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Charlottes Web Hldgs Inc. (OTC:CWBHF)
Q2 2020 Earnings Call
Sep 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. second-quarter conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Cory Pala, director of investor relations.

Thank you. Please go ahead, sir.

Cory Pala -- Director of Investor Relations

Thank you. Good morning everyone. Thank you for joining us for our 2020 second-quarter earnings conference call for Charlotte's Web Holdings, Inc. My name is Cory Pala, director of investor relations, and leading the call this morning is Charlotte's Web's CEO, Deanie Elsner, along with CFO Russ Hammer.

The earnings release, along with financial statements for the quarter and MD&A can be found in the investor relations section of our website and these have been filed on sedar.com. On today's call, Deanie will provide high-level comments on the quarter with operational updates on the business. Russ will provide some color around Q2 financial results, and we will take questions from our analysts at the end of our prepared remarks. A replay of this call will be available through the next week, accessible per the details provided in our earnings release and a webcast replay of this call will be available for an extended period of time which will be accessible through the investor relations section on our website at charlottesweb.com.

As a reminder to our listeners, certain subjects discussed on this call including some answers we may provide to certain questions, may include content that is forward-looking in nature and, therefore, subject to risks and uncertainties and other factors which could cause actual future results' performance to differ materially from any implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings which can be found on sedar.com. In addition, during the call, we will refer to supplemental non-IFRS accounting measures including adjusted EBITDA which do not have any standardized meaning prescribed by IFRS. Adjusted EBITDA is therefore defined in our press release as well as the MD&A as filed on SEDAR.

I'll now hand over the call to Charlotte's Web chief executive officer, Deanie Elsner.

Deanie Elsner -- Chief Executive Officer

Thank you Cory. Good morning. I'd like to begin with a quick update on our business operations with regard to the coronavirus pandemic. To date, our employees are healthy, and we've had no meaningful disruptions to our supply chains due to COVID-19.

From the beginning of the pandemic, we took actions to structure our teams and shifts with redundancy protection and from an operational standpoint, our internal production, quality, testing and warehousing have continued to run smoothly. We benefit from controlling our supply chain, and our actions to protect our employees while maintaining operations provided a relative shelter from pandemic-related disruptions. However, COVID-19 has impacted sales levels in our B2B channel due to lower foot traffic and temporary location closures which I will detail shortly. Since the pandemic dawned, we've donated $1 million in product to those in need through our CSR partnerships.

This was an important and impactful action for our CSR community and our employees to come together to support the Charlotte's Web families in need. Now a review of our progress in the second quarter. Within a category operating under regulatory ambiguity, the pandemic has created an additional headwind and a less predictable external environment. Despite this difficult operating landscape, Charlotte's Web is outperforming much of our competitive set by expanding our portfolio and channel footprint, strengthening our operational excellence and extending our leadership in brand health metrics.

With regard to expanding our portfolio and channel footprint, we closed the acquisition of Abacus Health Products. This transaction significantly expanded our topical portfolio including OTC pharmacological-grade products and launched us into the beauty and bath segment. It nearly doubled our reach in terms of doors, and it cemented our leadership in market share in the mass retail channels and healthcare practitioner channel, representing about 16,000 customers. In terms of strengthening our operational excellence, we fortified our balance sheet with liquidity with a $54 million financing loan ending Q2 with $99.8 million in cash and $155 million in working capital.

We advanced scientific legitimacy through a collaboration with ValidCare for a clinical trial and efficacy of hemp products. This clinical trial is operated to collect large amounts of data to inform the FDA's questions regarding CBD. We commenced warehousing and distribution in the first stage of our new production and fulfillment center to support cost-efficient, high-volume growth. We executed our portfolio price reduction strategy which dramatically reduced our competitive price gaps and through August, is increasing our sales velocities.

We achieved B Corp certification, underscoring our ESG commitments to our employees, our customers, our communities and our shareholders. Finally, we expanded our leadership in key brand health metrics. We became the No. 1 CBD product in terms of household penetration, increasing our penetration 40% versus a year ago.

We continued our No. 1 position in awareness, purchase intent and loyalty and increased our lead across all three metrics double digits. And we remained the No. 1 CBD product in terms of a trust rating, increasing by almost 10 basis points.

These brand health metrics are important indicators for long-term sustainable growth. And as the external operating environment settles, Charlotte's Web will emerge a stronger brand among consumers. Now, turning to Q2 performance. The pandemic had the greatest impact on our sales through temporary closures of brick-and-mortar retail that made up our B2B channel.

