COVID-19 has impacted the Company’s retail and health practitioner channels
Charlotte’s Web Holdings, Inc. (“Charlotte’s Web” or the “Company”) the market share leader in full spectrum cannabidiol (CBD) hemp extract products, today reported financial results for the second quarter ended June 30, 2020. All amounts are expressed in United States dollars unless otherwise noted. Certain metrics, including those expressed on an adjusted basis, are non-IFRS measures (see “Non-GAAP Measures” below).
Q2-2020 Financial Highlights
- Consolidated revenue of $21.6 million vs. $25.0 million in Q2-2019
- Adjusted gross profit of $14.0 million (excluding inventory provisions), or 64.8% of consolidated revenue
- Adjusted EBITDA loss of $5.7 million
- Direct-to-Consumer (“DTC”) eCommerce sales increased 33.6% year-over-year and contributed 71.8% of Q2 revenue
- $99.8 million cash and $155.0 million working capital on June 30, 2020
- Awarded utility patent protecting Charlotte’s Web proprietary varietal
- Completed acquisition of Abacus Health Products, Inc.
- Surpassed 21,000 unique retail doors
- Commenced Abacus product cross-selling though Charlotte’s Web leading DTC channel
- Commenced clinical study on CBD effect on liver health with ValidCare
- Moved warehousing and fulfillment operations into new 137,000 sq ft facility
- Awarded B Corp™ certification for excellence in ESG
- Completed $54 million financing for expansion and working capital
Q2-2020 Business Review
COVID-19 has impacted the Company’s retail and health practitioner channels due to lower foot traffic and temporary location closures under the pandemic. Limited disruption has occurred within production and manufacturing operations, however the Company’s back office and reporting functions have been impacted and additional time was required for the consolidated second quarter filing.
Acquisition of Abacus Health
On June 11, 2020 Charlotte’s Web completed the acquisition of Abacus Health Products, Inc. (“Abacus”) in an all-stock transaction. Abacus is a leading provider of over-the-counter (“OTC”) topical products for pain relief and skincare containing CBD hemp extracts. The acquisition greatly extends Charlotte’s Web’s product offerings and reach and solidifies a commanding position in the U.S. hemp CBD topicals category. In the third quarter, Charlotte’s Web commenced implementing operating cost synergies with Abacus and will continue through the remainder of the year. Further cost synergies are targeted in 2021 through integration into the Company’s new production and fulfillment center.
Subsequent to the close of the second quarter, Charlotte’s Web became certified as a B Corporation (“B Corp™”). B Corps are for-profit companies that use the power of business to build a more inclusive and sustainable economy, and the certification recognizes Charlotte’s Web’s rigorous standards for social and environmental performance, transparency, and accountability. B Corp status aligns with the Company’s mission-based principles including a focus on sustainable and regenerative organic farming methods, water stewardship, and a low carbon footprint. CW is the only publicly traded CBD B-Corp certified company.
Q2-2020 Financial Review
The following table sets forth selected financial information for the periods indicated.
The following information sets forth selected quarterly revenue information for the Company’s recent fiscal quarters.
Consolidated second quarter revenue decreased to $21.6 million, as compared to $25.0 million in 2019 partly due to COVID-19 reduced foot traffic for retailers and temporary closures. Strong DTC sales largely offset a 54.5% decrease in B2B retail sales which accounted for 28.2% of total revenue in the quarter. DTC net sales grew by 33.6% year-over-year as online traffic and high conversion rates increased through ongoing marketing and social media programs. Year-over-year new consumer acquisitions increased 25% and conversion rates increased 77%. DTC net revenue accounted for 71.8% of total revenue in the second quarter compared to 46.4% for the same period in the prior year.
Adjusted gross margin (prior to biological asset adjustments and inventory provisions) was 64.8%, compared to 74.0% last year and 69.8% in the first quarter of 2020. After adjustments gross margin was 53.2% of net revenue, compared to 75.2% for the second quarter of 2019 and 70.2% in Q1-2020.
Operating expenses were $29.5 million, increasing 82.1% year-over-year from $16.2 million. The increase reflects the Company’s investments in capacity expansion and transition to a consumer-packaged goods (“CPG”) operating company capable of supporting mass retail channel growth. The increase includes approximately $6 million of extraordinary expenses related to the Abacus acquisition and legal fees associated with brand and intellectual property protection. Subsequent to Q2-2019, operating expenses increased as the Company relocated into larger office facilities in Boulder, Colorado and added senior CPG management to the leadership team along with related personnel.
Lower than expected revenue has resulted in an increase in operating expenses as a percent of revenue. Management is initiating an expense optimization program targeting a 10 percent reduction in consolidated expense run rate by the end of 2020.
Adjusted EBITDA for the quarter was negative $5.7 million, compared to positive EBITDA of $3.8 million for the second quarter of 2019. The Adjusted EBITDA ratio during the second quarter reflects lower sales and the substantial investments to support expected future revenue growth from the F/D/M channel.
“The pandemic has had a larger and longer impact than we anticipated on retail and health practitioners,” explained Russ Hammer, Chief Financial Officer of Charlotte’s Web. “We are seeing improvements and a stronger back half in our DTC channel, but without a meaningful opening up of the economy and health practitioner channel we expect only flat to modest consolidated net revenue growth for 2020. Our long view market opportunity remains intact and we continue to add new customers, doors, and products. Our Q3 revenues are trending ahead of Q2 sales levels and we anticipate reopening of retail locations in the U.S. will support a positive growth trend. As we see resolutions in COVID-19 and hemp CBD regulations or legislation we can see the category build towards its full potential.” See the advisories contained under “Forward-Looking Information” below.
