a new strain of wellness products charlotte's web holdings...

Charlotte's Web Holdings, Inc.

Consumer Products

Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and allthe companies and securities that are the subject of this report discussed herein.

Canadian Equity Research19 September 2018

BUYPRICE TARGET C$21.00Price (18-Sep)Ticker

C$15.56CWEB-CNSX

52-Week Range (C$): 9.05 - 18.00Market Cap (C$M): 1,636Shares Out. (M) : 105.2Implied Return to Target (%) : 35.0Net Debt (Cash) (C$M): (94)Enterprise Value (C$M): 1,543

FYE Dec 2017A 2018E 2019E 2020ESales (US$M) 40.0 79.9 169.5 296.6Gross Profit (US$M) 29.9 61.7 125.8 219.5

EBITDA (US$M) 14.1 28.3 59.0 98.9EPS (US$) 0.09 0.20 0.37 0.65EV/EBITDA (x) 84.0 42.0 20.1 12.0P/E (x) 136.2 59.6 32.2 18.5

18

17

16

15

14

13

12

11

10

9

Se

p-1

8

CWEB

Source: FactSet

Priced as of close of business 18 September 2018

Charlotte’s Web is a market leader in the productionand distribution of wellness products made fromcannabidiol, a compound extracted from industrialhemp. Based in Boulder, Colorado, Charlotte's Webmarkets its products to customers across the UnitedStates and on a limited basis internationally, throughspecialty retailers and its website (www.cwhemp.com).

All figures expressed in US$ unless otherwise stated

Derek Dley, CFA | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 416.869.7270Alexander Diakun | Associate | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.687.6339

Initiation of Coverage

A new strain of wellness productsInvestment recommendation:We are initiating coverage on Charlotte’s Web with a BUY rating and C$21.00 targetprice. Charlotte’s Web offers investors exposure to the high-growth cannabidiol (CBD)market through its industry-leading market share and product suite at what we believe isan attractive current valuation.

Investment highlights:• Charlotte’s Web is a market leader in the production and distribution of wellness

products made from cannabidiol (CBD), a compound extracted from industrial hemp.Industrial hemp is a species of cannabis with no more than a 0.3% concentration ofTHC – not marijuana – which is a key distinction, as this definition allows Charlotte’sWeb to sell its products across the US and in many countries. In the last two years, theUS market for hemp-derived CBD supplements has experienced robust growth and isexpected to grow at a 55% CAGR over 2016-2021, according to the Brightfield Group.

• Charlotte’s Web products achieved mass consumer acceptance following the airingof a CNN documentary by Dr. Sanjay Gupta which followed 5-year-old Charlotte Figi,who has a rare form of epilepsy and suffered from over 300 seizures a day. Charlottewas administered a CBD extract and within a week her well-being had significantlyimproved. In mid-2018, the company adopted the name Charlotte’s Web Holdings Inc.,representing the inspiring story that propelled the company into the spotlight.

• Today, while still being used as an antiepileptic, CBD is typically used to promoteinternal stability and equilibrium in the body. As such, its various benefits are said toinclude relieving stress, providing users with a sense of calm and focus, and helping inthe recovery of exercise-induced inflammation.

• While legal ambiguities exist, the operations of Charlotte’s Web are legal in the UnitedStates, where the company generates approximately 97% of its revenue. With thatsaid, we believe the CBD supplements market is poised for robust growth over ourforecast period, as CBD supplement products become more widely accepted at boththe governmental and consumer level, with transformational regulation expected tobecome law prior to the end of 2018. Most notably the 2018 Farm Bill, which includesprovisions to de-schedule industrial hemp as a Schedule I controlled substance, isexpected to be signed into law by President Trump prior to the end of 2018.

• We are forecasting EBITDA of $28M, $59M and $99M in 2018, 2019 and 2020,respectively, implying a CAGR of 91% over 2017-2020.

Valuation:Our target price is derived using a DCF valuation, with an 11.1% WACC and 2.5% terminalgrowth rate, yielding a value per share of $20.88. Our target implies 16.5x our 2020EBITDA estimate of $99 million, which we convert to Canadian dollars to account for thecompany’s CSE-listed share price. Charlotte’s Web offers investors exposure to the high-growth CBD supplements market, through its industry-leading market share, impressivemanagement team, established and growing retail relationships, and strong brandpower. With the shares currently trading at 12.0x our 2020 EBITDA estimate, we believeCharlotte’s Web represents an attractive buying opportunity.

For important information, please see the Important Disclosures beginning on page 35 of this document.

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Table of Contents Executive Summary .................................................................................................... 3

Overview of operations ............................................................................................... 5

Investment Thesis .................................................................................................... 10

Risks ......................................................................................................................... 20

Financial analysis and outlook ................................................................................. 22

Valuation .................................................................................................................. 26

Appendix A: Management ......................................................................................... 31

Appendix B: Ownership ............................................................................................. 32

Appendix C: Competitors .......................................................................................... 33

Appendix D: CV Sciences financials .......................................................................... 34

Charlotte's Web Holdings, Inc.Initiation of Coverage

Buy Target Price C$21.00 | 19 September 2018 Consumer Products 2

3

Executive Summary

Charlotte’s Web is a market leader in the production and distribution of wellness

products made from cannabidiol (CBD), a compound extracted from industrial hemp.

Industrial hemp is a species of cannabis with no more than a 0.3% concentration of

THC – not marijuana – which is a key distinction, as this definition allows Charlotte’s

Web to sell its products legally across the United States and in many countries. In our

view, this positions the company as a health and wellness product distributor, not a

cannabis company, which we believe allows for a broader base of investors otherwise

hesitant to invest in the cannabis industry.

Based in Boulder, Colorado the company is the market leader in hemp-extracted CBD

supplements, with a 14% market share in 2017, selling products including tinctures,

topical products and capsules. The company participates in the hemp-derived CBD

supplement market, which is expected to grow to $1.6 billion, representing a CAGR of

55% over 2016-2021, according to a report from the Brightfield Group, “Hemp-

Derived CBD, Market Overview & Analysis”.

We believe the strong brand positioning of Charlotte’s Web, the company’s vertical

integration, and its growing retail presence, has the company well positioned to

exceed industry average growth rates and deliver healthy returns to shareholders. As

such, we are forecasting revenue to grow from $40 million in 2017 to $297 million in

2020, and EBITDA from $14 million in 2017 to $99 million in 2020 as CBD products

gain more acceptance, from consumers as well as from federal and state

governments.

Investment highlights:

Below we highlight four key investment drivers:

1. Rapid market growth expected amidst transformational regulation

2. Market share expansion expected to continue as CBD acceptance increases

3. Robust innovation pipeline positions Charlotte’s Web for long-term growth

4. Vertical integration should lead to robust EBITDA margins

Rapid market growth expected amidst transformational regulation

While legal ambiguities exist, the operations of Charlotte’s Web are legal in the United

States, where the company generates approximately 97% of its revenue. Importantly,

the distinction made in the Consolidated Appropriations Act between industrial hemp

and cannabis means Charlotte’s Web is able to deduct operating expenses related to

the production of its products. This is an important distinction from U.S. cannabis

companies, which are subject to section 280E of the Internal Revenue Code.

With that said, we believe the CBD supplements market is poised for robust growth

over our forecast period, as CBD supplement products become more widely accepted

at both the governmental and consumer level, with transformational regulation

expected to become law prior to the end of 2018. Most notably the 2018 Farm Bill,

which includes provisions to de-schedule industrial hemp as a Schedule I controlled

substance, is expected to be signed into law by President Trump prior to the end of

2018. We believe this improving regulatory environment is likely to open up support

for CBD products in the near term, giving us confidence in the sustainability of the

robust growth recently witnessed in the hemp-derived CBD supplement market.

Market share expansion expected to continue as CBD acceptance increases

Charlotte’s Web is the hemp-derived CBD supplements industry leader, with 14%

market share in 2017, almost double 2016 at 8%. We believe this is attributable to



4

the company’s strong brand recognition and positioning as a product of choice for a

number of larger niche and specialty healthcare retailers. The company plans to exit

2018 with over 3,000 retail partners which, along with continued growth in the

company’s e-commerce platforms, should allow Charlotte’s Web to continue to

expand its market share. Should regulations surrounding CBD products continue to

ease, we believe Charlotte’s Web is well positioned to add a mass-market retail

relationship, which is not included in our forecast and would further entrench the

company’s industry-leading status.

Robust innovation pipeline positions Charlotte’s Web for long-term growth

Currently, Charlotte’s Web offers ~23 SKUs in a number of different forms and

compositions. We believe the company will be able to leverage its proprietary hemp

strains and extraction capabilities to develop new, high-growth products over the

course of our forecast period. The company intends to introduce 5-7 new products

over the next two years, and over the long term, the company’s new product pipeline

is expected to expand the company’s applications into areas such as sports medicine,

topical cosmetics, CBD beverages and pet treats. The company’s new products which

may not all necessarily contain CBD, which we believe will open up the Charlotte’s

Web brand to a group of consumers previously hesitant to use the company’s

products.

Vertical integration should lead to robust EBITDA margins

Charlotte’s Web is fully vertically integrated, controlling its product from seed to

shelves. We believe this is instrumental and allows the company to generate robust

EBITDA margins in the 35-37% range. This is roughly 500-700 bps ahead of CV

Sciences (CVSI | Not Rated), the company’s largest competitor and owner of the

PlusCBD brand, which produces product made from externally sourced hemp. Through

its ownership of plant genetics as well as proprietary extraction and conversion

processes, the company can scale the cultivation of its proprietary hemp plants in a

cost-efficient manner which, coupled with its premium pricing ability, should allow

Charlotte’s Web to continue to generate industry-leading margins.

Compelling valuation given margin profile and robust revenue

We are initiating coverage with a BUY rating and C$21.00 target price. Our target is

derived using a discounted cash flow analysis, which results in a valuation of $20.88

per share. Our target implies 16.5x our 2020 EBITDA estimate of $99 million, which

we convert to Canadian dollars to account for the company’s CSE-listed share price. In

our view, Charlotte’s Web represents an attractive buying opportunity at current levels,

trading at 12.0x our 2020 EBITDA estimate of $99 million. This represents a discount

to health and wellness-focused supplement manufacturers, which trade at 13.2x

2020 EBITDA estimates. We believe Charlotte’s Web should be valued at a premium

to its peer group as we think the company is positioned for higher near-term growth

than its peers. As well, Charlotte’s Web maintains greater financial flexibility given its

$72 million net cash position, which leaves the company fully funded over our

forecast period to achieve our estimates.

Potential risks (see Risks section on page 20 for details)

CBD research discovers negative side effects or lack of efficacy

FDA increases intervention in the operations of the company

2018 Farm Bill not signed into law

Agricultural operations risk

Increased industry competition



5

Overview of operations

Charlotte’s Web is a market leader in the production and distribution of wellness

products made from cannabidiol (“CBD”), which is a compound extracted from

industrial hemp. Based in Boulder, Colorado the company currently markets its

products to customers across the United States and, on a limited basis,

internationally. Importantly, Charlotte’s Web distributes extracts made from industrial

hemp, which is hemp that contains no more than a 0.3% concentration of

tetrahydrocannabinol (“THC”), the psychoactive compound found in cannabis. In our

view, this positions the company as a health and wellness product distributor and not

a cannabis company, which may ease concerns for some investors.

