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Edited Transcript of CWEB.TO earnings conference call or presentation 13-Nov-19 1:00pm GMT

Q3 2019 Charlotte's Web Holdings Inc Earnings Call

Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Charlotte's Web Holdings Inc earnings conference call or presentation Wednesday, November 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrienne D. Elsner

Charlotte's Web Holdings, Inc. - President, CEO & Director

* Cory Pala

Charlotte's Web Holdings, Inc. - Director of IR

* Russell C. Hammer

Charlotte's Web Holdings, Inc. - Executive VP & CFO

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Conference Call Participants

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* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Jenny Wang

Eight Capital, Research Division - Analyst

* Kyle McPhee

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Michael Joseph Hickey

The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst

* Michael Scott Lavery

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Pablo Ernesto Zuanic

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Scott Thomas Fortune

Roth Capital Partners, LLC, Research Division - Director & Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Charlotte's Web Holdings Inc. Third Quarter Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Cory Pala, Director of Investor Relations. Thank you. Please go ahead, sir.

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Cory Pala, Charlotte's Web Holdings, Inc. - Director of IR [2]

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Thank you, Corina, and good morning, everyone. Thank you for joining us for 2019 Third Quarter Earnings Conference Call for Charlotte's Web Holdings Inc. My name is Cory Pala, Director of Investor Relations, and leading the call this morning is Charlotte's Web's CEO, Deanie Elsner; along with CFO, Russ Hammer, who will review the Q3 financial results in detail.

On today's call, Deanie will provide high-level comments on the quarter with operational updates on the business. Russ will provide color on the Q3 financial results, and we'll take your questions from our analysts at the end of the prepared remarks.

A replay of this call will be available through the next week accessible through the details provided in our earnings release and a webcast replay of this call will also be available for an extended period of time, which will be accessible through the Investor Relations section of our website at charlottesweb.com.

The earnings press release was issued this morning, and the MD&A and financial statements for the quarter can be found in the Investor Relations section of our website. They are also being filed on sedar.com.

As always, a reminder to our listeners that certain subjects discussed in the call including some answers we may provide to certain questions, may include content that is forward-looking in nature, and therefore is subject to risks and uncertainties and other factors, which could cause actual future results or performance to differ materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings, again, which can be found on sedar.com.

In addition, during this call we'll refer to supplemental non-GAAP accounting measures including adjusted EBITDA, which do not have any standardized meaning as prescribed by IFRS. Adjusted EBITDA is therefore defined in our press release as well as in the MD&A filed on SEDAR.

A note to our shareholders that we have modified our approach to calculations of adjusted EBITDA to exclude interest income generated from cash holdings. Although the interest income amounts are immaterial, we believe that the elimination from adjusted EBITDA is appropriate as such interest income is not generated from the ongoing operations of the company. We have retroactively applied this adjustment in our public disclosure documents.

With that I'll now hand over the call to Charlotte's Web's Chief Executive Officer, Deanie Elsner.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [3]

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Good morning. I'm pleased to report that Charlotte's Web's Q3 net revenue increased 42% versus a year ago to $25.1 million. This growth was driven both by double-digit increases in both B2B and our DTC businesses. Charlotte's Web expanded distribution during the third quarter, increasing sales and reach with new distributors and retail locations.

By the end of the third quarter, our total number of retail doors was well beyond 9,000, now approaching the 10,000 door milestone, primarily driven by growth within the food, drug and mass channel. We are especially pleased that we've been able to deliver this significant growth despite a lack of regulatory direction from the FDA.

Third quarter revenues were up slightly from Q2 consistent with the historical sales relationship between Q2 and Q3. Gross margin came in where we expected, and we are on plan with our operational build-out in the transition to becoming a company capable of competing in the CPG space.

Over the past several months, we've put substantial infrastructure in place to accommodate anticipated future growth driven by the FDM channel. This includes management team processes in addition to investment in expanded production, distribution, R&D and extraction capacity. We continue to progress our expansion plan so that when the FDA regulations are set for the CBD category, we are ready with the infrastructure and capacity to disproportionally capture that growth. The FDM channel introduces new patterns to our sales growth as large pipeline orders get filled creating an initial revenue spike in any given period. With expected inventory builds of 4 to 6 weeks for most food, drug and mass customers, our challenge will be to provide transparency to the revenue run rates versus pipeline shipments. As we see more of this happening, we will share it externally.

The B2B revenue from combined retail sales was up 65% year-over-year, substantially, by the addition of food, drug and mass in 2018. Approximately 76% of new retail doors were added in Q3, were added in the food, drug and mass channel with the balance added in the natural channel. Growth in the FDM channel provides significant retail reach for our business, however, full revenue growth potential of the FDM channel remains dampened due to lack of regulatory clarity for ingestible CBD products. Currently, the majority of the FDM channel carries only topical products from Charlotte's Web.

For perspective, the Charlotte's Web topical line consists of skin lotion and balm, which make up just 4 items of our 45 SKU portfolio available. In stores that do carry our full product line, topicals account for just 10% to 15% of total portfolio sales. The opportunity for Charlotte's Web will be both the expansion of our distribution breadth across national retailers, in addition to the expansion of our portfolio depth, within each retailer. The catalyst for this significant revenue inflection point would be the FDA setting guidelines for dietary supplements. Until that time, we continue to actively pursue the FDM channel for expansion of our ingestible products, and we will continue to focus on the battle for market share versus our competitive set to enable us to grow independent from the FDA regulatory. We are optimistic we'll have some success.

