Charlotte's Web Holdings, Inc.

Thank you, Denise and good morning, everyone, and thank you for joining us for our 2019 second-quarter earnings conference call for Charlotte’s Web Holdings Inc. My name is Cory Pala, Director of Investor Relations, and leading the call this morning is Charlotte’s Web’s CEO, Deanie Elsner, along with CFO, Rich Mohr, who will review the Q2 financial results in detail.

Unfortunately, the global index is selling-off this morning as the 10 year bond yield fell below the two year’s yield on recession concern. The Dow opened down over 400 points and our entire sector turned down[ph] this morning with all equity.

So today did not turn out to be the optimal day to hold our call unfortunately. I pointed this out only to say that we issued strong results today on record revenue and we caution that as weak market today may not be an accurate reflection of our results, however.

Off note this morning, this will mark Rich Mohr final earnings call with the company along with our Q2 earnings press release this morning and a separate press release we announced the CFO transition commencing tomorrow with the appointment of Russ Hammer as the company’s new incoming CFO to support the next stage of the company’s global CPG ambition. I’m pleased to share that we will have Russ Hammer joining us at the end of the call, for a brief introduction following the Q& A portion of today’s call.

Outgoing CFO Rich Mohr has been instrumental in the company’s success over the past two years, including leading Charlotte’s Web through one of the sector’s top performing IPOs for 2018. Rich helped take the company to a critical part of its evolution, setting it up for this next phase with the hand-off to Russ.

Russ Hammer officially assumes the CFO title and role at Charlotte’s Web tomorrow. He has already been working alongside with Rich and his team ensuring a smooth transition.

Russ brings, Charlotte’s Web experience as Chief Financial Officer from multibillion dollar multinational companies including consumer retails, Brown Shoe now as Caleres brand, Colorado based Crocs shoes, online travel company Orbitz and an extensive career with Motorola. Russ has global experience in retail and international markets.

He is a critical element for the company’s ambitions to become a global CPG company requiring internationally integrated operations, financial systems and analytics. Russ will play a key role for the company in CPG future and we are pleased to welcome him to the Charlotte’s Web team.

During today’s call Deanie will provide high-level comments on the quarter with the operational updates on the company’s progress, the longer term vision for the business and Rich will provide color around the Q2 financial results. We will take questions from our analysts at the end of our prepared remarks.

A replay of this call will be available through the next week, accessible per the details provided on our earnings release. A webcast replay of this call will be available for an extended period of time, which will be accessible through the Investor Relations section on our website at charlottesweb.com.

The earnings press release along with financial statements for the quarter and the MD&A can be found on the Investor Relations section and these have also been filed on sedar.com. A reminder to our listeners that certain subjects discussed in this call, including some answers we may provide to certain questions, may include content that is forward-looking in nature and therefore subject to risks and uncertainties and other factors which could cause actual future results or performance to differ materially from any implied expectations.

Such risks surrounding forward-looking statements are all outlined in detail within the Company’s regulatory filings, which can be found on sedar.com. In addition, during this call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have any standardized meaning prescribed by IFRS.

Adjusted EBITDA is therefore defined in our press release as well as in the MD&A as filed on SEDAR. With that I will now hand over today’s call to Charlotte’s Web’s Chief Executive Officer, Deanie Elsner.

Good morning and thank you for joining us. Before Rich details our performance for the second quarter, I wanted to provide some perspective and I approach my first 100 days on the job next week.

I am more excited today about the opportunity with Charlotte’s Web than I was when I first walked in this job three months back. Let me give you some insights of what I have discovered.

This year in the United States, the hemp CBD category has received mainstream validation as large retailers in the FDM segment announced their entry into the space and began putting hemp CBD products on their shelves. In Q2, we have seen healthy growth in number of retail stores carrying Charlotte’s Web products in both the national retail segment as well as in the large food, drug and mass retailers segment.

We refer to that as FDM. Several natural brand retailers began carrying Charlotte’s Web products and the addition of these retailers and the FDM channel is both exciting and validating and will be a real catalyst to volume growth and sales growth going forward.

Provided some perspective on the impact this has on our retail distribution. In January of 2018 Charlotte’s Web products were on shelves in just under 2,000 stores in the United States, primarily in the natural segments.

In January of 2019 we had doubled that number of doors to 4,000 adding 2,000 doors over a 12 month period, but as the FDM channel ramped up in 2019 we’ve added twice that amount in half the time, 4,000 doors added in the front half of 2019 doubling our total doors to well over 8,000 today. As the most sought after brand Charlotte’s Web is now on the shelves with the majority of the first move our large retailers that became active in the CBD category.

We’re also in discussions with additional large retailers that we expect to come on board. As we expect to see our existing retail partners expand the number of states and locations.

Kroger is the most recent example of the expanded distribution. They recently added four more states to their distribution in July, including Texas, which is the largest state to approve CBD hemp products on retail shelves.

Charlotte’s Web products are now shipping to Kroger stores in Texas and a total of 1,350 other Kroger stores in locations across 22 states. The impact of the retail channel entering into the hemp CBD category should not be underestimated.

