Ms. Jessica Saxton reports
CHARLOTTE'S WEB REPORTS 2023 FIRST QUARTER FINANCIAL RESULTS
Charlotte's Web Holdings Inc. has released financial results for the first quarter ended March 31, 2023.
"In the first quarter, we maintained prudent cost controls to balance softness in the CBD category due to the unregulated environment. We successfully reduced operating expenses by 14 per cent on a year-over-year basis and ended the first quarter with a cash balance of $61 million. This provides ample working capital to support growth plans, including the launch of ReCreate,(TM) our new NSF Certified for Sport(TM) lifestyle brand," said Jessica Saxton, Chief Financial Officer. "We continue to maintain healthy gross profit margins and have improved our operating margins, despite a net revenue decline of 12.1 per cent year-over-year."
"On the regulatory front we were encouraged during the quarter by increased activity in Washington, D.C. including the reintroduction of bill H.R. 1629 for the regulation of hemp CBD as dietary supplements. We are working with Congressman Griffith to address the concerns of the FDA while meeting the needs of the industry and the consumer," said Jacques Tortoroli, Chief Executive Officer of Charlotte's Web. "We are supporting federal and state legislative initiatives to help advance a comprehensive U.S. CBD regulatory framework through our efforts in Washington and anticipate further progress throughout this year. In parallel, we have also established DeFloria LLC with AJNA BioSciences and BAT to pursue a regulatory pathway with the U.S. Food and Drug Administration ("FDA") for an investigative new drug."
ReCreate(TM) by Charlotte's Web
Subsequent to the end of the first quarter, the company launched a new lifestyle brand named "ReCreate(TM)". The first product under the new brand is a broad spectrum CBD oil tincture "ReCreate Daily Edge" - the only broad spectrum CBD oil to be NSF Certified for Sport(TM). ReCreate Daily Edge was developed for the sports and cultural lifestyle pillars that provide athletes and consumers with natural options to support recovery from intense workouts, stay calm under pressure, and maintain healthy sleep cycles and focus. The ReCreate brand will also carry the iconic MLB logo and launch with MLB's base of approximately 180 million fans. Beginning in the second half of 2023, future ReCreate products and formats will be launched, including CBD formulations combined with functional botanical wellness formulations for self-care and mental well-being. The lifestyle brand targets cultural verticals of Millennials and GenZers, who make up approximately 47 per cent of a multi-billion-dollar CBD market. ReCreate products have received early distribution support from retail partners including Fresh Thyme, The Vitamin Shoppe, and Southern Glazer's Wine & Spirits.
Botanical IND (Investigative New Drug)
On April 6, 2023, Charlotte's Web announced (Press Release) the formation of DeFloria LLC ("DeFloria" or the "Entity") with AJNA BioSciences PBC ("AJNA"), a botanical drug development company focused on mental health and neurological disorders, and a subsidiary of British American Tobacco PLC (LSE: BATS and NYSE: BTI) ("BAT"). BAT holds an equity interest in the Entity in the form of 200,000 preferred units following its $10 million investment and has the right to participate in future equity issuances to maintain its pro rata equity position. The company and AJNA each hold 400,000 of the Entity's voting common units. DeFloria was established to pursue a botanical investigative new drug ("IND") through the FDA drug development pathway for a botanical drug to target a neurological condition. The novel botanical drug will be developed from certain proprietary hemp genetics of Charlotte's Web. Renowned neurologist Dr. Orrin Devinsky, Chief Medical Advisor for AJNA, is leading the project. He was a principal investigator for the development of a cannabis-based FDA approved drug approved in 2018. AJNA has a pre-IND filed with the FDA on behalf of DeFloria and is commencing its first set of phase I clinical trials in summer of 2023.
Q1 2023 Financial Review
The following table sets forth selected financial information for the periods indicated.
Consolidated net revenue for the first quarter ended March 31, 2023, was $17.0 million, a decrease of 12.1 per cent from $19.4 million in the first quarter of 2022. The decrease was primarily due to lower oil tincture sales volume and related product mix for the periods. Gross profit was $9.9 million, or 58.3 per cent of revenue, as compared to gross profit of $11.8 million, or 60.5 per cent of revenue, in the first quarter of 2022. Excluding inventory provisions, gross margins were comparable at approximately 60 per cent in the first quarter of both 2022 and 2023.
Business-to-business ("B2B") retail net revenue was $5.7 million, a decrease of 7.7 per cent year-over-year from $6.2 million in Q1 2022. The decrease was primarily due to comparable product mix for the periods, including a consumer preference shift from higher priced oil tinctures, to lower unit-priced gummies and topical products, which more than offset distribution gains, particularly in the Natural Channel. On a comparative basis, Q1 2022 included significant relative expansion following the passing of Assembly Bill 45 in California in Q4 2021, while there was not a similar positive regulatory event supporting Q1 2023. New B2B distribution partners in grocery, natural, and pet retail were added in late 2022; however, require time to materially increase sales. On May 1, 2023, Charlotte's Web announced a new partnership with Phillips Pet Food & Supplies, America's largest distributor in the pet specialty retail channel, covering more than 6,000 retailers representing more than 14,000 retail locations. B2B sales contributed 34 per cent of the company's total net revenue in Q1 2023.
In the US, Charlotte's Web holds the number one market share position in the CBD market relative to retail dollars based on market share data from leading third-party analysts such as Nielsen Company (US), LLC, SPINS, LLC, and Brightfield Group.
