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 September 2020 and has been very prophetic.

The headwind facing CWEB over the past year has been increasing CBD competition, 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 this Q.

All of the above remains.

CWEB is like a truck stuck in reverse right now. Abacus will give them lift next Q but they paid $114 million for $100 million in goodwill and intangibles. 

• They closed on Abacus June 11, 2020, so they did not even have a full month of contribution. 
• COVID is given as reason for declining B2B but they have been on a down trend since June 2019.
• They now have the 2^nd worst SGA and SBC as % of sales in our USA peer group, trailing only Acreage.  And the worst SGA in peer group at 129% of sales, the next closest is MMEN at 88%.

This Q:

• 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.

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 16% to $25.2 million, which is a hair above their previous record of $25 million in September 2019.  Direct to customer retreated in the Q by $0.3 million.  It had only retreated once in the period under review prior to this Q.  B2B increased $3.8 million or 79% to $8.6 million.  Likely that Abacus was the reason for the majority lift.

This shows that increased CBD competition in US has not made it easy on CWEB’s growth. 

Sales growth continues to be very elusive for CWEB in the CBD space. 

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.

A full Q of revenue and GM are in hand on Abacus… and CWEB shows an increase to $0.62 up from $0.57 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 increased $3.8 million in the Q to $15.3 million.  GM in $’s remains below three of the four Q’s in F2019.  GM improves 8% as a percentage of sales to 61%.  The entirety of the improvement is the lack of inventory provision this Q which flipped 13% QoQ.  They have guided that there could be further inventory provisions resulting from covid and the pace of sales to B2B.

Inventory expenses is the second highest it has been in the period under review. Not sure if that is Abacus driven or not.

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 increases to $0.38 from $0.30 but remains well below F2019 Q1-Q3 (Q4 had negative GM due to provisions).  CWEB is third highest in this metric.

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

Gross Margin: USA Peer

CWEB is second from the top at 61%.  Now, if only they could generate meaningful sales growth to take advantage of that GM%.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

What I said last Q:

Still not very pretty trend lines. The G&A is worrisome but should benefit from lack of professional fees next Q offset by a full Q of Abacus personnel and operations.

This Q:

No downward movement on Selling this Q. But G&A saw a decrease.

Selling expense increased by $1.7 million to $8.5 million and increased to 34% of sales from 32%.  Increases in personnel expense of $1.2 million and $0.6 million in advertising and promotion were the reasons. A full Q of Abacus likely the reason.

G&A reversed its march upwards as a % of sales and in $ amounts with a $3.3 million decrease this Q to $18 million.  Professional fees decrease of $4.4 million and personnel decrease of $1.1 million were offset with facilities expense increase of $1.7 million.  The facility increase is likely a full Q of Abacus related.

Aggregate SGA retreated from last Q highest on record at $28 million to $26.2 million, the second highest on record

SBC increased to 17% from 11% of sales QoQ or by $2 million to $4.3 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 $2.0 million up from $1.5 million from last Q. The entirety of the increase is facility cots likely attributable to Abacus.

Net Operating Profit was negative $13 million an improvement from negative $18 million last Q.  GM increase of $3.8 million was the improvement and G&A were the balance.

Other Income and Expenses:

• Other income of $7.4 million versus $3.9 million last Q, which is not described anywhere but looks like it is tied to warrants which on the balance sheet decreased by $6.4 million.

Net Income for the Q is negative $6.5 million versus negative $14 million last Q.

SGA & SBC as a % of Sales: Peer

CWEB aggregate SGA SBC is the third highest out of 10 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 five straight Q’s of negative NOP.  

CWEB, at current GM% and OPEX$’s, needs incremental sales of 86% to achieve +NOP.  They will need more sales from organic operations and abacus to scale that hill.

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

EBITDA Trend and Peer

Adj EBITDA continues its negative ways, with negative $8.3 million for the Q, a decrease QoQ from $6 million.  My numbers do not jive with theirs as they back out a $0.7 million restructuring charge that I can not find a description of.  They also have other buried expenses in Opex they are backing out that I cannot find.  Thus, despite an improvement in GM and what looks like an improvement in cash SGA I cannot track down the improvement.

Opex Burn for the Q was -$7.2 million versus -$11.8 million last as the acquisition costs and professional fees were reduced. 

+EBITDA Quarterly Breakeven Sales: USA Peer

At current GM% and Cash OPEX, CWEB needs an incremental 54% to achieve +EBITDA.

+EBITDA Quarterly Breakeven Sales: North American Peer

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

Inventory continues to edge higher.   Plenty of inventory on hand to support sales growth, should it occur.  They are sitting on 3 quarters worth of inventory, which given they grow outdoor and buy from outdoor sources makes sense. But a new harvest will be showing up in one more Q.

Cash decreased QoQ by $34 million to $66 million.  They also have a credit facility from JP Morgan for $10 million with a provision to increase to $20 million.   

PPE increased by $8 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 $11 million to $19 million.

What I said last Q:

Not much progress at CWEB QoQ or YoY.  They are worse off operationally than a year ago. 

They should show some increase in sales next Q but that is at the expense of $114 million purchase of which $100 million was Goodwill and intangibles.  They are vey much buying sales with that acquisition and hoping for sales channel synergies.

The once heralded CBD market is turning out to be a tough go for the #1 CBD brand in the USA.

This 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.

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.