LOUISVILLE, Colo. – Charlotte’s Web Holdings, Inc., a market leader in full-spectrum hemp extract wellness products, reported financial results for the second quarter ended June 30, 2024.
“Our strategic turnaround initiatives and innovations are yielding promising results towards a return to growth, despite lower revenue,” said Bill Morachnick, Chief Executive Officer of Charlotte’s Web. “During the second quarter, we successfully migrated to our new e-commerce platform, which has enhanced the consumer experience and provided more effective customer relationship management tools. The platform has been performing well. Our retail business has also shown improvement, delivering the first sequential second-quarter growth since 2021, supported by distribution gains, including with Walmart, as well as the successful launch of our new CBN Stay Asleep Gummies.”
In June, Charlotte’s Web launched new CBD isolate topical products with Walmart in 827 Walmart stores across five states including California, Illinois, Florida, Texas, and Pennsylvania. The new retail distribution at Walmart expands Charlotte’s Web CBD wellness presence at an affordable price point, unlocking both value and accessibility.
“Following our first-quarter operating expense reductions, we took additional measures after the close of the second quarter to further align with current revenue levels,” said Erika Lind, Chief Financial Officer. “These prudent reductions are designed to decrease future cash burn and position us for positive cash flow as we return to growth. We expect a reduction in SG&A for 2024 of more than $20 million from 2023, effectively lowering our cash burn in the second half of 2024. With our newly refined cost structure, we would be able to achieve cash flow breakeven at approximately $65 million in annual net revenue.”
DeFloria LLC Update
DeFloria’s Phase 1 trial data processing is nearly complete. DeFloria expects to include the Phase 1 data in its investigational new drug (IND) application with the U.S. Food and Drug Administration (FDA) later this year. The Phase 1 clinical trial determined the dose range that will inform an IND opening Phase 2 clinical trial, which would follow a No Objection letter from the FDA. Charlotte’s Web is excited about the potential for a Phase 2 clinical trial program and updates on DeFloria’s progress will be provided as appropriate. DeFloria is a botanical drug development company developing a botanical drug utilizing patented hemp genetics from Charlotte’s Web.
Federal Regulatory Update
Encouraging progress continues regarding The Hemp Derived Consumer Protection and Market Stabilization Act of 2023 (H.R. 1629), and Hemp Access and Consumer Safety Act (S. 2451). The proposed legislation seeks to regulate hemp extract products under the FDA’s existing dietary supplement regulatory framework. Charlotte’s Web has been actively supporting industry stakeholders, including the Coalition for Access Now and the industry working group ONE HEMP, to advocate for this critical legislation. Together, these groups are actively engaged in providing comments and assistance on these bills. Finalized drafts are expected to be introduced this calendar year, including FDA technical assistance, which will commence the official legislative process leading to committee hearings. Charlotte’s Web remains committed to supporting this legislative effort and is optimistic about the positive impact these regulations could have on the hemp and CBD industries.
The proposed bills are poised to establish comprehensive FDA regulations for food and beverage products and dietary supplements, specifically targeting non-intoxicating CBD products. By creating a clear regulatory pathway, these measures would ensure consistent oversight and consumer protection for non-intoxicating CBD products in the marketplace.
Financial Review – Q2 2024
Consolidated net revenue for the second quarter ended June 30, 2024, was $12.3 million, as compared to $16.0 million in the second quarter of 2023, with both retail and e-commerce revenues lower year-over-year. Overall, CBD industry growth in 2024 has been stymied by ongoing headwinds in the category, including regulatory ambiguities at the federal and state levels and associated competitive alternatives causing retailer and consumer confusion.
Gross profit was reduced to $2.6 million, or 21.0% of revenue, due to a non-cash inventory provision of $3.8 million taken in the quarter related to a one-time wholesale hemp biomass transaction. Excluding inventory provisions, Adjusted Gross Margin was 52.2% for Q2 2024, versus Adjusted Gross Margin of 56.5% in Q2 2023. The decrease reflected the lower revenue in Q2 2024 as well as the Q1 2024 price reductions implemented on all oil tinctures. This was partially offset by improved production costs.
Direct-to-consumer net revenue through the Company’s web store was $7.8 million, a decrease of $2.9 million as compared to $10.7 million in Q2 2023, primarily as a result of lower online traffic and new consumer acquisitions. In June 2024, the Company migrated to a new e-commerce platform which provides improved software integrations, advanced target marketing tools, and superior customer relationship management capabilities. The new platform aims to provide a more engaging consumer experience and guide consumers to find the right products. On a quarter-over-quarter basis DTC net revenue increased 0.6% compared to the first quarter of 2024.
