Charlotte’s Web earnings release

What I said last Q:

I want to point out Molly’s closing comment from Structure and Current State from June 30, 2019:

• “As it is – and if you’re looking at these guys as an investment: I don’t care about the sales levels right now. If investing, I would only care about sales growth. Reporting $2MM in income from an outfit this thin in PP&E and sporting their market cap? This current market valuation is likely not sustainable without some serious growth in sales. Far more serious than they are showing.”

This point has held for September 2019 through December 2020 and has been very prophetic.

The headwind facing CWEB over the past year has been increasing CBD competition and covid, and the ever-increasing amount of hemp planted and harvested that has driven down the cost of product and the sell through price. This has come to a head with the provisioning of inventory in Q4 for the second fiscal year and three of past five Q’s.

All of the above remains.

• Sales advanced in a material way for the first time since June 2019, with a $3.5 increase.  $2.5 million is Abacus which they paid $114 million for.
• GM increased but is almost half of OPEX
• Cash reduced significantly.

This Q:

• Sales +7% or $1.8 million.
• GM, with $5.8 million impairment to inventory, drops to 39%. Trusting GM is getting harder and harder with these impairments.
• Good reduction in SGA of $4.4 million as Abacus is absorbed and expenses reduced.
• Adj EBITDA, if you do not count the inventory impairment, improves by $5.6 million but remains negative.
• Cash remains sufficient at $53 million

Open up the fins and MDA and follow along.

Income Statement Drivers & Breakeven: Trend

Sales Table:

Sales Direct to Customer

Sales B2B or Wholesale

Sales grew QoQ by 7% to $26.9 million a new record, after a 16% growth the previous Q. The growth of $1.8 million is almost half of last Q growth of $3.5 million, as Abacus was onloaded for the full Q in Q3.

Direct to customer increased in the Q by $0.8 million to $17.4 million a new record.

B2B increased $0.9 million or 11% to $9.5 million.  This is after an increase in Q3 of $3.8 million owing to Abacus.

I note that they were not able to disaggregate Abacus contribution to sales in the fiscal. But they did provide this:

• If the acquisition had taken place as of January 1, 2020, revenue from continuing operations for the year ended December 31, 2020 would have been $99,340. Loss from continuing operations for the year ended December 31, 2020 would have been $(61,588).

Ehhh… that does not inspire confidence but likely explains the SGA cutting evidenced in the Q. Also concerning is Abacus revenue seems to be in decline as the last two Q’s CWEB as a whole had $52 million in sales and $95 million for the entire fiscal.

Annualized Sales $ Per Aggregate Property, Plant & Equipment and Goodwill & Intangibles: Peer and Trend

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the sales and divided that by aggregate of PPE + G&I.

Two full Q’s of revenue and GM are in hand on Abacus… and CWEB shows an increase to $0.66 up from $0.62 last Q but well off their previous pace pre the loading Abacus G/I to the balance sheet.

Income Statement Drivers & Breakeven: Peer

CWEB has fallen below all but LHS in this graph.

Gross Margin: USA Peer & Trend

Gross Margin Table

Gross Margin disclosure is very good. 

As you can see from the above, over the long term the erosion has largely been in the inventory expensed to sales.  The steady creep is likely the competition forcing CWEB to lower unit prices to be competitive. They have improved sales mix of DTC versus B2B which has likely helped preserve margins.

GM decreased $4.7 million in the Q to $10.6 million, the entirety of decrease is owing to $5.8 million inventory impairment.  I note they had a $2.5 million impairment in Q2 and $14 million in Q4F19.  GM in Q4 is lowest of the year.   They did guide that there could be further inventory provisions resulting from covid and the pace of sales to B2B last Q which materialized this Q.

Without impairment GM would have been 61% level with Q3, but how trustworthy is that 61% if they wrote down inventory three of five Q’s?

Annualized Gross Margin $ Per Aggregate Property, Plant & Equipment and Goodwill & Intangibles: Peer and Trend

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the gross margin and divided that by aggregate of PPE + G&I.

With Abacus on the books for the entire Q… this metric decreases to $0.26 from $0.38 and is the lowest of the year.  The impairment is the reason for the decrease. CWEB is 5th highest in this metric.

We will see if any efficiency from Abacus starts flowing through to justify that $114 million purchase price in F2021.

Gross Margin: USA Peer

CWEB drops from second from the top to last at 39%.   