The natural channel revenue increased 27% in Q3. As mentioned in the past, many retailers in the natural channel carry both our topical and ingestible products. In this channel, we have seen more crowdedness. New products compete for shelf space, in some cases, with manufacturers outright buying shelf space. This is an unsustainable model that is causing some price pressure and margin pressure among the lower end products and lesser-known brands. In categories where consumers are overwhelmed by choice, have questionable quality and confusing labels, brands like Charlotte's Web matter. Charlotte's Web was less impacted due to our established brand power and our well-developed B2B and DTC business model. But it is something we will continue to track.

In our direct-to-the-consumer e-commerce business, Q3 revenue increased 39% year-over-year. DTC is an important margin contributor to our business, delivering 51% of our total Q3 revenue. Expanded marketing and social media programs during the third quarter garnered enormous reach and customer impressions, driving a 68% year-on-year increase in traffic to our site. Subsequent to the quarter, we launched a new e-commerce platform in October. Our new data analytics platform provides great insight into consumer behavior and interest. We're leveraging this data to provide customized education and communication messages that increase value to our customer base. We've had good initial results in terms of traffic, conversions and subscriptions, which will enable us to build on the more than 10,000 new registered consumers we are adding to our database every month.

We saw good traction on our new pet line during the quarter, up 57% year-over-year. Independent retailers began carrying the new 12-item pet line in the quarter, and we've been receiving very positive feedback as we begin to ramp up growth in this channel. We added 2 leading distributors in the pet store channel this quarter, representing approximately 5,000 potential retail distribution expansion locations. We believe we're just beginning to see what the pet product segment is capable of becoming, and we look forward to participating in the development of this channel.

To succeed in FDM, with FDM customers, data becomes critical and it is an area of great focus and investment for us. Our Chief Information Officer, Paul Lanham, joined us during the third quarter and he heads up our business analytics, digital strategy and direct-to-the-consumer e-commerce business. Paul is leading our transformation to becoming a digital and data organization to bring visibility to our operations, enabling us to better reach and serve our customers.

In conjunction with Paul's appointment, we established a strategic partnership with Nielsen. As the world's leading market intelligence companies, Nielsen is helping us to harness the retail consumption data to better understand channel availability, the competitive landscape and the consumer purchase dynamics. Our plan is to gain access to more meaningful data to level set the category with objective, consistent metrics to analyze and communicate market share.

Shifting to marketing. We launched the Trust the Earth campaign recently with legendary artist, Shepard Fairey, calling out hemp for natural life, which included murals and art projection campaigns in New York, DC, Chicago, and LA. Early results from the campaign saw an earned media reach of over 296 million people.

With regard to cultivation, this year's harvest was positive despite some negative weather shifts testing our team with the snow in Colorado and heavy moisture in Oregon. For reference, we planted more than 862 acres in 2019, and we ran our cultivation efforts around 3 states to mitigate crop risk. This diversification served its purpose this year, as we were able to mitigate underperforming crops with overperforming crops. On the whole, we are very pleased with the overall success of our 2019 harvest.

We've acquired tremendous expertise growing our hemp cultivar over the last 6 years. In addition, we employ organic methods on all of the acres we cultivate. In 2019, that resulted in more than 50% of our harvest achieving organic certification. We are still postharvest processing, so we do not have total inventory counts yet to release, but from our early estimates, we're confident the harvest would be greater than our expectations.

A quick update on our production expansion. Our new 137,000 square-foot GMP-grade production facility is under construction. This facility will be coming online in early 2020 and will add up to 10x the production capacity for us. Additionally, this facility can accommodate a build-out that will support annual revenues of up to $2 billion. This facility will be fully operational by the end of the 2020.

So to summarize our Q3 results. We are on schedule with our operational expansion plans, and we are pleased with our sales growth in the FDM channel despite the regulatory headwinds. We did not expect that we would only sell topicals in majority of our mass channel for the entirety of 2019. We had anticipated an update from the FDA before now, but as of today, there is no further guidance. This requires us to readjust our near-term growth expectations. So until such time as the FDA clarifies regulations, we expect our future year-on-year growth rates to continue in the 40% to 50% range, which includes 2019. This revises our 2019 revenue expectations in the range of $95 million to $105 million (sic) [$100 million]. We will revisit and adjust our growth expectations as regulatory clarity is landed. For Charlotte's Web, nothing changes in the long-term attractiveness of this category. We have never experienced a category that has so much substitutability across other category adjacencies as the CBD category does, and we continue to believe there is enormous growth in front of us in the mass market channel. We currently only serve 6% of the nearly 80,000 potential food, drug and mass outlets in the U.S. With the next few -- within the next few years, we expect that up to 2/3 of the total category volume will flow through FDM, and we look forward to competing on that playground.

Certain retail partners had indicated that they intend to begin adding our ingestible products to their offering ahead of the final FDA rulings. That seems reasonable as we are not aware of any enforcement against the sale of ingestible products by the FDA to date, rather only unsubstantiated claims. We fully support the FDA's position on unsubstantiated claims and we are working closely with our partners on these efforts.

With that, I'd like to turn the call over to our Chief Financial Officer, Russ Hammer, to discuss the financial results of our Q3.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [4]

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Thank you, Deanie, and thank you all for joining us today. We certainly appreciate it.

