Charlotte's Web Holdings Inc

TSX:CWEB

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen, and welcome to Charlotte's Web Holdings Inc. Third Quarter Conference Call. [Operator Instructions] Note that this call is being recorded on Monday, November 15, 2021.And now, I would like to turn the conference over to Cory Pala, Investor Relations. Please go ahead.

[Cory Pala, Director of Investor Relations]

Thank you, Sylvie. Good afternoon, everyone. Thank you for joining us for our Q3 earnings conference call. 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, Wes Booysen. Our earnings release was issued at market close, 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.

[Adrienne D. Elsner, President, CEO & Director]

Thanks, Cory. Good afternoon from Denver, Colorado, and thank you for joining our call.Prior to reviewing our Q3 results, I want to share 3 key takeaways for the quarter and year-to-date. First, as the CBD category expands, the product segments are evolving from a manufacturer push to a 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 products 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 of these lower-priced formats has meant lower revenues from many companies across the industry relative to prior years.” 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 aligns portfolio offerings 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 represent 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, especially 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's a rapidly evolving consumer acceptance of hemp and cannabis globally and regulators country by country are establishing regulatory guidelines to manage these new categories. So finance 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 roadmap for long-term success is built upon advancing the science and expanding our global footprint across the sector. I'll speak more to each of these momentarily.Now shifting to our third quarter results. Q3 total net revenue was down 5.8% versus a 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 a year ago, driven by a 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% in 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 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 topicals 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 carries 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 a 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 spend. The health care 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 a year ago to 23.4%. The pet channel revenue increased the most, up 321% versus a 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've added a total of 1,438 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 transition back to bricks and mortar. In terms of KPIs, Q3 traffic and average order value were down 10% and down 7%, respectively, versus a year ago. However, our year-over-year conversion was up 21% and subscriptions were up 47%, which drove our subscriber user base to increase 47% versus a 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 9 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 specialty channels in addition to expanding retail distribution in California on the back of 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 topline as we head towards breakeven adjusted EBITDA at the end of the year.Now, I'll turn the call over to Wes to provide the financial details for Q3.

[Wessel 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 have achieved much in the past year in terms of infrastructure improvements and streamlining our operations, and we will continue to benefit as we grow. Our operating numbers have continued to improve in the back half 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 loss 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.So 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 a 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 million to $2 million, bringing our total expected CapEx for the year to approximately $5 million to $7 million.Turning to liquidity. Total cash used for the first 9 months of this year was $31.7 million. For context, approximately 2/3 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 JPMorgan with the potential to extend to $20 million.And so, as we are approaching breakeven 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 towards 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.

[Adrienne D. Elsner, President, CEO & Director]

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 help 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 a hearing on the bill planned 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 Mace of South Carolina, introduced new federal legislation on cannabis and CBD, name the States Reform Act. We're encouraged by this legislation because it shows congressional intent for cannabis in CBD. This legislation deschedules cannabis, protects each state's existing laws, [ expenses 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, it positions CBD as 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 believe we have achieved some of the lowest cost per milligram of CPD 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 consumption 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 EU, we're working to expand our current footprint and will 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.

[Operator]

[Operator Instructions] And your first question will be from Gerald Pascarelli at Cowen.

[Gerald John Pascarelli, Vice President]

I just had a question on your topline, how trends are running into your fiscal 4Q now that we're halfway through the quarter here. Any color you can provide on the run rate maybe relative to where you closed out 3Q? It sounds like you're certainly going to get some incremental distribution opportunities in California. I don't know if that is expected to hit 4Q in a meaningful way, or if that gets pushed out to your fiscal '22. But any color you can provide on some of the tailwinds that you have here going forward would be helpful.

[Adrienne D. Elsner, President, CEO & Director]

Gerald, absolutely. So first, we are expanding distribution -- we are expanding our distribution footprint in Q4. It's not just in California. It's actually nationally. We're 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, and is on track to go into Q4. In terms of our Q4 topline, we're anticipating a return to growth in Q4. So we are 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 just launched at the end of Q3 that will wrap around into next year. And so, I think the distribution provides some nice tailwinds going forward.

[Gerald John Pascarelli, Vice President]

Perfect. 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 pets. 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?

[Adrienne D. Elsner, President, CEO & Director]

Yes. I think, Gerald, given the growth that we're seeing in the category right now, I think the competition is heating up, everybody is trying to fight to get revenue in the door. And we're definitely seeing that through some increased price compression in DTC and a couple of 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 and you meet consumers' needs in a new way, I think you have a competitive advantage in that you reduce 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 a grain of cell on a gross revenue basis. Our gummy business in Q3 was up 28%. Our topical business was up 3%, and our pet business was up 71%. Now that's all against a tincture business that was down 26%. So you see how the mix is negatively impacting us. That said, gummies has been relatively stable at the same level for the most part, almost throughout the entire year. So I think we're hitting the first tier of mix stabilization with much less of a dramatic drop, I think, going forward.

