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CV Sciences, Inc. (CVSI)·Q1 2016 Earnings Summary

Executive Summary

  • Q1 2016 revenue declined year over year to $2.42M, driven by 2015 pricing reductions (~50%) and a mix shift from bulk oil to branded finished products; however, gross margin expanded materially to 67.1% from 58.1%, narrowing the net loss and signaling improved unit economics .
  • Operating discipline improved: SG&A fell to $2.69M vs $3.94M and R&D to $0.14M vs $0.32M, while Adjusted EBITDA improved to $(0.54)M from $(0.68)M YoY .
  • Balance sheet mix: cash was $0.54M and inventory remained heavy at $13.87M with secured European supply contracts through October 2018, supporting consumer product growth but elevating working capital risk .
  • Financing update: all 2015 convertible notes were repaid/converted in Q1; a new $850k unsecured note (12% coupon) with 2.0M warrant coverage was issued—positive removal of convert overhang but adds high-cost debt .
  • No formal quantitative guidance or Q1 earnings call transcript was found; management reiterated consumer segment can fund operations, while pharma segment requires ~$1.5M over 12 months (term sheet executed) .

What Went Well and What Went Wrong

What Went Well

  • Margin expansion and cost control: Gross margin rose to 67.1% (from 58.1% YoY) as mix shifted to finished goods and process yields improved, while SG&A and R&D were reduced meaningfully .
  • Removal of convertible overhang: Remaining tranches were repaid/converted in Q1 2016; the new capital structure replaces converts with a fixed unsecured note, reducing dilution risk .
  • Strategic channel penetration and brand focus: “Our branded products are positioned to take advantage of market demand for CBD… We continue to provide the market leadership in ‘mainstreaming’ CBD…” (CEO) ; store penetration scaled from 120 (Q2) to 240 (Q3) and 340 by YE2015 .

What Went Wrong

  • Top-line pressure and mix shift: Sales fell YoY to $2.42M (from $2.71M), primarily due to 2015 pricing reductions (~50%) and transition away from bulk oil, even as margin improved .
  • Heavy inventory and customer concentration: Inventory stood at $13.87M with $7.81M located in EU; one customer represented 64% of accounts receivable at quarter-end—concentration and working capital risk remain elevated .
  • Controls and legal overhang: Disclosure controls were deemed not effective with identified material weaknesses; securities class action and shareholder derivative suits continue, with motions pending .

Financial Results

Quarterly trend (oldest → newest)

MetricQ2 2015Q3 2015Q1 2016
Revenue ($USD)$2,413,886 $4,151,180 $2,422,678
Net Income ($USD)$(2,003,068) $(989,549) $(1,533,117)
EPS ($USD)$(0.06) $(0.03) $(0.03)
EBITDA ($USD)$(1,765,572) $(656,801) $(942,048)
Adjusted EBITDA ($USD)$(898,880) $343,271 $(536,897)

YoY comparison (Q1 2015 vs Q1 2016)

MetricQ1 2015Q1 2016
Revenue ($USD)$2,714,051 $2,422,678
Gross Profit ($USD)$1,577,946 $1,625,635
Gross Margin (%)58.1% 67.1%
EPS ($USD)$(0.08) $(0.03)
SG&A ($USD)$3,940,651 $2,689,245
R&D ($USD)$323,145 $141,813

Segment breakdown (Q1 2016)

SegmentQ1 2016
Consumer Products Revenue ($USD)$2,422,678
Pharmaceutical Revenue ($USD)$0 (no activities in period)

KPIs (Q1 2016)

KPIQ1 2016
Cash ($USD)$536,141
Inventory ($USD)$13,874,524
Inventory in EU ($USD)$7,812,530
Top Customer AR Concentration (%)64%
Unsecured Note Payable – Net Carrying Amount ($USD)$560,911
Convertible Notes – Net Carrying Amount ($USD)$0 (fully repaid/converted)
Weighted Avg Shares (Basic & Diluted)49,931,919

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Pharma segment capital needs ($USD)Next 12 monthsN/A~$1,500,000; term sheet executed Introduced
Raw inventory purchase plan2016 cropN/ADo not intend to purchase raw inventory from 2016 crop Introduced
Consumer segment fundingFY2016N/AManagement believes consumer revenues/inventory sufficiency can fund obligations Introduced

