Executive Summary

Revenue of $2.49M rose 3% year over year and 3% sequentially, while gross margin expanded to 66.9% on a mix shift toward branded finished products; net loss was ($2.23M), with EPS of ($0.04) versus ($0.06) a year ago .
Management highlighted distribution expansion to 705 retail locations (vs. 120 a year ago) and the initiation of a preclinical specialty pharmaceutical program leveraging synthetic CBD .
SG&A increased on higher marketing, commissions, legal, benefits, and the start-up costs for the pharma segment; interest expense rose on new borrowings (Iliad convertible note, unsecured note) .
No formal revenue or margin guidance was provided; management said consumer-products inventory is sufficient through Q2 2017 and reiterated ~$1.5M capital needs over the next 12 months to fund pharma development (potential financing catalyst) .

What Went Well and What Went Wrong

What Went Well

Distribution growth and sales mix shift: “distribution of our branded consumer products increased to 705 retail locations… compared to 120 retail locations a year ago,” underpinning $2.5M sales in Q2 .
Margin expansion: Gross margin improved to 66.9% (vs. 53.4% YoY) from a heavier branded finished product mix and greater harvest/processing yields lowering production costs .
Strategic pivot: Initiated preclinical drug development following CanX acquisition to address sizable therapeutic markets using synthetic CBD; management assembled a team and reiterated intent to advance clinical efforts in 2016 .

What Went Wrong

Profitability: Adjusted EBITDA declined to ($1.13M) from ($0.90M) YoY and worsened sequentially from Q1 ($0.54M), reflecting higher operating costs and interest expense .
Operating expense load: SG&A rose to $3.39M (including $122,809 pharma segment start-up), increasing headcount, legal, commissions, marketing, and benefits; R&D was $0.34M (with $117,281 pharma), as consumer-segment R&D shifted into production .
Balance sheet and controls: Company relies on additional capital (~$1.5M) to fund pharma development; material weaknesses in internal controls persisted (audit committee formed, remediation continuing); litigation matters remain ongoing .

Financial Results

Metric	Q2 2015	Q1 2016	Q2 2016
Revenue ($USD)	$2,413,886	$2,422,678	$2,487,756
Gross Profit ($USD)	$1,288,061	$1,625,635	$1,664,327
Gross Margin %	53.4%	67.1%	66.9%
Net Loss ($USD)	($2,003,068)	($1,533,117)	($2,226,902)
EPS (Basic & Diluted)	($0.06)	($0.03)	($0.04)
EBITDA ($USD)	($1,765,572)	($942,048)	($1,799,906)
Adjusted EBITDA ($USD)	($898,880)	($536,897)	($1,129,224)

Segment breakdown (Q2 2016):

Metric	Consumer Products	Specialty Pharmaceutical	Total
Product Sales, Net ($USD)	$2,487,756	$0	$2,487,756
Gross Profit ($USD)	$1,664,327	$0	$1,664,327
SG&A ($USD)	$3,262,917	$122,809	$3,385,726
R&D ($USD)	$224,266	$117,281	$341,547
Operating Income (Loss) ($USD)	($1,822,856)	($240,090)	($2,062,946)

KPIs and balance sheet (sequential):

KPI	Q1 2016	Q2 2016
Retail Locations (stores)	—	705
Cash and Equivalents ($USD)	$536,141	$1,408,322
Inventory ($USD)	$13,874,524	$13,566,412
Stockholders’ Equity ($USD)	$23,007,798	$21,821,578
Shares Outstanding	51,513,924	52,038,924
Interest Expense ($USD)	$355,349	$163,961
Gross Margin %	67.1%	66.9%
Adjusted EBITDA ($USD)	($536,897)	($1,129,224)

