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Will the Abacus Health Acquisition Benefit Charlotte’s Web?

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On June 11, Charlotte’s Web Holding (NYSEARCA:CWEB)(OTCMKTS:CWBHF) announced that it completed the acquisition of Abacus Health Products. The company’s performance wasn’t strong in the first quarter. Charlotte’s Web reported a negative EBITDA, while its revenue declined slightly compared to the first quarter of fiscal 2019. The stock has fallen 26.3% YTD (year-to-date), while the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has declined 14.5% YTD.

Charlotte’s Web acquires Abacus Health

Charlotte’s Web completed the acquisition of Abacus Health, which it first announced in March. Abacus Health manufactures OTC (over-the-counter) topical products. The company makes its products by combining active pharmaceutical ingredients with hemp extracts. Through the acquisition, Charlotte’s Web can capture the US CBD market. Notably, US regulations favor topical CBD products. When combined, the company will have access to more than 21,000 unique retail locations and capture 34.7% of US CBD sales within the F/D/M (or food/drug/mass) channel. By closing the acquisition, Abacus Health’s consumer brands CBD MEDIC and Harmony Hemp will be part of Charlotte’s Web’s product portfolio. The company will also be able to expand into the retail skincare segment through the Abacus Health acquisition. Charlotte’s Web is already a vertically integrated company that controls its own supply chain.

Talking about the acquisition, Charlotte’s Web CEO Deanie Elsner said, “The addition of Abacus Health cements a market-leading position in both topical and ingestible products in the CBD category, representing approximately 33% market share of the U.S. CBD food/drug/mass retail channel.”

Why was Q1 mixed?

Charlotte’s Web reported mixed first-quarter results last month. The company reported revenue of $21.5 million, which beat analysts’ expectations of $20.78 million. The revenue was also higher than its revenue of $21.7 million in the first quarter of fiscal 2019. The company’s B2B (business-to-business) sales fell 31.5% in the first quarter due to increased competition in the natural retail channel, which impacted the total revenue. However, the DTC (direct-to-consumer) sales increased by 29.4% YoY (year-over-year).

The company saw a 76.5% YoY increase in its operating expenses to $23.3 million. The growth could have resulted in an adjusted EBITDA loss of $5.7 million compared to a positive EBITDA of $4.5 million in the first quarter of fiscal 2019. Management targets revenue growth of 10%–20% in 2020. The company will likely hit a positive adjusted EBITDA by the end of the year. The company ended the quarter with cash of $53.0 million.

Meanwhile, Cresco Labs (OTCMKTS:CRLBF) and Curaleaf (OTCMKTS:CURLF) reported an EBITDA profit of $3.2 million and $20.01 million in their first quarter of fiscal 2020.

Outlook

Analysts expect Charlotte’s Web to report a slight increase of 3.0% in its revenue to $25.79 million in the second quarter. The EBITDA losses could be around $4.9 million. In comparison, the company posted a profit of $3.9 million in the first quarter of fiscal 2019. Analysts are bullish about the stock despite the mixed performance this year. Among the nine analysts that cover the stock, two recommend a “strong-buy,” five recommend a “buy,” and two recommend a “hold.” The average target price on the stock is 11.71 Canadian dollars, which is 60% higher than its last closing price. The stock closed 9.1% higher at 7.32 Canadian dollars on Monday.

In June, Charlotte’s Web stock has fallen 3.5%, while Cresco Labs and Curaleaf have fallen 10.8% and 4.6%, respectively.

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