Charlotte's Web Archives - Green Market Report

StaffAugust 13, 2021
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8min10751

Charlotte’s Web (OTC: CWBHF) CEO Deanie Elsner addressed the company’s recent rejection letter by the FDA in the company’s earnings call on Thursday. Since the passage of the 2018 Farm Bill that legalized hemp, the issue of CBD products has remained in a grey area. The FDA has had several public meetings and accepted public comments on the subject, but it still hasn’t made any specific decisions.

Charlotte’s Web was specifically focused on a regulatory pathway for full spectrum hemp extract with naturally occurring CBD. CBD products remain unregulated as the industry has grown to become a $3 billion to $4 billion industry.

FDA Punts To Congress

“After 2.5 years, it has become increasingly more apparent that in the FDA’s own words, potential legislation might be appropriate to enable a framework for under which the FDA can regulate full spectrum hemp extracts as dietary supplements,” said Elsner. “During the second quarter of 2021, we put this thesis to test by formally submitting a new dietary ingredient notification to the FDA for our full spectrum hemp extract as they have been recommending. The FDA responded with an objection letter to our NDI notification. Their response substantially based on their drug preclusion provision reveals that legislation is required to enable the FDA to establish a regulatory oversight for full spectrum hemp extracts as dietary supplements. Both the House and the Senate have introduced bills that would recognize hemp CBD as a dietary supplement and we are encouraged by this progress.”

When asked about the specifics of the letter, Elsner went on to say, “I will start with we were disappointed and strongly disagreed with not just the conclusion that they advanced, but the reasoning for their conclusions, because their letter back to us contained a significant amount of factual inaccuracies. And so the first thing I would tell you to do is on our website in the IR section, we have posted our response to the FDA. And we laid out an excruciating detail why we think they need to create the record in terms of what we submitted and what they concluded.

Now, that said, they drew a conclusion based on two examples. One was, they can’t move forward with an NDI as a dietary supplement because CBD is precluded, because it’s already a drug. And as you know, six months prior to the hemp bill being signed into law in December 2018, a drug was approved that’s CBD isolate. The second reason why they objected to our NDI was that they expressed safety concerns. And I think that’s the part that we are looking for a correction on, because regarding safety, the conclusions drawn just don’t appear to be based on the data we provided in our NDI. So, that’s we are trying to get focused on. In terms of what does it mean, I think what you are getting to is, it is the industry has been caught in a little bit of a catch-22, because the FDA has not been clear about the process by which they want companies to go through to gain regulatory clarity. And Congress has been pointing to the FDA to take responsibility for this.

And so our decision was full transparency, to force the issue to see who has the next decision. And with the FDA objecting to our NDI, it becomes very clear that the regulatory process to get established has to start with Congress, legislative and the FDA to regulate the dietary supplement for CBD, and then FDA can regulate within. And so I am confident there is a way to do this. Over the last 18 months, we have met with the FDA, about eight to ten different times and our meetings were very constructive. I have got a great deal of respect for the FDA. But I think they are in a bit of a catch-22, because they have approved the drug. And they can’t seem to move away from that precedent. And so Congress has to act. And I think once Congress acts, the FDA can be very clear about the process. The process is scientific. It’s intense. There is a ton of data that we have got to do to submit for it. And I feel really good having gone through this knowing what they are looking for. But now we need Congress to act. And when that happens, I think the category will be able to submit NDIs and the whole thing will begin to open up.”

THC Challenge

Elsner was asked whether relying on Congress would be any better and she answered, “This is not just a CBD hemp industry challenge. This is a THC sector challenge, because we are going through with hemp extracts with naturally occurring CBD is exactly what the cannabis industry is going to have to do following us. And so this is not Congress, maybe or maybe not engaging on the hemp CBD industry. This is Congress looking at a category today, that is roughly $17 billion to $20 billion in total in the US across 11 states where cannabis is legal and CBD participates. And so some kind of resolution has to be landed for how both of these categories are regulated. And the FDA has to have clarity and perspective about how they want companies to produce safe products for consumers in a way that is holding manufacturers to a very high level of standard. And so we are doing this for ourselves, but doing this for our category. We are doing this in support of our consumers. But it’s the whole sector that is going to put the pressure for Congress to act and push the FDA to move forward. And we will continue to push both fronts.”