Our consolidated Q2 revenue was $21.6 million, down 13.6% versus a year ago. Legacy Charlotte's Web Q2 revenue was $21 million, down 16% versus a year ago. Versus Q1, our total consolidated Q2 revenue was up 1%, and the Charlotte's Web legacy Q2 revenue was down 2%. This was a strong relative performance from an industry perspective as the Brightfield Group estimated category revenues in Q2 were down 63% versus Q1.

In Q2, our consolidated B2B retail channel revenue was down 54.5%. This decline was substantially offset by the strength of our direct-to-consumer channel which increased revenue 33.6% versus a year ago and 10% versus Q1. For Q2, direct-to-consumer sales represented 72% of our total revenue and B2B represented 28%. I want to unpack the Q2 B2B results for better understanding.

Our B2B revenue is made up of four channels: Food, drug and mass retail, natural retail, healthcare practitioners, we refer to that channel as HCP and the pet retail channel. For legacy Charlotte's Web, the two B2B channels most impacted by COVID were the natural channel and the healthcare practitioner channel, down collectively about 60% versus a year ago. This makes sense as many of these outlets were closed for an extended period of time in Q2. Our Q2 food, drug and mass channel revenue was down 34.9% versus a year ago, performing better than the natural channel and the healthcare practitioner channel due to less store closures, more foot traffic and our expanded distribution at a national drug chain.

On a sequential basis, our food, drug and mass retail volume was up 35% versus Q1 driven by expanded distribution and innovation. Our pet retail revenue increased significantly on a small base by expanded distribution in our first national pet retailer. In addition, we are in discussions with other national pet chains for 2021 distribution. In total, legacy Charlotte's Web B2B distribution expanded by 1,700 doors in Q2, bringing our total doors to about 12,000.

Finally, in Q2, we executed our price deal realignment which reduced our base price points by 15% to 20% across our total portfolio, enabling us to close competitive price gaps by 37 percentage points in Q2. In terms of product segment growth, gross sales of our ingestible products was down 12% versus a year ago. Within ingestibles, our new gummy line was a tremendous success, with sales up six times versus a year ago, contributing now 20% of our total portfolio gross revenue. Early consumer research indicated new users showing a preference for more familiar forms, our gummy innovation capitalized on this insight.

In the second half of 2020, we plan to expand our gummy offering with larger formats to satisfy increased consumer demand. Q2 gross -- growth -- Q2 gross revenue for topicals was down 49% versus a year ago as we lapped the largest quarterly FDM inventory load of 2019. However, sequentially, gross sales of topical increased 32% versus a year ago reflecting the launch of our new topical innovation and the contribution of the Abacus topical sales. Looking forward, we expect topical sales to increase significantly in the second half of 2020.

Shifting to our acquisition. The Abacus transaction closed on June 11 and contributed sales for the final 19 days of the quarter, adding $610,000 in revenue. The healthcare practitioner channel represents a substantial amount of Abacus' total revenue. And this channel has been particularly impacted by the COVID-19 with accounts closed temporarily in Q2 due to the pandemic.

The 100-day business integration plan is on track. From an opex standpoint, we began leveraging initial cost synergies with Abacus last month. This will continue in the second half of 2020 as we integrate our new production and fulfillment center, providing further cost reductions. We are now operational in our new manufacturing and fulfillment center.

We are building out the facility in stages and expect to be fully operational by early 2021. We have commenced warehousing and fulfillment operations and the first production lines are scheduled for later this month. Consolidating disparate manufacturing operations into a new facility will enable closing of two former locations, reducing certain operating expenses beginning in the fourth quarter. Future milestones target additional expense optimizations as we manage operating expenses during capacity expansion to support an eventual full product launch into the food, drug and mass retail channels.

I will now turn it over to Russ for an overview of our financial performance.

Russ Hammer -- Chief Financial Officer

Thank you Deanie, and good morning everyone. We certainly appreciate you joining us this morning. Our Q2 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 Q2 press release.

I will address some of the more notable items in the Q2 financial results with the aim of providing additional transparency and share some highlights on our outlook and our guidance. Total consolidated net revenue for the second quarter was $21.6 million which includes $610,000 from the Abacus acquisition during the final 19 days of the quarter reflecting the June 11 acquisition closing date. Excluding Abacus, net revenue for the Charlotte's Web business was $21 million, a decrease of 16% year over year and a decrease quarter over quarter of 2% from Q1. Our Q2 B2B retail sales decline of 55% year over year were substantially offset by strong DTC sales, up 34% year over year to $15.5 million, accounting for 72% of total revenue compared to 46% for Q2 a year ago.