Total revenue for the second quarter (sic) [third quarter] was $25.1 million slightly higher than Q2 and a 42% increase year-over-year. Our revenue mix was about evenly weighted between B2C and B2B during the quarter. B2C e-commerce sales contributed 51% of revenue in Q3, down from 56% in Q3 of last year as the addition of the FDM retail channel in 2019 is contributing more heavily to the revenue mix. B2C revenue growth through our online web store in Q3 showed a significant growth of 39% year-over-year.

Our gross profit for the quarter came in at $17.9 million or 71.3% of revenue. This is compared to 69.5% for the same period of last year.

Our OpEx is at 78.1% of revenue, appears high for the quarter. Let me unpack that for a better understanding. Our Q3 OpEx profile was planned in 2 primary areas. One, planned on a much higher revenue profile on the back half of the year, which was fueled by anticipated FDA guidance, which has not yet materialized. Two, our planned CPG infrastructure and cultivation build-out investments ahead of next year's expected revenue growth. These factors resulted in operating expenses as a percentage of revenue for the third quarter of 78.1%. The new facility will come online in phases in 2020, driving cost savings and leverage in the back half of 2020. We will prudently manage our expansion cost as the mass market channel grows.

Sales and marketing activities as a percentage of revenue decreased slightly from 26% in Q2 to 25.1% in Q3. We launched our Trust the Earth marketing campaign during the quarter, which was a big success, and we'll continue to invest in marketing initiatives that will further our brand recognition, educate the consumer and drive increased revenue to future periods.

Adjusted EBITDA was $1.07 million (sic) [$0.7 million] for the quarter, down from $3.6 million (sic) [$3.9 million] in Q2. Q3 adjusted EBITDA as a percentage of revenue was 4.4% compared to 14.4% in the second quarter. The decrease reflects the investment in infrastructure expansion effort ahead of anticipated revenue.

Our cash balances at the end of the quarter were $35 million, and working capital was $95.9 million. Cash used in operations during the 9-month period ending September 30, 2019 totaled $24.8 million, and was primarily used for of our cultivation activities to build necessary hemp raw material inventories for the future growth.

To detail our updated guidance, we are revising our revenue expectations to $95 million to $105 million for the 2019 year. This represents a healthy year-over-year growth rate of 40% to 50%. We expect to maintain growth within this range for 2020, or until clear regulations are set for the CBD industry, which would drive growth expectations significantly higher. In the interim, we will continue our distribution growth in the FDM channel. As FDM retail sales volume becomes a larger part of our revenue mix, gross margin percentage will gradually decrease, but gross profit dollars increase against the significantly higher sales volume. This reflects more of a CPG business model. As we continue to invest in our infrastructure, we are modeling a reduction in OpEx as a percentage of revenue beginning by the second quarter of 2020 as we manage our cost prudently. Manufacturing efficiencies from our new production facility will contribute to increased adjusted EBITDA beginning later in 2020 as retail revenue growth accelerates past e-commerce growth.

This covers the financial update for the quarter. I'll now turn the call back over to Deanie for questions.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [5]

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Thanks, Russ. As Russ indicated, we're investing in the build-out of our operations to become a company capable of competing in the CPG industry. We believe that our ultimate competition would be traditional CPG companies and having the management team and infrastructure in place to take on this competitive set globally, is critical. By strategically investing in our production, R&D, distribution and extraction capacity, we can meet the needs of the CPG customers at scale, and will be a key enabler to becoming a strategic partner for our customers in the future.

Now a comment on the FDA. The FDA has a complex task at hand and we are optimistic that they are committed to finding a positive path forward for the industry. We're working through trade associations, including the U.S. roundtable -- the US Hemp Roundtable, to assist with establishing industry-wide regulatory expectations that hold us, both as an industry and as individual companies, to a higher standard. We are also engaged in a number of states at the policy level. We're helping to frame up the state regulatory environments. We are taking a multipronged approach until the standards of this industry are raised to where they need to be.

So in closing, Charlotte's Web is the leader of the CBD category, and we are uniquely positioned in the market as the low-cost producer through our vertically integrated supply chain and proprietary genetics. We are very confident in our strategic playbook going forward, and we have the capacity to get -- to scale where the industry is going.

With that, I'd like to open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Derek Dley with Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [2]

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When you think about 2020 just given the, I would say, deceleration in potential revenue growth compared to what you were previously expecting and your comment I think you just made that OpEx is likely to stay elevated as a percentage of revenue until Q2, can you give us any update on where we should think about EBITDA margin guidance for the year?

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [3]

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Sure, Derek, it's Russ. As you -- as we're thinking about EBITDA margin, you're referring to 2020, I assume?

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [4]

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Yes, yes.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [5]

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Or '19?

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [6]

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2020.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [7]

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In 2020, we would expect our EBITDA margins -- adjusted EBITDA margins to be low in the first half of the year, and then growing into double digits in the second half of the year.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [8]

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Okay. Okay. And how about the capital plan for 2020? What should we be thinking about in terms of CapEx?

