Charlottes Web Hldgs Inc. (CWBHF) Q3 2021 Earnings Call Transcript

Charlottes Web Hldgs Inc. (CWBHF 0.20%)
Q3 2021 Earnings Call
Nov 15, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. And welcome to Charlotte's Web Holdings, Inc. third quarter conference call. At this time, all lines are in a listen-only mode.

Following the presentation, we will conduct a question-and-answer session. [Operator instructions]. Note that this call is being recorded on Monday, November 15, 2021. And I would like to turn the conference over to Corey Pala, investor relations.

Please go ahead.

Corey Pala -- Investor Relations

Thank you. Silvi. Good afternoon, everyone. Thank you for joining us for our Q3 earnings conference call.

My name is Corey Pala, director of investor relations and leading the call this morning is Charlotte's Web CEO, Deanie Elsner; and CFO, Wes Booysen. Our earnings release was issued a market closed and our financial statements, and MD&A can be found on the investor relations section of our website and they have been filed on sedar.com. On today's call, Deanie will share some high-level comments on the financial results with an update on the business and the CBD category, and Wes will highlight the details of our financials. We will take questions from our analysts at the end of our prepared remarks.

A replay of this call will be available through the next week, accessible for the details provided in our earnings release. A webcast replay of this call will be available for an extended period of time accessible through the IR section on our website at charlottesweb.com. A reminder to our listeners that certain statements made 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, uncertainties, and other factors, which could cause actual future results or company performance to differ from implied expectations. Such risks surrounding forward-looking statements are all outlined in detail within the company's regulatory filings on sedar.com.

In addition, during this 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 in the MDA as filed on SEDAR. With that, I now hand over the call to Charlotte's Web chief executive officer, Deanie Elsner. Go ahead.

Deanie Elsner -- Chief Executive Officer

Thanks, Corey. Good afternoon from Denver, Colorado, and thank you for joining our call. Prior to reviewing our Q3 results, I want to share three key takeaways for the quarter and year to date. First, as the CBD category expands, the product segments are evolving from the manufacturer push to consumer pull.

CBD has become a significant category and continues to evolve. The U.S. CBD industry is estimated to grow to $4.7 billion by year-end 2021, up 2.5%. The segment within which Charlotte's web competes will grow to $3 billion by year-end, up 0.7%.

According to the Brightfield Group and I quote, "There is a shift away from higher ticket items in CBD, like tinctures, toward product sold at lower price points such as gummies and drinks, which is masking a growing adoption and increased usage of CBD. Because of this shift, even with equal to or greater volume being sold overall, the growth that these lower-price formats has meant lower revenues for many companies across the industry relative to prior years". Unquote. We are experiencing this mix impact in our results driven by the growth of gummies, topicals, and pet, which are priced on average 30 to 70% lower than our tinctures.

Our perspective is that despite near-term mix impacts, the CBD category has become a substantial industry in the U.S. with ample room for growth. But it requires a consumer-centric lens that alliance portfolio offers to evolving behaviors. This is our approach.

Second, due to the lack of regulation, the CBD channel development is different than originally forecasted. The FDM channel was forecasted to represent 66% of total CBD category sales, while e-commerce was forecasted to represent about 15% of CBD sales. Today, due to a lot of regulation, the FDM channels represents about 6% of the current CBD sales, while e-commerce represents about 38% of CBD sales. Consumers are going where CBD is being sold in e-commerce dispensaries.

Usually in vitamin shops and healthcare practitioners, where we are increasingly shifting our focus. Finally, there is an increasing need for science to establish the regulatory landscape for hemp and cannabis globally. There is a rapidly evolving consumer acceptance of hemp and cannabis globally, and regulators country by country are establishing regulatory guidelines to manage these new categories. Science and research on the effects from the plant, the products, and the usage are an increasingly important requirement for companies with global ambitions.

Respected brands with science credentials have a competitive advantage in navigating the global regulatory environments. Our road map for long-term success is built upon advancing the science and expanding our global footprint across the sector. I will speak more to each of these momentarily. Now, shifting through our third quarter results.

Q3 total net revenue was down 5.8% versus year-ago to $23.7 million due to product and channel mix, as well as some temporary supply chain disruptions. Despite the decline in revenue, Q3 total unit volume sales were actually higher versus year-ago driven by consumer shift to new lower-priced formats like gummies, topicals, and pet. We estimate that the Q3 net revenue impact from mix was approximately $1.1 million. Although this mix shift results in lower average revenue per unit, the number of unit sales continue to increase.

