Charlotte's Web achieves 4.2% revenue growth in Q2 2025, driven by e-commerce expansion and innovative product launches, while targeting path to positive cash flow by 2026.

OPERATOR - (00:01:10)

Good morning ladies and gentlemen and welcome to the Charlotte's Web Holdings Inc. 2025 second quarter conference call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press 0 for the operator. This call is being recorded on Wednesday, August 13, 2025. I would now like to turn the conference over to Corey Pala, Investor Relations. Please go ahead.

Corey Pala - Investor Relations - (00:01:41)

Thank you and good morning everyone. Welcome to Charlotte's Web Holdings second quarter 2025 earnings conference call. On the call with me today are Bill Mirochnik, our Chief Executive Officer and Erica Lynn, our Chief Financial Officer. This morning we will review our financial results and provide commentary on the business performance and outlook. Following our prepared remarks, we'll answer questions from covering analysts. Before we begin, I need to remind you that certain statements made during this call may constitute forward looking statements within the meaning of applicable securities laws. These forward looking statements are based on current expectations and assumptions and are subject to risks and uncertainties which could cause actual future results to differ materially from those expressed or implied. We direct you to review the cautionary language in this morning's earnings press release as well as the risk factors and other important considerations detailed in our filings with the securities and Exchange Commission and in Canada on SEDAR+, particularly our most recent Form 10-K and 10-Q reports. We undertake no obligation to update these forward looking statements except as required by law. During today's call. We will also reference non GAAP measures including adjusted EBITDA and adjusted gross profit. Reconciliations to comparable GAAP measures can be found within our earnings press release. A replay of this call will be available for one week via the instructions contained within in this morning's earnings press release and a webcast replay will be accessible for an extended period through our investor relations website. And with that, I'll now turn over the call to Bill Mirochnik, Charlotte's Web Holdingsb Chief Executive Officer.

Bill Mirochnik - Chief Executive Officer - (00:03:12)

