Q4 2024 Charlotte's Web Holdings Inc Earnings Call

Yeah.

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

Speaker Change: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings, Inc. Fourth quarter Conference call. At this time lines are in listen only mode. Following the presentation. We will conduct a question answer session. If at any time during the call you require immediate assistance. Please press star zero for the operator this call is being recorded and once.

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.

Operator: This call is being recorded on Wednesday, March 19, 2025.

Speaker Change: Steve March 19, 2025, and I would now like to turn the conference over to Mr. Cory Pala director of Investor Relations. Please go ahead.

Cory Pala: And I would now like to turn the conference over to Mr. Cory Pala, director of investor relations. Please go ahead.

Cory Pala: Thank you, Ina, and good morning, everyone. Thank you for joining us for our 2024 fourth quarter and year-end 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. Our 10K filing is also available on cdrplus.ca in Canada and EDGAR in the U.S.

Speaker Change: Thank you Anna and good morning, everyone. Thank you for joining us for 2020 for fourth quarter and year end conference call for Charlotte's Web Holdings, Inc are.

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. Our 10-K filing is also available on SEDAR plus dossier in Canada and Edgar in the U S. T O Bill Mirage neck, and CFO, Eric the lender, leading our call. This morning will review the financial results and provide some color around the business and the outlook.

Cory Pala: CEO Bill Morachnick and CFO Erika Lind are leading our call this morning. We'll review the financial results and provide some color around the business and the outlook. Afterwards, we'll answer some questions submitted by our analysts and a replay of this call will be available through the next week, accessible via the details provided on our earnings press release.

Cory Pala: Afterwards, we'll answer some questions submitted by our analyst and 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 of our website at Charlotte's web Dot com.

Cory Pala: 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. Please note that some statements made during today's discussion include responses to questions containing forward-looking information based on current expectations and assumptions. Actual results may differ materially due to risks and uncertainty, many of which are detailed in our latest SEC filings, including our most recent Form 10-K report. We encourage you to review these filings, work to comprehensively discuss the risk factors and other important considerations that may impact our future programs. We reserve the right to update these statements as conditions change.

Cory Pala: Please note that some statements made during today's discussion include responses to questions contain.

Cory Pala: Containing forward looking information based on current expectations and assumptions actual results may differ materially due to risks and uncertainty many of which are detailed in our latest SEC filings, including our most recent Form 10-K report. We encourage you to review these filings, which are comprehensively discuss the risk factors and other important considerations that may impact our few.

Cory Pala: Performance, we reserve the right to update these statements as conditions change during the call. We will also refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have standardized meanings prescribed by GAAP. Please refer to these earnings press release for descriptions of these measures and reconciliations to their most directly comparable GAAP financial measure.

Cory Pala: During the call, we will also refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have standardized meetings prescribed by GAAP. Please refer to these earnings press release for descriptions of these measures and reconciliations to their most directly comparable GAAP financial measures.

William Morachnick: And now I'll hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick. Good morning, everyone, and thank you for joining us today. So 2024 marked a pivotal year for Charlotte's Web as it was highlighted by achieving a return to consecutive quarterly revenue growth throughout the year. While the growth was modest, it is encouraged. We have not seen consistent quarter-on-quarter improvement in several years. Having said that, we also acknowledge that we were still down significantly year-over-year, and this is not the level of revenue we find acceptable, nor that shareholders had expected. It does seem to indicate, however, that the revenue decline has bottomed, and this is the first step in the process of returning to growth.

Cory Pala: Yes.

Speaker Change: And now I'll hand over the call to Charlotte's Web Chief Executive Officer Bill Ratchet.

Bill Ratchet: Good morning, everyone and thank you for joining us today.

Bill Ratchet: So 2024, Mark a pivotal year for Charlotte's web as it was highlighted by achieving a return to consecutive quarterly revenue growth throughout the year.

Bill Ratchet: While the growth was modest it is encouraging.

Bill Ratchet: We have not seen consistent quarter on quarter improvement in several years.

Bill Ratchet: Having said that we also acknowledged that we were still down significantly year over year and this is not the level of revenue we find acceptable.

Bill Ratchet: Nor that shareholders had expected.

Bill Ratchet: It does seem to indicate however that the revenue decline has bottomed and this is the first step in the process of returning to growth.

William Morachnick: While I won't go into detailed financials, as Erika will cover that shortly, I do want to highlight that the improved quarter-on-quarter revenue and operating performance reflect the synergy between our upgraded e-commerce platform, high-impact omnichannel strategy, discipline cost management, and operational efficiencies implemented throughout the year. This foundation positions us well for growth in 2025 and beyond. Our fourth quarter, which is traditionally our strongest period due to holiday shopping, was indeed our best quarter this year. While regulations in some states impacted our retail performance, our e-commerce channel delivered excellent results during the Black Friday, Cyber Monday period and throughout the holiday season.

Bill Ratchet: Well I won't go into the detailed financials as Erica will cover that shortly I do want to highlight that the improved quarter on quarter revenue and operating performance reflect the synergy between our upgraded E Commerce platform.