Balance Sheet and Cash Flow
The Company used $7.1 million of cash in operations during the second quarter of 2020 compared to $11.5 million of cash used in operations during the second quarter of 2019, primarily due to the increase in changes in working capital. The overall increase in cash flows during the second quarter of 2020 is primarily driven by proceeds from the Company’s public offering completed in June 2020. The Company’s cash and working capital at June 30, 2020 were $99.8 million and $155.0 million, respectively, compared to $68.6 million and $116.9 million at December 31, 2019.
Consolidated Financial Statements and Management’s Discussion and Analysis
The Company’s unaudited financial statements and accompanying notes for the periods ended June 30, 2020 and 2019 and related management’s discussion and analysis of financial condition and results of operations (“MD&A”) are available under the Company’s profile on SEDAR at www.sedar.com and on the Investor Relations section of the Company’s website at https://investors.charlottesweb.com.
Management will host a conference call to discuss the Company’s second quarter 2020 results at 8:30a.m. ET on Monday, September 14, 2020. To participate in the call, please dial 1-647-427-7450 or 1-888-231-8191 approximately 10 minutes before the conference call and provide conference ID 4570749. A recording of the call will be available through September 24, 2020. To listen to the rebroadcast please dial 1-416-849-0833 and provide the same conference ID.
A webcast of the call can be accessed through the investor relations section of the Charlotte’s Web website.
About Charlotte’s Web Holdings, Inc.
Charlotte’s Web Holdings, Inc., headquartered in Boulder, Colo., is the market leader in the production and distribution of innovative hemp-derived cannabidiol (“CBD”) wellness products. The Company was founded by the Stanley Brothers with a mission to unleash the healing powers of botanicals with compassion and science, benefitting the planet and all who live upon it. The Company’s premium quality products start with proprietary hemp genetics that are 100-percent American farm grown and responsibly manufactured into hemp-derived CBD extracts naturally containing a full spectrum of phytocannabinoids, including CBD, terpenes, flavonoids and other beneficial hemp compounds. Charlotte’s Web product categories include CBD Oil tinctures (liquid products), CBD capsules, CBD topicals, as well as CBD pet products. Charlotte’s Web hemp-derived CBD extracts are sold through select distributors, more than 21,000 brick and mortar retailers, and online through the Company’s website at www.CharlottesWeb.com.
The rate the Company pays for agricultural products reflects a fair and sustainable rate driving higher quality yield, encouraging regenerative farming practices, and supporting U.S. farming communities. As a B Labs certified B Corporation™ and a Benefit Company, Charlotte’s Web is a socially and environmentally conscious company and is committed to using business as a force for good and a catalyst for innovation. The Company weighs sound business decisions with consideration of the impact of their decisions on all stakeholders: customers, workers, communities, and the environment, while maximizing profits and strengthening its brands which include Charlotte’s Web™, CBD Medic™, CBD Clinic™, and Harmony Hemp. The Company’s management believes that its socially oriented actions have a positive impact on the Company, its employees and its shareholders.
Shares of Charlotte’s Web trade on the Toronto Stock Exchange (TSX) under the symbol “CWEB” and are quoted in U.S. Dollars in the United States on the OTCQX under the symbol “CWBHF”. As of September 11, 2020, Charlotte’s Web had 104,672,925 Common Shares outstanding and 85,738.458 Proportional Voting Shares convertible at 400:1 into Common Shares, for an effective equivalent of 138,968,308 Common Shares outstanding.
Certain supplementary measures in this news release do not have any standardized meaning as prescribed under International Financial Reporting Standards (“IFRS”), which are also generally accepted accounting principles (“GAAP”) for publicly accountable entities in Canada, and, therefore, are considered non-GAAP measures. Since non-GAAP measures are unlikely to be comparable to similar measures presented by other companies, securities regulations require that non-GAAP measures be clearly defined, qualified and reconciled to their nearest GAAP measure. Except as otherwise indicated, these non-GAAP measures are calculated and disclosed by Charlotte’s Web on a consistent basis from period to period. Specific adjusting items may only be relevant in certain periods.
The intent of non-GAAP measures is to provide additional useful information with respect to Charlotte’s Web’s operational and financial performance to investors and analysts though the measures do not have any standardized meaning under IFRS. The measures should not, therefore, be considered in isolation or used in substitute for measures of performance prepared in accordance with IFRS. Other issuers may calculate these non-GAAP measures differently.
In particular, the terms “Adjusted EBITDA”, “Adjusted gross margin” are used in this news release to describe certain financial information of Charlotte’s Web. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) is not a recognized performance measure under IFRS. Adjusted EBITDA does not have a standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other issuers. The term EBITDA consists of net (loss) income and excludes interest (“financing costs”), taxes, depreciation and amortization. Adjusted EBITDA also excludes share-based compensation, impairment of assets, acquisition costs, legal settlement costs, restructuring charges, and adjustments for fair value of biological assets, warrant liabilities, and stock appreciation rights. Adjusted EBITDA is included as a supplemental disclosure because management of Charlotte’s Web believes that such measurement provides a better assessment of the Company’s operations on a continuing basis by eliminating certain non-cash charges and charges or gains that are nonrecurring. The most directly comparable measure to Adjusted EBITDA calculated in accordance with IFRS is net (loss) income. See “Adjusted EBITDA” in the MD&A for a reconciliation of Adjusted EBITDA to net (loss) income.