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Charlottes Web Hldgs Inc. (OTC:CWBH.F)
Q1 2020 Earnings Call
May 14, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Charlotte's Web Holdings, Inc's. first-quarter conference call. [Operator instructions].

Please be advised that today's conference is being recorded. [Operator instructions] I'd now like to hand the conference over to your presenter today, director of investor relations, Cory Pala. You may begin, sir.

Cory Pala -- Director of Investor Relations

Thanks, James. Good morning, everyone, and thank you for joining us for our first-quarter results call. 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, Russ Hammer. Deanie will share her remarks and her comments on the quarter regarding the business and Russ will provide some color on the financials.

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 through the details provided in our earnings release this morning. A webcast replay of the call will be available for an extended period of time through the IR section of our website at charlottesweb.com. Our earnings press release was issued this morning and our MD&A and financial statements have been filed on SEDAR.

You can also access these in the investor relations section of our website. Our standard of reminder to listeners this morning that certain subjects discussed in this call, including some answers we may provide to certain questions, they may include content that is forward-looking in nature, and therefore, subject to risks and uncertainties, which could cause actual future results or performance to differ materially from implied expectations. Risks surrounding forward-looking statements are outlined in detail within the company's regulatory filings. In addition, on this call, we will refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have any standardized meaning as prescribed by IFRS.

Adjusted EBITDA is therefore defined in our press release, as well as, our MD&A. Note that any forward-looking financials are for Charlotte's Web business only do not include additional financials of the proposed Abacus acquisition. We will not be commenting on Abacus forward financials until the acquisition closes. And with that, I'll now hand over the call to Charlotte's Web chief executive officer, Deanie Elsner.

Deanie?

Deanie Elsner -- Chief Executive Officer

Good morning. As many of you are aware, we recently lost the namesake of our company with the passing of Charlotte Figi. What began is her story became a shared story of hundreds of thousands and the inspiration for many millions more on their journey for betterment. Charlotte was and will remain our true north.

Her passing only strengthens our conviction that consumers deserve access to the natural alternatives provided by full spectrum hemp extracts to improve their wellness. Our company commitment is embolden as we strive to achieve a regulatory environment that enables global access to this category of products for consumers. Before I get into our Q1 results, I wanted to provide a quick update on COVID-19 and our business. We are tightly managing this unique situation and our production, quality, and warehouse teams have risen to the occasion.

We've structured our teams and ships for redundancy. And to date, our operations have been running smoothly. Our employees are engaged and supportive of what we're doing. So we know we're on the right track.

I'm pleased to report that we have not had any known cases of the coronavirus among our staff of over 300 and we've had no disruptions to our business to date. Now, regarding the impact of COVID on our sales. We engaged Nielsen to run an analysis to determine the impact of the COVID pandemic across several consumer product categories, including CBD within the food, drug, and mass retail channels. The Nielsen data showed a slight increase in takeaway for the CBD category for the two-week period leading up to the March 21st shelter in place mandate.

Although there was some slight pantry loading that occurred in the CBD category prior to the shelter in place, the FDM category takeaway remains 15% to 20% below the 2020 pre-COVID run rate. In our DTC channel, we experienced a similar increase in our sales. However, we have not experienced the sales contraction occurring in the FDM channel. It's premature to predict the impact of what coronavirus will be on the FDM channels.

As we move forward, we expect the FDM channels to return back to pre-COVID run rates. We anticipate that a portion of these sales will be realized online, which is confirmed with the continued strength of our DTC business. We will continue to monitor the situation and update you as it plays out. Now turning to the review of our first quarter.

Our first quarter of 2020 delivered organic consolidated revenue of $21.5 million, on par with a $21.7 million reported in Q1 2019. Revenue was at the high end of our guidance provided in March driven by the strength of our DTC e-commerce business. For the quarter, DTC sales grew 29% year over year, offsetting declines in our B2B business, which was down 32% versus a year ago. For the quarter, DTC represented 66% of our total business while B2B represented about 34%.

Consolidated gross margins in the first quarter were approximately 70%, about 3 percentage points lower than Q1 2019 and 16 percentage points higher than Q4 2019. Our Q1 margins increased due to the bigger percentage of our sales moving through the higher-margin DTC channel. Five key headlines capture our progress for the first quarter. First, our efforts to transform our DTC business are working to accelerate growth.

Second, we are proactively addressing some of the softness in our B2B channel with new products, new formats, and reduced pricing launched late March and early April combined with distribution expansion. Third, the new products we introduced in Q3 2019 are exceeding expectations and represent approximately 25% of our total sales through Q1 2020. Fourth, we're making very good progress standing up our new production facility with initial distribution and warehouse operations commencing under our new chief operating officer, David Panter. And finally, we've made strategic choices to strengthen the science behind our products with the launch of CW Labs and our intent to acquire Abacus Health.

