Charlotte's Web Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Charlotte's Web Holding Sync 2025 Fourth 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. If at any time during this call you need assistance, please press star-zero for the operator. This call is being recorded on Tuesday, March 31, 2026. I would now like to turn the conference over to Corey Pella, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us today for Charlotte's Web Q4 2025 Earnings Conference Call. We'll provide some color around the recent developments around the AP transaction, the Medicare opportunity, regulatory momentum, and other progress. Afterwards, we will take questions from our analysts. As always, before we begin, please note that certain statements made during this call, including those regarding our future financial performance, business strategy, and plans, constitute forward-looking information within the meaning of applicable security laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause actual results to differ materially. We direct you to review the cautionary language in this morning's earnings release as well as the risk factors and other important considerations that are detailed in our regulatory filings, particularly in our most recent Form 10-K report. During the call, we will also refer to supplemental non-GAAP accounting measures, including adjusted EBITDA, which do not have standardized meetings prescribed by GAAP. Please refer to the earnings press release for descriptions of these measures and reconciliations to their most directly comparable GAAP financial measures. And with that, I'll now hand over the call to Charlotte's Web CEO, Bill Marocinick.

Thanks, Corey. Good morning, and thank you for joining us today. I want to say right up front that this is not business as usual for Charlotte's Web. We've had several key announcements that have tremendous positive impact on our business that I'm excited to share with you. So let me also add that this includes another quarter of demonstrated progress for our push towards achieving scalable profitability. But first, let me start with the most recent development. Last night, we announced a financial transaction with British American Tobacco in relation to its existing convertible loan note. This transaction has two primary components. First is the conversion of BAT's outstanding $55 million convertible to venture, plus approximately $10 million in accrued interest in the common shares of Charlotte's Web. at a conversion price of 94 cents Canadian per share. This eliminates our largest balance sheet liability entirely and avoids approximately $3 million in future annual interest for the next three and a half years. The second component is a new equity investment of $10 million through a private placement. This is fresh capital coming into the business to support the execution of our key strategic initiatives, including our upcoming participation as a leader in the CMMI Medicare pilot programs. So, in total, VAT's combined equity commitment under this transaction is approximately $75 million. And following completion, VAT will hold approximately 40% of the company on a non-diluted basis. Among other things, this transaction provides clarity and stability around VAT's existing investment positions. Let me also provide some additional background on why we believe this is the right transaction at the right time and appropriate in the current circumstances. The original debenture was issued in November 2022 at a conversion price of $2 Canadian per share. Due to several issues, including the ongoing federal regulatory delays around consumable hemp, it was extremely unlikely that VAT would voluntarily convert its debt anytime soon. If this debt burden were left unaddressed and continued to accrue interest at 5% per year, the company would have faced an additional $12 million or more in aggregate interest from now through the maturity date in November 2029. This transaction eliminates all of that. The net effect is a dramatically simplified equity-based capital structure. We go from carrying significant debt obligations to a clean balance sheet with a well-capitalized long-term investor. The additional $10 million in fresh capital strengthens our working capital position and provides flexibility to pursue multiple exciting growth opportunities. All right, so now let me turn to our most exciting recent growth opportunity, the Center for Medicare and Medicaid Innovation Pilot Program, or CMMI. Under the CMMI pilot program, for the first time, seniors gain access to science-backed CBD products through a federally authorized Medicare pilot, and Charlotte's Web is positioned to be a participant within this program. Just 10 days ago, CMS, which is the Center for Medicare and Medicaid Services, issued additional guidance that significantly clarifies and strengthens this opportunity. CMS established the Substance Access Beneficiary Engagement Incentive, or Substance Access EEI, which will be the specific mechanism through which the pilot will operate. Notably, the guidance confirmed that the hemp-derived CBD products, including non-intoxicating full-spectrum products containing up to 3 milligrams per serving of naturally occurring THC, are eligible under the program. This means our core portfolio of full-spectrum CBD wellness products qualifies under this federally authorized program. Under the Substance Access BEI, participating healthcare organizations, primarily accountable care organizations, or ACOs, and oncology providers, may purchase eligible hemp-derived CBD products for their Medicare patients with up to $500 per beneficiary annually available. To provide some clarity, it's important to note that Medicare does not directly reimburse these products. Rather, the ACO purchases hemp CBD products directly and furnishes them to its patients. The economic rationale is that if these products contribute to lower utilization of higher-cost services, the ACO may benefit to reduce total cost of care. As a result of that, the ACO may have an incentive to support adoption of the substance access DEI. Participants in the ACO REACH model and the Enhancing Oncology model are anticipated to begin offering the substance access BI beginning April 1st, which is tomorrow, with the ACO lead model expected to follow in January of 2027. I want to be really clear about what this means. This represents an established healthcare integration pathway. It operates with CMS authorization, physician oversight, patient support through the program's partner realm of caring, and structured outcomes data collection. To facilitate the pilot, Charlotte's Web will offer products intended to support eligible patients through a secure online healthcare portal. The initial phase is focused on senior patients receiving care through an ACO reach provider. Over time, this type of model has the potential to be applied more broadly within the Medicare population, which currently includes approximately 67 million beneficiaries. And looking ahead, there is a second potentially much larger Medicare pathway in development. In November, CMS proposed for the first time allowing Medicare Advantage plans to include hemp-derived CBD products in their benefit design. That is a separate program from the CMM pilot, and it represents a potential expansion of CBD access into the broader Medicare Advantage system, which covers roughly half of all Medicare products. beneficiaries. The timing and additional details for this program are still being finalized, but we remain confident that our quality standards and compliance infrastructure position us well for this potential opportunity. All right, let me take a moment now to talk about the federal regulatory status. Despite ongoing challenges, recent federal policy developments are showing progress for hemp-derived CBD. Congressman Morgan Griffith who's the chairman of the House Energy and Commerce Subcommittee on Health, which oversees the FDA, advanced the Hemp Enforcement, Modernization, and Protection Act, known as the Hemp Act. This proposed legislation would establish a science-based federal framework for hemp-derived products under the FDA oversight. We are actively working with our OneHemp partners through the markup process. Energy and Commerce Committee this year, with potential pathways for advancement through broader legislative vehicles, including Congress's continuing resolution this September. At the same time, we recognize that multiple legislative approaches to hemp regulation are under active consideration in Congress, and we remain actively engaged with policymakers and stakeholders across these efforts and will support the most effective path forward to achieve a durable, science-based federal framework. It's clear that a broader federal solution is critical. Recently issued substance access BEI guidance explicitly permits hemp-derived CBD products containing up to three milligrams of THC per serving under the CMS program. This would certainly seem to be a direct signal from the federal government that full-spectrum products are considered safe and appropriate. Okay, now let me turn to the Florio. which is one of our most compelling long-term potential opportunities outside of our core consumer business. This is our collaboration with Ajna Bioscience and British American Tobacco. Last year, DeFloria received FDA clearance received with Phase II clinical trials for its investigational new drug. This botanical IND is for the treatment of irritability associated with autism spectrum disorder. It represents a natural alternative to pharmaceuticals that are often poorly tolerated. It uses our proprietary full-spectrum CBD extract derived from our patented hemp cultivars, and we believe it represents the most advanced cannabinoid drug program utilizing the FDA's botanical drug pathway. Building on the favorable results in Phase I, which established the dosing parameters for the Phase II program, Defloria has been actively preparing for entry into Phase II clinical trials. Preparations are substantially advanced and a program is expected to initiate mid-year, subject to the customary development activities and resource alignment. Phase II consists of multiple studies across distinct patient populations. These studies will evaluate safety and tolerability,