Charlotte’s Web Holdings, Inc. (PNK:CWBHF) Q1 2023 Earnings Call Transcript May 12, 2023

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

Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte Web Holdings, Inc. 2023 First Quarter Conference Call. At this time, all lines are in a listen-only mode. [Operator Instructions] This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Cory Pala, Director of Investor Relations. Please go ahead.

Cory Pala: Thank you, Sergio. Good morning, everyone. Thank you for joining us for our 2023 first quarter earnings conference call for Charlotte’s Web Holdings, Inc. Our earnings press release was issued this morning and posted on our website along with our financial statements. Our 10-Q has been filed on SEDAR and EDGAR. Leading our call this morning is CEO, Jacques Tortoroli, CFO, Jessica Saxon and COO, Jared Stanley. Jacques and myself are each join from remote locations today. On this morning’s call, we will review our Q1 financial results and provide some color on some recent strategic initiatives. We will take questions from analysts at the end of our prepared remarks. A replay of this call will be available through the next week, accessible for the details provided in our earnings press release and a webcast replay of this call will be available for an extended period accessible through the IR section of our website.

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, uncertainties and factors, which could cause actual future results or company performance to differ materially from implied expectations. Risks surrounding such forward-looking statements are all outlined in detail within the Company’s regulatory filings. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which does not have any standardized meaning prescribed by GAAP. Please refer to the earnings release that we filed this morning for a description of adjusted EBITDA as well as a reconciliation to the comparable GAAP financial measures.

With that, I’ll now hand over the call to Charlotte’s Web Chief Executive Officer, Jacques Tortoroli. Jacques?

Jacques Tortoroli: Thank you for joining our call. And thank you, Core, and happy Friday. This morning, we reported Q1 revenue of $17 million, down 12% with volumes down 5% versus the prior year, modestly below our expectations. Jessica will review selected financials momentarily, but I wanted to ground this in the market and then give you an update on the progress in our strategic initiatives. Looking at the CBD category. The CBD market is approximately $4.4 billion according to Brightfield. The top 20 brands share 17% with Charlotte’s Web at number one. While the one FDA approved cannabinoid drug represents 16% share. That leaves over 60% of the market or roughly $3 billion to some 2,000 brands, by the way, down from over 3,500 brands in 2021.

Therein lies the size of the prize before regulation, which we shouldn’t lose sight of as we discuss each quarter. Charlotte’s Web is number one with 3% share of the total market and 6% share, if you exclude the channels, formats and pharma sectors we don’t today participate in. We are number one in brand metrics like awareness and loyalty, number one in retail. Retail represents 25% of the total market, and we have category-leading shelf velocities. In e-commerce, which is 35% of the market, we ranked number one with less than 4% share. Finally, given the high fragmentation of very small brands in the market, we expect to see a significant culling of the number of competitors to continue without regulation in Washington, D.C., and certainly when regulation happens.

Our brand equity, full spectrum, NSF-certified broad-spectrum products, innovation pipeline and our IP and the opportunity to expand our consumer reach and relevance to recreate starting later this summer, our partnership with MLB and our balance sheet uniquely position us to grow our number one share over time. In our recently announced partnership to enter into an IND path for a botanical drug with the FDA opens the potential longer term for us to participate in a substantial part of the market that we don’t do today. We previously framed our strategy with you, namely returning to growth, winning in D.C. and unlocking the value of Charlotte’s Web IT and Botanical wellness. Let me briefly update you on some significant progress in the quarter on each pillar.

First, returning to growth. Last month, we announced the launch of ReCreate a new Botanical lifestyle brand designed for young and attractive active wellness seekers and sports and other valuable cultural verticals. ReCreate capitalizes on the growing trend of CBD-infused functional botanical wellness formulations for self-care and mental well-being, certainly among millennials and Gen Zers who make up approximately 47% of this multibillion-dollar CBD market. They are also among the most active daily users of CBD when they wake up throughout the day across different occasions, making this a very important demographic for broad-spectrum CBD. Launching this new need states driven brand with new formulations across multiple formats coincides with the first year of our MLB partnership and packaging that bears the iconic MLB logo with NSF certification.

