Charlotte's Web - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $12.7M, down 20% year over year but up slightly quarter over quarter; gross margin compressed to 40.2% due to holiday promotions and shipping inefficiencies, while Adjusted EBITDA turned positive at $0.3M.
• Management modeled gross margin to return above 50% in 2025, driven by in-house gummy/topical production, shipping carrier diversification, and e-commerce threshold changes; cash burn fell to $1.8M in Q4 and is expected to decline further in 2025.
• Wall Street consensus revenue for Q4 2024 was ~$12.8M; actual $12.7M was a slight miss. EPS consensus was unavailable; EBITDA consensus data is limited and mixed. Values retrieved from S&P Global.*
• Strategic catalysts: first meaningful Amazon presence via functional mushroom gummies, expanding Walmart and Chewy retail partnerships, and DeFloria’s FDA clearance to proceed to Phase 2 trials for AJA001 (ASD), creating a potential long-term manufacturing and revenue opportunity.

What Went Well and What Went Wrong

What Went Well

• Positive Adjusted EBITDA in Q4 2024 ($0.3M), a $6.8M improvement year over year; SG&A reduced 43% YoY to $10.6M, reflecting disciplined cost controls.
• Omnichannel progress (Walmart, Chewy) and new product innovation (functional mushroom gummies; CBN “Stay Asleep”) strengthened brand reach; upcoming Amazon launch broadens access and potential conversion.
• Management quote: “Our e-commerce platform… a total game changer… 20% reduction in shopping cart abandonment… optimizing individualized transactions and maximizing consumer value”.

What Went Wrong

• Revenue down 21.4% for FY 2024 amid category headwinds and reduced retailer shelf allocations; Q4 gross margin fell to 40.2% (vs 56.0% YoY) due to holiday promos, shipping tier inefficiencies, and fixed-cost absorption.
• State-level regulatory patchwork negatively impacted retail in Q4, contributing to lower-than-expected revenue and complicating retailer shelf decisions; retail <1/3 of revenue in Q4.
• Cash decreased to $22.6M at year-end (from $47.8M), reflecting operating cash use ($21.2M in FY), MLB rights payments, and capex; net loss widened to $29.8M for FY 2024 vs $23.8M in FY 2023 due to absence of 2023 non-cash gains.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holdings Inc. fourth quarter conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, March 19, 2025. I would now like to turn the conference over to Mr. Cory Pala, Director of Investor Relations. Please go ahead.

Cory Pala (Director of Investor Relations)

Thank you, Ina. Good morning, everyone. Thank you for joining us for our 2024 fourth quarter and year-end conference call for Charlotte's Web Holdings Inc. Our earnings press release was issued this morning and posted on the Investor Relations section of our website, along with our financial statements. Our 10-K filing is also available on sedarplus.ca in Canada and EDGAR in the U.S. CEO Bill Morachnick and CFO Erika Lind are leading our call this morning. We'll review the financial results and provide some color around the business and the outlook. Afterwards, we'll answer some questions submitted by our analysts, and a replay of this call will be available through the next week, accessible via the details provided on our earnings press release. Additionally, a webcast replay of this call will be available for an extended period, accessible through the IR section of our website at charlottesweb.com.

Please note that some statements made during today's discussion include responses to questions containing forward-looking information based on current expectations and assumptions. Actual results may differ materially due to risks and uncertainty, many of which are detailed in our latest SEC filings, including our most recent Form 10-K report. We encourage you to review these filings, which more comprehensively, discuss the risk factors and other important considerations that may impact our future performance. We reserve the right to update these statements as conditions change. During the call, we will also refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have standardized meanings prescribed by GAAP. Please refer to these earnings press releases for descriptions of these measures and reconciliations to their most directly comparable GAAP financial measures. Now I'll hand over the call to Charlotte's Web Chief Executive Officer, Bill Morachnick.

Bill Morachnick (CEO)

Good morning, everyone, and thank you for joining us today. 2024 marked a pivotal year for Charlotte's Web, as it was highlighted by achieving a return to consecutive quarterly revenue growth throughout the year. While the growth was modest, it is encouraging. We have not seen consistent quarter-on-quarter improvement in several years. Having said that, we also acknowledge that we were still down significantly year-over-year, and this is not the level of revenue we find acceptable, nor that shareholders had expected. It does seem to indicate, however, that the revenue decline has bottomed, and this is the first step in the process of returning to growth.

