(TSX: CWEB) (OTCQX: CWBHF), Charlotte’s Web Holdings, Inc. (“Charlotte’s Web” or the “Company”), the market leader in full spectrum hemp extract wellness products, today reported financial results for the second quarter ended June 30, 2023.
Regulatory Update
During the second quarter, the U.S. Food and Drug Administration (“FDA”) committed to “work at speed” with Congress to resolve a regulatory pathway for hemp-derived CBD. Recent progress has been encouraging surrounding The Hemp Derived Consumer Protection and Market Stabilization Act of 2023, (bill H.R. 1629) which aims to regulate hemp extract products under the dietary supplement regulatory framework. Charlotte’s Web and industry peers have compiled and shared safety and toxicology data with Congress to address concerns raised by the FDA. On July 27th, the U.S. House Oversight and Accountability Subcommittee on Health Care and Financial Services held a hearing on the FDA’s failure to regulate hemp-derived CBD products since the passing of the 2018 Farm Bill. An RFI (Request for Information) was made public immediately after the hearing by the Energy and Commerce Committee, with a deadline of August 18th for the CBD industry participants to engage and support the future regulatory landscape of the category. Charlotte’s Web is actively supporting work towards an aligned industry voice coming back to Congress.
“Executing on one of our stated strategic pillars, ‘Winning in Washington DC’, Charlotte’s Web is pleased to be a part of the influential collaboration among consumers and industry stakeholders under a united strategy that is proactively engaged with Congress to support the regulation of hemp CBD as a dietary supplement,” said Jared Stanley, Chief Operating Officer. “Additionally, in July, Coalition for Access Now (“CAN”), a 501-c4 political non-profit organization, founded and led by Paige Figi, announced a partnership with the U.S. Pain Foundation, to further advocate for the passage of CBD products to be regulated as a dietary supplement. CAN also has other influential groups such as the American Legion, the nation’s largest veteran organization, that has expressed support for CAN’s efforts. These partnerships acknowledge the benefits of CBD and the urgency for Congress to pass legislation to ensure consumer access to safe and accurately labeled products for the millions of Americans who use CBD daily.”
Business Review
Charlotte’s Web progressed on its stated strategic pillars: winning in Washington DC, returning to growth, and expanding into botanical wellness.
“Executing on our strategic pillar for growth, in the second quarter, we launched ReCreate™ by Charlotte’s Web, a new broad-spectrum CBD brand focused on cultural lifestyles for Millennials and GenZers who make up approximately half of the multi-billion-dollar CBD market1,” said Jacques Tortoroli, Chief Executive Officer of Charlotte’s Web. “These groups are anticipated to become the largest consumer group by 20262 and often view sports and fitness as a form of self-care.”
ReCreate is NSF Certified for Sport® and is the official CBD of Major League Baseball© (“MLB”) and Angel City Football Club. In July, the Company further cemented its leading position in professional sports by becoming the official CBD partner of the Premier Lacrosse League. Professional sports leagues raise brand awareness and relevance to their audiences, fans, players, and teams, which are ReCreate’s target consumers.
“This exposure is particularly important for our e-commerce channel where increased traffic and sessions to www.CharlottesWeb.com and www.ReCreateYou.com are our highest priorities,” explained Mr. Tortoroli. “ReCreate products are available on our webstore, and we are launching the portfolio across select retail customers later this year, including Vitamin Shoppe, Fresh Thyme, and Stark International among others – with more to come over time.”
To drive future growth in the retail channel, Charlotte’s Web achieved category-leading All Commodity Volume (ACV) distribution gains within the Natural Products Retail channel over the first six months of 2023. In the U.S., Charlotte’s Web holds the number one market share position in overall retail and e-commerce channels per Nielsen Company (US), LLC, SPINS, LLC/IRI, and The Brightfield Group. In May 2023, the Company’s distribution was further expanded in pet retail through a new partnership with Phillips Pet Food & Supplies, America’s largest distributor in the pet specialty retail channel, covering more than 6,000 retailers, representing more than 14,000 retail locations.
“We have a robust pipeline of innovation-to-market products that respond to consumer needs with new formulations, formats, and packaging, leveraging our intellectual property and leading science in minor cannabinoids and botanical wellness. We launched ReCreate gummies on July 11th on our new website www.ReCreateYou.com, which directly integrates into our current e-commerce platform,” said Mr. Tortoroli.
“Lastly, in May, we began an initiative to insource the production of topical products, leveraging our Louisville facility and Operations team, while driving down costs.”
Charlotte’s Web also progressed on its third strategic pillar, expanding into broader Botanical Wellness. On April 6, 2023, Charlotte’s Web announced (Press Release) the formation of DeFloria LLC, with a subsidiary of British American Tobacco PLC (LSE: BATS and NYSE: BTI), and AJNA BioSciences PBC, a botanical drug development company. DeFloria was established to pursue a botanical IND through the FDA drug development pathway for a botanical drug to target a neurological condition. In August, DeFloria received Ethics Committee approval to commence a phase 1 clinical trial in Australia.
“We continue to believe we are deploying the right strategies and are confident in our long-term growth outlook; however, we have not yet returned to revenue growth year-over-year, although B2B was essentially flat year-over-year in Q2. We maintain our market leading position which speaks to the overall CBD sector remaining challenged,” added Mr. Tortoroli.
