Charlotte’s Web Holdings, Inc. (PNK:CWBHF) Q3 2023 Earnings Call Transcript
Charlotte's Web Holdings, Inc. (PNK:CWBHF) Q3 2023 Earnings Call Transcript November 9, 2023
Charlotte's Web Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.1 EPS, expectations were $-0.05.
Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings, Inc. 2023 Third Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, November 09, 2023. I would now like to turn the conference over to Cory Pala, Investor Relations. Please go ahead.
Cory Pala: Thank you and good morning, everyone. Thank you for joining us for our 2023 third quarter earnings conference call for Charlotte's Web Holdings, Inc. Our earnings press release was issued this morning and posted on the Investor Relations section of our website along with our financial statements. Our 10-Q report for the third quarter is also available and has been filed on sedarplus.ca in Canada, and in the U.S on EDGAR with the SEC. Leading our call this morning is CEO, Bill Morachnick; CFO, Jessica Saxton; and Chief Commercial Officer and Co-Founder, Jared Stanley. On this morning's call, we will review the financial results for the third quarter, provide some color on operations. We will take questions from our analysts at the end of our prepared remarks.
Photo by Richard T on Unsplash
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 at our website at charlottesweb.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 outlined in detail within the Company's regulatory filings on sedarplus.ca and sec.gov.
In addition, during the call, we'll 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 of such measures to their respective and most directly comparable GAAP financial measures. I would like to start by introducing, Bill Morachnick, our Incoming Chief Executive Officer. Bill has been with us for 2 months now and is quickly immersed himself into the business. He is a proven entrepreneur skilled and creating and managing strategies for consistent and sustained growth. In his short time he has demonstrated constructive leadership across our business and has already begun enacting positive change, which we will discuss further shortly.
And with that, I will now hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick.
Bill Morachnick: Yes. Thanks, Cory, and good morning everyone. It is really a true honor to join you today for my first earnings call as CEO of Charlotte's Web. I want to start by thanking the Board for trusting me to steer this visionary company and its mission. I am truly energized by this challenge and the potential of this company and the CBD and botanical wellness industry overall. So I came to Charlotte's Web because I have a passion for building premium mission based brands and leading companies through transformative change. While there are current industry challenges such as regulatory, this company has held the true leadership position for the last decade. Charlotte's Web continues to set the standards. But simply put, it's time to rip off some mandates.
Mandates that were meant to be temporary, and they are now burdening our team's progress. It's not unusual for brand with a 10-year history to shake things up a bit, and that's precisely why I'm here. Simplify, focus and sharpen so that Charlotte's Web can get back to doing what is always done best, which is leading by example. Now this doesn't mean taking away the essence of Charlotte's Web. It means streamlining processes and updating technology for more agile and effective approach. It means upgrading the consumer experience so that we will not miss any valuable touch points to monetize our marketing efforts. Lastly, it also means revisiting our brand. The emotional connection consumers have to Charlotte's Web brand is priceless. It is one of our most valuable assets.
It needs evolution upkeep. In my first 60 days with the company, I have worked very closely with an impressive depth of talent on this team. And we're going to shake things up together. I'm immediately putting the necessary actions into motion and we'll speak more about this in a few minutes. But first, I'd like to turn the call over to our Chief Financial Officer, Jessica Saxton, to review our Q3 and year-to-date financial results. And then to Jared Stanley, recently appointed Chief Commercial Officer to share the latest on the regulatory front.
Jessica Saxton: Thank you, Bill. I presume that listeners have had a chance to review our financial results in detail in our earnings press release and 10-Q. So I will focus more on the high-level points. Our third quarter net revenue of $14.3 million was down 16.1% compared to $17 million last year. Revenues were down in both DTC eCommerce and B2B retail. However, gross margin remains healthy at 55.5%, up from 52.5% a year ago. This improvement was primarily driven by supply chain efficiencies in the quarter. As we have discussed in prior calls, we continuously evaluate opportunities to improve operating efficiencies and margins. This includes leveraging our infrastructure. In early 2023, we launched a plan to transition the outsource production of our topical products to in-house at our state-of-the-art facility in Lewisville, Colorado.
Shortly thereafter, we also set in motion a plan to insource gummy production. Accordingly, during the third quarter, we completed an initial CapEx investment towards the gummy production line. This investment was to purchase long lead time manufacturing equipment. Based on our analysis, the payback period for this investment is compelling. Gummies are our largest volume and revenue product line accounting for approximately 40% of our business. Onsite manufacturing can drive significant benefits across the business. For example, this move unshackled our potential for rapid innovation in both our topical and gummy formulations and substantially improves our speed to market. No longer will we be constrained by third-party production schedules and limitations.
