Charlotte’s Web Holdings, Inc. (OTC:CWBHF) Q3 2022 Earnings Call Transcript

Charlotte’s Web Holdings, Inc. (OTC:CWBHF) Q3 2022 Earnings Call Transcript November 15, 2022

Charlotte’s Web Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $-0.02.

Operator: Good morning, ladies and gentlemen, and welcome to Charlotte’s Web Holdings Inc. Third Quarter Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on November the 15th of 2022. And I would now like to turn the conference over to Cory Pala, Investor Relations. Please go ahead, Cory.

Photo by Christopher Gower on Unsplash

Cory Pala: Thank you, Mitchell. Good morning, everyone. Thank you for joining us for our 2022 third quarter earnings conference call for the Charlotte Web Holdings, Inc. Our Q3 earnings press release and financial statements were issued this morning and have been posted on the Investor Relations section of our website and filed on sedar.com in Canada, as well as in the U.S. with the SEC. We are hosting today’s quarterly call from London following last night signing of $57 million debenture investments in the Charlotte’s Web by BAT, which we announced in a press release this morning. On today’s call in addition to discuss in our results for the quarter, we will provide commentary on this announcement with BAT along with other recent wins.

We will take questions from our analysts at the end of our prepared remarks. And a replay of this call will be available through the next week accessible via the details provided in our earnings release and a webcast replay of this call will be available for an extended period accessible through the IR section of our website at Charlotte’sweb.com. As a reminder to our listeners, certain statements made on today’s call, including some answers we may provide to certain questions, may include content that is forward-looking in nature, and therefore, subject to risks and uncertainties and factors which could cause actual future results or company performance to differ materially from implied expectations. Such risks surrounding forward looking statements are all outlined in and forward-looking statements are all outlined in detail in the company’s regulatory filings on sedar.com and sec.gov.

In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which does not have any standardized meaning prescribed by GAAP. Please refer to the earnings release contained in the Form 8-K that we filed this morning for a description of adjusted EBITDA as well as a reconciliation on such measures to the respective and most directly comparable GAAP financial measures. I now hand over the call to Charlotte’s Web Chief Executive Officer, Jacques Tortoroli.

Jacques Tortoroli: Thanks, Cory. Good morning, everyone. Thanks for joining our call. As Cory said, he, Jared and I are in London. Greg is in Colorado for this call. Before handing the call to Greg for a review of our third quarter I want to spend a few minutes highlighting this morning’s announcement about BAT and other recent news. This morning we announced gross proceeds of $56.8 million, seven years debenture convertible into 19.9% ownership of Charlotte’s Web shares by BAT. Conversion price is $2 per share on the TSX. This is a premium of more than 100% to a 10 day for a relatively low cost of capital. The debenture carries a 5% interest rate with a step down to 1.5% upon federal regulation of CBD in the U.S. We believe this is an outstanding deal for our shareholders.

For Charlotte’s Web, this investment provides substantial liquidity at a great price, including the gross proceeds on the debenture on addition approximately $70 million. This capital allows us to choicely invest behind our key strategic imperatives, growing our revenues, continuing our asset light international footprint, innovating our product portfolio, including launching our broader sports formats, pursuing our science and broader botanical wellness opportunities while winning in Washington DC. To be clear, we will continue to be disciplined in our investments and stewardship of our capital. On October 12th, Charlotte’s Web was named the official CBD of Major League Baseball in a groundbreaking announcement. This marked the first major professional sports league to form a strategic partnership in agreement with CW.

MLB is arguably the most prestigious professional sports league in the world and their reach and exposure is incredible. This is a multiyear strategic partnership, one of those rare game changing moments in a company’s history. It’s a validation of Charlotte’s Web made possible by our NSF certification as the first and only CBD company with a broad spectrum hemp extract NSF Certified for Sport, for our Daily Edge Tincture, which proudly displays the iconic MLB batter logo and official CBD partner at MLB on the packaging. Daily Edge underwent strict independent testing to uniquely meet MLB’s scientific benchmarks and no bad substances policy. Charlotte’s Web and Major League Baseball will fill a major gap in the sports channel for an NSF Certified for Sport portfolio of CBD products.

Charlotte’s Web now has a premier brand presence at MLB’s jewel events, including the All-Star Game postseason World Series through marketing, media and communication activations that connect to the league’s massive 175 million fan base, 180 million social media followers and 111 million broadcast viewers and millions of active email subscribers. I imagine you would have seen our brand in stadiums or captured on the screen during the recent playoffs in World Series. So much more to come next season, for — which for us started the day after Houston won. We will collaborate on a joint high impact media plan including local penetration through club channels, customized brand engagements, tickets, and unique fan experiences and alignment with fitness events throughout the year.

CBD education is also a shared priority that will come to life through a CBD wellness agenda that educates coaches, performance trainers, doctors and all stakeholders. Charlotte’s Web MLB will also come together for social impact underscoring our shared values and commitments to our communities. One of our significant revenue headwinds is a decline in traffic to our e-commerce site. We’ve talked about this with you before. The partnership is a critical piece to our plans to help address this. Our sports portfolio will be immersed in the enormous and loyal MLB community. The excitement over the initial announcement delivered in earned media equivalent to over $20 million and counting. Put that in the context of our multiyear rights deal the commitment and you can understand why we’re so thrilled.