Good morning everyone and thank you for joining us today. So let's jump right in. I'm pleased to report that Q2 marked another meaningful step forward in our transformation journey. We delivered our second consecutive quarter of. Year over year revenue growth building on. The Momentum established in Q1 when we achieved our first year over year increase since 2021. This sustained improvement validates our strategic initiatives. And demonstrates that Charlotte's Web is successfully. Navigating through industry headwinds while positioning for accelerated growth. For the second quarter, we reported net. Revenue of $12.8 million, representing 4.2% year over year growth and sequential improvement from Q1. While these growth rates remain modest, they. Represent a fundamental inflection point in our trajectory. After several challenging years, we've stabilized the. Business, returned to growth and are now building sustainable momentum. So let me highlight some critical areas. Of progress that are driving our transformation. Our Q2 top line performance was fueled by enhanced E commerce capabilities and innovative product launches. Our direct to consumer channels remain the cornerstone of our revenue architecture. Powered by the enhanced E commerce platform. Deployed in 2024, these investments are yielding measurable returns through improved conversion rates, reduced cart abandonment and just an overall better consumer experience. Our subscription programs continue to reflect the loyalty and trust consumers place in the Charlotte's Web brand. In addition, our strategic expansion across Amazon, TikTok, Shop and Fair is delivering incremental revenue while broadening our addressable market. Each of these platforms serves distinct consumer segments allowing us to meet wellness seekers wherever they shop. Now it is important to mention that innovation remains at the heart of our growth. The launch of Brightside during the second. Quarter represents perhaps our boldest innovation to date. These precision formulated low dose hemp derived delta 9 THC gummies have exceeded our projections with initial SKUs selling out during Memorial Day weekend. What sets Brightside apart is our proprietary. Time infusion technology which delivers effects in 5 to 15 minutes versus the typical. 1 to 2 hour onset time for traditional edibles. This fast acting formulation combined with our. Neat state based approach really differentiates us in the marketplace. Our fast acting gummies outperform most competitive. Offerings in onset time and efficacy due. To our precision dosing and unique cannabinoid blends. The Brightside collection addresses the multibillion dollar hemp delivered THC market which is one of the fastest growing segments in the botanical wellness industry. Now following the success of our CBN Stay Asleep Gummies which is now our. Second best selling gummy, we recently launched. Our new CBG Focus and attention gummies. The US CBG market grew 47% year over year in 2023 and we are. Really well positioned to capture share with our science backed formulations and brand trust. Our diversification beyond hemp is also gaining momentum to expand our Omni channel footprint. Our four functional mushroom gummies including a new muscle recovery product are now available. Across Multiple platforms including Walmart.com, Amazon and. Our direct to consumer website. This new product line is tapping into a rapidly growing wellness category with fewer regulatory constraints. Our portfolio expansion into non hemp botanical products creates strong opportunities for nationwide omnichannel distribution as these products face fewer regulatory restrictions than hemp derived offerings. We have several innovative products pending launch. In the second half of 2025 which. Will further strengthen our position as a leading botanical wellness innovation company. All right, turning to our key operational updates, we have made major strides in. In house manufacturing, which is a critical component of our cost optimization efforts. I'm particularly pleased to report that our new Brightside Gummy line is entirely produced. In house, which not only enhances our. Control over quality and supply chain, but also positions us for meaningful cost savings. This milestone represents an important achievement in our manufacturing optimization strategy. By next year, we anticipate that our. In house manufacturing could yield up to. $3 million in annual savings, improving our. Margins and our cash flow profile. Looking at the broader market, we're still. Operating in a complex hemp regulatory environment. However, lately we've seen some of the. Most promising developments in years for establishing clear federal pathways for hemp derived products. Coalition for AccessNow, a group that we. Support, is actively engaged with both Congress. And the new Administration on advancing comprehensive CBD regulations. The appointment of Representative Morgan Griffith as. Chair of the House Energy and Commerce. Healthcare Subcommittee is particularly significant as he. Now has direct jurisdiction over the FDA and has been a longtime champion of hemp regulation. Both Chairman Griffith and Senator Wyden have indicated their intention to introduce legislation this year that would provide the FDA with clear authority to regulate CBD as a dietary supplement and food ingredient. This represents a fundamental shift from the regulatory stalemate we faced since 2018. While the administration's position continues to evolve, we're encouraged by the growing recognition that a regulated market better serves public health than the current patchwork of state approaches. The US CBD market, despite challenges, was still $2.9 billion in 2024, with potential. Growth at 3.8 billion by 2030 under favorable regulatory scenarios, according to latest estimates from the Brightfield Group. We view eventual FDA regulation as a potential catalyst that could consolidate the market in favor of established compliant brands like Charlotte's Web. Let me touch quickly on the clinical development front. Our DeFloria joint venture was cleared to commence FDA phase 2 clinical trials for. AJA-001, an investigational new drug or IND. As it's known, for potential treatment of irritability associated with autism spectrum disorder. This represents a significant long term opportunity with Charlotte's Web retaining exclusive manufacturing rights. For commercial supply while we maintain focus. On our core consumer business. This pharmaceutical pathway provides material upside potential in a multi billion dollar addressable market. Quickly, before I turn the call over to Erika to discuss our financial results in detail. I just want to emphasize what excites me most about Charlotte's Web's position today. As I've noted earlier, we've stabilized the business. We've returned to growth, we've dramatically improved. Our cost structure and launched innovative products that are resonating with consumers. We're not simply navigating market challenges, but we're helping to define the future of botanical wellness with a combination of brand. Trust, scientific rigor, and operational excellence. With that, I'll turn the call over to our CFO, Erica Lynn, to walk through our Q2 financial performance.

Erica Lynn - Chief Financial Officer - (00:11:32)