Charlotte's Web has strategically developed a portfolio of products that follows the needs of key consumer segments and our market share gains across every channel we compete within demonstrates we have products consumers prefer. Our supply chain disruption was primarily related to macro supply chain challenges, which impacted our revenue by about approximately $1 million. These supply chain challenges were substantially resolved in October. Excluding supply chain and mix in Q3, net revenue would have been slightly up on a year-on-year basis, regarding segment splits.

DTC represented about 64% of our total revenue, down from 67% year-ago during the pandemic, while B2B increased to 36% of our total revenue. Charlotte's web outperformed key competitors during the quarter in terms of share increases, velocity increases, and distribution increases. In addition, we delivered P&L improvements on Q3 across key financial metrics including direct growth margin -- percent gross margin, operating expense, and adjusted EBITDA. Wes will cover this in more detail during -- following my channel review.

Within our B2B segment, Q3 net revenue increased 1.3% versus a year ago, on higher unit sales and new distribution in pet topical and gummies. The increase in revenue was modest on a year-on-year basis due to product mix, and supply chain, product delays resulting in out-of-stocks and some customer shipments shifting into Q4. Our natural channel carriers' ingestible products, and is affected by the consumer transition to higher unit sales of gummies versus tinctures. Our net revenue in the natural channel was down 15% versus year-ago.

However, we outperformed the total natural channel, which was down 18%, as a result, we gained share against our competitive set according to spends. The healthcare practitioner channel was softer in the quarter following a strong inventory build in Q2, but we are taking replenishment orders in Q4 and continue to see more practices reopening. In the FDM channel, which carries primarily topical products, revenue increased 54% year on year. According to Nielsen, our FDM market share increased 5 percentage points, versus year ago to 23.4%.

The pet channel, revenue increased the most, up 321% versus year-ago, driven by increased velocities, distribution expansion, and new product launches. In terms of distribution expansion, we added 461 new doors across total B2B channels in Q3 including 200 new doors in pet, 100 new doors in alternate retail, and 100 new doors in FDM. Year to date, we have about a total of 1438 doors. Excluding the healthcare practitioner channel, this represents a 10% increase in B2B retail doors year to date.

Further and importantly, we are planning a significant increase in our distribution nationally and in California in Q4, following the legalization of CBD through the recent Assembly Bill 45. Shifting to DTC. Our e-commerce net sales were down 9.3% year over year, due to product mix and higher discounting in a competitive DTC market as consumers transitioned back to bricks-and-motor. In terms of KPIs, Q3 traffic and average order value were down 10% and down 7% respectively versus year ago.

However, our year-over-year conversion was up 21%, and subscriptions were up 47%, which drove our subscriber user-base to increased 47% versus year ago. These loyal subscription consumers drive a significantly higher lifetime value for Charlotte's Web and demonstrate a strong consumer engagement with our brand, which our DTC channel will capitalize on going forward. Looking at the total business on a year-to-date basis, total net revenues for the first nine months are up 4.3% versus year-ago, outperforming key competitors and outpacing the total category across e-commerce and B2B. Going forward, we expect to continue to grow our revenues and expand our market share leadership behind innovation and distribution expansion.

At the end of Q3, we launched new products in pet and gummies, in addition to our new to the market CBG and CBN oral sprays. In Q4, we're increasing distribution in the dispensary and specially channels in addition to expand in retail distribution in California in the back of a AB45. In a dynamic U.S. category that continues to evolve, Charlotte's Web has delivered sequential quarterly improvements in our adjusted EBITDA year to date.

We've also been taking actions to build our organization that is fit for purpose to ensure our operating expenses are in alignment with our top-line as we head toward breakeven adjusted EBITDA at the end of the year. Now, I will turn the call over to Wes, to provide the financial detail for Q3.

Wes Booysen -- Chief Financial Officer

Good afternoon, everyone. And thank you again for joining us today. As Deanie mentioned, our Q3 year-over-year revenue comp was impacted by mix shift and supply chain disruptions, partially offset by higher unit volume sales. I'm pleased to report that profit and operating margins improved as a result of increased volumes, as well as efficiencies as our production and performance center became operational.

We've achieved much in the past year in terms of infrastructure improvements and streamlining our operations, and we will continue to benefit as we grow. Operating numbers have continued to improve in the back-off as we previously projected, with year-over-year and quarter-over-quarter improvements in adjusted EBITDA. Turning to Q3 gross margin and profit. Gross profit increased by 1.1% year over year to $14.9 million, on an improved gross margin of 62.9% in the quarter, compared to gross margin of 58.7% last year.

In general, we expect consolidated gross margins in the low 60s depending on product and channel mix. Turning to operating expenses. Total opex for the third quarter was $23.9 million, down 15.6% from $28.3 million a year ago. As a reminder, our plan was to reduce expenses by at least 10% from the run rate of Q3 2020, and we have exceeded our goal.