We launched Recreate Daily Edge Tincture last month exclusively available on our e-commerce site, and we’ll begin rolling out new formats, starting with a line of need-state gummies, which will be available on our site in the summer and in retail during the second half of this year. ReCreate products have secured early interest from leading retailers, including Fresh Thyme, the Vitamin Shoppe and others as well as Southern Glazer’s Wine and Spirits. We recently appointed Andrew Shafer, our Chief Marketing Officer, leading our cross-platform activations with MLB in the sports vertical to ReCreate to drive online traffic and sales. Andrew comes to us from two decades of Verizon leading brand strategy, digital experience, social marketing, while benefiting as well from his work with professional sports partnerships.

Finally, we recently announced a partnership with Philips Pet Food and Supplies, the largest pet specialty channel distributor servicing over 14,000 retail doors across the country. And by the way, Pet is a $400 million channel, but today, less than 10% of our revenues in the quarter. Second pillar of our strategy is regulatory, in Washington, D.C. and increasingly at the state level, where we’re actively progressing both. Jared has taken a critical leadership role in these initiatives, and we’ll speak more to that in his remarks. We also activated the third strategic pillar, unlocking the value of the Company’s in IP and the botanical wellness. This means formally pursuing an IND pathway, seeking an FDA-approved botanical drug based on our proprietary cultivars through the right partnerships and structures.

Jessica and Jared will each touch on this in their remarks. So with that, I’ll now pass the call over to our CFO, Jessica Saxon.

Jessica Saxton: Thank you, Jacq. Our financial results and adjusted EBITDA are reviewed in detail in our earnings release and 10-Q. As such, I will not go through all of them on this call. However, I’m happy to answer any specific questions you have in our Q&A session. Net revenues of 17 million declined 12% compared to last year, with B2B down 8% and e-commerce down 14%. However, our unit volumes only declined 6%. Consumer shifts from tincture to other formats principally gummies continues for the category and for us specifically. Tinctures and gummies are number one and number two formats in the market with 19% and 15% share respectively. This continued shift represents a strain on revenues, given the price points of tinctures versus gummies.

We expect this to continue until the growth in gummy volumes more than offsets the drop in tincture volumes. In the quarter, this mix shift resulted in tincture revenues declining 5 points to 27% of our revenue mix with gummies up 7 points to 43% of our revenue mix. In the quarter, gummy volumes were up high single digits year-over-year. Charlotte’s Web operates the largest e-commerce business in the industry. Our e-commerce business generates more than 66% of our revenues with attractive gross margins. B2C revenue of 11.3 million was 14.2% lower on a year-over-year basis in Q1 as we continue to experience lower traffic to our site. Increasing top of the funnel by educating and attracting new consumers into CBD and Charlotte’s Web remains the number one priority and turning around the Company’s overall revenue trajectory.

As we’ve talked about previously, we believe the MLB partnership as we go through the seasons and activate against MLB jewel events, leveraging the League’s enormous fan base and media platforms will be an unlocked against this business priority, as well ReCreate our new lifestyles brand, which is both attractively priced and carries the MLB logo on packaging. Our online conversion rates remain strong at 11.7%. Our subscribers account for approximately 40% of revenues, showcasing that when we bring people into our ecosystem, they go through their consumer journey from awareness to purchase, to ultimately becoming subscribers, representing significant lifetime value. We are prioritizing growing traffic to our web store and have a cross-functional team working on improving the user experience on our site.

In the food drug mass retail channel, Q1 sales were 9.3% lower year-over-year, outperforming the total category, which was down 10.1%. As a result, we held 18.7% share in retail dollar volume and the number one channel position. In FDM, we increased the number of retail doors, while we saw a decrease in the number of doors for the overall category. This speaks to our brand strength. In addition, our ARP was up 7% in SPM, while the category was down 15%. And we hold four of the top 10 SKUs in the channel. In the natural channel Q1 sales were 12.8% lower year-over-year, outperforming the category again which was down 13.5%. I want to spend a minute on the natural channel. What we saw in the last quarter was interesting. First, we grew doors with existing customers within the quarter and about two times the category rate.

However, while more doors are selling Charlotte’s Web and CBD, retailers are also reducing the total facings on shelf and the number of SKUs and formats carried, principally taking gummies and reducing tinctures. For us, the number of doors carrying our gummies grew ahead of the category, while the number of doors carrying our tinctures declined slightly higher than the category. Net despite significant incremental penetration in the quarter given the mix revenues were negatively impacted. Given our leadership in the category and with the highest velocities, that bodes well for the longer term opportunity for Charlotte’s Web to grab an incremental share of shelf. We expect to gain further market share pending customer receptivity for soon to launch ReCreate gummies and positively impact revenues when the rate of growth and other formats, particularly gummies eclipses the decline and tinctures.

