Earnings Transcript for CWBHF - Q1 Fiscal Year 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Charlotte Web Holdings, Inc. 2023 First Quarter Conference Call. At this time, all lines are in a listen-only mode. [Operator Instructions] This call is being recorded on Friday, May 12, 2023. I would now like to turn the conference over to Cory Pala, Director of Investor Relations. Please go ahead.

Cory Pala: Thank you, Sergio. Good morning, everyone. Thank you for joining us for our 2023 first quarter earnings conference call for Charlotte's Web Holdings, Inc. Our earnings press release was issued this morning and posted on our website along with our financial statements. Our 10-Q has been filed on SEDAR and EDGAR. Leading our call this morning is CEO, Jacques Tortoroli, CFO, Jessica Saxon and COO, Jared Stanley. Jacques and myself are each join from remote locations today. On this morning's call, we will review our Q1 financial results and provide some color on some recent strategic initiatives. We will take questions from analysts at the end of our prepared remarks. A replay of this call will be available through the next week, accessible for the details provided in our earnings press release and a webcast replay of this call will be available for an extended period accessible through the IR section of our website. Certain statements made on today's call, including some answers we may provide to certain questions, may include content that is forward-looking in nature and, therefore, subject to risks, uncertainties and factors, which could cause actual future results or company performance to differ materially from implied expectations. Risks surrounding such forward-looking statements are all outlined in detail within the Company's regulatory filings. In addition, during the call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which does not have any standardized meaning prescribed by GAAP. Please refer to the earnings release that we filed this morning for a description of adjusted EBITDA as well as a reconciliation to the comparable GAAP financial measures. With that, I'll now hand over the call to Charlotte's Web Chief Executive Officer, Jacques Tortoroli. Jacques?

Jacques Tortoroli: Thank you for joining our call. And thank you, Core, and happy Friday. This morning, we reported Q1 revenue of $17 million, down 12% with volumes down 5% versus the prior year, modestly below our expectations. Jessica will review selected financials momentarily, but I wanted to ground this in the market and then give you an update on the progress in our strategic initiatives. Looking at the CBD category. The CBD market is approximately $4.4 billion according to Brightfield. The top 20 brands share 17% with Charlotte's Web at number one. While the one FDA approved cannabinoid drug represents 16% share. That leaves over 60% of the market or roughly $3 billion to some 2,000 brands, by the way, down from over 3,500 brands in 2021. Therein lies the size of the prize before regulation, which we shouldn't lose sight of as we discuss each quarter. Charlotte's Web is number one with 3% share of the total market and 6% share, if you exclude the channels, formats and pharma sectors we don't today participate in. We are number one in brand metrics like awareness and loyalty, number one in retail. Retail represents 25% of the total market, and we have category-leading shelf velocities. In e-commerce, which is 35% of the market, we ranked number one with less than 4% share. Finally, given the high fragmentation of very small brands in the market, we expect to see a significant culling of the number of competitors to continue without regulation in Washington, D.C., and certainly when regulation happens. Our brand equity, full spectrum, NSF-certified broad-spectrum products, innovation pipeline and our IP and the opportunity to expand our consumer reach and relevance to recreate starting later this summer, our partnership with MLB and our balance sheet uniquely position us to grow our number one share over time. In our recently announced partnership to enter into an IND path for a botanical drug with the FDA opens the potential longer term for us to participate in a substantial part of the market that we don't do today. We previously framed our strategy with you, namely returning to growth, winning in D.C. and unlocking the value of Charlotte's Web IT and Botanical wellness. Let me briefly update you on some significant progress in the quarter on each pillar. First, returning to growth. Last month, we announced the launch of ReCreate a new Botanical lifestyle brand designed for young and attractive active wellness seekers and sports and other valuable cultural verticals. ReCreate capitalizes on the growing trend of CBD-infused functional botanical wellness formulations for self-care and mental well-being, certainly among millennials and Gen Zers who make up approximately 47% of this multibillion-dollar CBD market. They are also among the most active daily users of CBD when they wake up throughout the day across different occasions, making this a very important demographic for broad-spectrum CBD. Launching this new need states driven brand with new formulations across multiple formats coincides with the first year of our MLB partnership and packaging that bears the iconic MLB logo with NSF certification. We launched Recreate Daily Edge Tincture last month exclusively available on our e-commerce site, and we'll begin rolling out new formats, starting with a line of need-state gummies, which will be available on our site in the summer and in retail during the second half of this year. ReCreate products have secured early interest from leading retailers, including Fresh Thyme, the Vitamin Shoppe and others as well as Southern Glazer's Wine and Spirits. We recently appointed Andrew Shafer, our Chief Marketing Officer, leading our cross-platform activations with MLB in the sports vertical to ReCreate to drive online traffic and sales. Andrew comes to us from two decades of Verizon leading brand strategy, digital experience, social marketing, while benefiting as well from his work with professional sports partnerships. Finally, we recently announced a partnership with Philips Pet Food and Supplies, the largest pet specialty channel distributor servicing over 14,000 retail doors across the country. And by the way, Pet is a $400 million channel, but today, less than 10% of our revenues in the quarter. Second pillar of our strategy is regulatory, in Washington, D.C. and increasingly at the state level, where we're actively progressing both. Jared has taken a critical leadership role in these initiatives, and we'll speak more to that in his remarks. We also activated the third strategic pillar, unlocking the value of the Company's in IP and the botanical wellness. This means formally pursuing an IND pathway, seeking an FDA-approved botanical drug based on our proprietary cultivars through the right partnerships and structures. Jessica and Jared will each touch on this in their remarks. So with that, I'll now pass the call over to our CFO, Jessica Saxon.

