Since we reported on the last financials, the share price of this company has ranged from $15-$28, and volatility appears to be a feature (not a bug) that comes included with the purchase price.
I cut my teeth in commodities, so I should be inured to such trivialities like a 140% annualized volatility….yet….here we are. And I can’t quite seem to grow a big enough callous around the potential of holding so much value at risk. Look: a margined account on exchange cleared instruments used to hedge naked exposure, I ‘get’ that.
The thought of having a one stock portfolio and holding the VaR that something like this baby brings with is a little too thrilling for this kid, and something I’d get rid of reflexively. At the least, I would hold any exposure to it tighter than a toddler holding their parents hand going through a haunted house. That said, there’s much potential to trade around this thing – and the demonstrated revenues shows core intrinsic value.
To the financials!
Cash and inventory holding Cash burn noticeable, no big asset picks or acquisitions. I’d thought they were preparing for a move.
They certainly pay their bills on time. Current liabilities virtually nothing, accrued liabilities orderly.
74% margin reported this time. Heck of a good number to sport.
Intangibles negligible, PP&E expanding, but mainly peripheral to operations. Yes, they have some equipment. And no, it’s not much to speak of. More on this below.
G&A running hot at $3MM/month.
Same with Sales/Marketing expenses, which is over $2MM/mo. Considering they’re sold *only* $25MM in during the quarter, seems relatively high.
They run lean on the asset side, not so lean on labour. Apparently it takes quite a whack of people to package and sell product – they’ve hired 85 in the quarter alone.
And yep, the joys of US based cannabis businesses: proportional voting shares. More on that below.
8.1MM share options at $0.59.
Note 16(c) touches on the deferred taxes they’ve booked as an asset, yet the rationale behind the booking still eludes me. It’s accreting at around $1MM/mo. They’ve mentioned a $4MM reserve against it, I wish I could tell you more. Their MD&A sure doesn’t.
Nothing much more to speak of without a slide rule. Mainly in their capital structure. And it’s hard for me to visualize how CWEB operates.
I had hoped to get the skinny on the deferred taxes, maybe an ask of IR (LOL). I know, I know. It’s not a big deal numerically, but it’s an oddity in the sector, and all the opacity in the financials does is make me more curious. From what I can see, is they’re taking a position on an IRS tax code provision (Sec 162(m)). ‘Raise the flag, and see if anyone salutes’ kind of thing.
The story here to me looks like CWEB is operating an asset-thin-high-headcount-brand-driven business model. They made $2.1MM in income off of $25MM in sales. Ok. The income statement is pretty clean, and while there’s a relatively large amount of optionality floating around on their balance sheet, there’s now some $120MM that can be lifted off of the share options. Restricted units aren’t abundant – and they don’t need to be. CWEB management has only taken $600k in SBC this fiscal year. At the same time, we find out they’ve converted some of the proportionate voting shares (they’re 400:1 btw) during the period. I’ll need to check the initial filings, but if they’re like every other ‘super-duper’ share out there, founders are doing pretty well by them.
The implication is clear: total share count rose by some 16MM shares in the last quarter alone as 43,000 of the proportionates suddenly became 17.3MM common shares, upping the float by 20%, and giving someone a payday to remember. The liquidity and bullishness of the equity itself will help ring fence it from offer side supply to some degree. So, while $340MM in equity magically appears (with no attendant cash inflows), I begin to think about the guy who owns some of this equity, and if that is what they were looking for in investing. CWEB has another 134,000 of those proportionates in hand, which represents some 57MM more common shares that could suddenly exist with nothing done other than the stroke of a pen.
All for a current run rate of $100MM a year in sales, with $8MM in income. As of now.
Ignoring all of my lathering about structure above, sales growth is the only thing about CWEB of any real import to me. They run an asset lean shop, I’d expect heavy seasonality reflecting in their G&A, and their margin is simply to die for. Look for a hockey stick next fins in G&A, if they’re using a bunch of seasonal workers or if they need to rent/lease equipment on short notice, their cost curve could go weird fast.
As it is, they’ve simply done sale/leasebacks on assets, and really don’t own anything other than the brand. Fair enough. They seem to have a decent handle on their supply chain, and are hands on with their production partners.
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.
The preceding is in the opinion of the author, and is not intended to be a recommendation to buy or sell any security or derivative. The author holds no position in CWEB.