming months and quarters. As we deploy these tools, they're going to continue to drive a fundamentally different experience.

Bill Morachnick: The other thing it's going to do for us moving forward is. Our previous platform required a ton of custom coding as well as in-house engineering that was really just around maintaining the site. In the Shopify environment, we are moving rapidly away from a custom coding environment into a full suite of tools that we can access through APIs. That will allow our e-commerce team to focus much more on the consumer experience and not just the stability of the site. So,

Bill Morachnick: um

Bill Morachnick: The other thing it's going to do for us moving forward is.

Erika Lind: This is compared to a net income of 2.8 million or 2 cents per share in Q2 of last year, which was favorably impacted by non-cash gains of 14.9 million related to financial instruments and ownership valuation in the dysphoria venture. Despite our lower revenue and gross margin, our significant expense reductions have improved our cash firm. Cash flow for the quarter was negative 6 million. We are lapping the receipt of the IRS employee retention credit in the prior year.

Bill Morachnick: Our previous platform required a ton of custom coding, as well as in-house engineering that was really just around maintaining the site.

Bill Morachnick: In the Shopify environment, we move rapidly away from a custom coding environment.

Bill Morachnick: into a full suite of tools that we can access through APIs that will allow our e-commerce team to focus much more on the consumer experience and not just the stability of the site.

Erika Lind: This year we experienced an increase in the conversion of biomass to extract that, coupled with lapping the employee retention credit, would have made the cash firm flat compared to the prior year. At the close of the second quarter, we had 32.5 million, had cash of 32.5 million, and working capital of 38.5 million. With our substantial expense reductions and prudent cash management, we believe that we have sufficient capital to meet our near term objectives and return to revenue growth.

William Morachnick: So what excites me more than the results thus far is what we're going to see in the coming months and coming quarters. As we deploy these tools, they're going to continue to drive a fundamentally different experience. Again, I referenced in earlier our ability to target our ability to offer dynamic content, dynamic offers, to increase the subscription experience, the word of mouth, the gamification, all the things that were part of our core strategy, that we were somewhat prohibited from deploying, all become feasible within this new platform. But just seeing these early indications before we've really put the tools against it, get me really excited.

Bill Morachnick: What excites me more than the results thus far is what we're going to see in the coming months and quarters. As we deploy these tools, they're going to continue to drive a fundamentally different experience. Again, I referenced it earlier, our ability to target, our ability to offer dynamic content, and dynamic offers to increase the subscription experience. Word of mouth, the gamification, all the things that were part of our core strategy that we were somewhat prohibited from deploying, all become feasible within this new platform. But just seeing these early indications before we've really put the tools against it gets me really excited.

Bill Morachnick: So,

Bill Morachnick: What excites me more than the results thus far is what we're going to see in the coming months and coming quarters. As we deploy these tools, they're going to continue to drive a fundamentally different experience.

Speaker Change: Again, I referenced it earlier, our ability to target, our ability to offer dynamic content, dynamic offers to increase the subscription experience.

Erika Lind: And so with an increased runway, our new e-commerce platform and focus to turn around objectives. We are increasingly optimistic looking forward.

Bill Morachnick: The word of mouth, the gamification, all the things that were part of our core strategy that we were somewhat prohibited from deploying, all become feasible within this new platform. But just seeing these early indications before we've really put the tools against it gets me really excited.

William Morachnick: I will now turn the call back over to Bill. Thank you, Erica.

Bill Morachnick: um

Bill Morachnick: The word of mouth, the gamification, all the things that were part of our core strategy.

William Morachnick: All right, so let's talk about the progress that we've made in our key focus areas. And let's start with D2C. The key component underlying our e-commerce business pillar to create an excellent consumer experience with the migration to our new e-commerce platform, which we launched in June. This was a top priority for the company. This new platform provides improved software integrations, advanced target marketing tools, and a secure customer relationship management capability. With this transition to the new e-commerce platform, we can offer a consistent, streamlined user experience, effective campaign performance, and agility to increase market speed.

Speaker Change: That we were

Bill Morachnick: Somewhat prohibited from deploying, all become feasible within this new platform. But just seeing these early indications before we've really put the tools against it, get me really excited.

Erika Lind: Okay, the final question from Canada Court is on cash flow break even, and when we expect to achieve the 65 million in annual net revenue required to be cash flow neutral. Thanks, Cory. I'll take that, and thanks, Luke, for the question. This is Erika. You know, while we don't really, we're not giving specific guidance at this time as we tend to not, we are anticipating and modeling that we will return to growth, based just on our recent and upcoming initiatives that Bill talked about and that we've all talked about. But the important takeaway is really that the actions that we have taken into one and very recently here in July are providing, are adjusting our operating expenses to give us the runway we need to get to cash flow break even even at modest growth.