Lastly, I want to reemphasize a key point. This is a partnership, not a pure play rights deal. MLB is a shareholder in CW, MLB participates in revenues of our cobranded products after a threshold is surpassed. And our interest to grow CW’s business and our shareholder value are completely aligned. The third major announcement we recently made is the partnership with Tilray for the manufacturing and distribution of Charlotte’s Web products in Canada. Jared has led these discussions with Tilray, so I’ll let him share more details in his remarks. But importantly, this is a perfect example of executing on a light asset model for international expansion with leading domestic partners by leveraging well established infrastructure, co-production and route to market capabilities.

This is clearly a repeatable model for multiple international markets going forward. Beginning of the year I said that we’d be entering new channels. We have entered into the employer benefits insurance channel in a partnership with SBM offering CBD for benefits programs that supports employee wellness, a new vertical and an industry first to CBD. Most recently, we entered into the spirits channel partnering with Southern Glazer’s Wine & Spirits, America’s leading Wine & Spirits distribution company in 44 U.S. states. And of course, our most high profile new vertical, Sport, and we’re entering it with the most venerable partner Major League Baseball. We also expanded our reach and consumer access by adding new distribution partners including Cardinal Health, serving thousands of pharmacies; Hanson Faso, covering the central U.S. retailers; Stark, covering the New York Tri-state area as well as relationships across the country and Gopuff in the instant delivery channel.

Our international plans also continue to progress most recently with Tilray in Canada, as well as smaller agreements in several Latin and Central American markets, as well of course is greater China. These new distributors and verticals have yet to impact B2B revenues. While we know that traffic to our e-commerce site converts to purchases and loyal subscribers, each bodes well for returning the company to grow. To summarize these last 11 months since I became CEO, I’ve seen fundamental changes at Charlotte’s Web, starting with lowering our operating costs and stemming our cash burn through an overhaul of our retail channels sales team, compensation and route to market, the laying down a strategy for growth for a broader botanical wellness future leveraging our IT via partnerships, through MLB, and yesterday, to securing liquidity to selectively fuel the execution of this strategy.

I’ll now hand over the call to Greg to review the financial results for the quarter, and then have Jared to provide additional commentary on Canada and the UK, as well as ongoing progress in Washington DC. And finally, some updates on our innovation pipeline, and IT strategy. I’ll close with the latest progress against these initiatives as we outlined in our last earnings call before opening the call for questions. Greg?

Greg Gould: Thank you, Jacques. In our third quarter net revenue was $17 million. This was down from $18.9 million in the last quarter, and $23.7 million in the same quarter last year. Revenue was lower in both D2C e-commerce and B2B retail businesses. When looking at our current revenues, we need to start with the micro headwinds. The first micro headwind is natural and food/drug/mass retailers are reducing shelf space. With total CBD distribution points down 20% to 22% versus the previous year, Charlotte’s Web has maintained more shelf space than the competitive set because our products have the highest velocity in the category with total distribution points down approximately 14% versus the previous year. As a result, we continue to be the market leader despite lower B2B revenues.

The second headwind which we all are seeing has led to a significant depth and frequency of price promotions and percentage of revenue done on deal which has climbed year-over-year. In the third quarter, we achieved a positive 2.8 point unit share gain across total U.S. natural versus a negative 2.8 point unit share change for all other brands. As of the second week of September of this year, Charlotte’s Web market share in food/drug/mass retail was 18.6%. As consumers continue to shift to other product formats, primarily gummies, in Q3 gummies represented 37% of Charlotte’s Web revenues, an increase of 7 percentage points versus the prior year. E-commerce traffic remains the largest constraint on our B2C revenues, as Jacques discussed in his comments earlier.

And lastly, the last headwind, finally the channel mix between B2B and B2C has heard us giving relative absolute dollar declines as B2C generally has higher prices than B2B and higher gross margins. But even with these headwinds, we maintain our market share leadership. On the B2B side, we had lower year-over-year shipments to our largest customers, largely reflecting the factors noted earlier. B2B net revenue was $5.3 million, a decrease of $3.3 million or 38.1% year-over-year. The reorganization of our sales force and transition from direct sales to a distributor led route to market has impacted our revenue performance as well. We have made significant strides in signing new distributors. However, the timing on signing to orders to shipments to stocking on retail shelf takes months, so we are not benefiting from these significant new distribution wins yet.

D2C net revenue was $11.8 million, a decrease of $3.4 million or 22.5% due to lower traffic on our e-commerce site. But the conversion rates improved 1.1 percentage points year-over-year to 13.2 to 14.3. This continues to be encouraging as it demonstrates that if we bring audiences to our brand world and e-commerce site, we convert them to consumers at the best-in-class rates, this bodes well for us as we activate our MLB partnership. The Q3 gross margin of 52.5% is primarily related to lower net revenue, and product mix. Gummies are lower gross margin SKUs for the company as they are sourced via co-manufactures, while tinctures are produced in house at our facility. Overall, lower revenues also mean our fixed overhead costs are under absorbed creating higher period costs in our cost of goods sold line.

