Charlotte’s Web Reports $18.8M Q4 Loss, Executives Discuss Challenges and the Future

In a recent earnings call, Charlotte’s Web executives discussed a drop in Q4 sales due to regulatory uncertainty, its recent Abacus acquisition and how the coronavirus will impact business.

March 27, 2020

Despite it being the first full year that hemp cultivation was legal in the U.S., 2019 was a tough year for many along the supply chain.

Denver-based cannabidiol (CBD) giant Charlotte’s Web can attest to that, especially for the tail-end of the year. The company’s latest earnings report shows it lost $18.8 million in Q4 of 2019, a steep tumble from the $3.2 million in net income it earned in the same period the year prior.

The story for the full year includes another substantial fall. The company reports a loss of $15.6 million for all of 2019, compared with $11.8 million net income in 2018—a 232% decrease from the year prior. 

During a recent earnings call, CEO Deanie Elsner attributed the Q4 loss to a slowdown of growth in the food/drug/mass (FDM) retail channels because of regulatory uncertainty, as well as an oversaturation of products in the market.

In December of 2019, the U.S. Food and Drug Administration (FDA) issued several warning letters to CBD companies for violating labeling regulations. Afterward, the FDA issued a consumer update, where it questioned the safety of CBD and emphasized that it has only approved one form of the cannabinoid for market.

Like other companies, Elsner said those comments had resounding consequences and caused consumers to pull back “across all channels.”

The demand shock left Charlotte’s Web with a stockpile of aging inventory it needed to dispose of.

“The unanticipated delay in FDA regulations that would have enabled the sale of this inventory to the FDM channel shortened the remaining product exploration base required for the channel, with ongoing regulatory timing uncertain. Our aged inventory reached the end of its useful shelf life,” said company Chief Financial Officer Russ Hammer.

Looking Ahead

Last year, of course, had some bright spots for the company as well, and Charlotte’s Web headed into this year with some major announcements. 

The company recently created a new internal division focused on research and development of minor cannabinoids calls CW Labs, which is located on the medical campus at University of Buffalo. “CW Labs is integrated into the SUNY network of 64 universities and medical centers and we are working with leading institutions to deliver clinical data and breakthrough renovation,” Elsner said.

On March 23, the company also announced a new banking relationship with JP Morgan for a senior credit facility and merchant banking services. Elsner called it a “tier-1 banking relationship.”

And perhaps in the most significant development for the company so far, Charlotte’s Web recently acquired Abacus Health Products to create the world’s largest vertically integrated CBD company in a $69 million deal expected to close later this year. 

“Charlotte's Web is a leader in CBD ingestible products, and Abacus is a leader in CBD topical products. Combined, we have a current market share of approximately 35% of the FDM channel, in addition to having an advantaged cost position through our vertically integrated supply chain,” Elsner said. 

He adds that the topical CBD market is forecasted to be the fastest growing and largest segment within the CBD category. It will likely help the company recover some of its loss in the FDM channel, as topicals have more regulatory certainty than ingestibles. 

“This effectively turns a headwind into a tailwind for Charlotte’s Web,” Elsner said.

Yet, headwinds abound heading into 2020 for nearly every business in the U.S. As the COVID-19 spreads, Charlotte’s Web is not immune to its effects. 

“While we are optimistic about our strong DTC [direct-to-consumer] business and the Abacus acquisition, with the uncertainties around coronavirus and the regulatory environment, we are revising down our 2020 growth expectations for Charlotte's Web business to 10% to 20% year-over-year growth,” Hammer said. “We expect Q1 2020 revenue growth to be flat to slightly down year-over-year in the $20 million range. As the same headwinds from the fourth quarter carryover in [the] coronavirus, [it] distracts our retail partners’ focus on keeping category staples and stock during this crisis.”

Here are some other highlights from the quarter and the year:

  • Charlotte's Web grew 36% in 2019 to roughly $95 million of revenue. 
  • For the full year 2019, the company’s business-to-business (B2B) channel grew 33% and its direct-to-consumer (DTC) e-commerce business grew 39%. Total 2019 revenue reflected a split of B2B representing about 43% of total sales, and DTC representing about 57% of total sales.
  • In the B2B business, the natural channels grew sales by 13% versus a year ago and FDM sales grew 361%. However, the company experienced a 26% decrease in its B2B revenue Q4 because of negative Q4 FDA comments and competitive oversaturation in the natural channel.
  • The DTC channel in Q4 posted the company’s largest quarterly sales to date, with revenue of about $15 million. Hammer says: “DTC is a critical channel for us for two reasons; it is the single largest channel today in the CBD category, and it will remain the single largest channel in the CBD category, growing to $8.8 billion by 2025.”
  • Q4 2019 adjusted EBITDA loss was negative $10.2 million compared to positive $3.4 million last year. 
  • Q4 gross profit was $12.2 million or 54% gross margin. This compares to gross margin before biological asset adjustments of 72% in Q4 2018 due to discounting programs that were implemented in 2019. In addition, gross margins for Q4 2019 were 70% before taking actions to clean up aging inventory.
  • Total revenue in Q4 was roughly $23 million, up 6% versus a year ago but down 9% versus Q3. 
  • Added more than 6,000 doors in 2019 and have commitments to add an additional 2,000 doors in the coming months.
  • Increased distribution in Q4, ending the year with greater than 10,000 stores, an increase of 6,140 versus a year ago.
  • Acquired 38,000 new consumers, up 22% versus Q3, in addition to increasing our subscription rate.