We recorded a net loss of $0.9 million for the quarter, compared to a net loss of $6.5 million a year ago. This is an 86% improvement, reducing our last by $5.6 million. On an adjusted EBITDA basis, we recorded a loss of $2.8 million, a 58% improvement versus prior year and a 30% improvement sequentially versus Q2 of 2021. To summarize the P&L for the quarter, revenue declined due to mix and macro supply chain disruptions partially offset by increased unit volume sales.

We expanded gross margin on a year-over-year basis. We reduced our opex and improved adjusted EBITDA, and net losses on both sequential and year-over-year basis. Total capex year to date was $4.1 million, primarily related to completing the final phase of our R&D production and distribution facility. We expect capex investment in Q4 of between 1 to $2 million, bringing our total expected capex for the year to approximately 5 to $7 million.

Turning to liquidity. Total cash used for the first nine months of this year was $31.7 million. For context, approximately two-thirds of cash used during this period was non-recurring. Cash at the end of Q3 was $21.1 million, not including a near-term IRS tax refund of $10.9 million.

In addition, we have no long-term debt and have access to a $10 million line of credit with JP Morgan with the potential to extend to $20 million. And so, as we are approaching break even adjusted EBITDA, we believe that we are sufficiently capitalized to deliver on our plan. As Deanie stated, we expect to continue to grow our revenues and expand our market share as we head toward adjusted EBITDA breakeven under IFRS at the end of this year. I will now turn the call back over to Deanie for her closing remarks.

Deanie Elsner -- Chief Executive Officer

Thanks, Wes. To close the call today, I want to update you on our advancements in regulatory, international, and science. On the regulatory front, we continue to see legislative movement at both the state and federal levels. We're very pleased with the passing of California Assembly Bill 45, which we actively helped to shape.

Our current retail partners, represent more than 1,000 locations in California, and we're in the process of expanding our distribution in the current quarter. Federal legislation H.R. 841 has gained further bipartisan support with the hearing on the bill plan before the end of the year. Ultimately, through support in both the House and the Senate, we expect the government will be able to establish a legislative framework under which the FDA would regulate.

We look forward to working with the FDA in the coming months. Finally, this morning, representative Nancy May of South Carolina, introduced new federal legislation, on Cannabis and CBD name, The State's Reform Act. We're encouraged by this legislation because it shows congressional intent for Cannabis in CBD. This legislation de-schedules cannabis, protects each states existing laws, expunges non-violent federal cannabis offenses, and imposes a 3% federal excise tax.

Importantly, for the CBD category, it also addresses some of the gaps within the Farm Bill of 2018, specifically if physicians CBD is a dietary supplement and opens up food and beverage for CBD with the FDA regulating dosing and safety. We look forward to partnering on this legislation. Regarding international. We are advancing our international agenda rooted in strong partnerships to support an asset-light approach.

This quarter, we harvested our first-ever international hemp crop in Canada. Our yield was 20% above plan, and we believed we achieved some of the lowest cost per milligram of CBD ever produced in Canada. We expect to have products ready-to-launch in-market by mid-2022. In Israel, we continue to develop our exclusive CBD partnership with Canndoc, one of the fastest-growing Cannabis companies outside of North America.

Israel maintains one of the highest per capita consumptions of medical Cannabis in the world, and we believe there will be strong consumer demand for high-quality CBD in the future. We expect to have products available in Israel in 2022. In the U.K. and E.U.

we are working to expand our current footprint and we'll provide further updates as the regulatory landscape develops. Finally, we continue to advance the research and science behind cannabinoids through our CW labs research division. As we communicate with regulators at the FDA and in other countries, we see science as a competitive advantage and a critical enabler to global expansion. In summary, we've built an organization that's fit for purpose, while we are expanding our global business, and we are well-positioned for long-term growth going forward.

With that, I'll open up the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions]. And your first question will be from Gerald Pascarelli at Cowen. Please go ahead.

Gerald Pascarelli -- Cowen and Company -- Analyst

Hello. Hi, team. Thanks very much for taking the questions. I just had a question on your top-line, how trends are running into your fiscal 4Q net, where we're halfway through the quarter here.

Any color you can provide on the run rate, maybe relative to where you closed out 3Q? Sounds like you're certainly going to get some incremental distribution opportunities in California. I don't know that is expected to hit 4Q in a meaningful way, or if that gets pushed out to your fiscal '22? But any questions or any color you can provide on some of the tailwinds that you have here going forward will be helpful. Thank you.

Deanie Elsner -- Chief Executive Officer

Gerald. Absolutely. So first we are expanding distribution expense -- we are expanding our distribution footprint in Q4. It's not just in California, it's actually nationally.