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [9]

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So the primary driver in our CapEx is the build-out of our facilities that we mentioned and announced earlier last quarter. So we're spending $30 million on those facilities over 3 years. We are spending a fair amount of that next year, but it will be spread out over the 3 years. And we expect the facilities to come online active in third quarter, and we'll start to see cost savings of that in the fourth quarter as we get a full quarter of the facility running at -- with peak efficiencies.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [10]

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Okay. That's great. Understood. Deanie, just when I think about the B2B business, and I believe it was around 49% of your revenue this quarter. And if we were to assume that we use that higher end of the range that you provided in terms of the topical sales being about 15% of sales in stores where product -- where they offer your full product suite, if I just kind of use the math and extrapolate, this implies sort of a $325 million potential B2B market based on your sales this quarter. Is that the right way to look at it? Is that how you guys think about sizing the market potential in the near term?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [11]

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I think, your assumptions in terms of looking at the current segments, extrapolating out and then expanding across the distribution points is probably the right formula to be looking at. And the difference would be that the velocities on our topicals and our capsules tend to be at a higher price point per unit, but the math is right. And as we look at what the potential of this business would be today if all channels were open and FDA regulations were laid down, you begin to get a sense of where our distribution would be taking us today, if that were the case. And so, that's what we're keeping an eye on and setting expectations for what we plan to deliver until FDA gets landed.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [12]

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Okay. And then just the last one for me. Just in terms of the new data analytics, I know this is a big focus for the new management team. Can you just talk about some of the learnings that you've got from those data analytics? And I guess specifically, and I know this might be a tricky one, but is there -- do you have any update on where your market share might be? Is the data that sophisticated that you can draw that yet?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [13]

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It's a great question. So let me just take that in a couple of pieces. On the data analytics front, we now have a data repository or data lake where we're holding all our data, both internally and externally, organizing it so that we can cut it and look at it from a dashboard basis to action it. So that is going incredibly well. And we've gotten some good insights into how consumers are coming into this category, what products by what demographic they're coming into the category, and how we trade them up. And we're seeing some really interesting dynamics in pet and gummies from that standpoint as consumers come in and then they come in under the pretext of their pet or in the gummy line and then trade up into our categories. So we feel good that we're actioning the data to grow our business and expand our basket.

In terms of market share, we are currently working with Nielsen around-the-clock to frame up the categories. As you can imagine, with all of the players and for a perspective, the category competitive set in the last year has gone from about 650 players to about 2,800 players. So getting them all in the database, getting them all tagged so we can read them appropriately is where all the work is being done. We're not in a position right now to reliably call out market share. We are absolutely seeing numbers with the competitors who are coded today, but they don't represent the total competitive set, and it would be a misdirect if we shared out those numbers with you because we just don't trust them at this point. But our expectation is by early to mid-Q1, we will be in a position where we can start talking about actual objective data that level sets what I think is a lot of telephone tag in terms of how communication, data gets communicated here. So that would be the plan.

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Operator [14]

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Your next question is from Scott Fortune with Roth Capital Partners.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [15]

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A real quick on the guidance. Kind of looking at the seasonality part of your business now, it seems like the last couple of years have been very flat, third quarter is a pickup and fourth quarter and flat maybe the first quarter. Can you touch base on the seasonality and what you're seeing now from that standpoint in a sense?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [16]

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Yes, Scott, I think it's a really great question. I think it's too early at this point to identify seasonality in the category in terms of known periods. I can tell you that we're starting to see, as we communicated, kind of a Q2, Q3 flattening of revenue or close to flattening of revenue. And we can hypothesize why that is. But that's just from our own P&Ls for the last 2 years. The Nielsen data from that standpoint would be really helpful to get a full read on what the index is for the total category across the months and across the years. That said, we actually believe that there are times of the year that are -- consumers are more receptive to trying new things and changing their behaviors. We're also seeing that happen on the pet front. And so for example, on our pet products, what we've been able to identify in the last 12 months is our largest indexing month in terms of sales in the pet category is July. And we assume that's because of the July 4th fireworks and the anxiety and stress animals feel during that period. And so we are beginning to see opportunities where we can tap into the consumer insight and really, in a very direct and precise way, communicate to our consumers to bring new consumers into the category. And so that's the seasonality we see so far. The one thing that we are quite confident about in terms of our historical data is Q4 has historically been our stronger quarter on the year, and we expect to see that happening. So...

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [17]

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Yes. Scott, this is Russ. I'd just add 1 more thing. From a seasonality standpoint, the 1 channel that we do see that a little bit is in D2C in Q4 because that is our highest month for our D2C, highest quarter for our D2C business.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [18]

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All right. Makes sense. Okay. And then real quick, just touch base on -- although you've talked about the independent channel being very crowded and pricing there and such. And without the FDA moving, let's say, nothing happens with them, touch base on new ways to continue to grow in that channel, and how you guys are addressing that channel going forward?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [19]

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Yes. New ways to continue to grow, your -- it's music to my ears, Scott. This is where consumer insight innovation, the 4 Ps of marketing come into play. New formats, new forms, new communication, new investment and new communications to consumers, a big part of our digital and big data infrastructure is built to help have a more direct relationship with consumers. And so we feel like we've put ourselves in a position, where, regardless of where the FDA goes, we're going to be in a position to deliver the 40% to 50% growth. Now if the FDA lands a regulatory environment that sets some guidelines or give some direction to how they're going to set guidelines, our customers will begin to open up distribution opportunities in the FDM channel, and although, we might not get all customers, we're seeing customers who are beginning to take steps in front of the FDA. And so just a little bit of guidance from them will open up channels and enable us to compete in a more proactive way across our total portfolio.