Bill Ratchet: Hi impact Omnichannel strategy.

Bill Ratchet: Disciplined cost management and operational efficiencies implemented throughout the year.

Bill Ratchet: This foundation positions us well for growth in 2025 and beyond.

Bill Ratchet: Our fourth quarter, which is traditionally our strongest period due to holiday shopping was indeed, our best quarter. This year.

Bill Ratchet: While regulations in some states impacted our retail performance our E Commerce channel delivered excellent results during the Black Friday, cyber Monday period and throughout the holiday season.

William Morachnick: Since launching our new e-commerce platform in June, we've seen a 20% reduction in shopping cart abandonment, which has had a real impact on our conversion rate. One of the core benefits of our new platform is the unprecedented clarity it provides into the effectiveness of the consumer journey and related transactional insight. This enhanced visibility has enabled us to optimize individualized transactions and maximize consumer value through tailored bundles and targeted promotion. The platform has revealed purchasing behaviors that we really just couldn't see or act upon in our old legacy system. The insights and adjustments we can make now are a total game-changer.

Bill Ratchet: Since launching our new ecommerce platform in June we've seen a 20% reduction in shopping cart abandonment.

Bill Ratchet: Had a real impact on our conversion rates.

Bill Ratchet: One of the core benefits of our new platform is the unprecedented clarity provides into the effectiveness of the consumer journey and related transactional insights.

Bill Ratchet: This enhanced visibility has enable us to optimize individualized transactions and maximize consumer value through tailored bundles and targeted promotions.

Bill Ratchet: The platform has revealed purchasing behaviors that we really just couldn't see your act upon in our old legacy system.

Bill Ratchet: The insights and adjustments we can make now are a total game changer.

William Morachnick: We're also seeing a notable lift in first-time customer ordering at Q1 this year, which seasonally has been our softest.

Bill Ratchet: We're also seeing a notable lift me first time customer ordering in Q1, this year, which seasonally has been our softest quarter.

William Morachnick: Okay, let's turn to our omni-channel approach. This continues to support growth by broadening consumer access through seamless integration of e-commerce, traditional retail, healthcare channels, and a multitude of digital shopping platforms. A retail partnership with Walmart has our CBD isolate topicals available in more than 800 physical stores and with extended availability now on walmart.com. We're also encouraged by the initial sales we are seeing with our strategic partnership with Chewy.com, the largest online pet retailer. This has strengthened our pet product sales through targeted promotions and consumer outreach.

Bill Ratchet: Okay, let's turn to our Omnichannel approach. This continues to support growth by broadening consumer access through seamless integration of e-commerce traditional retail health care channels, and a multitude of digital shopping platforms.

Bill Ratchet: Our retail partnership with Walmart has our CBD isolate topical available in more than 800, physical stores and with extended availability now on Walmart Dot com.

Bill Ratchet: We're also encouraged by the initial sales we are seeing with our strategic partnership with chewy Dot com the largest online pet retailer.

Bill Ratchet: This has strengthened our pet product sales through targeted promotions and consumer outreach.

William Morachnick: All right, let's talk about our expanding product offer. The successful introduction of our functional mushroom gummies last fall represents a strategic expansion into the rapidly growing mushroom wellness market. This innovative product line featuring focus, stress support, and energy support formulations has gained significant traction across hundreds of retail locations, including walmart.com, with additional sales channels through other third-party platforms. I'm also pleased to announce our further expansion into the functional mushroom market with two new innovative gummies unveiled earlier this month at Expo West.

Bill Ratchet: Well, let's talk about our expanding product offerings.

Bill Ratchet: The successful introduction of our functional mushroom gummies last fall represents a strategic expansion into the rapidly growing mushroom wellness market.

Bill Ratchet: This innovative product line, featuring focus stress support and energy energy support formulations has gained significant traction across hundreds of retail locations, including Walmart dot com with additional sales channels through other third party platforms.

Bill Ratchet: I'm also pleased to announce our further expansion into the functional mushroom market with two new innovative gummies unveiled earlier this month at Expo West.

William Morachnick: The first one is Vital Defense, and that's a proprietary blend of five mushrooms for immune support. And the second one is Muscle Restorer, featuring chaga mushrooms for athletic recovery. These new gummy offerings further extend our botanical wellness portfolio. The functional mushroom market is valued at more than $200 million per year. These new products allow us to leverage our reputation for science-backed solutions to capture market share while also creating natural cross-selling opportunities with our existing consumers.

Bill Ratchet: The first one is vital defense and that's a proprietary blend of five mushrooms for immune support and the second one in small silver store featuring chaga mushrooms for athletic recovery.

Bill Ratchet: These new gummy offerings further extend our botanical wellness portfolio.

Speaker Change: <unk> mushroom market is valued at more than $200 million per year. These new products allow us to leverage our reputation for science backed solutions to capture market share, while also creating natural cross selling opportunities with our existing consumers.