Debra BorchardtAugust 12, 2021
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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.


Kaitlin DomangueMay 18, 2021
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Brightfield Releases New CBD Report

Cannabis and CBD consumer data analytics company, The Brightfield Group, is announcing the release of their newest report analyzing the CBD market in 2020 and laying out their predictions for 2021. Some key information from the report includes: 

  • U.S. hemp-derived CBD sales are expected to reach $5.3 in 2021, up 15% from 2020’s $4.6 billion
  • By 2026, American CBD sales will reach $16 billion, driven by accelerated growth of ingestible products
  • Drinks and gummies are expected to be the fastest growing product types in 2021, with 71% and 44% value growth, respectively
  • Tinctures will retain the highest share of the market in 2021, holding 18% of retail sales
  • Online sales will surpass $2 billion in 2021, accounting for 38% of the total American CBD market

The report also highlights the coronavirus pandemic’s impact on the American CBD market, the FDA’s stance on regulating CBD in 2021, and various other pieces of information about the rapidly expanding market. The Brightfield Group predicts the hemp-derived CBD market will grow at a compound annual growth rate (CAGR) of 25% from 2021 to 2026, with growth driven by: 

  • New consumers 
  • Expanding retail into new channels
  • A regulatory framework from the FDA, accelerating the growth rate of ingestibles
  • New players to bring innovation to the market

Price and Potency Changes

According to aggregate data from Hemp Benchmarks, the Brightfield Group’s report says the aggregate assessed price for hemp CBD biomass declined by a whopping 82% from April 2019 to May 2020, taking the price from $38 a pound to just $7 per pound. 

While the coronavirus pandemic surely played a part in this, you have to wonder if the newly-established American CBD industry in 2019 played a role in the price per pound during that time. It was a hot market, performing beautifully and faster than anticipated, thanks to the federal government removing hemp from the Schedule I Substances list in 2018. The hemp space in 2019 is a tough year to compete with, and throw a global pandemic on top just one year later: you might see some lower hemp prices than average. 

  • 30 ML tinctures saw, on average, a 33% potency increase, going from 450 to 600 milligrams of CBD. The price dropped from $25 to $20. 
  • 120 ML tinctures saw, on average, a 33% potency increase, going from 1800 to 2400 milligrams of CBD. The price dropped from $70 to $60. 

Innovation 

In typical cannabis industry fashion, the CBD market is ahead of innovation and constantly thinking of new ways to keep customers satisfied. However, CBD brands are going beyond wacky flavors and new designs: the companies are focusing on functional ingredients that will make a difference for the consumer. 

Immunity is a huge focus for the CBD space in 2021, and 2020 saw the same thing. Ingredients like elderberry, echinacea, Vitamin C, and zinc are popular choices for consumers. Minor cannabinoids like CBG and CBN are still hot for 2021, tapping into the entourage effect full-spectrum cannabis products provide us. 

Top CBD Companies in Q4 

In terms of market share, here were the leading CBD companies during the last quarter of 2020: 

  1. Charlotte’s Web (3.6%)
  2. Medterra (1.7%)
  3. cbdMD (1.6%)
  4. CBDfx (1.5%)
  5. CBDistillery (1.2%)

The report listed 20 CBD companies, others include: CBD American Shaman, Bluebird Botanicals, Garden of Life, Ananda Hemp, and Martha Stewart CBD. 

Distribution Channels

Online CBD sales are expected to reach $2.02 billion in 2021, accounting for 38% of the total market. This is down slightly from 42% in 2020, but it’s a good sign that things might be returning to the beginning of normalcy as people return to in-person retail shopping. Curbside and contactless options are still available in many places, which might contribute to this number. E-commerce will dominate the distribution market in 2021, with pharmacy following behind it, then CBD speciality retailers, natural food stores, pet stores, and more.


Debra BorchardtMay 11, 2021
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Charlotte’s Web Holdings, Inc. (OTCQX: CWBHF) reported financial results for the first quarter ended March 31, 2021, as revenue increased 9.1% to $23.4 million. This missed the average analyst estimate for $27 million from Yahoo Finance. Charlotte’s Web said DTC eCommerce net sales increased 14.5% reflecting increased marketing, targeted promotions as well as incremental demand for the company’s new topical and THC-free ingestible products.