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Scott Thomas Fortune, Roth Capital Partners, LLC, Research Division - Director & Research Analyst [20]

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And just a real quick follow-up on that. Is that 40% to 50% growth including these potential FDM customers that are going to bring on ingestibles or without that?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [21]

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No, at this point, our 40% to 50% growth guidance is based on the growth and expansion that we feel very confident about that we are landing as we speak. It's a bottoms up assessment of what we expect next year to be. If the FDA guidelines land or if the FDA gives a positive direction of how and when they're going to land the guidelines, we think there's potential to upside to our business.

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Operator [22]

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Your next question is from Jenny Wang with Eight Capital.

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Jenny Wang, Eight Capital, Research Division - Analyst [23]

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My first question is a follow-up on Scott's question. The 40% to 50% growth expectations for fiscal '20, what are the main assumptions that are built in there? And maybe which channel do you think are going to be the biggest drivers of this growth?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [24]

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It's a good question. As we step back, our biggest driver of growth next year will be the FDM channel and that will come as a result of an expansion in distribution in terms of retail outlets and in some case, an expansion of our portfolio being carried within those channels. And so, the FDM tsunami that we have been talking about in terms of how it's going really morph the revenue going through those channels versus any other channel. That is coming, and that's a big driver of the channel expectation we have for next year. And again, that's based on information and commitments we have aligned with on customers.

In terms of our other channels, we do expect growth across all of our channels. We have got big plans for our direct-to-the-consumer business as well as plans for our natural channel business in terms of innovation, distribution expansion and portfolio development. The last part of our equation, and I'd be remiss not to address, the strength of our new products. Our new products that were launched in the summer of this year, gummies and pet, represent about 10% of our portfolio on the year. And so that is new distribution and new expansion opportunities we have in our portfolio. So as we said before, the guidance is based on what our plans are, what our innovation is planned, and what our commitment is to expand our distribution across all of our retail channels. If the FDA lands, there will be upside to our plan.

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Jenny Wang, Eight Capital, Research Division - Analyst [25]

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Got it. And just a second question. In terms of the competitive pressures in the natural products segment, are you experiencing any retail price compression or pressure from retailers to lower your prices now that they have more CBD brands to choose from?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [26]

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Yes, there's certainly a lot of players and a lot of activity happening in the natural channel. And I think, as I mentioned, where there's so much confusion, consumers get a big -- a bit fragmented and confused. I think in times like that brands matter. And I think Charlotte's Web has not experienced the level of impact that other players in the channel have experienced. We're relatively flat to where we were in Q2. So although we see it happening, and yes, of course, we're getting slightly impacted by it, I don't think, Jenny, it's more than 1% or so in terms of what it has meant to our business, so pretty modest. I would attribute our ability to withstand that on both the brand strength and the brand power of Charlotte's Web, in addition to, I think, the smart business model that Charlotte's Web operates with in both a DTC and retail perspective because where consumers can't find our brands, they go to our direct-to-the-consumer website and are able to get to our -- get access to our brands immediately. And so we've been smart about trying to drive consumers into different channels, and that definitely has benefited. So we're not seeing as much of an impact, but for sure, something that we will keep an eye on.

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Jenny Wang, Eight Capital, Research Division - Analyst [27]

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Got it. And one last one for me. In terms of the timing of the U.S. stock cross-listing, is that still on the agenda and maybe you can give us an update on the timing and status of that?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [28]

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Absolutely.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [29]

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Yes, that's still in our plans for next year, and we will give more color on that in the near future.

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Operator [30]

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Your next question is from Michael Lavery with Piper Jaffray.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [31]

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Just want to make sure I understand your thinking of the guidance and following up a little bit on your comment about how 4Q is typically a stronger quarter, which we've seen in the history, but I think if I'm doing the math right, at the low end of your guidance, it would be a sequential decline. Is that conservatism that you're factoring in? Or is there something we should keep in mind, competitive or otherwise, that it might make 4Q not be the strongest quarter?

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [32]

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I'd say, we're a little conservative on that piece of that, Michael, as you look at it. The D2C business definitely has its highest month in November and then followed by December. So we do expect to see that seasonality shift that Scott was asking about.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [33]

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Michael, one other thing just to keep in mind and having lived through this a couple of different times. I think, we're going to have to challenge the perspective of the sequential month and the sequential quarter-on-quarter growth trajectory. Because I think it could be misleading. As food, drug and mass comes into the channel, they will on average add 4 to 6 weeks of inventory as a onetime inventory pipeline fill to come into the category. Now for some of our customers, we're seeing them add more than 4 to 6 weeks. We're seeing them add inventory above 6 weeks. That said, depending on when these big retailers come in and when that inventory gets set for the first time, that is going to be a blip in our quarterly projections that are not going to be repeatable in the next quarter. And so that's where I get to, we're going to have to talk about revenue run rates versus pipeline fills, and looking at potentially a better way to guide externally in terms of what that all means because if we really [plus] that out across all FDM and there's about 33,000 stores directly in the food, drug and mass channel specifically, that's a lot of volume shifting on a onetime basis in any 1 period. So just as a complete side note.