Jessica Saxton: Thank you, Jacq. Our financial results and adjusted EBITDA are reviewed in detail in our earnings release and 10-Q. As such, I will not go through all of them on this call. However, I'm happy to answer any specific questions you have in our Q&A session. Net revenues of 17 million declined 12% compared to last year, with B2B down 8% and e-commerce down 14%. However, our unit volumes only declined 6%. Consumer shifts from tincture to other formats principally gummies continues for the category and for us specifically. Tinctures and gummies are number one and number two formats in the market with 19% and 15% share respectively. This continued shift represents a strain on revenues, given the price points of tinctures versus gummies. We expect this to continue until the growth in gummy volumes more than offsets the drop in tincture volumes. In the quarter, this mix shift resulted in tincture revenues declining 5 points to 27% of our revenue mix with gummies up 7 points to 43% of our revenue mix. In the quarter, gummy volumes were up high single digits year-over-year. Charlotte's Web operates the largest e-commerce business in the industry. Our e-commerce business generates more than 66% of our revenues with attractive gross margins. B2C revenue of 11.3 million was 14.2% lower on a year-over-year basis in Q1 as we continue to experience lower traffic to our site. Increasing top of the funnel by educating and attracting new consumers into CBD and Charlotte's Web remains the number one priority and turning around the Company's overall revenue trajectory. As we've talked about previously, we believe the MLB partnership as we go through the seasons and activate against MLB jewel events, leveraging the League's enormous fan base and media platforms will be an unlocked against this business priority, as well ReCreate our new lifestyles brand, which is both attractively priced and carries the MLB logo on packaging. Our online conversion rates remain strong at 11.7%. Our subscribers account for approximately 40% of revenues, showcasing that when we bring people into our ecosystem, they go through their consumer journey from awareness to purchase, to ultimately becoming subscribers, representing significant lifetime value. We are prioritizing growing traffic to our web store and have a cross-functional team working on improving the user experience on our site. In the food drug mass retail channel, Q1 sales were 9.3% lower year-over-year, outperforming the total category, which was down 10.1%. As a result, we held 18.7% share in retail dollar volume and the number one channel position. In FDM, we increased the number of retail doors, while we saw a decrease in the number of doors for the overall category. This speaks to our brand strength. In addition, our ARP was up 7% in SPM, while the category was down 15%. And we hold four of the top 10 SKUs in the channel. In the natural channel Q1 sales were 12.8% lower year-over-year, outperforming the category again which was down 13.5%. I want to spend a minute on the natural channel. What we saw in the last quarter was interesting. First, we grew doors with existing customers within the quarter and about two times the category rate. However, while more doors are selling Charlotte's Web and CBD, retailers are also reducing the total facings on shelf and the number of SKUs and formats carried, principally taking gummies and reducing tinctures. For us, the number of doors carrying our gummies grew ahead of the category, while the number of doors carrying our tinctures declined slightly higher than the category. Net despite significant incremental penetration in the quarter given the mix revenues were negatively impacted. Given our leadership in the category and with the highest velocities, that bodes well for the longer term opportunity for Charlotte's Web to grab an incremental share of shelf. We expect to gain further market share pending customer receptivity for soon to launch ReCreate gummies and positively impact revenues when the rate of growth and other formats, particularly gummies eclipses the decline and tinctures. Moving to SG&A, our first quarter SG&A was 14% lower year-over-year, despite the addition of the MLB rights fee amortization as well as a $1 million noncash amortization expense from the convertible debenture we completed with VAT last fall. Going forward each quarter will include an amortization expense in our SG&A related to the MLB asset, reflecting this valuable three year partnership. Notwithstanding the additional MLB expense, we expect SG&A for the full year of 2023 to be comparable to 2022. Excluding these amortization items, our SG&A expenses in Q1 were approximately 14.7 million, which is a decrease of more than 20% year-over-year. Our material reduction and operating expenses significantly reduces our cash burn to a manageable level. Net cash used for operations was 6.1 million in Q1 2023 versus 4.7 million last year, with the increase entirely attributable to the initial quarterly rights fee payment to MLB. With our $61 million cash position at the end of the first quarter, we are in a stable financial position moving forward, which is also an advantage against the bulk of our competitive set in the current environment. Jac discussed earlier the collaboration with AJNA BioSciences and BAT to pursue a botanical drug. I wanted to give a little bit more insight into the rationale of the structure and the benefits for Charlotte's Web and our shareholders. On April 6th, we announced this collaboration with BAT and AJNA with the formation of the DeFloria which each party is contributing. Charlotte's Web is contributing existing studies and a license permitting the use of certain proprietary hemp intellectual property, including clinical and consumer data. AJNA is contributing laboratory provisioning, regulatory services, and IND clinical expertise, such as Dr. Orrin Devinsky. Lastly, BAT is contributing $10 million to fund phase 1 of the project which is being fully managed by AJNA. Financially, the funding from BAT and other potential third parties reduces capital risk for Charlotte's Web. However, we maintain the opportunity to participate in future funding rounds, though not obligated. I will now turn the call over to co-founder and COO, Jared Stanley.