Based on these five key headlines, our trends and customer feedback, we're maintaining our guidance for 2020. Russ will speak to the guidance momentarily. Now, let me unpack our Q1 performance in a bit more detail. Our DTC channel continued to deliver strong performance in Q1 with revenue of $14.1 million.

DTC grew 29% year over year, demonstrating the success of our recently launched new technical platform, as mentioned, DTC was responsible for two-thirds of our revenue in Q1. Over the last eight months, we have doubled done this channel, recruiting new talent, transforming key processes, and investing in new technology and capabilities to improve the online experience and accelerate sales growth. Our DTC channel has successfully been hitting a high single-digit to low double-digit conversion rate, which is considered very high and has a KPI that we manage very closely. Our DTC platform provides our consumers with access to our broadest product portfolio, enabling them to get what they want when they wanted.

This was a valuable asset during the COVID lockdown as people shopped from the safety of their homes. Online sales remain the largest channel in the CBD category today and it will remain the largest channel in the CBD category going forward according to the Brightfield Group. For perspective, we believe that our DTC business alone is larger than any single competitor in the CBD category, which positions us well as the category growth accelerates. Our DTC business remains a key strategic area for us and it provides a place for us to gain quick consumer insights regarding new products.

In the first quarter, B2B sales were down 32% versus a year ago, driven by the natural channel down 31% and FDM down 33%. The three issues impacting out B2B sales were, first, lapping of initial pipeline stocking orders in FDM from Q1 2019. Second, an ongoing regulatory uncertainty for our dietary supplements. And third, the competitive overcrowding in the natural channel.

In FDM the year-over-year decrease in sales was amplified by lapping Q1 2019 initial pipeline stocking orders as new customers launched into the CBD category. FDM distribution expansion and pipeline orders did not repeat in Q1 2020 as customers pulled back expansion plans due to the regulatory uncertainty. However, since then, more encouraging statements recently from the FDA has resulted in us securing distribution at our first national pet retailer with shipments beginning at the end of March. In addition, I'm pleased to announce an 1,100 door expansion launching this month with an existing FDM partner.

This will increase our total door count to nearly 12,000 by the end of this quarter and will help to improve performance of the FDM channel for the remainder of 2020. Our B2B portfolio has faced some issues in terms of pricing, in addition to having an underdeveloped topical segment. We've addressed these issues in Q1 2020 in a number of different ways and I'd like to take you through that. First, on pricing, we face two issues: expanding competitive price gaps, and second, a lack of accessible price points.

To address the expanding competitive price gaps, we executed a price deal realignment to reduce our list prices 15% to 20% on average across our portfolio. This resulted in an adjustment to our promotional spend combined with a decrease in our list price. This was supported by a reduction in our COGS. These moves minimize the margin impact of our list price reduction by two-thirds.

To create accessible price points for consumers, we launched trial formats on our base products. Charlotte's Web benefits from the highest awareness in the category based on loyalty ratings, in addition to having the highest consumer satisfaction and willingness to recommend ratings in the category, creating accessible ways for consumers to come into our franchise will drive long-term sales. In addition, our successful price point formats present opportunities to attract new consumers in new distribution channels. To address our underdeveloped topical segment, in March, we launched seven new products expanding our topical portfolio by 3 times.

Our new products have been very well received in the B2B channel and are particularly important to our growth in the FDM channel as the majority of these customers have only carried topical products to date. For context, in 2019, Charlotte's Web offered only two topical products and four SKUs, which represented less than 9% of our low sales. Our new topicals offer some of the highest full spectrum CBD concentrations available in the market today, making them more efficacious, and our new formats are getting positive consumer feedback. Finally, our proposed acquisition of Abacus Health will greatly expand our topical portfolio.

Abacus Health is a leader in the over-the-counter topical product segment that combines active pharmacological ingredients with hemp extract. The expansion of our topical portfolio with Abacus will enable us to accelerate growth in food, drug, and mass, where we have a combined market share of approximately 35%. Turning to innovation. Sales traction for our new products launched Q3 2019 has exceeded expectations.

Our innovative gummies were introduced last July and have been one of our most successful product launches to date. Customer feedback has been excellent, and this segment has grown to become 18% of our portfolio sales, driving our ingestible segment to grow approximately 10% year over year in Q1 on a gross sales basis. Within our ingestible's portfolio, gummy sales growth offset declines in oils and capsules. Our pet line is also doing well.

Our pet segment grew 163% through Q1 2020 as new distribution came online. Regarding our capacity expansion, we are making good progress on the build-out of our new fulfillment center. This is now being led by David Panter, who recently joined the company as chief operating officer coming to us from the Estee Lauder Company. David brings deep experience and leadership to our supply chain team.