The company markets products through its owned brand, Charlotte’s Web, which

currently offers ~23 SKUs with a focus on CBD extracts. Products are sold in

numerous forms, including tinctures (liquids/drops), capsules, and topical products,

along with a product line specifically designed for canines. Charlotte’s Web is the

industry leader in the high-growth, hemp-derived CBD extracts market, with an

estimated 14% market share in 2017, up from 8% in 2016, in a market that is

forecasted to grow at a 55% CAGR over 2016-2021.

Figure 1: Current product portfolio

Source: Company web site

Since 2014, Charlotte’s Web has grown its cultivation practices to three states

(Colorado, Kentucky, and Oregon), while selling its products both online and through

2,700 retail partners. The company generated revenue of $40 million in 2017, and

EBITDA of $14 million.

Figure 2: Historic revenue Figure 3: Historic EBITDA and EBITDA margin

Source: Company reports, Canaccord Genuity estimates Source: Company reports, Canaccord Genuity estimates

Capsules Cream PawsCBD IsolateExtract Oil

15

40

16

30

0

5

10

15

20

25

30

35

40

45

2016 2017 H1/17 H1/18

$ m

m

2

14

5

1114%

35%

30%

35%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

5

10

15

20

25

2016 2017 H1/17 H1/18

$ m

m

Charlotte’s Web is the industry leader

in hemp-derived CBD extracts, with a

market share of 14% in 2017



6

Vertically integrated model

Importantly, Charlotte’s Web is fully vertically integrated, allowing the company to

maintain control over its products from seed to shelves. The company leases or has

contracts in place for over 300 acres of agricultural farmland in Colorado, Kentucky,

and Oregon, which is used to cultivate industrial hemp. In Colorado, the company

owns the cultivation, as the state has progressive regulations which allow for

commercial hemp cultivation. In Kentucky and Oregon, the company uses contract

manufacturing, partnering with farmers licensed under the state’s pilot programs. In

2018, Charlotte’s Web expects to produce 250,000-350,000 pounds of industrial

hemp, up from 63,000 pounds in 2017. While we do not expect the company to sell

through the entirety of its 2018 harvest in the same fiscal year, we estimate that

production of 250,000-350,000 pounds of industrial hemp would generate

approximately $160-220 million in revenue.

Furthermore, Charlotte’s Web owns and operates a 40,000 square foot

manufacturing facility, as well as a warehouse and distribution center in Colorado,

where the company extracts CBD from its harvested industrial hemp. The company

utilizes both carbon dioxide and alcohol extraction processes at the facility, both of

which are proprietary. This facility currently has the capacity to bottle 16,000 30 mL

bottles or 8,000 100 mL bottles per day.

Figure 4: Breakdown of 2018 cultivation acreage by state

Source: Company reports, Canaccord Genuity estimates

Charlotte’s Web also operates a 2,800 square foot plant breeding facility, where it

owns the genetics and cultivates its most popular strain of hemp plants. The company

has developed a feminized seed protocol, which allows for greater standardization

across the company’s hemp production, while also providing greater scalability. These

proprietary genetics consistently produce a CBD:THC ratio that is far superior to that

of the competition, with only a limited number of cannabis strains even approaching

this ratio. In addition to the company’s genetics, the company’s extraction and

conversion processes, as well as designs, are also proprietary. In our view, the

company’s proprietary genetics and breeding operations allow the company to scale

its cultivation in a manner which would be difficult to replicate through a simple plant

cloning process, which is common throughout the industry.

The company currently sells its products both online and through brick-and-mortar

retail channels, with e-commerce sales accounting for approximately 64% of sales in

2017. The e-commerce strategy currently has roughly 200,000 “opt-in” email

45%

32%

23%

Colorado Kentucky Oregon

Current cultivation acreage: 300 ac.

Fully vertically integrated, maintaining

control over its products from seed to

shelves

Proprietary genetics and breeding

operations allow for improved

scalability in cultivation



7

customers, and recently has added an average of 10,000 new email customers every

month. In addition to having products available through the company website

(www.cwhemp.com), Charlotte’s Web products are also listed through multiple vendor

sites. The e-commerce strategy allows customers to sign up for a subscription

program, and importantly, approximately 80% of sales are generated from repeat

customers, demonstrating the strength of the company’s brand power.

Figure 5: Overview of assets

Source: Company reports

Company history

Charlotte’s Web has an inimitable and meaningful history that is important to the

branding and overall purpose of the company and which, in our view, has led to the

company’s industry-leading position and 14% market share.

Figure 6: Company history timeline


The company was founded by seven brothers from Colorado, known as the Stanley

brothers. The brothers began working with cannabis and researching its medicinal

properties after their uncle was diagnosed with cancer in 2008. In 2012, the Stanley

brothers met Charlotte Figi, a 5-year old girl with a rare form of epilepsy who suffered

from over 300 seizures a day. With early research showing the applications of CBD as

an antiepileptic, the Stanley brothers developed a hemp-derived CBD extract for

Charlotte which, after being administered by her parents, substantially improved her

condition. Inspired by Charlotte’s story, the brothers founded Stanley Brothers Inc. in

2013 and began distributing high-CBD, low-THC hemp-derived extracts under the

brand Charlotte’s Web. In mid-2018, the Stanley brothers changed the name of the

company to Charlotte’s Web Holdings Inc., representing the inspiring story that

propelled the company into the spotlight.

Facility (all in Colorado) Size (sq. ft.)

Administrative office 7,100

HQ/processing/R&D 40,100

Distribution 23,000

Horticulture/breeding 6,700

Customer service 3,000

Greenhouse 16,000

Greenhouse & office 16,000

2008Stanley Brothers begin researching medicinal

properties in plants

August 2013CNN documentary by Dr. Sanjay Gupta airs

on CNN featuring Charlotte Figi

December 2013Stanley Brothers Inc. is

founded

March 2014The company

establishes its first commercial cultivation

operation

2012Stanley Brothers first meet Charlotte Figi

August 2018As Charlotte’s Web, the company goes public and begins

trading on the CSE as CWEB

2010The brothers begin

breeding plants with a high-CBD, low-THC

content

May 2015The company expands product line to include

health and wellness products

June - Dec 2015The company plants

its first crops in Kentucky; moves to current 40,000 sq.ft.

manufacturing facility

2008 2010 2013 20142012 20182015 2016 2017

June 2017Expands operations to include a 23,000 sq. ft.

storage and distribution facility



http://www.cwhemp.com/

8

Charlotte’s Story

Charlotte’s Web products achieved mass consumer acceptance following the airing of

a CNN documentary by Dr. Sanjay Gupta. The documentary followed 5-year-old

Charlotte Figi and her parents. Charlotte (whom the company is named after) has a

form of epilepsy called Dravet Syndrome and as a result suffered from more than 300

seizures a day. Charlotte’s parents had been looking for a treatment and decided to

try CBD, given the published research indicating the applications for CBD as an

antiepileptic. The Stanley brothers, who had been developing a strain of hemp high in

CBD content and low in THC, created an extract from this plant which Charlotte’s

parents administered, following approval from her doctor. Within a week, Charlotte’s

well-being had significantly improved.

Following the airing of this documentary, Charlotte’s Web had a waitlist for its product

of over 15,000 families. We believe the media attention received by Charlotte’s Web

in relation to the CNN documentary has helped propel the company to its industry-

leading market share. Furthermore, Charlotte’s story was instrumental in developing

broader consumer acceptance of CBD and its potential applications. Today, while still

being used as an antiepileptic, CBD is typically used to promote internal stability and

equilibrium in the body. As such, its various benefits are said to include relieving

stress, providing users with a sense of calm and focus, and helping in the recovery of

exercise-induced inflammation.

About hemp & CBD

To understand why hemp-derived CBD has been shown to have various positive

effects on the human body, it is important to understand the science behind CBD and,

more importantly, the endocannabinoid system (“ECS”). First, we will discuss the

difference between hemp and marijuana, which leads to our classification of

Charlotte’s Web as a consumer-packaged goods company, and not a cannabis

company.

A key distinction between hemp and marijuana

As previously mentioned, we believe Charlotte’s Web to be a distributor of health and

wellness products and not a cannabis company. The key distinction is in the definition

of cannabis. While it is broadly assumed to refer to marijuana, which is cannabis with

a high level of THC, the term cannabis refers to the species of plant called Cannabis

sativa (L.). Hemp is also derived from the cannabis species; however, it is defined as

being cannabis with no more than a 0.3% concentration of THC. This difference is

substantial, as THC is the main psychoactive cannabinoid found in cannabis. The lack

of legal distinction between marijuana and hemp is the reason why hemp has been

included in the United States Controlled Substances Act (“CSA”) as a Schedule I drug,

yet is still allowed to be legally transported and sold across state lines.

While research remains in its infancy, CBD efficacy is well documented

Given the fact that the shift in sentiment behind cannabinoids has only ramped up

within the last decade, the research behind the applications for hemp and hemp

products remains in its infancy. That being said, there are numerous early indicators

that point towards the efficacy of CBD for various applications, one of the first of

which being US Patent 6,630,507 issued in October of 2003. While this patent

outlines the multiple applications for cannabinoids, it notes the potential application

for CBD as an antiepileptic.

More recently the FDA approval of the drug Epidiolex, developed by GW

Pharmaceuticals, further supports the efficacy of CBD, as it was approved for the

treatment of seizures associated with Lennox-Gastaut and Dravet syndrome, two rare

forms of epilepsy. Additionally, we believe there are eight other drugs currently

conducting clinical research on treatments for various conditions such as epilepsy and

Cultivates in three U.S. states with

products sold in 2,700 retail locations



9

schizophrenia. In our view, the increasing number of clinical studies being conducted

with CBD is strongly supportive of the efficacy of the compound.

Figure 7: List of drugs with CBD in development

Source: World Health Organization CBD Critical Review Report, Canaccord Genuity estimates

Lastly, in terms of the safety of the compound, the World Health Organization (WHO)

recently published a Critical Review Report on CBD. Importantly, it found the

compound to have a good safety profile, with the only adverse effects resulting from

drug-drug interactions with other patient medication, while noting that CBD exhibits no

effects that would indicate any potential for substance abuse or dependence. It was

also mentioned that there is early evidence that the compound has antitumor,

neuroprotective, antiepileptic, antipsychotic, anti-inflammatory and anti-asthmatic

properties.

The endocannabinoid system and the science behind the efficacy

The ECS is a regulatory system in the human body that works to promote

homeostasis, which is internal stability and equilibrium in the body. The ECS contains

two main cannabinoid receptors (CB1 & CB2) as well as cannabinoids, which are

either produced in the body (endocannabinoids) or can be found in different foods in

our diet. These endocannabinoids bind to activate the cannabinoid receptors. CBD

impacts the ECS by inhibiting the metabolic enzymes that break down

endocannabinoids, thereby increasing the levels of endocannabinoids in the body and

promoting more activity in the cannabinoid receptors.