Jared Stanley: Thank you, Jessica. Before getting into regulatory let me give a brief update on our progress with our partner Tilray in Canada. We are progressing on tinctures, topical, capsules and gummy formats and on track to launch tinctures late this quarter as we await Health Canada approvals. Next, we are focusing our attention on topicals and capsules with gummies this final phase. Our gummy formulations combined with Health Canada requirements will take more time. For this reason we want to ensure we bring other great products to market in a timely manner while ensuring we launch our gummy SKUs with confidence and consistency to what is produced in the U.S. Let me give you an update on the regulatory front starting with the state level. It's been 10 years since CBD was introduced to American consumers as a dietary supplement choice. It has been nearly five years since the passage of the 2018 Farm Bill. Since then, the lack of FDA guidance has four states to step in specifically to address the recent concerns of hemp derived Delta-8 THC and other intoxicating hemp cannabinoids. We have and will continue to educate legislators in this process to ensure that consumer access to therapeutic full-spectrum CBD is preserved while regulating intoxicating compounds like Delta-8 THC. We have been present in states like Virginia, Florida and Colorado where our voices were heard in Charlotte's Web full spectrum products will continue to be accessible to consumers. A few states have implemented regulatory requirements that impact the sale of non-intoxicating CBD products and we will take appropriate steps through the legislative process. While this process is coming to an end in 2023, this will be an ongoing focus of the Company. On the federal front, as stated in previous earnings, we are seeing more come together in the last month than we have in years in DC to highlight impactful events. FDA's position in January state of the need for a new regulatory lane for CBD and their commitment to work with Congress on a new path, we responded by supporting Congress and compiling industry safety and toxicology data to address the FDA's concerns. HR-841 was reintroduced in the 118th Congress now as H.R.1629. This shows the intent of Congress to regulate CBD as a dietary supplement. Furthermore, Congressman Jamie Comer sent a letter to the FDA investigating the agency's failure to regulate CBD as a dietary supplement. Considering our engagement with Congressman Griffith's staff and the letter sent by Congressman Comer, it is clear Congress is holding their position to regulate CBD as a dietary supplement. We have established the foundation to support Griffith through coalition for access now, a political consumer advocacy 501(c)(4) we support. Additionally, we are addressing the FDA's concerned over the safety of CBD, a uniting industry tox studies and sharing the reports with Congress. Moreover, we engaged an objective firm to bring the industry data together to recommend a safe daily use of CBD based on science. We are also actively participating in and supporting the industry coming together under one united strategy to progress the dietary supplement path for CBD. This does not mean we will find a one size fits all approach for every CBD provider. It means the industry is embracing the actuality that a set of standards must be met to address the FDA's concerns. Our goal is to embolden Congress with the confidence and credibility needed to land a favorable market for CBD. At a minimum, this will require amending the Griffith Bill through the legislative process with aligned industry stakeholders to ensure CBD products are standardized across labeling and warning statements, accurate testings protections against false claims and GMP standards and facilities registered with the FDA. Our journey began by amplifying the consumers' voice through our support of coalition for access now, this served as the cornerstone of our strategy in Washington DC. Now, our focus expands to encompass the entire industry. Recognizing the crucial collaboration between industry and consumer voices, it is essential that we synchronize our efforts to advance the Griffith Bill this year. With these vital elements converging, I have full confidence in the progress we will achieve. However, we're simply not waiting for the FDA to act, but are driving the destiny of our business. The recent announcement of our biotech partnership with AJNA BioSciences and BAT is a testament to this commitment we have made to shareholders. DeFloria is the name of the entity created to hold the IP and investigational new drug asset in the third leg of our business strategy with botanical drug path. It's critical to understand the difference between a botanical drug and a traditional pharmaceutical to realize the vast market potential. A botanical drug refers to a medication that is derived from natural plant sources. It is developed, formulated and standardized to contain specific active ingredients or mixtures of plant-based substances. They're not isolated and synthesized like traditional single compound pharmaceuticals, yet they hold the same requirements for safety, quality and efficacy for pharmaceutical use. The development of botanical drugs involves rigorous scientific research, clinical trials and adherence to established guidelines to demonstrate their effectiveness and safety for treating specific medical conditions. Botanical drugs are regulated and approved by the FDA. Botanical drug guidance was introduced in 2004 and expanded in 2017. Combining this with CBD being removed from the Controlled Substances Act in the 2018 Farm Bill enables this path to create an entirely new pharmaceutical category for full-spectrum CBD. This is the logic behind our IP investment into DeFloria. The joint venture has an amazing team of senior drug experts led by AJNA's Chief Medical Adviser, Dr. Orrin Devinsky, and recently appointed Chief Scientific Officer of Charlotte's Web, a 21 year cannabinoid researcher Marcel Bonn-Miller. The team has already made significant strides in the drug development process. AJNA has engaged with the FDA on behalf of DeFloria and completed its first pre-IND meeting to ensure the partnership meet the administration's botanical drug guidance. This meeting provided valuable agency feedback to inform DeFloria's clinical strategy and trial roadmap. We are continuing preclinical and commencing phase 1 trials this summer. And we believe the venture has enough seed funding from BAT to complete the investigational new drug application and the phase 1 clinical trials. I'll now hand the call back over to Jac.

