CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI)

Original Source: CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI)

CBD is all the rage at the moment as the newly legalized products are being infused into a multitude of foods and beverages. CBD is the non-psychoactive ingredient in cannabis that has all of the health benefits. In this industry, it is simple and inexpensive to start a White Label company and have another producer supply and bottle your product. Then, you merely advertise the products for sale letting your supply do all of the mechanical work for your business.

CV Sciences (OTCQB:CVSI) is one of the suppliers to White Label companies as well as selling their own products direct to consumer. But, with continuously increasing sales of CBD products, CV Sciences has not seen in-kind revenue increments. Now, they are getting short on cash. This has the potential to weigh on their stock even more than it has over the past several months.

Total CBD Market And Projections

CBD is all the buzz and hype at the moment. In fact, the growth rate is said to be off the charts for the coming years.

Here is a look at the projections for sales for the CBD market:

(Data Source: Statista – Author’s Chart)

While this chart is impressive, I am not impressed.

I do not see any one company being a stand-out, nor could any one company take the lead. There are a lot of factors for this; you, or I, could be one of them.

I just had a conversation with a company regarding them doing a White Label/Drop Shipping product for me using CBD as a product. I inquired about a product at this company and then the conversation turned to the potential of me doing a White Label product through them that they could ship for me directly to my customers if the product sold.

I could start this business and be selling by the end of this week all for about $100.00. Period. Please note: I have no interest in doing a drop-ship/white label CBD product; I have a medium-sized coffee business that keeps me quite busy as it is.

But, if I did have the interest, I could place an advertisement in your Instagram feed by the end of this week and sell you that product. All I would have to do is what every other individual that is placing ads inside your Instagram/Facebook/Pinterest/Tik Tok, etc. feed does and that is start a Shopify website and White Label/Drop Ship the products directly to you. Since my startup costs are so minimal, I could turn this quite quickly.

And, if I could do it, anyone could do it. In fact, I just did an eBay search for CBD – very generic – and got 27,569 search results returned to me. I scrolled down one page’s worth of the results and they are all the same types of products: Gummies and oils and other types of ingestible products. I am betting that most of these products are produced by wholesale companies.

That means there are almost no barriers to entry. In this case, I could feasibly be running this business with the walk-around cash I have currently tossed on top of my dresser. Despite being a very big believer in the CBD world, I have no belief in any one company; it would be impossible to create differentiation. I think this is going to be a very tough go for any company that is involved in CBD.

Then curiosity got the best of me and a quick internet search revealed that CV Sciences does White Label wholesale packaging for the CBD market. Believe it or not, my tune about this company shifted modestly. They are the ones doing what is basically the easy lifting/mechanical work while all of the white label customers are scrambling around trying to find customers.

Which brings about the obvious question: What exactly does CV Sciences do?

They are exactly as I explained. They extract CBD from cannabis and then turn that into either oils or ingestible foods. The company touts many different types of strains and from this many different types of CBD products targetting different ailments within the body. They also have some products that are non-cannabis derived but are still holistic and natural. CV Sciences sells direct to consumer and on a wholesale basis.

Let’s have a look at how the revenue plays out with that as the foundation of CV Sciences.

CV Sciences Revenues

In the beginning, revenues were moving steadily upwards but since seem to be falling downwards steadily:

CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI) | CBDNewsFeed

(Data Source: Company Data – Author’s Chart)

CV Sciences peaked in revenues in the June quarter of 2019. Since then, revenues have declined significantly by approximately 66%, as the chart above shows.

According to the latest earnings release, a lot of the declines are attributed to the fall in foot traffic in the retail outlets that they service. And yet, CV Sciences sells in some 6,227 stores. I guess on a collective basis this is all adding up to a negative decline in overall sales.

At the same time, however, e-commerce is generating an increasing amount of traffic for the company but has not compensated for the decline in the retail stores they sell through.

The company has taken several steps in addressing its declining revenue and loss of customer base. But, they need to see significant improvements in more than just the revenue areas of the business.

CV Sciences Gross Margins

Gross margins have been declining somewhat over the course of the past few quarters.

CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI) | CBDNewsFeed

(Data Source: Company Data – Author’s Chart)

There are not too many purely CBD companies that I am aware of that I can look towards to compare the gross margins. Although I have read a couple of the earnings transcripts from CV Sciences, I have not found a full explanation for the drop in gross margins in November’s release (There were no transcripts available from that quarter’s earnings release).

