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Why Charlotte's Web Tanked on Tuesday

By Eric Volkman – Jun 16, 2020 at 7:01PM

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A new issue of common shares and warrants will dilute existing stockholders.

What happened

Charlotte's Web (CWBHF -1.74%) announced Tuesday that it is floating 10 million "units" of the company in an underwritten public offering. The issue's underwriting syndicate will purchase these for 6.75 Canadian dollars ($4.96) for total gross proceeds of C$67.5 million. The stock closed down by nearly 14% on the news.

So what

"Units," which are combinations of common stock and warrants, have become a trend lately in marijuana industry capital-raising. In this case, Charlotte's Web's units consist of a single common share of the marijuana company, and one-half of a warrant to buy a common share.

Each full warrant's exercise price is C$8.50 ($6.24), and can be exercised within a two-year period following the issue's closing date. This price is, however, "subject to adjustment in certain events," which weren't specified in the company's announcement.

Marijuana leaf atop a $100 bill.

Image source: Getty Images.

The issue's underwriting syndicate has also been granted a 30-day option to purchase as many as 1.5 million additional units, under the same terms as the regular offering. 

Now what

Charlottte's Web needs to shore up its cash base, as it had only $53 million in cash and equivalents at the end of its first quarter.

The problem is, share issues are dilutive, and warrants only add to the problem down the road. According to Yahoo! Finance, the company had just under 72 million shares outstanding at the end of the first quarter. This issue will begin to add substantially to that number.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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Charlotte's Web Holdings, Inc. Stock Quote
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