In addition to promoting homeostasis, the ECS has been found to be involved in other

processes such as sleep, digestion, energy, memory, metabolism, neuro-protection,

hormones and heart function.

Management and ownership

Charlotte’s Web is led by a strong and experienced management team with an

emphasis on consumer-packaged goods experience. CEO Hess Moallem was

previously a consumer-packaged goods executive, and most recently General Counsel

at Onnit Labs. CFO Rich Mohr has over 25 years’ experience as a CFO with Nasdaq-

and TSX-listed companies.

Drug name Company Status Intended Treatment

EpidiolexGW

Pharmaceuticals

Approved by

FDA

Seizures in patients with Dravet and Lennox-

Gastaut syndromes

ArvisolEcho

Pharmaceuticals

Phase I clinical

study

Various neurological disorders, including

schizophrenia and epilepsy

ZYN002Zynerba

Pharmaceuticals

Phase II clinical

study

Fragile X Syndrome, Epilepsy and

Developmental and Epileptic Encephalopathies

N/A Bionorica N/A N/A

N/ASTI

Pharmaceuticals

Phase II clinical

studyMarijuana-induced subjective effects

N/AINSYS

Pharmaceuticals

Phase II clinical

study

Childhood absence seizures for Prader-Willi

syndrome

N/AINSYS

Pharmaceuticals

Phase III

clinical studyInfantile spasm-type seizures

PTL101PhytoTech

Therapeutics

Phase I clinical

studyPediatric intractible epilepsy

N/A Ananda ScientificPhase I clinical

studyN/A

World Health Organization has recently

found the CBD compound to have a

good safety profile



10

The Stanley brothers remain involved with Charlotte’s Web, with Joel Stanley serving

as Chairman of the Board of Directors, and Jared Stanley serving as VP Cultivation as

well as a member of the Board. We estimate that the Stanley brothers own ~34% of

the shares outstanding, while insiders and management own ~10% of the shares

outstanding.

Investment Thesis

In our view, Charlotte’s Web is well positioned to expand its already industry-leading

market share, given the following:

1) Rapid market growth expected amidst transformational regulation

2) Market share expansion expected to continue as CBD acceptance increases

3) Robust innovation pipeline positions Charlotte’s Web for long-term growth

4) Vertical integration should lead to healthy EBITDA margins

Rapid market growth expected amidst transformational regulation

While sentiment and awareness as it relates to industrial hemp continues to improve,

regulations in the United States remain ambiguous. As of the writing of this report,

industrial hemp is classified as a Schedule I drug as defined by the Controlled

Substances Act (“CSA”), and thus the laws and regulations regarding industrial hemp

are enforceable by the Drug Enforcement Administration (“DEA”). As well, while many

hemp-derived CBD products are currently being marketed as dietary supplements, the

viewpoint of the Food and Drug Administration (“FDA”) is that CBD is a drug, requiring

the appropriate approval processes to be sold in the United States.

The landscape the company operates in is quite complex; therefore, we have provided

an in-depth discussion of the legal complexities below. While this analysis is necessary

to understanding the risk profile of the company, it is important to note that in the

United States, it is currently legal to:

1. Cultivate and produce hemp in 41 U.S. states,

2. Distribute hemp between all U.S. states

3. Sell hemp and hemp products anywhere in the U.S.

As such, while legal ambiguities exist, the operations of Charlotte’s Web are legal in

the United States. We present a brief summary in the table below of the key

regulations relating to hemp, ahead of the more in-depth analysis below.

Stanley Brothers maintain 34%

ownership while management and

insiders own 10%

While legal ambiguities exist, the

operations of Charlotte’s Web are legal

in the United States



11

Figure 8: Summary of hemp-related legislation in the United States


The main reason behind the strict regulation of industrial hemp is that it is technically

cannabis. While the intention behind the laws is to regulate marijuana, the lack of

legal distinction between marijuana and industrial hemp has resulted in tight

restrictions imposed on industrial hemp, notwithstanding the fact it contains no

psychoactive compound and is not addictive or dangerous. Despite the legal

ambiguity, 2018 is proving to be a transformational year for the legalization of hemp,

with numerous bills pushing for less regulation of hemp and its extracts. We believe

the passing of these bills will be a transformational event not just for Charlotte’s Web,

but for the entire hemp industry, which has experienced unjust and strict regulation

for close to a century. In our view, the removal of this legal overhang is a key inflection

point for industrial hemp, and we expect it to allow the industry to flourish.

Brief history of hemp in the United States

The cultivation of hemp in the United States traces its roots as far back as the early

1600s, when settlers of an early English settlement in Virginia were required by law to

grow hemp to produce rope, sails and clothing. In fact, throughout the 17th and 18th

centuries, hemp production was required by farmers across many colonies, as its

applications were widely used in the production of warships and merchant vessels, for

which there was substantial demand at the time. Cultivation of hemp began to decline

in the 19th century, as the demand for these ships requiring hemp was displaced by

demand for steam ships.

Regulation title Effective Summary of hemp-related regulation Impact on industrial hemp

U.S. Controlled Substances Act May 1, 1971

Cannabis (inclusive of hemp) classified as a

Schedule I drug with cultivation, manufacturing and

distribution strictly regulated by the DEA

Industrial hemp scarcely cultivated in the

United States until 2014

Agricultural Act of 2014

(2014 Farm Bill)February 7, 2014

Introduces definition of industrial hemp and allows

for cultivation and marketing of hemp under an

Agricultural Pilot Program

U.S. states now allowed to regulate hemp

cultivation; currently 36 states with pilot

programs in place

Consolidated Appropriations

Act (2015-2018)December 16, 2014

Specifies that no federal funds can be used to

prohibit industrial hemp provided it was cultivated

in accordance with the 2014 Farm Bill

Hemp and hemp products can be sold

anywhere in the United States without the

intervention of federal administrations

Agricultural Improvement Act

of 2018 (2018 Farm Bill)

TBD

(estimated prior to

the end of CY 2018)

Industrial hemp de-scheduled in the U.S. CSA;

U.S. states to regulate hemp production while the

bill provides no authorization to interfere with

interstate commerce of hemp and hemp extracts

Cultivation, production, distribution and

marketing of hemp allowed across the U.S.,

creating legal clarity across all U.S. states

The lack of legal distinction between

marijuana and cannabis has resulted in

the strict regulation of hemp



12

Figure 9: Legal timeline for hemp in the United States


In the 1900s, regulation in the United States would cause further hemp production

declines, first with the Pure Food and Drug Act of 1906 which required drug labelling

to list ingredients that were considered to be “addictive” or “dangerous”. This list of

ingredients included 10 drugs, in addition to cannabis (whose definition included

industrial hemp), including morphine, cocaine, heroin and chloroform. Further

restrictions on cannabis occurred with the passing of the Marihuana Tax Act of 1937

(“MTA”), which regulated the importation, cultivation, possession and distribution of

cannabis in the United States. A few decades thereafter, in 1970, the Controlled

Substances Act was signed into law by Richard Nixon. This act listed cannabis as a

Schedule I controlled substance, imposing strict regulations on its cultivation.

Introduction of the 2014 Farm Bill and the Hemp Pilot Program

A key breakthrough in the distinction between marijuana and hemp occurred with the

passing of the Agricultural Act of 2014, also known as the 2014 Farm Bill.

Importantly, the bill included the definition of industrial hemp, defining it as the plant

Cannabis sativa L. with a THC concentration of not more than 0.3%. As well, the Farm

Bill established an Agricultural Pilot Program to study the growth, cultivation and

marketing of industrial hemp. It allowed for the cultivation of industrial hemp by either

an institution of higher education or a U.S. state’s department of agriculture. While the

bill laid out some preliminary framework for the cultivation of industrial hemp, it

remained a Schedule I controlled substance and as such, enforceable by the DEA at

the federal level.

Consolidated Appropriations Act, 2015-2018

Given the high degree of ambiguity with the Hemp Pilot Program and the 2014 Farm

Bill, former US President Barack Obama signed into law the Consolidated and Further

Continuing Appropriations Act of 2015. The act prohibited federal funds from

contravening the Hemp Pilot Program. Obama then signed into law the Consolidated

Appropriations Act of 2016, which further specified that federal funds could not be

used to intervene in the transportation, processing, sale or use of industrial hemp, so

long as it is cultivated in accordance with the Hemp Pilot Program.

Since taking office, President Donald Trump has signed into law the Consolidated

Appropriations Acts of both 2017 & 2018, which have the same language with

respect to the Hemp Pilot Program as the Act of 2016. In our view, this bipartisan

support for the hemp industry is a strong indication that the sentiment around hemp

Early 1600Settlers in Virginarequired by law to

grow hemp; used in the production of

warships

1970Controlled Substances

Act lists cannabis, including hemp, as a

Schedule I drug

1998The U.S. begins to import food-grade

hemp products

2007Two farmers in North

Dakota granted licenses to cultivate

hemp

1937Marihuana Tax Act

introduced, regulating the importation,

cultivation, possession and distribution

1700sMany American colonies legally

required settlers to grow hemp

20142014 Farm Bill signed into law, allowing for

the cultivation and marketing of hemp

under U.S. state pilot programs

2015-2018Consolidated

Appropriation Acts prohibit federal funds from interfering with

the Hemp Pilot Program

1600 1700 19701900 20182000 2014 2015

20182018 Farm Bill passes senate, if signed into

law it would de-schedule hemp from

being a Schedule I drug

2014 Farm Bill allowed for the

cultivation of hemp under state

regulated agricultural pilot programs



13

has changed in the United States and that the government, at the federal level, is

willing to support the burgeoning industrial hemp industry.

2018 Farm Bill to remove industrial hemp from the marijuana definition

The Agricultural Improvement Act of 2018, otherwise known as the 2018 Farm Bill, is

the most important piece of legislation for the industrial hemp industry and is

currently working its way through Congress. There are three key items proposed by the

bill that are very positive for the production of industrial hemp in the United States (all

items below are included in the Hemp Farming Act, which is included in the senate

version of the 2018 Farm Bill):

1. The removal of hemp (and all derivatives/extracts) from the definition of

marijuana, effectively de-scheduling hemp and removing it from the purview

of the Controlled Substances Act. As well, this classifies hemp as an

agricultural commodity allowing it to be distributed and sold between states.

2. Allow U.S. states to regulate the production of hemp within their own

jurisdiction.

3. The bill does not authorize any interference with the interstate commerce of

hemp and hemp extracts.

After passing the House of Representatives on June 21, 2018, the bill had

overwhelming support in the Senate and passed with a vote of 86-11 on June 28,

2018. A conference committee is now reconciling the amendments made to the bill in

the House and Senate before bringing it to President Trump to be signed into law,

which is expected to occur later in the year. Importantly, the contentious differences

being reviewed are of no relation to the hemp regulation put forth.

In our view, the anticipated passing of the 2018 Farm Bill is a transformational event

for Charlotte’s Web and more broadly the hemp industry, for three key reasons:

1. It would allow for the cultivation, production, distribution and marketing of

hemp-derived products across the United States.

2. The de-scheduling of hemp provides increased legal clarity as the industry will

no longer need to rely on the annual renewal of the Consolidated

Appropriations Act to ensure the DEA does not intervene in its operations.

