CV Sciences Inc (CVSI)

[Det_Robert_Thorne]

CANV 2Q/15 Results: $0.06/share loss on $2.4M Revenue

Results:

On Aug 14, 2015, Cannavest (CANV) filed its 2Q/15 10-Q covering the quarter ending June 30, 2015. The company reported Revenues of $2.4M and a loss of $2M, or ($0.06) per fully diluted share.

Revenues in 2Q/15 were down 20% from 2Q/14's $3.0M and on a sequential basis, down 11% from 1Q/15's $2.7M. Gross margin of 56.3% was down from the 59.7% reported in 2Q/14 and 1Q/15's 60.1%.

CANV's net loss in 2Q/15 was $2M, or $0.06 per fully diluted share, compared to a net profit of $8M in 2Q/14 ($0.24/FD share), but it should be noted that $7.9M of that 2Q/14 profit was the claimed value of the sale of CANV's interest in KannaLife. On an operating basis, 2Q/14 showed a net profit of $132K.

As of Aug 14, 2015 CANV had 35,141,666 shares of issued and outstanding common stock.

As of the end of 2Q/14, CANV had $1.8 in Cash and Equivalents, Accounts Receivable of $1.1M and inventories of about $13.6M, with about $9.3M of that inventory in raw materials (probably hemp oil paste). Liabilities totaled $1.4M.


Analysis

The fairly large 20% Year-over-year revenue drop is chiefly due to the fact that during 2Q/14 CannaVest was still selling its CBD only through Medical Marijuana, Inc's HempMeds division, which was in turn supporting the startup of KannaWay, a CBD-related multi-level marketing company. As part of the startup, KannaWay's members were required to make initial purchases, which boosted the 2Q/14 revenues.

As stated in CannaVest's past two quarterly filings, it is no longer selling CBD to Medical Marijuana, Inc, and since that company now owns KannaWay, that revenue has moved elsewhere, and so CANV is rebuilding its sales.

More worrisome is the 11% sequential quarter decline in revenues. In both 4Q/14 and 1Q/15, CANV had sales of $2.693M and $2.714M, with 1Q/15 showing less than 1% growth over 4Q/14. The second quarter sales are nearly $300K lower.

One has to wonder if the increasing competition in the CBD-from-industrial-hemp space, along with the increasingly legal use of CBD from high-CBD from marijuana strains such as Charlotte's Web is eating into CannaVest's market share.

CannaVest seems to have trouble generating a profit. For the past year, it's been in a legal battle with Medical Marijuana, Inc over various brand names and the distribution contract with HempMeds, and legal expenses have hurt CANV's bottom line. The recent settlement is explained in the 10-Q, and the discussion of the particulars is outside the scope of this post, but suffice it to say that with this particular matter settled, CannaVest's legal costs should drop.

One other fairly large expense has been shares and options for CANV's employees, non-employees, officers and directors. In the second quarter alone, $55&.8K in stock options, $308.9K of common stock and $857.8K of stock-based compensation was expensed. Management needs to look at this more closely, and perhaps not be so generous in future quarters.

During the second quarter, the company entered into a Securities Purchase Agreement for notes totaling $6.5M. It appears that these notes will be convertible into common shares, and CANV has filed a registration statement with the SEC indicating that this conversion could add nearly 30M shares to the number outstanding.


Opinion:

CannaVest has a good amount of cash and more than enough inventory to get them through the remainder of 2015 and into 2016. My main concerns are the sequential flattening and decline of revenue growth over the past three quarters and the potential dilution from the notes.

Is the flattening and decline due to the loss of HempMeds as a distributor, or is it due to a more competitive environment?

The company isn't profitable, but if it is able to get legal costs and share compensation costs down, it should be able to squeeze out some profits. Then again, will the potential dilution due to the new notes hurt the EPS?

Gonna be an interesting rest of 2015.