For better transparency, adjusted gross margin before inventory provisions was 64.8% compared to 75.2% last year and 70.2% in the first quarter. Lower gross margin reflects product sales mix, a portfoliowide repricing during the quarter and new topical distribution in B2B. The reported Q2 gross margin of 53% includes inventory provisions of $2.5 million taken in the quarter for expiring product. For transparency and modeling purposes, we expect second half consolidated gross margin in the mid-60s range based on sales mix and increasing into 2021 from production and fulfillment cost improvements as our new facility comes fully online.

Q2 operating expenses of $29.5 million were up 82% year over year from $16.2 million. This included $6 million of extraordinary items relating to the Abacus acquisition transaction and legal fees to protect our brand and IP. Excluding these extraordinary items, our Q2 opex expenses for the Charlotte's Web legacy business were basically flat from Q1. Our banking and merchant fees are 50% lower year over year since partnering with JPMorgan at the start of the year, reducing expenses by approximately $400,000 per quarter.

For modeling purposes, with the addition of Abacus, we expect additional expenses of about $6 million per quarter for the balance of this year which includes cost of restructuring. Let me comment a little bit on opex and cost controls. Our expense levels partly reflect the infrastructure and capabilities we've been building out ahead of revenue to support the growth of our e-commerce business and B2B business originally expected in the first half of the year but have been temporarily impacted by the COVID-19 pandemic. Additionally, healthcare practitioner offices have been closed due to COVID-19 which has materially impacted Abacus channels and sales temporarily.

While we believe these channels will recover in 2021, the infrastructure and associated costs remain today, and operating expenses have become a higher percentage of revenue than desired. While we anticipate the FDA or a legislation will enable a launch of the FDM channel around mid-2021 and COVID lockdowns could be resolved to a meaningful degree, we are proactively taking action to reduce our spend. Our new production and fulfillment center has been coming online in stages and presents significant future cost-saving opportunities starting in 2021 for expense consolidations, a benefit of owning our supply chain. Consolidating disparate manufacturing operations into the new facility will enable the closing of two former locations, reducing associated operating expenses in 2021.

As the facility build progresses, additional expense optimizations will be realized. We have also identified significant synergies related to the integration of Abacus which will start to provide additional cost relief in Q1 '21. In total, we are actively targeting a 10% reduction of annualized consolidated operating expenses going into 2021. This is not downsizing of the business but opportunistic reductions through efficiency improvements.

Adjusted EBITDA loss was $5.7 million compared to Q1 -- compared to a positive $3.8 million a year ago reflecting the infrastructure build-out ahead of revenue growth and the COVID impacts. Now, turning to cash flow. Turning to cash and working capital, our cash balances at the end of the second quarter were $99.8 million, with working capital of $155 million. capex of $8.7 million during the quarter, $10.2 million during the first half.

In the second half, we expect capex expenditures of approximately $25 million for a total of $35 million for 2020. This primarily reflects the continued investment in construction of the company's new production and fulfillment center. As a reminder, our total new production center capital expenditures will total approximately $33 million between 2019 and 2021, with the bulk of it in 2020. Abacus business outlook and expected revenue contribution.

We're fully integrating Abacus' topical portfolio into our business channels. And so there won't be separate P&Ls going forward. Operating synergies will be realized beginning in Q4 that will equate into savings starting Q1 2021. The majority of Abacus' quarterly sales go through the healthcare practitioner channel, where it is a market leader with its CBD clinic line of products.

Unfortunately, this was among the most heavily impacted channels from COVID as the majority of healthcare practitioners have been forced to temporarily close operations due to the pandemic. As some states have begun to reopen from the lockdown, we are seeing sales beginning to return and expect sales levels to return to normal in due course once the country fully emerges from lockdown. However, at this point, we are modeling for the Abacus acquisition to add $5 million to our revenue in the second half of 2020 due to the closures. Now, turning to guidance.

We are operating in a suboptimal environment for the near-term as the pandemic has had a larger and longer impact than we anticipated on retail and practitioners. Thankfully, retail sales declines have been mostly offset by a strong DTC growth of more than 30%. We believe Q2 was our low for the year and with only two weeks remaining in the third quarter, we see growth for the second half of 2020 over the first half. Depending on how meaningful we see the opening up of the economy and healthcare practitioner channels, we expect revenue to be flat to modestly higher for the 2020 year.

I'll now turn the call back to Deanie for her closing remarks.