This internal production builds on Charlotte's Web evolution as a vertically integrated CBD market leader. We expect insourcing to deliver improved capacity utilization, enhanced fixed cost leverage and benefit long-term gross margins. We are confident that this investment will help generate shareholder value over the long-term. Turning to online sales. Direct-to-consumer sales through our eCommerce web store generated revenue of $9.4 million for the quarter. This was down from $11.8 million for Q3 of last year. The revenue decline was primarily due to lower organic consumer traffic and engagement on our website. eCommerce is our most critical sales channel representing approximately two-thirds of our revenue. We have defined a clear action plan to address this revenue decline immediately to ensure that we are cost effectively attracting consumers to our website in a highly scalable way.
Bill will walk you through the key initiatives that will get us there in more detail shortly. We do continue to maintain our number one spot and brand loyalty metrics as measured by the Brightfield Group, showcasing our continued strength amongst consumers. For the third quarter, B2B retail sales were $4.9 million compared to $5.2 million for Q3 of last year. This modest decrease was primarily due to some retail customers exiting the CBD category on a year-over-year basis. Total retail shelf space allocated to the overall CBD category was down roughly 8% year-over-year in the third quarter. This is in line with expectations as retailers are adjusting their total space allocation and right sizing both the brands and SKUs they carry. However, Charlotte's Web's products as a whole have outperformed the category as we have been able to reduce our shelf space by less than half of the total category decline.
Additionally, we continue to target growth in the natural channel, where there is a focus on early adoption by carrying both ingestible and topical products, and also where CBD has the highest category ACV. Specifically, we've expanded the max number of natural doors selling by over 32% in the last 24 weeks compared to a year ago. All of this while maintaining approximately 10 items per store, which is higher than the category average. As we discussed, most retail customers continue to maintain a topical product only position on CBD until federal regulations are established. Federal government regulation of CBD would be a material catalyst for broadly increased retail distribution of CBD ingestibles. In the interim, with our in-house production of topicals, we will have an enhanced ability to introduce new CBD topical products.
Not only should this improve our annual sales volumes and benefit our manufacturing costs as a result of scale, but it also has the further benefit of establishing our brand presence on shelf at a broader scale. This will submit new routes to market with respect to ingestible CBD products once the necessary regulatory frameworks are established. Our third quarter SG&A was $19.9 million, a 31.8% increase from $15.1 million excluding a $4.1 million employee retention tax credit in Q3 of last year. Excluding MLB related expenses of $2.9 million, total Q3 SG&A increased $1.9 million or 12.6% year-over-year, driven by timing of payments between quarters. Notwithstanding the additional MLB expense, we expect SG&A for the full year of 2023 to be only modestly higher than last year.
This is evident in our year-to-date SG&A of $57 million, which is only 8.2% higher than the first 9 months of 2022. And as a reminder, 2023 year-to-date also includes $6.8 million and MLB expenses that did not occur in the comparable period last year. We reported a third quarter operating loss of $12 million versus a loss of $3.9 million in Q3 last year. The increased loss was primarily tied to the MLB related expenses and lack of benefit this year of the tax credit. This combined $7 million year-over-year difference resulted in a higher net loss of $15.2 million or minus $0.10 per share versus a net loss of $7.6 million or minus $0.05 per share last year. Both quarters also included a noncash loss and the fair market value of our derivative instruments of approximately $4 million.
We reported negative cash flow in the third quarter of $10.7 million as compared to a positive $1.7 million in Q3 last year. As a reminder, the reason Q3 2022 had positive cash flow was due to a $7.6 million cash receipt related to an IRS refund as well as the timing of payments. In addition, we spent approximately $2.6 million CapEx on long lead time equipment related to bringing our gummies and topical products in-house. The calculated payback on these projects is less than 2 years once production begins. In the first 9 months of 2023, cash used was $15.9 million of which $6 million was MLB related as compared to $3 million of cash used in the first 9 months of 2022. Additionally, we're lapping a $10.8 million cash receipt related to the IRS refund in the prior year.