The net losses increased to $13.9 million over last year’s $11.5 million for the same time period. The net loss per share was $0.10, which was also higher than the average analyst estimate for an net loss per share of ($0.05).

“Despite reduced retail activity due to the pandemic, our directly comparable B2B retail sales showed year-over-year growth. Our B2B retail sales and velocities further strengthened in March and April as US vaccination programs support reopening of the economy, and our DTC sales continued to grow demonstrating long-term secular strength for our products in the e-commerce channel,” said Deanie Elsner, CEO of Charlotte’s Web. “We continued to expand our leading market position with quarterly market share gains across all of our channels. Internationally we have made our first moves into Israel and Canada with initial product sales planned for early 2022. We are pleased with our progress and believe that Charlotte’s Web is well-positioned to drive continued growth in the US and new growth in key international markets as we expand outside of the US.”

Expenses Rise

The company also reported its operating expenses rose 2.9% to $24.0 million over last year’s $23.3 million. the company said that 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 Q3-2020 consolidated expense run rate. First-quarter operating expenses were 15.2% lower compared to the third quarter of 2020, ahead of plan, and were achieved despite the additional expenses in the quarter from the CW Labs R&D division and the acquisition of Abacus Health, which were not present for the full quarter in Q1-2020.

Adjusted EBITDA for the quarter was negative $4.7 million, or (19.9)% of consolidated revenue, compared to negative EBITDA of $5.7 million, or (26.5)% of revenue, for the first quarter of 2020.

Cash Burn

Charlotte’s Web cash and working capital at the end of the quarter was $35.0 million down from last year’s $52.8 million for the same time period. The company said it used $7.7 million of cash in operations during the first quarter of 2021 compared to $14.9 million of cash used in operations during the first quarter of 2020. So it spent less and still has a cushion of cash.  During the quarter the company paid total consideration of $8.0 million cash for an Option Purchase Agreement with Stanley Brothers USA Holdings, Inc. providing the optionality to acquire or own warrants Stanley Brothers USA upon federal legalization of cannabis in the United States.


Debra BorchardtMarch 25, 2021
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Charlotte’s Web Holdings, Inc.  (OTCQX: CWBHF) looks like it has been able to regain some ground after the pandemic caused the company a lot of disruption as retailers were closed for some time. Charlotte’s Web reported revenue increased 17.9% to $26.9 million in the fourth quarter of 2020 versus $22.8 million for the same time period in 2019. The company said DTC (direct-to-consumer) sales increased 21.2% year-over-year, contributing $17.4 million or 64.8% of the fourth-quarter revenue. While it was a positive turn of events, the company missed revenue estimates of $27.5 million according to Yahoo Finance.

For the full year, total net revenue increased to $95.2 million vs. $94.6 million in 2019. The company said DTC eCommerce sales grew 27.6% in 2020 contributing 67.0% of total revenue, substantially offsetting a decline of 29.5% in B2B sales impacted by the COVID-19 pandemic.

“We turned a challenging start to 2020 into a strong finish, taking multiple actions and outperforming much of the competitive set to extend our brand and market share leadership,” said Deanie Elsner, CEO of Charlotte’s Web. “We filled product and channel gaps with competitive offerings and advanced the science of hemp CBD through CW Labs and collaborative studies with top-tier institutions. We have now protected our intellectual property with 5 patents awarded for our proprietary cultivars and have defended our trademarked Charlotte’s Web brand through a recent judgment.”

E-Commerce Business Builds

During 2020 Charlotte’s web said it implemented a competitive pricing realignment strategy across its product portfolio resulting in increased unit sales and expanded market share in the second half offsetting some of the headwinds created by COVID-19.  B2B net sales increased 12.4% year-over-year supported by expanded topical product offerings. DTC net sales grew by 21.2% year-over-year supported by the pricing realignment and higher conversion rates through ongoing marketing and social media programs. Year-over-year new consumer acquisitions increased 52% and conversion rates increased 98%.