Deanie Elsner -- Chief Executive Officer

Thanks Russ. Before I close, I want to provide an update on the regulatory front. 10 days ago, bipartisan hemp legislation was introduced into the house representative. The HR 8179 bill states that CBD and any other ingredient derived from hemp shall be lawful under the Federal Food, Drug and Cosmetic Act as a dietary ingredient in a dietary supplement.

We provided input in support of HR 8179 because it effectively resolves the FDA's quandary and would enable companies to comply with the existing legal framework for dietary supplements production and labeling. This legislative process is running in parallel to efforts being undertaken by the FDA toward a regulatory pathway for hemp CBD dietary supplements. In July, the FDA submitted draft enforcement policy for the industry to the Office of Management and Budget. This is the agency's best thinking on how they will structure enforcement.

The FDA plays a critical role in consumer safety, and we are supporting their efforts by sharing our data in addition to participating in a national clinical trial being led by ValidCare. This study will help the FDA gain the data it needs to confidently regulate hemp-derived CBD. We are committed to the safety and efficacy of our products, and we welcome the opportunity to bring science-based data forward to key regulators. Results of the study will be shared with the FDA near the end of this year, and are effectively published in a peer reviewed journal early 2021.

While a specific time line for a definitive regulatory framework has not yet been provided by the FDA, industry observers expect that we may see actionable guidance from the FDA sometime in 2021, and we aim to be ready. Despite the headwinds of an ambiguous regulatory environment and the pandemic, the growth trajectory for this category remains three to five times its current size over the next three to four years. So it's important to maintain the long view on this sector. Charlotte's Web's developed portfolio across channels and segments is a true advantage.

In addition, we have a fortified balance sheet, we are advancing the science. We're actively managing our expenses down, and we have rapidly integrated the Abacus acquisition and effectively stood up our new production and fulfillment facility. COVID-19 is not forever. And we are confident that favorable regulations are forthcoming from the FDA or legislation in 2021.

This will be a key catalyst for the category growth, and we remain focused on our efforts to strengthen our business to ensure that Charlotte's Web is the best positioned company to win. Thank you. And with that, we will open it up to questions.

Questions & Answers:


Operator

[Operator instructions] Your first question comes from the line of Michael Lavery of Piper Sandler. Your line is open.

Michael Lavery -- Piper Sandler -- Analyst

Good morning. Thank you.

Deanie Elsner -- Chief Executive Officer

Hey Michael.

Russ Hammer -- Chief Financial Officer

Good morning.

Michael Lavery -- Piper Sandler -- Analyst

Can you touch a little bit on how to balance cost savings and running efficiently with how to position yourself for the kind of growth you want and leaning in on some investments to be the sort of CPG company that you have as your aspiration? And specifically related to that, give some sense of how much of the cost savings that you anticipate are from deal synergies versus other efficiencies apart from that?

Deanie Elsner -- Chief Executive Officer

Russ, you want to start?

Russ Hammer -- Chief Financial Officer

Yeah, let me take a shot at that. It's a long question but I think I got it all. So the cost savings we're looking at are across a few different channels. One, when we finish the build-out of our operational and distribution center, we will be able to produce our extracts at less than half the cost we're looking at before.

When we in-source our quality testing that we have been outsourcing, we're going to save again significant costs, over half of what we were doing. So the center is unlocking a value for us in the future that gives us a significant cost advantage going forward. Then on the synergy side that you asked, and we had the second quarter with 19 days in with them at the end of the quarter, but it's going well. We're ahead of our plan.

As you've noticed, they're already up on our website, and they're already cross-selling with our channels. That being said, the healthcare practitioner is a tough part. But the synergies that we're looking at are the revenue synergies within the cross-selling, but that has been limited with the healthcare practitioner shutdown. And then cost synergies.

Cost synergies, just to give you a flavor, will go across employees, contractors, marketing, R&D, operations, lease amortization and obviously, public company costs. So we'll give more color on that in the third quarter, but we're looking at some pretty significant synergy savings from a cost perspective as well.

Michael Lavery -- Piper Sandler -- Analyst

That's great color.

Deanie Elsner -- Chief Executive Officer

Looked like this...

Michael Lavery -- Piper Sandler -- Analyst

Sorry, Deanie, what was that?

Deanie Elsner -- Chief Executive Officer

Sorry, I was just going to build up the back part of your question which was how do you do that if you want to be a CPG -- a world-class CPG player in the marketplace? We spend a lot of time building our infrastructure and our capabilities. And I'll tell you, this is I think the strongest management team that I've ever had the privilege to work with. And so our focus will be on surgically getting after redundant costs in our system, getting smarter about how we spend and COGS while we maintain the infrastructure to drive the capability and ultimately our top line.