3. The removal of the stigma associated with being a “Controlled Substance” is

expected to increase consumer acceptance as well as household penetration,

while increasing the likelihood of Charlotte’s Web securing distribution

agreements with mass market retailers.

2018 Farm Bill set to remove hemp

from the purview of the Controlled

Substances Act

The pro-hemp version of the 2018 Farm

Bill passed the senate with a vote of

86-11



14

Figure 10: U.S. states allowing the legal cultivation of hemp

Source: mapchart.net, Canaccord Genuity

The passing of the 2018 Farm Bill is a key step in supporting the development of the

industry, as the laws currently in place are too ambiguous to allow individual states to

apply them consistently. A prime example of this is in Texas, where the Department of

State Health Services announced it would ban the sale of all CBD products and seize

all products containing CBD from store shelves earlier in the year. The department

recently put a hold on the action, as there was strong disapproval among the public

given the legal ambiguity. The department indicated it would wait for further legislative

clarity before carrying out further action. In our view, passing the 2018 Farm Bill would

remove any ambiguity relating to the legality of hemp products.

Industrial hemp and section 280E of the Internal Revenue Code

Section 280E of the Internal Revenue Code states that companies cannot deduct any

expenses that relate to the trafficking of a Schedule I controlled substance. While

industrial hemp is still classified as a Schedule I controlled substance, it is important

to note that the Consolidated Appropriations Act prohibits federal funds from

intervening in the transportation, processing, sale or use of industrial hemp, so long

as it is cultivated in accordance with the Hemp Pilot Program. As such, we believe

Charlotte’s Web falls outside of the scope of the Internal Revenue Services’

enforcement of section 280E. Furthermore, if the senate version of the 2018 Farm

Bill becomes law, industrial hemp will no longer be a Schedule I controlled substance,

and will no longer be within the scope of section 280E.

FDA and the marketing of a dietary supplement

While the viewpoint held by the FDA on CBD provides further legal complications for

Charlotte’s Web, we believe this to be non-material given the increasing amount of

research suggesting that CBD is considered a safe product.

In the United States, the regulation governing food and drugs is the Federal Food,

Drug and Cosmetic Act (“FDCA”) while the Dietary Supplement Health and Education

Act (“DSHEA”), which is an amendment to the FDCA, defines and regulates dietary

supplements. Both are enforced by the FDA, and the stance of the Administration is

that CBD cannot be marketed as a dietary supplement as there is evidence the FDA

accepted an Investigational New Drug application (“IND”) for a drug containing CBD in

2006. Under the DSHEA, an IND containing CBD would exclude CBD from being a

dietary supplement.



15

To date, the FDA has issued a warning letter to Charlotte’s Web which focused on the

health benefits and claims being made through the marketing on its website.

Charlotte’s Web has since adjusted the website and does not make any claims that its

products are safe and effective as treatment for any conditions.

In our view, there are a variety of reasons why the FDA’s stance is non-material to the

operations of Charlotte’s Web:

1. Under the 2018 Farm Bill, there is no authorization to interfere with the

operations of companies selling hemp and hemp extracts, meaning the FDA

cannot intervene provided the company is selling hemp-derived extracts

containing CBD.

2. Cannabis and its cannabinoids have been used therapeutically and

consumed for centuries, which provides strong support for CBD being a

dietary supplement.

3. Charlotte’s Web firmly believes there is no evidence that substantial clinical

investigations were made public prior to its products being marketed as a

dietary supplement.

4. There is increasing evidence that is supportive of CBD being a safe product,

highlighted by WHO’s Critical Review of CBD in June of 2018, which found

that CBD did not exhibit any effects in humans that were indicative of any

abuse or dependence potential, and found it to be well tolerated with a good

safety profile. As well, as per Congressional finding 13 in the DSHEA, the

federal government’s intention is not to impose unreasonable regulatory

barriers to slow the flow of safe products to consumers. As such, we believe it

is outside the scope of the FDA to explore further legal action against

Charlotte’s Web.

In summary, while the legal landscape in the United States is ambiguous and at times

challenging to navigate, we believe the new regulations, which are expected to

become law in late 2018, are positive for Charlotte’s Web and more generally the

hemp industry. Following de-scheduling, we expect the company to expand and

diversify its cultivation within the United States, increasing its seed production

capacity while reducing its reliance on a small number of geographic regions.

In our view, the company is poised to benefit from the improving regulations as the de-

scheduling of hemp is expected to remove the Controlled Substances overhang on the

product. This should allow Charlotte’s Web to increase household penetration while

expanding into mass market retailers that would not support selling products

containing a Schedule I drug off the shelf. We believe the company’s industry-leading

market share and management’s strong consumer-packaged goods experience

provide the company with the best positioning in the industry to be a pioneer in new

mass-market retail channels.

Market share expansion expected to continue as CBD acceptance increases

While the market for CBD extract products is forecast to grow at a robust 55% CAGR

between 2016 and 2021 (according to Brightfield Group), Charlotte’s Web has more

than doubled the industry growth rates, with revenue increasing 172% YoY in 2017 to

$40 million. We are forecasting continued market-leading revenue growth of 100% in

2018 to $80 million. In our view, as CBD products gain further consumer acceptance,

Charlotte’s Web’s strong brand positioning, industry-leading market share, and

commitment to product quality, have the company well positioned to deliver robust

growth exceeding the industry average.

We believe Charlotte’s Web is poised to

capture market share as CBD products

gain further consumer acceptance



16

Figure 11: 2016 Hemp-derived CBD supplement market segmentation


Charlotte’s Web almost doubled its market share of the CBD supplement market in

2017, growing its market share to an estimated 14% from 8% in 2016. Outside of

Charlotte’s Web and its largest competitor Plus CBD, which we estimate has

approximately 8% market share in 2017, no other brand has more than 2% market

share of the $287 million (and growing) CBD supplements market. While PlusCBD,

which is owned by CV Sciences (CVSI-US | Not Rated), continues to gain share in the

industry, we believe the growth of Charlotte’s Web is outpacing that of PlusCBD, and

Charlotte’s Web continues to expand its market leadership position, as growth in

website traffic continues to outpace that of the company’s largest competitor.

Figure 12: Hemp-derived CBD website traffic


In our view, the complex regulatory framework in the United States has been the key

driver of the high degree of fragmentation in the industry to date. State-regulated pilot

programs have created a barrier to entry for hemp-derived CBD producers to scale

operations nationally. While regulation of hemp is still expected to exist at the state

8%

5% 2%2%

2%

80%

CW Hemp

PlusCBD Oil

HempMeds

CannazAll

Elixinol

Other

0

100

200

300

400

500

600

Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18

Web

site

vis

its

('0

00

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Charlotte's Web PlusCBD

E-commerce sales accounted for 64%

of 2017 revenue; expecting this to be

50% over our forecast period



17

level under the 2018 Farm Bill, we believe the de-scheduling of hemp will reduce the

industry’s barriers to entry. With that said, we believe the proprietary genetics and

operations of existing producers are key barriers to entry for the industry. For

Charlotte’s Web, the company’s proprietary genetics allow it to contract cultivation

globally while consistently producing products with less than 0.3% THC. We believe it

will be difficult for entrants to the industry to scale operations as efficiently as

Charlotte’s Web does, as reliance on outsourced cultivation, with unknown origins of

hemp genetics, may result in hemp extracts with a THC concentration above 0.3%. In

our view, this will force potential entrants to invest in owned genetics. As such, despite

the evolving regulatory landscape, we believe Charlotte’s Web remains poised to

capture share of the hemp-derived CBD market.

Charlotte’s Web expected to be a pioneer in brick-and-mortar expansion

In 2017, e-commerce accounted for 64% of Charlotte’s Web’s revenue, with brick-

and-mortar sales accounting for the remainder. While not included in our estimates,

we envision this sales breakdown moving to a more balanced 50-50 split over the

course of our forecast period as competitors gain distribution in larger mass market

retailers.

Figure 13: Charlotte’s Web hemp-derived CBD market share estimate


We believe one of the keys to the company’s growth will be adding incremental brick-

and-mortar retail locations. The company currently sells its products in over 2,700

locations, with a target of 3,000 locations by the end of 2018. Today, the company

has focused on selling products through smaller, niche, health focused grocery store

chains or natural health stores, such as Thrive Market, Lucky’s Market, Erewhon,

Fresh Thyme, New Seasons, Lassens and Earth Fare.

Furthermore, Charlotte’s Web’s first-mover advantage in developing retail

relationships, along with its exclusive distribution agreement with the leading United

States natural health product distributor, has the company well positioned to remain

the market leader, as new competitors potentially look to enter the market. In fact, we

believe Charlotte’s Web will continue to increase its market share as consumer

acceptance of CBD products increases.

Mass market represents meaningful incremental upside to our estimates

As CBD supplements gain further consumer acceptance, and perhaps as soon as late

2018 pending President Trump’s signing of the 2018 Farm Bill, we believe larger

national grocery and drug store chains will look to partner with Charlotte’s Web. This

should allow the company to continue to gain market share and grow revenue well

above industry average growth rates. Furthermore, as Charlotte’s Web products

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2016 2017 2018E 2019E 2020E 2021E

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Products currently sold in 2,700 retail

locations with plans to be in 3,000 by

the end of 2018



18

become increasingly sold through mass market channels, we believe this could lead

to an acceleration of industry sales, as the consumer becomes more aware and

accepting of the benefits of CBD.

In our view, Charlotte’s Web is very well positioned to be the first hemp-derived CBD

company to sell through mass market retailers. However, we have not included this in

our estimates and believe that it would add meaningful upside to our valuation. We

estimate that a mass market retailer would generate stronger sales per store

compared to Charlotte’s Web’s current retailers, while being slightly dilutive to EBITDA

margins. As such, we estimate that securing distribution at a mass market retailer

with 1,000 stores could generate approximately $5.5 million in incremental EBITDA

annually. We view this possibility as likely over our forecast period as the three largest

retailers in the United States have a combined store network that is upwards of 7,000

stores.

Figure 14: Sensitivity analysis of incremental EBITDA for mass market distribution ($000s)


International expansion and acquisition potential remain untapped

While Charlotte’s Web predominantly sells its products within the United States,

roughly 3% of sales in 2017 were in international markets. The company believes

international sales will represent ~10% of overall sales by 2019. We believe western

Europe will be the first area of international expansion for Charlotte’s Web, with the

company looking to partner with contract manufacturers to serve its international

customers.

Figure 15: International revenue projection


We believe as broader acceptance of CBD products occurs in North America, the

company will have ample growth opportunities within the United States market, which

should more than allow the company to reach its 2019 revenue targets. Therefore,

while we believe Charlotte’s Web’s international growth strategy represents an

attractive potential growth avenue, investor focus should remain on the growth

potential within the company’s core North American market.

