Charlottes Web Hldgs Inc. (CWBHF) Q3 2020 Earnings Call Transcript

Charlottes Web Hldgs Inc. (CWBHF 4.22%)
Q3 2020 Earnings Call
Nov 12, 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 third-quarter conference call. [Operator instructions] I would now like to hand the conference over to your host today, Mr. Cory Pala, head of investor relations. Thank you.

Sir, please go ahead.

Cory Pala -- Head of Investor Relations

Hopefully, we're coming through clear. I did hear a bit of static on the line. Well, thank you, anyway, for joining us for our 2020 third-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 and CFO, Russ Hammer. This morning's earnings press release, along with financial statements for the quarter and MD&A can be found in the Investor Relations section of our website. These have also been filed on SEDAR.com. On today's call, Deanie will share her high-level comments on the quarter and provide operational updates -- updates on operations and the business.

Russ will provide some additional details around the Q3 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 further details provided on our earnings release and a webcast replay of this call will also be available for an extended period of time, also accessible through the Investor Relations section on our website at charlottesweb.com. A reminder to our listeners that certain comments made on today's call, including some answers we may provide. 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 events or future results or company performance to differ materially from implied expectations.

Such risks surrounding forward-looking statements are outlined in detail with the company's regulatory filings, which can be found on sedar.com. In addition, during this call, we will refer to supplemental non-IFRS accounting measures, including adjusted EBITDA. We should not have any standardized meaning prescribed by IFRS, adjusted EBITDA is therefore defined in our press release as well as in the MD&A as filed on SEDAR. With that, I'll now hand over the call to Charlotte's Web's CEO, Deanie Elsner.

Deanie?

Deanie Elsner -- Chief Executive Officer

Thank you, Cory. Good morning. I hope everyone is healthy and is remaining safe during these trying times. Let me first comment on the COVID-19 impact on our company.

With regard to our employees, I'm pleased to report that we've had minimal COVID-19 impact within the Charlotte's Web employee teams. With regard to our business, we've experienced some disruptions in our supply chain with vendors in Q3. However, these challenges were relatively minor and were resolved by our supply chain team. Prior to jumping into our Q3 results, I want to share with you some perspective of how we are assessing our business as a result of the pandemic.

While analyzing year-on-year results provides perspective on long-term sustainable growth, within the pandemic it fails to recognize early indicators of returning consumer momentum due to the fact that some of our distribution channels were essentially shut down over a period of time in Q2. Our management team needed additional context to determine the return of our business to the pre-pandemic sales trends. So we've been assessing year-on-year trends, quarter-over-quarter trends, and brand health trends to determine the strength of our business. Quarter-on-quarter trends provide us real-time insight on consumer momentum, while brand health trends are a good indicator of consumer connectedness.

To turn into our third-quarter results; three key takeaways emerge. First, our consolidated Charlotte's Web business delivered year-on-year net revenue growth in Q3 of 2020. Second, importantly, we delivered consecutive quarter-over-quarter net revenue growth across both our DTC and B2B businesses, confirming an increase in consumer momentum coming out of Q2, and we anticipate this to continue into Q4. Finally, our brand leadership is driving competitive outperformance and market share gains.

Now let me provide some color on our Q3 performance on a year-over-year basis. Total consolidated Q3 revenue was $25.2 million, up slightly versus a year ago, a strong performance given the external operating environment. Third-party data indicates that Charlotte Webb continues to outperform much of our competitive set as a result of our strong brand metrics, competitive pricing strategies, and expanded channel footprint. In Q3, lower foot traffic in brick-and-mortar retail channels that make up our B2B business resulted in a decrease of 29% in B2B revenue versus Q3 2019.

However, this was offset by a year-on-year increase of 28% in the consumer e-commerce business as consumers transitioned to online shopping as a result of the pandemic. For the third quarter, direct to the consumer sales represented 66% of our total revenue and B2B represented 34%. Our DTC e-commerce revenues grew 28% year over year to $16.7 million as a result of effective online marketing, targeted segmentation of customers, and personalized messaging, which drove a 98% increase in our conversion rate versus a year ago. In addition, new customer acquisitions grew 52% and retention grew 65%, and our subscriptions grew 139%.

These results reflect our decision to invest to build new capabilities and expand our team to win in this important direct to the consumer channel. During Q3, we launched CBD Medic onto the charlottesweb.com platform, migrating consumers from the CBDMedic.com platform. Our plans are to continue evolving the CBD Medic experience to elevate the brand and Connect Charlotte's Web consumers to the unique CBD Medic products. Our new e-commerce capabilities have enabled us to put data at the center of our decision-making to better understand consumer buying habits, to build relevant and timely communication.