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [34]

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That's very helpful color. And so even if we don't know the timing of what the FDA's plans are and obviously, maybe it's like you might expect from the government looking slower than you first thought. Can you just give a sense of what it is you expect from them, and what some of the sequencing or steps would be? And is there -- is it sort of a multistage process? Just give us a sense of maybe what to expect as far as how that plays out and what some of the stages are in terms of getting news between from them to actually being on the shelf?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [35]

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Yes. It's a great question, Michael. Thank you for serving it up. As you know, the FDA committed to giving -- providing direction on regulatory environment for dietary supplements late summer to fall. Here we are in mid-November, and we're still waiting for that direction. So that has clearly not happened, and we're quite disappointed that we continue to have an environment that invites a lot of bad actors in to take advantage of. That said, we see this as a speed bump at the end of a long journey. This is the final regulatory that opens the door for distribution, availability and access nationally. And so very much unlike where cannabis is today, CBD is on the last leg of the journey. We really believe, between the FDA commitment and what is being generated today in the appropriations bill for next year, we expect some kind of direction to be set by the end of Q1, and that election could either be actual regulatory direction on dietary supplements, or it could be direction from the FDA on how they're going to make a decision to get to direction on the dietary supplements. But either way, we feel like by the end of Q1, we will understand how 2020 is going to shape up. Customers need to understand what the FDA is going to enforce, and what they are not going to enforce. And that's in the vacuum of no information, that is where our food, drug and mass customers have been hesitant to act and carry the total portfolio. Once they understand that, we have another -- a number of customers who are making progress towards expanding their portfolio in light of where the FDA is in today. So we feel like with any positive direction, the distribution channels in the food, drug and mass will be able -- will begin to open up, if not totally, in some portion. And so that's how we see this all shaping up. It is possible that the FDA doesn't land regulatory in final version until mid-2020 to mid-2021. That's possible. And we are building our plans as if that is going to happen. In terms of our customers, I just want to unpack that quickly for you. We are seeing repeat sales across all of our FDM customers in Q1 -- excuse me, in Q3. So we know that our customers are reordering. We also know that we are expanding distribution outlets across our customers. So they're expanding their business, and we look at the velocities in both natural as well as the early velocities we're seeing in a very small way from Nielsen, and our velocities are bigger than any other player in the CBD category. So we feel like as soon as the distribution begins to open, Charlotte's Web will be in a front-runner position to both gain access nationally in distribution as well as portfolio development. And so that's kind of where the FDA comes into the customer side of the equation and how we see it opening it up. Does that answer your question?

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [36]

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It's very helpful. Maybe just sort of related to that, the government certainly can surprise, but do you have a sense of whether or not to expect a product standard type proposed rule that could be a multi-month rulemaking process with public comments and everything else? Or do you think it's more likely they'll layout guidelines for applying for product approval on a case-by-case basis, or something else entirely? What is it that you imagine their action to be?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [37]

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I would imagine 2 things to happen. I would imagine, consistent with what the FDA has done historically across a lot of other categories, I would imagine them to come out and lay the foundation for how they're going to make a decision, how they're going to entertain a question-and-answer period, how they're going to do the analysis, and when they think they will come back and begin to float their preliminary guidance. I think that will happen between the end of this year and summer of next year and guidance to be somewhere summer of next year to summer of the following year. The appropriations bill being advanced by Mitch McConnell today for 2020 asks that in light of no direct regulatory guidance provided by the FDA, no final guidance, layouts for the industry, the manufacturers and the farmers, what will be enforced and what will not be enforced. I think that's the second [leg] of this equation, which is if there's clarity about what they will enforce and what they will not enforce, then retailers will have confidence to expand distribution in a broader way against dietary supplements and ingestibles. And so we're hoping to see something in that arena by the end of Q1 as the appropriations bill comes into act and the FDA has 90 days to conclude that direction. Does that make sense?

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Michael Scott Lavery, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [38]

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Yes, that's very helpful. One just last one, if you don't mind. Your brand is clearly a differentiator you've called out and that's both with consumers and the retail trade. Can you give a sense of how you're building and maintaining that equity in such a crowded field and how is it similar or different to some of the ways you can do that in traditional CPG with other brands that have sort of standard playbook? Are some of the levers similar, different, the same? How are you really pushing brand equity there?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [39]

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Yes. It's a great question. So first and foremost, I think Charlotte's Web is not only a premier brand in the category, I think, it might be one of the only brands in the category that actually has brand power and brand strength. Consumers identify the category as Charlotte's Web and retailers are telling us that we become an anchor by which to guide consumers in store to find the CBD category. So we feel really good about the brand we have in our hands. In terms of how you develop that and what are the similarities to other CPG brands versus an OTC or a CBD category, you're right, we won't be employing some of the high trade tactics that some of the CPG players advance. But what I will say is this, a brand and a market -- a marketing capability is focused on the 4 Ps. Those are directly transferable and applicable to any category. That's price, and how you promote and advertise, how you gain distribution, how you improve product quality and drive innovation. And so you take those broad concepts, apply them across this category, and yes, there's a lot of similar levers in terms of formats, and forms and price point by channel and distribution, and innovation, and segmentation of the consumer to find insights around which you can advance innovation against. And so those principles of marketing apply and give us quite a lot of excitement in terms of where we can take this category, and how we can uniquely grow across the different channels that represent. This is also true in terms of how we take this business globally. The 4Ps are the 4Ps and you adapt them and apply them by country, and so that's where the similarities are, that's what we're excited about, and that's really, in large part, why we feel good about setting our guidance at 40% to 50% despite where the FDA lands because we feel like we have the fundamentals of a plan to grow and deliver against that guidance.