Cutting Expenses

Charlotte’s Web also made headway as it cut Operating expenses by 10.4% to $23.6 million from $26.4 million. The company noted that the high operating expenses were due to its investments in capacity expansion and transition to a consumer-packaged-goods (“CPG”) operating company capable of supporting mass retail channel growth. In response to lower B2B retail sales growth during the pandemic, management said it took actions to better align operating expenses through an expense optimization program successfully achieving reductions of more than 10% of the consolidated expense run rate by the end of 2020. “This was achieved despite the addition of the CW Labs R&D division and the Abacus acquisition during the year. As a percent of revenue operating expenses improved from 136%, to 113% and 88% for Q2, Q3 and Q4, respectively in 2020.”

The company said it used $5.1 million of cash in operations during the fourth quarter of 2020 compared to $8.6 million of cash used in operations during the fourth quarter of 2019. Charlotte’s Web cash and working capital at December 31, 2020, were $52.8 million and $113.6 million, respectively, compared to $68.6 million and $116.9 million on December 31, 2019.

Elsner added, “In 2021 we are positioning for long-term growth and shareholder value creation as we evolve towards establishing Charlotte’s Web as a leading global botanicals wellness company by expanding into cannabis wellness where federally permissible. To support our international growth we have an exclusive agreement with one of Israel’s largest medical cannabis producers, and in the U.S. we secured future optionality through a strategic option to acquire Stanley Brothers cannabis business pending US federal legalization of cannabis.”


Kaitlin DomangueMarch 4, 2021
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It’s time for your Daily Hit of cannabis financial news for March 4th, 2021. 

On the Site

Columbia Care Guides Higher for 2021

Columbia Care Inc.  (OTCQX: CCHWF)  released preliminary results for the fourth quarter and full year ended December 31, 2020 and issued 2021 guidance. Actual revenue rose 228% in the fourth quarter to $76 million versus $23 million for the same time period in 2019. 

While this is a solid performance, it does miss the analyst estimates for revenue of $79 million in the fourth quarter according to Yahoo Finance. The combined results for the fourth quarter are listed as $81 million. 

 

Cannabis Companies Go On Buying Spree

This week has been unusually active as cannabis companies have been on a major buying spree.

  • Schwazze acquires Star Buds for roughly $72.3 million
  • Greenlane acquires Eyce for an undisclosed amount
  • Terra Tech buys UMBRLA, Inc., recently rebranded as Unrivaled for an undisclosed amount

 

PACT Act to Apply to All Vaping Products

Amendments to the Prevent All Cigarette Trafficking (PACT) Act may have caused cannabis to hit yet another setback. The PACT Actt has been amended to include “electronic nicotine delivery systems”, which looks inclusive to cannabis at first glance. However, it’s described as followed:

“any electronic device that, through an aerosolized solution, delivers nicotine, flavor, or any other substance to the user inhaling from the device including an e-cigarette; an e-hookah; an e-cigar; a vape pen; an advanced refillable personal vaporizer; an electronic pipe; and any component, liquid, part, or accessory of a device described without regard to whether the component, liquid, part, or accessory is sold separately from the device.”

This means that USPS can no longer deliver cannabis vape products to consumers. 

 

Delic Moves To Focus On At-Home Mushroom With Homestead Acquisition

Psychedelic media company Delic Holdings Inc. (OTCQB: DELCF) has acquired mushroom kit maker and media company Homestead brands in an all-stock deal. DELIC issued subordinate voting shares worth $50,000 and 50,000 incentive stock options were also granted to Homestead founder David Tatelman, with an exercise price of $0.58. David Tatelman will act as a consultant to the company.

 

Charlotte’s Web Moving Beyond Hemp

Well-known hemp CBD company Charlotte’s Web Holdings, Inc.  (OTCQX: CWBHF) is expanding beyond its current model with a planned acquisition of privately-held Stanley Brothers USA Holdings. Stanley Brothers is a cannabis wellness incubator currently operating in three states (Colorado, California, Florida) with expansion plans underway in eight additional states.

The acquisition though isn’t immediate. Instead, Charlotte’s Web is pursuing a five-year option plan valued at $8 million, which could be extended to seven years.

In Other News

Tryp Therapeutics Announces Application to List on OTCQB

Pharmaceutical company focused on identifying and developing clinical-stage compounds for diseases with complex and unmet medical care, announced today their application to list on the OTCQB® Venture Market OTCQB. 