We usually model gross margins in the high 50s to low 60 percentage range for quarterly revenue above $22 million. With variances primarily depending on product mix in future quarters. Turning to our sales, general and administrative expenses. This is an area where we continue to see lower year-over-year cost as a result of our organizational actions taken in January and July and our continued focus on reducing discretionary spending. SG&A reported in Q3 was $11 million, down from $24.3 million in Q3 of ’21. However, this also reflects a $4.1 million credit taken in the quarter related to the pandemic related employee retention credit for which we have filed a amended tax return. Excluding the credit, SG&A expenses were $15.1 million, still a substantial 38% decrease year-over-year.

We have brought our fiscal year 2022 SG&A expenses well below $70 million, which is more than a $30 million annualized savings compared to fiscal year 2021. As a result, our net operating loss of $3.9 million for the quarter was a $5.5 million or 58% year-over-year improvement despite lower revenues. Adjusted EBITDA for the third quarter of 2022 was positive $600,000, an improvement of $5.5 million as compared to adjusted EBITDA of negative $4.8 million in Q3 of 2021. Prudent expense control this year was strict management of our balance sheet along with the collection of the IRS refunds resulted in net use cash in operations in the first nine months of 2020 of $2.6 million, which is $5 million was used in the first quarter. This compares to $23.3 million of cash used in operations during the first nine months of 2021.

Cash at September 30, 2022 was $16.5 million, compared to $19.5 million on December 31, 2021 and up from $14.8 million on June 30, 2022. With this morning’s announcement of the BAT debenture investment of $56.8 million, our cash on a pro forma basis is now above $70 million and working capital as of today is now over $100 million. With that I will now turn the call over to our co-founder and COO, Jared Stanley.

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Jared Stanley : Thank you, Greg. As we stabilize our business to positive cash flow, we focus on growth through market expansion and regulatory hurdles. I’ll briefly update the core initiatives we are executing in these areas. Starting with our Sports vertical, Charlotte’s Web broad spectrum tincture NSF Certified for Sport resulted in our groundbreaking partnership with Major League Baseball, and is a tremendous validator for Charlotte’s Web and for the CBD category in general. From a regulatory perspective, the partnership is helpful in putting Charlotte’s Web at the forefront of the DC push for CBD as a dietary supplement. MLB didn’t wait on the FDA, but chose NSF as the gold standard for now. The NSF for sport certification means that our product is free of 280 banned substances, and it would be highly unlikely to fail a drug test when using our product at label claim.

We educated NSF on CBD using THC study results from 2020 and 2021, and this moved the needle. Our Daily Edge tincture was able to become the first broad spectrum extract NSF Certified for Sport because of our market leading science. We expect to roll out additional products from the Sports line in Q2 and Q3 of 2023. Each product will undergo the same rigorous NSF certification process. We are launching with gummies followed by topicals. And in 2024 we have a robust innovation pipeline focused on beverages. We are working closely with NSF as their topical standards for CBD are currently being established. We applaud NSF for their vision to uplift quality in CBD and unlock these potential products for athletes. The NSF Certified for Sport distinction gives us a competitive advantage in the market.

We now have the playbook and an approved NSF extract ingredient to drive innovation and bring our products to an entirely new consumer base. We are excited to see how this portfolio will play out. I would like to give a brief update on recent announcement of strategic alliances with Canadian category captain, Tilray. This is the first of its kind of agreement for Charlotte’s Web to license its brands, intellectual property and formulations to a trusted partner like Tilray. This will ensure a successful launch of Charlotte’s Web core products made available in the medical and recreational channels in Canada. First, Tilray will be launching tinctures in the medical market with gummies and tinctures to follow in the recreational market. This is expected in 2023 and followed by topicals.

Their leadership has aligned core values to Charlotte’s Web, and we are excited about what this formidable relationship will hold for Canadian consumers. Furthermore, creating the company’s supply chain in Canada before the contemplated introduction of new natural health product regulations, prepares Charlotte’s Web products for availability through traditional pharmacies and mass retail in Canada once such regulations are passed. And finally, this relationship will provide us potential export to other international geographies through Canada, including countries in the European Union. With that, let me transition to Washington. With regards to regulation, our DC strategy is going as planned. We expected 2022 to be the year to establish our presence and ignite H.R. 841 effectively into 2023.

As you may recall, H.R. 841 is the hemp and hemp derived CBD market stabilization act, which if passed, will regulate CBD through the FDA’s new dietary ingredient pathway. Our accomplishments since July of 2022 include the rehiring of Page Biggie, mother of Charlotte, who resurrected her 501C4 called Coalition for Access Now. Page and Charlotte started the CBD category, and there’s no voice more credible in DC than Page’s to represent everyday Americans who are using CBD. Charlotte’s Web is the guiding supporter of the Coalition, which has engaged both Public Affairs Group and Nahigian Strategies, a top lobbying and PR strategy firm to represent our voice in Washington. So far, we have made four trips to DC to meet with congressmen and senators, and we have a fifth trip scheduled this month.