William Morachnick: As mentioned in this morning's earnings press release, I am especially pleased to announce that our functional mushroom gummies will soon be selling at Amazon.com. This represents our first meaningful presence on this critical e-commerce platform, introducing our brand to millions of potential new customers.

Speaker Change: As mentioned in this morning's earnings press release, I'm, especially pleased to announce that our functional mushroom gummies will soon be selling at Amazon Dot com.

Speaker Change: This represents our first meaningful presence on this critical e-commerce platform, introducing our brands millions of potential new customers.

William Morachnick: I also want to touch on our improvements in operation. Our focus on operational efficiencies has yielded gains.

Speaker Change: I also wanted to touch on our improvements in operations our focus on operational efficiencies has yielded gains we've made significant strides in reducing SG&A expenses and aligning our cost structure with revenue levels. These actions combined with our ongoing transition to in house gummy and topical production are.

William Morachnick: We've made significant strides in reducing SG&A expenses and aligning our cost structure with revenue levels. These actions, combined with our ongoing transition to in-house gummy and topical production, are establishing the foundation for improved margins in 2025.

Speaker Change: Tableau seen the foundation for improved margins in 2025.

Erika Lind: To review our Q4 results and financial positions further, I'll now hand over the call to our CFO, Erika Lind. Thank you, Bill. Our approach now reflects a true omni-channel model, where sales through third-party platforms are integrated into our total revenue reporting. This strategy offers a more holistic view of our performance. In terms of the financial results for the quarter, net revenue was $12.7 million, which while down 21% from the prior year, was up modestly compared to the prior quarter. This outcome aligns with the trends we've observed throughout 2024, indicative of the broader category headwind. Our growth over the previous quarter demonstrates the initial impact of our comprehensive omni-channel approach and validates the traction we're gaining with our product initiatives and strategic retail partnerships, where we have generally outperformed the category in retail.

Eric: To review, our Q4 results and financial positions further I'll now hand over the call to our CFO Eric <unk>.

Eric: Thank you Bill.

Eric: Our approach now reflects a true omnichannel model, where sales through third party platforms are integrated into our total revenue reporting.

Eric: This strategy offers a more holistic view of our performance in.

Eric: In terms of the financial results for the quarter net revenue was $12 7 million, which while down 20% from the prior year was up modestly compared to the prior quarter.

Eric: This outcome aligns with the trends we've observed throughout 2024 indicative of the broader category headwinds are.

Eric: Our growth over the previous quarter demonstrates the initial impact of our comprehensive omnichannel approach and validates the traction we're gaining with our product initiatives and strategic retail partnerships, where we have generally outperformed the category in retail.

Erika Lind: In 2024, we achieved our initial objective of establishing a solid foundation from which to build. As Bill mentioned earlier, this stabilization of quarterly revenue levels marked the first critical step in reversing our previously declining revenue trends, illustrated by delivering consecutive quarter-over-quarter growth. Our strategic focus now shifts to achieving year-over-year growth in 2025, leveraging the operational improvements implemented throughout 2024. Q4 gross profit was $5.1 million, down $3.8 million or 42.7% compared to the prior year. Margin as a percent of net revenue was 40.2 percent, down 15.8 basis points compared to Q4 of 2023. This temporary reduction in gross margin primarily reflected holiday promotional investments, some shipping inefficiencies, and compression of fixed cost absorption on lower than expected revenue.

Eric: In 2024, we achieved our initial objective of establishing a solid foundation from which to build.

Speaker Change: As Bill mentioned earlier this stabilization of quarterly revenue levels Mark the first critical step in reversing our previously declining revenue trends illustrated by delivering consecutive quarter over quarter growth.

Speaker Change: Our strategic focus now shifts to achieving year over year growth in 2025, leveraging the operational improvements implemented throughout 2024.

Speaker Change: Q4, gross profit was $5 1 million down $3 8 million or 42, 7% compared to the prior year.

Speaker Change: Margin as a percent of net revenue was 42% down $15 eight basis points compared to Q4 of 2023.

Speaker Change: This temporary reduction in gross margin, primarily reflected holiday promotional investments some shipping inefficiencies and compression of fixed cost absorption on lower than expected revenue.

Erika Lind: Looking ahead, we anticipate incremental margin improvements in 2025 as we execute our manufacturing strategy, bringing a higher percentage of gummy and topical production in-house. This transition will further enhance our cost structure and strengthen our quality control, production flexibility, and speed to market capabilities. We have recently implemented carrier diversification, shipping threshold adjustments, and production enhancements to drive gross margins toward historical ranges as these measures take effect. Expense management was a strategic priority in 2024, and I'm pleased to report substantial progress in this area. In the fourth quarter alone, we achieved an $8 million year-over-year reduction in total SG&A expenses, representing a 43.3% decrease.

Speaker Change: Looking ahead, we anticipate incremental margin improvement in 2025, as we execute our manufacturing strategy, bringing a higher percentage of gummy and topical production in house.