Company's cash and working capital at the end of the quarter were $51 million and $59 million, respectively. As the official CBD of Major League Baseball Angel City Football Club in the premier Lacrosse League, we continue to leverage our valuable professional sports partnerships through media and marketing initiatives to drive these passionate fan bases into our brand ecosystem. Specific to MLB, we have gained valuable exposure for NSF Certified for Sport products, as we have been in every playoff games dugout, bullpen and clubhouse throughout the postseason. MLB delivered over 174 million digital impressions in Q3 alone. And as a result, for the month of September, we saw a 38% lift in total DTC sessions. Since our announcement of the Premier Lacrosse League in June, the net media value we received was 5x that of the overall sponsorship fee.
Specifically, the partnership has provided us with athlete brand ambassadors, and allowed us to engage with fans of one of the fastest growing sports in America. On an exciting note, Lacrosse was recently named as an Olympic sport to premiere at the 2028 Summer Olympics in Los Angeles. As you can see, our professional sports sponsorships have been successful in generating meaningful exposure, as well as bringing first time visitors to our site. However, this has not yet translated into a meaningful increase in sales. We need to increase conversion rates from these leads and are taking several actions to do so, which Bill will speak more to in a moment. With a $51 million cash position at the end of the third quarter, we maintain a stable financial position moving forward, which continues to be an advantage against the bulk of our competitive set in the current environment.
I will now turn the call over to Co-Founder and CCO, Jared Stanley.
Jared Stanley: Thank you, Jessica. The quarter was very meaningful for Charlotte's Web and the hemp industry and our co-founding membership of industry coalition ONE HEMP. We are now leveraging the uniting ONE HEMP industry voice with the consumer voice through Coalition For Access now for CAN [ph]. In this politically charged environment, we are remaining persistent and bold in our approach as demonstrated and we're proud to share ONE HEMP and CAN [ph] have a forthcoming December 6 briefing on Capitol Hill. This briefing will lead to continued education and keep CBD legislation on the agenda. The goal is an official Committee hearing on CBD regulation before House, Energy and Commerce and/or Senate Health committees. This would be followed by CBD FDA legislation moving through regular order through markup and beyond.
I would like to give more context on ONE HEMP, as ONE HEMP will be key in both briefings to educate on the safety of CBD and the policy solution drafted by Dentons LLP in response to a request for information known as an RFI. ONE HEMP was born from the RFI that came from the House, Energy and Commerce Committee on July 27, and strives to strike the right balance between FDA concerns and industry stability. Top CBD companies have joined together in a historic alliance to advocate for legislation, and ultimately, FDA regulation of hemp derived CBD products as dietary supplements. ONE HEMP has and will continue to offer policymakers a science and safety back industry resource for the development of a regulatory approach that aligns with the need to ensure access to more than 45 million Americans who rely on the benefits of CBD every day includes veterans, seniors, athletes, families and more.
Our strategy for 2023 continues to be laying the groundwork necessary for passage of CBD FDA legislation simply by keeping the consumer voice at the forefront of the debate, establishing credibility through a science backed approach in a policy solution, furthering House and Senate legislation, engaging with the FDA, uniting the industry and regular order, committee hearing and markup. Approaching midway through the fourth quarter, Coalition For Access now includes several of the nation's largest veterans associations, including the American Legion, and also the U.S Pain Foundation. We have House and Senate bills, FDA engagement and unprecedented bicameral committee RFI, direct engagement from the FDA and newly formed industry coalition ONE HEMP.
Our strategy has always been based on the reality that CBD FDA legislation would likely not pass as a freestanding bill. Rather, we would need to catch a ride on another must pass legislation. It is also based on an understanding that we will be at the mercy of the legislative and political process. At best that means there could be long periods when we will have to generate our own momentum while Congress deals with other issues. Activities such as Hill Meetings, the RFI, or committee staff briefings are example of where we continue to grind out progress. For example, the recent change to a new Speaker of the House resulted in a month delay as the House was essentially frozen until the GOP chose a new speaker. The result is a very limited legislative calendar through the end of the year.
The continuing resolution expires November 17. And the new House Speaker Johnson has proposed a second continuing resolution through January of 2024. While Senate Democrats and the White House are proposing a second continuing resolution into April of 2024. From our perspective, this change is little in the sense that the strategy has always aimed for a spending bill or another likely to pass piece of legislation to be most likely vehicle on which to attach CBD FDA reform legislation. So in order to keep the process on track, ONE HEMP and CAN are now focused on preparing for the December 6th congressional briefing. The briefing for House and Senate staffers will feature two panels, one representing the consumer or public interest, and the second will include talk strategies and Dentons LLP.