We successfully executed two significant activations in Q2 and Q3, which delivered exceptionally relevant offers to the right people at the right time exceeding sales expectations and building our subscriptions. We feel very good about our strategy and new capabilities in DTC, and we are confident in our ability to drive growth in this channel going forward. Shifting to our B2B business. Year-on-year B2B revenues declined 29% due to the pandemic, competitive overcrowding, and an unsettled regulatory environment.

For context, our B2B revenue is comprised of four channels: food, drug, and mass retail, natural retail, healthcare practitioners, and pet retail. During the second quarter of this year, when the country moved to shelter in place, the channels that experienced the greatest impact from the pandemic were our natural and healthcare practitioner channels. Our business in these channels is well developed, but some customers experienced temporary closures during the second quarter impacting our revenues. However, in Q3, as many states began to reopen our sales trends began to improve, resulting in year on year and quarter-over-quarter improvements.

Real-time improvement in our business performance becomes more evident when we look at the Q3 sales on a quarter-over-quarter basis. Consolidated Q3 revenue of $25.2 million was up 17% quarter over quarter, making the important return to consecutive quarterly growth in both our direct to the consumer business, which was up 8%, and our B2B business, which was up 39%; well ahead of our recent Q2 results. Excluding the Abacus acquisition, legacy Charlotte's Web delivered total consecutive quarterly growth of 8%, with legacy DTC increasing 6% and legacy B2B increasing 12%. The legacy B2B improvement was led by our natural retail channel, which was up 20%, and the healthcare practitioner channel, which was up 26% quarter on quarter; responding positively to our portfolio repricing and expanded portfolio offering.

Finally, the Abacus business contributed additional Q3 revenue of approximately $2.5 million for the quarter. Turning to segmented product performance on a gross revenue basis, all product segments grew sequentially versus Q2. To further expand on product segment quarter-on-quarter gross revenue sales growth, our tinctures were up 2%, our capsules were up 9%, gummies were up 41%, pet was up 12% and topicals were up a whopping 169%. These gross sales results show an increase in consumer momentum coming out of Q2.

In addition, with the Abacus business fully integrated into our Q3, gross topical sales contributed 17% of our gross revenue compared to just 8% of gross revenue in Q2 2020. Looking forward, we expect topical sales to increase further in Q4 to become an even bigger part of our portfolio. Regarding distribution, we expanded our B2B channel footprint by nearly 1000 retail doors in Q3. This included approximately 500 new FDM retail doors, nearly 100 new natural retailers, and approximately 300 new independent pet stores.

We've had good traction in pet sales this year, and we are currently in discussions with national pet chains for further distribution expansion in 2021. In total, Charlotte's Web B2B retail distribution expanded to about 13,000 doors in Q3. Today, combined with the Abacus distribution, Charlotte's Web has a total of approximately 22,000 unique retail doors carried our portfolio of brands, which include Charlotte's Web, CBD Medic, CBD Clinic, and Harmony Hemp. For context, this number does not include the Abacus network of about 16,000 healthcare practitioners.

With this leading distribution coverage, Charlotte's Web is positioned to benefit greatly as both the pandemic and regulatory uncertainty are resolved. We're encouraged by our B2B business and it is improving on a quarter-over-quarter basis. In April of this year, we executed our price deal realignment. Which reduced our base price points by 15% to 20% across our portfolio to close the price gaps within our product segments.

In the FDM channel, our average price gaps have narrowed by more than 60 percentage points which reduced our base price points by 15% to 20%. This new competitive pricing is driving an improvement in our sales velocities. As of August of this year, the Charlotte's Web sales velocity growth per point of distribution was outpacing our competition, and we are seeing a similar benefit across the B2B channels. Pricing, combined with our new expanded portfolio offer, innovation, and improved e-commerce capabilities have resulted in an overall improvement in our brand health metrics.

Market share and -- and I've got a few points to dimensionalize how this works. Charlotte's Web dollars per point of GDP in the latest 12 weeks Q3, is 32% higher than the No. 2 player and 107% higher than the category average. Charlotte's Web now has nine of the top 20 products in ex-AOC.

Charlotte's Web brand market share increased 1.8 share points in ex-AOC and the total company share position increased by 2.1 share points in Q3. Our brand health Charlotte's Web is No. 1 in awareness, No. 1 in consideration, No.

1 in intent to purchase, and No. 1 in loyalty. We've experienced double-digit improvement in all of our e-commerce KPIs. And Charlotte's Web is the No.

1 brand in household penetration; up over 30% versus a year ago. In summary, within a difficult business environment, Charlotte's Web continued to perform. I will now turn the call 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 Q3 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 Q3 press release.