 

Illinois Dispensaries See $2.88 Million in Daily Sales in February 

Illinois dispensaries sold almost $2.9 million dollars worth of cannabis last month, outpacing the record set just one month earlier. The state’s retail shops sold more than $80 dollars in adult-use cannabis last month, a slight drop from $88 million in February. 


Debra BorchardtMarch 4, 2021
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Well-known hemp CBD company Charlotte’s Web Holdings, Inc.  (OTCQX: CWBHF) is expanding beyond its current model with a planned acquisition of privately-held Stanley Brothers USA Holdings. Stanley Brothers is a cannabis wellness incubator currently operating in three states (ColoradoCaliforniaFlorida) with expansion plans underway in eight additional states.

The acquisition though isn’t immediate. Instead, Charlotte’s Web is pursuing a five-year option plan valued at $8 million, which could be extended to seven years. However, the acquisition could also happen in three years and upon the federal legalization of cannabis in the U.S. The company stated that the common shares of Charlotte’s Web continue to trade on the TSX in Canada and OTCQX in the US. The payment will be made in stock, which has fallen on the news.

“Consumer attitudes, market trends, and laws surrounding cannabis and its role within the wellness category continue to trend positively. This strategic Option provides Charlotte’s Web optionality to enter the U.S. cannabis wellness market in partnership with an experienced and trusted team and brand, positioning our business for potential new growth opportunities and shareholder value creation,” explained Deanie Elsner, CEO of Charlotte’s Web. “The Stanley Brothers are innovating cannabis wellness with the same philosophy and vision that drove their success as founders of the Charlotte’s Web brand. With this shared heritage, we could not be more aligned.”

Stanley Brothers combines full-spectrum cannabis extracts with functional botanical ingredients. Marketed under the “ReCreate” brand, the wellness formulations are lower in THC for more precisely controllable benefits. Products include functional chocolates, gummies and oil tinctures, formulated with the wellness benefits of the entire cannabis plant including CBD and THC to help achieve a desired state of wellbeing.

Charlotte’s Web Revenue Woes

Charlotte’s Web had a difficult year in 2020 as the pandemic closed many retailers which hurt sales. The company has missed earnings estimates for three quarters in a row according to Yahoo Finance. The company has also faced intense competition from thousands of CBD companies that have launched over the past two years since hemp was legalized. On top of those problems, the company has faced a lawsuit challenging its ability to patent the strain which is the company’s namesake. So it’s no surprise that the company is seeking a way to expand beyond legal hemp products.

The two companies also share a lineage with the founders. Two founders of Stanley Brothers USA are also members of Charlotte’s Web board of directors. As a result of the planned acquisition Stanley Brothers co-founders Joel Stanley and Jared Stanley are resigning as members of the Charlotte’s Web board of directors and will take board positions at Stanley Brothers.

Option Details

According to the company statement, upon the occurrence of the Triggering Event, the Company may exercise the Option to acquire Stanley Brothers USA for a purchase price to be determined at the time of exercise of the Option. The purchase price determination will involve weighted application of 3.5 times revenue and 13.5 times EBITDA multiples to Stanley Brothers USA’s financial statements at the relevant time, or a base amount and earn-out, in certain circumstances. The purchase price will be subject to customary adjustments for working capital, debt and cash at closing, and certain portions of the purchase price may be held back to cover post-closing adjustments and indemnification matters.

 


Debra BorchardtSeptember 14, 2020
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 Charlotte’s Web Holdings, Inc. (OTCQX: CWBHF) reported that revenue fell from revenue $25 million in the 2019 second quarter to $21.6 million for the second quarter ending June 30, 2020. The company missed the average estimate for revenues, which was $25.9 million according to Yahoo Finance. The company also missed the earnings estimate of -$0.04 with an reported earnings of -$0.13.

The company blamed the drop on the pandemic saying, “COVID-19 has impacted the Company’s retail and health practitioner channels due to lower foot traffic and temporary location closures under the pandemic. Limited disruption has occurred within production and manufacturing operations, however, the company‎’‎s back office and reporting functions have been impacted and additional time was required for the consolidated second-quarter filing.”

The company also delivered a net loss of $14 million for the quarter versus last year’s net income of $2.2 million for the same time period. On a positive note, Charlotte’s Web did report that strong DTC (direct to consumer) sales largely offset a 54.5% decrease in B2B retail sales which accounted for 28.2% of total revenue in the quarter. DTC net sales grew by 33.6% year-over-year as online traffic and high conversion rates increased through ongoing marketing and social media programs.