# Stores

5,470 500 750 1,000 1,250 1,500

28.2% 2,395 3,593 4,790 5,988 7,185

30.2% 2,565 3,847 5,130 6,412 7,695

EBITDA % 32.2% 2,735 4,102 5,470 6,837 8,204

34.2% 2,905 4,357 5,809 7,262 8,714

36.2% 3,074 4,612 6,149 7,686 9,223

424

1,840

5,899

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2017 2018E 2019E

Inte

rna

tio

na

l Rev

enu

e ($

00

0s)

We believe Charlotte’s Web is poised to

be the first hemp-derived CBD company

to sell product through mass market

retailers

International revenue expected to

generate 10% of sales in 2019,

compared to 3% in 2017



19

Robust innovation pipeline positions Charlotte’s Web for long-term growth

Today, Charlotte’s Web offers 23 products in forms such as tinctures, capsules, and

topical products, along with a line of products focused on canines. The company

recently introduced an isolate tincture, containing only CBD and no THC, which we

believe will convert a subset of consumers who today may be hesitant to use the

company’s products. The company believes its current product line-up alone can

outpace the robust 55% average industry growth rates. This strong organic growth,

coupled with the introduction of 5-7 new products by the end of 2019, leaves the

company well positioned to reach its revenue targets, in our view.

Charlotte’s Web’s new product pipeline will expand the company’s applications into

areas such as sports medicine, topical cosmetics, CBD beverages and pet treats.

Furthermore, the company has the technology available to develop products which

specifically assist in various consumer need states, such as sleep deprivation as well

as stress and mood management. These broader product applications should allow

Charlotte’s Web to remain the preeminent consumer brand within the industry.

Figure 16: Current product list


Vertical integration should lead to robust EBITDA margins

As mentioned previously, Charlotte’s Web is fully vertically integrated, allowing the

company to control its product from seed to shelves. We believe this is instrumental

and allows the company to generate robust EBITDA margins in the 35-37% range.

Through the company’s proprietary feminized seed protocol, Charlotte’s Web has

developed a proprietary hemp strain with a high concentration of CBD and low THC

concentration which, importantly, is not more than 0.3%. The company, through its

ownership of plant genetics as well as proprietary extraction and conversion

processes, has the ability to scale the cultivation of its proprietary hemp plants in a

cost-efficient manner.

This, along with the company’s positioning as one of the highest-quality CBD

supplement providers, and the coinciding ability to price at a premium level, has led to

robust EBITDA margins. While we expect slight margin compression to occur in the

long run as increased competition leads to lower prices, we believe the company will

still be able to maintain its best-in-class margin profile.

In our view, Charlotte’s Web will continue to generate far better EBITDA margins than

the company’s publicly traded supplement manufacturing peers. In particular, we

believe this to be due in large part to the fact that Charlotte’s Web is a vertically

integrated producer that has been refining its cultivation operations for more than

four years. Given the low cost associated with the outdoor cultivation of hemp,

combined with the strong premium pricing, and premium branding of Charlotte’s Web,

CBD Oil Tinctures Bottle Size Retail Price (US$) Capsules Count Retail Price (US$)

Full Strength 30 mL $39.99 Hemp 30 $34.99

Full Strength 100 mL $99.99 Hemp 60 $59.99

Extra Strength 30 mL $74.99 Hemp Plus 30 $69.99

Extra Strength 100 mL $188.99 Hemp Plus 60 $119.99

Original Formula 30 mL $149.99

Original Formula 100 mL $274.99 Canine product Bottle Size Retail Price (US$)

CBD Isolate 30 mL $99.99 PAWS 30 mL $74.99

PAWS 100 mL 188.99

Topicals Size Retail Price (US$)

Hemp Infused Balm 0.5 oz $14.99

Hemp Infused Balm 1.5 oz $39.99

Hemp Infused Cream 2.5 oz $49.99

New product pipeline to expand

offering to include sports medicine,

topical cosmetics and pet treats

Vertical integration allows for EBITDA

margins in the 35-37% range



20

we expect the company to maintain above-average industry margins over our forecast

period.

Figure 17: Peer EBITDA margins

Source: Company reports, Canaccord Genuity estimates, Factset

*CV Sciences margins based on most recent quarterly results, as LTM EBITDA margin is not reflective of the company’s current performance

Furthermore, a portion of the proceeds from the company’s IPO will be used towards

mechanizing of the cultivation processes, and further research and development into

low cost production and seed feminization. We believe this will continue to support

strong EBITDA margins over the medium to long term.

Risks

CBD research discovers negative side effects or lack of efficacy

Despite the various reports and studies that have been conducted to evaluate the

efficacy of CBD, there remains limited conclusive evidence to support the many

claimed benefits of the cannabinoid. While the FDA’s recent approval of Epidiolex is a

testament to the proven efficacy of CBD, the scientifically proven applications remain

limited and there are multiple use cases which have yet to be empirically evaluated.

As such, while further evidence supporting the use of CBD can be very positive for the

company, the lack of evidence, or evidence that shows any negative side effects of

CBD, has the potential to substantially impact the demand for the products of

Charlotte’s Web.

FDA increases intervention in the operations of the company

Currently, CBD is not generally recognized as safe by the FDA, and the Administration

believes that CBD cannot be marketed as a dietary supplement as it was the subject

of investigation as a new drug prior to it being marketed as a dietary supplement.

Charlotte’s Web does not agree with the view of the FDA and believes that CBD was

marketed in a dietary supplement or food prior to the investigations being made

public. With that being said, increased involvement by the FDA would substantially

impact the company’s ability to market products containing CBD.

2018 Farm Bill not signed into law

The 2018 Farm Bill has passed both the House of Representatives, as well as the

Senate, and a conference committee is now reconciling the amendments made to the

bill in the House and Senate before bringing it to President Trump to be signed into

law. The bill contains key legislation related to the cultivation of hemp; most

importantly it would de-schedule hemp as a Schedule I drug under the Controlled

Substances Act. While the sentiment towards hemp is certainly improving and the

Farm Bill, including the legalization of industrial hemp, is very likely to become law,

failure of the pro-hemp version of the bill to become law would further complicate the

legal landscape that Charlotte’s Web operates in as cultivation of hemp is currently

regulated at the state level. As such, lack of federal regulation and varying state laws

may continue to create a complex legal environment for Charlotte’s Web to operate in,

potentially impacting the company’s ability to secure distribution, reducing end

demand.

Company name LTM EBITDA Margin

Supplement manufacturers

Jamieson Wellness, Inc. 19.8%

CV Sciences, Inc.* 30.8%

Glanbia Plc 13.0%

USANA Health Sciences, Inc. 15.8%

Blackmores Limited 18.6%

Group average 19.6%



21

Agricultural operations risk

While Charlotte’s Web is beginning to diversify its agricultural assets, now producing in

Colorado, Kentucky and Oregon, there are various risks related to the growing of

hemp that could hinder the company’s ability to produce high quality product. This risk

is further magnified by the fact that the company’s hemp is proprietary, and

Charlotte’s Web cannot easily source replacement hemp to manufacture its products.

The company relies on the outdoor grow of industrial hemp and so abnormal weather

patterns have the potential to negatively impact crop yields or even destroy plants.

Additionally, agricultural products are vulnerable to various diseases which can reduce

crop quality or even result in the death of the plant. There is no guarantee that crop

yield will remain consistent, and if the quality or quantity of production is negatively

impacted it may hinder the company’s ability to fulfill its demand.

Increased industry competition

Improving regulation that supports the production and distribution of hemp and CBD

products is attracting competitors to the industry. While the industry continues to

evolve, there may be competitors with greater financial or marketing resources that

look to enter the space. An increased level of competition may erode the company’s

competitive advantage if Charlotte’s Web is not able to adapt to the changing

competitive landscape accordingly. While Charlotte’s Web maintains a market

leadership position, increased distribution by a competitor at a mass market retailer

could negatively impact the demand for the company’s products, particularly if it is a

quality competitive offering that is priced below Charlotte’s Web.



22

Financial analysis and outlook

We are forecasting robust revenue and EBITDA growth from Charlotte’s Web over our

forecast period. While the CBD supplements market is expected to grow at a CAGR of

55% from 2016-2021, we believe Charlotte’s Web will outpace this growth, through

market share gains, new product introductions, and expanding retailer relationships.

We note the company almost doubled its market share in 2017, increasing to 14%

market share in 2017 from 8% in 2016. Furthermore, revenue increased 172% YoY in

2017, more than triple the industry growth rate.

We note, we do not include any acquisitions, or mass-market retail customer

relationships in our forecast, implying they may prove to be conservative over the next

2-3 years.

Figure 18: Estimates summary table


Forecasting revenue to double over 2018–2019

We expect Charlotte’s Web to generate revenue of $80 million in 2018, up from $40

million in 2017, as the company continues to gain market share in the high growth

CBD supplements market. Looking ahead to 2019, Charlotte’s Web’s hemp cultivation

is expected to grow to ~250,000-350,000 pounds, up from 63,000 pounds in 2017,

providing the company with ample supply to satisfy the step-up in demand we expect

in 2018 and 2019. We are forecasting revenue to more than double in 2019 to $169

million.

Charlot te's Web Holdings Inc . F2017 Q1/18 Q2/18 Q3/18E Q4/18E F2018E F2019E F2020E

Revenue 40,007 13,092 17,217 21,866 27,769 79,944 169,481 296,592

Cost of sales 10,064 2,555 4,013 5,138 6,526 18,232 43,726 77,114

Gross prof i t 29,943 10,537 13,204 16,727 21,244 61,712 125,755 219,478

Gross prof i t % 74.8% 80.5% 76.7% 76.5% 76.5% 77.2% 74.2% 74.0%

General and administrative 11,472 4,244 4,915 6,242 7,927 23,328 48,382 84,669

Sales and marketing 5,941 2,063 2,411 3,062 3,889 11,425 23,733 41,534

Research and development 508 55 129 164 208 556 1,270 2,222

Total operating expenses 17,921 6,362 7,455 9,468 12,024 35,309 73,386 128,425

SG&A as a % of revenue 44.8% 48.6% 43.3% 43.3% 43.3% 44.2% 43.3% 43.3%

Adjus ted EBITDA 14,140 4,613 6,100 7,566 10,026 28,305 58,990 98,897

EBITDA margin % 35.3% 35.2% 35.4% 34.6% 36.1% 35.4% 34.8% 33.3%

Depreciation and amortization 842 268 307 307 807 1,689 6,620 7,844

Financing costs (247) (64) (66) (66) (66) (262) (264) (264)

Income tax expense (4,320) (1,029) (1,234) (1,798) (2,288) (6,350) (13,026) (22,697)

Net earnings 7,475 3,103 3,730 5,395 6,865 19,093 39,079 68,092

EPS 0.09 0.04 0.04 0.05 0.07 0.20 0.37 0.65

Charlotte’s Web more than tripled the

industry average growth rate in 2017,

growing sales by 172% YoY

Revenue forecast

2018E $79.9 million

2019E $169.5 million





23

Figure 19: Annual revenue estimates


Expecting stable EBITDA margins over the next two years

We believe Charlotte’s Web will be able to capitalize on its leading position within the

CBD supplements industry by leveraging its vertical integration to generate industry

leading EBITDA margins.

In our view, Charlotte’s Web’s future investments in cultivation mechanization, as well

as increased scale through greater product sales should lead to gross margin

expansion in the near term. This could be partially offset by incremental SG&A as the

company looks to invest in marketing and increasing brand awareness. This should

translate into EBITDA growing from $14 million in 2017, to $28 million and $59

million in 2018 and 2019, respectively.