The size and the influence of the FDM channel will shape how the CBD category develops and the decisions being made by these massive companies will determine how we need to scale to meet their needs to remain number one. Mass retailers are likely to adhere to the FDA guidelines and they will need to be confident that their suppliers do so as well.

We believe that that’s where we’re advantaged with our vertical supply chain. It gives us the ability to have traceability of our ingredient streams and to have transparency of our manufacturing products.

The process, that enables us to consistently deliver high quality products from soil-to-shelf. These influential customers want confirmation of where the product ingredients come from and that our products are exactly as what our labels indicates.

We own our own genetics, we test our products 20 times throughout our production process and our hemp is 100% grown in the U.S. farms under strict standards and oversight.

Our vertically integrated supply chain also enables us to stay ahead of demand in bio-mass, extraction and finished goods with controlled costs and we consider that to be one of our greatest assets. In terms of channel development, it is important to note many of these traditional FDM mass retail channel were virtually nonexistent in the category in 2018.

We believe that they will command a majority of the revenue growth in the CBD category within the next four years with about two-thirds of the total CBD sales likely flow in through these channels when fully developed. This means, that to succeed in this space, you must build a CPG organization, one that has the capabilities to become global and a scope and you will need to build a leadership team with the experience and know how to navigate it.

Adding top tier talent to our senior executive team has been a key focus of mine over the last 90 days. Last month I announced that Tony True have joined our company as Chief Customer Officer, Tony came to us from Pharmavite, one of the largest U.S.

manufacturers of high quality vitamins, minerals and dietary supplements. He has a unique balance of CPG background in both OTC health foods as well as beverage complaint drug as well as food and beverage companies across CPG, including Johnson & Johnson, Pepsi, WhiteWave and Kellogg.

Tony has made a very big impact in a very short amount of time by building an exceptional sales team to pursue new channels. I’m thrilled to have Tony on board and leading the sales function for Charlotte’s Web.

To support the effort to bring data visibility to our operations as well as to build new capability in our e-commerce business, we recently appointed Paul Lanham as the company’s Chief Information Officer, Paul brings deep experience in the space, having recently led this transformation at other companies in the retail industry. He is leading our transition to a digital and data organization that better informs how we can serve our customers and how we evolve our business.

Tony, Paul and Russ Hammers are the latest additions to the build-out this world-class CPG leadership team and I’m thrilled to have them on board. Having a production facility that meets their needs of CPG at scale will be a key enabler to becoming the strategic partner for our customers in the future.

Last week, we announced an expansion into a new 137,000 square foot GMP grade production facility. This facility will be coming online in early 2020 and more than triples our current facility that has 40,000 square feet in Boulder.

This announcement reflects how we see the category evolving and the environment we anticipate competing within. The facility provides enough capacity to support our growth plans for several years, with the ability to expand into adjacent facilities in the future.

This facility can accommodate a buildout that will support annual revenue in the excess of $2 billion once properly equipped. To support future demand projections and inventory requirements, we more than doubled our planting for 2019, increasing total acres planted from 300 acres to 862 acres.

And we are getting more out of our fields every year, as we learn more and are continuously improving our growing, harvesting and drying techniques to improve cannabidiol yields. In 2018, we’ve seen high double-digit increases in our yield per acre.

In terms of R&D, we made excellent progress building pathways into areas that are going to give us further credibility and exposure to channels that we haven’t yet entered. Some of this innovation going forward will be different from anything else we’ve had in the past, even addressing new channels that CPG is not currently in to lead the market in innovation.

The Charlotte’s Web brand stands almost exclusively among customers and retailers, it’s the premier brand in the segment. This brand has tremendous recognition and respect, and is one of the few brands that could expand to become a global business.

We have lists of families across several countries waiting for Charlotte’s Web to become legal and available. Our plan is to follow the legality of this category internationally.

This require us to cultivate our genetics in-country through local partners. It’s important that our genetics and cultivation are the forefront of our product availability to ensure our quality and consistency, bottle-to-bottle, year-to-year across all growing regions, domestic and international.

It wouldn’t be fair to exit an earnings call without having some reflection on the FDA. In the United States, we are cautiously optimistic that the FDA is moving in the right direction and we believe they’re committed to finding a positive path forward for the industry.

And FDA action in setting the regulatory environment for dietary supplements could be the biggest catalyst to the industry, since the signing of the 2018 Farm Bill. While the Farm Bill unlocked the door for category availabilities, the FDA now has the opportunity to expand availability of hemp CBD products across more distribution points to benefit more consumers.

And when that happens, our plan is to be ready. In closing, I’d like to turn over the call to our CFO, Rich Mohr to discuss the financial results and then we’ll hear something quickly from Russ Hammer.

Rich?

Thank you, Deanie, and thank you all for joining us today. Total revenue for the second quarter was $25 million, a 15% increase over Q1 and a 45% increase year-over-year.

Our revenue mix was more heavily weighted towards B2B during the quarter, as we added a significant number of brick and mortar locations bringing in Charlotte’s Web products, in both the math and natural channel categories. B2B accounted for 53% of our total revenue in the second quarter, up from 47% of total revenue during the same period in 2018.