Michael Lavery -- Piper Sandler -- Analyst

OK. Thank you very much. I'll pass it on.

Operator

Your next question comes from Gerald Pascarelli of Cowen. Your line is open.

Gerald Pascarelli -- Cowen and Company -- Analyst

Hi. Good morning. Thanks very much for taking the questions.

Russ Hammer -- Chief Financial Officer

Good morning Gerald.

Gerald Pascarelli -- Cowen and Company -- Analyst

Good morning. So it was encouraging to see e-commerce, certainly I guess accelerate from the 29% growth in 1Q, but still trending below, now through the first half of the year, trending below the 39% that CWEB delivered for full-year 2019. I guess, can you provide some color on maybe just a cadence of how you see that channel given how we're so deep into 3Q right now? Maybe how your e-commerce has trended in July and August and just the opportunity to cross-sell the Abacus brands channel which I believe makes -- essentially represents a new revenue stream for them. Thanks.

Deanie Elsner -- Chief Executive Officer

Yup. Gerald, absolutely. And I think it's a fair question. Remember, year on year, e-commerce this year for us is a much bigger channel, and so growing it at the same accelerated pace as we did in '19 is always our desire, but may not be completely possible.

We feel really, really great about our DTC business. We're watching the business up almost 34% on the quarter and up versus Q1. But if you dig into what's driving that e-commerce business, we're seeing double-digit conversion rates. Our acquisition is up 63%, subscription is up 124%, and our retention is up 56%.

So amazing increases on our KPIs. The one place that is below a year ago is traffic. Traffic is down. And traffic is down due to civil unrest, the pandemic, the election and consumers are distracted.

And so we feel like as things settle out a little bit, we will see traffic return. And then our strong KPIs will continue to drive that business up. I think we've got a lot of opportunity in this channel. We built an amazing infrastructure last year.

We built new capabilities that got launched in Q2 and starting in Q3. And so we now have the infrastructure, the capabilities to get very precise about targeting insights, personalized messaging and prompting consumers. We're also seeing some great new opportunities with Abacus. We mentioned that our database in this e-commerce channel is 30 times the size of what Abacus was operating on.

And so scale will play a big part of this. Actually, the first month Abacus has been on, we saw about 68% of the Abacus sales included Charlotte's Web products. So we see the early data points that would indicate we've got upside on this channel, and we'll continue to drive it.

Russ Hammer -- Chief Financial Officer

Gerald, this is Russ. I'd just add one comment to Deanie's inputs on that. And that is our e-commerce channel of course as everyone knows, is one of our most profitable, but it's also larger than our next nearest competitor, just our e-commerce channel alone. So that's -- the significant size of, as Deanie mentioned, on the growth, still growing well over 34% again this quarter, is substantial for a sizable market.

Gerald Pascarelli -- Cowen and Company -- Analyst

Got it. Thank you. That's super helpful. Just last one for me.

I get that brick-and-mortar retail is a headwind for everyone in the industry. And market saturation within certain channels at brick-and-mortar retail has certainly been a theme. I mean does -- I guess this is more of a hypothetical question. But does COVID-19 expedite the process of a potential shakeout from some of these companies that are -- and some of these brands that are better saturating natural products to result in a shakeout, maybe quicker than would have been the case outside of a COVID-19 environment? Thanks.

Deanie Elsner -- Chief Executive Officer

Yeah, it's a great question, Gerald. And we are beginning to see that happen. We're seeing competitors begin to lose steam and lose their space on shelf. I think the shakeout is going to happen.

I think that in the natural channel, it's going to happen a little slower just because natural has historically housed the greatest amount of competitors and the greatest breadth of portfolio. I think the biggest changeover in terms of how you're going to see brands shake out is the opening of the food, drug and mass channels. And that's really because of two reasons. One, when it is fully opened and the FDA has landed their regulatory, that set of channels is going to represent about two-thirds of the revenue that goes through this category, that go through food, drug and mass.

And so it will be a massive shift in terms of volume going through. Importantly, the food, drug and mass customers tend to operate on a more limited brand and portfolio representation. And so on average, I would expect to see about 12 competitors in an FDM competitive set versus many, many, many more in a natural set. And so I think that's going to be one of the biggest drivers.