Thank you Bill and good Morning Everyone. Our Q2 financial results reflect the operational momentum Bill described with progress across key metrics. Net revenue for the quarter reached 12.8 million, marking our second consecutive quarter of year over year expansion, up 4.2% compared to Q2 of last. This performance is particularly noteworthy given the continued headwinds in the broader CBD category, our ability to grow while the category. Contracts underscores the strength of our brand. The effectiveness of our innovation strategy and the success of our Omni Channel expansion. Gross profit for the quarter was 6.0 Million, representing a gross margin of 46.8% compared to 2.6 million or 21% of revenue in Q2 of 2024. It's important to note that last year's second quarter included a substantial 3.8 million non cash inventory provision related to a. One time wholesale biomass transaction. Excluding this provision, Q2 of last year adjusted gross profit was 6.4 million or 52.2% of revenue. The current quarter's margin of 46.8% reflects several temporary factors that we expect to normalize in coming months. These include startup costs associated with transitioning. Gummy production, in house promotional activities during. Our successful Memorial Day campaign, and approximately 300 basis points of margin impact from 0 margin defloria extract sales to support their phase 2 clinical trials. Excluding the deploria component, our underlying gross margin would have been approximately 50% for the quarter. As Bill mentioned, the transition to in house manufacturing will drive meaningful margin expansion over time. We model gross margins returning to the. Low to mid-50s as we achieve full run rate savings from internalized production and as we optimize our product mix. As you've seen in our Q2 results, we lowered SG&A expenses to 10.1 million, down from 14.7 million a year ago. This $4.6 million decrease is a substantial. 31.7% improvement, driven partly by a $1.9. Million reduction in amortization expense related to the termination of our MLB promotional rights agreement during the quarter. In total, that change has eliminated over. $18 million in future cash outlays, preserving. That cash for future growth. The results also reflected decreased personnel costs between comparable periods. As part of our focus on operational. Efficiency, our disciplined approach to cost management. Has fundamentally restructured our expense base. Building on this momentum this month we implemented additional expense reduction measures that are expected to bring our annual operating expenses down by an additional $6 million next year. Looking ahead to 2026, we expect to achieve approximately $9 million in annualized cost. Savings with $6 million from the operational. Efficiencies implemented post quarter and an additional $3 million from our transition to in house manufacturing. As we complete the internalization of our. Gummy portfolio and evaluate topical production, these. Combined initiatives significantly accelerate our path to. Positive cash flow while maintaining our innovative growth capabilities. Net loss for the quarter improved to $6.3 million or $0.04 per share, compared to a net loss of $11.1 million or $0.07 per share in the prior year. This 43% improvement in net loss demonstrates the combined impact of our growth initiatives. And and cost discipline to provide greater. Visibility into our operational performance. Our second quarter 2025 adjusted EBITDA was. Negative $3.5 million, representing a 37.1% improvement. Over the second quarter adjusted EBITDA loss of $5.2 million. Last year we ended Q2 with $$15.3. Million in cash and a working capital. Position of $$29.3 million, which provides adequate. Flexibility to execute our growth initiatives while maintaining financial discipline. While cash utilization remains a focus area. We remain confident in a significant reduction. In cash burn as we approach cash flow positive in 2026 based on modest growth and effective cost management. So in summary, our re engineered cost structure, strategic expanded margins and targeted revenue momentum and create a path to positive cash flow. To get there, we're targeting steady quarter over quarter revenue growth, gross margins in. The low to mid-50s range, continued SGA discipline and approaching cash flow positive in 2026. With that, I'll turn the call back to Bill for closing remarks.

Bill Mirochnik - Chief Executive Officer - (00:16:51)

Thank you, Erica. All right, so as I've indicated before, we're going through a pivotal inflection point in our transformation story. We've demonstrated consistent improvement in our financial performance and are focusing on accelerating strategic initiatives that can drive us towards profitability. Following the close of the second quarter, we implemented additional cost optimization measures to shorten our path to positive cash flow. These initiatives, which were not reflected in our Q2 results, position us for reduced cash burn and better cash preservation throughout the remainder of 2025 and beyond. First, the substantial SGA reductions already implemented in Q2, including eliminating over $18 million in future cash outlays, were followed by a comprehensive operational review to identify additional efficiency opportunities without compromising our growth trajectory or innovation pipeline. Second, we are further refining channel strategies to ensure capital allocation toward our most profitable opportunities. Our omnichannel expansion across Amazon, TikTok, Shop and Fair has validated the diversification strategy and we're now applying rigorous ROI metrics to optimize our channel mix. Direct to Consumer remains our highest margin channel, and we're implementing targeted initiatives to enhance customer lifetime value subscription program penetration. Third, we're building on our bright side success. The Memorial Day weekend sellout exceeded our projections, confirming significant market demand for precision formulated low dose Delta 9 THC. We're evaluating addressable areas of market expansion. For our brightside portfolio. So in closing, the transformation we began two years ago is now delivering tangible results. We've returned to growth, we're targeting positive. Cash flow which is just on the horizon, and we're building a platform for sustained success in the expanding botanical wellness market. I want to thank you all for your continued confidence and patience in Charlotte's Web. We look forward to updating you on our continued progress and Operator, we're now ready for questions from our analysts.