Erica Lee: Okay, the final question from Canada Court is on cash flow breakeven and when we expect to achieve the $65 million in annual net revenue required to be cash flow neutral.

Cory Pala: Okay, the final question from Canada Court is on cash flow breakeven and when we expect to achieve the $65 million in annual net revenue required to be cash flow neutral.

Erica Lee: Okay, the final question from Canada Court is on cash flow breakeven and when we expect to achieve the $65 million in annual net revenue required to be cash flow neutral.

Erika Lind: Thanks Cory, I'll take that, and thanks Luke for the question. This is Erika.

Erica Lee: Thanks Cory, I'll take that and thanks Luke for the question. This is Erica.

Erika Lind: You know, while we don't really, we're not giving specific guidance at this time, as we tend not to, we are anticipating and modeling that we will return to growth based just on our recent and upcoming initiatives that Bill's talked about and that we've all talked about. But the important takeaway is really that the actions that we have taken in Tijuan and very recently here in July are providing, are adjusting our operating expenses to give us the runway we need to get to cash flow break even, even at modest growth.

Erica Lee: You know, while we don't really, we're not giving specific guidance at this time, as we tend not to, we are anticipating and modeling that we will return to growth based just on our recent operating expenses as a percent of net revenue compared to our peer set, and that's where we need to be to reach that point.

William Morachnick: It's already proving to be a game changer for us, with July revenue improving over June and D2C. There's obviously a lot more to do, and we continue to refine and optimize the platform, but it is encouraging to see the immediate impact we are already experiencing.

Erica Lee: You know, while we don't really, we're not giving specific guidance at this time as, as we tend to not, we are anticipating and modeling that we will return to growth based just on our recent.

Speaker Change: And upcoming initiatives that Bill's talked about and that we've all talked about. But the important takeaway is really that the actions that we have taken in Q1 and very recently here in July ,

William Morachnick: On the V2B front, we've also been executing well against our retail business pillar, which is to be a most value partner with retailers and distributors. We are intently focused on profitable growth in key V2B channels, which includes a range of retail partners as well as healthcare practitioners. Strong distribution and retail relationships have been a foundation of Charlotte's Web market share leadership. To further support these critical relationships, we've been aligning closer with retailers and new innovations and marketing integrations tailored to unique needs of our retail partners. These collaboration efforts are intended to enable attractive opportunities for retail expansion with new wellness products and formats.

Erika Lind: So the steps we're taking now are going to get us there much faster than we otherwise would have been able to get to. I mentioned in my recent comments that just this year, we're going to save more than $20 million in operating expenses as compared to prior years. So that gets us much closer to operating expenses as a percent of net revenue compared to our peer set, and that's where we need to be to reach that point.

Erica Lee: are providing are adjusting our operating expenses to give us the runway we need to get to cash flow berth even even at modest growth so

Erika Lind: So the steps we're taking now are going to get us there much faster than we otherwise would have been able to get to. I mentioned that in my recent comments that just this year we're going to save more than $20 million in operating expenses as compared to prior years. So that gets us much closer in operating expenses as a percent of net revenue to our peer set. And that's where we need to reach that point.

Erica Lee: The steps we're taking now are going to get us there much faster than we otherwise would have been able to get to. I mentioned that in my recent comments that just this year, we're going to save.

Erica Lee: More than $20 million in operating expenses as compared to prior years, so that gets us much closer in Operating expenses as a percent of net revenue

Cory Pala: Okay, it's turning to Scott Fortune, Research Analyst at Roth MKM. Scott's first question is pertaining to DTC metrics on the e-commerce platform. Bill, you've addressed that thoroughly.

Cory Pala: Okay, turning to Scott Fortune, Research Analyst at Roth MKM. Scott's first question is pertaining to DTC metrics on the e-commerce platform. Bill, you've addressed that thoroughly. Now, we'll move to his second question. On the B2B side of the business, Scott's asking if the quarter growth in B2B was primarily associated with Walmart versus the new CBN gummies launch, and can we expect follow-on orders and further distribution expansion with Walmart as a customer, which I guess you've addressed to a degree.

Erica Lee: To our peer set, and that's where we need to be to reach that point.

