Well, can’t say we didn’t warn you about volatility in the sector.

Charlotte’s Web – like $GTII and $TRUL – are poster children for volatility. And man, a buy & hold strategy with them can be a nightmare for those with XL sized positions or margin. Which, is a really bad idea in both cases on a high volatility stock.

$CWEB itself has ranged from $33 to $12 in the past 6 months (!), even running from $16 to $29 in less than 2 months in the summer. Wow o wow o wow.

That kind of volatility is radioactive to myself, except perhaps in very modest positions. Subscribers will know I’ve been interested in $CWEB for awhile now, mainly because of their business model and margins. And by ‘interested’ – I don’t mean in an investing sense. Volatility like this is far more suited to trading, which, increases volatility, which, encourages trading. This is different than reading financial statements to try and gage longer term success and points of investing.

With CWEB, we’ve noted issues in their capital structure (yuck) and some opacity in the financials (boo!).

In the wider world, it’s not hard to find some absolute utter tripe out there about ‘investing’. That link will take you to what is probably one of the crappiest, dumbest, carny-like bullshit pieces I think I’ve ever read in legal cannabis. And I can assure you that’s not an understatement. I’m including it here for posterity – it’s definitely benchmark. It could be an archetype FFS. And it’s easy to find variants of it everywhere. Apologies for the aside, but the first piece is truly magnificent in its’ complete and total idiocy. It’s only here because I think it contains many, many lessons for the investor who approaches it from that perspective. It’s easy to jump on a person making a wrong call, it happens. This one goes far, far beyond that.

So, for $CWEB from share price highs to the now-newest lows, what exactly happened? Let us see if the latest statements can give us any insights.

To the financials!

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• Cash burn accelerated to $20MM/Q over the past two quarters. $35MM left.
• Sales are flat as a pancake, almost to a dollar. This is not good. More on that below.
• G&A did indeed balloon by 25%+ to more than $13MM in the quarter.
• Another 22k of proportional shares converted, bringing another 9MM shares out of thin air
• 5.4MM of $0.64 share options which expired post financials. Even after todays price drop, that means CWEB is putting out nearly $70MM in shares for $3MM. 
• I thumbnail the proportionates at a similar contribution – so in total – $150+MM in equity went out the door for some $5MM in return. Egads.
• Existing shareholders get to pay for both of those items as they are a hard kick right in their equity box.
• Their wholesale B2B side has increased to 50% of their business. 71% margin on all products. Man, some outfits would love that.
• Still – gross margin is off 4%.
• Those curious ‘deferred tax assets’ came down by $2MM over the quarter to $24MM. God only knows what the tax lawyers cooked up, or whether it’ll fly. Might be an agriculture subsidy/thingy.
• Inventory way up, as is accrued liabilities. Might be a reflection of some seasonality as harvest could have been coming in over the month of September.
• Headcount decreased QoQ by 13 people from 320 to 307, and gross personnel cost went from $10.5MM to $8.2MM.
• Yet the expansion in G&A swamped that. The MD&A attributes the rise in G&A to absolutely everything – from directors insurance to system implementation. If something even remotely could be an expense, it got blamed.

Ok. 

The takeaway from these financials to me is that their disclosure is becoming increasingly opaque. I had 5 browser windows opened at one point to get a comparative, and had to play ‘find the weenie’ around more than one note. The MD&A is so anodyne, not much can be taken away about the operations, and is of little use.  I’ll direct the interested reader to Note 7 (inventory) in earnings release which is the longest single note it I’ve ever seen on it. 

Overall, they still pack an amazing valuation for a company that ostensibly only holds about $17MM in hard assets (the remainder in ‘right of use’, which is a capital lease). It implies that the brand is worth a gazillion – which would mean an established consumer base and sales growth as demand side comes along. The revenue pancake is really troubling. Given the reach and the stores the product is available in suggests a couple of potential drivers.

• Market saturation is occurring
• Their price is high relative to competitors
• Brand penetration in existing markets is nearing capacity
• Increasing amount of competitors
• Seasonality (?)

Honestly, it’s a guess, and that last one is a reach to be sure. Your guesses would be as good as mine. I can’t find a single word about any of it. Cost of sales increased $600k on same revenues, and margin is declining as the B2B side has increased. Forgoing higher margin in retail sales channels to feed the competition with flat sales is definitely a headwind to adjust for. But cost and margin are only part of it 

To myself, sales stagnation is the burning question here. Share price valuation is driven by expected future earnings, and if this posit is correct, then a flat-lined future of expected sales growth will take the kneecaps out from under anything. Another main point is the price compression being seen in wholesale hemp overall, as prices currently look to be heading down a black-diamond run on a ski hill.

Once again, this equity is interesting to me. Either as a canary in a CBD coal mine, a weathervane for wider market adoption, or market valuation of their business – it’s one I have my eye on, but I doubt it’ll capture my wallet. As noted previously, the capital structure is a rat’s nest of optionality yet to be struck (all amazingly deep in the money), which would keep me away even if price volatility was within the realm of reason.

The expansion in G&A is also troubling. I predicted last time that G&A could ramp – and I was right. But my reasoning was around use of seasonal workers and such. Instead, gross personnel costs went down by 20%, begging several questions. They only added $9MM in assets over the period – so it appears doubtful it’s about a ‘ramp’. Whether sales are simply at a temporary plateau or not, volatility around this thing still spooks me. I am fascinated by watching an asset-thin brand business and their story develop.

This one is a canary to me about CBD in general, and brand valuation in the specific. Wish I could tell you more about it all. The company doesn’t seem to want to tell me either.

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 holds no position in $CWEB