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Operator [40]

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Your next question is from the line of Kyle McPhee from Cormark Securities.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [41]

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I just wanted to quickly talk about financial capacity and how you guys are balancing: one, your spending ramp-up in preparation of the growth that you expect to show up, all the OpEx and CapEx spending we're seeing right now; versus, two, on the other hand, you're still facing some FDA-related bottlenecks, so growth and cash flow rolling in lower than prior expectations. And what this all means for your cash burn? I guess the question is at what point would you consider slowing your growth spend? Or are you looking at potentially taking on some debt to bridge your funding gap, if you even do see a funding gap? Any comments there would be appreciated.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [42]

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Great question, Kyle. Right now, with the growth in our channels, especially with the FDM, that we do see very clear line of sight to for next year. We know that we're going to be generating cash and we're going to have strong enough cash flow to fund our operation even though we are investing, as you said, in the expansion of our ramp up in prep for the FDA [growth.] So we don't see that need right now for that, but we'd certainly have access to it if we need to.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [43]

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Okay. And then, on the CapEx spend, the $30 million over 3 years, you said a fair bit of that's spent next year. Can you be more specific on what the actual budget is for 2020?

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [44]

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We see about $15 million being spent next year.

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Operator [45]

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And we have a question from Mike Hickey from The Benchmark Company.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [46]

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The -- I guess maybe just briefly speak to perhaps the global opportunity you see for CBD. And how you sort of potentially expect to sort of take advantage of that? And obviously, domestic market is significant but this is a global opportunity, I think you mentioned that. Sort of curious how you look at that as an opportunity for you going forward.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [47]

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Mike, thanks for the question. We are excited about the global opportunity. We continue to be quite interested in building the plan and the activities to become a global player. Today, we're the only brand that globally is recognized by consumers, and we have a number of consumers who are on a waiting list, waiting for Charlotte's Web original formula to come into their country through a legalized mechanism. And so we know we've got consumer interest, we know we've got consumer -- brand awareness, and we know we have an infrastructure and a competitive advantage in our product offer that will be able to compete in a global arena. In order for us to go global, we've got to do 2 things. One is, we've got to build our cultivation ahead of our product launch. A big part of our advantage is our proprietary genetics. We've been able to secure a patent on one of those genetics. We've got some other things in the works. And so building our cultivation so that we can drive the high quality, the safety and the consistently -- the consistency bottle-to-bottle, year-to-year, that consumers have come to rely on in terms of Charlotte's Web will be our first step in terms of any global expansion. From there, we'll go to the markets that we can legally penetrate and we will approach the growth of this business in a very similar way to what we've done in the U.S. We'll look at the most appropriate demographics to tap into. We'll look at the product profile that meets the needs of the consumers locally, and we will partner with distributors and potentially manufacturers to get that product into the marketplace so that we are being prudent from a capital standpoint. That would be our plan, and we're in the process of trying to build out how we attack that at the appropriate time.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [48]

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All right. And the 40% to 50% growth for '20 that doesn't include any international, correct? That's all just domestic.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [49]

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That is correct. At this point, our guidance is based on what we know we can control. And does not reflect an international expansion at this point.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [50]

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Okay. I guess, what are your thoughts on M&A? I mean, valuations sort of -- if you can find a [indiscernible] valuation that clearly [come in.] Market is highly fragmented. But how do you think about M&A here in terms of maybe now you have 2 brands, the brand expansion, maybe new product categories or thinking about strategic partnerships that may get your brand in other product categories that maybe you wouldn't want to build out internally. But your thoughts there would be helpful.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [51]

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It's a good question. I'll take the first part of this question and then I'll let Russ address some perspective on the valuations and what that all means. In terms of what we would do for an M&A, absolutely, we are looking. The environment today is ripe with opportunity. As we go down that path, we're going to be looking really for 3 things. One is, where are the capability gaps currently in our portfolio from a segment offering standpoint, and that will be the first approach is how do we complement and build out our product segments. The second will be how do we geographically expand and drive the global footprint, and then third is, we will figure out how we scale to win at the shelf. Capability, scale and global expansion is how we'll assess M&A. For us, the multiples are high, but they're also high for our brand, and we are looking at smart, capable ways to scale and build a total value that is greater than the sum of the parts. And so I'll let Russ expand a little further on that.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [52]

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Yes, I think the only thing that I would add to what Deanie just said is when we are looking at M&A, we're looking at it from 3 standpoints. One, is it a good strategic fit? As Deanie said, perhaps it's one of the product areas that we are -- that is not our strength right now that we want to expand or it's an area that we want to go into that we're not in today. Two, we look at is it accretive? We obviously don't want to just expand and not be adding to our EBITDA and our growth. And then, the third part is just our readiness. We have a lot going on. The growth is -- in front of us is large, but at the same time, we feel that we are uniquely positioned to have that capacity to be able to absorb a strategic asset.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [53]

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I guess the last part of that and it's not that you asked but I'll add. We've built an infrastructure that is capable of managing volume and revenue. And so as we ramp up, we feel like we are in a good position to be smart about how we move and to be smart about the partners or targets we may go after. And I think that's probably the end of that answer.

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Michael Joseph Hickey, The Benchmark Company, LLC, Research Division - Entertainment Software & Cannabis Analyst [54]

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Okay. That's good. Last one, just a clarification maybe, again, on your guidance for '20. Did you mention what your pricing assumption is there for your guidance? And how many retailers you expect to sort of turn on through '20? That will be helpful.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [55]

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We didn't mention that. And we're probably not going to mention that. But I'm smiling at your question.