Moving to SG&A, our first quarter SG&A was 14% lower year-over-year, despite the addition of the MLB rights fee amortization as well as a $1 million noncash amortization expense from the convertible debenture we completed with VAT last fall. Going forward each quarter will include an amortization expense in our SG&A related to the MLB asset, reflecting this valuable three year partnership. Notwithstanding the additional MLB expense, we expect SG&A for the full year of 2023 to be comparable to 2022. Excluding these amortization items, our SG&A expenses in Q1 were approximately 14.7 million, which is a decrease of more than 20% year-over-year. Our material reduction and operating expenses significantly reduces our cash burn to a manageable level.

Net cash used for operations was 6.1 million in Q1 2023 versus 4.7 million last year, with the increase entirely attributable to the initial quarterly rights fee payment to MLB. With our $61 million cash position at the end of the first quarter, we are in a stable financial position moving forward, which is also an advantage against the bulk of our competitive set in the current environment. Jac discussed earlier the collaboration with AJNA BioSciences and BAT to pursue a botanical drug. I wanted to give a little bit more insight into the rationale of the structure and the benefits for Charlotte’s Web and our shareholders. On April 6th, we announced this collaboration with BAT and AJNA with the formation of the DeFloria which each party is contributing.

Charlotte’s Web is contributing existing studies and a license permitting the use of certain proprietary hemp intellectual property, including clinical and consumer data. AJNA is contributing laboratory provisioning, regulatory services, and IND clinical expertise, such as Dr. Orrin Devinsky. Lastly, BAT is contributing $10 million to fund phase 1 of the project which is being fully managed by AJNA. Financially, the funding from BAT and other potential third parties reduces capital risk for Charlotte’s Web. However, we maintain the opportunity to participate in future funding rounds, though not obligated. I will now turn the call over to co-founder and COO, Jared Stanley.

Jared Stanley: Thank you, Jessica. Before getting into regulatory let me give a brief update on our progress with our partner Tilray in Canada. We are progressing on tinctures, topical, capsules and gummy formats and on track to launch tinctures late this quarter as we await Health Canada approvals. Next, we are focusing our attention on topicals and capsules with gummies this final phase. Our gummy formulations combined with Health Canada requirements will take more time. For this reason we want to ensure we bring other great products to market in a timely manner while ensuring we launch our gummy SKUs with confidence and consistency to what is produced in the U.S. Let me give you an update on the regulatory front starting with the state level.

It’s been 10 years since CBD was introduced to American consumers as a dietary supplement choice. It has been nearly five years since the passage of the 2018 Farm Bill. Since then, the lack of FDA guidance has four states to step in specifically to address the recent concerns of hemp derived Delta-8 THC and other intoxicating hemp cannabinoids. We have and will continue to educate legislators in this process to ensure that consumer access to therapeutic full-spectrum CBD is preserved while regulating intoxicating compounds like Delta-8 THC. We have been present in states like Virginia, Florida and Colorado where our voices were heard in Charlotte’s Web full spectrum products will continue to be accessible to consumers. A few states have implemented regulatory requirements that impact the sale of non-intoxicating CBD products and we will take appropriate steps through the legislative process.

While this process is coming to an end in 2023, this will be an ongoing focus of the Company. On the federal front, as stated in previous earnings, we are seeing more come together in the last month than we have in years in DC to highlight impactful events. FDA’s position in January state of the need for a new regulatory lane for CBD and their commitment to work with Congress on a new path, we responded by supporting Congress and compiling industry safety and toxicology data to address the FDA’s concerns. HR-841 was reintroduced in the 118th Congress now as H.R.1629. This shows the intent of Congress to regulate CBD as a dietary supplement. Furthermore, Congressman Jamie Comer sent a letter to the FDA investigating the agency’s failure to regulate CBD as a dietary supplement.

Considering our engagement with Congressman Griffith’s staff and the letter sent by Congressman Comer, it is clear Congress is holding their position to regulate CBD as a dietary supplement. We have established the foundation to support Griffith through coalition for access now, a political consumer advocacy 501(c)(4) we support. Additionally, we are addressing the FDA’s concerned over the safety of CBD, a uniting industry tox studies and sharing the reports with Congress. Moreover, we engaged an objective firm to bring the industry data together to recommend a safe daily use of CBD based on science. We are also actively participating in and supporting the industry coming together under one united strategy to progress the dietary supplement path for CBD.