Jacques Tortoroli: Thanks, Jared. We continue to execute in our three-pillar strategy of returning to growth, winning in D.C. and unlocking the value of IP in botanical wellness. We're confident about our strategic moves and the long-term view of the business. However, in the short-term, finding a constructive regulatory outcome or optimism remains reserved, yet and stepping back for a moment, we didn't grow revenues in the quarter however slow the rate of declines at 12% in revenues and 5% in volumes. There are signs of momentum, which should not let be drowned out. We clearly nearly double the category growth in expanding doors in the natural channel. We grew distribution double digits in FDM, while the category was down mid-single digits. Our average retail price in FDM is up single digits. While the category pricing is down double digits, indicating the strength in our brand equity, while ineffective brands will not turn at any price. A B2B revenue growth is being muted by mix from tinctures to gummies. However, this will pass and year-over-year growth will return particularly with our pending new ReCreate gummies spring incremental SKU sales, it will help grow the traction while bringing new customers into our brand worlds and e-com. We're working on improving the user experience on our e-com platform. We have a cost base and control. We're making progress on regulatory of both the federal and state levels. MLB for us kicks off in the second half of the year starting with the All-Star game in Seattle in July. And we have the balance sheet to win. I want to make sure we're sharing a balanced view of where we are and where we're heading, and I'll turn the call back over to Cory.