OPERATOR - (00:19:22)

Thank you ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press the star followed by the one. On your touchtone phone you will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Pablo Zwanich at Zuwanich and Associates. Please go ahead.

Pablo Zwanich - (00:19:52)

Good morning Bill and Erica and thank you for taking my questions and congratulations on all the progress you are making. Look, I have a few questions. My first one regarding cost savings. You have outlined $9 million in annualized cost savings for 26. 6 million in SGA, 3 million from manufacturing. Can you walk us through the timing of when those savings will begin to show in the P&L and how much impact we should expect in 3Q and 4Q. And as part of that, can you give us more color on the transition to in house manufacturing and how that is influencing your gross margin? Thank you.

Erica Lynn - Chief Financial Officer - (00:20:34)

Good morning Pablo, thank you for the question on SGA. Most of the 6 million in savings comes from actions we implemented two weeks ago. So the benefit will phase in over time. We expect meaningful savings beginning in Q4 with the full run rate realized in 26. These savings represent structural changes that further align our cost base with our revenue. To stem the cash burn on manufacturing. We'Ve always produced our tincture oil extracts in house. Over the past several quarters we've transitioned gummy production internally and later this year we'll begin bringing topicals in house as well. Last year, 100% of Brightside gummies were produced on site. Sorry, last quarter. By year end, approximately 75% of all. Gummies will be made in house and. We're leaving about 25% intentionally kept with. Our co manufacturer for capacity flexibility and risk management. We're also evaluating topicals for in house production in 26, furthering the vertical integration which is a critical milestone for both margin expansion and quality control. As Bill mentioned, when the transition is. Complete, we do expect annualized COGS savings of roughly 3 million, which will contribute meaningfully to that path towards positive cash flow.

Pablo Zwanich - (00:21:53)

Understood? That's great caller. Look, I have a few more questions. I don't know if there's other people on the queue here, so apologies to them if they're on the queue. My next question regarding cash flow. You've been clear about targeting positive cash flow for 26 for the remainder of 25, can you give us more granularity on the quarterly progression Again you expect through 3Q and 4Q and the key operational milestones you need to hit to support that trajectory on cash flow? Thank you.

Erica Lynn - Chief Financial Officer - (00:22:24)

Sure. Pablo. Our focus remains squarely on positioning the business for positive cash flow in 26. That said, we do expect sequential improvements in cash flow in the second half. Of this year, most visibly in Q4. Q3 will be a transitional quarter as. These initiatives take hold, but by Q4 we do expect material improvement from both SGA savings and internal manufacturing benefits. Two milestones are critical. First, the manufacturing transition I just outlined, which will be substantially completed by year end and generate that 3 million in annualized cash savings. And second, the SGA reductions which really. Start contributing in Q4 but have their. Full impact in 2026. Together, those initiatives, along with the continued revenue growth put us on the trajectory. We've communicated with the full 9 million. In annual savings, modest revenue growth and improved margins from vertical integration. We have multiple paths to achieving our. 2026 target, which gives us confidence in our outlook for 1H25. We did reduce our cash burn by. 52% year over year, so our current. Cash position of 15.3 million and working capital of 29.4 million provide adequate Runway.

Pablo Zwanich - (00:23:44)

Got it. Now moving on to your channel mix evolution. You expanded as you outline into new digital and specialty channels such as Amazon, TikTok, Shop Fair alongside your existing retail and medical distribution. My question is, how is your overall channel mix evolving and what does this mean for margin profile and long term channel strategy?