We are on track to have a very nice bump in our distribution that will significantly expand our doors before the end of the year. That will go into Q4 -- it is on track to going into Q4. In terms of Q4 top-line, we're anticipating a return to growth in Q4 and so we all bullish about how we're going to end the year. We're excited about the distribution we have, and we're really excited about the new products we've just launched at the end of Q3, that will wrap around into next year.

And so, I think the distribution provide some nice tailwinds going forward.

Gerald Pascarelli -- Cowen and Company -- Analyst

Perfect. Thanks, Deanie. Next one for me is just on the drivers behind your revenue. I hear you loud and clear on the negative mix associated with things like gummies and topicals, and pet.

As you look at the landscape because these are lower-priced products. Is the pricing environment more rational for these form factors relative to tinctures? I guess what I'm trying to get at is whether or not you're seeing price compression or price competition, or if you're comfortable with your current price gap levels? Thanks.

Deanie Elsner -- Chief Executive Officer

Yes. I think Gerald, given the growth that we're seeing in the category right now, I think a competition is heating up. Everybody is trying to fight to get revenue in the door, and we're definitely seeing that through some increase price compression in DTC and a couple other channels, primarily DTC. For us, as we look at this, there's just not as many players who have successfully innovated into these new platforms.

For example, in gummies or pet, or frankly even in some of the topicals we have in the market. So, as you drive innovation, you meet consumers' needs in a new way, I think you have a competitive advantage and that you reduced some of the direct competitors in that space. We're definitely seeing price compression, but probably a little bit less on those newer innovations versus some of the more established products. Just for perspective, it's just at a gross level, so take this with the grain of salt.

On a gross revenue basis, our gummy business in Q3 was up 28%, our topical businesses are up 3%, and our pet business was up 71%. Now, that's all against a tinctures business that was down 26%. You see how the mix is negatively impacting us. That said, gummies have been relatively stable at the same level for the most part, almost throughout the entire year.

I think we're hitting the first tier of mix stabilization with much less of a dramatic drop, I think going forward.

Gerald Pascarelli -- Cowen and Company -- Analyst

Perfect. Thank you very much for the caller. I will hop back in queue.

Operator

Thank you. Next question will be from Scott Fortune at ROTH Capital. Please go ahead.

Scott Fortune -- ROTH Capital Partners -- Analyst

Good afternoon, and thanks for the questions. Real quick, Deanie, can you elaborate on the California Assembly Bill 45 and the legalizing and adjustable Hemp CBD in the California market. And more importantly, what's the FTM or the retailer's response and timing? You mentioned a little bit for new adjustable products on the shelves in California from that. And then the exposure and the opportunity overall in California for [Inaudible] it's web and what's your sense of other states adopting similar regulations to that of California as potential growth drivers as we look out to 2022 here.

Deanie Elsner -- Chief Executive Officer

Absolutely, Scott. I'll unpack that a little bit of time. So, on the first part of this, the impact of AB45, we finally have the opportunity to go talk to a number of our food drug and mass retailers and they been receptive. But as you know, the national retailers especially, are hesitant to step in front of the FDA from a regulatory standpoint.

So, I don't see FDM necessarily opening up for us in California overnight, although we will continue to push on it. I will tell you the thing that does get exciting for us in California. We have 1,000 customers in California that are already existing customers in our base. The only reason why they didn't carry are ingestible in California was because of the California legal environment.

We will already begin to close the gap on some of those retailers in Q4 of this year, but you will see a big part of those retailers close in Q1 of next year. So, we're bullish in terms of what this means for us in California for perspective. California in Cannabis represents about 38% of the total sales across the country. California is the biggest economy in our country and getting California onside definitely helps us with other states.

Now, I'll get the third-party your question, which is really what's the impact of California for the rest of the states. Currently there's about 13 states in the country that currently do not have CBD legalized in state, so having a state and an economy like California endorsing CBD legality from an ingestible standpoint, I think goes a long way to help those states move forward, just like Florida helped us in California and we helped pattern California a lot with what we were able to accomplish in Florida. We'll be able to go back to these other states now and begin to advance what Florida and California have done in terms of this category. So, we definitely see California helping us.

There are about five or six states who currently have this unbalanced going forward, and so we think one at a time the states are going to drop off and the FDA will be put in a position where they have to regulate. And so, we're bullish about what California means for us in the near term. We're bullish about what it means for us across the states, and we love the fact that as 38% of the Cannabis sales today, it could have a very nice disproportionate impact to our revenue and top-line going forward.