I think once it gets into food, drug and mass, those customers tend to be more focused on making every inch work and much more focused on category management. That's where this company is going to shine. We've got tremendous sales infrastructure to help guide the retailer, to inform them about the insights and to help optimize the return on their investment from a shelving standpoint in store. And so as that moves FDM and FDM opens up, that's where I think you're going to see the biggest shake out.

We're beginning to see receptivity from the FDM channel. As I mentioned, 1,700 new doors of expansion in FDM in Q2. And we're beginning to initiate conversations with some of our retailers on ingestibles. And so I think you're going to begin to see this move, and I'm optimistic the FDA will land the regulatory to enable it.

Russ Hammer -- Chief Financial Officer

And Gerald, I'll just add one thing to what Deanie just mentioned. As she said in her closing comments as well, the bipartisan hemp legislation, HR 8179 bill has been introduced. That could possibly be the start of this. So we're excited about it.

Gerald Pascarelli -- Cowen and Company -- Analyst

Got it. Thanks very much for the color. I'll pass it on.

Operator

Your next question comes from Scott Fortune of ROTH Capital Partners. Your line is open.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning and thank you for taking the call. I wanted to focus a little bit on your second half '20 guidance. Obviously, we're going to see continued DTC growth from that standpoint. But is that including modest FDM channel growth, stores opening there, kind of just help understand the pet channel, the new national retailer and the growth there? And what is being offset the volume? And are you seeing continued pricing pressure from that standpoint?

Deanie Elsner -- Chief Executive Officer

Russ, do you want to start or do you want me to start?

Russ Hammer -- Chief Financial Officer

Well, I'll give a couple of inputs on the back half, Scott. Thanks for the question. As we're looking at third quarter, fourth quarter, we're already seeing, as I mentioned in my comments, that we're ahead in third quarter over second quarter, with just a couple of weeks to go in the third quarter. So that is encouraging to us.

Our e-commerce business has its new software and -- with Adobe, and we're able to raise our level of performance on that in the back half. So we're pretty excited about the opportunity in front of us. We've also taken position on our gummies so that we see the exploding popularity of this, and we will be well-stocked for the run-up into the -- up into Cyber Monday and the entire holiday season. And so we're pretty excited.

Where we -- we see growth still in FDM, and that's on expansion. The natural channel is so tight, and we think we'll probably continue some contraction. And then the medical channel is expanding as well, especially as the healthcare practitioner doors start to open up. Deanie?

Deanie Elsner -- Chief Executive Officer

Yeah, I think that's right. And I think the exclamation point you should put on Russ's notes is as we watch takeaway, both through SPINS and Nielsen, Scott, we're beginning to see sales velocity and the category as well as our brand tick back up nearing the pre-COVID levels. And so what I think we had and what we've experienced is a dip in Q2 that ran into parts -- the early part of Q3, but those velocities and that takeaway is improving and getting back up to pre-COVID levels. In our previous earnings call, we mentioned that going into COVID, we saw a pantry stocking event happen both in B2B as well as DTC.

The difference was DTC continued seeing the growth and B2B bottomed out, at some points getting as low as 40% or 50% of what the previous velocities were for a period of time. And so we're seeing a nice rebound. And I think that we can expect to deliver on what mass has laid out in terms of the channel growth in the back half.

Russ Hammer -- Chief Financial Officer

And Scott, I'd mention one more thing. We also have expansion in the pet. So I mentioned expansion on the FDM. We also have expansion in the pet area as well as doors are opening.

Scott Fortune -- ROTH Capital Partners -- Analyst

Real quick follow-up on that. So you do have -- are you selling into a national retailer on the pet side, one of the big-box retailers currently?

Deanie Elsner -- Chief Executive Officer

We are. We've launched our product line in that. The channel, unfortunately, also experienced some partial closures in Q2. But versus previous year, it was up slightly and continues to improve in velocity.

So we have expanded distribution there.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK. And then one other follow-up real quick on your hemp crop update for this year. Obviously, there's been fires in Oregon and the snow, freeze in Colorado? Any color there and then provide kind of an update on your inventory and provisions around the inventory side of things here?

Russ Hammer -- Chief Financial Officer

Sure. Deanie, I'll take that.

Deanie Elsner -- Chief Executive Officer

I apologize. I've got to say -- Russ -- I apologize guys. Russ and I are not in the same room. And so just the visual is not getting caught.

Please, Russ.

Russ Hammer -- Chief Financial Officer

So the inventory primarily, Scott, what we've been growing this year is only minor for generic R&D purposes. So we have done very little grow. All of our biomass that you see on our balance sheet is stored and safe. So we don't have any growth issues because we had plenty of growth in the previous years.