[Gerald John Pascarelli, Vice President]

Perfect. I'll hop back in the queue.

[Operator]

Next question will be from Scott Fortune at ROTH Capital.

[Scott Thomas Fortune, MD & Senior Research Analyst]

Real quick. Deanie, can you elaborate on the California Assembly Bill 45 and the legalizing I think just for hemp CBD in the California market? And more importantly, what's kind of the FDM or the retailers' response and timing? You mentioned a little bit for new injectable products on the shelves in California from that. And then the exposure and the opportunity overall in California for Charlotte'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?

[Adrienne D. Elsner, President, CEO & Director]

Absolutely, Scott. I'll unpack that a little bit of time. So on the first part of that, the impact of AB45. We finally have the opportunity to go talk to a number of our food, drug and mass retailers, and they've been receptive. But as you know, the national tailors 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'll tell you the thing that does get exciting for us in California is we have 1,000 customers in California that are already existing customers in our base. The only reason why they didn't carry our ingestibles 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'll 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 and cannabis represents about 38% of the total sales across the country. California is the biggest economy in our country and getting California on site definitely helps us with other states.Now I'll get to the third part of 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 base 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's about 5 or 6 states who currently have this on balance going forward. And so, we think one at a time, these 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 topline going forward.

[Scott Thomas Fortune, MD & Senior Research Analyst]

And then the second question is a little bit of a housekeeping side of things. 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 now to drive the EBITDA profitability with limited CapEx kind of needed to deploy moving forward here? Curious how you're weighing growth initiatives with the kind of the profitability side for the business?

[Wessel Booysen, Chief Financial Officer]

Yes. This is Wes speaking. Thank you for the question. As Deanie mentioned, we are excited to move towards positive adjusted EBITDA at the back end of this year and going into next year. And it's really a combination of executing against several 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 performance facility. We've essentially incurred most of the CapEx, not much will be needed going forward. Secondly, we have relocated our corporate offices from Boulder to a more cost-effective Denver office. And then lastly, what I would add to the manufacturing efficiencies that we continue to push for is operational streamlining, as Deanie referenced, the fit-for-purpose ambition.

[Operator]

Next question will be from Pablo Zuanic at Cantor Fitzgerald.

[Pablo Ernesto Zuanic, Research Analyst]

Deanie, just a question on the regulatory side of things. So I know it's hard to handicap these things. But in terms of H.R.481 versus a separate congressional bills, either Schumer draft or the Nancy Mace, how does that work? I mean can you [indiscernible] on its own? Or will the sponsors or the other will say, no, wait a minute, hemp and CBD have to be part of these more larger comprehensive reforms, I mean, stand-alone versus being part of the bigger build? Do you have any views on that?

[Adrienne D. Elsner, President, CEO & Director]

Yes. 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 were all -- they won't all move independently, and they want all -- they can't stand alone, only one can stand. But what you have, and you've mentioned them, you've got Schumer's Bill, you've got Mace's Bill, you've got 841, which is a group of bipartisan house and senators behind it.And you've got a couple of 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 representative Mace's Bill and her press conference this morning. And so, what 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 Ernesto Zuanic, Research Analyst]

Just a couple of follow-ups. When we talk about this downgrade in terms of categories from insures to games and other tinctures, gummies, and other formats, is that the same consumer? Or are these new formats bringing new consumers? I'm sure [indiscernible] but I'm just trying to understand whether it's different consumers looking for different need states or whether it's just the same people just trading down?

[Adrienne D. Elsner, President, CEO & Director]

Yes, it's a great question. To answer 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're coming in, they tend to be a little bit younger than our current consumer and they're buying forms that they're a little bit more familiar with like gummies. But that said, once we get those consumers in and the segments 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 topline 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 kind of right sizes but a really, really, really good positioning for Charlotte's Web as we look to build into the future.

[Pablo Ernesto Zuanic, Research Analyst]

And one last one, if I may. On the subject of brands, and I know you'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 in COVID, they delayed plans there? From what size, it seems that a lot more would have been done. And then just the second part of the question, I keep struggling with the idea of how far can you stretch the Charlotte's Web brand in terms of either consumer segments or new locations or new states? And I wonder if that's a limiting factor for you going forward.

[Adrienne D. Elsner, President, CEO & Director]

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 consumers' 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, in natural, we had to change out some of the ingredient streams. As we changed out those ingredient streams, we had to get new ingredient 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 non-essential categories, it slowed that down. And so, now 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. So I'm excited about what's ahead of us. And I think we've done a good job to hold this 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 a 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 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, you know 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 in a different set of need 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 that consumer can trust, and then we can build the brand around the consumer segments, and we've got the portfolio of brands that go after those segments, which means that we have ample room for growth in this sector. We just have to get our portfolio organized to get after it.