In terms of e-commerce revenue through our online web store in Q2, we showed an increase of 32% year-over-year with the e-commerce contributing 47% of Q2 revenue. Our gross margin for the quarter came in at $18.8 million or 75% of revenue, this was compared to 76% for the same period in 2018.

Operating expenses as a percentage of revenue during the second quarter compared to the first quarter increased by 4 percentage points to approximately 65% and was driven primarily from increases in sales and marketing expenditures. Sales and marketing activities as a percentage of revenue increased from 21% in Q1 to 26% in Q2, as we continue to invest in marketing programs that will drive future revenue growth.

We are constantly looking at marketing initiatives that will further our brand recognition, educate the consumer and drive increased revenue in future periods, such the variation from period-to-period. You should expect these variations in the ratio of sales and marketing as a percentage of revenue to continue in future periods.

General and administrative expense as a percent of revenue decreased from 39% in Q1 to 35% Q2. The company continues to invest in required infrastructure in advance of future growth expectations, including investment in key personnel that Deanie mentioned, IT, product fulfillment capabilities and in R&D as well.

This investment is showing up in our operating expense numbers today, but these expenditures will be leveraged in future periods, as revenue continues to climb. Adjusted EBITDA was $3.9 million for the quarter, down from $4.5 million in Q1.

Q2 adjusted EBITDA as the percentage of revenue was approximately 16%, compared to 21% first quarter. We are forecasting revenue to grow at a faster pace than operating expenses, particularly in the last half of the year.

This supports our expected increase in adjusted EBITDA percentage of revenue and future periods. Likewise, our revenue guidance for the year of $120 million to 170 million remains intact, but the level of achievement will be driven by both FDA communications and the impact in associated timing of distribution channel expansion.

Bottom line, during the quarter, we delivered roughly $2.8 million of income before taxes and net income of $2.2 million, which equates the earnings per share of US$0.02 per share. Our cash balances at the end of this quarter was $51.4 million and working capital grew to $97 million at the end of the quarter from $93.8 million at the end of 2018.

During the quarter, we increased inventory and deposits to support our future revenue growth, as well as manufacturing and cultivation. Last week in a press release, we announced the addition of a new 137,000 square foot facility in order to expand their production capacity.

The investment and buildout will incur – will occur in a metered approach over a three year period of time. Turning to cultivation.

We are now in full swing on this year’s hemp crops in Colorado, Kentucky, and in Oregon. The crops are looking great.

We’ll keep you updated on progress through future press releases and our quarterly earnings calls And lastly, this morning we announced an executive transition as I hand off the CFO rains to Russ Hammer, the company’s new CFO. Russ represents an important addition for us as we continued the transformation of Charlotte’s Web from a natural channel focused company to a worldwide CPG company.

Russ’s international and retail experiences of great value per Charlotte’s Web. We were diligent in our recruiting process in order to plan the right executive for this role and I’m confident that Russ is well aligned with our vision.

His experience will support the company’s future success as we continue to grow internally, domestically and internationally. Welcome Ross, I know the company is in good hands with you onboard.

And that covers the financial update for the quarter. And I’ll now turn the call back over to the operator for questions.

Operator?

Yes, hi there. Deanie, appreciate your comments, as it relates to the FDA, as you know about three weeks ago, we saw the FDA issued a letter to one of your competitors on the CBD side.

Just wondering if you guys have seen any incremental communication from the FDA over the last few weeks.

I’m happy to report that we have not seen any communications from the FDA directly. And at this point, I don’t anticipate it.

And you mentioned that you’re – I think the word you used is optimistic that if the FDA is going to provide some more clarity. Any chance that you have a view in sort of the timing on that?

And when you think about some of the conversations that you’re having with your retail partners – your mass market retail partners, what really is holding them back from adding more skews other than the topical products in the shelves? Is it really just more clarity from the FDA or is there anything else that would give them some more confidence in distributing some – a broader suite of your products?

So two parts of your question, first part, any additional insights or clarity on the FDA? I don’t, and I wish I did, I wish I had a great big crystal ball that could tell me exactly what and when.

But I do think that the communication that has been happening and coming out from the FDA would indicate there is a desire to work with and set some regulatory to provide some perspective, so we are cautiously optimistic on that front. In terms of food, drug and mass customers and how they think and how they act.

I really believe, and I’ve had 30 years in this industry, so I speak with some deep experience. These customers are not going to get in front of the FDA setting regulatory, it’s not the way they will operate in.

So we’ve got first movers who are operating in States, where there is clear direction, but across the board nationally, this is what we’re hearing from our customers. They’re not going to get ahead of the FDA, which is why the FDA really needs to be aware that in order for the industry to move forward, they’ve got to set that regulatory down.

I hope that answered your question.

No, it did, it’s helpful. Rich, maybe this one is for you.

You mentioned you guys are reiterated, you’re maintaining your revenue guidance of $120 million to $170 million, the variation depending on some updates from the FDA. But just wanted to ask you about the margin target or outline that you had previously set forward of 30% to 35% EBITDA margins for the year, given the start to the year, is that still achievable?