Speaker Change: This transition will further enhance our cost structure and strengthen our quality control production flexibility and speed to market capabilities.

Speaker Change: We have recently implemented carrier diversification shipping thresholds adjustments and production enhancements to drive gross margins towards historical ranges as these measures take effect.

Speaker Change: Expense management was a strategic priority in 2024 and I'm pleased to report substantial progress in this area in the fourth quarter alone, we achieved an $8 million a year over year reduction in total SG&A expenses, representing a 43.3% decrease this.

Erika Lind: This brought our Q4 SG&A down to $10.6 million from $18.6 million in the same period of last year. These significant cost reductions stem from our disciplined approach to cost optimization, including contract renegotiations, eliminating discretionary expenditures, and leveraging efficiencies gained through our new e-commerce platform. These reductions were strategically implemented to preserve our core capabilities and growth initiatives. We reported a Q4 net loss of $3.4 million, or $0.02 per share, marking a meaningful reduction of $5.1 million, or $0.04 per share, compared to the fourth quarter of 2023. To provide greater visibility into our operational performance, our fourth quarter 2024 adjusted EBITDA was positive $0.3 million, representing a $6.2 million improvement over the fourth quarter of last year.

Speaker Change: Our Q4, SG&A down to $10 6 million from $18 6 million in the same period of last year E.

Speaker Change: These significant cost reductions stem from our disciplined approach to cost optimization, including contract renegotiations, eliminating discretionary expenditures and leveraging efficiencies gained through our new ecommerce platform <unk>.

Speaker Change: These reductions were still cheap strategically implemented preserve our core capabilities and growth initiatives.

Speaker Change: We reported a Q4 net loss of $3 4 million or <unk> <unk> per share, marking a meaningful reduction of $5 1 million or four cents per share compared to the fourth quarter of 2023.

Speaker Change: To provide greater visibility into our operational performance our fourth quarter 2024, adjusted EBITDA was positive 0.3 million, representing a $6 $2 million improvement or the over the fourth quarter of last year. This substantial progress.

Erika Lind: This substantial progress represents our successful operational efficiency initiatives and stringent expense management. The strategic actions implemented throughout 2024 materially reduced our cash burn to $1.8 million in the fourth quarter. We concluded 2024 with $22.6 million in cash reserves. We are confident that our current cash position is sufficient to support our path to positive cash flow as we further optimize operations and maintain a disciplined spending posture.

Speaker Change: Represents our successful operational efficiency initiatives and stringent expense management.

Speaker Change: The strategic actions implemented throughout 2024 materially reduced our cash burn to $1 8 million in the fourth quarter.

Speaker Change: We concluded 2024 with $22 6 million in cash reserves, we are confident that our current cash position is sufficient to support our path to positive cash flow as we further optimize operations and maintained a disciplined spending posture.

Erika Lind: Turning to our FOLIA results, total revenue was $49.7 million, representing a decrease of 21.4% from the prior year. While retail sales continued to face headwinds despite important new partnerships, our e-commerce performance showed encouraging trends. Notably, despite declines in the overall CBD category, Charlotte's Web continued to outperform the category at retail for the year, according to data from Spins, LLC, and we hold the leading brand position in trust and loyalty, according to the latest surveys by the Brightfield Group. Gross profit before inventory provision for the full year was $25.4 million, or 51.1% of net revenue, and we anticipate improvement in 2025 as we bring more production in-house, particularly for our high-volume gummy and topical product line.

Speaker Change: Turning to our full year results total revenue was $49 7 million, representing a decrease of 21, 4% from the prior year.

Speaker Change: While retail sales continued to face headwinds despite important new partnerships our e-commerce performance showed encouraging trends.

Speaker Change: Notably despite declines in the overall CBD category Charlotte's web continue to outperform the category at retail for the year. According to data from <unk> LLC and we hold the leading brand position in trust and loyalty. According to the latest survey by the bright field group.

Speaker Change: Gross profit profit before inventory provision for the full year was $25 4 million or 51, 1% of net revenue.

Speaker Change: And we anticipate improvement in 2025, as we bring more production in house, particularly for our high volume gummy and topical product lines.

Erika Lind: We substantially reduced SG&A expenses for the full year by $22.4 million, or 29.6%, a reduction rate that significantly outpaced our revenue decline. This demonstrates our commitment to operational efficiency while increasing quality as we look to bring manufacturing in-house.

Speaker Change: Substantially reduced SG&A expenses for the full year like $22 4 million or 29, 6% a reduction rate that significantly outpaced our revenue decline. This demonstrates our commitment to operational efficiency, while increasing quality as we look to bring manufacturing in house.

Erika Lind: Net loss for 2024 was $29.8 million, or $0.19 per share, compared to a net loss of $23.8 million, or $0.16 per share in the prior year. It is important to note that 2024 included a non-cash inventory provision of $4.2 million, while 2023 included a non-cash net gain of $20 million from fair value adjustments related to the debt derivative and the investment in DeFloria. For more transparency on operating results, the adjusted EBITDA loss for 2024 was $12.6 million, compared to an adjusted EBITDA loss of $22.7 million for 2023. This $10.1 million improvement demonstrates our substantial progress in financial discipline, and we are committed to maintaining that stewardship in 2025 as we enter a critical growth phase.