Scott Fortune -- ROTH Capital Partners -- Analyst

That's great, appreciate the color. And then the second question is a little bit of housekeeping kind of things on -- you've built out the production and fulfillment facilities here, you've added a lot of automation. How are you looking at kind of now, the right size of the business and now the drive EBITDA profitability, much limited capex kind of needed to deploy moving forward here? Curious how you're weighing growth initiatives with that kind of the profitability side for the business?

Wes Booysen -- Chief Financial Officer

Yeah. Good morning. This is Wes, speaking. Thank you for the question.

As Deanie mentioned, we are excited to move toward positive adjusted EBITDA at the back end of this year and going into next year. And it's really a combination of executing against civil optimization plans. So, from an expense perspective, as you know, we've recently consolidated a couple of our multiple locations into our new production and fulfillment facility. We've essentially incurred most of the capex, not much will be needed going forward.

Secondly, we have relocated our corporate offices from [Inaudible] to a more cost-effective Denver office. And then lastly, what I would add to the manufacturing efficiency that we continue to push for is, operational streamlining, as Deanie referenced, the fit-for-purpose ambition.

Scott Fortune -- ROTH Capital Partners -- Analyst

OK. I appreciate the color. Hop back in the queue. Thanks.

Operator

Thank you. Next question will be from Pablo Zuanic at Cantor Fitzgerald. Please go ahead.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Thank you all. Deanie, just a question on the regulatory sleight of things, and I know it's hard to handicap these things. But in terms of H.R. 841 versus a separate congressional deal, either Schumer draft of the non-CNA's Bill, how does that work? I mean, can H.R.

841 go out here on its own, or will the sponsors of the other Bill say, no, wait a minute, Hemp CBD helped this [Inaudible] in these larger comprehensive reforms. Standalone versus being part of a bigger Bill. Do you have any deals on that? Thanks.

Deanie Elsner -- Chief Executive Officer

Yeah. Pablo, thanks for the question. Absolutely. I think as we mentioned, what all these things point to is the congressional intent is to get CBD over the finish line.

That comes also with Cannabis and so, these things will all -- they won't all move independently and they won't all -- they can't stand alone. Only one can stand. But what you have and you've mentioned them, you've got Schemers Bill, you got Macy's Bill, you've got 841, which is a group of bipartisan House in senators behind it and you've got a couple other ones. They're all coming from different partitions of the congress, and they're all trying to get at the same thing, which is legalize the sector, regulate this category, protect the consumer.

And so, I think I'm encouraged -- I'm really encouraged by 841. I was way encouraged by that before I heard about Representatives Macy's Bill in her press conference this morning. And so, I think it shows is bipartisan support and that's really positive for all of us, but very, very positive for CBD. CBD can move on without cannabis, but it's very curious that these cannabis bills are advancing with CBD regulatory built into them.

So, I'm excited about that.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Just a couple of follow-ups, when we talk a lot of these downgrade in terms of categories from tinctures to gummies and other format. Is that the thing consumer or are these new formats bringing new consumers? I'm sure it's not so black and white, but I'm just trying to understand whether there's different consumers looking for different need's states, or where it is just the same people, just trading them?

Deanie Elsner -- Chief Executive Officer

Yes. It's a great question. The answer to the question in terms of mix, it's actually both. We're seeing our current consumer base adopt more forms and almost build a health regime around how they consume CBD.

That's amazing to witness, and we're leveraging those insights to sell more. But equally, we're seeing an increase in consumer purchase, individual consumers coming in and purchasing, new consumers coming in and purchasing into this category. Now, they are coming and they tend to be a little bit younger than our current consumer, and they're buying forms that they're a little more familiar with, like gummies. But that said, once we get those consumers in and the segment stabilize a little bit in terms of percent of total contribution they represent, we're really well-positioned to grow because from here, we can bring value to those segments and begin to drive up both the top-line in terms of revenue per unit as well as the CBD and the offer for consumers.

And so, we see this as a short-term impact as our tincture's kind of rightsized, but a really, really, really good positioning for Charlotte's Web as we look to build into the future.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

And last one if I may. On the subject of brands, and I know we've talked about this before, but I guess the first part would be how would you describe your performance with Abacus? Have you done as much as you had wished or can we all blame it on COVID, the delayed plans there? [Inaudible] other things that a lot more could have been done. And then just a second part of the question. I keep struggling with idea of how far can you stretch the Charlotte's Web brand in terms of either consumer segments or need locations, or need states? And I'm wondering if that's the limiting factor for you going forward? Thanks.

Deanie Elsner -- Chief Executive Officer

Absolutely. And so first in terms of Abacus and has it performed the way we wanted it to, or are we happy with where it is? The answer to that is no. And it's because of the pandemic, it's because of the supply chain challenges, and it's because of the speed by which we could evolve that portfolio to meet new consumer's needs. I'll give you for an example, when we bought Abacus, we saw opportunities in a number of different channels where it wasn't represented and we knew we had distribution, so we saw the cross-sell opportunity as significant, we still do.