Over the medium to long term, we expect increased competition to lower pricing in the

industry, compressing gross margins, while we expect increased operating leverage to

support long-term EBITDA margins. We are forecasting slight margin compression in

the medium to long term. With that said, we believe there are no existing competitors

with the scale to challenge Charlotte’s Web until beyond 2019.

Figure 20: Annual EBITDA estimates


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2018E $28.3 million

2019E $59.0 million

2020E $98.9 million




24

Figure 21: Income statement summary


Vertical integration and strong margins drive solid free cash flow generation

Given the company’s strong margin profile and robust revenue growth opportunities,

Charlotte’s Web generates a meaningful amount of free cash flow annually, while

retaining what we view as a very healthy balance sheet. We expect the company to

incur significant CAPEX in the near term, as it increases manufacturing capacity to

satisfy post 2019 demand. Following these above-normal expenses associated with

the company’s expansion, which we think Charlotte’s Web is well funded to complete,

we believe the company is poised to generate strong free cash flow over our forecast

period.

Char l o tte 's Web Ho l di ngs Inc.

Income statement (US$ 000s) Change Change Change

Y ear ended December 31 2016 2017 2018E 2019E 2020E 18/17 19/18 20/19

Revenue 14,730 40,007 79,944 169,481 296,592 100% 112% 75%

Cost of sales 5,121 10,064 18,232 43,726 77,114

Gross profit 9,609 29,943 61,712 125,755 219,478 106% 104% 75%

General and administrative 5,105 11,472 23,328 48,382 84,669

Sales and marketing 3,075 5,941 11,425 23,733 41,534

Research and development 449 508 556 1,270 2,222

Total operating expenses 8,629 17,921 35,309 73,386 128,425

Adj usted EB ITDA 2,000 14,140 28,305 58,990 98,897 100% 108% 68%

Depreciation and amortization 242 842 1,689 6,620 7,844

Loss from change in fair value of biological assets 95 816 (453) 0 0

Share-based compensation 323 460 421 0 0

EBIT 980 12,022 26,403 52,369 91,053 120% 98% 74%

Financing costs (39) (247) (262) (264) (264)

interest income 0 20 54 0 0

EBT 941 11,795 26,195 52,105 90,789 122% 99% 74%

Income tax expense (327) (4,320) (6,350) (13,026) (22,697)

Net earnings 614 7,475 19,093 39,079 68,092 155% 105% 74%

Basic EPS 0.01 0.09 0.22 0.42 0.73

Diluted EPS 0.01 0.09 0.20 0.37 0.65 128% 85% 74%

Basic shares outstanding 80,316 79,249 86,138 92,846 92,846

Diluted shares outstanding 86,058 84,990 95,030 105,164 105,164

Rati os 2016 2017 2018E 2019E 2020E

Gross margin 65.2% 74.8% 77.2% 74.2% 74.0%

SG&A / sales 58.6% 44.8% 44.2% 43.3% 43.3%

EBITDA margin 13.6% 35.3% 35.4% 34.8% 33.3%

EBIT margin 6.7% 30.0% 33.0% 30.9% 30.7%

Profit margin 4.2% 18.7% 23.9% 23.1% 23.0%

ROE 13.1% 59.1% 19.8% 28.9% 33.5%



25

We are forecasting CAPEX of $15 million in 2018 and $28 million in 2019, followed

by $10.0 million annually thereafter, leading to free cash flow of $2.3 million in 2018,

$15.1 million in 2019 and $62.4 million in 2020.

Figure 22: Cash flow analysis


Healthy balance sheet

Following the initial public offering of Charlotte’s Web, the company maintains a very

healthy balance sheet and, in our view, is fully funded to achieve our estimates over

our forecast period, with what we estimate to be a net cash position of $72 million.

We believe this provides Charlotte’s Web with adequate capital to rapidly expand the

company’s production capabilities, while also investing in innovative new products to

allow the company to continue to gain market share.

Figure 23: Financial policy analysis


Return on invested capital

Given the company’s strong margin profile and ability to internally generate robust

free cash flow, we expect Charlotte’s Web will generate ROIC in the 30-35% range

over our forecast period.

Cash fl ow anal y si s (US$ 000s) 2016 2017 2018E 2019E 2020E

Cash flow from operations 1,393 9,496 20,800 45,699 75,936

Cash from operating activities 21 7,549 17,404 43,069 72,447

Capital expenditures, net (664) (2,367) (15,089) (28,000) (10,000)

Free cash flow 729 7,129 5,711 17,699 65,936

Free cash flow (inc. wc) (643) 5,182 2,315 15,069 62,447

Free cash flow per share 0.01 0.08 0.06 0.17 0.63

Free cash flow per share (inc. wc) (0.01) 0.06 0.02 0.14 0.59

F i nanci a l po l i cy anal y si s (US$ 000s): 2016 2017 2018E 2019E 2020E

Total debt 533 1,779 568 568 568

Net debt (cash) (557) (5,277) (71,655) (86,724) (149,171)

Total capital 8,273 19,454 108,296 160,643 247,323

Net debt / equity n.a n.a n.a n.a n.a

Net debt / total capital n.a n.a n.a n.a n.a

NTM EBITDA 14,140 28,305 58,990 98,897 164,072

NTM interest expense 247 262 264 264 264

Interest coverage 57.2x 108.0x 223.4x 374.6x 621.5x

Debt / EBITDA 0.0x 0.1x 0.0x 0.0x 0.0x

Net debt / EBITDA n.a. n.a. n.a. n.a. n.a.

Free cash flow forecast

2018E $2.3 million

2019E $15.1 million

2020E $62.4 million




26

Figure 24: Return on invested capital


Valuation

We are initiating coverage of Charlotte’s Web with a BUY rating and C$21.00 target

price. Our target price is derived using a DCF valuation, with an 11.1% WACC and

2.5% terminal growth rate, which yields a value per share of $20.88.

Our target implies 16.5x our 2020 EBITDA estimate of $99 million, which we convert

into Canadian dollars to account for the company’s CSE-listed share price. This

represents a premium to health and wellness supplement manufacturers. We believe

as both consumer and governmental acceptance of CBD supplements increases,

Charlotte’s Web’s valuation multiple will re-rate higher. The signing of the 2018 Farm

Bill by President Trump represents a key valuation catalyst, in our view.

In our view, Charlotte’s Web offers investors exposure to the high-growth CBD

supplements market through its industry-leading market share, impressive

management team, established and growing retail relationships, and strong brand

power. With shares currently trading at 12.0x our 2020 EBITDA estimate, we believe

Charlotte’s Web represents an attractive buying opportunity.

Comparable valuations

While there is a limited subset of directly comparable, publicly listed peers, we have

constructed a peer-set using health and wellness-focused manufacturing and

distribution companies as well as CBD product and cannabis oil manufacturers.

While our peer set includes companies across multiple industries, we will be focusing

on the health and wellness supplement manufacturers as the basis of our valuation,

as we believe the positioning of Charlotte’s Web as a consumer-packaged goods

company warrants this comparison. These health and wellness supplement peers

currently trade at an average of 13.2x their respective 2020 EBITDA estimates. While

the company’s health and wellness peers manufacture and distribute products with

greater consumer acceptance and less regulatory risk, we believe Charlotte’s Web is

positioned for higher near-term growth than its peers, while maintaining greater

financial flexibility given its $72 million net cash position. Additionally, we believe that

the regulatory landscape of hemp-derived CBD is poised to rapidly improve in the near

term, which is expected to support a substantial increase in consumer acceptance.

Therefore, we are comfortable valuing Charlotte’s Web at a premium to its peer group.

20%

28%32%

35% 35%

10%

60%

0%

10%

20%

30%

40%

50%

60%

70%

2016 2017 2018E 2019E 2020E 2021E 2022E

RO

IC

Company is deserving of a premium

valuation to health and wellness

supplement peers given the higher

near-term growth profile and financial

flexibility



27

Figure 25: Comparable valuations


Free cash flow yield

Charlotte’s Web is currently valued at a free cash flow yield of 0.2%, 1.2% and 5.0%,

based on 2018, 2019 and 2020 free cash flow, respectively. We note that we

anticipate significant growth in free cash flow post-2019 as the company expects to

incur significant CAPEX in 2018 & 2019 to expand its manufacturing capabilities. We

estimate that the business will generate strong free cash flow conversion, in excess of

60%, starting in 2020 following the completion of expansion initiatives.

Historical NTM EV/EBITDA multiples for peer group

Historically, Charlotte’s Web’s health and wellness peer group has traded at an

average NTM EV/EBITDA multiple of 14.8x and 13.8x over the last one and three

years.

Share and Earni ngs Informati on By Company

Shrs Mark et Enterpr i se Val ue /

O/S Cap. Enterpr i se EBITDA/Revenue YoY EB ITDA Growth EBITDA Rati os

Company Name TK Pr i ce (ml n) (ml n) Val ue (ml n) LFY FY1 FY2 FY3 FY1/LFY FY2/FY1 FY3/FY2 LFY FY1 FY2 FY3

Suppl ement manufacturers

Glanbia Plc GL9-IE $14.62 295.8 $4,324 $4,726 13.8% 13.8% 14.1% 14.3% -1.4% 7.0% 7.2% 14.3 14.5 13.6 12.7

USANA Health Sciences, Inc. USNA-US $124.10 24.8 $3,083 $2,784 15.4% 18.0% 18.1% n.a. 33.2% 8.7% n.a 17.3 13.0 11.9 n.a.

Blackmores Limited BKL-AU $136.58 17.2 $2,356 $2,405 18.5% 17.8% 18.9% 19.9% 20.6% 17.8% 17.5% 21.6 17.9 15.2 12.9

Jamieson Wellness, Inc. JWEL-CA $26.44 39.8 $1,052 $1,217 20.5% 20.4% 21.8% 22.4% 10.9% 14.9% 9.9% 19.8 17.9 15.5 14.1

Group Average 17.1% 17.5% 18.2% 18.9% 15.8% 12.1% 11.5% 18.2 15.8 14.1 13.2

CBD product manufacturers

CV Sciences, Inc. CVSI-US $5.70 112.5 $641 $635 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Isodiol International Inc ISOL-CA $3.55 30.1 $107 $91 n.a. n.a. 19.3% 21.3% n.a. n.a. 32.9% n.a. n.a. 7.2 5.4

Elixinol Global Ltd. EXL-AU $1.94 102.9 $200 $181 n.a. 5.4% 13.5% 14.3% n.a. n.a. 47.5% n.a. 100.6 29.7 20.1

Xanthic Biopharma, Inc. XTHC-CA $0.25 56.8 $14 $13 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Medical Marijuana, Inc. MJNA-US $0.09 3,444 $304 $310 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

GW Pharmaceuticals PLC GWPH-US $148.81 28.2 $4,199 $4,123 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Group Average n.a. 5.4% 16.4% 17.8% n.a. n.a . 40.2% n.a. 100.6 18.4 12.8

Cannabi s o i l manufacturers

CannTrust Holdings, Inc. TRST-CA $12.20 108.0 $1,318 $1,230 0.2% 3.5% 14.4% 21.9% n.a. n.a. 88.4% n.a. 454.6 33.4 17.7

Tilray, Inc. TLRY-US $152.63 93.1 $14,217 $14,246 n.a. n.a. 17.0% 25.8% n.a. n.a. 230.0% n.a. n.a. 538.6 163.2

Aphria Inc APH-CA $20.80 253.8 $5,279 $4,929 29.8% 15.1% 34.4% 39.2% n.a. n.a. 154.9% 810.1 882.6 57.3 22.5

Cronos Group Inc CRON-CA $14.94 206.4 $3,084 $2,982 n.a. 24.0% 31.0% 39.5% n.a. n.a. 96.7% n.a. 353.9 64.7 32.9

Group Average 15.0% 14.2% 24.2% 31.6% n.a. n.a . 142.5% 810.1 563.7 173.5 59.1

B l ended peer average 16.4% 14.8% 20.3% 24.3% 15.8% 12.1% 76.1% 176.6 231.9 78.7 33.5

Char l o tte 's Web Ho l di ngs, Inc.CWEB-CA $15.56 105.2 $1,636 $1,543 35.3% 35.4% 34.8% 33.3% 100.2% 108.4% 67.7% 84.0 42.0 20.1 12.0

Robust growth in free cash flow

expected following planned near-term

CAPEX investments



28

Figure 26: Historical NTM EV/EBITDA multiple


Discounted cash flow analysis

In addition to our peer-based valuation analysis, we support our valuation for

Charlotte’s Web through our discounted cash flow analysis. Our discounted cash

valuation yields a value of $20.88 per share. We utilize an 11.1% WACC and a 2.5%

long-term growth rate to arrive at our discounted cash flow value per share.