Erica Lee: Okay, turning to Scott Fortune, Research Analyst at Roth MKM.

Erica Lee: Scott's first question.

Erica Lee: As pertaining to DTC metrics on the e-commerce platform, Bill, you've addressed that.

William Morachnick: We'll move to his second question on the B2B side of the business. Scott's asking if the quarter of a quarter growth in B2B was primarily associated with Wal-Mart versus the new CBN gummies launch. And can we expect follow-on orders and further distribution expansion with Wal-Mart as a customer, which I guess you've addressed to degrees. Yes, Cory, thanks for that. I can check some light on that as well for Scott. The B2B sales growth in the quarter was definitely driven by the excellent CBN launch that we had and the new distribution points, as we discussed previously.

Speaker Change: We'll move to his second question. On the B2B side of the business, Scott's asking if the quarter-over-quarter growth in B2B was primarily associated with Walmart.

William Morachnick: In addition, the medical channel, which is displayed resilience, also represents a promising area for strategic repositioning and stands out as one of our more lucrative V2B channel opportunities. More to come on that in future quarters.

Speaker Change: versus the new CBN Gummies launch? And can we expect follow-on orders and further distribution expansion with Walmart as a customer? Which I guess you've addressed to a degree.

Cory Pala: Yeah, Cory, thanks for that. I can shed some light on that as well for Scott. The B2B sales growth in the quarter was definitely driven by the excellent CBN launch that we had and the new distribution points, as we discussed previously. We are seeing Walmart sales meet the early velocity expectations in stores, and it does give us a lot of optimism about the potential expansion in the future that Bill mentioned earlier, but it is still early.

William Morachnick: Supporting another core pillar reinforcing and amplifying CW's influential voice, we are leveraging our traditional and digital marketing capabilities to drive our brand equity across the entire on the channel shopping continuum. We know that our current as well as prospective new consumers can experience our brand throughout a wide range of shopping experiences. So we want to ensure that we are maximizing synergy between our DTC and B2B channels. So whether consumers first see a digital ad that brings them to our website, but they end up purchasing a portion of their future show its web products from one of their favorite retailers or healthcare providers, we just want to ensure that they have a well informed consistent and pleasant experience.

Quy: yes quy thanks for that i can i can cheed some light on that as well for scot

Speaker Change: the beautunity sales quarter growth in the quarter was definitely driven by the exceent cb n launch thatwe had the new distribution pointsas we discussed previously

William Morachnick: We are seeing Wal-Mart sales meet the early velocity expectations in store. And it does give us a lot of optimism about the potential expansion in the future that Bill mentioned earlier, but it is still early. We have an encouraging start. And in addition to the encouraging in-store sales, there's definitely an opportunity, and, as Bill mentioned. So we're hopeful; we're expectant. And it does allow us to reach the new retail demographic that are important for the expansion of the business. We're, we're expected is what we can say about that.

Erica Lee: We are seeing Walmart sales meet the early velocity expectations in store, and it does give us a lot of optimism about the potential expansion in the future that Bill mentioned earlier, but it is still early.

Erica Lee: We've had an encouraging start, and in addition to the encouraging in-store sales, there's definitely an opportunity to expand, as Bill mentioned. We're hopeful, we're expectant, and it does allow us to reach some new retail demographics that are important for the expansion of the business. We're ex-exits, is what we can say about that.

Cory Pala: We have, we've had an encouraging start. And in addition to the encouraging in-store sales, there's definitely an opportunity to expand, as Bill mentioned. So, we're hopeful, we're expectant, and it does allow us to reach some new retail demographics that are important for the expansion of the business. We're at X exits, is what we can say about that.

Erica Lee: we have we've had in the encouraging start and in addition to the encouraging in-store sales there's definitely opportunities and as they'll mentioned so

Erica Lee: We're hopeful, we're expectant, and it does allow us to reach some new retail demographics that are important for the expansion of the business.

Erica Lee: Can you provide some color around how Walmart affects our gross margins? The question is around our decline in gross margin on the quarter in terms of adjusted gross margin. And what would be the gross margin expectations going forward then?

Erika Lind: Can you provide some color around how Walmart affects our gross margins? The question is around our decline in gross margin on the quarter in terms of adjusted gross margin. And what would be the gross margins expectations going forward then? You bet. You know, our sales with gross with Walmart are early. So, they're not material enough to be impactful or gross margins at this point yet. Our gross margins initially have more to do, as I mentioned, just with the price reductions that we took on our oil tinctures, in addition to some promotional activity and just below revenue impacting our fixed cost leverage.