I will address some of the more notable items in the Q3 financial results with the aim of providing additional transparency and share some highlights on our outlook. Total consolidated net revenue for the third quarter of $25.2 million was up modestly versus Q3 2019, but up 17% sequentially from Q2 and included approximately $2.5 million from the acquired Abacus business. Excluding Abacus approximate net revenue for the Charlotte's Web legacy business was $22.7 million, down 10% year over year due to the pandemic but up 8% quarter over quarter from Q2 of this year, marking that all-important return to consecutive quarterly growth Deanie referred to earlier, and we expect revenues to continue to increase sequentially in Q4. Since the pandemic began, retail sales declines have mostly been offset by our strong D2C growth of around 30%, and we have returned to consecutive quarterly growth, and expect to report year-over-year growth in the coming quarters.

Gross margin, prior to biological asset adjustments, was 60.3% compared to 71.3% last year and adjusted gross margin of 64.8% in the second quarter of this year. The lower gross margin primarily reflects product sales mix, portfolio repricing, and new topical distribution in B2B. For transparency and modeling purposes, we are modeling consolidated gross margins to vary quarterly based on sales mix, but to generally land within the low to mid-60s range. Our COGS are designed to decrease in the back half of 2021 as our new production distribution facility will be fully operational, and we expect significant efficiencies from our capabilities investments this year as 2021 volumes ramp up.

Our new production and fulfillment centers have been coming online in stages in 2020 and present significant future cost-saving opportunities starting in 2021 for expense consolidations. The benefit of owning our supply chain, consolidating disparate manufacturing operations into the new facility enables closing of two former locations, driving improved efficiencies in 2021. Q3 operating expenses of $28.3 million were 44% higher year over year, reflecting our strategic investments in 2020 in capacity expansion and transition to a consumer packaged goods, CPG, operating company capable of supporting D2C and mass retail channel growth. On a quarter-over-quarter basis, operating expenses were down 4% from Q2 2020 as we initiated expense reduction actions.

Let me unpack our opex controls and cost controls for further transparency. Our sales have been below our internal plan for the year due to the pandemic. In response, we have proactively taken actions to better align operating expenses within our revenue levels and initiate an expense optimization program with identified reductions of more than 10% of the second half 2020 opex run rate. This will amount to more than $12 million annualized savings as we head into 2021.

This is primarily being accomplished with opportunistic expense reductions through efficiency and expense management actions. For example, we have cut our banking and merchant fees in half since partnering with JPMorgan, reducing expenses by approximately $400,000 per quarter. At the same time, we are actively and proactively taking action to reduce spend we are expecting Q4 revenues to increase sequentially over Q3, which will further reduce OPEX as a percent of revenue. Adjusted EBITDA loss was $6.7 million, similar to Q2 compared to a positive $0.8 million a year ago, again, reflecting the infrastructure investment build-out ahead of revenue growth and the COVID impacts.

Now turning to cash and working capital. Our cash balances at the end of the second quarter were $65.9 million with a working capital of $129 million. In the quarter, we utilized capital for purchase of equipment to build-out of the company's expanded production distribution facilities. We expect to see this level of investment drop off significantly as we complete our strategic investments and head into 2021.

We have no debt. We have an unused line of credit with JPM, we expect to end the year with approximately $60 million in net cash, which includes $11.4 million income tax receivables from the IRS who are delayed with refunds due to the pandemic. I will now provide some clarity on our CAPEX spend of $12.1 million during the quarter, which included $11.5 million invested in construction of the company's new production distribution facility. Our cumulative capital expenditures on the new facility will total approximately $31 million between 2019 and 2021.

We planned Q4 CAPEX expenditures of another $10 million, primarily allocated to the completion of this facility. We expect CAPEX investment in 2021 of no more than $10 million. We successfully completed our 100-day integration plan for fully integrating Abacus and its topical portfolio into the business channels. Operating synergies will be realized beginning in the current quarter that will equate to savings starting in Q1 2021.

Now providing an outlook, due to the uncertainty presented by the ongoing pandemic, we are not providing revenue guidance numbers for 2021 on today's call. However, we can state that we expect sequential quarterly growth to continue into the fourth quarter and growth for the year overall in 2021 and are targeting positive EBITDA in the back half. I will now turn the call back over to Deanie for her closing remarks.

Thanks, Russ. We've not talked a lot about the new brands to the Charlotte's Web portfolio, but let me take one minute to brag a bit. Last month, our CBD Medic brand became the first and only CBD brand sold in the FDM channel to be designated as an impact sponsor of the arthritis foundation. Earlier this year, our CBD Medic brand sponsored the Arthritis Foundation's Survive & Thrive Fundraiser, including three-time national NFL Champion CBD Medic's spokesperson, Rob Gronkowski.

According to Nielsen's most recent data, CBD Medic is a top-selling product for those suffering from the symptoms of arthritis as well as pain and inflammation. The addition of Abacus brands to our portfolio provides Charlotte's Web immediate breadth and depth across channels and segments. We've worked hard to get to this point in our journey, and we look forward to the growth ahead. Now closing with thoughts on the FDA.