While I won't go into detailed financials, as Erika will cover that shortly, I do want to highlight that the improved quarter-on-quarter revenue and operating performance reflect the synergy between our upgraded e-commerce platform, high-impact omnichannel strategy, disciplined cost management, and operational efficiencies implemented throughout the year. This foundation positions us well for growth in 2025 and beyond. Our fourth quarter, which is traditionally our strongest period due to holiday shopping, was indeed our best quarter this year. While regulations in some states impacted our retail performance, our e-commerce channel delivered excellent results during the Black Friday, Cyber Monday period, and throughout the holiday season. Since launching our new e-commerce platform in June, we've seen a 20% reduction in shopping cart abandonment, which has had a real impact on our conversion rates.

One of the core benefits of our new platform is the unprecedented clarity it provides into the effectiveness of the consumer journey and related transactional insights. This enhanced visibility has enabled us to optimize individualized transactions and maximize consumer value through tailored bundles and targeted promotions. The platform has revealed purchasing behaviors that we really just could not see or act upon in our old legacy system. The insights and adjustments we can make now are a total game changer. We are also seeing a notable lift in first-time customer ordering in Q1 this year, which seasonally has been our softest quarter. Okay, let's turn to our omnichannel approach. This continues to support growth by broadening consumer access through seamless integration of e-commerce, traditional retail, healthcare channels, and a multitude of digital shopping platforms.

Our retail partnership with Walmart has our CBD isolate topicals available in more than 800 physical stores and with extended availability now on Walmart.com. We're also encouraged by the initial sales we are seeing with our strategic partnership with Chewy.com, the largest online pet retailer. This has strengthened our pet product sales through targeted promotions and consumer outreach. All right, let's talk about our expanding product offerings. The successful introduction of our functional mushroom gummies last fall represents a strategic expansion into the rapidly growing mushroom wellness market. This innovative product line, featuring focus, stress support, and energy support formulations, has gained significant traction across hundreds of retail locations, including Walmart.com, with additional sales channels through other third-party platforms. I'm also pleased to announce our further expansion into the functional mushroom market with two new innovative gummies unveiled earlier this month at Expo West.

The first one is Vital Defense, and that's a proprietary blend of five mushrooms for immune support. The second one is Muscle Restore, featuring chaga mushrooms for athletic recovery. These new gummy offerings further extend our botanical wellness portfolio. The functional mushroom market is valued at more than $200 million per year. These new products allow us to leverage our reputation for science-backed solutions to capture market share while also creating natural cross-selling opportunities with our existing consumers. As mentioned in this morning's earnings press release, I am especially pleased to announce that our functional mushroom gummies will soon be selling at Amazon.com. This represents our first meaningful presence on this critical e-commerce platform, introducing our brand to millions of potential new customers. I also want to touch on our improvements in operations. Our focus on operational efficiencies has yielded gains.

We've made significant strides in reducing SG&A expenses and aligning our cost structure with revenue levels. These actions, combined with our ongoing transition to in-house gummy and topical production, are establishing the foundation for improved margins in 2025. To review our Q4 results and financial positions further, I'll now hand over the call to our CFO, Erika Lind.

Erika Lind (CFO)

Thank you, Bill. Our approach now reflects a true omnichannel model, where sales through third-party platforms are integrated into our total revenue reporting. This strategy offers a more holistic view of our performance. In terms of the financial results for the quarter, net revenue was $12.7 million, which, while down 20% from the prior year, was up modestly compared to the prior quarter. This outcome aligns with the trends we've observed throughout 2024, indicative of the broader category headwinds. Our growth over the previous quarter demonstrates the initial impact of our comprehensive omnichannel approach and validates the traction we're gaining with our product initiatives and strategic retail partnerships, where we have generally outperformed the category in retail. In 2024, we achieved our initial objective of establishing a solid foundation from which to build.