Finally, we've made some strong strategic moves during Q1 with the proposed acquisition of Abacus Health in addition to the launch of the CW Lab Science and Innovation division. With these strategic moves, we are bringing more science legitimacy to the category, which enhances our ability to drive breakthrough innovation and support regulators with much needed data. The combination of Charlotte's Web and Abacus creates a formidable company in the CBD category, leading the market with brands, science, and quality. Combined, we represent the deepest and broadest CBD company in the world with the most developed portfolio offer across all channels and all segments.

Our integration discussions are encouraging with revenue and synergy opportunities exceeding our expectations and we are benefited by the depth of transaction and integration experience across the collective team. For us, the CBD category remains as exciting as ever as we believe that Charlotte's web is the best-positioned company to lead the category growth going forward. Now, I'll turn the call over to Russ to provide some comments on the financials.

Russ Hammer -- Chief Financial Officer

Thank you, Deanie, and good morning, everyone. We certainly appreciate you joining us this morning. Our Q1 financial statements and the management discussion and analysis have been filed on SEDAR. I trust you've had a chance to review along with this morning's Q1 press release.

I will address some of the more notable items in the Q1 financial results with the aim of additional transparency and share some highlights on our outlook and guidance. Q1 revenue of $21.5 million came in ahead of our guidance range of $20 million, which we provided in March. B2B revenue, which includes both the FDM and natural retail channels, was 31.5% lower year over year as a lack of FDA guidance. And the CBD market continues to result in a cautious approach by national retailers by the increased number of competitors in the independent natural retail channel.

However, we are pleased to report that this weakness was fully countered by our strong DTC e-commerce sales, which increased by 29% year over year in the first quarter of 2020. Turning to gross margin. Our Q1 gross profit was $15 million or 69.8% before biological asset adjustments. This compares to gross margin before biological asset adjustments of 72.8% in Q1 2019.

Our modestly lower effective gross margin percentage reflects promotional programs as part of our competitive DTC growth strategies. For modeling purposes going forward, we expect consolidated gross margins in the mid- to upper 60s range and improving near the end of 2020 into early 2021 from production and fulfillment cost improvements as our new customer fulfillment center comes online. Our vertically integrated supply chain is one of our most valuable assets, enabling full control of product cost, quality, and service. Our 2019 harvest had higher yield and potency, resulting in a 33% reduction in cost per milligram of CBD, combined with cost savings through our new production fulfillment in R&D center, we are confident we will be able to improve margins while at the same time passing on savings to our customers as we enter 2021 and 2022.

Now turning to opex. Q1 operating expenses of $23.3 million increased 76.5% year over year, but down quarter-over-quarter by 11.7% from $26.4 million in Q4 of 2019. As a percentage of revenue, this high opex level is temporary. We are forecasting revenue growth for 2020 and intend to leverage our opex down as a percent of sales against revenue growth each sequential quarter in 2020.

Opex growth was primarily from an increase in SG&A driven by investing ahead of revenue and building out our customer capabilities, expanding our management team, and increased D2C investments. We have also incurred legal fees as we protect our brand, IP and genetics. Adjusted EBITDA loss was a negative $5.7 million, compared to a positive $4.5 million a year ago. The loss was primarily the result of flat year-over-year revenue against the higher overall investments in operating expenses.

We are maintaining our model for negative adjusted EBITDA in the first half of 2020 and a return to positive adjusted EBITDA for the back half of 2020. I'd like to take a moment to talk about our tax provision. During the first quarter, the company reduced our deferred tax asset in accordance with IAS 12 by $6.3 million due to our inability to recognize. The cumulative net operating losses triggering IAS 12 were primarily caused by our Q4 noncash inventory reserve plus our Q1 loss.

Our NOLs remain available to use in the future as the company returns to profitability. And as we have discussed, we fully expect continued growth and a return to profitability in the future, therefore, believe we will still utilize the net operating losses in the future. Now turning to cash and working capital. Our cash balances at the end of the first quarter were $53 million, with working capital at $114.9 million.

Cash used in operations during the quarter totaled $14.9 million that was primarily used for taxes receivable, accounts payable, and trade receivables. We're executing on our capitalization strategy to provide flexible liquidity tools to support anticipated growth and strategic opportunities. As part of this process, we recently engaged in a banking relationship with J.P. Morgan that includes a line of credit and an implementation of J.P.

Morgan merchant services, which will drive cost reduction in card fees in our growing DTC business. Now turning to capex. In terms of capex for 2020, we are carefully managing our investments into our capacity expansion as we continue our infrastructure build-out ahead of anticipated growth resulting from the anticipated eventual FDA policies to support wide adoption of hemp extract products within the FDM channel. Net cash used for our new production fulfillment center was approximately $4.6 million in the first quarter.

Net of tenable allowances, which are included in our receivables, we spent $1.5 million in the first quarter on our new 700 Tech Center. We are investing significantly in our new customer production and performance in our capabilities this year. Our total 700 Tech Capital expenditures are approximately $39 million over three years, with $8 million spent in 2019, $28 million in 2020, and we have postponed approximately $4 million into 2021. Our total capex investment plans for 2020 are approximately $36 million.