I think ultimately as the quarters progress and you see top line revenue increase and our ability to leverage our operating costs and cost of goods sold, you’ll see the or you should see the adjusted EBITDA margins increase. So by the end of 2020, I think you’ll see adjusted EBITDA margins back in the 30% plus range.

But that’s on a run rate basis, right? That’s not for the full year.

No, that would be for the full year.

Okay. That’s great.

And then I guess just the final one for me in terms of the hemp harvest that you guys have completed and obviously the plant – the acres planted up 187% year-over-year. Can you just talk about some of the plans for inventorying that product?

I mean, I’d imagine the expectations you’re not going to sell through all of that in the next 12 months. But what are some of the plans for inventory?

Are there other things, now that you may be looking at to use that inventory?

Yes. So I guess first point operational excellence is going to be the first pillar and frankly the foundation to how we succeed as a company, that’s going to require us to have firepower, as well as inventory to react to any condition that might present itself.

As, you know, we do not grow our hemp in greenhouse as we grow it outside. And so, part of being operationally excellent is to ensure that we can manage business operations across speed bumps that might happen in terms of harvest in any one year.

And so our plans are with our incredibly advantage genetics and our inventory of biomass is to protect our potential supply chain needs going forward for growth in the sector that we may or may not be experiencing today. In addition to enable us to overcome any kind of adverse grilling condition in any year, and so, we’ve got plans for our inventory.

At some point if we have inventory that we feel like we could move on and sell, that might be something at some point we could evaluate, but at this point, we actually believe the category development. And our supply in biomass is pretty well matched and gives us a little bit of firepower just in case it gets – it grows faster.

Okay. Thank you very much.

Good morning, congratulations on the quarter and thank you for taking questions here.

Hey, good morning, Scott.

Good morning.

Good. If you can provide a little bit, we know the FDM channel of a very few skews on the topical side.

But if you can provide a little more color on the independent natural channel as far as you guys are seeing? It seems to be getting a little more competitive, is there pricing pressure?

It used to be three or four brands there, now we’re seeing a lot more brands. Provide a little more color on the independent natural channel and the growth on that side of the business.

Yes, I’ll start Scott, the answer – if Rich wants to chip in, he is more than welcome to. In terms of the natural channel, we did see distribution expansion occur in the natural channel and we feel very good about what’s going on there.

The natural channel is the one channel right now that we have okay data visibility to and have a perspective of how we are performing. And if we look at our sales velocity per point of GDP, what we’re seeing is on average the Charlotte’s Web brand has about a 50% to 100% higher sales velocity per GDP than our nearest competitor.

What that says is consumers are finding the value exchange to be a positive one as they purchase the Charlotte’s Web brand. Now brand is a key part of this.

We of course are going to see in this category price compression because the category today is developing in a pretty traditional CPG way, where there is value brands come into the marketplace, mainstream brands and premium brands. Charlotte’s Web sits clearly in the premium brand offer.

And so, as more lower price competitors come into the marketplace, that naturally will compress prices. However, for Charlotte’s Web we are not taking actions to drop our price points.

We’re not seeing a big impact in our business as a result of the lower price points. And our velocities in the natural channel, where we can actually see the data are handsomely strong.

And so I think that’s the whole reason why building a brand and offering a value exchange that is high to a consumer is the way we’re going to win in this category. Consumers will pay for benefits they can’t get from other products and I think that’s what Charlotte Web does.

Rich, is there anything you wanted to…

Yes. Scott, I mean ultimately, the big talk is about the mass retailers, the grocery, the vitamin stores so forth.

And those are expanding rapidly, but we cannot dismiss the natural channel at all. As a matter of fact for us, it’s a key focus for us on go forward basis and I’ll give you an example between Q1 and Q2, we grew that sector by over $400.

Scott, did that answer your question?

Yes, that’s great. That perfect.

That’s what I want to hear, it sounds like you’re still strong in that side. And then if you can touch base a little bit on the pet line, the launch, I know you have 12 skews, couple – you’ve added two distributors, is there toxic discussions that the major big box pet retailers as they control a lot of that market and your kind of strategy as rolling out the pet line and what you’re hearing from the large retailers there?

Yes, a couple things, you know that we launched a 12 skew pet line and it’s been incredibly well received. Consumers are reacting positive, we’re seeing the positive effects on our results and we’re seeing interest across both the specialty pet channel as well as kind of the mass, pet distributors, and so we feel good about what’s going on.

Just to give you a couple of data points, and I think this will help. On the West Coast, we’ve partnered with a distributor called United Pacific Pet.

In California, they service 1,000 different independent pet stores in California, Arizona, Nevada and Hawaii, so much west gets covered in that partnership. On the East Coast, we’re partnered with pet food exports, they’ve got over 4,000 retailers across 33 States, and they’re primarily in the East Coast, as well as the Midwest.

And so, as we step back and we look at the pet category, we look at the U.S. that has about 320 million consumers in it.

