CV Sciences Inc (CVSI)

[Det_Robert_Thorne]

Little revenue growth. More convertible notes. Dilution coming

2Q/16 revenue of $2.49M grew only 3.1% from 2Q/15 and as usual, there was a net loss. This time, it was $2.2M, partially due to $671K of stock-based compensation paid to executives.

CVSI's business isn't growing. They saw $2.7M revenue in 1Q/15, and haven't equaled that since. Yes, they posted $4.15M in 3Q/15, but $2M of that was all the old RSHO and Cannabis Beauty Defined inventory that was sold to MJNA once the lawsuit ended. CVSI disclosed in the 1Q/16 (and current filing) that MJNA never paid for the stock, and CV Sciences kept the collateral stock instead, which was worth much less than $2M due to CVSI's declining stock price:

In August 2015, we entered into an agreement to sell MJNA our products and received from MJNA a promissory note in the principal amount of $2,002,910 (“MJNA Promissory Note”) that was to be paid in 12 equal installments beginning on November 3, 2015 in exchange for the product shipped to MJNA. The MJNA Promissory Note is secured by 2,000,000 shares of the Company’s common stock held in escrow. MJNA has failed to make any payments on the MJNA Promissory Note and is in default. The MJNA Promissory Note is likely not collectible, and the probable form of collection is for the Company to foreclose on the 2,000,000 shares of Company common stock. At June 30, 2016 and December 31, 2015, the fair value of the collateral was determined to be $480,000 equal to the $0.24 per share closing price of the Company’s Common Stock as of December 31, 2015, respectively, multiplied by the 2,000,000 shares of Company common stock. [emphasis added]

So revenue is not growing, and management keeps awarding shares or options to itself, while not being profitable.

Yet the company paid the CEO $315K, the VP of Operations (his son) $195K and the CFO $230K in 2015 (see page 17 of the 2015 10-K)

With all the losses, where are they getting this kind of cash to pay the salaries and development costs of the new medical products?

A May 25, 2016, $2M note with Iliad that will become convertible in late November to the tune of $275K/month at a steep discount to the trading price (unless CVSI is over $0.50 at the time of conversion). From page 16 of the 2Q/15 10-Q

On May 25, 2016 (the “Purchase Price Date”), the Company entered into a Securities Purchase Agreement (“Iliad SPA”) with Iliad Research and Trading, L.P. (the “Lender” or “Iliad”) pursuant to which the Lender loaned the Company $2,000,000. On the Purchase Price Date, the Company issued to Lender a Secured Convertible Promissory Note (the “Iliad Note”) in the principal amount of $2,055,000 in exchange for payment by Lender of $2,000,000. The principal sum of the Iliad Note reflects the amount invested, plus a 2.25% “Original Issue Discount” (“OID”) and a $10,000 reimbursement of Lender’s legal fees. Out of the proceeds from the Iliad Note, the Company paid the sum of $25,000 to its placement agent, Myers & Associates, L.P. The Company received net proceeds of $1,975,000 in exchange for the Iliad Note. The Iliad Note requires the repayment of all principal and any interest, fees, charges and late fees on the date that is thirteen months after the Purchase Price Date (the “Maturity Date”). Interest is to be paid on the outstanding balance at a rate of ten percent (10%) per annum from the Purchase Price Date until the Iliad Note is paid in full. Interest is accrued during the term of the Iliad Note and all interest calculations shall be computed on the basis of a 360-day year comprised of twelve (12) thirty (30)-day months and shall compound daily. Subject to adjustment as set forth in the Iliad Note, the conversion price for each Lender conversion shall be $0.50 (the “Lender Conversion Price”), convertible into shares of fully paid and non-assessable common stock. Beginning on the date that is six months after the Purchase Price Date and continuing until the Maturity Date, Iliad shall have the right to redeem a portion of the Iliad Note in any amount up to the Maximum Monthly Redemption Amount ($275,000, which is the maximum aggregate redemption amount that may be redeemed in any calendar month), for which payments may be made in cash or by converting the redemption amount into shares of Company common stock at a conversion price which is the lesser of (a) the Lender Conversion Price of $0.50 and (b) the Market Price, defined as 70% (“the Conversion Factor”), subject to adjustment as follows: if at any time (1) the average of the three lowest closing bid prices in the previous twenty (20) trading days is below $0.25 per share then the Conversion Factor will be reduced by 10%, (2) the Company is not Deposit/Withdrawal At Custodian eligible, then the Conversion Factor will be reduced by an additional 5%, or (3) there has occurred a “Major Default” then the Conversion Factor will be reduced by an additional 5%. The Company may prepay the Iliad Note at any time by payment to Lender of 125% of the principal, interest and other amounts then due under the Note. The Company may prepay the Iliad Note notwithstanding an earlier notice of conversion from the Lender, provided that in such event the Lender may convert an amount not to exceed $300,000 under the Iliad Note. In connection with the Iliad Note, as set forth above, the Company incurred an original issue discount of $45,000 and $35,000 of other debt issuance costs, which will be amortized over the Iliad Note term. The Iliad Note is securitized by the Company’s accounts receivable, inventory and equipment.

Expect a large number of shares to be added to the OS in 2017.