We have continued to meet and share information with the FDA in an effort to establish a regulatory environment for hemp CBD dietary supplements. We continue to believe that the industry will see this accomplished in 2021 and will stay active and involved to move this industry forward on that path. In parallel to the FDA's ongoing process, there is increasing optimism around the recent H.R. 8179 bill introduced to the house last month to legislate hemp-derived products as dietary supplements.

H.R. 8179 is widely supported and now has 16 bipartisan co-sponsors in the house. This will help stabilize the hemp markets and open up a promising economic opportunity for U.S. agriculture.

With the regulatory framework in place, the hemp industry can provide a needed financial jolt to the nation emerging from an economic recovery. Independent surveys predict with the regulatory pathway, sales of CBD products would grow from approximately $1.2 billion in 2019 to anywhere from $10 billion to $16 billion in market size by 2025, and our intent is for Charlotte's Web to be at the forefront of this industry. Thank you, and operator, we'll now open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is from Gerald Pascarelli of Cowen.

Gerald Pascarelli -- Cowen and Company -- Analyst

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

Deanie Elsner -- Chief Executive Officer

Hi, Gerald.

Gerald Pascarelli -- Cowen and Company -- Analyst

Good morning. So now that we're halfway through 4Q, we've obviously seen COVID cases ticking up. Deanie, I was just hoping you could provide some color on what you're seeing at the brick-and-mortar retail level, in terms of the trends over the course of October and then maybe through November and how that compares to what was nice recovery in 3Q? Thanks.

Deanie Elsner -- Chief Executive Officer

Absolutely. It's a great question. So I'll go back to the Q2 earnings. What we saw going into the pandemic in both e-commerce and in our B2B retail channel, brick-and-mortar outlets, was a bit of a pantry load, if I recall the numbers correctly, Gerald, I think those numbers were in the area of about 30% to 35%.

Both channels pantry-loaded going into the pandemic. E-commerce held on to that growth and never stopped, where the B2B channels began to suffer and take a hit on the reduced foot traffic. And I think at the low point in a number of our B2B channels through different syndicated data sources, we saw as much as a 60% to 70% decrease in consumption period on period. And so Q2 was hit incredibly hard.

Coming out of Q2 we mentioned the fact that our quarter-on-quarter growth in two really important channels to us, healthcare practitioners as well as the natural health channel have accelerated their momentum coming out of Q2. On the bricks and mortar side of the business, and specifically in FDM, we're seeing a return to some normal sales volumes in Q3. And so for the most part, in the start of the third, Gerald, we were seeing reduced resumptions in the FDM channel kind of in the low 30s, and that has rebounded through the end of the quarter. And so it looks like a number of our retail channels have gotten back up to pre-pandemic trends.

I would expect to see that fully realized by the end of the year, assuming the vaccination and the medicines that have been brought forward come into play. So we feel like we've seen the worst of the pandemic and that we're on the upward swing. What's important to note is whether the pandemic continues or not, we've all adjusted to a new normal. I think that's true in terms of companies, consumers and so even in an extended pandemic, I don't think you'll see us returning back to Q2 impacts.

Gerald Pascarelli -- Cowen and Company -- Analyst

Got it. That's super helpful. Thanks, Deanie. My next question is just on Abacus.

The online opportunity seems like a bigger whitespace opportunity, as this was traditionally a B2B business. I guess, can you just talk about some of the initiatives you're taking to drive e-commerce growth with Abacus? And how will that -- like the steps you took over 3Q and then what you expect to do in 4Q and then over the course of 2021?

Deanie Elsner -- Chief Executive Officer

We do see the Abacus acquisition as a big whitespace opportunity. So let's just go back and unpack the numbers. Abacus last year on a net revenue basis, in 2019, delivered about $16 million of net revenue. Almost 65% to 70% of that net revenue was contained in the healthcare practitioner channel.

What that means is, they had just a very early stage business developing in the more traditional retail channels. In addition, prior to our acquisition of Abacus, Abacus acquired Harmony Hemp, which is a bath and beauty brand. And so what we were able to bring into our business in June, was a portfolio that was very heavily concentrated in the healthcare practitioner channel important because about 50% of consumers are influenced to come into this category by healthcare practitioners, and an over the counter topical business that enables us to tap into very specific needs states. In addition, Harmony Hemp gave us exposure to the fast-growing beauty and bath segment.

And so in total, we now have a portfolio that gives us tremendous scale. When you combine that with the Charlotte's Web supply chain leverage as well as our scale across channels, what you find is exactly what you've said, tremendous whitespace opportunity in a number of retail and channels that we haven't gotten into before. Retail outlets like C-Store, gas, and convenience, expansion into areas like the natural channel, where today Charlotte's Web is the number two share player, but we have a very, very, very, underdeveloped portfolio of topicals, and this gives us an opportunity to bring Abacus into natural and expand out that offer in addition to Harmony Hemp. And so we see real upside to the portfolio, as we look at the whitespace that we can benefit from by just scaling our efforts.