So we are actually hardly growing at all this year. That's the advantage of our supply chain as we can dial those variable costs up and down based on how we see the demand and how the inventory is.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK, thanks for that color. I'll jump back in the queue.

Operator

Your next question comes from Derek Dley of Canaccord Genuity. Your line is open.

Derek Dley -- Canaccord Genuity -- Analyst

Yeah. Hi, there. Just wondering, in terms of new product introductions, you mentioned gummies have been doing exceptionally well. Can you comment on sort of what the pipeline looks like going forward, whether that's with Charlotte's Web products or with Abacus products?

Deanie Elsner -- Chief Executive Officer

Absolutely, Derek. Good morning. So our innovation from last year, both on the pet expansion as well as gummies, have been tremendous success. As we look to the back half of this year, we'll be filling in the gap with more trial packs on some of our products as well as value packs.

So larger volume packs. We've had such a strong demand on our gummy business, we're going to be expanding that business across value packs so that consumers can satisfy their demand, and we can take advantage of the sales. Those packs will be both margin accretive as well as revenue driving. So that's what the back half looks like.

You know that we launched CW Labs back in February of this year, and we've put a lot of time into our innovation pipeline. You can count on us going into next year to be focused on innovation by channel and format by channel. I think one of the challenges we've had historically in our portfolio is that we offered the same portfolio across every channel. And that got a little problematic when it came to different channel pricing practices.

But importantly, customers shop in those channels. And so we've put a lot of time into trying to figure out where the innovation best meets the consumer need and aligning our portfolio to best meet the needs of the consumers in those channels. And you'll see us launching that as early as late Q4 this year and Q1 of next year.

Derek Dley -- Canaccord Genuity -- Analyst

OK. And then just in terms of the promotional activity during the quarter, you mentioned you did reduce prices. I think you started doing that in Q1 and completed the price reduction this quarter. Did you see any changes in that competitive set? Like I get you guys came down to narrow the gap, but did your competitors move down even more as promotional activity remained relatively stable?

Deanie Elsner -- Chief Executive Officer

We're seeing -- it's a great question. And so just to set the context, we announced a price deal realignment, 15% to 20% list price reduction in Q1. That launched in the market in late March, early April. And so it was described in the cost of Q1, Q2.

Within weeks of launching in the market, we began to see our price gaps compress versus the competitive set. And every -- Q2, we saw the compression. In July and August, we saw the compression. So the price deal realignment that was launched in April has now worked its way through on shelf totally.

And we're now seeing the price compression targets that we were going after achieved as of August. We're not seeing a lot of competitive reaction to what we've done in market, Derek. But it's very possible that the competitive pricing scenarios took place before we launched ours. And so our gaps have reduced, and we're seeing the velocity uptick.

So we're feeling quite excited about that. In addition, a part of our price deal realignment was to launch excessive entry points into our product segments. And those primarily first were launched in the e-commerce, but are starting to work their way into retail. And we've seen a really nice uptick on those.

From an e-commerce standpoint, we have a way to really leverage trial across a number of our different segments. But from a retailer standpoint, we have an opportunity to dial in price points appropriate by channel. And so you'll see us do more in that area going forward as we try to meet the needs of these customers across different channels.

Derek Dley -- Canaccord Genuity -- Analyst

Great. Thank you for the color.

Deanie Elsner -- Chief Executive Officer

Thank you.

Russ Hammer -- Chief Financial Officer

Thanks Derek.

Operator

Your next question comes from Pablo Zuanic of Cantor Fitzgerald. Your line is open.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Good morning. Look, I just want to start with a very I guess broad macro question, and then I have some follow-ups. You've talked about the brand health, but what about the category health in the eyes of the consumer? What worries me sometimes is that we keep talking about this three to five times growth in the market over the next few years. In the case of THC, we have an idea of the size of the market-based on the illicit market.

But in the case of CBD, it's an estimate, right, based on consumers' appreciations of the category. But again, here, without being long-winded, what worries me is that I see plenty of different types of products on the shelf? Amazon says they don't carry CBD, but they carry hemp seeds or hemp extracts, right? You have distillates in some places at a retail level, you have broad spectrum, full spectrum. So I'm just wondering, is the consumer confused because of all the products on the shelf and the small bad operators potentially are there has -- do we have some products that don't actually work, and as a result, the consumer gets upset with the category. Can you talk in general about that? That's a bit of a concern on my side, in terms of how new category develops and whether it has suffered over the next year or over the past year? Thanks.

