Charlotte’s Web Holdings, Inc. (CWBHF) (CWEB) 2019 Q4 and Year-End Results

Q4 Business Review

F/D/M retail channel: Q4 sales to F/D/M increased 68% year-over-year as the Company added several new channel partners in 2019 representing more than 5,000 retail locations. Approximately 75% of the F/D/M locations continue to only carry topical products due to an uncertain regulatory environment. Expansion of the F/D/M market slowed in the fourth quarter after anticipated regulatory clarity did not materialize. However, Charlotte’s Web has been encouraged by recent public comments from the Agency. Ongoing discussions with channel partners indicate a meaningful increase in additional store locations intend to add Charlotte’s Web products to their shelves over the coming months including national pet retailers.  Charlotte’s Web intends to introduce new topical products in April, 2020, an important focus of the F/D/M channel in particular.

Natural health channel: Q4 sales within the natural channel declined 11% year-over-year and 21% quarter-over-quarter due to competitive crowding and to low barriers to entry, partly due to lack of regulatory oversight. In 2019 thousands of new brands entered the channel, diluting market share and consumer spending. As consumer education increases and regulatory oversight is implemented, the Company expects a competitive culling of brands with unsustainable business models or subpar products. In April, Charlotte’s Web will launch competitive new product formats into the channel leveraging its trusted brand name.

Direct-to-consumer (DTC) ecommerce channel: Q4 DTC sales through the Company’s online store increased 14% year-over-year. The Company completed a significant upgrade to its ecommerce platform during the fourth quarter adding a more robust technical platform that enables greater segmentation and marketing capability. The enhanced shopping experience has resulted in a significant lift in conversion rates and Charlotte’s Web is increasing its investments into this top-performing channel in 2020. Further enhancements are underway to deliver shopping experience optimizations including significant checkout, content and mobile enhancements.

“We actively adapt our strategies with the changing market dynamics within our sales channels,” said Ms. Elsner. “In 2020 we are bolstering our ecommerce channel, launching additional topical products into the F/D/M channel, and introducing competitive new products into the natural health retail channel.”

Financial Review

Financial summary for the three and twelve months ended December 31, 2019 :

Quarterly revenue growth for the Company’s nine most recent fiscal quarters:

For the year, DTC sales grew to 57% of total revenues compared to 56% in 2018. B2B sales contributed 43% of total revenue compared to 44% in 2018.

Segmented sales for the three and twelve months ended December 31, 2019 :

Fourth Quarter Financial Review

Revenue for the fourth quarter ended December 31, 2019 increased 6% to $22.8 million , compared to $21.5 million for the fourth quarter of 2018. Segmented sales of human ingestible, topical and pet products grew by 26%, 29% and 33%, respectively year-over-year. During the quarter ended December 31, 2019 , the Company’s human consumables, topicals and pet products accounted for approximately 90%, 6% and 4%, respectively, of total sales.

DTC sales grew by 14% year-over-year and accounted for 65% of total revenue in the fourth quarter as online traffic and conversions increased through ongoing marketing and social media programs. B2B sales decreased by 6% year-over-year and accounted for 35% of total revenue in the quarter as the natural retail channel struggled with overcrowding.

Gross margin (prior to biological asset adjustments and increase in inventory provision) was 54%, compared to 72% for the fourth quarter of 2018. The fourth quarter included an inventory provision of $13.9 million which is applied to cost of goods sold in the quarter, resulting in negative gross profit (after biological assets adjustments and increase in inventory provision) of ($2.1) million and a reported and a gross margin of negative 9%.

Fourth quarter operating expenses were $26.4 million , a 103% year-over-year increase from $13.0 million . The increase reflects the Company’s investments in capacity expansion and transition to a CPG operating company capable of supporting mass retail channel growth. During the year the Company relocated into larger office facilities in Boulder and added senior CPG management to the leadership team along with related personnel. Employee headcount was 302 at December 31, 2019 , a 34% increase from 226 at December 31, 2018 .

Adjusted EBITDA for the quarter was negative $10.2 million compared to positive Adjusted EBITDA of $3.4 million for the fourth quarter of 2018. The negative Adjusted EBITDA reflects a combination of the increased operating expenses against lower than expected sales from the F/D/M and natural retail channels in the fourth quarter. During the year the Company invested in infrastructure to support expected future revenue growth from the F/D/M channel.

After inventory write downs the Company reported a net loss of $18.8 million , or ($0.19) per share for the fourth quarter of 2019, compared to net income of $3.2 million , or $0.03 per share in the fourth quarter of 2018.

Balance Sheet and Cash Flow

The Company used $33.4 million of cash in operations during the twelve months of 2019 compared to $0.9 million of cash used in operations during 2018. Cash used in operations primarily reflects the investment in planting, cultivation and inventory required to supply anticipated retail consumer demand. Net cash of $17.7 million used in capital investing activities in 2019 was primarily for the purchase of equipment, building and land used in the Company’s cultivation and manufacturing operations.

At December 31, 2019 the Company held cash of $68.6 million and working capital of $116.9 million .