Business-to-business retail net revenue was $4.4 million, as compared to $5.3 million in Q2 2023. The $0.9 million decrease was primarily due to the reductions in retail shelf space allocated to the CBD category between the comparable periods. Inflationary impact on discretionary consumer spending activity and product mix shift away from higher-priced tinctures were additional contributing factors. Despite declines in the overall CBD category this year, Charlotte’s Web has been outperforming the category at retail according to data from SPINS LLC and holds the leading brand position in trust and loyalty according to the latest surveys by The Brightfield Group.
B2B net revenue increased 8.8% quarter-over-quarter compared to the first quarter of 2024. During the second quarter of 2024, Charlotte’s Web rolled out its new CBN ‘Stay Asleep’ gummies to retailers. The Company also added Walmart as a retail partner. The distribution improvements in the first half of 2024, combined with CBN Stay Asleep gummy retail placements, increased overall retail distribution in the Natural channel by 10% year-over-year.
SG&A Expenses
Total selling, general, and administrative (“SG&A”) expenses in the quarter were $14.7 million, a 25.0% improvement versus $19.6 million in Q2 2023. The improvement reflects actions taken during the first quarter of 2024 to reduce operating expenses to better align SG&A against revenue levels. Additional expense reductions were made subsequent to the close of the second quarter of 2024. As a result of the operating expense reductions, efficiency improvements, and stringent cost controls, the Company expects operating expenses for 2024 to be more than $20 million lower than 2023.
Net Income and Adjusted EBITDA
Charlotte’s Web reported a net loss of $11.0 million, or ($0.07) per share basic and diluted, for the second quarter of 2024, as compared to net income of $2.8 million, or $0.02 per share basic and diluted, for the second quarter of 2023. The positive net income in Q2 2023 reflects a $10.7 million gain due to the Company jointly forming an entity, DeFloria LLC, with AJNA Biosciences and a subsidiary of British American Tobacco. DeFloria was established to pursue FDA approval for a novel botanical drug to target a neurological condition, with the botanical drug being developed from certain proprietary hemp genetics of the Company. The initial investment was measured at fair value and is remeasured at each reporting date, with changes recognized in the fair value of financial instruments.
Adjusted EBITDA loss for the second quarter of 2024 was $5.2million, compared to Adjusted EBITDA of $3.7 million in the second quarter of 2023.
Cash Flow and Balance Sheet
Net cash used for operations for the three months ended June 30, 2024, was $4.7 million as compared to $1.0 million cash provided in Q2 2023. There were $1.3 million of capital expenditures during the quarter but no payments for MLB license and media rights assets. The comparable three-month period in 2023 included capital expenditures of $0.1 million, $2.0 million for MLB payments, and the receipt of a $4.2 million IRS Employee Retention Credit.
The Company’s cash and working capital as of June 30, 2024, were $32.5 million and $38.5 million, respectively, compared to $47.8 million and $54.5 million at December 31, 2023, respectively.
Consolidated Financial Statements and Management’s Discussion and Analysis
The Company’s unaudited consolidated financial statements and accompanying notes for the three and six months ended June 30, 2024, and 2023, 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 and on SEDAR+ and will be available on the Investor Relations section of the Company’s website.
About Charlotte’s Web Holdings, Inc.
Charlotte’s Web Holdings, Inc., a Certified B Corporation headquartered in Louisville, Colorado, is the market leader in innovative hemp extract wellness products that include Charlotte’s Web whole-plant full-spectrum CBD extracts as well as broad-spectrum CBD certified NSF for Sport. Charlotte’s Web is the official CBD of Major League Baseball, Angel City Football Club and the Premier Lacrosse League. Charlotte’s Web branded premium quality products start with proprietary hemp genetics that are North American farm-grown using organic and regenerative cultivation practices. The Company’s hemp extracts have naturally occurring botanical compounds including cannabidiol (“CBD”), CBN, CBC, CBG, terpenes, flavonoids, and other beneficial compounds. Charlotte’s Web product categories include CBD oil tinctures (liquid products), CBD gummies (sleep, calming, exercise recovery, immunity), CBN gummies, 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 analytic testing from soil to shelf for quality assurance. Charlotte’s Web products are distributed to retailers and healthcare practitioners throughout the U.S.A. and online through the Company’s website.