In terms of what we've been doing to capture that upside, we've talked about it on both calls. We have been aggressively expanding out our distribution. So despite the pandemic, our sales organization has been expanding distribution. And I believe in Q2 we picked up about seventeen hundred doors in distribution, in Q3, we picked up another thousand.

We continue to expand out retailers are receptive to the message. We have a lot and a big portfolio to bring to the forefront, and you will see us continue to expand distribution and fill those gaps across all the retail channels this category has carried in today.

Gerald Pascarelli -- Cowen and Company -- Analyst

Very helpful. Thank you. I'll hop back in the queue.

Operator

Our next question comes from the line of Scott Fortune with ROTH Capital Partners. Please go ahead. Your line is open.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good morning, and thank you for the questions here. Wanna get a little more color on the natural channel and the recovery there? As far as -- is it a quarter-over-quarter recovery? Are you starting to see some consolidation in the space as there's more pressure on a lot more of the competitors in that natural channel? Kind of step us through kind of growth, what's occurred in the natural channel, and what you expect going forward here from that standpoint?

Deanie Elsner -- Chief Executive Officer

Yes. So it's a great question, Scott, and I appreciate the opportunity to speak to it, because natural is one of those channels where this category was actually originally born. And it's also a channel where we're seeing the most aggressive expansion of competitive crowding. So you are right, we are seeing a nice uptick on quarter-over-quarter growth.

Our Q3 quarter-over-quarter growth was up 20% versus Q2. Now, that does not include the Abacus portfolio at this point, because we don't have it in the natural channel. So that's primarily being driven by the legacy Charlotte's Web portfolio. We expect that to accelerate.

Our year-over-year comparatives for natural are still down, although improving versus Q2, it's still down. And so we're seeing the natural channel continue to be challenged with competitive overcrowding, and a bit of confusion. We're reading a lot of external data sources that are indicating that there are hundreds of smaller brands that are falling off the face of this category, just unable to sustain their positions given the challenge of the pandemic. And so going forward, we believe we will see a nice uptick in natural, both in Q4 this year, as well as through next year.

We've got an innovation pipeline plan to expand our footprint in natural and speak very specifically to different consumers within that channel, consumers we've not spoken to before. So we're excited about the opportunity there, and think that we've turned the corner on the natural channel. We are seeing some retailer consolidation in that channel. In Q1 this year, right before the pandemic hit, we saw a couple of big retailers go bankrupt and go out of business.

And we're continuing to see a slow recovery and some of the retailers that closed and just have been slower to reopen in full. So I think there will be some consolidation in the natural retail channel as well is the competitive set in natural. And I think we'll see that all the way through next year.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK. Perfect. Thanks. And then just kind of a big picture question, you're seeing a lot larger, some of these Canadian LP's or larger competitors really coming on board here and push into the U.S.

CBD space and increased in terms of the marketing spend, Canopy Growth, BioSteel is going for the sports naming rights, and others are turning toward more traditional TV media to drive that. How are you kind of strategically managing the cost of your build-out, and how do you see your sales and marketing efforts kind of continue to build your brand loyalty and add new consumers in this space going forward here? It's a tricky situation right now from that standpoint.

Deanie Elsner -- Chief Executive Officer

Yes. Absolutely. And I think we've talked before, we've always looked at our competitive set, not at who's in the category today. We've looked at it as the brands that are going to come in, both the Canadian LP's as well as CPG brands that will be entering the space.

And we've been investing to build out capability and science and research as well as infrastructure to ensure that we can compete against the likes of a Unilever or a Canopy going forward. And so that's what the investment has been behind, that's what the capability build-out has been behind, as well as really attracting quite a significantly strong management team who comes from a like experience. As we look forward, I think our best defense is a good offense. And so what that means is, we've got to stay focused on the science of Charlotte's Web.

The key competitive differentiation that we have in the marketplace that comes through our genetics, that comes through our product offer, it's consistency, it's quality, it's safety that comes from our ability to trace and be transparent all the way through our supply chain. Because in the end, this is a dietary supplement that consumers are going to take day in and day out. And in its mature state, it will be as prevalent in the medicine cabinets in America that we believe as aspirin is today. And so this is going to be a $16 billion, $17 billion market.

There's going to be room for a number of different competitors, but competitors who offer true differentiation. We have the consistency, we have the quality, we have the genetics, we have the science, we have the data. Now, our focus is how do we communicate that to the consumer, so we stay at the forefront of where this category is going, and that's exactly what we intend to do. So as we go into 2021, you will see us expand out our product portfolio across every single channel, this category competes in today.