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [56]

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Good question.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [57]

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No, we didn't mention that. But to my previous point on the 4 Ps, channels and outlets represent different shopping occasions for different consumers, and they go in for different missions. And so we've got to be smart about how we manage our portfolio across the retail landscape so that we've got the right offer, the right price points and the right innovation that meets the needs of the consumer in that channel. And so, you can kind of think through some of the things we may be considering, as you go down that path, it's pretty fundamental.

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Operator [58]

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And our final question for today is from the line of Pablo Zuanic with Cantor Fitzgerald.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [59]

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I know it's been a long call so I'll just keep it brief. Look, first, a housekeeping question. So for the number that you gave for the fourth quarter implies year-on-year growth of 7% to 30%, but for next year, you're guiding for 40% to 50%, so can you explain that ramp? Or is it more an issue that 4Q will be sell-through being higher than selling of 7% to 30% and we should think that your sell-through in 4Q will be really 40% to 50%? I have more follow-ups but if you can start with that?

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Russell C. Hammer, Charlotte's Web Holdings, Inc. - Executive VP & CFO [60]

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I'm sorry, what was your specific question?

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [61]

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Well the guidance you're giving for the full year of $95 million to $100 million means $23 million to $28 million in sales for the fourth quarter. Your sales in 4Q '18 were $21 million, right? So that means your year-on-year growth in the fourth quarter is going to be anywhere from 7% to 30%. Yet you're guiding for forward sales in 2020 of 40% to 50% growth. I just want to understanding is that the case of selling versus sell-through, that your sell-through in 4Q will still be at 40% to 50% as opposed to your selling being 7% to 30%, if you can explain that?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [62]

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Yes. I think, so, Pablo, the way I talked about that is our guidance is on the year. And so it's hard to hard to look at any 1 quarter, including fourth quarter, and extrapolate that out. We are lining up customers in terms of distribution expansion and portfolio expansion. And so, Q4 separate from next year. Our guidance for 2019 reflects that 40% to 50% growth on the year, and I won't do the math for you because you're certainly significantly more intelligent than I, but you get a sense for what that could mean in Q4. In terms of next year, it's a reset, and we look at the run rates in terms of our distribution expansion as well as our new distribution, and that's how we're getting to the 40% to 50%. So I think to look at '20 -- Q4 and say that is a proxy for next year would be false because we have more activity happening that we expect in Q1 of next year that will go beyond Q4. So I don't know if I'm answering your question specifically.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [63]

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No, understood. That's helpful. That's very helpful. That clarifies it. And just a follow-up here, I know it's been a long call. So look, in terms of the FDA guidelines, we've talked about that in detail and you've been very thorough in your answers, but if you think in terms of scenarios, is there a worst-case scenario in terms of getting the guidelines and FDA coming up pretty much and saying you know what at a [fairer] level, ingestibles will not be legal or that's totally out of the question. That's not even a scenario we should think about.

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [64]

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So hypothetically, if we said what's the worst thing that could happen, it would be that the FDA came out and said, we're not doing -- we're not providing dietary -- guidance on dietary supplements and they are illegal and we will enforce that. That would be for the category probably the worst thing that could happen. I think what's more realistic is that given how expansive this category is, and given the activities that are happening state-by-state, don't forget state-by-state, they run their own governments and are able to build the laws within the state that reflect the people of the state, and so, if that were to happen, I think, the states would progressively stand up and make a decision that we would have to work within. And so even in the worst-case scenario, I think, there's a line of hope to how you would continue to develop a portfolio and a category and continue to build this business. I don't see the FDA coming out and saying that the implication so far and what they have communicated to date would reinforce that they want to set regulatory for this category, they want to help dietary supplements in terms of guidance. And so what's more likely from my standpoint is that they communicate how they're going to make a decision, in that case, our distribution partners begin to open up, or they communicate a decision, in which case, all distribution partners open up. And that's the way we've built our plan is that we can grow despite what's happening, and any positive direction from the FDA being how they're going to make a decision or what the decision is would be top line on top of our 40% to 50% guidance.

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Pablo Ernesto Zuanic, Cantor Fitzgerald & Co., Research Division - Research Analyst [65]

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Understood. And one last one. You mentioned that there are some FDM stores that are starting to stock ingestibles or they are planning do that? Can you give examples or that hasn't happened at all yet?

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Adrienne D. Elsner, Charlotte's Web Holdings, Inc. - President, CEO & Director [66]

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No, we are absolutely beginning to see our customers move ahead of the FDA. We have 1 customer that is carrying our total portfolio across 45 different states. That's the biggest move in that direction we have seen, but even among our current customer base within some of the states that are legal in terms of dietary supplements for -- from a CBD standpoint are beginning to expand out the portfolio. So that's why we say customers are beginning to take steps in the direction ahead of the FDA. If the FDA could land any kind of direction around how they're going to make a decision, you would see customers start to lean in a little further.

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Operator [67]

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I now turn the call back over to the presenters.

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Cory Pala, Charlotte's Web Holdings, Inc. - Director of IR [68]

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Well thank you for attending the call everyone. We will look forward to reporting to you in our fourth quarter earnings call in 2020. Thank you.

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Operator [69]

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This concludes today's conference call. You may now disconnect.