Cory Pala: Thank you. Sergio, can we open the call to questions?

Operator: [Operator Instructions] Your first question comes from Scott Fortune from ROTH MKM.

Scott Thomas: I appreciate the comments, and then first Jac on kind of the market share, but you want to focus will their market share? And what you're seeing in the competitive, very competitive, fragmented market here, as small brands continue to be discount and the shift to the value here. But can you provide a little more color? You mentioned, obviously, it's come down from 3,500 competitors, and many with limited capital, you mentioned times on the shelf at stores, but with your activation in support at the store level, can you provide little more color? Is Charlotte's Web starting to pick up here, be more self pay system? A liitle bit more color on the rationalization and SKUs on the shelves and how you see this moving forward?

Jacques Tortoroli: Thanks for the question, Scott. Look, I think that I said in the remarks, but 3,500, "competitors" to 2,000 now, we could clearly see that culling expected to continue even before regulation, and most dramatically, probably after regulation. You frame the competitive environment a little bit so many small brands undercapitalized and certainly not with the brand equity or science credentials, that Charlotte's Web can bring to bear. So we're optimistic that we can grow share in a category that clearly declined last year, according to Brightfield and we are. Although we're doing it by contracting less at the moment than then growth and clearly, there were factors for that, including the mix shift of tinctures to gummies as one predominant element to it. But what we're seeing is, I think, a real opportunity to grow share, because as retailers are clearly seeing that not every CBD brand has the same philosophy on shelf, I think that provides an opportunity for us with the highest velocity in the industry, to grab that incremental shelf space as competitors are delisted. And so I look at that as a real opportunity for us that we can really throw the leverage through the introduction at retail later this year of the ReCreate brand, which is Jessica alluded to, we'll also be at a price point that would be more affordable, and SKU formats that smaller packs to make the consumer coming into the brand for the first time afford to try. And when we know by looking at our e-com statistics at, once we bring people into our brands, they stay, because what they perceive the beta value of other brands for them on a personal basis, and they become lifelong consumers for us. So we're excited about the opportunity. It's not going to be overnight but I think we're doing everything right, from a branding, from a pricing and from a retail and e-com point of view, to position ourselves to gain additional share as we go forward here in the market.

Scott Thomas: So just a quick follow-up on that, let's say we do get -- you win in DC and we do get the regulatory side of things coming on board. Kind of what's your sense of the brands that will be left that can meet the high regulatory standards expected from that standpoint? And then any momentum or timing on H.R.1629, as it seems -- as it gets closer to the Farm Bill is kind of expectations for the number of brands that can meet these high regulatory standards that occurs?

Jacques Tortoroli: I'll start and then hand it to Jared to answer the timing piece and he'll have a much better perspective on the brands. But look, my view and we've talked about this is, certainly not going to have 1000s of brands. How many we have? I don't know, but I don't suspect it's more than 2030 at that. And I think you'll see a lot of the brands can't -- won't be able to get through the FDA gate, obviously have to pivot. And I think between now and then you'll see more competitors fall away as they don't have the capital to compete and invest behind whatever brands they do have. So I think the calling will continue and I think post-regulation, you'll have a very limited number of competitors in the market compared to what we see today. Jared, do you want to add anything there?