Additionally, we’ve met directly with the co-author of H.R. 841, Congressman Griffith. He has emphasized the interest and intent to reintroducing this legislation in 2023 and getting on the house’s agenda. Our progress has been significant in adding five new co-sponsors to the bill since our engagement in July. The last milestone puts us in a great position to be driving this agenda post January 3rd, when our new representatives take office. The election results this year were anything, but predictable. While it looks like the House and Senate will be controlled by different political parties, we do not see this as a deterrent, in fact, quite the opposite. We’ve not experienced opposition to CBD on either side, and we believe this bipartisan bill will give our divided legislature a clear win.

H.R. 841 is one leg of our strategy that forwards the regulatory landscape for CBD as a CPG company. I would like to give a brief update on another pillar of our botanical wellness strategy, the investigative new drug or IND path through the FDA. We are bullish on landing the regulatory landscape for our CPG business and simply put, we’re not waiting or speculating on what Congress may or may not do as looking forward to further unlock shareholder value in an FDA approved path through the investigational new drug path. Let me give a brief update on IND. As we discussed in our previous earnings call, we are exploring an investigational new drug pathway to seek IND approval from the FDA to advance into clinical trials. This can sound confusing as Charlotte’s Web is a consumer packaged goods or CPG company and not a biotech company.

If you recall, CW submitted a new dietary ingredient notification dossier to the FDA in 2021. The foundational requirements of this dossier are based on robust safety and toxicology studies. The same studies are also required for IND submission for advancement into Phase 1 and Phase 2 human clinical trials. We further stated in the previous earnings call that CW has the intellectual assets to partner with a biotech company, and we were referring specifically to our patented genetics, safety and toxicology studies, and our quality control systems. These assets are second to none in the industry and positioned Charlotte’s Web to meet the requirements to seek an IND and create a separate value proposition to shareholders. Ultimately, Charlotte’s Web is looking to reclaim its birthright in CBD wellness by creating a path that will garner physician advocacy, and bring this company back to truly making medicine again.

I would like to remind all that a foreign company, GW Pharmaceuticals was fast tracked into Phase 2 human clinical trials. At the same time, Charlotte’s Web was launching a CPG company under, back then, the only approved regulatory environment that existed at the time in the United States. This was when CBD was a controlled substance until passage of the Farm Bill in December of 2018. Now we are fully capable and clear to seek the IND drug path with the FDA. We look forward to sharing the ongoing progress with you as we drive this new vertical. This is an exciting time that taps into the company’s pioneering DNA and spirit. With that, I’ll hand the rest of the time over to Jacques.

Jacques Tortoroli: Thanks, Jared. Before wrapping up, I wanted to give you more color on why we see MLB as a game changing partnership and a tipping point for the CBD industry. The big leagues have been talking about CBD for their athletes for the last few years, but didn’t see a path. It wasn’t until MLB with their first mover and safety mindset and Charlotte’s Web with its scientific studies and quality controls came together that that door to professional sports could be unlocked. The credibility that comes from the NSF certification for sports distinction allows us to move into this broad spectrum product portfolio into other important sectors like hospitality, big box, travel, E&Ts, law enforcement, et cetera, including sports adjacencies.

Beyond the exposure in stadium, the impact of professional athletes embracing CBD and frankly, Charlotte’s Web truncates education needed to move consumers from awareness to consideration to purchase. As I said earlier, the earned media since announcing MLB on October 12th, validates our ability to reallocate paid media dollars historically to MLB. Couple of data points. We saw 25% increase in traffic on charlottesweb.com the day of the announcement. We sustained the increase in consumer engagement through social media, clicks on digital ads, and continued press coverage of Charlotte’s Web becoming the official CBD of Major League Baseball. The earned media advertising equivalent of over $20 million continues to grow as the interest in the partnership grows.

Media in the form of national and local broadcast radio, podcasts, local digital out of home and more, yielded millions of impressions. We’ve acquired 1000s of new customer emails into our database and new purchases since the announcement. And those purchases aren’t just buying the sports tinctures, they’re buying across the current product portfolio, a promising sign moving forward. With every MLB marketing execution we’ll continue to widen and deepen the top of the funnel. Now, with 45 million Americans taking CBD, the headwinds of the lack of FDA regulation have caused an influx of bad players selling synthetic compounds as natural cannabinoids. The result is a bifurcated market caught between vape shops and wellness platforms. The passiveness of the FDA in creating a strong regulatory framework to the CBD industry has resulted in opening itself up to bad actors looking to make a quick buck at the expense of consumer safety.