This represents the scientific and legal issues, ensuring ONE HEMPs position remains objective. ONE HEMP will then use the briefings as the leverage and basis for a hearing on the legislation and the legislative hearing as the basis and rationale for a committee markup. In this way, we create our own momentum and keep the issue alive and on track. We have made enormous and unprecedented progress this year. While we cannot control the politics and the congressional schedule, we have the right plan and the right people engaged to drive much needed change. We continue to work on the things we can control and to innovate around the things we cannot. Briefing, hearing, markup are next steps. One leads to the next. This will put us in the strongest position to accomplish CBD legislation.
I'll now hand the call back over to Bill.
Bill Morachnick: Thanks, Jared and Jessica. So let's start by taking a quick look back at the Charlotte's Web three pillar strategy for 2023, which includes number one to win in Washington; two, pursue botanical drug development; and three, grow the business. There's been great strides on the first two pillars. But to be very frank, we've clearly fallen short on the third one growing the business. Regarding botanical drug development, we're excited to share that our joint venture DeFloria has recently commenced its Phase 1 clinical program through the FDA botanical drug development pathway. Following the completion of this study, DeFloria plans to submit an investigational new drug application to the FDA to initiate the Phase 2 clinical program in the first half of 2024.
As Jared just shared, the Washington update earlier, I will quickly move on to the growth pillar, which is a territory that demands the most immediate attention. From an operational perspective, I have identified three key areas of opportunity to hone our strategy. To start, we must urgently improve our eCommerce experience. There are no two ways about it. Each and every consumer touchpoint must be streamlined to drive subscriptions and loyalty as well as boost customer acquisition. Secondly, our IT infrastructure requires much needed modifications and upgrades to support our growth goals. Our teams and strategies are unable to perform at their full potential on outdated and sometimes broken platforms. Specifically, we must enhance our tools for ERP, supply chain and DTC.
As a third priority, we're focused on strengthening the brand for DTC and B2B marketing by bringing brand mission and purpose back to the forefront. This includes a brand refresh that reflects the core values of what makes Charlotte's Web great. To address this, we're taking quick and decisive actions. As I stated in my opening remarks, I believe Charlotte's Web has the necessary expertise and firepower to increase our leading position market share. To make this a reality, I have restructured parts of our organization to create a smoother, more integrated business. This simplifies our corporate structure and boosts our agility and speed. On the commercial side of the business, we have established a commercial department to enhance our collaboration between innovation, marketing and sales.
This tighter knit group will help synchronize and optimize our product portfolio, innovation pipeline within our overall brand architecture. We're very fortunate to have Jared Stanley to lead this department, and he has been appointed Chief Commercial Officer. Jared will also continue to oversee the innovation, cultivation and government regulations functions. This is a transition for Jared from his previously held Chief Operating Officer role. With Jared taking on this new role, we have internally promoted Ray Kunkel as our new Chief Operating Officer. Over the past 2 years, Ray and his team have done an exceptional job streamlining operations at our Lewisville facility. There's no doubt that he'll do a fantastic job as COO. Onto the B2B front.
To boost our retail sales velocity, we have formed a more robust integrated marketing team and improved our go-to-market strategies. At the same time, we're working to expand distribution through new retail partners in untapped channels, and leveraging our valuable professional sports partnerships to provide us with rapid awareness, trust and credibility. Now let's talk about our DTC and IT structure. We're fortifying our eCommerce business by integrating IT engineering into the eCommerce framework. As the company has expanded, multiple software integrations have been layered over time, which has created an overly complex IT infrastructure that's efficient and costly. We have already started an eCommerce platform migration for more user friendly and cost efficient website.
Most importantly, it will add rocket fuel for content management, marketing attribution, consumer engagement and CRM tools. I think you'll notice that we're working towards fully connecting IT, marketing and innovation. The end game here is a smoother shopping experience and a highly engaging platform that consistently addresses consumer needs, and ultimately inspires brand love. My goal is to simplify, focus and sharpen what truly matters most to move the business forward. I'm very confident we will regain momentum and reinforce category leadership for Charlotte's Web. So I expect the coming period to be a transformative one for Charlotte's Web, specifically a time that it ceases getting back to the core of what we do best, which is leading by example.
It will also bring renewed life to Charlotte's Web unique legacy and propel it into the next prosperous chapter. We are very grateful for our shareholders patience and support as we navigate these challenges and seize future opportunities. The business transformation I've laid out, will take some time to fully integrate. But I am excited about what lies ahead. We've got the leading brand, vertical integration, scientific expertise, and now a sharpened strategy that we are already executing against. I am thrilled to be a part of this journey and look forward to updating you in the coming quarters. And now we'll take questions for analysts.
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