Charlotte’s Web Holdings, Inc. (TSX: CWEB) (OTCQX: CWBHF) missed expectations as the CBD company continues to struggle amid a patchwork regulatory landscape. The company reported its financial results for the second quarter ending June 30, 2022.
For the key metric of total revenue, Charlotte’s Web missed expectations as it delivered approximately $18.9 million during the period — missing the Yahoo Finance Average analyst estimate for revenues of $27.13 million. The revenue decreased 21.8% versus $24.2 million in the same period last year. The company said that the decrease was primarily due to lower comparable customer shipments, consumer shift to lower priced formats, a return reserve as well as lower comparable online traffic.
Charlotte’s Web also reported a second-quarter net loss of $7.9 million compared to a net loss of $5.9 million in the same period last year. The company said that the net result was primarily impacted by “lower net revenues, higher return reserves and increased inventory provisions, which were offset by significantly reduced operating expenses.” The earnings were for a loss of five cents per share, a cent below analysts’ loss estimates of four cents a share.
“While we are disappointed with the second quarter revenue, we achieved significant distribution and customer wins consistent with our growth priorities to expand our coverage in existing channels and enter new vertical,” CEO Jacques Tortoroli said. “We’re also focused on improving operating cash flow as we progress through the second half of the year. Operating expenses were down over 31.5% year-over-year in the second quarter. In July, we further lowered our staffing levels and administration expenses. In aggregate, our focus on right-sizing our business is bringing operating expenses below $70M on an annualized run rate.”
The company also saw a $2.4 million decline in the e-commerce platform versus $15.7 million at the same time last year. Charlotte’s Web maintains the largest e-commerce business in the CBD industry; and e-commerce represents the largest channel in the industry with an approximate 40% market share, according to the Brightfield Group.
Business-to-business net revenue was $5.6 million after a $0.9 million returns reserves — representing $2.9 million, or 33.9%, lower year-over-year “primarily due to lower comparable shipments to some of the company’s largest retail customers.”
“Charlotte’s Web holds the number one share position across major retail channels including food/drug/mass retail, natural grocery & vitamin retailers, and e-commerce, based on market share data from leading third-party analysts such as The Nielsen Company and Brightfield Group,” the release said.
Gross profit was $9.3M, or 49.4% of revenue versus $15.8 million and 65.5% of revenue respectively in same period last year. The company said the decrease was primarily related to lower net revenue “including a $0.9 million customer return reserve, and $1.9 million of inventory provisions.” Excluding the return reserve and inventory provisions, gross profit was 61.0% of revenue, it said.
Adjusted EBITDA fell to $5.4 million in the second quarter, versus a loss of $5.1 million in the same period last year.
Net cash used from operations during the first half of the current fiscal year was $4.3 million versus $16.2 million for the same period last year. The company’s cash and working capital as of the second quarter were $14.8 million and $64.6 million, respectively, versus $19.5 million and $75.6 million in the latter half of the previous fiscal year.
Total selling, general and administrative expenses of $17.3 million improved 31.5% year-over-year due to a $7.9 million reduction versus the second quarter last year. The company said the improvement reflects lower staff levels and compensation as well as increased operating efficiencies “resulting from actions implemented year-to-date.”
New Pathways For CBD
As companies in the cannabis sector suffer from a lack of regulatory guidance from the federal government, new opportunities are opening up for CBD companies.
Overseas, the company’s original CBD oil formula has been placed on the Foods Standards Agency list of products allowed to be sold in the U.K — making Charlotte’s Web the only substantially vertically-integrated U.S. company with a full-spectrum hemp extract to have passed the validation phase and advance to the safety assessment phase in the United Kingdom, it said.
Also, the Scientific Advisory Committee for Health Canada unanimously agreed CBD is “safe and tolerable for short-term use” — recommended hemp CBD products should be considered for mainstream retail availability.
Cory Pala, Director of Investment Relations, told The Green Market Report at the time that the company is “particularly excited” about the recommendation.
The company cannot legally export its products to Canada under current law “which is sort of ironic” considering it is federally legal in both countries, he said, so it has partnered with cultivators in the country instead. The new recommendation presents a juncture for the company.
“In the US, we have 2,500 different competitors that have similar products,” Pala said. “But in Canada, we have maybe half a dozen, if that. And so it’s really, really compelling to us as a market opportunity. This is big for multiple reasons.”
The health board will take consultation with stakeholders and advocates to hash out regulation guidelines and figure out whether it actually wants to move in that direction before seeking approval from the Canadian government.