In the interim, the daily edge product is an epic example of self-regulation and certification. This should signal the Washington that it’s time for the FDA to step up and take the lead. The result would be a standardized experience on what constitutes CBD and which products and what companies make the cut. Charlotte’s Web imagines a world where there is a strong CBD regulatory infrastructure supported by transparent education on what CBD is, what it can do, and what it’s not, allowing athletes and consumers to power a freedom to make personal choices on their wellness journey. It’s often said the price of stagnation is more costly than the price to evolve. While we’re evolving and on the tipping point of growth, our financing announced earlier today gives us the capital to thoughtfully invest behind our strategic initiatives following our actions to simplify the business, reduce costs and to position the company to grow cash at these revenue levels.

The MLB partnership uniquely validates CW, our quality, our brand trust and our mission, with a megaphone reaching audiences in relevant ways 12 months a year in a way that we simply couldn’t do on our own. These two game changing deals grabbed the headlines, and deservedly so but our evolution is more than this. We’re advancing CBD as a dietary supplement in DC and leveraging our science and IP to open new verticals. We’ve reorganized Charlotte’s Web rounded in a strategic plan focused on innovation, new channels, expanded distribution, and brand awareness to drive new consumers to our e-commerce platform. To that end, we’re very excited about the new structure of our e-commerce team. We brought on to lead our direct to consumer business.

Mary comes to us from Avon as the Head of our E-commerce Business with a long career at Barnes & Noble as well, helping to create and grow their e commerce platform. As we move into 2023, we continue to best optimize our organization and resources to drive our forward momentum into next year and beyond. Now, the U.S. CBD industry is estimated at nearly $5 billion a year. But we don’t play in the entire space that estimate encompasses. Not all segments are going to survive regulation. Delta 8 is an obvious example. We participate in roughly 60% of the total market in the segments that are sustainable, and that we can win and grow in over the long-term. With our new NSF for Sport, we’re effectively creating a new category for professional sports.

Once we launch beverages and cosmeceuticals, we’ll add another 10% to the overall market to our opportunity. With the addition of potential IND path, we add validation to unlock true value of the hemp plant. We’re in this for the long game, and with this morning’s substantial capital infusion we again set ourselves apart from our competitive set with the right to win. BAT, our founders and MLB now represent our three largest shareholder groups. I look forward to sharing more news with you soon about progress into some of these key channels, both the new business verticals and in regions. With that I’d like to ask the operator to open the call up for questions.

Q&A Session

Operator: Your first question will come from Harrison Vivas of Cowen.

Harrison Vivas: First one for me just on the BAT agreement, congrats on the financing there. Just curious if you could share any specifics around potential for additional strategic overlap beyond the board that BAT is going to have whether it be via best practices sharing or potential to use any of the distribution assets? And secondly, just could you offer some more specifics around how you intend to use that cash? And if there are any restrictions on what you use it for? Thanks.

Jacques Tortoroli: Yeah, Harrison, its Jacq, thanks for the question. So first of all, there are no restrictions on the use of cash from the deal. We intend to use the cash thoughtfully, and choicefully and invest the proceeds as appropriate over time, against the strategic initiatives that we outlined: growing the revenue; continuing to work in DC; and pursue a broader botanical wellness platform. It’s day one of our partnership with BAT. abut we see where they’re going and what their strategy is, and it’s aligned around botanical wellness, and we’re excited about that and what we could do together in the future. But right now, it’s day one. So that’s where we stand today.

Harrison Vivas: Next one for me. It seems like a couple quarters ago, I’m not sure if I’m getting this right. But it seemed like the transition, the consumer transition into those cheaper form factors, like gummies had kind of been stabilizing. Is there a change in that or I guess, how are you seeing that? And maybe if you look out 12 to 18 months, what percentage of your business do you expect to be — of your e-com or your B2C business, do you expect to be in gummies?

Jacques Tortoroli: Yeah, I mean, just let me give you some data. So in for Q3 in B2B, we saw our tincture volume decline about 50%, whereas gummy volumes are up 6%. And so we continue to see that consumer shift. And what we’re really poised to do, Harrison is as we’ve looked at our portfolio, we’ve looked at our SKU formats, and whether they’re in B2B or an e-commerce, it’s pretty clear to us but what we really want to focus on is sort of those lower entry price point formats and sizes in B2B. And then as we see consumers and come into the brand world, transition them into our e-commerce platform to upsize both on price and on formats and have them be loyal consumers into our subscription service as well. You have to believe that inflation is playing some part in this as well.

But we’re continuing to see that shift. And I think in a perfect world, we’d come back to a little bit more of a format, where tinctures aren’t as big as they’ve been, I don’t think that’ll come back. But I think opportunities for us in innovation, particularly in the Sports line, will give the consumers more choice at different price points to enter and continue into the brand well that we have.

Operator: Your next question comes from Scott Fortune of ROTH Capital Partners.

Scott Fortune : Congrats on all the expansion, the distribution in new channels to start. But with that said, in mind here is that flux is to really try and grow the top line in the U.S. alone, and obviously, the negative sequentially last three quarters? And in your remarks, you said the strategic transition from direct sales to direct to the distributor model will take some time to develop. But can you provide a little bit of color on timing now kind of expectations for regaining top-line growth? I mean, I know it’s a priority initiative here, but just kind of your sense of what you have in place, the opportunity can be large in ’23, but kind of the near-term timing of it to really start to inflect?