Speaker Change: Net loss for 2024 was $29 8 million or <unk> 19 per share compared to a net loss of $23 8 million or <unk> 16 per share in the prior year.

Speaker Change: It is important to note that 2024 included a noncash inventory provision of $4 2 million or <unk>.

Speaker Change: Twenty-three included noncash net gain of $20 million from fair value adjustments related to the debt derivative and the investment into Florida.

Speaker Change: For more transparency on operating results. The adjusted EBITDA loss for 2024 was $12 6 million compared to an adjusted EBITDA loss of $22 7 million for 2023.

Speaker Change: This $10 1 million dollar improvement demonstrates our substantial progress and financial discipline, and we are committed to maintaining that stewardship in 2025, as we enter a critical growth phase.

William Morachnick: Concluding our financial overview, I will now hand the call back over to Bill. Thanks, Erika.

Phil: Concluding our financial overview I will now hand, the call back over to Phil.

Phil: Thanks Erica.

William Morachnick: All right, so we had an exciting announcement last month with DeFloria, which is our collaboration with Ajna Biosciences and British American Tobacco. The FLORIA achieved a significant milestone as the FDA accepted the FLORIA's IND application for advancement to phase two clinical trials for treating the symptoms of autism spectrum disorder. This achievement represents a historic moment for defloria and for botanical drug development with this being the first orally ingested botanical drug designed to meet standards for advanced clinical tests. The upcoming Phase 2 clinical trial will evaluate its effectiveness in people with autism, which is building on the promising Phase 1 results.

Phil: Alright, So we had a we had an exciting announcement last month with the Florida, which is our collaboration with <unk> Biosciences and British American tobacco.

Phil: Florida achieved a significant milestone as the FDA accepted the floor is <unk> application for advancement to phase II clinical trials for treating the symptoms of autism spectrum disorder.

Phil: This achievement represents a historic moment for to Florida and for <unk> drug development with this being the first orally ingested botanical drug designed to meet standards for advanced clinical testing.

Phil: The upcoming phase II clinical trial will evaluate its effectiveness in people with autism, which is building on the promising phase one results.

William Morachnick: Charlotte's Web is contributing a decade of research, cultivation, and manufacturing expertise to the DeFloria venture, with our proprietary hemp genetics forming the foundation for the IND. Charlotte's Web has exclusive manufacturing rights for this product.

Speaker Change: Charlotte's web is contributing a decade of research cultivation and manufacturing expertise to the to Florida adventure with our proprietary hemp genetics, forming the foundation for the IMD.

Phil: Charlotte's web has exclusive manufacturing rights for this product if.

William Morachnick: If it's successfully commercialized, this initiative could represent a very significant long-term revenue opportunity for Charlotte's Web.

Phil: If it's successfully commercialize this initiative could represent a very significant long term revenue opportunity for Charlotte's web.

William Morachnick: And finally, I'm excited to share that earlier this month at the Expo West Natural Products Trade Show, we unveiled our comprehensive rebranding initiative that unifies our expanding product portfolio under a cohesive Charlotte's Web identity. The strategic evolution transforms us from a family of brands to a branded family, which creates a singular recognizable presence across all product categories. This brand consolidation not only enhances retail shelf presence, but it also maximizes our marketing efficiency as we prepare to introduce additional product categories throughout 2025.

Phil: And finally I'm excited to share that earlier this month at the Expo West natural products trade show, we unveiled our comprehensive rebranding initiative that unifies, our expanding product portfolio under a cohesive Charlotte's web identity.

Phil: This strategic evolution transforms us from a family of brands to a branded family, which creates a singular recognizable presence across all product categories.

Phil: This brand consolidation not only enhances retail shelf presence, but it also maximizes our marketing efficiency as we prepare to introduce additional product categories throughout 2025.

Phil: Yeah.

William Morachnick: So, in summary. As we approach the end of the first quarter, we're focused on returning to year-over-year growth. Charlotte's Web is well positioned for 2025. We've established a solid foundation with our optimized cost structure. expanded product portfolio, and strategic retail and e-commerce partnership. As always, any regulatory clarity at the state and federal levels create additional tailwinds that can support growth.

Phil: So in summary.

Phil: As we approach the end of the first quarter, we're focused on returning to year over year growth.

Charlotte's web is well positioned for 2025, we have established a solid foundation with our optimized cost structure expanded product portfolio and strategic retail and e-commerce partnerships.

Phil: As always any regulatory clarity at the state and federal levels create additional tailwind that can support growth.

William Morachnick: One final comment I want to add as well. Let me also add that it's not lost on myself or the leadership team and the Charlotte's Web board that our shareholders have suffered a long and difficult ride, but we remain fully committed and focused on improving shareholder value and on the important mission of Charlotte's Web. We truly appreciate your continued patience and support as we move forward on this effort.