Speaker Change: we're we're expected is what we can say about that

Speaker Change: Can you provide some color around how Walmart affects our gross margins? The question is around our decline in gross margin on the quarter in terms of adjusted gross margin. And what would be the gross margins expectations going forward then?

Erika Lind: You bet. You know, our sales with Walmart are early, so they're not material enough to be impactful to our gross margins at this point yet. Our gross margins... Initially, I have more to do, as I mentioned, just with the price reductions that we took on our oil tinctures, in addition to some promotional activity and just the lower revenue impacting our fixed cost leverage. In terms of gross margin modeling, we have been consistent in modeling in the mid to low to mid 50s, and we expect that to continue until we get into the latter part of this year and into next year with our in-house gummy production.

Speaker Change: you bet our sales of growross with walmart are early so they're not material enough to be impactfulll our gross margins at this point yet

William Morachnick: A police report that we have recently received an updated draft legislation of the Wyden Paul Senate bill with FDA comments included. This is S2451 the hemp access and consumer safety act. Industry stakeholders we support, including the coalition for access now and the industry working group one hemp are actively engaged. Once the final drafts are introduced, we are hopeful the legislative process can advance.

Speaker Change: Our gross margins initially have more to do, as I mentioned, just with the price reductions that we took on our oil tinctures, in addition to some promotional activity and just the lower revenue impacting our fixed cost leverage.

Erika Lind: In terms of the gross margin modeling, we have been consistent in modeling in the mid to low to mid 50s, and we expect to continue until we get into the latter part of this year and into next year with our in-house company production.

Erica Lee: In terms of gross margin modeling, we have been consistent in modeling in the mid to low to mid 50s, and we expect that to continue until we get into the latter part of this year and into next year with our in-house gummy production.

Erica Lee: In terms of the gross margin modeling, we have been consistent in modeling in the mid to low to mid 50s, and we expect that to continue until we get into the latter part of this year and into next year with our in-house gummy production.

William Morachnick: One final comment I'd like to make today pertains to the FDA IND pathway being pursued by Defloria, which is our collaboration with British American tobacco and Agina bioscience. I am pleased to report that Defloria is completing the processing of its phase one clinical trial data in preparation for an IND filing with the FDA. Phase one was conducted to determine the safety and tolerability as well as the pharmacokinetic and pharmacodynamic effects of the botanical compound to inform a phase two clinical trial program, which would follow with no objection later from the FDA. We look forward to providing further updates as appropriate in the coming months as we continue to monitor the Florida's progress.

Erika Lind: And Scott is asking on in terms of the additional reductions that that our plan to reduce our cost does that until workforce shrinkage and as we right size the business is their sale support to support forward growth initiatives. Sure, we did have a worse workforce reduction in July as part of the cost actions we took. As you know, we definitely have given a lot of thoughtful consideration to all the actions that we're taking right now to ensure that we have all the right people in the right place. So we're being very surgical in precision with everything that we do with our dollars as we have right-sized to the size of business we are right now to ensure that we do have the right people and the right support in place to achieve our initiatives.

Erica Lee: And Scott is asking, in terms of the additional reductions that are planned to reduce our costs, does that entail workforce shrinkage? And as we right-size the business, is there sales support to support forward growth initiatives? Sure.

Erika Lind: And Scott is asking, in terms of the additional reductions that are planned to reduce our costs, does that entail workforce shrinkage? And as we right-size the business, is there sales support to support forward growth initiatives? Sure.

Speaker Change: And Scott is asking, in terms of the additional reductions that are planned to reduce our costs, does that entail workforce shrinkage? And as we right-size the business, is there sales support to support forward growth initiatives?

Erika Lind: Sure. We did have a worse workforce reduction in July as part of the cost actions we took. As you know, we definitely have given a lot of thoughtful consideration to all the actions that we're taking right now to ensure that we have all the right people in the right places. So we're being very surgical in precision with everything that we do with our dollars as we have the right size to the size of business we are right now to ensure that we do have the right people and the right support in place to achieve our initiatives.

Erica Lee: Sure. We did have a worse workforce reduction in July as part of the cost actions we took. As you know, we definitely have given a lot of thoughtful consideration to all the actions that we're taking right now to ensure that we have all the right people in the right places. So we're being very surgical in precision with everything that we do with our dollars as we have the right size for the size of business we are right now to ensure that we do have the right people and the right support in place to achieve our initiatives.

Erica Lee: Sure. We did have a workforce reduction in July as part of the cost actions we took.