The Company believes that it has sufficient working capital to execute on its expansion plans. Establishing alternative capital options provides flexibility while investing in capacity expansion and infrastructure. Accordingly, Charlotte’s Web has engaged J.P. Morgan as part of several prudent financial controls and liquidity tools being structured by the management team. This includes a new Asset Backed Line of Credit with J.P. Morgan for $10 million with an accordion feature to extend the line to $20 million with a 3 year maturity. In addition, Charlotte’s Web has engaged with J.P. Morgan for its commercial banking services including its merchant processing services to support the Company’s global growth.

GUIDANCE

“We are optimistic about the strength of our DTC business in 2020,” said Ms. Elsner. “However ongoing uncertainties surrounding regulatory progress and timing, as well as growing COVID-19 concerns, tempers our retail growth expectations for 2020. We anticipate Q1-2020 revenue will be in the $20M range and forecast 10% to 20% topline growth for the full year for the Charlotte’s Web business.”

Consolidated Financial Statements and Management’s Discussion and Analysis

The Company’s audited financial statements and accompanying notes for the periods ended December 31, 2019 and 2018 and related management’s discussion and analysis of financial condition and results of operations (“MD&A”) are available under the Company’s profile on SEDAR at www.sedar.com and on the Investor Relations section of the Company’s website at https://investors.charlottesweb.com.

Conference Call

Management will host a conference call to discuss the Company’s fourth quarter 2019 results at 8:30 am ET on Tuesday, March 24, 2020 . Charlotte’s Web CEO Deanie Elsner , CFO Russ Hammer and Director of Investor Relations Cory Pala , will host the call, followed by a question and answer period. To participate in the call, please dial 1-647-427-7450 or 1-888-231-8191 approximately 10 minutes before the conference call.  A recording of the call will be available through March 31, 2020 . To listen to a replay of the earnings call please dial 1-416-849-0833 and provide conference ID 3252968. A webcast of the call will also be accessible through the investor relations section of the Charlotte’s Web website.

About Charlotte’s Web Holdings, Inc.

 Charlotte’s Web Holdings, Inc. is the market leader in the production and distribution of innovative hemp-derived cannabidiol (“CBD”) wellness products. Founded by the Stanley Brothers, the Company’s premium quality products start with proprietary hemp genetics that are responsibly manufactured into hemp-derived CBD extracts naturally containing a full spectrum of phytocannabinoids, including CBD, terpenes, flavonoids and other beneficial hemp compounds. Charlotte’s Web product categories include CBD oil tinctures (liquid products), CBD capsules, CBD topicals, as well as CBD pet products. Charlotte’s Web hemp-derived CBD extracts are sold through select distributors, brick and mortar retailers, and online through the Company’s ADA compliant website at  www.CharlottesWeb.com. The rate the Company pays for agricultural products reflects a fair and sustainable rate driving higher quality yield, encouraging good farming practices, and supporting U.S. farming communities.. The rate the Company pays for agricultural products reflects a fair and sustainable rate driving higher quality yield, encouraging good farming practices, and supporting U.S. farming communities.

Charlotte’s Web is a socially conscious company and is committed to using business as a force for good and a catalyst for innovation. The Company weighs sound business decisions with consideration for how its efforts affect its employees, customers, the environment, and the communities where its employees live and where it does business, while maximizing profits and strengthening its brands. The Company’s management believes that socially oriented actions have a positive impact on the Company, its employees and its shareholders. Charlotte’s Web donates a portion of its pre-tax earnings to charitable organizations.

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 23, 2020 , Charlotte’s Web had 71,448,314 Common Shares outstanding and 92,455.58 Proportional Voting Shares convertible at 400:1 into Common Shares, for an effective equivalent of 108,430,544 Common Shares outstanding.

1. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)  is not a recognized performance measure under IFRS. The term EBITDA consists of net (loss) income and excludes interest (financing costs), taxes, depreciation and amortization. Adjusted EBITDA also excludes share-based compensation, and share offering related costs, impairment of assets and adjustments for fair value of both biological assets and warrant liabilities. Adjusted EBITDA is included as a supplemental disclosure because Management believes that such measurement provides a better assessment of the Company’s operations on a continuing basis by eliminating certain non-cash charges and charges or gains that are nonrecurring. The most directly comparable measure to Adjusted EBITDA calculated in accordance with IFRS is net (loss) income.

Forward-Looking Information

Certain information in this news release constitutes forward-looking statements and forward-looking information (collectively, “forward-looking information”). In some cases, but not necessarily in all cases, forward looking information can be identified by the use of forward-looking terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an opportunity exists”, “is positioned”, “estimates”, “intends”, “assumes”, “anticipates” or “does not anticipate” or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might”, “will” or “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events.

Forward-looking information is necessarily based on a number of opinions, assumptions and estimates that, while considered reasonable by the Company as of the date of this news release, are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the factors described in greater detail in the public documents of the Company available at www.sedar.com. These factors are not intended to represent a complete list of the factors that could affect the Company; however, these factors should be considered carefully. There can be no assurance that such expectations, estimates, projections and assumptions will prove to be correct. The forward-looking statements contained in this news release are made as of the date of this news release, and the Company expressly disclaims any obligation to update or alter statements containing any forward-looking information, or the factors or assumptions underlying them, whether as a result of new information, future events or otherwise, except as required by law.

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SOURCE Charlotte’s Web Holdings, Inc.