Now turning to guidance. Uncertainties around the coronavirus pandemic and the FDA regulatory environment remains. However, for Charlotte's Web, the impact from the COVID-19 pandemic so far on the retail side of our business has been countered by the strong online sales of our DTC e-commerce business. So we are, therefore, maintaining our 2020 growth expectations for Charlotte's Web business for 10% to 20% year-over-year growth.

This provides for a top-line range of approximately $105 million to $115 million for 2020. Note that our guidance is for Charlotte's Web business only and does not consider the additional revenues of the Abacus acquisition. Based on successful Abacus shareholder approval in June, we anticipate the closing of the Abacus acquisition around the end of the second quarter or early Q3 and intend to update our 2020 guidance for the combined business in due course following a successful closing of the acquisition. To conclude with some comments on the proposed strategic Abacus acquisition.

Abacus is holding its shareholder meeting on Thursday, June 4th, which will include the vote for approval from the shareholders of Abacus. Post-acquisition, Abacus shareholders will own approximately 15% of Charlotte's Web. In terms of size, Abacus annualized run rate is about 15% to 20% of Charlotte's Web. Combined, we are the deepest and broadest CBD company in the world, fully integrated across all channels and all segments.

Our strategy is to accelerate our growth and extend our market-leading position, both in domestic and international markets. We look forward to updating you on our progress on the strategic acquisition. This completes the financial update for the quarter. I'll now turn the call back over to Deanie.

Deanie Elsner -- Chief Executive Officer

Thanks, Russ. Tomorrow marks my one year anniversary since joining Charlotte's Web. Over the last year, we've strengthened the business and our market position, building out the required management team to stand the business up and leverage the strong brand, proprietary genetics, and the vertically integrated supply chain. We invested in capital expansion for the anticipation of food, drug, and mass retail growth.

We implemented business systems and processes, accounting controls, liquidity tools in corporate governance. We evolved our DTC technical platform, which is paying dividends in sales growth and data intelligence. We've introduced new products, formats, we've introduced competitive pricing, all aimed to fuel growth across all channels, and we're bringing scientific legitimacy and data to the hemp-derived CBD and cannabinoid categories. It's been a great year, and I'm grateful to steward this ship for you, our shareholders.

With that, operator, we'd like to be -- open up the line and we'll be happy to take any questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Scott Fortune with Roth Capital Partners. Go ahead please. YOur line is open.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning and thanks, and congrats on the quarter. Real quick, there's been in the past, seasonality for the channel in the first quarter. Are you seeing any of that? Obviously, COVID is changing that. And then, just to focus on the natural channel.

Are we seeing any rationalization of brands there? Or you can still expect that to be crowded with competitors moving forward here?

Deanie Elsner -- Chief Executive Officer

Hi, Scott. It's good to hear you. In terms of seasonality, I'll tell you, every quarter since I've been here has been an unusual quarter, and I think, Q1 is no exception. And so, where we've been seeing different patterns of seasonality, I'm not sure that we can put a stake in the ground as to what each quarter contributes.

And I'll give you an example. Typically for us, Q4 is a stronger quarter through the years and Q4 fell short of our expectations as the FDA uncertainty forced our retailers who had made commitments to lean into distribution pullback. I think in Q1, we're seeing some similar apprehensive mission. So it's too early to call, seasonality and I wouldn't want to put a stake in the ground from that standpoint.

In terms of retail sections consolidating and starting to move on brands. I think that's way too early. In FDM, the brands still haven't really reached the shelf and the category really hasn't been developed. In the natural channel, we're still seeing overcrowding and no clear indication at this point but there is a reduction in brands or an attempt to try to control the category so that you lean into the brands that are providing the best growth opportunities.

And so at this point, we're not seeing it and I wouldn't expect to see it until this pandemic clears. I think retailers right now are just trying to keep up with the foot traffic they're experiencing in addition to just keeping essential category in stock. And so, I wouldn't expect to see any of that come to fruition if it did until late this year, more likely category reviews March 2021. Does that answer your question?

Scott Fortune -- ROTH Capital Partners -- Analyst

Yeah. No, it provides a lot of color. Thank you on that. And then just real quick on the FDM channel.

You announced a little bit of expansion, new geographies and doors with existing partners with presumably more topicals coming on board, kind of is there a white space in your conversations with these FDM retailers for the ones that are carrying your products and expanding into more SKUs, topicals, kind of what's your average number of SKUs from that side and expectations embedded into your expectations going forward here in 2020?

Deanie Elsner -- Chief Executive Officer

So, I'd love to give you the number to plug into the model but what I'll tell you is this. We've had very strong uptick on our topical launch across the majority of our retailers in our B2B business. They're taking the majority of, if not the total topical line. So it's been received incredibly well.