Unfortunately, it took us longer to develop products to go into those channels, for example, and natural, we had to change out some of the ingredient streams. As we've changed out this ingredient streams, we had to get new ingredients streams in to do pilot testing. So COVID and the supply chain disruption just slowed everything down. In terms of customers and their willingness to move on nonessential categories, it's slowed that down and so no, from that standpoint, I'm not pleased with where we are today, but I'm really excited about where we are as we kick into the front half of 2022 because you're going to see us do a lot to bring those brands under a portfolio brand architecture and push very hard under one unified message.

I'm excited about what's ahead of us, and I think we've done a good job to hold it together. In terms of how far can you stretch Charlotte's Web? I agree with you that any one brand can stretch only so far. But because Charlotte's Web is more than just a brand, it's designation of trust with our consumers. We actually have done a lot of research around brand stretch, and we feel like there is lots of room in the kind of the Cannabis and the Hemp wellness arena.

That brand has tremendous opportunity to take advantage of. So that brand has a lot of adjacencies across CBD and Cannabis wellness to expand. In addition, we have a portfolio of brands that can get after other segments where Charlotte's Web really can't go today. And then beyond that, we've got the option purchase agreement with the Stanley Brothers.

Their brand, ReCreate, gives us a whole new opportunity to tap into a different consumer set and a different set of new states. And so, for me, the unifying brand around all of these is either Charlotte's Web branded or Charlotte's Web on the inside as a trusted, credible ingredient stream for Hemp the consumer can trust and then we can build the brand around the consumer segments. And we've got the portfolio brands that go after those segments, which means that we have ample room for growth in the sector. We just have to get our portfolio organized to get after it.

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Got it. Thank you.

Deanie Elsner -- Chief Executive Officer

Absolutely.

Operator

Thank you. Next question will be from Michael Lavery at Piper Sandler. Please go ahead.

Michael Lavery -- Piper Sandler -- Analyst

Thank you. Good afternoon.

Deanie Elsner -- Chief Executive Officer

Hi, Michael.

Michael Lavery -- Piper Sandler -- Analyst

You talked about the mix headwinds, but can you just help us understand the look ahead? You still have 37% of your portfolio from tinctures versus the 30 from gummies, and this momentum is going to continue that net-negative mix headwind hasn't gone away. So, what are you assuming for in terms of like the next quarter or two, you're talking about returning to growth? How much does it account for this piece of the equation?

Deanie Elsner -- Chief Executive Officer

Absolutely. So, when we talk about mix and mix headwinds, I just want to give you a perspective of the big step-downs we've taken over the last year of quarters and then where we are today. Over -- through 2020, we were watching our percent of gummies on a percentage basis go from what was Q1 of last year, about 18% of our portfolio to today, it's about 30% of our portfolio at the same time, our tinctures went from 55 to about 37 in the last three quarters including Q3 of this year. We've stabilized gummies at about 28 to 30% of our portfolio.

So, we think that's a plateau that holds -- if I look at an adjacent category outside of Hemp and CBD, and I look at vitamins and supplements. Gummies represent about 40 to 50% of the revenue mix in those categories, so I don't think we're off tremendously here. I think the one thing about tinctures that we have to keep in mind is that consumers who are looking for the highest delivery of CBD, a delivery method that they can control in terms of how many milligrams they take for whatever condition they are trying to address. Tinctures are really the best platform for that.

And so, we've seen tinctures drop as a percent of our total portfolio; but tinctures are but one way that you get CBD as a format into consumers. We think it will stabilize, I would guess, somewhere in the 35-ish range. And you'll see the formats to continue to evolve, but gummies will become a bigger part of our portfolio. But my guess is in the next, zero to 5% points over the next year or so.

Michael Lavery -- Piper Sandler -- Analyst

OK. That's helpful. I guess just to put it another way, can you give a sense of -- if you called out the, I think it was a million and some change headwind in the quarter from that shift, us it something similar for 4Q or do you think your over a hump or that it's going to get worse? What's just the way you are modeling it in your plans?

Deanie Elsner -- Chief Executive Officer

Yes. Q4 of last year was -- gummies represented about 24% of our business so, expecting about a 30% of our sales in Q4, similar to what we've seen on the year, you're really going to see about four- or five-point increase versus where it was last year. So, it will diminish in terms of a headwind, but it's going to continue to be there as new consumers come in on a format that's more familiar. Well, actually, as we look at Q4 because of our distribution expansion, we're seeing a nice uptick on our broader portfolio, including all of our segments.