Financial Review
The following table sets forth selected financial information for the periods indicated.
| Three Months Ended, June 30, | ||||
| U.S. $ millions, except per share data | 2023 | 2022 | ||
| Revenue | $16.0 | $18.9 | ||
| Cost of goods sold | 7.1 | 9.6 | ||
| Gross profit | 8.9 | 9.3 | ||
| Selling, general and administrative expenses | 19.6 | 17.3 | ||
| Operating loss | (10.7) | (7.9) | ||
| Gain on investment in unconsolidated entity | 10.7 | – | ||
| Change in fair value of financial instruments and other | 4.2 | – | ||
| Other income, net | (1.4) | 0.1 | ||
| Net income (loss) | $2.8 | $(7.9) | ||
| Net income (loss) per common share, basic and diluted | $0.02 | $(0.05) |
Consolidated net revenue for the second quarter ended June 30, 2023, was $16.0 million, a decrease from $18.9 million in the second quarter of 2022. The Company believes that continued positive legislative progress in Washington DC for the regulation of CBD will increase consumer interest and confidence as well as unlock incremental customer opportunities.
Gross profit was $8.9 million, or 55.7% of revenue, as compared to gross profit of $9.3 million, or 49.4% of revenue, in the second quarter of 2022. The improvement was primarily due to higher inventory provisions recorded in Q2 2022.
| Three Months Ended | |||||
| June 30, | |||||
| 2023 | 2022 | ||||
| Total Revenue – U.S. $ millions | $16.0 | $18.9 | |||
| Direct-to-consumer (“DTC”) | $10.7 | $13.3 | |||
| Business-to-business (“B2B”) | $5.3 | $5.6 |
Direct-to-consumer (“DTC”) net revenue through the Company’s webstore was $10.7 million, as compared to $13.3 million in Q2 2022. E-commerce sales were negatively impacted by aggressive competitive online pricing and lower traffic to the Company’s webstore. Charlotte’s Web holds the number one market share position across e-commerce, which is the largest purchase channel for CBD according to the Brightfield Group. The Company continues to invest in this significant category, including a new platform to improve the consumer experience.
Business-to-business (“B2B”) retail net revenue was $5.3 million, as compared to $5.6 million in Q2 2022. Lower unit sales to existing retail customers were substantially offset by retail distribution gains achieved in the first six months of 2023.
SG&A Expenses
Total selling, general and administrative (“SG&A”) expenses in the quarter were $19.6 million, a 13.7% increase from $17.3 million in Q2 2022. The increase reflects the timing of marketing expenses and includes the amortization of the MLB license and media rights assets of $2.1 million, which were not present in the comparable period. Excluding amortization, SG&A increased 1.7% year-over-year. SG&A expenses in the six months ended June 30th were comparable at approximately $37.1 million in 2023 and $37.6 million in 2022, although the prior year period did not include expenses related to the MLB partnership.
Net Income and Adjusted EBITDA
Net income benefited from non-cash gains during the quarter, including a $4.2 million gain in fair value of the Company’s derivative instruments, and a $10.7 million gain on a non-cash investment in DeFloria. These gains offset the operating loss and interest expense, resulting in net income of $2.8 million, or $0.02 per share basic and diluted, for the second quarter of 2023. This was an improvement versus a net loss of $7.9 million, or ($0.05) per share basic and diluted, in Q2 2022.
Adjusted EBITDA3 loss for the second quarter of 2023 was $7.1 million, compared to an Adjusted EBITDA loss of $5.4 million in the second quarter of 2022.
Balance Sheet and Cash Flow
Net cash provided from operations, for the three months ended June 30, 2023, was $1.0 million as compared to $0.3 million in Q2 2022. Additionally, the second quarter of 2023 included a rights fee payment to MLB, which did not occur in the prior year period.
“We reported positive cash flow in the second quarter, including collecting our $4.2 million IRS Employee Retention Credit as well as prudent expense management, partially offset by MLB quarterly Rights payment of $2.0 million,” said Jessica Saxton, Chief Financial Officer of Charlotte’s Web. “Our cash balance increased to $61.7 million at quarter end, providing ample working capital to support continued execution of our strategy.”
Net cash used in the six months ended June 30th was $5.2 million and $4.3 million in 2023 and 2022, respectively. In the current year, collection of the $4.2 million Employee Retention Credit was offset by MLB Rights payments of $4.0 million. Last year’s cashflow included $3.2 million in IRS tax refunds.
The Company’s cash and working capital as of June 30, 2023, were $61.7 million and $72.3 million respectively, compared to $67.0 million and $82.3 million on December 31, 2022, respectively.
Consolidated Financial Statements and Management’s Discussion and Analysis
The Company’s audited consolidated financial statements and accompanying notes for the three months ended June 30, 2023, and 2022 and related management’s discussion and analysis of financial condition and results of operations (“MD&A”) are reported in the Company’s 10-Q filing on the Securities and Exchange Commission website at www.sec.gov and on SEDAR at www.sedarplus.ca and will be available on the Investor Relations section of the Company’s website at https://investors.charlottesweb.com.
Conference Call
Management will host a conference call to discuss the Company’s 2023 second quarter at 11:00 a.m. ET on August 10, 2023. There are three ways to join the call:
There are three ways to join the call:
- Register and enter your phone number at https://emportal.ink/3JQUm05 to receive an instant automated call back, or
- Dial 1-416-764-8659 or 1-888-664-6392 approximately 10 minutes before the conference call and provide confirmation number 98335923, or
- Listen to the live webcast online.
Earnings Call Replay
A recording of the call will be available through August 17, 2023. To listen to a replay of the earnings call please dial 1-416-764-8677 or 1-888-390-0541 and provide conference replay ID 335923#. A webcast of the call will also be accessible through the investor relations section of the Company’s website for an extended period of time.
