Charlotte's Web Revenue Rises, But FDA Isn't Impressed

Charlotte’s Web Holdings, Inc. (TSX: CWEB) (OTCQX: CWBHF) reported financial results for the second quarter ending June 30, 2021 with consolidated revenue increasing 11.4% year-over-year to $24.2 million. This missed the Yahoo Finance average analyst estimate for revenues of $28 million. Charlotte’s Web said that increased retail volumes have resulted in ongoing incremental quarterly gains in retail market share. Charlotte’s Web grew its number one market share across its core retail channels, including total US Food/Drug/Mass retail, total US natural specialty retail.

Net losses were trimmed to $5.3 million from last year’s $14.4 million. The earnings per share were ($0.04) which fell from last year’s ($0.13). It also beat the estimates for ($0.05).

“The ongoing economic recovery from the pandemic that began in Q1 strengthened through the second quarter, driving a 38% increase in our retail revenue as many consumers transitioned from online shopping back to brick and mortar retail. This was especially evident within our largest and most established medical and healthcare practitioner channels,” said Deanie Elsner, CEO of Charlotte’s Web. “We believe we are best positioned to take advantage of the return to brick and mortar retail as we hold the number one share position in the food/drug/mass and natural specialty retail channels in the US.  Internationally, we recently planted our first hemp crop in Canada and anticipate initial product sales by early 2022.”

In disappointing news, Law360 reported that the U.S. Food and Drug Administration released a letter on Wednesday telling Charlotte’s Web that it can’t put a cannabidiol product on the market as a dietary supplement, suggesting that CBD reform may have to wait for congressional action. The site said, “The agency told Charlotte’s Web that it won’t sign off on its application to market its “Full Spectrum Hemp Extract” because CBD is already the active ingredient in the company’s epilepsy treatment Epidiolex, the first and so far only FDA-approved cannabis-derived drug, according to the letter dated July 21. It has been the FDA’s stance since the 2018 farm bill removed hemp from the Controlled Substances Act that CBD can’t be used in foods since it’s a drug product.”

Law360 said the letter stated that while Charlotte’s Web submitted a study showing that there were no observable adverse effects from the CBD product, it did not supply the underlying data that the FDA requested, according to the letter. “In addition, none of the provided studies addressed the issue of whether CBD affects the liver or the reproductive system, according to the letter.”

Revenue Growth

The company noted that the consolidated business-to-business (“B2B”) revenue increased 37.7% year-over-year reflecting consumers returning to brick & mortar retail shopping following the economic reopening from pandemic lockdowns. Similarly, B2B healthcare practitioner (“HCP”) and medical channels experienced increased activity and revenue, additionally supported by the company’s acquisition of Abacus Health in June 2020. The direct-to-consumer (“DTC”)  eCommerce net sales grew by 1.0% year-over-year, reflecting some consumer transition back to retail shopping. Year-over-year new subscriptions increased 43% and conversion rates increased 27%. DTC accounted for  64.9% of total revenue in the second quarter of 2021 versus 71.6% for the same period in 2020.

Expenses Improve

Operating expenses were $25.0 million, a 15.2% year-over-year improvement from $29.5 million. In response to lower B2B retail sales during the pandemic,  management took actions in the fourth quarter to better align operating expenses through an expense optimization program targeting reductions of more than 10% of the third-quarter consolidated expense run rate. Operating expenses reductions for the first half of 2021 were ahead of plan and were achieved despite incurring the additional operating expenses from the CW Labs R&D division as well as the acquisition of Abacus Health, which were not present for the full first six months of 2020.

Adjusted EBITDA for the quarter was negative $3.9 million, or (16.3)% of consolidated revenue, a 31.1% improvement from negative Adjusted EBITDA of $5.7 million, or (26.6)% of consolidated revenue, for the second quarter of 2020.

Balance Sheet and Cash Flow

The company used $6.5 million of cash in operations during the second quarter of 2021 compared to $7.1 million of cash used in operations during the second quarter of 2020. The company’s cash and working capital on June 30, 2021, were $27.1 million and $90.1 million, respectively, compared to $52.8 million and $113.6 million on December 31, 2020Charlotte’s Web has a near-term IRS tax receivable of $10.9 million and maintains an unused $10 million line of credit with JPMorgan, with an opportunity to extend to $20 million.

Debra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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