Jared Stanley: Yes, look, hey, Scott, how are you? I mean, there's the industry has to come together, we're not going to get support, passing a bill that's restrictive to it industry. So what we're seeing and what I meant by my comments is that you're starting to see, really, we called in passing this bill, there's two strategies, there's focusing on regular order, and what we're calling the four corners strategy. And focusing on regular order is really just the legislative process where you have committee hearings, and you start to have markup, and you amend the legislation, through committees of jurisdiction. And in this process, this is where industries will unite, and we'll engage the committees and it'll really be the industry that supports the technical drafting to ensure the final legislation reflects the best approach for the industry, which ultimately, we're here for the consumer, which then gives the best guarantee to consumer access. But in that process, it's very important because we've had the FDA come in with their concerns. So for the industry to come together to also address the concerns made by the FDA is a very important process as we amend this bill through focusing on regular order. The next part is you've got the, what we call referred to as the four corners. You can look at H.R. 1629 with 21 cosponsors where you know, previously have 4546, but by focusing on the four corners, this is where we get a little bit more strategic. And we have to realize that there's a very narrow majorities in the House and Senate and it's a very politically charged environment, so very few pieces of legislation will make it to the President's desk this year. In other words, meaning CBD and FDA legislation is not going to move as a freestanding bill. What we see instead is we will be focusing on what we call the four corners, which is the chair and ranking members of the Senate Health and the House Energy and Commerce Committees in Congress. By using these committees and hearing markup processes, we can catch a ride on a on a must pass piece of legislation like the drug pricing bill, or the 2024 spending bill. And all of this really happens in the fall, that the groundwork and the process and support by focusing on these ranking committee members in Congress is where we're at right now. Does that answer your question?

Scott Thomas: Yes, no, I appreciate that. That's great detail for that. And just my last follow-up here. You mentioned ReCreate, I just want to kind of follow-up on that lifestyle brand launch. You provide a little bit color of the positioning of it, but how should we look at this with the product mix or the SKU availability head of Major League Baseball and their marquee events in the summer and fall? Kind of the roll -- one thing here now but kind of the rollout to really drive growth towards the second half kind of Kansas SKU opportunity there for that ReCreate brand here in second half?

Jacques Tortoroli: Sure, Scott. Go ahead, Jared. I was just going to say, I think, we've launched ReCreate tinctures and we're going to be launching additional SKUs additional formats in concert with the first, the All-Star game in July. And then we should see some pipeline into retail later in the year. But I'll let Jared kind of take you through the need states and in the formats that were initially going to have in the market and then sort of a pipeline and what's to come.

Jared Stanley: So we're looking at the brand as new targeted needs states. I don't know if we recall, we were engaged to the MLB process, and we were really saying the game is played in the eight inches between your ears. And what they really wanted to support where for athletes and consumers alike, was mental wellness sleep. But we took our needs states even further. So we have a brain support that hits mental wellness but really is built with a Lions Mane CBD which gets us into the whole new functional mushroom category, which functional mushrooms what you could compare it to what CBD was four or five years ago and its growth. And then we've got a sleep product, which uses a botanical passionflower. We look at our sleep gummies SKUs today and in the current legacy Charlotte's Web and it's our number one selling SKU, but I would contend is that product in the CBD market or is it in the melatonin market. So this allows us to get to a sleep product with a functional botanical, then we also have gone even further to get more active lifestyle support for your everyday consumer. And so we've hit muscle recovery with a tart cherry, as well as endurance with a deep powder. So those are the new need states that are coming out. And then we're also focusing on what I refer to really more as an innovation behind tinctures to support the decline in tinctures that these are spray format. So think grab and go throw in your gym. And these would also be need states focusing on sleep, energy endurance, and then we're also working on powder formats, which are soon to come likely late this year or early next year. Which powders opens the door to multiple innovation formats.