Direct-to-consumer ("DTC") net revenue through the company's webstore was $11.3 million, a decrease of 14.2 per cent from $13.1 million in Q1 2022. The decrease was attributable to lower traffic to the company's webstore. The company is seeing a category-wide decrease in consumers searching for CBD wellness solutions and continuing to shift from higher cost tinctures to gummies. E-commerce conversion rates remain strong at 11.7 per cent, consistent with our historical conversion rates based on total site traffic. DTC sales contributed 66 per cent of the company's total net revenue in Q1 2023.
Charlotte's Web maintains the largest e-commerce business in the CBD industry. E-commerce is the CBD industry's largest sales channel representing approximately 37 per cent of total annual industry sales. Later this year, the company is launching initiatives to increase online traffic to broaden demographic exposure, with partners such as MLB and improve consumer experience on our platform.
Total selling, general and administrative expenses in the quarter were $17.5 million, a 14.0 per cent reduction from $20.4 million in Q1 2022. The reduction reflects actions taken in 2022 to improve operating efficiencies and reduce personnel and marketing expenses to better align with current revenues. This was partially offset by an increase in the amortization expense related to MLB assets and convertible debenture discounts of approximately $2.1 million.
Lower operating expenses supported a reduced operating loss of $7.6 million for the first quarter of 2023, an improvement of $1.0 million, or 12.1 per cent, as compared to an operating loss of $8.6 million in Q1 2022.
Total change in fair value of financial instruments and other for the three months ended March 31, 2023, was $5.4 million, primarily due to a revaluation of the fair value of the company's debt and interest rate conversion. Net loss for the first quarter was $2.9 million, or ($0.02) per share on a basic and diluted basis, as compared to a net loss of $8.6 million, or ($0.06) per share, on a basic and diluted basis in Q1 2022.
Adjusted EBITDA1 loss for the first quarter of 2023 was $3.3 million, an improvement of $2.0 million, or 57.7 per cent as compared to an Adjusted EBITDA loss of $5.3 million for the first quarter of 2022.
Balance Sheet and Cash Flow
Net cash used from operations, for the three months ended March 31, 2023, was $6.1 million as compared to $4.7 million in Q1 2022. The first quarter of 2023 included rights fee payments to MLB which did not occur in the prior year period.
The company's cash and working capital as of March 31, 2023, were $60.8 million and $78.5 million respectively, compared to $67.0 million and $82.3 million at December 31, 2022, respectively.
Consolidated Financial Statements and Management's Discussion and Analysis
The company's audited consolidated financial statements and accompanying notes for the three months ended March 31, 2023 and 2022 and related management's discussion and analysis of financial condition and results of operations ("MD&A") are reported in the company's 10-Q filing on the Securities and Exchange Commission website at www.sec.gov and on SEDAR at www.sedar.com, and will be available 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 2023 first quarter at 10:00 a.m. ET on May 12, 2023. There are three ways to join the call:
There are three ways to join the call:
Register and enter your phone number at https://emportal.ink/3nhInAl to receive an instant automated call back, or
Dial 1-416-764-8659 or 1-888-664-6392 approximately 10 minutes before the conference call and provide confirmation number 59487501, or
Listen to the live webcast online.
A recording of the call will be available through May 19, 2023. To listen to a replay of the earnings call please dial 1-416-764-8677 or 1-888-390-0541 and provide conference replay ID 487501. A webcast of the call will also be accessible through the investor relations section of the company's website for an extended period of time.
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About Charlotte's Web Holdings, Inc.
Charlotte's Web Holdings, Inc., a Certified B Corporation headquartered in Denver, is the market leader in innovative hemp extract wellness products under a family of brands that includes Charlotte's Web(TM), CBD Medic(TM), and CBD Clinic(TM). Charlotte's Web whole-plant CBD extracts come in full-spectrum and broad-spectrum (THC-free) options, including ReCreate(TM) by Charlotte's Web, the world's only broad-spectrum CBD certified NSF for Sport(TM), which is the official CBD of Major League Baseballcopyright. Founded by the seven Stanley Brothers, Charlotte's Web ignited the CBD industry when the brothers came to global prominence with the coverage of a young girl's astounding reaction to their hemp extract. Their advocacy changed laws, public perception, and research around the vast health potential of plant-based solutions. The Stanleys built their business with the mission to bring botanical options to health seekers worldwide. Charlotte's Web branded premium quality products start with proprietary hemp genetics that are American farm-grown using organic and regenerative cultivation practices. The company's hemp extracts have naturally occurring botanical compounds including cannabidiol ("CBD"), CBC, CBG, terpenes, flavonoids, and other beneficial compounds. The company's CW Labs R&D division advances hemp science at a center of excellence in Louisville, Colorado. Charlotte's Web product categories include CBD oil tinctures (liquid products) CBD gummies (sleep, stress, exercise recovery), CBD capsules, CBD topical creams and lotions, as well as CBD pet products for dogs. Through its substantially vertically integrated business model, Charlotte's Web maintains stringent control over product quality and consistency with 20+ product lot testing for quality assurance. Charlotte's Web products are distributed to retailers and health care practitioners throughout the U.S.A, and online through the company's website at www.charlottesweb.com.
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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 March 31, 2023, Charlotte's Web had 152,432,914 Common Shares outstanding.
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