Deanie Elsner -- Chief Executive Officer

Yeah, Pablo. It's a great question because I think with the lack of a regulatory environment, the FDA has left open for competitors to define this category. And you're right, we're seeing everything from isolate to distillate to full spectrum to claims of CBD and no CBD in the product. And so the risk is consumer confusion.

The risk is a bad experience and consumers walk away from the category. I'm encouraged by the e-commerce revenue. And it appears that the manufacturers in this category today who have a well-developed e-commerce footprint are faring better through the pandemic. I think the demand through e-commerce demonstrates that consumers are seeking out this category to deal with things like anxiety and sleep and general wellness.

We're going to have a lot of that coming off this pandemic. And so we continue to be very bullish on the category. I do agree with you that getting to the bottom of what this category really is in terms of an estimate has been a hard trudge, but we're now looking across several different authorities in the category. And we're kind of landing on the same number, kind of in that mid-teens to high-teen range in terms of billions.

And so although I know 2020 has been disappointing from a standpoint of distribution availability and just general category trends externally in the B2B channels, the reality is this category, even with all of that, will grow 11% this year. And going forward, we'll see growth rates in the 20% to 35% range in the next four or five years. And so I think it's realistic to expect some very attractive growth and a profile that is worthy of staying participating in, but I do understand your concerns.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

OK. And then just one last question, but it's an odd question. In terms of the competition in the past, we were worried about all these small operators, fragmented nature of the industry, but now we keep seeing more larger companies entering the category, kind of the growth with full suit of products including the alliance with natural store and pet and other CBD products, Aurora award brands. I know it's maybe single isolated incidents, but we're seeing one or more companies, right? And what I worry about is, as the category develops, then you have CBD on top of that.

Maybe that's an issue for small companies on the CBD side, you guys with a strong brand, maybe it's less of an issue. But if you can talk about that in terms of how you see that competitive -- that new source of competition that in the past maybe we have not paid enough attention to. And related to that, just remind us, when you think of your brand portfolio, not in terms of format, but in terms of the brand portfolio, where are we right now? Because you have Abacus, you have obviously the skincare brand that Abacus acquired, Charlotte's Web has been extended to pet, if I'm not wrong, right? So you know what, as you have larger competitors with a full house of brands, what are your gaps, if any, in terms of brands-- your gaps in terms of brands? Thanks.

Deanie Elsner -- Chief Executive Officer

Yeah. Pablo, thank you. To your first question, we track the broader sector closely, and we're keeping tabs on the THC competitive set as they expand into CBD. We think that it's -- nothing has come to fruition on it yet, but it's something we watch very closely.

Like anything, the best defense is a good offense. And so our focus has been on advantaged and patented genetics, science that proves the differentiation, platforms that scale across all channels and then dialing up innovation that uniquely meets the needs of consumers. And so I think our focus has always been on the competitor over the hill versus the one we're directly competing with today. And we see that CPG will come forward and compete at some point in the future.

I think it's the importance of why you've got to develop a brand that is differentiated, unique and advantage in the marketplace. And I think that's what we've got with Charlotte's Web. And so we see it developing, but we think we've got an opportunity to truly dial it in and be one of the only brands that succeeds as those new players come into the marketplace. In terms of where our portfolio goes across the different segments as well as consumers, you will see us evolve.

We're taking in all of the Abacus brands. We're doing a complete assessment from a consumer standpoint, a need state occasion to ensure that we're getting the brands right, identifying the gaps from a consumer standpoint that don't -- aren't met today in the portfolio and evolving our brands toward a scale play where it makes the most sense. We will begin to launch those initiatives in Q1 of next year, and you'll see more from us as that develops. But we're doing exactly what you suggested.

We're going to roll out a brand portfolio that leads with Charlotte's Web with science and legitimacy with data and validated research and price genetics. And then we will push out the portfolio to take advantage of the over-the-counter sector as well as the medical sector and launch some new products into consumers that we have not been able to get to historically. So that will all start in Q1 of next year.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Right. Thank you.

Operator

There are no further questions at this time. I turn the call back over to the presenters for closing remarks.

Cory Pala -- Director of Investor Relations

OK. Well, thank you everyone for joining us today and appreciate the questions. We will look forward to next reporting to you on our November call on our Q3 results. That terminates the call.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Cory Pala -- Director of Investor Relations

Deanie Elsner -- Chief Executive Officer

Russ Hammer -- Chief Financial Officer

Michael Lavery -- Piper Sandler -- Analyst

Gerald Pascarelli -- Cowen and Company -- Analyst

Scott Fortune -- ROTH Capital Partners -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

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