Phil: One final comment I want to add as well.

Phil: Let me also add that is not lost on myself or the leadership team and the Charlotte's Web board.

Phil: That our shareholders have suffered a long and difficult right.

Phil: But we remain fully committed and focused on improving shareholder value and on the important mission of Charlotte's web.

Phil: We truly appreciate your continued patience and support.

Phil: As we move forward on this effort.

Cory Pala: With that update, Cory will now take questions from our analysts. Great.

Speaker Change: With that update Korea will now take questions from our analysts.

Operator: Ina, can you open the call for our analysts, please?

Speaker Change: And can you open the call for analyst please.

Operator: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the 1 on your telephone keypad. And should you wish to cancel a request, please press star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any. One moment, please, for your first question.

Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your telephone keypad and should you wish to cancel your request. Please press star floor, but if you if you're using a speaker phone. Please lift the handset before pressing Yankees one woman. Please please first question.

Luke Hannan: Your first question comes from the line of Luke Hannan from Canaccord Genuity. Please go ahead. Yeah, thanks. Good morning, everyone.

Speaker Change: Your first question comes from the line of Luke Hannan from Canaccord Genuity. Please go ahead.

Luke Hannan: Yeah. Thanks, Good morning, everyone Bill I, just wanted to hear a little bit more detail on some of the state level restrictions that impacted you in retail during the quarter, maybe a little bit more specificity on when they took it back effect and overall what was the impact to basket and traffic as a result of those restrictions.

William Morachnick: Bill, I just wanted to hear a little bit more detail on some of the state level restrictions that impacted you in retail during the quarter. Maybe a little bit more specificity on when they took effect and overall, what was the impact to basket and traffic as a result of those restrictions? Yeah, thanks, Luke. So, the short answer is it's pretty, it's difficult to say how big the impact is because the state regs now are really such a chaotic patchwork of different rules, and they're ever-changing. I think it does highlight how critical it is for us to finally get federal regulations in place, which establish a baseline for all of our companies to operate within.

Speaker Change: Yes, Thanks Luke.

Luke Hannan: So.

Speaker Change: The short answer is it's pretty it's difficult to say how big the impact is because the state regs now are really such a chaotic patchwork of different roles and they are ever changing.

Speaker Change: I think it does highlight how critical it is for us to finally get federal regulations in place, which establish a baseline for all of our companies to operate with them, but you can imagine the confusion that it creates for consumers and for retailers as well when the state regs are all over the place.

William Morachnick: But you can imagine the confusion that it creates for consumers and for retailers as well when the state regs are all over the place. For us as a business, I can say that we're going to be just fine. We're going to continue to adapt and figure out ways to grow and thrive regardless of the state regs. As we were just mentioning in the call, we are rapidly expanding our product portfolio to include botanical products, so the mushrooms that we mentioned, as well as a wide range of minor cannabinoids and isolates. We, you know, when I talk about the confidence we have for 25, we know that we're going to be able to grow revenue, profits and scale the business successfully.

Speaker Change: For us as a business I can say that we're going to be just fine.

Speaker Change: We're going to continue to adapt and figure out ways to grow and thrive regardless of the state regs as you were just mentioning in the call. We are rapidly expanding our product portfolio to include botanical products. So the mushrooms that we mentioned.

Speaker Change: As well as a wide range of minor.

Speaker Change: Cannabinoid and isolates.

Speaker Change: So we when I talk about the confidence we have for 25.

Speaker Change: We know that we're going to be able to grow revenue profits and scale the business successfully.

William Morachnick: I think the much more important issue is the impact that what I would categorize humbly as ill-conceived regulations, what that impact will have on the millions of consumers who depend on our product. I'm trying to remain hopeful that the state legislators are engaging with their constituents and hearing what I hear every single day. from people that depend on our products to manage a wide range of health and wellness needs. Ultimately, these are the folks that lose if the regs aren't done correctly. What I can tell you is that Charlotte's Web is never going to stop fighting for these millions of people in need to have access to our products that fundamentally change their lives.

Speaker Change: I think the.

Speaker Change: But much more important issue is the impact that what I would categorize humbly as ill-conceived regulations.

Speaker Change: That impact will have on millions of consumers who depend on our products.

Speaker Change: I'm trying to remain hopeful that the state legislatures are engaging with their constituents and hearing what I hear every single day.

Speaker Change: From people that depend on our products to manage a wide range of health and wellness needs.

Speaker Change: Ultimately these are the folks that lose if the rigs are done correctly. What I can tell you is that Charlotte's web is never going to stop fighting for these millions of people you need to have access to our products that fundamentally changed their lives.

Luke Hannan: Okay, I appreciate that. Thanks.

Okay I appreciate that thanks, and maybe as somewhat of a follow on to that then so in light of all of that what is your high level view when it comes to retailers' shelf allocations for the CBD category for 2025.