And so, I think distribution gains will help us kind of do some of these headwinds, but you are going to see about a 25 to 30% change, right? 25% last year's percent of our portfolio to about 30% this year, about a five-point change in gummies in Q4, consistent with the year.

Michael Lavery -- Piper Sandler -- Analyst

OK. Thanks. And just on the regulatory and, I guess, really THC side, you gave some color on the latest news from Congress, there's some -- a little bit more indirect read-through for how that might impact CBD. But what I hear correctly that it's also the THC opportunity you have your eye on and can you just give us a sense of how big your ambitions there might be and what have you -- would expect the -- how the Stanley Brothers ' relationship might evolve or just what your roadmap might look like?

Deanie Elsner -- Chief Executive Officer

Yeah, absolutely. And so, if the option purchase agreement has an opportunity to be activated as of Federal legalization. And so, we are watching the Federal side of cannabis very closely because we believe that the total available market for us in the cannabis wellness sector is at three to four time increased our total available market. And so today if the available market is 7 to 10 million, we think a Cannabis wellness play could mean 30 to $40 million of a new market that we can tap into.

So, we are watching that very closely. Equally, we think that on CBD there's opportunity both in the segments we're competing in today, but also a broader set of segments that we have intention at getting after. And so, for us, the growth -- what was most important for us is their ample room to grow? Yes. The second most important thing, do we have the portfolio of brands that can tap into that growth across the segments? And we think the answer is yes; and then third, is there adjacencies beyond this category that lets us expand our portfolio even further and the answer to that is absolutely yes.

We are watching federal legislation on Cannabis. We're watching federal legislation on CBD while we're pushing both the state and the federal front. And I'm bullish about what this means for us. It's a good time to be in the category.

And I think this could open up for Charlotte, open it in a really handsome way.

Michael Lavery -- Piper Sandler -- Analyst

OK. Thank you very much.

Operator

Thank you. [Operator instructions]. And your next question will be from Jason Zandberg of the PI Financial. Please go ahead.

Jason Zandberg -- PI Financial -- Analyst

Hi. Thanks for taking my question. Just wanted to talk about your recent launch of oral sprays. Specifically, could you talk about the margin profile of this product relative to your other form factors, and as well I know it's a direct-to-consumer right now? What would be your expectation in terms of number of doors that this product could go in terms of whether you had any initial talks or just in terms of what you'd expected and your previous pet product roll outs?

Deanie Elsner -- Chief Executive Officer

Yes, absolutely. Jason, our Oral Spray line is the first of its kind launched in Q4 this year and it's our first product that brings new cannabinol to the forefront. One is with CBN and one is with CBG, so we're excited about what it can do for us. We chose deliberately to test it on our DTC channel, first and foremost, to see if there was consumer interest in this new platform.

We are big believers that oils as a segment don't go away, but very potentially, we've got a fine, more consumer-accepted behavioral ways to consume them.Sprays is a way to do that. We also love the absorption model of the spray and our consumer feedback on it so far has been really quite positive. In terms of how is it going so far, its early days, but I can tell you that we're excited about the sales expectation. It's exceeding our internal benchmarks.

And as we go to launch it, we will launch it in our early adoptive channels as we look into next year. We've got to clear some hurdles from revenue and volume standpoint first to make sure that there is something we really want to land behind, but we see really nice opportunity in a channel like natural going forward. In terms of our margins, it's a great question. The margins on this product are about the mid-60s today.

Again, that's unoptimized and unscaled. So, we feel like if we prove out the business prop on this and see the revenue numbers we want to see, that we'll be able to scale that and push that a little bit further. But right now, they are mid-60s, so complementary to our gross margin percent today in the P&L.

Jason Zandberg -- PI Financial -- Analyst

OK. Great. That's a great color. In terms of production, can you just talk about in terms of how aggressive you want to get into the Canadian market and what that timeline might look like?

Deanie Elsner -- Chief Executive Officer

Absolutely. Our intention is to be launching our products into Canada by mid-2022. So, we've now harvested our cultivars. We are in the process of drying them, and we'll start to extract internals in the products in the front half of next year and launch mid-year next year.

Canada is important for us from two standpoints. One is Canada as a market is federally legal for Cannabis and CBD, and so it gives us an opportunity to run, if you will, a bit of a pilot on how do we enter on CBD, and potentially expand out beyond into cannabis wellness. The other thing Canada best for us is that it's strategically positioned. We can export out of Canada.

And so, we feel like we've got cultivars that had been bred for purpose for Canada. They're early maturing. We had a really nice harvest this year, our first year out of the gates. And so, we see Canada as being a bit of a launching ground for us to enter other countries around the world.