In terms of white space, and I think, potentially pushing toward are there broader discussions happening across other segments in the category? The answer to that is yes. With the recent FDA move in terms of just opening up distribution slightly, we are seeing conversations happening where customers are willing to entertain discussions on ingestibles and dietary supplements. Now that has not resulted immediately in distribution, but we're beginning to have those discussions. In addition, we do understand that they themselves are looking at opportunities to expand private label out.

And so, we know that the discussions are happening. We're involved in a number of them. And I would anticipate with some positive views from the FDA, you'll see the food, drug and mass channels move more quickly.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK. Thank you. I will jump back in the queue.

Deanie Elsner -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Derek Dley with Canaccord Genuity. Go ahead please. Your line is open.

Derek Dley -- Canaccord Genuity -- Analyst

Yeah. Hi, good morning, everyone. Just wondering in terms of your online sales or your direct-to-consumer, have you found that customer retention has improved as you've expanded your product offering or, as well as, starting to offer some smaller sort of like starter sizes, I think you called them trial size product offerings?

Deanie Elsner -- Chief Executive Officer

Derek, it's good to hear you. Yeah, it's exactly what's happened in our DTC. So, we look at several metrics in terms of anticipating and forecasting our revenue on DTC. First is the traffic, the conversion rate, the average order value, as well as, the retention rate.

So retention becomes a very important factor to us because we know if consumers come into our brand, we've got a much higher likelihood of holding them in the brand from a loyalty standpoint. And so, we are seeing an uptick in retention. We're also seeing an uptick in our subscription rates. And so, I think, the science of e-commerce and DTC is deep and broad and requires a very dedicated team of experts and capabilities to crack, and that's exactly what we've done.

And we've got very deep plans across each of those KPIs in terms of how do we continually improve them and retention has seen the benefit of that.

Derek Dley -- Canaccord Genuity -- Analyst

OK. Great. And just wanted to touch a little bit on your hemp crop for 2019, obviously, really strong growth over 200%. Can you just talk about what your plans are for that robust hemp crop?

Deanie Elsner -- Chief Executive Officer

Yeah, so --

Russ Hammer -- Chief Financial Officer

Sure, there -- 

Deanie Elsner -- Chief Executive Officer

Sorry, Russ, pick it.

Russ Hammer -- Chief Financial Officer

No. Go ahead.

Deanie Elsner -- Chief Executive Officer

No, please. Go ahead, Russ, you can pick it up.

Russ Hammer -- Chief Financial Officer

So Derek, in our hemp crop for 2020, as we talked about in Q4, we have substantial inventory built that is cost reduced and sitting on our balance sheet and as that flows through. So, we have significantly cost reduced in our hemp crop plans for 2020 and are growing significantly less this year as we are obviously using our cash for the build-out of the 700 Tech Center. And -- but we are seeing significant improvement in the yields that we are getting from our crop and the cost reductions from our crops, which is the advantage of our integrated supply chain.

Derek Dley -- Canaccord Genuity -- Analyst

OK. And then just last one, a real quick one for me. Just on Abacus, is the shareholder vote really the sort of last remaining hurdle in closing that acquisition?

Russ Hammer -- Chief Financial Officer

It is. And we do not have any [Inaudible] regulatory issues in front of us as well. So that is not going to be an issue. So the shareholder vote is the last hurdle to clear.

Derek Dley -- Canaccord Genuity -- Analyst

Great. Thank you very much.

Russ Hammer -- Chief Financial Officer

Thank you, Derek.

Operator

Our next question comes from the line of Gerald Pascarelli with Cowen. Go ahead please. Your line is open.

Gerald Pascarelli -- Cowen and Company -- Analyst

Hi, good morning. Thanks very much for taking my questions. 

Deanie Elsner -- Chief Executive Officer

Hi, Gerry.

Gerald Pascarelli -- Cowen and Company -- Analyst

Hi, Deanie. 

Russ Hammer -- Chief Financial Officer

Good morning. 

Gerald Pascarelli -- Cowen and Company -- Analyst

Good morning, Russ. So really encouraging to see that you're holding your revenue guide, especially in light of this current environment. But can we just dive a little bit deeper into what gives you the conviction that you're going to be able to show what will need to be a pretty notable acceleration over the last three quarters of the year? Thanks.

Deanie Elsner -- Chief Executive Officer

Yeah. Russ, why don't I just take that?

Russ Hammer -- Chief Financial Officer

OK, go ahead.

Deanie Elsner -- Chief Executive Officer

I'll just take the top line and I'll flip it over and I apologize to the folks on the phone. We're in, again, three different states as we take this call. So we have no visual to run air traffic control. So Gerald, in terms of just the initiatives that are in place that help to accelerate our growth going forward.

We've addressed some of the issues that exist in our B2B channel. We've addressed them with new products, new formats, and accessible price points and price reductions. And so, that combined with distribution expansion that we've already secured gives us the confidence that we've got the momentum in FDM to deliver our internal commitments on the B2B business. In DTC, it's more of a science and that's something we watch hour by hour and day by day, literally, we are changing plans within hours of making decisions.