Non-GAAP reconciliation notes: Adjusted EBITDA excludes non-cash stock-based compensation and other specified items; stock-based compensation was $670,682 in Q2 2016 (SG&A), with no R&D stock comp in Q2 2016 .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Consumer-products inventory sufficiency	Through 2016	Inventory levels sufficient to support 2016 sales	Inventory sufficient through Q2 2017	Raised horizon
2016 raw inventory purchases	2016 crop	Do not intend to purchase raw inventory from 2016 crop	Do not intend to purchase raw inventory from 2016 crop	Maintained
Specialty pharma capital needs	Next 12 months	Approx. $1.5M; executed term sheet to provide capital (no assurances)	Approx. $1.5M; expect to obtain financing on acceptable terms (no assurances)	Maintained
Revenue, margins, OpEx, OI&E, tax rate, dividends	FY16/Q3/Q4	Not provided	Not provided	Maintained

Earnings Call Themes & Trends

Note: No Q2 2016 earnings call transcript was found; themes reflect management commentary in filings and press releases.

Topic	Previous Mentions (Q-2 and Q-1)	Current Period (Q2 2016)	Trend
Pricing & sales mix	Q1: price cuts in 2015; shift to branded finished products; margins benefited	Continued shift to branded products; margins improved from yields and mix	Mix shift supports higher margins
Supply chain & inventory	Contracts with European farmers; inventory sufficient for 2016	Inventory in Europe; sufficiency through Q2 2017; no 2016 crop purchases	Strong inventory position, lower cash outflow
Regulatory/legal	Class action & derivative suit ongoing	Litigation remains ongoing	Unchanged; monitoring required
R&D execution (pharma)	No pharma activity in Q1; plan to pursue synthetic CBD drugs	Initiated preclinical program; segment incurred R&D $117k and SG&A $123k	Ramp-up phase
Capital structure/financing	Jan unsecured note ($850k); convertible note repayments/conversions	May Iliad secured convertible note ($2.055M principal); ongoing interest and amortization	Increased borrowings and financing flexibility
Internal controls	Material weaknesses; audit committee formed	Material weaknesses persist; remediation progressing	Gradual improvement planned

Management Commentary

“We continued to generate strong performance from our consumer products division, as the distribution of our branded consumer products increased to 705 retail locations… We have seen a strong market acceptance and an increase in demand for our consumer products with sales of $2.5 million during the three months ended June 30, 2016…” — Michael Mona, Jr., Chairman & CEO .
“Given our established position as a market leader in CBD consumer products, we have pivoted our corporate strategy to include the development and commercialization of innovative medicines… we initiated our preclinical drug development program… The remainder of 2016 will be focused on laying the groundwork for our development of novel therapeutics, utilizing synthetic CBD…” .

Q&A Highlights

No Q2 2016 earnings call transcript was available; no analyst Q&A highlights could be identified in company documents [SearchDocuments, no results].

Estimates Context

Wall Street consensus EPS and revenue estimates for CV Sciences Q2 2016 were not available via S&P Global for comparison. We attempted retrieval; estimates could not be fetched, likely due to coverage limits for this OTC-listed company [GetEstimates error].

Where estimates may need to adjust: With gross margin expansion and growing retail distribution, models should reflect higher mix of branded finished goods, but rising SG&A and interest expense offset near-term profitability .

Key Takeaways for Investors

Sequential and YoY revenue growth with substantial margin expansion driven by branded product mix and improved yields; watch for continued retail expansion as a sales driver .
Operating losses persist as SG&A and interest costs rise; Adjusted EBITDA deteriorated sequentially, underscoring near-term profitability headwinds despite healthier gross margins .
Strategic optionality: specialty pharma program initiated; near-term cash needs (~$1.5M) and financing (Iliad note) are key milestones/catalysts to monitor for R&D progression .
Strong inventory positioning (including European-held stock) and stated plan to avoid 2016 crop purchases should reduce cash outflows for inventory through Q2 2017 .
Governance/controls and legal overhang remain; remediation steps underway, but matters could affect investor sentiment and execution risk .
Trading implications: Positive narrative around margin and distribution growth offset by higher OpEx/interest; stock likely reacts to financing updates, retail footprint growth, and tangible pharma program milestones .
Estimate frameworks should incorporate sustained higher gross margins from mix, but account for elevated SG&A and financing costs until scale or cost controls materially improve .

CV Sciences, Inc. (CVSI)·Q2 2016 Earnings Summary