As Bill mentioned earlier, this stabilization of quarterly revenue levels marked the first critical step in reversing our previously declining revenue trends, illustrated by delivering consecutive quarter-over-quarter growth. Our strategic focus now shifts to achieving year-over-year growth in 2025, leveraging the operational improvements implemented throughout 2024. Q4 gross profit was $5.1 million, down $3.8 million, or 42.7% compared to the prior year. The margin as a percent of net revenue was 40.2%, down 15.8 basis points compared to Q4 of 2023. This temporary reduction in gross margin primarily reflected holiday promotional investments, some shipping inefficiencies, and compression of fixed cost absorption on lower-than-expected revenue. Looking ahead, we anticipate incremental margin improvements in 2025 as we execute our manufacturing strategy, bringing a higher percentage of gummy and topical production in-house. This transition will further enhance our cost structure and strengthen our quality control, production flexibility, and speed-to-market capabilities.

We have recently implemented carrier diversification, shipping threshold adjustments, and production enhancements to drive gross margins toward historical ranges as these measures take effect. Expense management was a strategic priority in 2024, and I'm pleased to report substantial progress in this area. In the fourth quarter alone, we achieved an $8 million year-over-year reduction in total SG&A expenses, representing a 43.3% decrease. This brought our Q4 SG&A down to $10.6 million from $18.6 million in the same period of last year. These significant cost reductions stem from our disciplined approach to cost optimization, including contract renegotiations, eliminating discretionary expenditures, and leveraging efficiencies gained through our new e-commerce platform. These reductions were strategically implemented to preserve our core capabilities and growth initiatives.

We reported a Q4 net loss of $3.4 million, or $0.02 per share, marking a meaningful reduction of $5.1 million, or $0.04 per share compared to the fourth quarter of 2023. To provide greater visibility into our operational performance, our fourth quarter 2024 adjusted EBITDA was positive $0.3 million, representing a $6.2 million improvement over the fourth quarter of last year. This substantial progress represents our successful operational efficiency initiatives and stringent expense management. The strategic actions implemented throughout 2024 materially reduced our cash burn to $1.8 million in the fourth quarter. We concluded 2024 with $22.6 million in cash reserves. We are confident that our current cash position is sufficient to support our path to positive cash flow as we further optimize operations and maintain a disciplined spending posture. Turning to our full-year results, total revenue was $49.7 million, representing a decrease of 21.4% from the prior year.

While retail sales continued to face headwinds despite important new partnerships, our e-commerce performance showed encouraging trends. Notably, despite declines in the overall CBD category, Charlotte's Web continued to outperform the category at retail for the year, according to data from SPINS, LLC, and we hold the leading brand position in trust and loyalty, according to the latest surveys by the Brightfield Group. Gross profit before inventory provision for the full year was $25.4 million, or 51.1% of net revenue, and we anticipate improvement in 2025 as we bring more production in-house, particularly for our high-volume gummy and topical product lines. We substantially reduced SG&A expenses for the full year by $22.4 million, or 29.6%, a reduction rate that significantly outpaced our revenue decline. This demonstrates our commitment to operational efficiency while increasing quality as we look to bring manufacturing in-house.

Net loss for 2024 was $29.8 million, or $0.19 per share, compared to a net loss of $23.8 million, or $0.16 per share in the prior year. It is important to note that 2024 included a non-cash inventory provision of $4.2 million, while 2023 included a non-cash net gain of $20 million from fair value adjustments related to the debt derivative and the investment in DeFloria. For more transparency on operating results, the adjusted EBITDA loss for 2024 was $12.6 million, compared to an adjusted EBITDA loss of $22.7 million for 2023. This $10.1 million improvement demonstrates our substantial progress in financial discipline, and we are committed to maintaining that stewardship in 2025 as we enter a critical growth phase. Concluding our financial overview, I will now hand the call back over to Bill.