And so, that's something that we have the ability to track very closely and have a fairly high level of confidence on in terms of making sure we deliver that number and the capabilities and infrastructure that we've built give us the tools and the platform to go do that. We've launched new products in a new distribution channel with pet. That channel basically was non-existent for us last year. That volume is all upside to us this year.

I mean, we're really quite excited about that. And then, we're looking at some different options to activate some individual specific new products to get out the door in the back half or some customer requests. So in totality, we feel like we've got the components to hold that guidance and can see the trends happening. Russ, did you want to talk specifically about any of the numbers?

Russ Hammer -- Chief Financial Officer

I'll just add a couple of parts there. The big drivers that Deanie mentioned, obviously, that we see accelerating in the back half of the year are in our DTC channel. We also have the pet channel that Deanie had mentioned earlier in her comments and with a national retailer coming online, that is pretty meaningful for us. And then FDM, we have modest growth built in on that in the back half as well.

So like Deanie said, our confidence in how we built our model for our growth in the back half we are very confident in and the DTC is the primary driver.

Gerald Pascarelli -- Cowen and Company -- Analyst

Thanks very much. That's super helpful. Next question is just on the Abacus transaction. Obviously, it strengthens your portfolio when it comes to topicals, and it looks like you're building out gummies as well, which started to take hold last quarter, I believe.

But as it relates to your portfolio today, are there any gaps that you see? And if so, how do you plan to address those? Thanks.

Deanie Elsner -- Chief Executive Officer

In terms of gaps to our portfolio, without a doubt --

Gerald Pascarelli -- Cowen and Company -- Analyst

In terms of form factors that you may want to get more constructive on over the near term?

Deanie Elsner -- Chief Executive Officer

Absolutely. So for sure, the biggest gap that existed in our portfolio was topical. We were greatly underdeveloped in a segment that was the only segment that retailers would take nationally. And so, we had to fast track both the development of a new topical line and get some unique form factors out with that and you're going to see on that line roll-ons, sticks, and gels, and they're really quite good.

So I feel wonderful about what we've done on the topical front. In terms of other gaps in our portfolio, I don't -- I would tell you right now that, in my opinion, we don't have large gaps. Now, what you're getting to is are there other formats that could be unique platforms for us to bring full spectrum CBD to consumer? And the answer to that is absolutely yes and we are working hard through our CW Labs and our development teams to identify those new formats. That are more consumer friendly, are more acceptable, and more appropriate by consumer segment across the portfolio.

And so, I won't give too much more away on that front because I think that we've got several things in development. I literally just reviewed this yesterday. But yes, we are -- the reason why we brought CW Labs to the forefront is we need to continue to fuel breakthrough innovation in this category while we build the science and the data that reinforces what makes us different. And so absolutely, that's in front of us.

Gerald Pascarelli -- Cowen and Company -- Analyst

Super helpful. Thanks very much. I'll hop back in the queue.

Deanie Elsner -- Chief Executive Officer

You bet.

Russ Hammer -- Chief Financial Officer

Thanks, Gerald.

Operator

[Operator instructions] And our next question comes from the line of Michael Lavery with Piper Sandler. Go ahead please. Your line is open.

Michael Lavery -- Piper Sandler -- Analyst

Good morning.

Russ Hammer -- Chief Financial Officer

Good morning, Michael.

Deanie Elsner -- Chief Executive Officer

Good morning, Michael.

Michael Lavery -- Piper Sandler -- Analyst

I know it's only -- it sounds like about four to six weeks into the new pricing. But can you give us a sense of what you're seeing so far? And I guess maybe two parts of it. One is how very much of a read you have on the consumers reaction in terms of elasticities and that sort of thing. And then maybe as well, trade response, certainly, they'll replenish as it sells through, but has the lower price point triggered any incremental facings or any other way that they've also increase their interest in more volume?

Deanie Elsner -- Chief Executive Officer

Yeah, absolutely. So first, just to reframe this, competitive price gap and lack of accessible price points to bring consumers into the category. That's what we're attacking to get to the competitive price gaps. We did the price deal realignment and really funded that with a reduction in our promotional spending, a reduction in our list price, and benefits from our COGS that were favorable coming through.

So that's how we funded almost two-thirds of the margin hit from that price reduction. The last part of that margin hold, you're absolutely right, is based on elasticities. And so, what we built was that we wouldn't see any elasticities because, Michael, we don't have data that shows us -- it's just that we can't identify what the elasticities are in the marketplace because we're not that development. However, what we've seen from DTC, and we launched the new pricing and the new formats in DTC about three weeks ago.