As the regulatory environment opens up.

Jason Zandberg -- PI Financial -- Analyst

Great, thanks very much.

Deanie Elsner -- Chief Executive Officer

Absolutely.

Operator

Thank you. Next question will be from Derek Dley at Canaccord Genuity. Please go ahead.

Derek Dley -- Canaccord Genuity -- Analyst

Thanks. Just wondering, in terms of -- I would imagine it's more the natural health stores, but stores would sell all different product types whether it be tinctures, capsules, topicals, etc. What percentage of those sales do you topicals make up?

Deanie Elsner -- Chief Executive Officer

It's a great question. So, if we just talked about the natural channel stores, Derek because I think those were their early adopters. I think that's the channel you're talking about, right? Natural more than anything else?

Derek Dley -- Canaccord Genuity -- Analyst

Yes. Correct.

Deanie Elsner -- Chief Executive Officer

In those -- in that channel today, tinctures represent about 40% of the sales, gummies represent about 40% of the sales, capsules and topicals each represent about 10% each of the sales. And that's how the split is today. What's interesting about that channel is it really is the place where our early adopter is, and so you see the broadest portfolio in those channels. And I think the more cutting-edge innovation launching into that channel.

So that's the reason why we like the channel. I think we'd like to see where consumers are with these new innovations.

Derek Dley -- Canaccord Genuity -- Analyst

So, going forward, if we were just, at some point, the FDA kind of gave the approval on ingestible, is that a similar split to what you would expect going forward in that market?

Deanie Elsner -- Chief Executive Officer

Yes. Probably not. I would expect gummies probably in that range, probably 35 to 40% range. But I think topicals becomes a bigger part of the total portfolio.

And so, the splits aren't going to be that dramatic. I would guess, gummies somewhere in the 35 to 40% range in FDM. Tinctures, probably somewhere in the 25% range. Topicals somewhere in the 20% range and capsules, I would guess 10 to 15% range.

So, you will shift a little bit. I think that consumers already using more topicals, that's the only category that's really carried today in national FDM. And so, I don't think that behavior goes away, I think it gets complemented by segments. And I think a more acceptable segment for that consumer base is probably going to be more likely gummies, which is why we are excited about the potential for vertical integration because I think we have the opportunity to really take advantage of getting after the cogs profile and improving some of those margins.

Derek Dley -- Canaccord Genuity -- Analyst

OK. That's helpful. And then second question. Just in terms of their ruling in California, in your view or I guess in discussions with retailers and other states, do you expect understates or other retailers to take a similar approach to California and sort of move to allowing ingestible to be allowing within those states in those stores?

Deanie Elsner -- Chief Executive Officer

Yeah. We're definitely using it as a platform to leverage against other states and to help educate state legislators that today have not legalized this category, what California, what Florida and what New York have done, which is put really nice and I think constructive regulatory framework around how they're going to legalize it. And so, we're using it with other state legislatures. In terms of our customer base, we are absolutely having conversations with customers and it's a funny time in the category because today, the growth in this category is not coming through FDM.

But when the FDA regulates the growth, the growth is going to come almost exclusively from FDM. So, you have to push the nut floorboard in all these channels that are a little bit more fragmented while you hold the relationships with FDM together. FDM retailers are very, very interested in carrying a smaller portfolio of brands, call it 10 brands, and they are very interested in what the market share leadership is of those brands. From that standpoint, it's why we stay so -- we remain so focused on market share leadership because as FDM opens up, we will be at the top of the list for FDM and when FDM opens up, the growth will be explosive.

And so, it's kind of a balancing act with getting after the channels where the revenue is today and readying yourself to where the revenue is going to be tomorrow.

Derek Dley -- Canaccord Genuity -- Analyst

OK. That will make sense. Thank you very much.

Deanie Elsner -- Chief Executive Officer

Thank you.

Operator

Thank you. We have now reached the end of our call time. I would like to turn it back to Mr. Pala.

Corey Pala -- Investor Relations

Thank you, Silvi. And thank you, everyone, for joining us today on our Q3 call. We look forward to speaking to you again when we update you on our year-end results in March of next year. Thank you.

This concludes our call.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Corey Pala -- Investor Relations

Deanie Elsner -- Chief Executive Officer

Wes Booysen -- Chief Financial Officer

Gerald Pascarelli -- Cowen and Company -- Analyst

Scott Fortune -- ROTH Capital Partners -- Analyst

Pablo Zuanic -- Cantor Fitzgerald -- Analyst

Michael Lavery -- Piper Sandler -- Analyst

Jason Zandberg -- PI Financial -- Analyst

Derek Dley -- Canaccord Genuity -- Analyst

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