Jacques Tortoroli: It’s a great question, Scott. Look, typically, these shift from direct customer sales to distributor led route to market, finding a new distributor, sometimes can take six months, if not longer before, they’re actually — you’re actually seeing product and shelf through their pipe. We’ve been able to condense that timeline for sure. The reality is, as I said earlier, we didn’t see really anything in Q3 with that with respect to the shift and route to market strategy. It’ll impact Q4 modestly, and you really start to see the benefit of these new distribution partners and these new distribution channels into retail certainly as we get into ’23 and beyond — and we’re not done, we’re continuing our discussions with a host of other potential distribution partners as well, particularly thinking about new industry verticals where we haven’t participated in yet like hospitality, like travel.

So, the NSF certification is opening up new doors and new verticals for us that we’ll see the benefit from in ’23 and beyond.

Scott Fortune : And just kind of a follow-on, Jacq. I know you did deal with MLB and you’re probably putting a lot of the marketing dollar. But how do you look at your kind of sales and marketing dollar spend to support all these new partnerships that you’re bringing on to help drive growth going forward? Obviously, the announcement of the $58 million investment here will help. But just kind of how can we look at kind of your sales and marketing spend or priority to really drive that top-line growth in support?

Jacques Tortoroli: Well, I’ve said this last time when we talked I think, and we said it, when we had the announcement with MLB, we’re very much shifting our marketing spend from what we spent it on, arguably not very efficiently or effectively to putting that money into MLB. Not only the rights fees, but as I mentioned in my remarks, local activations, radio, podcasting, but really leveraging the microphone that MLB gives us and partnering with them on a media plan to take advantage of our content throughout their platforms and then support that through local activations around games, around the jewel events that we have a right to participate in as a brand. So that’s the focus. New partnerships and distribution, that doesn’t support marketing or you don’t need marketing dollars to do that.

But what it does do is put feet on the street that they pay for to be able to merchandise when they go and call on accounts. And that’s been a big problem for us with the direct to customer way that we were doing B2B in the past is that we don’t have the seat on the street to make sure our products was showing up on shelves, showing up in the right way. And these distributor partners give us that workforce if you will, to be in stores, literally on a day to day basis to make sure our product is restocked and looks great on shelf. In addition to that, we’ll be able to do more in terms of activations, and the vial displays, POS, POP material to really prominent — more prominently put our products in front of consumers. We’re also doing a test with one of our customers to bring our products out from behind the lock in tea cabinets.

And I’m confident that you’ll what we’ll find is that velocities have improved because we’ve removed consumer friction from buying those products. And so, we’re encouraged by all of this, it’s just not showing up in our P&L yet. And over the next year and beyond, we should be seeing the benefit of that in our top line, and then our overall financial performance.

Scott Fortune: And one last quick follow-up, you mentioned — provide a little more color near-term. I mean, you said the softness is kind of executing the transition, right, were going on. But I heard in your comments, you’re seeing a little bit of the consumer challenge inflationary prices. How much of kind of softness is tied to kind of maybe transition versus the consumer side of things right now?

Jacques Tortoroli: Yeah, look, I think there is clearly a shift in the consumer, there has been a shift from the consumer to the tincture format, which is at a high price point into a more affordable price format. So I don’t — that’s hurting our revenue because of the mix, the price, the products mix issue is depressing revenues in that regard. But for me, it’s really more about our execution and some of the things I just mentioned in your last question. We’re This is a year where we’re, we really laid a foundation for the company across up and down the P&L in the organization, in our strategy and resetting to be able to grow as we go forward. And I can’t wait to get to 2023 and beyond at this point.

Operator: Your next question comes from Derek Dley of Canaccord Genuity.

Derek Dley: I was just wondering on the pricing side, given the price compression or at least the consumer shift towards the more of the value end products, are you starting to see some of the smaller — I guess they’re all smaller, but some of the competitors in this space start to go away just given those challenges that they probably can’t — they probably can’t handle them?

Jacques Tortoroli: Yeah, well, great question Derek. But, in our remarks, I think in Greg’s remarks we talked about, in food/drug/mass and in the natural channel, the shrinkage of facings on shelf in store in some of those customers and in those channels, and that’s taking products that don’t turn off the shelf. So our competitive set is losing shelf space at a much higher rate than we are. We believe that, when you say — and in my experience as well is that, in interesting times their consumers tend to flock to quality and what we’ve really — through the MLB relationship through the NSF certification, it’s another stamp of quality. Why we deserve to be the premium price product in the category, and that’s only going to be helpful to us as we go forward.

