I can see why a risk-loving investor might take a gamble on CV Sciences (OTCMKTS:CVSI). Those who have already taken the plunge have done quite well. CV Sciences, somewhat incredibly, has risen by a factor of 21x in just the last year. CVSI stock, in fact, has risen more than 1,000% just since April.
And there are some reasons for optimism — even after the big gains. Unlike a number of OTC marijuana-related stocks, CV Sciences has a real business. Growth has been impressive, with revenue up 143% in Q3 and Adjusted EBITDA rising 372%. CBD oil demand continues to grow, and CV Sciences is a leader in that space. The pharmaceutical side of the business is aiming to develop cessation treatments for smokeless tobacco.
The valuation assigned to CVSI stock seems high: in the range of 40x+ 2018 Adjusted EBITDA and 11x-12x revenue. But in the context of the cannabis space, those multiples aren’t all that extraordinary. Well-known cannabis plays like Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC) are more dearly valued — with less established underlying businesses.
All that said, though, there are some red flags here. CV Sciences is the descendant of a foreclosure company, after all. It has issued shares repeatedly for almost nothing. Its former CEO was barred from serving as an officer of a public company for five years. There’s a real business here, assuming CBD oil demand continues. But as a stock, CVSI stock seems to have some questions.
Why Is the Company Giving Away CV Sciences Stock?
Growing companies often sell stock below market value in a bid to raise money and/or fund operations. But CV Sciences has been awfully generous with its shares over the years.
As this article pointed out, the company disclosed in its 10-Q (p. 28) that it had issued 150,000 shares of stock to IRTH Communications, its “investor relations consultant”. The Q cited fair value of $61,575; the current market value is over $700,000, however. That’s an enormous fee for an IR company — and the willingness to issue stock for what could have been $60K-plus in cash raises question about just how valuable CVSI management itself believes CVSI stock is.
Per the 10-K, in March 2017 CVSI seemed to do a favor for the shareholders of CanX, which CV Sciences acquired to create its pharmaceutical business. CanX shareholders were entitled to up to 15 million shares based on milestones reached in the development of an FDA-approved drug. CV Sciences hasn’t made much progress; it aspires to submit an IND (Investigational New Drug) application early next year, per a recent presentation.
Yet the company, in March 2017, decided to simply issue those 15 million shares anyway — which represent about 13% of the current fully diluted share count, and over $70 million in current value.
The company also owed CanX a potential royalty that could be bought out for 5% of outstanding shares. Instead, CV Sciences issued 6.4 million shares to buy out the royalty.
And in 2017 — again according to the 10-K (p. F-18) — CVSI issued 8.37 million shares to a lender for $1.805 million. That’s 22 cents per share.
CVSI Stock Concerns
As a result, CVSI’s share count continues to balloon — and shareholders continue to be diluted. It’s possible, now that the CBD oil business is profitable, that the dilution will end. But it’s also difficult to see why management and the board have been so willing to give away CV Sciences stock, particularly given the business turned FCF-positive last year.
There’s also the question of the viability of the pharmaceutical efforts. For all the stock given to CanX shareholders, and the optimism from management about the drug development, CV Sciences hasn’t put a lot of muscle behind R&D. R&D spend in the pharmaceutical business was just $473,000 in 2017, and $324,000 the year before. It’s difficult to develop an FDA-approved drug with less than $1 million in spend.
And as Citron Research pointed out in a tweet that sent CV Sciences stock spiraling, the company’s patent efforts so far have been rejected. The combination of CBD oil and nicotine hardly seems revolutionary, and as a smokeless tobacco user I’ve tried CBD oil with essentially zero effect.
It’s possible CV Sciences does develop a drug. Many skeptics didn’t trust the fish oil-based product from Amarin (NASDAQ:AMRN), either. But less than $1 million in spend probably isn’t getting it done.
Be Careful Out There
There is a viable CBD business underlying CVSI stock, admittedly. But CBD itself may be getting overhyped. As an interesting New York Times piece detailed, CBD is being posited as a savior for maladies of all kinds. And sure, GW Pharmaceuticals (NASDAQ:GWPH) has a CBD-based drug approved for epilepsy. But the claims of cures for depression, anxiety, gastrointestinal distress and myriad other ailments haven’t been proven.
If CBD is for real, and CV Sciences is the same, there is potential upside in CVSI stock. But there’s a lot of risk here in the company’s history and its end markets. Investors owning, or even considering owning, the stock need to understand those risks.
As of this writing, Vince Martin has no positions in any securities mentioned.
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