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

17.0x

18.0x

Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

Health and wellness supplement manufacturers



29

Figure 27: Discounted cash flow valuation


Charlotte’s Web an attractive target in an industry with strong balance sheets

While we have noted that Charlotte’s Web is not a cannabis company, we think it

could prove to be a very interesting target for many licensed cannabis producers in

Canada and the United States, along with many larger supplement manufacturing

companies. As such, we believe recent acquisitions made in the industry are

supportive of our valuation and could even provide meaningful upside if Charlotte’s

Web were to emerge as a more likely target for an acquisition.

While we have recently seen an acceleration in industry consolidation, there has been

a notable shift in emphasis towards targets with a strong portfolio of brands. As we

see it, within the hemp-derived CBD market, Charlotte’s Web has the best branding

and we believe this makes it a very attractive target for an acquisition. As well, we

believe the industry remains ripe for consolidation, as most licensed producers are

well funded with strong cash positions and are looking to deploy capital in whatever

way possible to create or maintain a competitive advantage.

F ree cash fl ow to the fi rm DCF ($000s) 2016 2017 2018E 2019E 2020E 2021E 2022E

EBITDA 2,000 14,140 28,305 58,990 98,897 164,072 255,937

Less:

Interest 39 247 262 264 264 264 264

Depreciation 242 842 1,689 6,620 7,844 7,473 7,898

Taxable income 1,719 13,051 26,355 52,105 90,789 156,335 247,775

Tax rates

Effective 25% 25% 25% 25% 25% 25% 25%

Cash taxes 430 3,263 6,589 13,026 22,697 39,084 61,944

Working capital (1,372) (1,947) (3,396) (2,630) (3,488) (5,231) (5,748)

Net CAPEX (664) (2,367) (15,089) (28,000) (10,000) (10,000) (10,000)

F ree cash fl ow to the fi rm (466) 6,563 3,232 15,333 62,711 109,757 178,245

PV o f cash fl ows 257,318 Terminal Value Growth Rate

Termi nal va l ue 1,360,544 $20.88 1.5% 2.0% 2.5% 3.0% 3.5%

Tota l PV 1,617,862 9.6% 22.96 24.29 25.82 27.58 29.63

Less: debt to be repai d -72,116 10.1% 21.47 22.63 23.95 25.45 27.19

PV o f cash fl ows to shareho l ders 1,689,978 10.6% 20.15 21.17 22.32 23.61 25.10

Shares outstandi ng 105,164 11.1% 18.97 19.87 20.88 22.01 23.28

WACC 11.1% 11.6% 17.91 18.71 19.60 20.59 21.70

DCF per share (US$) $16.07 12.1% 16.96 17.67 18.46 19.33 20.31

CAD conversion 1.29915 12.6% 16.09 16.73 17.43 18.21 19.07

DCF per share (C$) $20.88

Growth rate 2.5%

Growth rate LT 2.5%

Government of Canada 10yr bond 3.0%

Market risk premium 6.5%

Beta 1.3

Tota l Cost o f Equi ty 11.5%

Cost of Debt 10.0%

Tax Rate 25.0%

After Tax Cost o f Debt 7.5%

Weighting Assumptions

Equity 90%

Debt 10%

WACC 11.1%

Impl i ed EV/EB ITDA

Enterprise value 1,617,862

2020E EBITDA in CAD 98,897

EV/EBITDA 16.4x



30

Figure 28: Recent cannabis industry consolidation

Source: Factset

Figure 29: Key consolidators and financial position

Source: Factset

Target information

Implied Enterprise

Value ($mm)

NTM Sales

($mm)

EV/Sales

(NTM)

Constellation Brands Canopy Growth Corporation TBD Increased ownership to 38% 12,045 351 34.4x

Canopy Growth Corporation Hiku Brands Company Ltd. Est. 30-Aug-18 Acquisition 329 123 2.7x

Aurora Cannabis Inc. Anandia Laboratories 9-Aug-18 Acquisition 115 NA NA

Aurora Cannabis Inc. MedReleaf Corp. 25-Jul-18 Acquisition 2,356 145 16.3x

Aurora Cannabis Inc. CanniMed Therapeutics Inc. 1-May-18 Acquisition 919 150 6.1x

Aphria, Inc. Nuuvera, Inc. 23-Mar-18 Acquisition 450 NA NA

Aphria, Inc. Broken Coast Cannabis 13-Feb-18 Acquisition 225 NA NA

Canopy Growth Corporation Mettrum Health Corp 31-Jan-17 Acquisition 333 52 6.5x

Acquirer TargetTransaction

Closing DateTransaction details

Cannabis companiesMarket cap

(C$mm)

Net cash

(C$mm)

Canopy Growth Corporation 24,445 5,697

Aurora Cannabis Incorporated 5,220 45

Tilray, Inc. 18,264 -38

Aphria Incorporated 5,231 350



31

Appendix A: Management

Hesaam Moallem, Director, Chief Executive Officer

Mr. Moallem has a very diverse background in leadership and C-level positions, having

held various roles in sales, marketing, supply chain, manufacturing, business

development, international expansion as well as legal/regulatory functions. He

assumed the role of CEO of Charlotte’s Web in January of 2018. Prior to Charlotte’s

Web, Mr. Moallem served as the General Counsel and Chief Compliance Officer at

Onnit Labs, a fitness lifestyle company headquartered in Austin, Texas that specializes

in the manufacturing and marketing of cutting-edge nutritional supplements. Mr.

Moallem holds an undergraduate degree in Chemistry from the University of Texas

and a Juris Doctor degree from California Western School of Law.

Richard Mohr, Chief Financial Officer

Mr. Mohr joined Charlotte’s Web as CFO in September of 2017. Prior to joining the

company, he spent over a decade with Intermap Technologies, a publicly traded

provider of global geospatial solutions and analytics, where he held the role of CFO.

Mr. Mohr has more than 25 years of leadership experience with both private and

public companies, with a background that is focused on technology-based companies,

including software, manufacturing, remote sensing, semiconductors, optical storage

and green energy. He holds an MBA from Regis University and a Bachelor’s degree in

Accounting from Colorado State University. Additionally, Mr. Mohr is a licensed CPA in

the state of Colorado.

Joel Stanley, Chairman of the Board, Co-Founder

Since the founding of the company in 2013, Mr. Stanley has acted as the company’s

Chairman and CEO, recently stepping down as CEO following Mr. Moallem’s

appointment to the role. Mr. Stanley is considered to be one of the most

knowledgeable and well-known professionals in the cannabis industry and has been

recently active in educating various state and federal officials on the benefits of the

cannabis plant to society.

Jared Stanley, Director, Co-Founder, Vice President of Cultivation Operations

Since the inception of Charlotte’s Web in 2013, Mr. Stanley has served as a Director

of the company. Recently, he has worked with his brothers to build out the cultivation

operations of the company within the three states that Charlotte’s Web operates in.

Similar to his brother, Mr. Joel Stanley, Mr. Stanley is an advocate for cannabis at both

the state and federal level. Mr. Stanley holds a degree in Applied Human Sciences

from Colorado State University with a concentration in Construction Management.

Juan Sartori, Director

Mr. Sartori became a Director of the company in February of 2018. He is the

Chairman and founder of the Union Group, a privately held investment and private

equity management firm which he established in 2007. The company specializes in

investments in Latin America, with a focus on the natural resources, infrastructure

and real estate sectors. In 2008, he formed Union Agriculture Group, a consolidator of

agricultural assets which has since grown to be the largest agricultural company in

Uruguay and one of the largest in Latin America. He began his career in 2002 as a

financial services entrepreneur, launching Union Capital Group, a Geneva based multi-

strategy asset manager and holds a Bachelor’s Degree in Business and Economics

from the University of Lausanne.

John Held, Director

Mr. Held is a legal executive with experience in mergers and acquisitions, corporate

and securities laws and corporate governance. He has been with the Omega Protein

Group since 2000, serving as the Executive Vice President, General Counsel and



32

Secretary of Omega Protein Corporation since June of 2006. The company is a

producer of nutritional specialty oils and protein products, making products for

humans as well as animals. Additionally, Mr. Held has founded multiple companies

including the Byzantium Group, Red Hawk Industries and American Residential

Services. Importantly, Red Hawk and American Residential were both consolidators of

highly fragmented industries, completing roughly 20 and 100 acquisitions prior to

being acquired. Mr. Held holds a B.A. in Economics and International Relations from

Bucknell University and a Juris Doctor degree from Cornell Law School.

William West, Director

Mr. West is a strategic finance and operations executive, with substantial leadership

experience at multi-national businesses. Notably, Mr. West held multiple positions

over 6 years at HID Corporation, including Director of M&A and CFO. He also co-

founded and served as CFO & COO of ACRE, LLC, a company focused on investing in

specialized companies within the electronic security manufacturing industry.

Currently, he serves as the Co-Founder and President of Tesseract Medical Research,

a California based life sciences company. Mr. West holds an undergraduate degree

from Harvard University and an MBA with a specialization in international finance from

Harvard Business School.

Shane Hoyne, Director

Mr. Hoyne has more than 20 years of experience leading marketing and strategy for

many well-known global brands in the alcohol and spirits industry. For 12 years, he

held multiple positions with Heineken in various brand management roles. Following

that, he served as the Global Brand Director for William Grant & Sons, the world’s

third largest producer of Scotch whiskey, with brands that includes Glenfiddich and

Hendrick’s. More recently, he served as the Chief Marketing Officer for Europe at

Bacardi and is currently the CMO of the Quintessential Brands Group. Mr. Hoyne holds

an undergraduate degree from Trinity College Dublin and an MBA from the University

of Strathclyde Business School.