Erica Lee: as

Erica Lee: You know, we definitely have given a lot of thoughtful consideration to all the actions that we're taking right now to ensure that we have all the right people in the right place.

Cory Pala: With that update, Cory will now share the questions submitted by our analysts. Yes, today for better effectiveness. We've changed the format for our call and we've had our analysts who are on the call today submit their questions earlier today, allowing us to provide more time to provide some full cement options.

Erica Lee: We're being very surgical in precision with everything that we do with our dollars, as we have right size to the size of business we are right now, to ensure that we do have the right people and the right support in place to achieve our initiatives. So we're.

Erika Lind: So we're being very careful. We're being very precise. But we are expecting, and we have seen, efficiencies, in particular in our warehouse operations, that have helped us achieve some of these actions without... Um.., loss of support. And obviously, we'll have a lot more efficiencies come online with the full ramp up of our in-house production.

Erica Lee: So we're being very careful, we're being very precise. But we are expecting, and we have seen, loss of support. And obviously, we'll have a lot more efficiencies come online with the full ramp up of our in-house production.

Erika Lind: So we're being very careful. We're being very precise. But we are, but we have seen efficiencies in particular in our warehouse operations that have helped us achieve some of these actions without loss of support, and obviously we'll have a lot more efficiencies come online with our full ramp up of our in house production.

William Morachnick: So our first question comes from Luke Hannan at Khan Accord Genuity. He's asking on Walmart, Luke would like us to go through the process of how we were able to get on shelf at Walmart and is there potential to expand the presence nationwide. Okay, yeah, thanks, Cory. Thanks, Luke. So with Walmart, it's a really exciting initiative for us and hopefully for Walmart as well. The thing about Walmart, it's not a mystery of what they're looking for when they decide to work with the new partner and list new products.

Erica Lee: We're being very careful. We're being very precise.

Erica Lee: but we are expect we have seen

Erica Lee: efficiencies in particular in our warehouse operations that have helped us achieve some of these

Erica Lee: actions without loss of support and obviously well have a lot more efficiencies come online with the full ramp up of our in-house production

Cory Pala: Okay, and that's it for the analyst questions that were submitted.

Cory Pala: Okay, and that's it for the analyst questions that were submitted. We'd like to thank everyone for participating today, and we look forward to speaking to you on our next earnings call. Operator, I'll hand over the call to you to close it out.

Operator: Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Operator: We'd like to thank everyone for participating today, and we look forward to speaking to you on our next earnings call.

Operator: Okay, and that's it for the analyst questions that were submitted. We'd like to thank everyone for participating today, and we look forward to speaking to you on our next earnings call. Operator, I'll hand over the call to you to close it out.

William Morachnick: This is a comprehensive list, but you can imagine as Walmart chopper, they're looking for high quality products at attractive prices, good gross margins for them, partners that they can trust, which is a really critical component. And they want to see a high rate of turnover or consumer offtake or velocity. We check all those boxes in spades. So getting listed in the account, I always look at that. I've been, I started my career in trade sales for a major CPG company about 40 years ago and a lot of things have changed since then, but a lot of things happen. So those same criteria that I just listed out with the same challenges that I had way back in my career.

Operator: Offer it all; hand over the call to you to close it out.

Operator: Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Operator: Thank you, ladies and gentlemen. This concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

Speaker Change: Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

William Morachnick: I think where the game really begins is what happens after you're in store. So we're starting with Walmart in 827 locations across five states. That means we're penetrating about 17-18% of the current Walmart footprint. So we still have 80% to go. So what I'm really excited about is we now get a chance to demonstrate how well our products are going to perform and we've got a really comprehensive, fully integrated marketing plan to ensure attractive consumer offtake.

William Morachnick: And high velocity numbers that I think Walmart's going to be very excited about. Our early indications in these initial 827 stores are quite strong. So we're meeting the mutually defined criteria of what success looks like thus far and we're just getting started.

William Morachnick: We also, obviously, Walmart.com is a big opportunity within the Walmart ecosystem and that's something that excites us very much as well. Given that we have a really well structured and thought out on the channel strategy, we see the dot com component of any major retailer fitting in very nicely with our strategy. So highly enthusiastic for where we take.

William Morachnick: And Luke's second question is on our new e-commerce platform. He's asking how successful has any side been in terms of KPIs that we might be able to share for performance to date. Okay, thanks, Cory. Thanks, Luke again. I'll grab that one. So, as you all know, it's extremely extremely early days. So, we just are getting out of the gate with July, first full month, where we've gone to this new e-commerce platform, which is just one component of an overarching e-commerce digital marketing infrastructure that we're deploying along with the company's strategies.

