Charlotte's Web Holdings Reports Q1-2020 Results

First-quarter revenue was ahead of expectations driven by strong DTC eCommerce sales.

Charlotte's Web Holdings, Inc. (TSX:CWEB) the market share leader in full-spectrum cannabidiol (CBD) hemp extract products, today reported financial results for the first quarter ended March 31, 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.

First quarter revenue was ahead of expectations driven by our strong DTC eCommerce sales enabled by our new technical platform and capabilities.

Deanie Elsner, CEO of Charlotte's Web

Financial Highlights

  • Organic consolidated revenue of $21.5 million vs. $21.7 million in Q1-2019.
  • Gross profit of $15.0 million, 69.8% of consolidated revenue.
  • Adjusted EBITDA loss of $5.7 million.
  • Direct-to-Consumer eCommerce sales grew 29.4% year-over-year and contributed 65.6% of Q1 revenue.
  • $53.0 million cash and $114.9 million working capital on March 31, 2020.

Business Highlights

  • David Panter joins the Company as Chief Operating Officer from Estée Lauder Company
  • Announced intent to acquire Abacus Health to cement leadership in both CBD topical and ingestible product.
  • Launched CW Labs R&D Sciences Division, part of SUNY network of 64 universities and medical centers.
  • Achieved self-affirmed GRAS (generally recognized as safe) status for full-spectrum hemp extract.
  • Achieved NSF International's dietary supplements Good Manufacturing Practice (GMP) registration.
  • Received NASC certification received for Charlotte's Web pet products.
  • Signed and commenced shipping to first national mass pet products retail partner.
  • Surpassed 11,000 retail doors selling Charlotte's Web products.
  • J.P. Morgan engaged for commercial banking services and $10 million line of credit (extendable to $20M).

Acquisition of Abacus Health

On March 22, 2020, Charlotte's Web entered into an arrangement to acquire Abacus Health Products, Inc. (CSE:ABCS) in an all-stock transaction. The transaction is expected to close in late Q2 or early Q3 of this year subject to customary closing conditions, certain regulatory approvals and approval of the shareholders of Abacus, after which Abacus shareholders would own approximately 15% of Charlotte's Web effective outstanding common shares. Abacus is a leading provider of over-the-counter topical products for pain relief and skincare containing CBD hemp extracts. Abacus distributes the industry's widest portfolio of topical CBD SKUs through more than 12,000 doors including the three largest U.S. pharmacy chains, and also reaches 16,500 health care practitioners. Combined, the companies currently represent approximately 34.7% 1 market share of the food/drug/mass retail segment. 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 which is forecasted to become the fastest growing and largest CBD segment by 2021.

"Operationally we have not had any business disruptions from COVID-19 and have adapted well to the remote working environment," said Deanie Elsner, CEO of Charlotte's Web. "Strategically we implemented several strategies during the quarter to address the F/D/M channel, with new topical products, new pricing and the announcement of our intent to acquire Abacus Health. We also launched CW Labs to drive break-thru
Innovation and to support the need for more science and data. These moves have been well received by our customers across all channels and we continue to execute on our plan for 2020."

Q1-2020 Business Review

Charlotte's Web has expanded its physical brick and mortar retail reach past 11,000 doors as the first quarter concluded with signing the Company's first national mass pet retail partner. The Company is in discussions with other national pet retailers as interest grows in the Company's line of pet products which includes functionally focused chews with synergistic ingredients to target specific health functions including Calming, Hips & Joints and Cognition. The CBD pet market is forecast to grow rapidly at a Compound Annual Growth Rate of 151% between 2018-2022 to a market size of US$1.16B according to the market research firm, Brightfield Group.

As of May 14, 2020, Charlotte's Web was shipping product through more than 11,000 national retailer store locations and expects continued expansion through 2020.

In April Charlotte's Web launched seven new topical products, including a cooling gel, a balm stick and aromatherapy roll-ons, all to positive reviews. The new topical products are particularly important for the Company's partners in the F/D/M retail channel which continues to carry primarily topical CBD products as it awaits regulatory guidelines from the Food and
Drug Administration for the sale of ingestible CBD products.

During the first quarter, Charlotte's Web's well-established Web presence delivered strong sales through its DTC platform. "The DTC business remains an important area for growth particularly as we await broad regulatory policies to land for the retail channels, and we expect online sales to grow faster than retail in the first half of 2020," explained Ms. Elsner. "Our webstore provides our customers with our broadest product portfolio offering. We have increased resources into our DTC channel, increased capabilities, and improved the online experience. The result has been double-digit conversion rates that helped support a 29.4% year-over-year increase in online revenue for the quarter."

Q1-2020 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.

First-quarter revenue was $21.5 million, as compared to $21.7 million in 2019. Lower business-to-business sales were offset by increased DTC sales. B2B sales were 31.5% lower year-over-year, accounting for 34.4% of total revenue in the quarter as the natural retail channel struggled with overcrowding due to increased competition, while a lack of FDA regulatory guidelines for the F/D/M channel held back the adoption of ingestible products.

DTC net sales grew by 29.4% year-over-year as online traffic and high conversion rates continued to increase 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 65.6% of total revenue in the first quarter compared to 50.2% for the
same period in the prior year.

Gross product sales (before channel discounting) from human ingestible products, topicals and pet products grew by 9.9%, -27.3% and 162.5%, respectively, year-over-year. On a gross revenue basis, the Company's human ingestible products, topicals and pet products accounted for approximately 85.7%, 6.2% and 8.1%, respectively, of total sales compared to 87.1%, 9.5% and 3.4%, respectively of total sales for the first quarter of 2019.

Gross margin (prior to biological asset adjustments) was 69.8%, compared to 72.8% for the first quarter of 2019. Operating expenses were $23.3 million, a 76.5% year-over-year increase from $13.2 million. The increase reflects the Company's investments in capacity expansion and transition to a consumer-packaged-goods operating company capable of supporting mass retail channel growth. In 2019, the Company relocated into larger office facilities in Boulder, Colorado and added senior CPG management to the leadership team along with related personnel.

Adjusted EBITDA for the quarter was negative $5.7 million or -26.5% of consolidated revenue compared to positive EBITDA of $4.5 million and 20.7% of consolidated revenue for the first quarter of 2019. The Adjusted EBITDA ratio during the first quarter reflects the substantial investments to support expected future revenue growth from the F/D/M channel.

"We are modelling for revenue growth of 10% to 20% in 2020 and a return to positive adjusted EBITDA by the end of the year," explained Russ Hammer, Chief Financial Officer of Charlotte's Web. "As our new facilities come online later in the year, we expect to harness cost savings through our vertically integrated supply chain to support meaningful increases in
adjusted EBITDA, and then continue to leverage against higher revenue as we enter 2021 and 2022." See the advisories contained under "Forward-Looking Information" below.

Balance Sheet and Cash Flow

The Company used $14.9 million of cash in operations during Q1-2020 compared to $3.7 million of cash used in operations during Q1-2019. The reduction in cash flows primarily reflects the investment in the construction of the Company's new 137,000 sq. ft. production and fulfillment centre to support anticipated growth. The Company's cash and working capital
at March 31, 2020, were $53.0 million and $114.9 million, respectively, compared to $68.6 million and $116.9 million at December 31, 2019.

To learn more about Charlotte's Web Holdings, visit the company HQ here.

Disclaimer: Past performance is not an indicator of future performance.

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Casey Peternell
Casey Peternell

Casey is a media and content creator with a keen eye for creativity. Casey is currently in the process of obtaining a double bachelors degree in Media & Communications and Business from Swinburne University in Melbourne.

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