Logan - (00:24:10)

Yeah, thanks Pablo. Good to hear your voice wherever you are in the world right now. So the whole channel strategies has been a really big deal for us certainly since I got here to figure out. Ways how we can improve and optimize it. So we've done a really deep dive into our channel performance and for the. Most part it's reinforced what we've known for a while. Our direct to consumer remains our strongest. Performer both in terms of engagement and. In profit margins, as you would expect. What is new is the emergence of channels that give us kind of a. Nice combination of reach and margin over. The typical traditional retail channels. And some of that includes retail.com with. Folks like Walmart.com, amazon and others. I think what's important to highlight as well is it's not just optimizing for. Margin, but we're doing. We'Re doing a. Deep dive into understanding the channels that we work within that allow us to engage with consumers where we can effectively execute educated trial at scale, meaning an informed consumer who understands our product proposition. And the unique elements of our products have a higher inclination towards repeat purchase and to share the story with others. A good example of this is our medical channel. This is one of those where it really enables, whether it's a healthcare practitioner or peer to peer support kind of recommendation. That presents a higher return on investment value because the cost of acquisition comes down there and the peer to peer element allows this somewhat flywheel effect. To kick in at scale. We'll continue to refine our channel mix. But we're feeling really good about the broadening of it that we've experienced in. The last nine months in earnest. And now it's a matter of how. Do we optimize that and put the. Dollars against the best performing ones. Does that address your question, Pablo?

Pablo Zwanich - (00:26:54)

Yes, of course. That's good color. Thank you, Logan. Before I ask my last question, I guess I'll answer your question. I'm actually in Australia at a conference here and I have to say the Stanley Brothers brand is quite visible here in the market. So congratulations to them. Look, my last question is regarding, it's a two part question regarding Brightside. First on category outlook, there Seems to be strong consumer enthusiasm for your bright side, hemp derived Delta 9 gametes, including a sellout over the Memorial Day weekend, as you indicated. Can you share your perspective on the category's potential and how bright side fits into your broader growth category, especially given the fluid regulatory environment around hemp? And the second part of the question, it's more on product expansion. Right. Right now, Bright side is primarily a GAMI product line. Do you see opportunities to expand the format, for example, into beverages or introduce other unique formulations that build on the brand's early momentum? Thank you.

Logan - (00:27:57)

Yeah, thanks, Pablo. So let me address. I'm going to address your first question and then hit the second one. I'm balancing my excitement, enthusiasm for what we've seen so far with a bit of caution. So we're a long way from spiking. The ball, as it were, on our D9 entry. But we feel really, really good about the early signal. You know, we obviously we wouldn't have. Sold out if we had anticipated the demand that we received when we launched it. It's encouraging to put a smile on it to sell out on a new introduction. I wish we had more. We didn't, but here we are. It's early days. Let me frame it that way. We do believe that our current D9 portfolio in its dummy format is addressing. An underserved segment of the market. And by that I mean we're not targeting super high THC concentrations. We're really providing a curated experience to. Address a number of specific need states. Where a higher concentration of THC can. Be advantageous for the consumer. We believe that segment of the market is underserved. And with our brand, with our quality. With our innovative science, we've got a really strong potential to win big in this segment. That being said, as you alluded to. The regulatory environment is euphemistically categorize it as fluid. But we're playing to win, so we're. Not playing to hedge. We're going to address it in the. Markets that are open to us with the intention of grabbing as much share as we possibly can. In terms of, I think what you. Were asking, are there different formats beyond gummies? We are very actively evaluating opportunities, both formats, formulations, et cetera. But it would still play to the. Unique approach that Charlotte's Web has historically done. So we believe there's really compelling white space within other formats where we could. Be highly successful and significantly differentiated. I'm not in a position at this moment to get into those specifics, so stay tuned. But that is something that I'm looking. Forward to sharing in the not too distant future. And we're really pumped about it. So hopefully it's not too much of a non answer and I got to what you were seeking there. Pablo.

Pablo Zwanich - (00:31:27)

No, that's good. Thank you very much. That's all for me. Thank you.

Logan - (00:31:32)

Great. Thank you, Pablo.

OPERATOR - (00:31:35)

Thank you. We have no further questions. I will turn the call back over to Corey Paula for closing comments.

Corey Pala - Investor Relations - (00:31:42)

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

OPERATOR - (00:31:53)

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.