Jacques Tortoroli: I think, Scott, if I could just add as well, I think we need to be clear that ReCreate is positioned against the targeted demographic groups, Gen Z, Millennials, which is really an opportunity in a white space for us, when you think about the consumer is going into the Charlotte's Web brands. So first and foremost, very different targeted approach in terms of the brand, how we position the brand lifestyles, and how we price it, on a more affordable basis for consumers, as I mentioned earlier relative to Charlotte's Web. So I think the fact that the need states, the formulations, the pricing, and the targeted demographics are going after, and the MLB support and amplification as we go through the term of the deal within really positions us for incrementality as opposed to running what would you typically see as more of a cannibalization risk. So we're very comfortable that this unlocks an ability for us to be much more relevant with a different demographic of consumers who can come into the ReCreate brand, but also have the availability is ongoing. For example, on our e-commerce platform and shopping the rest of the Charlotte's Web portfolio, depending on what their specific needs and what they're looking for. So we're looking at this as a very different, it's not a brand extension, if you will, but it's a new line, new product, new look and feel, new messaging, new formulas, targeted at new consumer states that we don't really address today.

Operator: Your next question comes from Derek Dley from Canaccord.

Derek Dley: I just wanted to talk a little bit about the margin difference between gummies and tinctures. Is there any notable difference there? Or is the impact to the P&L mostly on revenue?

Jacques Tortoroli: I'd say -- I'll start and turn it over to Jessica for any color, but it's really much more of a revenue negative mix than it is margin. We do -- whether it's tinctures which we produce in-house or gummies that we produce today through Coleman, our margins are pretty healthy across the portfolio spectrum. So it's really more of a revenue mix impact than it is the margin impact, as you've seen with the margins that we put up in the first quarter.

Derek Dley: And then on that co-manufacturing, I mean, is there a point where they gummy mix SKUs higher as a percentage of your revenue that it would make sense to potentially bring that in-house? Do you guys have the capability or the capacity to be able to do that overtime?

Jacques Tortoroli: Yes, Derek, thanks for that question. The answer is yes, we have the capacity. And more importantly, we've made the capital investment a few years ago, recall, we put $40 million into a state-of-the-art facility where you're operating at about, I'll call it 20% capacity, and plus or minus. So we have the capacity, we've invested the capital. And to your point, when the economics turn in our favor, we will certainly be looking at that, and more to come there. And not only gummies, by the way, I mean, we have the opportunity to bring other things in-house as well over time. So, certainly one of the things we're looking at as we look forward in our strategic execution of plans, but more to come.

Derek Dley: And then can you maybe just give us some color on your, when I think about your overall revenue or product mix, however you guys want to put it, what percentage of sales or volumes is more value focus these days versus premium focused?

Jacques Tortoroli: Again, I'll let Jessica come in, but I'd say Charlotte's Web across all of our formats continues to be priced at a premium to the rest of the competition. And so we're very concerned about keeping that brand equity. So we continue to look at our pricing relative to the competition. And that's another opportunity for ReCreate to bring new consumers into our brand world, with a more sort of appropriately standard price kind of SKU set to complement what we're doing in Charlotte's Web portfolio at the moment. But overall, we still -- we believe we do have a premium product that deserves premium pricing, and then it's always a question of, how much is that index and where's the sweet spot for which we continue to look at?

Derek Dley: Yes, and then in terms of, I guess, just that industry pricing, as you start to see some of these smaller scale brands go away I think you mentioned 1,000, going to hopefully 20 or 30 over time. Have you have you seen that pricing change at all? Is it starting to stabilize? Any changes there just in the dynamics around pricing over the last couple of quarters?

Jacques Tortoroli: Yes, we've seen a relative stability in pricing, there's mixed impact on overall pricing as well. But as we mentioned earlier, our average retail price has grown when the categories come down. And so, we've been relying less on price promotions. And when products don't turn at retail, and you don't have the brand equity, then there's only one thing you can do to move product and that's a pricing down. So, we have done as we think appropriately to protect pricing and that premiumization. But we constantly need to look at the level of index of our brands versus the competitive set that remains, but I'd say, again, for us relative stability to pricing.

Operator: There are no further questions at this time. You may proceed.

Jacques Tortoroli: Well, I'd like to thank everybody for participating in our first quarter call, and we look forward to speaking to you again after our second quarter results in August. Thank you.

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