Luke Hannan: And maybe as somewhat of a follow-on to that then, so in light of all of that, what is your high-level view when it comes to retailer shelf allocations for the CBD category for 2025? Again, in light of all of what you just described there. Yeah, so Luke, it's what's what's really hard to kind of crystal ball is is where. There's a multitude of regs that are in play. I would categorize it across multiple states. As we saw last year, Some of the regulations came into place where they failed in state legislatures, they then emerged in executive orders through leadership at various state levels.

Speaker Change: Again in light of all of what you just described there.

Speaker Change: Yeah. So look it's what's what's.

Speaker Change: Really hard to kind of Crystal ball is is where.

Speaker Change: There is a multitude of regs that are in play I would categorize it across multiple states.

Speaker Change: As we saw last year.

Speaker Change: Some of the regulations came into place where they failed in state legislature's. They then emerged in.

Speaker Change: Executive orders.

Speaker Change: True.

Speaker Change: The leadership at various state levels. So it's just it's very hard to gauge where that falls.

William Morachnick: So it's just, it's very hard to gauge where that falls. I can tell you, and I know you know this, it does keep major retailers on the sidelines because they just don't know where they're going to be able to operate and what's gonna change or they have to pull product off the shelf. It causes massive disruption to their supply chains and to the way that they do their planning for slotting and retail sales. So we're really building 25. In a method that is regulatory agnostic and saying that we're going to lean much more aggressively into the miners, isolates, botanicals, while doing everything we can to preserve our full spectrum business.

Speaker Change: I can tell you and I know you know this it does keep major retailers on the sidelines because they just don't know where they're going to be able to operate in what's going to change anything I have to pull product off the shelf it causes massive disruption to their supply chains into the way that they.

Do their planning for slotting.

Speaker Change: And retail sales so.

Speaker Change: We're really building 25.

Speaker Change: In a method that is regulatory agnostic and saying that we're going to lean much more aggressively into the miners isolates botanicals, while doing everything we can to preserve our full spectrum business.

Cory Pala: But we've got a really broad portfolio that allows us to compete effectively regardless of where the state regs land.

Speaker Change: But we've got a.

Speaker Change: Really broad portfolio that allows us to compete effectively regardless of where the state regs land.

Cory Pala: And Luke, it's Cory. One last item I might add to that is that retail represents about a third, less than a third of our revenues in the fourth quarter. So, even the impacts on retail are not material to the business, a meaningful phenomenon. Understood. Thanks for that.

Cory Pala: And look it's Corey one last item I might add to that is that retail represents about a third less than a third of our revenues in the fourth quarter.

Cory Pala: So even the impacts on retail are not material to the business meaningful but not materially.

Cory Pala: Understood. Thanks for that and then so the next question I had there is again looking at 2025. So it was mentioned in the press release, you know you're targeting greater than 50%.

Luke Hannan: And then the next question I have here is, again, looking at 2025. So it was mentioned in the press release, you know, you're targeting greater than 50 percent. of gross margin expansion year on year. So maybe somewhat of a two-part question in that one is, what are the biggest buckets contained in that?

Cory Pala: Gross margin for the year ahead. So that's an implied roughly 700 basis points of gross margin expansion year on year. So.

Cory Pala: Maybe somewhat of a two part question and that one is what are the biggest buckets contained in that and then.

Erika Lind: And then how should we be modeling or thinking about the cadence of that improvement over the course of Hi, Luke. Sure.

Cory Pala: How should we be modeling or thinking about the cadence of that improvement over the course of the year.

Speaker Change: Oh, Hi, Luke sure. This is Eric I'll take that question.

Erika Lind: This is Erika. I'll take that question. So there's a couple of things I want to address with this. First, I do want to be clear that the margin compression we saw in Q4 was – it was very much an anomaly based on some specific factors that I went over in the call about, you know, we had some really aggressive holiday promotions. We had some shipping challenges because of the revenue levels we saw in 2024. We were experiencing higher shipping rates because we fell into a different shipping tier. And so, you know, and some of our fixed cost leverage.

Speaker Change: So theres a couple of things I want to address with this first I do want to be clear that the margin compression. We saw in Q4 was.

Speaker Change: It was very much an anomaly based on some specific factors that I went over in the call about we had some really aggressive holiday promotions.

Speaker Change: We had some shipping challenges because of the revenue levels. We saw in 2024, we were experiencing higher shipping rates, because we fell into a different shipping tier.

Speaker Change: And.

Speaker Change: So.

Speaker Change: And some of our fixed cost leverage.

Erika Lind: Because of, again, of the revenue levels we were at. So with the growth that we're modeling in 2025 on the revenue side, we are, we're, we're. You know, we're bumping back into a higher shipping tier. We've also diversified our shipping carriers to take advantage of some, you know, some savings in that area. We've made some adjustments to some of our shipping thresholds on our e-com platform, some of our just enhancements in that area.

Speaker Change: Again, the revenue levels, we were at so with the growth that we're modeling in 2025 on the revenue side we are.

Speaker Change: Where we are.