So those happen very quickly, and we can get early reads on that channel, which is the benefit -- one of the biggest benefits of that channel for us. And what we're seeing in DTC is an increase in units going through on the new pricing. And although you would expect with the price decrease our average order value to decline, it's actually held up because we've increased the number of units we're selling. And so, the elasticities are holding up as we had hoped they would.

We didn't have the data to make that determination going in. In terms of food, drug, and mass and natural channels, it's just too early to tell. The pricing would have just gotten locked in this month, April, and we won't see that data for about another four weeks. And so, we can't call it in retail yet, but early signs from DTC would say that our theory has held up and actually is positive.

Michael Lavery -- Piper Sandler -- Analyst

Sorry, just to clarify for sure, you say positive, meaning good or actually up? It sounds like if I heard you right a minute ago, you were saying that the lower price didn't drive a sales decline, the volume increase offset to be at about flat. Did I hear that right?

Deanie Elsner -- Chief Executive Officer

Yeah. But again, it's three weeks in. And so at this point, to be flat to slightly up three weeks in without us really getting behind it is very encouraging. We would call that a positive sign and something this early that we were not expecting.

Michael Lavery -- Piper Sandler -- Analyst

Gotcha. No, that's perfect. And just on CW Labs, you talked about some of the innovation you expect that to drive can you also give us a sense of what else we should expect from there? Would that be a way that you might do work to support claims or clinical trials? Or is it really just focused on product development?

Deanie Elsner -- Chief Executive Officer

The decision to launch CW Labs was really threefold. First, we needed to strengthen and organize the science behind our products and our genetics. So that's the first checkmark. The second was to launch breakthrough innovation.

And third was to partner with notable and prestigious institutions as they explore research on this category. So, we have a number of partnerships we have in place right now. We've developed some products that a couple of principal investigators are actively working against and we would expect to see structure and functional claims come out of some of those initiatives. I think, that's an important part for us.

It's a big reason why we tied into the Buffalo -- the University at Buffalo Campus and the SUNY System in New York with 64 different universities in New York. We have an opportunity to leverage our position in the market and take advantage of a very receptive New York environment and a number of academic institutions. In addition, there's several others that we're working with. So yes, we would expect to see a future where we'll be able to be a little bit more progressive in some of the structure and function claims that we make.

Michael Lavery -- Piper Sandler -- Analyst

OK. Thanks. Very helpful.

Deanie Elsner -- Chief Executive Officer

Good. Thank you.

Russ Hammer -- Chief Financial Officer

Thanks, Michael.

Operator

Our next question comes from the line of Jenny Wang with Eight Capital. Go ahead please. Your line is open.

Jenny Wang -- Eight Capital -- Analyst

Hi, good morning. Just a first question for me. On the DTC channel, I know that your e-commerce channel is a lot stronger than your peers. Are you seeing any -- I know you've mentioned that there's no contraction in sales, but are you seeing any uptick in sales with the current COVID environment where a lot of consumers are ordering online versus traditional brick and mortar?

Deanie Elsner -- Chief Executive Officer

Good morning, Jenny. It's good to hear from you. On DTC, you are -- the question is absolutely correct -- correctly stated. We are seeing an uptick in our traffic in DTC and we're seeing an uptick in our ability to convert on some of that traffic.

We did, going into the shelter in place mandate, see an uptick in sales. That was kind of in -- I hate to put an exact number on it. Russ, I'm going to say it was in the 10% to 20% as an uptick in sales going into the shelter in place. What's interesting about that channel for us is that it didn't contract.

And so, I would contend that the continued strength of that channel is reflective of consumers being home and reaching out and wanting to order in the safety of their homes. So, we are seeing that I don't know that we can completely attribute it to COVID-19 because we've put in place a new technical platform and new capabilities and we're getting really smart about how to identify and personalize communication to our different consumer segment. So that is absolutely helping us. But I would imagine there is a bit of a COVID-19 benefit to being online where consumers are shopping.

Russ Hammer -- Chief Financial Officer

Yeah, Jenny, I would agree with Deanie's comments. I think at the time that the shelter in place went in, we were up probably close to 15%, 20%. And as you know, we finished up quarter over quarter, up almost 30%. But we definitely have lift from our technologies and our e-commerce team because they're -- the conversion that they're getting is just unheard of in this industry right now and in any DTC e-commerce site as well.

So -- but some of it was probably due to people sheltering in place for sure.

Deanie Elsner -- Chief Executive Officer

Just -- Russ, I just remembered, there's probably, Jenny, one other fun little fact and it's just for humor. We are seeing a really nice uptick on our pet business since the COVID-19 pandemic hit and our hypothesis is that with consumers being home and more cat adoption happening and consumers being with their pets day in and day out and seeing some of the pain they're living through. They're getting online and we're seeing a really nice uptick on pet online. And so, that's probably a benefit of what we're seeing through DTC.

Jenny Wang -- Eight Capital -- Analyst

That's very interesting. And maybe just moving on to your sales guidance for the year. What percentage of sales are you modeling in? Or maybe is it kind of greater than kind of the current 66% for your DTC channel for the remainder of 2020?