This does not mean we will find a one size fits all approach for every CBD provider. It means the industry is embracing the actuality that a set of standards must be met to address the FDA’s concerns. Our goal is to embolden Congress with the confidence and credibility needed to land a favorable market for CBD. At a minimum, this will require amending the Griffith Bill through the legislative process with aligned industry stakeholders to ensure CBD products are standardized across labeling and warning statements, accurate testings protections against false claims and GMP standards and facilities registered with the FDA. Our journey began by amplifying the consumers’ voice through our support of coalition for access now, this served as the cornerstone of our strategy in Washington DC.

Now, our focus expands to encompass the entire industry. Recognizing the crucial collaboration between industry and consumer voices, it is essential that we synchronize our efforts to advance the Griffith Bill this year. With these vital elements converging, I have full confidence in the progress we will achieve. However, we’re simply not waiting for the FDA to act, but are driving the destiny of our business. The recent announcement of our biotech partnership with AJNA BioSciences and BAT is a testament to this commitment we have made to shareholders. DeFloria is the name of the entity created to hold the IP and investigational new drug asset in the third leg of our business strategy with botanical drug path. It’s critical to understand the difference between a botanical drug and a traditional pharmaceutical to realize the vast market potential.

A botanical drug refers to a medication that is derived from natural plant sources. It is developed, formulated and standardized to contain specific active ingredients or mixtures of plant-based substances. They’re not isolated and synthesized like traditional single compound pharmaceuticals, yet they hold the same requirements for safety, quality and efficacy for pharmaceutical use. The development of botanical drugs involves rigorous scientific research, clinical trials and adherence to established guidelines to demonstrate their effectiveness and safety for treating specific medical conditions. Botanical drugs are regulated and approved by the FDA. Botanical drug guidance was introduced in 2004 and expanded in 2017. Combining this with CBD being removed from the Controlled Substances Act in the 2018 Farm Bill enables this path to create an entirely new pharmaceutical category for full-spectrum CBD.

This is the logic behind our IP investment into DeFloria. The joint venture has an amazing team of senior drug experts led by AJNA’s Chief Medical Adviser, Dr. Orrin Devinsky, and recently appointed Chief Scientific Officer of Charlotte’s Web, a 21 year cannabinoid researcher Marcel Bonn-Miller. The team has already made significant strides in the drug development process. AJNA has engaged with the FDA on behalf of DeFloria and completed its first pre-IND meeting to ensure the partnership meet the administration’s botanical drug guidance. This meeting provided valuable agency feedback to inform DeFloria’s clinical strategy and trial roadmap. We are continuing preclinical and commencing phase 1 trials this summer. And we believe the venture has enough seed funding from BAT to complete the investigational new drug application and the phase 1 clinical trials.

I’ll now hand the call back over to Jac.

Jacques Tortoroli: Thanks, Jared. We continue to execute in our three-pillar strategy of returning to growth, winning in D.C. and unlocking the value of IP in botanical wellness. We’re confident about our strategic moves and the long-term view of the business. However, in the short-term, finding a constructive regulatory outcome or optimism remains reserved, yet and stepping back for a moment, we didn’t grow revenues in the quarter however slow the rate of declines at 12% in revenues and 5% in volumes. There are signs of momentum, which should not let be drowned out. We clearly nearly double the category growth in expanding doors in the natural channel. We grew distribution double digits in FDM, while the category was down mid-single digits.

Our average retail price in FDM is up single digits. While the category pricing is down double digits, indicating the strength in our brand equity, while ineffective brands will not turn at any price. A B2B revenue growth is being muted by mix from tinctures to gummies. However, this will pass and year-over-year growth will return particularly with our pending new ReCreate gummies spring incremental SKU sales, it will help grow the traction while bringing new customers into our brand worlds and e-com. We’re working on improving the user experience on our e-com platform. We have a cost base and control. We’re making progress on regulatory of both the federal and state levels. MLB for us kicks off in the second half of the year starting with the All-Star game in Seattle in July.

And we have the balance sheet to win. I want to make sure we’re sharing a balanced view of where we are and where we’re heading, and I’ll turn the call back over to Cory.

Cory Pala: Thank you. Sergio, can we open the call to questions?

Q&A Session

Operator: [Operator Instructions] Your first question comes from Scott Fortune from ROTH MKM.

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

Operator: There are no further questions at this time. You may proceed.

Jacques Tortoroli: Well, I’d like to thank everybody for participating in our first quarter call, and we look forward to speaking to you again after our second quarter results in August. Thank you.

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