We'll have differentiated brands against different consumer sets. And we will support that with science. And I think when you have that lined up with the authentic story of the market share leader and pioneer in the industry, I like our odds for being able to succeed in this category going forward. However, I do think you're going to see a massive fallout of the competitors in this space as FDA regulatory opens up and the onslaught of big-scale players come in.

And I think we will be very careful about watching that. So far, our marketing model is working, all the KPI's would say that it's working. And we're seeing an expansion in market share in some key channels. And so I feel good about our odds, but it's going to be a very competitive market in the next year.

Scott Fortune -- ROTH Capital Partners -- Analyst

Appreciate the color. Thanks, and I'll jump back in the queue.

Deanie Elsner -- Chief Executive Officer

Absolutely. Thanks, Scott.

Operator

Our next question comes from the line of Patrick Sullivan with Eight Capital. Please go ahead. Your line is open.

Patrick Sullivan -- Eight Capital -- Analyst

Thanks, guys. Good morning. Good morning, guys. Some really great questions have already been asked so far.

But I will focus more on the scaling up of the new facility. Wondering if you can provide a little bit more detail on exactly how you see that assisting with the growth and economies of scale. Is that going to result in a driving down of the G&A or just revenue growth above those expenses? Is it increased automation that will lead to those expenses going down, anything further you can provide there?

Russ Hammer -- Chief Financial Officer

Sure. Patrick, thank you for the question. It's a really good question. And I think it's important that everybody understands how our 700 Tech Law facility is going to provide efficiencies in the future.

So we've been building this out in phases. And as Deanie mentioned earlier, we were shipping in Q2 fully operational, but we have other sections that are coming online. So, for example, some of the cost savings, if we bring common activity in-house, or quality testing in house, we'll be coming as we finish building the rest of our CAPEX here in the fourth quarter. But next year, the efficiencies we're going to pick up, specifically to answer your question, come around not only automation, auto packing, EDI capabilities, auto-replenishment orders, we'll be able to handle the large food, drug, and mass requirements that are just table stakes to earn that business.

And in addition to that, we're consolidating from multiple facilities into one state of the art facility, which we're picking up efficiencies on that, just not having to transport material between several different facilities. So we're expecting, as I mentioned in my comments, to see strong efficiencies in the back half of 2021. We will finish our capital build-out of this facility, and we will see a significant drop-off in our cash burn rate and our CAPEX spend rate as we head into next year, which I mentioned in my comments as well. So we're excited to see the impact of lower gross margin or stronger gross margins, lower COGS from the efficiencies I mentioned, as well as the efficiencies of being able to handle the ramped-up volume that's coming.

Patrick Sullivan -- Eight Capital -- Analyst

OK. Great. And then one more thing. So you guys mentioned that phase three of that facility is an extraction R&D expansion.

So can you talk about is that just increasing the scale of your current extraction process? Is that adding new processes which would lead to further product innovation, development? Anything there you can provide?

Deanie Elsner -- Chief Executive Officer

Absolutely. And so we're excited about the fact that this infrastructure has enabled us to consolidate three different facilities into one. And we're seeing the synergies and the scale of a team being in one place and being able to communicate quickly and move even more quickly. Our new capabilities -- we'll be building in both, automated capabilities in our extraction as well as new capabilities in our extraction.

So we are putting ourselves in a position where it's not just CBD, we're looking more broadly across the total hemp plant. And we've talked before about this, Patrick. But, in terms of CBG, CBDA, when you look at compounds like CBN, there's a lot of this plant that makes very smart sense to try to leverage it into new products. And so not only we will be getting more efficient and tighter on our controls with our extraction, but we will have the opportunity to expand capabilities that will drive new innovation, in addition to giving our R&D team the tools they need to explore and further build out our innovation pipeline.

So that's what we're excited about is just what the potential of what this is going to mean for us long term.

Patrick Sullivan -- Eight Capital -- Analyst

OK. Great. Thanks. I'll get back in the queue.

Deanie Elsner -- Chief Executive Officer

Absolutely. Operator, any additional questions?

Operator

[Operator Instructions] Our next question comes from the line of Derek Dley with Canaccord Genuity. Please go ahead. Your line is open.

Derek Dley -- Canaccord Genuity -- Analyst

Yeah. Hi. Good morning, everybody.

Russ Hammer -- Chief Financial Officer

Good morning, Derek.

Deanie Elsner -- Chief Executive Officer

Good morning, Derek.

Derek Dley -- Canaccord Genuity -- Analyst

I want to follow-up just on -- Russ, on your comments there on the new facility allowing you to sort of meet the requirements of some of these large food and drug retailers. Can you just -- has there been any update or any discussions with any of these players recently?

Deanie Elsner -- Chief Executive Officer

Yes. I'll start Derek, and then, I'll let Russ chip in. And so we have been in conversation with these retailers. And what's different about the conversations today than what they were even three or six months ago, is that we now have a portfolio of brands that they can access in their current distribution states.

