CWBHF - Charlotte's Web: Well Positioned In A Tough CBD Market

Summary

• Charlotte's Web signed an impressive deal with BAT providing the company with the cash to invest in developing the CBD market.
• The company now has over $70 million to invest in expanding internationally and fully developing the MLB partnership.
• The stock is cheap with an $86 million market cap before the BAT deal, but CBD sales will remain weak until the FDA regulates CBD in food and dietary products.

While the full-spectrum hemp extract wellness sector remains in stall speed due to a lack of FDA regulations, Charlotte's Web Holdings ( OTCQX:CWBHF ) continues to build a scalable business for the eventual legislation on cannabidiol ("CBD") products. The large investment from a subsidiary of British American Tobacco ( BTI ) sets up CWH to be a survivor in the tough, but promising CBD space. My investment thesis remains ultra Bullish on the stock despite the growth struggles ahead.

BAT Lifeline

CWH hardly rallied on the announcement back in mid-November that a subsidiary of BAT would invest $56.8 million in the CBD wellness products company. CWH had seen the cash balance decline to only $16.5 million at the end of September, even with the CBD company streamlining operations for a much smaller market in the near term.

The original tobacco investments in the cannabis space sent stocks soaring. Now, the market hardly acknowledges such investments providing investors the opportunity to invest alongside industry insiders on the cheap.

BAT invested $56.8 million for unsecured convertible debt due on November 14, 2029 convertible into ~19.9% of the outstanding shares of CWH. The conversion price is C$2.00 ($1.49) with an interest rate of 5% per annum with a step down to 1.5% when federal laws authorize or does not prohibit the use of CBD as an ingredient in food products and dietary supplements.

After the deal, CWH has a cash balance topping $70 million. The deal provides the cash to fully invest into and benefit from the large marketing partnership with MLB announced back in the fall.

The company meeting the scientific benchmarks and substance policies of MLB should provide a lot of confidence to other athletic organizations and athletes looking to utilize CBD for health and wellness, such as pain relieve.

Struggles Will Persist

The 2018 Farm Bill legalized the growing of hemp. CWH has now invested for over 4 years in a CBD market that hasn't fully developed due to the lack of regulations on the inclusion of CBD in food products.

In fact, the company was clear on the Q3'22 earnings call that mass retailers were now pulling back on shelf space assigned to CBD products due:

The first micro headwind is natural and food/drug/mass retailers are reducing shelf space. With total CBD distribution points down 20% to 22% versus the previous year, Charlotte's Web has maintained more shelf space than the competitive set because our products have the highest velocity in the category with total distribution points down approximately 14% versus the previous year. As a result, we continue to be the market leader despite lower B2B revenues.

The lack of FDA clarity on food products and dietary supplements has completely killed the vast majority of the forecasted CBD market. CWH saw sales jump to nearly $95 million back in 2019 and sales have stalled despite acquisitions and the company entering new sectors, such as pets and the recent addition of the sports category.

CWH reported Q3'22 revenues of only $17.0 million for an annualized rate of just $68.0 million. The CBD company has seen revenues continue to slide despite all of the positive steps to expand product categories and shift internationally. Without the key f/d/m shelf space and distribution points for food and dietary products, CWH won't ever reach their full potential.

The stock valuation had slipped to just $86 million with CWH trading at only $0.57. The company signed an amazing deal with BAT highlighting the positioning of Charlotte's Web in the CBD space considering the willingness of the tobacco company to only accept a 5% return until the stock hits $1.49, or the equivalent of a 160% gain.

Takeaway

The key investor takeaway is that CWH is currently priced for the dismal prospects of the domestic CBD market. The company has made a lot of impressive partnerships and international deals setting CWH for success when the market fully opens.

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