“Second-quarter revenue was below expectations due to the impact of COVID-19 on retail sales,” stated Deanie Elsner, CEO of Charlotte’s Web. “However, our DTC sales increased by 33.6%, largely offsetting declines in B2B retail sales.  We made excellent progress building out our infrastructure and expanding our product portfolio with the closing of the Abacus acquisition.  Abacus CBD Medic™ products are now being sold through our online store and we look forward to realizing more cross-selling revenue synergies with Abacus through our FDM partners.”

Rising Expenses

Expansion has cost the company in terms of rising expenses. Operating expenses jumped 82% to $29.5 million over last year’s $16.2 million. The company said that the increase reflected its investments in capacity expansion and transition to a consumer-packaged goods (“CPG”) operating company capable of supporting mass retail channel growth. The increase included approximately $6 million of extraordinary expenses related to the Abacus acquisition and legal fees associated with the brand and intellectual property protection. Subsequent to Q2-2019, operating expenses increased as the company relocated into larger office facilities in Boulder, Colorado, and added senior CPG management to the leadership team along with related personnel. The company said that it is targeting a 10% reduction in expenses to match the falling revenue.

Charlotte’s Web completed the acquisition of Abacus Health Products, Inc. in June with an all-stock transaction. Abacus is a leading provider of over-the-counter topical products for pain relief and skincare containing CBD hemp extracts. In the third quarter, Charlotte’s Web began implementing operating cost synergies with Abacus and will continue through the remainder of the year. Further cost synergies are targeted in 2021 through integration into the Company’s new production and fulfillment center.

The company has been fighting a legal battle over the use of the name Charlotte’s Web. The company does not want any other brands to use the name Charlotte’s Web, while others believe it is just a strain name and that no company should be allowed to own a strain name.

Looking Ahead

Russ Hammer, Chief Financial Officer said, “We are seeing improvements and a stronger back half in our DTC channel, but without a meaningful opening up of the economy and health practitioner channel we expect only flat to modest consolidated net revenue growth for 2020. Our long view market opportunity remains intact and we continue to add new customers, doors, and products. Our Q3 revenues are trending ahead of Q2 sales levels and we anticipate reopening of retail locations in the U.S. will support a positive growth trend. As we see resolutions in COVID-19 and hemp CBD regulations or legislation we can see the category build towards its full potential.”


Debra BorchardtJune 12, 2020
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The Stanley Brothers in Colorado made their name by targeting a strain called Charlotte’s Web that had greater amounts of CBD than THC in order to treat a young girl with a rare form of epilepsy. The girl, Charlotte Figi, suffered from Dravet Syndrome that caused her to have multiple seizures in a single day. This strain of cannabis seemed to quell the seizures and allowed her to live a better life. Sadly, Figi recently passed away.

The company called the strain Charlotte’s Web in her honor and even changed its name to Charlotte’s Web Holding Inc. (OTC:CWBHF). Then the company attempted to trademark the name Charlotte’s Web, but was rejected. In October 2019, the United States Patent & Trademark Office rejected the trademark application for “Charlotte’s Web” in a nonfinal Office Action.  The USPTO specifically found that the name “Charlotte’s Web identifies a particular strain of low THC, high CBD content Cannabis sativa plants” does not function as a trademark.

CBD company AAXLL contends that anyone can use the name Charlotte’s Web since it isn’t trademarked. The company believes that CWI made “a serious mistake in adopting the generic name of a strain as its corporate and brand name since everyone has the right to use the name of a strain.”

The logic here is that no company can trademark a specific strain of cannabis. No one company can own the Jack Herer or Purple Kush or Girl Scout Cookies. However, master growers often apply for patents on strains they create as intellectual property. GW Pharmaceuticals (GWPH) has numerous patent applications for various cannabis drug combinations. Since the federal government is loathe to trademark anything related to marijuana, states stepped in to protect various brand names.

AAXALL Fights Back

AAXLL disputes CWI’s central allegation that Charlotte’s Web is not the name of a strain of hemp.  AAXLL CEO Joseph Maskell notes that CWI itself referred to “the Charlotte’s Web strain” in its own 2019 public offering documents.