So we do expect a contraction of competitors. And quite frankly, when you look at the market, the single biggest increase in the market is in vape shops and gas stations, and we’re never going to play there. That’s not where Charlotte’s Web should be, is, and will ever be. And so when regulation happens, which is what Jared was alluding to earlier, that all goes away, that all goes away, the total market may contract. But that’s okay, because we’ll just have a bigger share of the true marketplace for CBD behind wellness, behind quality and behind the amplification of awareness that MLB gives us as we go forward. So I’m super excited about the future. I think this will all shake out hopefully next year. But there’s one brand that deserves to stand, and it will, and that’s Charlotte’s Web.

And as we build out our portfolio of international markets, again, in a really smart, efficient financial way, that’s going to provide some additional top-line growth over time as well. So, I hope that answers your question.

Derek Dley: And then just on the shift that you’ve seen, and continue to see on tinctures towards gummies, is there anything you can do to drive a higher margin within that gummy product line? And it looks like it’s going to continue to be a bigger and bigger portion of your revenue?

Jacques Tortoroli: I mean, clearly at the moment, we have on gummies. But Jared, can fill you in a little bit of color there.

Jared Stanley: Look, actually, it’s a great question. What we’re currently focusing on is transitioning our current gummies to certified organic, our legacy gummies, we call them: the sleep; calm; and recovery. We’ve also identified a that has lower COGS and we expect those COGS to flow through to a higher gross margin in early 2020 — sorry, to mid-2023. And keep in mind, the legacy gummy sleep alone, calm recovery. These make up the lion’s share of Charlotte’s Web’s revenue in the gummy portfolio.

Derek Dley: And would there ever be a scenario where you would — instead of using , you would look to do this in house?

Jared Stanley: Look, I mean, that’s a good question. And it’s certainly of interest to us. Setting up gummy manufacturing is very expensive, the right equipment, it adds a lot of complexities. We have the infrastructure to do it, and we’ll have to weigh that option over the coming years.

Jacques Tortoroli: The other thing I’d say is as we return to growth when we return to growth, that’ll just give us incremental leverage as we renew arrangements and continually looking for alternative options that don’t compromise quality but can drive down the price of our COGS.

Operator: Our next question comes from Pablo Zunk of Cantor Fitzgerald.

Pablo Zunk: Look on the political side, just a few questions around H.R. 841, right. So for example, how much under the radar you said, people talking about safe out there, but not about — not as much as how H.R. 841 in my opinion. Is there any potential for some of the key components of H.R. 841 to go into safe plots in the lame duck session? Can you talk about how bipartisan is it? And, in terms of the senators you talked about, Senator McConnell they’ve ever made any comments around H.R. 841 or make you wait to include in the future Farm Bill revision. So now it has a lot of questions Jared but if you can just expand on HR-841? Thanks.

Jacques Tortoroli: Yeah, I’ll let Jared answer. He’s closest to it, Pablo.

Jared Stanley: Let me give you some color. First of all the election results, I think we all thought that republicans were going to take both the House and the Senate. There’s a very divided, we have a very split Congress right now. And with a split Congress, when we’ve been through this was safe plus cannabis has the — it’s still a conflict. It doesn’t have the, it has opposition, specifically on the Republican side. We saw the Democrats make some really awesome announcements that would push it forward, it could have been just a push to bring in voters looks like that push probably worked. But on 841, we just have no opposition. So we believe it’s better. Could it go into the lame duck, possibly, but we believe it’s better as a standalone, as opposed to coming into cannabis and having the opposition that cannabis still has, which CBD we just haven’t had the opposition.

Pablo Zunk: And I don’t know if you can talk in terms of senators, can you mention senators and publicly supported HR-841? I’m not aware of, for example, Senator McConnell supporting it, but can you talk about that?

Jared Stanley: Yeah, good question. I won’t say any of their names but we are actively working with senators to be drafting the Companion Bill to H.R. 841 for the Senate, which is our next step. So that’s been an awesome progress, but it’s too early to be coming out with their names.

Pablo Zunk: And then, on the distribution front, Jacq, if you could expand, you talked about 22% down in terms of points of sale, Charlotte’s Web were only down 14%. What type of channels are we talking about? I mean, is it generalize, FDM, natural, if you’re going to be more specific? And then, in terms of all the announcements, you’ve made major league and all those other things, when do you think we can see Walmart or Costco come through or are they going to wait for HR-841 pretty much? Thanks.

Jacques Tortoroli: Yeah. Great, Pablo. Look we’ve touched on this before, we were going to be having meetings with the kind of the retailers you’ve talked about two reasons, as we said, MLB and the NSF certification for sports products, for us not only opens up sports, if you will, right, but it opens up adjacencies in other industry verticals that heretofore haven’t wanted to take CBD, including the big box retailers. So, our position is simply, if it’s good enough for MLB it should be good enough for you and why wouldn’t you stock our products on your shelves. So those conversations will be happening we’re getting through sort of the holidays here but into early next year. Those are exactly the conversation we want to be having, which is, why not now and not wait for FDA approval.