Speaker Change: We're bumping back into a higher shipping tier we've also diversified our shipping carriers to take advantage of some.

Speaker Change: Yeah and savings in that area.

Speaker Change: We've made some adjustments to some of our shipping thresholds and our E com platform some of our interest.

Speaker Change: And just enhancements in that area and then bringing more of our production in house really beginning in the next quarter.

Erika Lind: And then bringing more of our production in-house, really beginning in the next quarter, is a significant improvement in our margin. We've been working on that project for a little bit and we're really seeing really successful pilot runs now and really making meaningful progress in that area. So we are. You know, we're expecting it to ramp throughout the course of the year, and that's going to bring us back into that, you know, plus 50% margin on a regular cadence throughout the course of the year. We're expecting it to basically ramp up. You know, it takes time for margin improvement to really hit the P&L because of the way inventory works, but we are expecting that to occur, and it'll have a more immediate impact to our cash flow.

Speaker Change: It is a significant improvement in our margins.

Speaker Change: We've been working on that project for a little bit and we were really seeing really successful pilot runs now and really making meaningful progress in that area. So we are.

Speaker Change: We're expecting it to ramp throughout the course of the year.

Speaker Change: And that's going to bring us back into that you know.

Speaker Change: Plus 50% margin on a regular cadence throughout the course of this of the year, we're expecting it to basically ramp up.

Speaker Change: It takes time for margin improvement to really hit the P&L because of the way inventory works, but we are expecting that to occur and it will have a more immediate impact to our cash flow.

Luke Hannan: Understood. Thanks.

Speaker Change: Understood. Thanks, and then maybe that's a good segue into my last question here and we will stick with you Erika overall, what are your cash burn expectations for 2025.

Luke Hannan: And then maybe that's a good segue into my last question here, and we'll stick with you, Erika. Overall, what are your cash burn expectations for 2025? How should we be thinking about that?

Speaker Change: How should we be thinking about that.

Erika Lind: You know, and I appreciate this question because I think it's important to give context, given that it's going to be a significant shift from what we saw in the past couple of years. You know, I know these past couple of years were challenging from a cash flow perspective. And while we're not going to, we're not, I'm not, you know, going to give a specific guidance number for 2025 Outlook, I will say that we are expecting a significant reduction in cash burn for a couple of very specific reasons. We're not going to have the significant capex that we've had the last couple of years, so that alone is going to provide significant savings.

Speaker Change: And I. Appreciate this question because I think it's important to give context, given that it's going to be a significant shifts from what we saw in the past couple of years.

Speaker Change: I know these past couple of years were challenging from a cash flow perspective.

Speaker Change: And while.

Speaker Change: While we're not going to we're not I'm not going.

Speaker Change: Can you give a specific guidance number for 2025 outlook I will say that we are expecting a significant reduction in cash burn for a couple of very specific reasons.

Speaker Change: We're not going to have the significant capex that we've had the last couple of years. So that alone is going to provide significant savings.

Speaker Change: The the in house production.

Erika Lind: The in-house production is also going to provide significant savings. Helping those CapEx projects pay for themselves very quickly. I'll say that. So you can do that math. And then just the increase in revenue and bringing in that margin makes a significant adjustment. But I think one of the biggest impacts is going to be having a full year of cost savings that we didn't even see this year. So the cost impacts that we had this year really didn't take effect until the half year. And Q4 is basically what we expect to see from an SG&A perspective going forward.

Speaker Change: It's also going to provide significant savings.

Speaker Change: Helping those capex projects pay for themselves very quickly I will say that.

Speaker Change: So you can do that math.

Speaker Change: And then just the increase in revenue and bringing in that margin. It makes a significant adjustment.

Speaker Change: I think one of the biggest impact is going to be having a full year of cost savings that we didn't even see this year. So the cost impacts that we had this year really didn't take effect until the half year and Q4 is basically what we expect to see from an SG&A perspective going.

Erika Lind: So we'll have a full year of that. It will make a significant impact for our cash flow.

Speaker Change: Forward. So we'll have a full year of that will make a significant impact for our cash next year.

Luke Hannan: Okay, great. I appreciate all the commentary. All the best. Thanks, Luke.

Speaker Change: Okay, Great I appreciate all the commentary from all the best.

Speaker Change: Awesome. Thanks, Luke Thanks, Luke it was great.

Operator: It was great.

Cory Pala: Thank you, and there are no further questions at this time.

Garofalo: Thank you and there are no further questions at this time I will now hand, the call back to Mr. Garofalo for any closing remarks.

Cory Pala: I will now hand the call back to Mr. Cory Pala for any closing remarks. Okay, thank you everyone for attending our call today and we will look forward to speaking to you on our next earnings. Thank you.

Garofalo: Okay. Thank you everyone for attending our call today, and we will look forward to speaking to you on our next earnings call.

Operator: And this concludes today's call. Thank you for participating. You may all disconnect.

Garofalo: Thank you and this concludes today's call. Thank you for participating you may all disconnect.

Garofalo: Yes.