Note: No formal quantitative guidance for revenue, margins, OpEx, tax, or dividends was provided in the cited Q1 2016 10‑Q or contemporaneous 8‑K press materials .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 2015)Current Period (Q1 2016)Trend
Natural Products channel penetrationEntered channel; 120 stores by Q2 ; reached 240 stores by Q3 Continued pivot to branded finished products mix Scaling brand presence; deeper retail penetration
Pricing and product mixQ2 revenue $2.41M with EBITDA $(1.77)M ; Q3 revenue $4.15M, Adj. EBITDA $0.34M Revenue $2.42M; margin up to 67.1% on mix and yields; pricing reduced ~50% starting Q1’15 Volatile sales; improving margins
Supply chain and inventory—Inventory $13.87M; EU supply rights through Oct 2018 Secure supply; elevated working capital
Legal/regulatoryMJNA litigation settled; $750k income recognized in Q3 Securities class action and derivative suits ongoing; motions pending Legal overhang persists
R&D executionR&D $433k (Q2) ; $229k (Q3) R&D $142k; transition into production reduced R&D R&D trending down as commercialization scales
Internal controls—Material weaknesses identified; remediation plan initiated Improving governance in progress
Financing structure—Converts repaid/converted; new $850k 12% unsecured note; 2.0M warrant Lower dilution; higher cash interest burden

Management Commentary

  • “Our branded products are positioned to take advantage of the market demand for cannabidiol (“CBD”) and CBD-based products. We continue to provide the market leadership in ‘mainstreaming’ CBD…” — Michael Mona, Jr., CEO (Q2’15 PR) .
  • “Distribution of our branded products continues to expand as we added 120 new retail locations during the third quarter, increasing our retail store penetration to 240 locations…” (Q3’15 PR) .
  • “CV Sciences expanded its corporate mission during 2015… acquisition of CanX… positioned both as a specialty pharmaceutical company… and continue our existing consumer product business segment…” (FY2015 PR) .
  • Q1 2016 MD&A emphasizes margin drivers and mix shift: “We had sales of $2,422,678 and gross profit of $1,625,635… gross profit percentage of 67.1%… The sales decrease… is primarily due to lower bulk oil and product pricing… current sales mix is more heavily weighted to branded finished products…” .

Q&A Highlights

  • No Q1 2016 earnings call transcript was available in the document catalog; therefore, no Q&A themes or clarifications can be provided from a call [ListDocuments: earnings-call-transcript returned 0].

Estimates Context

  • Wall Street consensus (S&P Global) for Q1 2016 EPS and Revenue was unavailable at time of analysis due to access limitations; comparisons to estimates cannot be made.
  • Actuals: Revenue $2.42M, EPS $(0.03) .
MetricQ1 2016 ConsensusQ1 2016 Actual
Revenue ($USD)N/A$2,422,678
EPS ($USD)N/A$(0.03)

Key Takeaways for Investors

  • Margin trajectory is positive despite revenue pressure; improved yields and branded mix produced a 900 bps+ YoY gross margin expansion—watch for sustainability as pricing normalizes .
  • Working capital risk remains high given $13.9M inventory and AR concentration; monitor sell-through in Natural Products channel and credit discipline with large accounts .
  • Capital structure cleaner post-convert repayment, but unsecured 12% debt adds cash interest and warrants; liquidity needs for pharma (~$1.5M) suggest continued financing activity near term .
  • No formal guidance and no call transcript limit visibility; use quarterly MD&A disclosures (mix, yields, channel penetration) to infer near-term drivers .
  • Legal and controls remediation are key overhangs; execution on audit committee and COSO framework adoption could de-risk governance narrative by year-end .
  • Strategic focus on branded finished products is accretive to margin; scaling retail distribution (240→340 stores by YE2015) supports medium-term revenue quality improvement .
  • Near-term trading: stock likely reacts to margin mix and financing headlines; medium-term thesis depends on consumer segment scale-up and milestones in pharma program funding/execution .