Improving gross margins would almost always improve net margins; a company has more to work with. But, without knowing the nature of what amounts to about a 25% drop, it is hard to focus on what management is working on to address that aspect of the business.

At the same time, CBD is a bit different than the THC sales here in the United States and other countries. In Canada, when the country legalized cannabis in October of 2018, there was an ensuing buildup of companies producing cannabis products. That industry all but was crushed by the glut of supply. There was no nationwide-legalization here in the United States; each state has legalized its state individually. So, there was no nationwide glut of supply.

Yet, the drop in CV Sciences’ revenues and gross margins coincides with the drop in Canada’s margins. However, I cannot imagine what the correlation would be.

If the current levels on gross margins are the new normal, then the company is going to have to increase revenues more to compensate for the loss in gross margins. This all leads down the pathway towards net income.

CV Sciences Net Income

Here is a look at CV Sciences’ net income over the past several quarters:

CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI) | CBDNewsFeed

(Data Source: Company Data – Author’s Chart)

If you look at revenues to this chart on earnings, it would appear that economies of scale are achieved at ~$8.5M in quarterly sales. This would need to be the target revenue that CV Sciences needs to focus on. But, and if you look at the gross margin picture, you will see that since gross margins have dropped as they have, the difference needs to be made up with increased revenues. The yardstick is being moved. But, that might not be the biggest issue right now.

CV Sciences cash on hand

Keep in mind that CV Sciences just lost $3.2M for the quarter. Here is a look at their cash on hand:

CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI) | CBDNewsFeed

(Data Source: Company Data – Author’s Chart)

According to the chart above, CV Sciences has less than six months’ worth of cash on hand given the last quarterly net loss. They will need to raise cash. Right now.

Having to raise cash via a stock offering would suppress the value of the stock given the losses the company incurs on a quarterly basis. This in turn would also drive the book value lower.

If CV Sciences instead opted for taking on debt, this would dilute the asset picture, again driving down book value which would pressure the stock significantly.

CV Sciences Book Value

CV Sciences’ book value is listed as $0.19 per share:

CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI) | CBDNewsFeed

(Data Source: Company Data – Author’s Chart)

Not only is book value per share dwindling, but I see no way for an improvement given the current picture in revenues, gross margins, net profits, and cash on hand at CV Sciences. They are getting to a point where they need to raise cash. But, their disposition is precarious with regards to the company moving in a positive direction.

The book value suggests that the stock price should be declining given their financial position.

CVSI Stock

Here is a look at the most recent stock for CVSI:

CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI) | CBDNewsFeed

(Data Source: Trading View)

As you can see in 2018, the industry was abuzz with activity as cannabis in Canada began legalization. A lot of stocks in the industry pushed upwards like this – and then subsequently fell sharply after the lack of profits and a whole list of other issues.

Be that as it may, CV Sciences’ revenues were on a solid upward trajectory during this time. However, throughout the end of 2019 and into 2020, revenues declined sharply, as well as the stock.

Currently, book value is sitting at 33% of the current stock price. If the company is not able to turn things around in a short period of time, the stock price will be pressured significantly.

It should be noted that CVSI finished the week last week at $0.45 per share but in this chart is already printing ~$0.61 per share, an approximate 33% increase for the week. I found no new news that had pushed the stock upwards during this time.

I have no idea what is pushing CSVI upwards when the book value is sliding lower – and, is already 33% of the book value – and the revenue and earnings picture is moving downwards. Nonetheless, my mind is made up about this company.

Conclusion: Is CV Sciences A Buy?

As I mentioned in the beginning, I am not a big fan of any one company in the CBD industry, but on a whole, the CBD industry is promising. At the same time, revenues for this company have declined in an industry that is seeing increasing revenues; something is out of line. Not only are revenues declining, but gross margins are also down significantly. Then there are EPS and book value, not to mention the likelihood of a capital raise.

All of these factors point in one direction: CVSI will fall. The company does not have enough time to turn things around in order to prevent a capital raise and ensuing dilution of stock.

For these reasons, I am bearish on CVSI.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article was republished on from the original article, CV Sciences: CBD Is All The Rage Yet This Stock Will Get Ravaged (OTCMKTS:CVSI), which was originally published on 2020-12-03 02:52:30 (based on the date that was listed on the original article at the time it was republished). We shared this article on because our editorial staff believed that its context was useful and helpful to our readers. If you have any questions regarding this article, please email us at .

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