In the pet universe, dogs and cats there is 180 million different dogs and cats across the country. So we see the opportunity that we’ve started as just scratching the surface.

And we will continue to evolve that line, we’re going to launch the third leg of that line hip and joint that will be in retailer shelves, very, very shortly, weeks ahead of us. And so we’re excited about what we’re seeing there and we believe there’ll be more to come.

Great. And then just last kind of follow-up on that and I’ll jump in the queue.

What type of percentage of the business can come from this pet market? Obviously a large market or do you have a target from a longer-term perspective, potentially of what that revenue could be?

Data visibility tends to be the biggest challenge I have found in the category so far. If you look at any of the predictions today on the pet category, it’s such a new and emerging category, it’s not even getting into the bright field expectations for the category yet.

And so, I can’t specifically say how sizable this market is going to be. We think it’s going to be very big, we think pet owners have a real soft spot for their family members and we’ve got products that perform, and so we’re bullish on the category and excited to get into another new retailer channel with products that make a ton of sense.

Okay. Appreciate it.

Thank you.

You Bet.

Well, thanks. Thanks for taking my question.

Just wanted to ask a bit about CapEx, I see you spent about $4 million on equipment during the quarter. Wonder if we get a little bit of color on what that was and also just CapEx expectations for the remainder of the year?

Yes. I mean ultimately I think that number is a little less than that, you may see some activity in there associated with the new IFRS 16 lease accounting.

But with that said, the CapEx that was spent during the quarter was primarily cultivation related business and some equipment in our manufacturing production as well. Most of that from a cultivation standpoint is complete at this point in time So on a go forward basis your CapEx will be specifically focused on the build out of our new facility, 136,000 square facility that we announced last week.

And that level is – ultimately, I think that facility is probably going to be in the $30 million plus range over a three year period of time, it will take place in a rateable fashion during that period of time. And the beauty of it is, once that production comes up in the first half of next year, we immediately get payback that begins and I think from an ROI standpoint, we have the ability to return that original investment within a very short period of time, probably within a two year window.

Okay. That’s great.

Maybe if I can get an update on, I believe, in the last call you talked about a pilot project with Amazon and Google, just any updates or any color on those projects?

Yes. They – so I’ll speak specifically to the Google updates because I think that’s the one where we’re getting some decent feedback.

We continue to be in beta test with Google specifically, the digital advertising pilot kicked-off as we mentioned in June, it probably launched a little slowly at first to understand really the terms and conditions with – in which we were engaging. I think that what we have found is we are learning how to better target our consumers, we’re learning how to better precisely message that – those consumer groups, and how our data will influence, what we’re getting back on the Google’s learning.

So we’re finding that partnership to be a positive one and moving forward. The Amazon partnership stalled out a little bit as Amazon continues to think through how they want to engage in this category.

And so that one has not produced as much learning as I would’ve liked, but Google definitely has and we’ll continue that partnership going forward, which to be honest with you is exactly what we expect in all these partnerships. We will succeed as a company and especially as a CPG company when we get into a methodology of test and learn, learn fast and scale, where we see the positive advantages, that’s exactly what we’re seeing.

Where we don’t succeed, we will understand why we didn’t, go back, reframe and try it again because this is a space we have to win in and we have to be at the front of.

Okay, great. Thanks for the update.

Good morning, thank you.

Hi, Michael.

Hey, Michael.

Just on the guidance, you mentioned that the range – the exchangeable range is in part related to not knowing where and when the FDA may land with some clarity. Can you give us just a sense of how to think about what your assumptions are?

Does the low end assume status quo and the high end maybe that they give the green light on some things or can you just give a little more color on how to put that in the right context?

Yes, Michael. [indiscernible] miss if I didn’t thank you at the beginning just for the recent launch covers, so thank you for that.

Perspective on this, as we’ve talked before, it’s a little bit of a crystal ball. So I will tell you that I’m encouraged with what I’m seeing.

I am optimistic they are – they do want to help this category take the next step. And I’m hopeful that we will see some – a framework of a regulatory frame, put forward mid-to-late fall, that’s what I would anticipate seeing now.

Even if we don’t see that, we’ve got plans to adjust and I think that’s the other part of becoming CPGs, you don’t put all your eggs in one basket, if the FDA puts any regulatory in the marketplace around dietary supplements, we will for sure be advantage in that space about 80% of our volume and our sales come through the dietary supplements part of our portfolio. So for us, this is a way for us to accelerate our velocity and our momentum going forward.

If they don’t provide the framework this year, as an organization that is leading the category, we’ve got to find other ways to grow, other channels to grow in and other products within the current regulatory environment that we can compete in. And so, we will have both sides of that equation open, my guess is, the question behind your question is, do you slow down your growth trajectory if the FDA doesn’t land?

And my answer, if that is your question, is absolutely not. We believe we’ve got ways to grow and the FDA landing will only accelerate that growth.

Yes. And I’m going to just add one thing to that, Michael as well.

We know these mass retailers are looking for reasons why.

Yes.

They’re looking for reasons why to carry more than just topicals. And they’re looking for those reasons in a very heavy way.