Maskell also states, “U.S. federal trademark law already dictates that cultivar or strain names are generic from the get-go, so the Charlotte’s Web name of the strain was never protected as a trademark. CWI cannot prevent the rest of the world from referring to Charlotte’s Web as a strain of hemp any more than a French winery could prevent the world from referring to Chardonnay as a varietal name of grapes.”

AAXLL’s Maskell comments that USPTO’s rejection of CWI’s trademark application would demonstrate Maskell concludes, “the family-run Balance CBD brand will not be bullied by CWI.  It’s shameful that a large publicly traded corporation uses such tactics to intimidate competition to try to cover up their past mistakes”

Charlotte’s Web Fights To Protect Name

Like any large company, Charlotte’s Web is fighting to protect its name. In a company filing it wrote, “CW currently has a portfolio of pending U.S. plant, utility and design patent applications directed to CW’s most promising plant genetics, proprietary extraction technology, cannabinoid isolation methods and cannabinoid conversion processes and industrial designs. CW also has pending U.S. and Canadian trademark applications.”

While AAXALL points to the government trademark rejection as a reason it should get to use the name, Charlotte’s Web says that the rejection was due to the product falling under the Controlled Substances Act and FD & C Act. Not because of a strain argument. It said it, “May rely on common law theories of trademark protection and enforcement in cases of actual or suspected trademark infringement of the trademarks it wishes to protect.” The company also noted that such battles to protect its name and trade secrets could be expensive.

Litigation Lineup

Any large company is always seen as a litigation target. There is the assumption that a big company has the money to settle a case rather than fight. Charlotte’s Web market share in the CBD industry is the largest and has at times been as much as a third, although competition has caused that number to decline.

The company faces a class-action lawsuit that its CBD products contain more hemp than the label says. The company contends the products are accurately labeled. Another lawsuit is being fought with AgriMed, who had the license to sell CW products in the state of Illinois. AgriMed says CW competed against it by selling CW products in the state as well. CW says that AriMed didn’t pay the royalties it said it would. That trial had been planned for May 2020.

 


Debra BorchardtMay 14, 2020
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5min93900

Charlotte’s Web Holdings, Inc. (OTCQX:CWBHF) reported slipping first-quarter revenue for the period ending March 31, 2020. Charlotte’s Web delivered revenue of $21.5 million, slightly below last year’s revenue of $21.7 million for the same time period in 2019. However, this beat the Yahoo! Finance average analyst estimate of $20.78 million.

The earnings per share were reported at a negative $0.11 per share. This missed the analyst estimate for a negative $0.06 per share. The company attributed the drop to lower business-to-business (B2B) sales, but also noted that direct-to-consumer (DTC) sales increased.

The company also reported a net loss of $11.5 million versus last year’s net income of $2.3 million for the same time period. Charlotte’s Web also said that the adjusted EBITDA for the quarter was a 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 company said this reflected the substantial investments to support expected future revenue growth from the F/D/M channel.

“First quarter revenue was ahead of expectations driven by our strong DTC e-commerce sales enabled by our new technical platform and capabilities.  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-through 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.”

Too Much Competition

Despite owning a third of the CBD market, increased competition weighed on Charlotte’s Web. The company said that B2B sales were 31.5% lower year-over-year as the natural retail channel struggled with overcrowding due to increased competition. The company also stated that a lack of FDA regulatory guidelines for the F/D/M channel held back the adoption of ingestible products.

Customers though managed to find the Charlotte’s Web products online as DTC net sales grew by 29.4% through ongoing marketing and social media programs. The company said that 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.

Cash Burn

The company used $14.9 million of cash in operations during the quarter versus the $3.7 million of cash that was used in the first quarter of 2019. The company said this was due to the construction of its new 137,000 sq. ft. production and fulfillment center to support anticipated growth. Still, the company is in great shape as its cash and working capital at the end of the quarter stood at $53 million and $114.9 million, respectively.

Looking Ahead

“We are modeling 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.”

Canaccord Genuity analyst Derek Dley wrote in a research note dated May 13, 2020, “The company’s CPG focused management team is well-positioned to lead the company into newer markets as the FDA allows the FDM channels to sell ingestible products over time, in our view.”


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