[Operator]

Next question will be from Michael Lavery of Piper Sandler.

[Michael Scott Lavery, Director & Senior Research 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 if this momentum is going to continue, that negative mix headwind hasn't gone away. So what are you assuming for it in terms of like the next quarter or 2, you're talking about returning to growth? How much does it account for this piece of the equation?

[Adrienne D. Elsner, President, CEO & Director]

Absolutely. So when we talk about mix and mix headwinds, I just want to give you a perspective of kind of the big step downs we've taken over the last year of quarters and then where we are today. So over kind of 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 3 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%, 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're 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 continue to evolve, but gummies will become a bigger part of our portfolio. But my guess is in the next 0 to 5 percentage points over the next year or so.

[Michael Scott Lavery, Director & Senior Research Analyst]

Okay. 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 [ $1 million and some ] change headwind in the quarter from that shift. Is it something similar for 4Q? Or do you think you're over a hump or that it's going to get worse? What's just the way you're modeling it and your plans?

[Adrienne D. Elsner, President, CEO & Director]

Yes. Q4 of last year was gummies represented about 24% of our business. So expecting about 30% of our sales in Q4, similar to what we've seen [ on the year ]. You're only going to see about 4 point or 5 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. We're 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 with some of these headwinds. But you are going to see about a 25% to 30% change, right, 25% last year as percent of our portfolio to about 30% this year, about a 5-point change in gummies in Q4 consistent with the year.

[Michael Scott Lavery, Director & Senior Research Analyst]

Okay. 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 in? Can you just give us a sense of how big your ambitions there might be? And what -- you would expect the how the Stanley Bros relationship might evolve or just kind of what your road map might look like?

[Adrienne D. Elsner, President, CEO & Director]

Yes, 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 a 3 to 4x increase in our total available market. And so today, if the available market is $7 million to $10 million, we think a cannabis wellness play could mean $30 million 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's most important for us is, is there ample room to grow, yes. The second most important thing, do we have the portfolio of brands that can tap into that growth across those segments. And we think the answer is yes. And then the third, is there adjacencies beyond this category that lets us expand our portfolio even further. And the answer to that is absolutely yes. So we're 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's Web in a really handsome way.

[Operator]

[Operator Instructions] And your next question will be from Jason Zandberg at PI Financial.

[Jason Zandberg, Special Situations Analyst]

I 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 direct-to-consumer right now. What would be your expectation in terms of number of doors that this product could go into in terms of whether you've had any initial talks? Or just in terms of what you'd expect, given your previous product rollouts?

[Adrienne D. Elsner, President, CEO & Director]

Yes, absolutely, Jason, our oral spray line is the first of its kind, launched in Q4 of this year. And it's our first product that brings new cannabinoids 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 oil as a segment don't go away, but very potentially, we've got to find 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, it's 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 adopter channels as we look into next year. We've got to clear some hurdles from a revenue and volume standpoint first to make sure this is something we really want to lean 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're mid-60s, so complementary to our gross margin percent today in the P&L.

[Jason Zandberg, Special Situations Analyst]

In terms of your Canadian hemp production, can you just talk about in terms of the -- how aggressive do you want to get into the key market and sort of what that time line might look like?

[Adrienne D. Elsner, President, CEO & Director]

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 and turn those into products in the front half of next year and launch midyear next year. Canada is important for us from a kind of 2 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 in CBD and potentially expand out beyond into cannabis wellness. The other thing Canada does 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.

[Operator]

Next question will be from Derek Dley at Canaccord Genuity.

[Derek Dley, MD & Consumer Products Analyst]

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 in tinctures, capsules, topicals, et cetera. What percentage of those sales do topicals make up?

[Adrienne D. Elsner, President, CEO & Director]

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

[Derek Dley, MD & Consumer Products Analyst]

Yes, correct.

[Adrienne D. Elsner, President, CEO & Director]

So 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 so, that's how the split is today. What's interesting about that channel is it really is the place where our early adopters are. 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, MD & Consumer Products Analyst]

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

[Adrienne D. Elsner, President, CEO & Director]

Yes. Probably not. I would expect gummies probably in that range, probably in the 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 in capsules, I would guess, 15% -- 10% to 15% range. So you'll see it shift a little bit. I think that consumers are 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, MD & Consumer Products Analyst]

Okay. No, that's helpful. And then second question, just in terms of the ruling in California, in your view or I guess in discussions with retailers in other states, do you expect other states or other retailers to take a similar approach to California and sort of move to allowing ingestibles to be allowed within the states of those stores?

[Adrienne D. Elsner, President, CEO & Director]

Yes. 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 a really nice and, I think, constructive regulatory framework around how they're going to legalize it. And so, we're using it with other legislatures -- 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 forward 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're 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 ready in yourself forward the revenue is going to be tomorrow.

[Operator]

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

[Cory Pala, Director of Investor Relations]

Thanks, Sylvie, 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]

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.