There are some of them in our top five that are out there that are occurring topicals. And so they’ll be looking to those and say, wait a minute, these guys are doing it, it’s very much a lemming type of business that we’re in, they will look for ways and we’re optimistic that they will be or find some reason to carry more than just topicals on a go-forward basis.

That’s helpful. Do you have – if it’s a retailer that only carries topicals, do you have any ability to put, say, like an insert referencing the rest of your portfolio and the ecommerce sales?

Or do you have any way to take advantage of that contact point with the consumer to introduce them to the rest of your products?

Absolutely, we do. And we are actively looking at different ways to link the two sides of our business together.

And just the last one for me. Do you have ways that you’ve been able to do anything to measure your brand equity?

Any qualitative or quantitative measures that give you a sense of just how it does compare against the peers?

Yes. As I mentioned, Michael, the data visibility in this challenge – or in this category in these channels is for us.

But in order for us to make good business decisions and frankly to lead a strategic plan going forward, we’ve got to get visibility. And so we are actively working on partners who can give us visibility in terms of the food, drug and mass channel in terms of how our products are performing in-store in addition to the natural channel.

But then importantly, we’re looking for providers who can give us a good assessment of the parameters of our brand equity and the strength of that equity. I have a lot of qualitative, I have a lot of people who are advancing suppliers, who are advancing a perspective, but it’s nothing right now that I would say, I quantitatively going to believe in, until we get deeper.

That said, what I’ve seen so far gives me a lot of confidence that – we’ve got a brand that really very quickly to become a global brand in scope.

Okay. Thank you very much.

Hey, Deanie; Rich.

Good morning, Mike. Mr.

Hammer, Cory; thanks guys for taking my questions here. Good morning.

Yes, just – I guess first just – I guess brand equity is a bit of a question mark that I think you are certainly the brand leader, I think that’s for sure. Just curious sort of how you think about your business, I mean, you’re primarily tinctures, topicals, there’s a lot of value added products seemingly out there, it could be in terms of food, shakes, beverages.

So curious Deanie, when you think past, your current products that maybe the brand, frankly, how do you think about layering in strategic partnerships with maybe CPG companies or otherwise and sort of leveraging your brand genetics, quality of your product, obviously you have some capacity too and sort of maybe combining that and sort of branching out beyond your current products? And I have a follow-up.

Thanks.

Yes, absolutely. Mike, I’ll give you I hope I can answer your question.

The way I think you’re hoping to, if you look at how the category is developing. The category is developing along the lines of OTC or dietary supplements, beauty and pharma those are kind of the three designations of the category today.

We’re also seeing emerging interest, more limited development but emerging interest in food and beverage. And so if we want to grow as a CBD company, we’ve got to be able to find ways to connect with consumers appropriate for the brand in those segments.

And so beyond what we have today in topicals, I think we’re just scratching the surface of what this genetic profile can do within skin and beauty. I think there are opportunities for us to think further out in terms of how research and clinicals support in advance where Charlotte’s Web, the brand can go.

And then I am very interested in watching how the food and beverage space develops and where there might be opportunities for this company in that space. And so there’s not a part of the growth of the future in this category but I don’t see an opportunity where we can have something in place that will enable to benefit from the organic growth that’s going to take place.

And I think there’s a very clear path for Charlotte’s Web going forward beyond the topicals and the dietary supplements that we offer today.

Yes, Thanks Deanie. That’s helpful.

And two more, I guess a first on your pet supply. Obviously this is a not cheap product, it looks like some of your new packaging has gotten some negative feedback with the pump bottle, just curious sort of how that happened and if there’s an a corrective action you’re taking on that bottle or otherwise.

Mike, I got to be honest with you, what you’re saying is new to me, so I don’t have a comment on it, but I can assure you that that my team is listening closely and in the next hour I will have an answer about what’s going on there and get a perspective for what you’re referring to. In terms of our new products that we’ve put in the marketplace specifically our dog chews our packaging has actually been – the resealable packaging has actually been received really well.

We’re hearing really positive feedback from consumers in terms of how their pets are responding to the products. As you know, we’ve got a cognitive product, a calming product and a hip and joint product that we’ve launched across a number of dog chews and we’re hearing really positive reaction on those.

So I’ll get to the bottom of what you’re referring to on the pump and if you’ll give me an hour, I’m happy to come back to you.

Thanks, appreciate that. Last question I think, I don’t know if I missed Mr.

Hammer Russ talking or not, but if I did, I apologize. Just sort of we’d love to hear from Russ and sort of your path to Charlotte’s Web and sort of the growth opportunity that you saw or see and sort of I guess more color from you Russ, would it be helpful?

Yes, so Mike, absolutely the plan would be we’re going to let Russ have a couple of comments as soon as we get to the end of Q&A and happy to do so. I think you’ll be thrilled to hear what he has to say.

So, next, question?

Thanks for taking my question and apologize if I missed it earlier, but maybe you guys can just remind us your store pipeline seems strong ahead of you, can you remind us what kind of penetration percentage you’ve reached currently versus the current retail stores available with your existing customers?