So the Abacus brands give us the over the counter products within topicals that we can sell in addition to the Harmony Hemp brand, which gets us to bath and beauty. And so we've had productive conversations in parts of this category that we have not had as much exposure to. And we're seeing a receptivity to both further expansion within the current distribution footprint, but also expanded distribution in our new portfolio. So that we're excited about.

I think the other side of the equation is, are retailers becoming more receptive to the ingestible side of the equation. And I'm happy to report that yes, they are, albeit, it's still slow and we're seeing a very cautious approach to ingestibles. But the conversations have opened up as a result of what topicals have done for us. And so we would expect to see our ingestibles expand.

But our big expansion next year across food, drug and mass, and brick and mortar retailers will come as a result of our Abacus acquisition.

Derek Dley -- Canaccord Genuity -- Analyst

OK. That's really good to hear. Maybe just in terms of some of these requirements. Can you just, I guess, really high level, talk about the complexity behind what these larger retailers require versus some of the smaller natural players that are typically dominating the space right now?

Deanie Elsner -- Chief Executive Officer

Yes. When you go into the food, drug, and mass retail environment, you're going in to compete among a competitive set that is serving some of the biggest companies in the world. Think about a Walmart or Target, a Kroger. These companies specialize in logistics.

And their stats, by which they evaluate companies, is something called on-time & in-full, so OTIF. They are now in the process of penalizing companies if you cannot get their order to them on an agreed-upon timetable, as well as in full. And so the challenge with that is, a lot of these smaller players, even working through different 3PLs, and providers have a hard time keeping up with the logistical challenges of this new retail consumer or customers. So that's where our focus has been on.

We've built out a very strong supply chain leadership team with people who've got tremendous experience in this space. We continue to build out our capabilities so that we can do this in a very-automated way. But that's really the scale-up that a competitor in this environment is going to have to make to succeed in this environment, and that's where our focus has been.

Derek Dley -- Canaccord Genuity -- Analyst

OK. And then, Russ, maybe just last one for you on the opex. I appreciate you guys outlining plans to reduce this by 10% next year. How quickly do you think you'll be able to do that like is it going to be relatively linear over the course of 2021 or should be backend load it? How should we think about that?

Russ Hammer -- Chief Financial Officer

No. We actually started these actions in the third quarter, Derek, and that's great question. Thank you. And we will see reductions in Q4.

And then we should be hitting that run rate of those reductions as we enter 2021.

Derek Dley -- Canaccord Genuity -- Analyst

OK. Great. Appreciate the clarity. Thank you very much.

Deanie Elsner -- Chief Executive Officer

You bet. Thank you, Derek.

Operator

Our next question comes from the line of Jason Zandberg with PI Financial. Please go ahead. Your line is open.

Jason Zandberg -- PI Financial Corp -- Analyst

Thanks, and good morning.

Russ Hammer -- Chief Financial Officer

Good morning, Jason.

Jason Zandberg -- PI Financial Corp -- Analyst

Good morning. I just wanted to focus a little bit on the pet segment. I wondered if you could give any color in terms of sell-through and your big box pet retailer. As well, I think you mentioned that they're good prospects to add to more national pet retailers in the coming year.

Just any color on the pet segment would be greatly appreciated.

Deanie Elsner -- Chief Executive Officer

Absolutely. So, Jason, the numbers are a little bit -- are tough to kind of fathom, because they're so big, they're triple and quadruple-digit growth versus previous year. And that's primarily because our base is so strong. So it's not easy to look at the numbers and say, what's really going on there, because we're seeing the benefit of the distribution, and then the expansion in actual doors.

The sell-through for us has been strong. We continue to see this channel as an opportunity; both from a customer standpoint as well as consumer standpoint. Let's start with the customer. In this channel, there are a significant amount of pet owners.

I think there's about 180 million pets in this country. And so we see a very buoyant channel that has the potential to grow north of $2 billion in this mature state for this category. So we love what we see there. In terms of consumers, what our data is showing us is that we've got a number of consumers who are coming into our franchise, into our human franchise through our pet channel.

So a pet owner who's got a dog that's older with arthritic hips, and they're looking for some joint and hip pain relief will come into our brand, see the benefit it gives to their pet and then go online and begin to adopt some of our products for themselves. And so that's the benefit of understanding the data and being broadly available across all these different channels with products that work. And so the pet channel sell-through has been very good. We're actually having a very hard time keeping up with the demand as it is one of the businesses where COVID has had an impact, because it's a little bit more difficult getting the products produced from a common outside.

But, we are seeing really good pickup. We're returning to a position in Q4 where we're able to supply that demand. And we would expect to see this channel continue to accelerate next year; both in terms of distribution expansion, portfolio expansion, and innovation. And so it's a channel that continues to delight us and give us really strong breakthrough insights in terms of the total category.