So we’ll see, in terms of the share of shelf and losing facings. As we said, it’s in the FDM channel, it’s in the national. And the good news for us is, some of those facings that, these other brands are going away, that the stores are no longer stocking. Gives us an opportunity with the sports line, when we launch middle of next year, to take that incremental shelf for the sports line and put it side by side with our existing portfolio. And the beauty of the sports product is nobody can compete with us. There is no competitive set. And therefore, we determine the size, we determine the value and we have that date, if you’d like Monopoly for a period of time, and it’s on us to take advantage of that as we talk to customers going forward.

Pablo Zunk: Just a quick follow-up. And I know that the experiences are not comparable. But one of the questions I’ve received from investors was the UFC Aurora deal that in the end didn’t amount too much. Why is this different? I think I know the answer to that question. But maybe you can share in this public forum?

Jacques Tortoroli: So it’s a great question and we’ve talked about this, and I’ve talked about it a lot. This is not a pure play rights deal. The MLB deal is a strategic partnership, I mean, they have a right to participate in revenues, after certain threshold is reached on the co-branded product. They are a shareholder of the company and they have absolute alignment on what our products do and why they’re — they’ve opened up to CBD and our products. And so, it’s not a rights deal, where we cut a check and see you three years from now when it’s time to renew. This is an act of participation and partnership with MLB, that is unlike any other deal and I’m not going to do a right deal. I don’t believe in those, and they don’t return on the investment.

And this is a way, this is a type of deal that we wanted to do. They agreed they saw the upside and the value that we could create together for Charlotte’s Web and then as a shareholder. And more importantly, the benefit that they believe this will do for their, their players and up and down the ranks of professional baseball. So it’s a very different deal and it’s a very strategic partnership. And I’m excited by it, and it’s the types of deals that the only type of deal that I do have of this nature.

Pablo Zunk: And one last one, if I may ask, intensely discussions with BAT. Why not an equity stake, I mean, was that considered, I mean, obviously, BAT to get 19.9% stake in Organigram. Here is a convertible debenture. I don’t know how much you can share about that. But I’m trying to understand why they went that route. And although you partly touched on it, in the near-term besides the cash inflow, what are the other benefits of working with BAT, they’re going to be distribution opportunities overseas or in the U.S., research, if you can to expand on that.

Jacques Tortoroli: Well, clearly, I’ll let Jared touched on this a little bit. But clearly their interest in science and in terms of botanical wellness is interesting for us. Clearly, they have a strategy that they’ve articulated and I don’t want to speak for BAT. But clearly they’re interested in transforming to a better tomorrow as they say, is an integral part of why they’ve done this transaction and why they believe in Charlotte’s Web because of our IP, and because of, you know, the innovation that we can drive over time. Distribution, we’ll see. Over time again, as regulations open up in different jurisdictions around the world, I mean, they’re in over 140 countries, I think, if I remember correctly. So, we’ll see in terms of commercial opportunities, but right now, it’s really about — they felt that this was the best vehicle in which to invest in the company, and again, I don’t want to speak for them, but we’re excited that they’ve chosen us and we’re excited with the structure.

And we’re excited about the liquidity. We’re going to be really continue to be prudent stewards of our newfound cash and be selective in what we spend against and invest against to get this company back to growth as we go forward.

Operator: Your next question comes from Chris Damas of BCMI Research.

Chris Damas: Yeah, thanks for taking my question. Pablo’s question kind of covered most of it. But just for argument’s sake, the MLB can’t force a framework on these of rosters to use your product, right? I mean, he wants to use BioSteel, he can use it. So is this a symbolic deal? Or doesn’t have any kind of attachments to it?

Jacques Tortoroli: Well, no, I don’t understand the question. But the deal with MLB clearly is one where the teams and the team ownership are aware and informed obviously, the trainers, the physicians, players themselves. So, yeah, I mean, I think the idea is that, you will see Charlotte’s Web used by the teams and by players as we go forward, so it’s not symbolic. That being said, the team’s own the rights to their own stadiums. MLB owns the rights to the inventory in the jewel events. And that’s why we’re participating with MLB in the jewel events, and then activating locally around the games during the regular season in different cities that are of interest to us, but it’s not symbolic. I mean, they believe in what we said, which is the — you need the balance of wealth — health of mind to be in balance with the health physically.

And they’re committed to doing that. They’re committed to wellness options for their players that give them the highest degree of comfort you can that they won’t fail a drug test for banned substances.

Jared Stanley: Yeah. And I’d add a little bit color to that, while the teams can do these types of deals, it still has to go through MLB which chose the NSF certification process. So any products that those teams would be recommended would have to be an NSF product and we happen to have the exclusive official CBD of Major League Baseball. So it does certainly put us to a competitive advantage and certainly a strong head start.

Operator: Ladies and gentlemen, that is all the time we have for questions this morning. I would now like to turn the conference back to Cory Pala for any closing remarks.

Cory Pala: Well, thank you for joining us everybody. That was a very long call. Appreciate your time. We’ve had some tough innings in 2022 but we’ve also had some recent singles and we’ve loaded the bases. So we’re all hoping for — we’re looking to hit a home run in 2023-’04, and we’ve got our eye on the ball.

Operator: Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask that you please disconnect your lines.