Yes, and I don’t have the specific enough FDM.

Excuse me.

So let me just give you some a little bit of perspective on what you’re asking Andrew. So current household penetration of the CBD category today across the United States is about 7%, the 7% of households on a 52 week period are using CBD.

So the universe of food drug and mass stores is about 33,000 stores big. Today in food, mass and drug, I’m looking at Rich for how many doors we have?

On doors?

On doors, specifically on food, Andrew we’ll have to come back to you, but rest assured that it’s a smidgen of the universe of the FDM doors that are available. And so I think we’ve got upside in a significant amount of upside as the category evolves across the sector.

Rich is showing me the number that right now we have about 3.7% penetration of the FDM stores. And so there’s a lot of upside as they embrace the category and bring on new players onto the shelf.

That’s fantastic. Sounds like you’ve got a lot of growth ahead.

Maybe if I can ask a similar question but just in a little bit of a different way, with the existing distribution partners that you have now, they’ve got a quite a large store network and I believe you guys are only in a certain percentage of their entire network with a lot more to go ahead of you. Not necessarily for the whole market, but just with your existing distribution customers are you able to give us a little bit of color of where you’re at now

In terms of – I think the answer to your question is no, but I just want to clarify, your question is in terms of what percentage of the stores that we’re in, percent of total – the total stores that were in of the retailers?

Right. And so if you’re – for example, Kroger’s, CVS, et cetera, they have 20,000 stores, if you’re in only 8,000 of them now, that represents a certain percentage and you have that much more to go with just your existing distribution partners.

Great question. Yes, it’s hard to quantify that.

I know that our products are being sold in 22 states and from these individual retailers and only a portion of their stores are carrying it. So the landscape is wide open for us and the additional states that come forth and additional stores that will be added and all of these big retailers are adding already new stores every single month, every single quarter.

Andrew, this is good question. I don’t have – of the stores we’re in, I don’t have right in front of me the total amount of stores that they’ve got in their network or the percentage of that total amount that we’re currently in.

But it’s something that we can certainly pull together and have at the next earnings call because that would be what year – I think your question is, where you’re performing well, if they expand you in that network, would we expect and can we expect the same performance? The great question, I don’t have the numbers.

We’ll come back to you on that.

No worries. Thanks for the time.

And I think my other questions were already answered.

Thank you.

Good morning. Thank you.

Hi, Jenny.

Thank you for taking my question. In terms of the sales split between e-commerce versus brick and mortar, how should we look at that going forward in the second half of 2019?

I think so far, Jenny for Q2 we were at 53% B2B and 47% e-com. And I want to make a point here that that e-com space continues to grow.

So year-over–year that grew by about, I believe the number was 31% to 32%. And even from Q1 to Q2, it grew another 11%.

So we’re investing very heavily in the e-com side. And you also have to remember that I think the statistics show that most dietary supplements, wellness products are actually purchased online.

I think roughly 60% of them are and that’s really going to drive where we are for e-com versus B2B as well. So we expect it to be strong, the 53% -47% range, probably pretty accurate on a go forward basis at least in the near-term.

Yes. And Jenny just to build on that, we’ve talked a little bit about the fact that in the next four years, the FDM channel will represent about 63% of total hemp sales.

So you’re going to see FDM explode in terms of volume, it’s just what they do. And so the numbers are always going to look disproportionate given our DTC business as it is today, rest assured DTC is incredibly important to us as important to our consumers.

A lot of our consumers on DTC are our subscription consumers. They rely on that product and we will continue to find ways to grow that channel.

E-commerce as a total a distribution point will be the fastest growing part of a lot of these FDM channels as they expand and offer this on their e-commerce networks. And so we have to have the capability, we will continue to invest a big part, that’s why Paul has been brought onto the company is to bring his expertise in building that capability.

And we will continue to grow at or above the e-commerce rate and keep that business buoyant.

Got it. Thank you.

In terms of the FDM channel, what are some of the key considerations you’re seeing right now for these retailers? When they’re choosing which companies products to bring onto their shelf?

What we’re hearing from FDM is really three things; they want to provide a portfolio offer of price points and available competitors to their consumers. They’re not going to bring everybody on the shelf they’re going to bring a handful of competitors.

They’re talking about kind of four to the six range into their category. So that’s the first point I think, I think it will be a well developed category, very consistent with CPG and be on shelf from that perspective.

Second, they’re looking for people who understand category management; they’re looking for people who understand supply chains on time and full delivery, investment into their in-store networks as well as into their advertising and promotional vehicles in store. And so I do think Tony brings tremendous advantage to the marketplace and his sales team will be a real leg up for us as we approach these FDM customers in a more strategic and long-term way.

I think the last part of the equation which is going to be fascinating to watch is, these customers have their own companies and their own brand at risk in terms of reputation. They’re looking for competitors and manufacturers in this space who can deliver quality and proven tested quality products, where if there is a problem, they can understand where it happened and what you’re going to do about it.

And so I do think that’s where – going to be advantage. We’re going to have the retail partnerships, we’re going to have the understanding of the CPG and how the market develops and importantly we’re going to have the highest quality, highest tested products on shelf.