SGA & SBC as a % of Sales: Trend

Selling saw a decline of $0.4 million to $8.1 million and decreased as a % of sales by 4% to 30%. Personnel costs were down $0.3 million in Q.

G&A saw its second decline QoQ as a % of sales and in $ amounts with a $4.0 million decrease this Q to $13.8 million.  Facility expense dropped $2.8 million while personnel dropped $1.1 million.

SBC increased to 22% from 17% of sales QoQ or by $1.6 million to $5.9 million.  Super Shares for the founders and SBC for the new hires is likely the reason.  Seasoned CPG execs are not cheap.

R&D rounds out Opex at $1.7 million down from $2.0 million from last Q.  

Net Operating Profit was negative $12.7 million an improvement from negative $13.6 million last Q.  SGA cost cutting was entirety of the improvement.

Other Income and Expenses: This Q net -$2.1 million versus +$7.0 million last Q.

• Other income of $7.4 million last Q versus expense of $1.7 million last Q, which is not described anywhere but looks like it is tied to warrants which on the balance sheet increased by $1.9 million after a decrease in Q3 of $6.4 million.

Net Income for the Q is negative $14.7 million versus negative $6.5 million last Q.  Worst Q of the fiscal.

SGA & SBC as a % of Sales: Peer

CWEB aggregate SGA SBC is the fourth highest out of 11 in the above Peer group. 

Combined SGA and SBC trails only MMEN.

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

After posting positive +NOP in Q1 and Q2 F2019, it is now six straight Q’s of negative NOP.  

CWEB, at current GM% and OPEX$’s, needs incremental sales of 123% to achieve +NOP.  They will need more sales from organic operations and Abacus and a return to +60% GM to scale that hill.

EBITDA Trend and Peer

Adj EBITDA continues its negative ways, with negative $2.7 million for the Q, an improvement QoQ from -$8.2 million.  My numbers do not jive with theirs as they back out a $0.4 million restructuring and acquisition charge that I can not find a description of.   

Opex Burn for the Q was -$2.4 million versus -$7.2 million last Q.

+EBITDA Quarterly Breakeven Sales: USA Peer

At current GM% and Cash OPEX, CWEB needs an incremental 25% to achieve +EBITDA.

Sales, Biological Assets, Inventory, WIP & FG: Trend

Inventory decreased by $2.8 million, the $5.8 million impairment took it down.  Plenty of inventory on hand to support sales growth, should it occur.  They are sitting on +2 quarters worth of inventory, which given they grow outdoor and buy from outdoor sources makes sense.  

Cash decreased QoQ by $13 million to $52 million.  They also have a credit facility from JP Morgan for $10 million with a provision to increase to $20 million.   Alas, “The Company has obtained a limited waiver of certain covenant provisions of the existing line of credit. The waiver is effective for the trailing four quarters ended December 31, 2020. As of December 31, 2020, the Company could but has not yet drawn on the line of credit.”

Subsequent to Q end they raised $8 million via an option purchase agreement with Stanley Brothers USA a founder of the company.

They have a $11.4 million income tax credit at the end of Q4: “The CARES Act, 2019 overpayments, and miscellaneous other income taxes receivable result in a total income taxes receivable as of December 31, 2020 of $11,440.”

PPE increased by $2 million as they completed phase 2 investment of $11.5 million to build out production.  They will need sales to go with that built out production.

A/P and Accrued Liabilities decreased in aggregate $2 million to $17 million.

What I said last Q:

Sales stagnation was halted with a meaningful increase of $3.5 million.  Problem is $2.5 million was the $114 million acquisition of Abacus and $1 million was organic.  That $1 million would have translated into 5% sales growth.  Not very meaningful.

GM bounced back north of 60% for $15 million, but without meaningful sales increases the $28 million in Opex will swamp that amount.

Cash, while satisfactory, did drop considerably in the Q.  If MSOs keep riding a wave, expect them to look for an equity raise to fill the coffers as debt does not appear to be an option given negative EBITDA.

This Q:

Sales have increased, but that should be expected if Abacus would have added $99 million in annual sales in F2020. Sales actually should have been much higher as the last two Q’s of sales of CWEB aggregate $52 million.  I wonder if Abacus was also down trending when purchased.

The inventory impairments in three of past five Q’s is worrisome. Makes GM tough to believe until they demonstrate that this is no longer an issue.

CWEB is the #1 CBD brand in the USA.  Yeesh, I wonder what the others look like.

That’s all I have.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in CWEB and will not start one in the next five days.