Charlotte’s Web Holdings, Inc. (OTCQX: CWBHF) reported that revenue fell from revenue $25 million in the 2019 second quarter to $21.6 million for the second quarter ending June 30, 2020. The company missed the average estimate for revenues, which was $25.9 million according to Yahoo Finance. The company also missed the earnings estimate of -$0.04 with an reported earnings of -$0.13.

The company blamed the drop on the pandemic saying, “COVID-19 has impacted the Company’s retail and health practitioner channels due to lower foot traffic and temporary location closures under the pandemic. Limited disruption has occurred within production and manufacturing operations, however, the company‎’‎s back office and reporting functions have been impacted and additional time was required for the consolidated second-quarter filing.”

The company also delivered a net loss of $14 million for the quarter versus last year’s net income of $2.2 million for the same time period. On a positive note, Charlotte’s Web did report that strong DTC (direct to consumer) sales largely offset a 54.5% decrease in B2B retail sales which accounted for 28.2% of total revenue in the quarter. DTC net sales grew by 33.6% year-over-year as online traffic and high conversion rates increased through ongoing marketing and social media programs.

“Second-quarter revenue was below expectations due to the impact of COVID-19 on retail sales,” stated Deanie Elsner, CEO of Charlotte’s Web. “However, our DTC sales increased by 33.6%, largely offsetting declines in B2B retail sales.  We made excellent progress building out our infrastructure and expanding our product portfolio with the closing of the Abacus acquisition.  Abacus CBD Medic products are now being sold through our online store and we look forward to realizing more cross-selling revenue synergies with Abacus through our FDM partners.”

Rising Expenses

Expansion has cost the company in terms of rising expenses. Operating expenses jumped 82% to $29.5 million over last year’s $16.2 million. The company said that the increase reflected its investments in capacity expansion and transition to a consumer-packaged goods (“CPG”) operating company capable of supporting mass retail channel growth. The increase included approximately $6 million of extraordinary expenses related to the Abacus acquisition and legal fees associated with the brand and intellectual property protection. Subsequent to Q2-2019, operating expenses increased as the company relocated into larger office facilities in Boulder, Colorado, and added senior CPG management to the leadership team along with related personnel. The company said that it is targeting a 10% reduction in expenses to match the falling revenue.

Charlotte’s Web completed the acquisition of Abacus Health Products, Inc. in June with an all-stock transaction. Abacus is a leading provider of over-the-counter topical products for pain relief and skincare containing CBD hemp extracts. In the third quarter, Charlotte’s Web began implementing operating cost synergies with Abacus and will continue through the remainder of the year. Further cost synergies are targeted in 2021 through integration into the Company’s new production and fulfillment center.

The company has been fighting a legal battle over the use of the name Charlotte’s Web. The company does not want any other brands to use the name Charlotte’s Web, while others believe it is just a strain name and that no company should be allowed to own a strain name.

Looking Ahead

Russ Hammer, Chief Financial Officer said, “We are seeing improvements and a stronger back half in our DTC channel, but without a meaningful opening up of the economy and health practitioner channel we expect only flat to modest consolidated net revenue growth for 2020. Our long view market opportunity remains intact and we continue to add new customers, doors, and products. Our Q3 revenues are trending ahead of Q2 sales levels and we anticipate reopening of retail locations in the U.S. will support a positive growth trend. As we see resolutions in COVID-19 and hemp CBD regulations or legislation we can see the category build towards its full potential.”