Appendix B: Ownership

Following the company’s IPO, which consisted of a treasury issuance of 13.3 million

shares and a secondary offering of 3.1 million shares, we estimate that insiders of the

company maintain 44% ownership in Charlotte’s Web. Importantly, the Stanley

Brothers own approximately 34% of the company while management and insiders

hold 10%.

Figure 30: Ownership summary


ShareholderBasic shares

outstanding

Dilutive securities

held

Fully diluted shares

outstandingOwnership %

Insider ownership

Stanley Brothers 29 6 36 34%

Management & insiders 4 6 10 10%

Total insider ownership 34 12 46 44%

All other shareholders 59 - 59 56%

Total 93 12 105



33

Appendix C: Competitors

Competitive environment

The market for hemp-derived CBD is competitive and rapidly evolving. As such, the

market remains highly fragmented, with the top 15 brands accounting for

approximately 22% of the total market. We estimate that Charlotte’s Web is the

market leader, maintaining approximately an 8% market share in 2016, while CV

Sciences is the only other company with market share greater than 2%, with a 5%

share of the market in 2016, by our estimates. As well, we estimate that in 2017

Charlotte’s Web rapidly gained market share, improving its market leadership

positioning and capturing market share of 14%.

We believe the market for CBD oils is poised for rapid expansion in the near to

medium term, as improving regulation substantially increases both retailer and

consumer acceptance of these products. Additionally, we believe further de-

criminalization of cannabis will increase acceptance of CBD products derived from

other species of cannabis. As such, we believe the set of companies that compete

with Charlotte’s Web will expand to include CBD products derived from sources other

than hemp.

CV Sciences, Inc.

CV Sciences (CVSI-US | US$641 million market cap | Not Rated)

Revenue (LTM): US$33.3 million

CV Sciences is a life science company that operates two distinct business segments.

The first is the specialty pharmaceuticals segment, which is developing synthetically

formulated CBD therapeutics. Currently, this business has one product, a chewing

gum containing synthetic CBD to support the cessation of smokeless tobacco

addiction and is in the preclinical stage of receiving FDA approval. CV Sciences also

operates a consumer products segment, which manufactures, markets and sells

consumer products containing plant-based CBD under the PlusCBD brand. We

estimate PlusCBD is the second largest hemp-derived CBD brand, with an estimated

market share of 8% in 2017. In Q2/18, the company grew sales by 203% YoY to

US$12.3 million and generated adjusted EBITDA margins of 27.7%.

Medical Marijuana, Inc.

Medical Marijuana (MJNA-US | US$304 million market cap | Not Rated)


Medical Marijuana is currently focused on the development, sale and distribution of

hemp oil products containing CBD. The company owns the Real Scientific Hemp Oil

brand, a medical cannabis product sold mainly in Brazil, Mexico and Paraguay. The

company also has a collection of brands sold as dietary supplements, most notable of

which is the brand Dixie Botanicals. Additionally, the company owns various consumer

packaged goods brands such as Cannabis Beauty Defined, Kannactiv, HempVAP,

KannaKick and CanChew. In Q2/18, Medical Marijuana grew sales by 160% to

US$14.8 million.

Isodiol International Inc.

Isodiol International (ISOL-CA | $107 million market cap | Not Rated)

Revenue (LTM): $19.1 million

Isodiol is a manufacturer of pharmaceutical grade CBD and consumer products

containing CBD. The company recently received approval to manufacture CBD as an

Active Pharmaceutical Ingredient for use in Finished Pharmaceutical Products. The



34

company’s consumer products portfolio includes Bioactive, which is Isodiol’s dietary

supplement brand and CannaCeuticals, a collection of topicals used for cosmetic

applications.

GW Pharmaceuticals Plc

GW Pharmaceuticals (GWPH-US | US$4,199 million market cap | Not Rated)


Founded in 1998, GW Pharmaceuticals is a biopharmaceutical company focused on

the discovery, development and commercialization of novel therapeutics which

contain cannabinoids. To date the company has commercialized one product, Sativex,

which is a spray containing even amounts of the THC and CBD cannabinoids. The

product has received regulatory approval in multiple countries excluding the United

States and is used in the treatment of muscle stiffness and spasms resulting from

multiple sclerosis. The principal competition for Charlotte’s Web is the company’s drug

Epidiolex, an oral solution used to treat seizures associated with two rare forms of

epilepsy. Epidiolex is the first ever FDA-approved CBD medicine, and availability of the

product is pending the de-scheduling of hemp as a Schedule I drug.

Appendix D: CV Sciences financials

Given CV Sciences is the closest competitor of Charlotte’s Web, we have provided

recent historical results below.

Figure 31: CV Sciences (CVSI) historical results


2017 Q1/18 Q2/18

Revenue 20,679 8,071 12,349

EBITDA (2,305) 787 3,806

EBITDA % -11.1% 9.8% 30.8%

YoY revenue growth 87.0% 114.4% 202.5%



Appendix: Important DisclosuresAnalyst CertificationEach authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) therecommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent andobjective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoringanalyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to thespecific recommendations or views expressed by the authoring analyst in the research.Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons ofCanaccord Genuity LLC and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communicationswith a subject company, public appearances and trading securities held by a research analyst account.Sector CoverageIndividuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoringanalysts of the report.

Investment RecommendationDate and time of first dissemination: September 19, 2018, 04:54 ETDate and time of production: September 19, 2018, 00:43 ETTarget Price / Valuation Methodology:Charlotte's Web Holdings, Inc. - CWEBOur target price is derived using a DCF valuation, with an 11.1% WACC and 2.5% terminal growth rate. Our C$21.00 target represents16.5x our 2020 EBITDA estimate of $99 million, which is converted into Canadian dollars to account for the company's CSE-listed shareprice.Risks to achieving Target Price / Valuation:Charlotte's Web Holdings, Inc. - CWEBCBD research discovers negative side effects or lack of efficacyDespite the various reports and studies that have been conducted to evaluate the efficacy of CBD, there remains limited conclusiveevidence to support the many claimed benefits of the cannabinoid. While the FDA’s recent approval of Epidiolex is a testament to theproven efficacy of CBD, the scientifically proven applications remain limited and there are multiple use cases which have yet to beempirically evaluated. As such, while further evidence supporting the use of CBD could be very positive for the company, the lack ofevidence, or the emergence of evidence that showed any negative side effects of CBD, has the potential to substantially impact thedemand for the products of Charlotte’s Web.FDA increases intervention in the operations of the companyCurrently, CBD is not generally recognized as safe by the FDA, and the Administration believes that CBD cannot be marketed as a dietarysupplement as it was the subject of investigation as a new drug prior to it being marketed as a dietary supplement. Charlotte’s Web doesnot agree with the view of the FDA and believes that CBD was marketed in a dietary supplement or food prior to the investigations beingmade public. With that being said, increased involvement by the FDA would substantially impact the company’s ability to market productscontaining CBD.2018 Farm Bill not signed into lawThe 2018 Farm Bill has passed both the House of Representatives and the Senate, and a conference committee is now reconciling theamendments made to the bill in the House and Senate before bringing it to President Trump to be signed into law. The bill contains keylegislation related to the cultivation of hemp; most importantly it would de-schedule hemp as a Schedule I drug under the ControlledSubstances Act. While the sentiment towards hemp is certainly improving and the Farm Bill, including the legalization of industrial hemp,is very likely to become law, failure of the pro-hemp version of the bill to become law would further complicate the legal landscapethat Charlotte’s Web operates in, as cultivation of hemp is currently regulated at the state level. As such, lack of federal regulationand varying state laws may continue to create a complex legal environment for Charlotte’s Web to operate in, potentially impacting thecompany’s ability to secure distribution, reducing end demand.Agricultural operations riskWhile Charlotte’s Web is beginning to diversify its agricultural assets, now producing in Colorado, Kentucky and Oregon, there are variousrisks related to the growing of hemp that could hinder the company’s ability to produce high quality product. This risk is further magnifiedby the fact that the company’s hemp is proprietary, and Charlotte’s Web cannot easily source replacement hemp to manufacture itsproducts. The company relies on the outdoor grow of industrial hemp and so abnormal weather patterns have the potential to negativelyimpact crop yields or even destroy plants. Additionally, agricultural products are vulnerable to various diseases which can reduce cropquality or even result in the death of the plant. There is no guarantee that crop yield will remain consistent, and if the quality or quantityof production is negatively impacted it may hinder the company’s ability to fulfill its demand.



Increased industry competitionImproving regulation that supports the production and distribution of hemp and CBD products is attracting competitors to the industry.While the industry continues to evolve, there may be competitors with greater financial or marketing resources that look to enter thespace. An increased level of competition may erode the company’s competitive advantage if Charlotte’s Web is not able to adapt to thechanging competitive landscape accordingly. While Charlotte’s Web maintains a market leadership position, increased distribution bya competitor at a mass market retailer could negatively impact the demand for the company’s products, particularly if it was a qualitycompetitive offering priced below Charlotte’s Web.Relationship with Stanley BrothersThe branding of Charlotte’s Web is closely affiliated with the branding and reputation of the Stanley Brothers. We believe there is a riskto the company’s branding should the Stanley Brothers distance themselves from Charlotte’s Web. Additionally, we believe there is riskassociated with increased competition from the Stanley Brothers, as they currently sell cannabis extracts and oils under the StanleyBrothers brand, with limited distribution in Colorado. While we do not expect the Stanley Brothers to materially compete with Charlotte’sWeb, the distancing of the Stanley Brothers name could lead to confusion in the marketplace which could negatively impact the brandingof Charlotte’s Web.

Distribution of Ratings:Global Stock Ratings (as of 09/19/18)Rating Coverage Universe IB Clients

# % %Buy 556 62.90% 44.96%Hold 213 24.10% 29.58%Sell 11 1.24% 27.27%Speculative Buy 104 11.76% 66.35%

884* 100.0%*Total includes stocks that are Under Review

Canaccord Genuity Ratings SystemBUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.

HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.

SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.

NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or therelevant issuer.Risk QualifierSPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in thestock may result in material loss.

12-Month Recommendation History (as of date same as the Global Stock Ratings table)A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month periodmay be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx

Required Company-Specific Disclosures (as of date of this publication)Charlotte's Web Holdings, Inc. currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies. Duringthis period, Canaccord Genuity or its affiliated companies provided investment banking services to Charlotte's Web Holdings, Inc..In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services fromCharlotte's Web Holdings, Inc. .In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-managerof a public offering of securities of Charlotte's Web Holdings, Inc. or any publicly disclosed offer of securities of Charlotte's Web Holdings,Inc. or in any related derivatives.Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Bankingservices from Charlotte's Web Holdings, Inc. in the next three months.



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Charlotte's Web Holdings, Inc. Rating History as of 09/18/2018C$18

C$16

C$14

C$12

C$10

C$8Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18

Closing Price Price Target

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

Past performanceIn line with Article 44(4)(b), MiFID II Delegated Regulation, we disclose price performance for the preceding five years or the whole periodfor which the financial instrument has been offered or investment service provided where less than five years. Please note price historyrefers to actual past performance, and that past performance is not a reliable indicator of future price and/or performance.

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