Deanie Elsner -- Chief Executive Officer

Russ, do you want to take that?

Russ Hammer -- Chief Financial Officer

We see our -- sure. We see our DTC e-commerce business increasing as a percent of our mix in the back half.

Jenny Wang -- Eight Capital -- Analyst

OK. That's helpful. And then maybe on the marketing spend, could you give us a ranking of kind of which sales channels the majority of the marketing and promo expenses gone toward this quarter just in terms of your three sales channels?

Russ Hammer -- Chief Financial Officer

Yeah --

Deanie Elsner -- Chief Executive Officer

Without a doubt, our focus --

Russ Hammer -- Chief Financial Officer

All right, Deanie, go ahead.

Deanie Elsner -- Chief Executive Officer

No, it's OK. I -- without a doubt, our focus on marketing has been redirected to drive traffic to DTC in an environment where the run rates in B2B are at about 15% to 20% down versus where they were pre shelter in place mandate. We're making sure that every dollar we spend is being focused against where we can realize the revenue so that we can improve our ROIs and deliver against that expectation for the year. And so, we've shifted to be more DTC traffic-driving and as the economy begins to open up and consumers are back in stores and shopping broader categories, we will shift back to where we -- our original plans were.

Jenny Wang -- Eight Capital -- Analyst

OK. That's helpful. And one last one for me. You've mentioned the Abacus shareholder vote as kind of the last hurdle for this transaction to close.

Can I interpret that as you won't need to file for HSR to close this transaction?

Russ Hammer -- Chief Financial Officer

That's correct, Jenny. I think I said that on one of the other answers to someone else's question. We will not need to file HSR. That's correct.

Jenny Wang -- Eight Capital -- Analyst

OK. Got it. Thank you so much.

Russ Hammer -- Chief Financial Officer

You're welcome. Thanks, Jenny.

Deanie Elsner -- Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of Mike Hickey with The Benchmark Co. Go ahead please.

Deanie Elsner -- Chief Executive Officer

Consumers are feeling today, anxiety, stress, lack of sleep because of what's happening externally really feeds right into this category and wellness. And so, we feel like the consumer trends are well-positioned for this category. In terms of how does unemployment impact potentially the future of what's going to happen this year? I would contend that the moves we've made in our B2B channel in terms of reducing price across our portfolio of 15% to 20% and finding accessible ways to let consumers trial our products in more accessible price points is exactly what we should be doing for this environment. And sometimes you're smart, sometimes you're lucky, sometimes you're both.

And I would contend, in this case, we're both. We made the right strategic pricing moves at a time when discretionary dollars get more challenged. And I think, we're well-positioned to take advantage of that. So, I feel pretty good about what's ahead of us, and the consumer trends would indicate the category will be in demand.

Mike Hickey -- The Benchmark Company -- Analyst

Thank you for that. And your price adjustments, was that just B2B? Or is that e-commerce as well? It looks like the price on e-commerce are the same, but I can't quite tell.

Deanie Elsner -- Chief Executive Officer

They're not -- we took a price reduction -- list price reduction across our total portfolio and we've launched the accessible formats across all channels. So it's impacting our total business.

Russ Hammer -- Chief Financial Officer

Yeah. And Mike, the way to think about that is the product became much more affordable to a lot of people and we think that helped give us a lift from a strategic product portfolio standpoint.

Mike Hickey -- The Benchmark Company -- Analyst

Gotcha. Did you reduce the pricing in your pets line that looks to be the same?

Deanie Elsner -- Chief Executive Officer

No, we did it, we did bring that out. And Mike, I think, maybe the reason why it might look the same to you is our national pet retailer -- before we got really national distribution, the prices were changed, and so, that won't be as obvious. But yes, across our total portfolio, our prices were reduced.

Mike Hickey -- The Benchmark Company -- Analyst

OK. All right. Thanks, guys. That's helpful.

Good luck.

Deanie Elsner -- Chief Executive Officer

Thank you.

Russ Hammer -- Chief Financial Officer

Thanks, Mike.

Operator

And there are no further questions in queue at this time. I'd like to turn the call back over to our presenters.

Deanie Elsner -- Chief Executive Officer

Good. Thank you very much. I appreciate all the time you guys have spent with us this morning in these unusual circumstances. Appreciate the support you're giving us and your questions.

If there's any follow-ups, please reach out to Cory Pala and have a great day.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Cory Pala -- Director of Investor Relations

Deanie Elsner -- Chief Executive Officer

Russ Hammer -- Chief Financial Officer

Scott Fortune -- ROTH Capital Partners -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

Gerald Pascarelli -- Cowen and Company -- Analyst

Michael Lavery -- Piper Sandler -- Analyst

Jenny Wang -- Eight Capital -- Analyst

Mike Hickey -- The Benchmark Company -- Analyst

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