Bill Morachnick (CEO)

Thanks, Erika. All right, we had an exciting announcement last month with DeFloria, which is our collaboration with AJNA BioSciences and British American Tobacco. DeFloria achieved a significant milestone as the FDA accepted DeFloria's IND application for advancement to phase two clinical trials for treating the symptoms of autism spectrum disorder. This achievement represents a historic moment for DeFloria and for botanical drug development, with this being the first orally ingested botanical drug designed to meet standards for advanced clinical testing. The upcoming phase two clinical trial will evaluate its effectiveness in people with autism, which is building on the promising phase one results. Charlotte's Web is contributing a decade of research, cultivation, and manufacturing expertise to the DeFloria venture, with our proprietary hemp genetics forming the foundation for the IND. Charlotte's Web has exclusive manufacturing rights for this product.

If it's successfully commercialized, this initiative could represent a very significant long-term revenue opportunity for Charlotte's Web. Finally, I'm excited to share that earlier this month at the Expo West Natural Products Trade Show, we unveiled our comprehensive rebranding initiative that unifies our expanding product portfolio under a cohesive Charlotte's Web identity. The strategic evolution transforms us from a family of brands to a branded family, which creates a singular, recognizable presence across all product categories. This brand consolidation not only enhances retail shelf presence, but it also maximizes our marketing efficiency as we prepare to introduce additional product categories throughout 2025. In summary, as we approach the end of the first quarter, we're focused on returning to year-over-year growth. Charlotte's Web is well-positioned for 2025. We've established a solid foundation with our optimized cost structure, expanded product portfolio, and strategic retail and e-commerce partnerships.

As always, any regulatory clarity at the state and federal levels creates additional tailwinds that can support growth. One final comment I want to add as well. Let me also add that it's not lost on myself or the leadership team and the Charlotte's Web board that our shareholders have suffered a long and difficult ride, but we remain fully committed and focused on improving shareholder value and on the important mission of Charlotte's Web. We truly appreciate your continued patience and support as we move forward on this effort. With that update, Cory will now take questions from our analysts. Ina, can you open the call for our analysts, please?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star, followed by the one on your telephone keypad. Should you wish to cancel the request, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Luke Hannan from Canaccord Genuity. Please go ahead.

Luke Hannan (Equity Research Analyst)

Yeah, thanks. Good morning, everyone. Bill, I just wanted to hear a little bit more detail on some of the state-level restrictions that impacted you in retail during the quarter, maybe a little bit more specificity on when they took effect, and overall, what was the impact to basket and traffic as a result of those restrictions.

Bill Morachnick (CEO)

Yeah, thanks, Luke. The short answer is it's difficult to say how big the impact is because the state regs now are really such a chaotic patchwork of different rules, and they're ever-changing. I think it does highlight how critical it is for us to finally get federal regulations in place, which establish a baseline for all of our companies to operate within. You can imagine the confusion that it creates for consumers and for retailers as well when the state regs are all over the place. For us as a business, I can say that we're going to be just fine. We're going to continue to adapt and figure out ways to grow and thrive regardless of the state regs.

As we were just mentioning in the call, we are rapidly expanding our product portfolio to include botanical products, so the mushrooms that we mentioned, as well as a wide range of minor cannabinoids and isolates. When I talk about the confidence we have for 2025, we know that we're going to be able to grow revenue, profits, and scale the business successfully. I think the much more important issue is the impact that what I would categorize humbly as ill-conceived regulations, what that impact will have on the millions of consumers who depend on our products. I'm trying to remain hopeful that the state legislators are engaging with their constituents and hearing what I hear every single day from people that depend on our products to manage a wide range of health and wellness needs. Ultimately, these are the folks that lose if the regs aren't done correctly.

What I can tell you is that Charlotte's Web is never going to stop fighting for these millions of people in need to have access to our products that fundamentally change their lives.

Luke Hannan (Equity Research Analyst)

Yeah, I appreciate that. Thanks. Maybe as somewhat of a follow-on to that then, in light of all of that, what is your high-level view when it comes to retailer shelf allocations for the CBD category for 2025, again, in light of all of what you just described there?

Bill Morachnick (CEO)

Yeah. Luke, what's really hard to kind of crystal ball is where there's a multitude of regs that are in play, I would categorize it, across multiple states. As we saw last year, some of the regulations came into place where they failed in state legislators. They then emerged in executive orders through leadership at various state levels. It's very hard to gauge where that falls. I can tell you, and I know you know this, it does keep major retailers on the sidelines because they just don't know where they're going to be able to operate and what's going to change. They're going to have to pull product off the shelf. It causes massive disruption to their supply chains and to the way that they do their planning for slotting and retail sales.