Jason Zandberg -- PI Financial Corp -- Analyst

That sounds great. What about the competitive nature in that segment, if you can compare it to your traditional channels?

Deanie Elsner -- Chief Executive Officer

Yes. So we are not seeing today the competitive overcrowding in the pet channel that we are definitely seeing in the human channel, but it's coming. And I think you're probably aware that a couple of our key competitors have just recently announced an entry into pet after I think laughing at our entry in the pet last year, and so we see competitors coming in. I think the tough part of pet is that anybody can produce a product, and the competitors in the channel today tend to be smaller and much more regional.

When you are dealing with a category like hemp extract, full-spectrum hemp extracts, you have to be incredibly focused on the consistency, the quality, and the safety of production of this product. Your pet is no different than any other member of your family. And so we've been adamant about developing safe products that are traceable and transparent through our supply chain, but importantly, also have the right certifications from the appropriate external animal associations that indicate we've got a safe product and they've been certified by them. For us, it's the NASC.

And that's a certification that we're one of the few companies offered today in the industry have. And so we will continue to expand our portfolio, expand our distribution and do it with products that are consistent, safe, and high quality. I'm confident that we will be able to hold our position in this category and expand going forward.

Jason Zandberg -- PI Financial Corp -- Analyst

OK. Great. Thank you very much.

Deanie Elsner -- Chief Executive Officer

You bet.

Russ Hammer -- Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Michael Lavery with Piper Sandler. Please go ahead. Your line is open.

Jeff Kratky -- Piper Sandler -- Analyst

Hi. This is Jeff Kratky on for Michael. Thanks for fitting me in. Most of my questions have been answered.

But just one, is there any more specific color you can add on how you're building consumer insights? And how specifically you're using data to help drive things like targeted marketing and product innovation?

Deanie Elsner -- Chief Executive Officer

Yes. Absolutely. And I love this question, and I'm thrilled that you have asked it. So one of the biggest challenges in this category is the lack of data.

Even the syndicated data sources, all have a different way by which they accumulate and extrapolate this data. And so it would be very easy to be confused by the conflicting data that exists in this market from traditional data sources that just claim to have the right data. I think the best data is your data. So over the last year, we have spent a lot of time and invested in building capability that puts data at the center of all of our decisions.

We've built the data infrastructure and have organized our company across that data. We've also matched our consumer data with third-party external data, so we can broaden out our data sets. What that gives us is the ability to independently and exclusively cut our data sets by consumer demo, by condition, by channel. And it's the driver of what our new product pipeline is going to be going next year.

And so you're going to see us have in a very different way, a differentiated portfolio developed by channel. And it's all based on the data that we're accumulating and understanding about our consumer. The other benefit of our capabilities is it puts us in ability to build hypotheses and theses, and then turn around and rapidly test and learn our way to see if those hypotheses hold. And so what used to take us weeks and months to understand from a consumer insight standpoint, now our e-commerce team can do in hours and within a day.

So we can very quickly jump on what we see as a trend, get an offer in the marketplace, see if there's a response to that offer. And if we're seeing a positive response that's delivering a return on our investments, we can, within the same hour, expand it across the scale of our e-commerce platform. Now, again, our e-commerce platform, if it were a stand-alone business, it would be the second biggest CBD company in the U.S. And so that's not small potatoes.

We have an ability to move quickly, and with great insight; move with precision. And so we will continue to build this out. Our ambition is to get to a position where our data becomes really connected to artificial intelligence and machine learning lets this drive these insights so that what we're doing is reacting to the learning and not necessarily building the learning ourselves. And that's where you will see this thing really accelerate.

So excited about where that's going and data is at the center of everything we're doing.

Jeff Kratky -- Piper Sandler -- Analyst

That sounds great. Thank you so much. I'll pass it on.

Deanie Elsner -- Chief Executive Officer

Thank you.

Operator

This concludes the analyst Q&A session. I will now turn the call back over to Deanie Elsner for closing remarks.

Deanie Elsner -- Chief Executive Officer

Thank you very much. Listen, I appreciate on a very busy morning of earnings returns, all of your participation and your questions. I appreciate your patience and going along in this call. And I appreciate the insight you guys have brought.

Thank you for your time. We look forward to Q4 and sharing our full-year results in March of next year. So enjoy the holidays. Stay safe, and thank you for your time.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Cory Pala -- Head of Investor Relations

Deanie Elsner -- Chief Executive Officer

Russ Hammer -- Chief Financial Officer

Gerald Pascarelli -- Cowen and Company -- Analyst

Scott Fortune -- ROTH Capital Partners -- Analyst

Patrick Sullivan -- Eight Capital -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

Jason Zandberg -- PI Financial Corp -- Analyst

Jeff Kratky -- Piper Sandler -- Analyst

More CWBHF analysis

All earnings call transcripts