And so that’s what we’re hearing. I think we’re well aligned and anxious for the FDA to land so we can look and move into the space.

Okay. And last one for me.

Are you looking at any acquisition opportunities? And if so, what kind of targets are you potentially interested in?

And I’ll leave it there. Thank you.

Thank you, Jenny. Acquisition absolutely is one of the levers in our tool set.

I’d remiss if didn’t acknowledge that we continuously look at ways to address some of the gaps in the portfolio or opportunities to accelerate our growth. When we look at acquisition, it’s really going to be on three fronts.

One we’re going to want to enable our business to scale in a way that we can’t get after today. So I have to know that I could grow faster as a result of what we’re pulling in.

Two, I want to build out capability that maybe we don’t have, something that could enhance our portfolio, make us smarter and more productive across the rest of our business. And three, ideally we would have an opportunity to expand our global footprint.

We talked a little bit about some of my learnings in the first hundred days. I do think global expansion of the Charlotte’s Web brand will be a key part of our strategy, if not where we are today.

And how we get there either through organic growth and/or acquisition is definitely on the horizon of something we’re actively involved in and in discussing.

Yes. Just a follow-up on international, you just kind of answered it as a kind of global expansion is not a priority today, but can we – obviously you’d have to build out an infrastructure there.

Is it a 2020 kind of 2021 focus for you guys?

Yes, Scott, I don’t think I said it was not a priority today. I think what I said is, it is absolutely a strategic imperative for this company.

I believe Charlotte’s Web should be a global brand and importantly for us to be global with that brand to deliver the consistency bottle-to- bottle, year to year, we’ve got to cultivate and partner locally. And so if we make a move to international, it won’t move well into the future.

If we made a move, it would be a move that we can make knowing that it’s going to take a couple of years for that cultivation to grow and be able to be at a quality standard we would expect. And so we would have to move more quickly, but maybe wait a year or two to benefit from whatever movement we make because we’ve got a locally cultivate.

Does that answer your question?

Yes, that’s perfect. Thank you.

That’s very helpful.

Thank you everyone for your questions today. Before we close, I’d like to take a moment to both, thank Rich Mohr and introduce Russ Hammer.

First, I want to extend company’s gratitude to Rich, as his notable contributions to the company over the last two years. Rich was recruited by Charlotte’s Web in 2017 to help prepare the company for an IPO.

In 2016 the company had revenues just under $15 million in 2017 and 2018, Rich built out the finance department implemented an ERP system and led Charlotte’s Web through the sector’s first long-form perspective offering, raising $100 million at $7 a share to one of the most successful IPOs of 2018. Rich has worked tirelessly with the company during his tenure with Charlotte’s Web despite his daily three hours of commute into our Boulder offices, while we will miss his daily presence.

At the company Rich will remain in an Advisory role to the company in the near-term, ensuring continued orderly transition of the CFO function and associated projects. Thank you for all of your help and support, Rich you’ve been tremendous.

Taking the range from Rich to our incoming CFO, Russ Hammer, who is here with us today. As Cory stated at the opening of our call, Russ brings consumer and retail public company experience at an international level and rounds out our CPG centric leadership team.

Though Russ is relocating from Chicago, he’s no stranger to Boulder, having spent three years as CFO of Crocs, which is based there and having led that transformation as a CFO. Russ, I’d like to welcome you to Charlotte’s Web.

I’d like to welcome you back to Boulder and officially introduce you to our shareholders today on our call,

Thank you Deanie and hello everyone. Charlotte’s Web is an incredible company with an enormous opportunity and I couldn’t be more pleased to be part of this pioneering and forward thinking company.

Charlotte’s Web and founders stand out with what they have achieved for all the people that rely on these products regularly, both the consumers as well as the American farmers that are on the front end of the critical cultivation process. I am joining the company with a shared commitment to expanding the reach of Charlotte’s Web both domestically and abroad to have an ever larger positive impact on the world by improving lives naturally.

Although more than 95% of the company’s sales are generated in the U.S. today, Charlotte’s Web is recognized brand globally and along with that comes our global ambitions.

As we transition the company to a global CPG company, I will leverage my experience, leading retail consumer companies to build analytical customer focused organization with an ever expanding global footprint. I’ve had the opportunity to spend significant time with Rich and the finance team and believe we are well positioned to build on the platform that Rich and his team have established.

Rich, thanks for your continued support in making my transition easier. I appreciate it.

And to our investors in the coming weeks and months, I look forward to speaking and meeting with many of our shareholders, analysts, and other capital market partners. Through my experience in the CFO role with publicly traded multinationals, I’ve established a reputation for being upfront and transparent in my communications, and I certainly value your input as shareholders.

As I roll up my sleeves, please coordinate shareholder communications through Cory Pala, in IR for the most efficient scheduling. I look forward to reporting our progress in the coming months and back to you Deanie to close the call.

Thank you, Russ. So with that, we’ll close our call and look forward to reporting to you in November on our Q3 earnings calls.

Thank you very much.