William Morachnick: I mentioned it in my thoughts before that the early indications are very, very encouraging, but I don't want to get too much into the detail around KPIs just yet because a month doesn't indicate a false trend. But let me hit on the things that objectively are working far better than they were before. One of the things, I mean, I think all of us are online e-commerce shoppers. And one of the most frustrating experiences you can have is when pages take a long time to load.

William Morachnick: And that was certainly the experience we had with our site prior to the conversion. We are now operating and we haven't even optimized it. But our page loads are at a little bit more than 2x, the speed that they were prior. And what you'll see happen as a result of that, and this is what we're seeing again in these early days, is that our, it creates not just a better desktop, but a better mobile experience.

William Morachnick: So what excites me more than the results thus far is what we're going to see in the coming months and coming quarters. As we deploy these tools, they're going to continue to drive a fundamentally different experience. Again, I referenced in earlier our ability to target our ability to offer dynamic content, dynamic offers, to increase the subscription experience, the word of mouth, the gamification, all the things that were part of our core strategy, that we were somewhat prohibited from deploying, all become feasible within this new platform, but just seeing these early indications before we've really put the tools against it, get me really excited.

Erika Lind: But the important takeaway is really that the actions that we have taken into one and very recently here in July are providing, are adjusting our operating expenses to give us the runway we need to get to to cash flow break even even at modest growth. So the steps we're taking now are going to get us there much faster than we otherwise would have been able to get to. I mentioned that in my recent comments that just this year we're going to save more than $20 million in operating expenses as compared to prior years. So that gets us much closer in operating expenses as a percent of net revenue to our peer set.

Erika Lind: And that's where we need to reach that point.

Scott Fortune: Okay, it's turning to Scott Fortune, research analyst at Roth MKM. Scott's first question is pertaining to DTC metrics on the e-commerce platform. Bill, you've addressed that thoroughly.

William Morachnick: We'll move to his second question on the B2B side of the business. Scott's asking if the quarter of a quarter growth in B2B was primarily associated with Wal-Mart versus the new CBN gummies launch. And can we expect follow on orders and further distribution expansion with Wal-Mart as a customer, which I guess you've addressed two degrees. Yes, Cory, thanks for that. I can check some light on that as well for Scott. The B2B sales growth in the quarter was definitely driven by the excellent CBN launch that we had and the new distribution points as we discussed previously.

William Morachnick: We are seeing Wal-Mart sales meet the early velocity expectations in store. And it does give us a lot of optimism about the potential expansion in the future that Bill mentioned earlier, but it is still early. We have an encouraging start. And in addition to the encouraging in-store sales, there's definitely an opportunity and, as Bill mentioned. So we're hopeful, we're expectant. And it does allow us to reach the new retail demographic that are important for the expansion of the business. We're, we're expected is what we can say about that.

Erika Lind: Can you provide some color around how Walmart affects our gross margins? The question is around our decline in gross margin on the quarter in terms of adjusted gross margin. And what would be the gross margins expectations going forward then? You bet. You know, our sales with gross with Walmart are early. So in they're not material enough to be impactful or gross margins at this point yet. Our gross margins initially have more to do as I mentioned just with the price reductions that we took on our oil tinctures in addition to some promotional activity and just below revenue impacted impacting our fixed cost leverage.

Erika Lind: In terms of the gross margin modeling, we have been consistent in modeling in the mid to low to mid 50s and we expect to continue until we get into the latter part of this year and into next year with our in house company production.

Erika Lind: So we're being very surgical in precision with everything that we do with our dollars as we have right size to the size of business we are right now to ensure that we do have the right people and the right support in place to achieve our initiatives. So we're being very careful. We're being very precise. But we are, but we have seen efficiencies in particular in our warehouse operations that have helped us achieve some of these actions without loss of support and obviously we'll have a lot more efficiencies come online with our full ramp up of our in house production.

Cory Pala: Okay, and that's it for the analyst questions that were submitted.

Cory Pala: We'd like to thank everyone for participating today and we look forward to speaking to you on our next earnings call.

Cory Pala: Offer it all hand over the call to you to close it out.

Operator: Thank you, ladies and gentlemen, this concludes your conference call for today.

Operator: We thank you for participating and ask that you please disconnect your lines.

Q2 2024 Charlotte's Web Holdings Inc Earnings Call

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