We're really building 2025 in a method that is regulatory agnostic and saying that we're going to lean much more aggressively into the minors, isolates, botanicals while doing everything we can to preserve our full-spectrum business. We have a really broad portfolio that allows us to compete effectively regardless of where the state regs land.

Cory Pala (Director of Investor Relations)

Luke, it's Cory. One last item I might add to that is that retail represents about a third, less than a third of our revenues in the fourth quarter. Even the impacts on retail are not material to the business, meaningful but not material.

Luke Hannan (Equity Research Analyst)

Understood. Thanks for that. The next question I have there is, again, looking at 2025. It was mentioned in the press release, you're targeting greater than 50% gross margin for the year ahead. That's an implied roughly 700 basis points of gross margin expansion year on year. Maybe somewhat of a two-part question in that. One is, what are the biggest buckets contained in that? How should we be modeling or thinking about the cadence of that improvement over the course of the year?

Erika Lind (CFO)

Hi, Luke. Sure. This is Erika. I'll take that question. There's a couple of things I want to address with this. First, I do want to be clear that the margin compression we saw in Q4, it was very much an anomaly based on some specific factors that I went over in the call about we had some really aggressive holiday promotions. We had some shipping challenges. Because of the revenue levels we saw in 2024, we were experiencing higher shipping rates because we fell into a different shipping tier. Some of our fixed cost leverage because of, again, the revenue levels we were at. With the growth that we're modeling in 2025 on the revenue side, we're bumping back into a higher shipping tier. We've also diversified our shipping carriers to take advantage of some savings in that area.

We've made some adjustments to some of our shipping thresholds on our e-com platform, some of our just enhancements in that area. Bringing more of our production in-house, really beginning in the next quarter, is a significant improvement in our margins. We've been working on that project for a little bit, and we're really seeing really successful pilot runs now and really making meaningful progress in that area. We are expecting it to ramp throughout the course of the year, and that's going to bring us back into that plus 50% margin on a regular cadence throughout the course of the year. We are expecting it to basically ramp up. It takes time for margin improvement to really hit the P&L because of the way inventory works, but we are expecting that to occur, and it'll have a more immediate impact to our cash flow.

Luke Hannan (Equity Research Analyst)

Understood. Thanks. Maybe that's a good segue into my last question here, and we'll stick with you, Erika. Overall, what are your cash burn expectations for 2025? How should we be thinking about that?

Erika Lind (CFO)

I appreciate this question because I think it's important to give context given that it's going to be a significant shift from what we saw in the past couple of years. I know these past couple of years were challenging from a cash flow perspective. While we're not going to—I'm not going to give a specific guidance number for 2025 outlook, I will say that we are expecting a significant reduction in cash burn for a couple of very specific reasons. We're not going to have the significant CapEx that we've had the last couple of years, so that alone is going to provide significant savings. The in-house production is also going to provide significant savings, helping those CapEx projects pay for themselves very quickly. I'll say that. You can do that math.

The increase in revenue and bringing in that margin makes a significant adjustment. I think one of the biggest impacts is going to be having a full year of cost savings that we did not even see this year. The cost impacts that we had this year really did not take effect until the half year. Q4 is basically what we expect to see from an SG&A perspective going forward. We will have a full year of that. It will make a significant impact for our cash next year.

Luke Hannan (Equity Research Analyst)

Okay. Great. Appreciate all the commentary. All the best.

Erika Lind (CFO)

Awesome.

Bill Morachnick (CEO)

Thanks, Luke.

Erika Lind (CFO)

Thanks, Luke. It was great.

Operator (participant)

Thank you. There are no further questions at this time. I will now hand the call back to Mr. Cory Pala for any closing remarks.

Cory Pala (Director of Investor Relations)

Okay. Thank you, everyone, for attending our call today, and we will look forward to speaking to you on our next earnings call.

Operator (participant)

Thank you. This concludes today's call. Thank you for participating. You may always connect.