Cannabis U.S. Companies

[JohnCM]

13 Reasons Why I Am Buying CV Sciences

Sep. 4, 2018
Special Situations and Arbs - Seeking Alpha

Summary

Company has fantastic sales growth.

Citron has covered their short.

Relative Strength Index at a low.

The past week and a half has been torturous for CV Sciences (OTCQB:CVSI) shareholders. The stock has crashed from an intraday high of $9.20 per share Monday August 20 to as low as $2.76 last Wednesday. More than a 60% haircut in less than seven trading days.

Before the decline CVSI had been one of the top performing stocks of 2018.

So why the massive decline?

A tweet from noted short seller Andrew Left of Citron.
Citron Research? @CitronResearch Aug 20

$CVSI misrepresentation by management. The total bull case is based on REJECTED patents the company has never disclosed and continues to hype. Securities Fraud? Another IRTH special

A bearish article on Seeking Alpha.

Class Action Lawsuits related to Citron's tweet about rejected patents they claimed the company never disclosed. The lawsuits seek to recover shareholder losses from the recent decline.

CVSI management has responded to Citron's allegations:

The conclusions in the complaint and in the ‘report’ by Citron Research are outright false, and demonstrate either an ignorance, a disregard, or both, of the basics of patent prosecution. A ‘final rejection’ in the context of patent prosecution is anything but final. It by no means indicates that the applicant has failed in its efforts to obtain an issued patent.

Regardless, what ultimately dictates a stock price are earnings and revenue. And for CVSI both are growing and are in the sweet spot.

The Company

CV Sciences operates two distinct business segments: a drug development division focused on developing and commercializing novel therapeutics utilizing synthetic CBD, and a consumer product division in manufacturing, marketing and selling plant-based CBD products under the PlusCBD Oil name to a range of market sectors.

PlusCBD Oil

PlusCBD Oil is the top-selling brand of hemp-derived CBD oil for consumers in the natural products industry. PlusCBD Oil offers the most diverse and largest supply of hemp-derived CBD oil on hand in the United States.

13 reasons I am buying CVSI now

Growing Revenues-Less than a month ago, CVSI reported triple-digit year-over-year revenue growth and double-digit sales growth on a sequential quarterly comparison. Second quarter sales were a record coming in at $12,349,000. That was a 53% sequential quarterly increase from $8.1 million reported for the first quarter. And this in a market that is nowhere near maturity.

They are making money-Gross profit in the second quarter was $9.1 million and adjusted EBITDA was $3.8 million. The Gross profit was a record and an increase of 219% compared to the second quarter from a year earlier. This is the company's second consecutive profitable quarter.

The Peter Lynch approach-Peter Lynch famously achieved success partially by kicking tires. I kicked a few tires myself in speaking to owners of multiple health food stores who sell CVSI's PlusCBD Oil. That is how I first came to buy the stock in the first quarter of this year. What I am hearing now is even more positive: CVSI's products are selling at a higher rate than quarter two. (Full disclosure the sample size is small). What also attracted me to the company is that consumers who are using the product say it works and helps them.

No more Citron-On Wednesday, Citron tweeted that they have closed out their short position. They clearly were the source of the decline. Those who had followed Citron's short call on CVSI will now likely cover their short as well. "Citron covering $CVSI short. Making 70% in a week is always a good trade. Stay tuned for more cannabis trades, our team is working hard to bring you the next 70% return."

Class Action lawsuits-They are commonplace in the stock market. These suits concern rejected patents that they claim the company never disclosed. As noted above CVSI has responded to the claims vigorously denying any wrongdoing.

Old news-The recent bearish article on Seeking Alpha was mostly about old news and didn't focus on earnings, cash flow or revenue. The article was well written but could have been more balanced.

Sentiment-There has been a lot of perceived bad news about CVSI in the past two weeks. I would think that a good chunk of the momentum traders and fast money have sold and moved on. The Relative Strength Index as of this writing is at its lowest level since June 18, which happens to be the day CVSI bottomed at $1.42.

No debt-last week management announced that they had recently paid off an $850,000 promissory note nine months early thus avoiding any remaining interest payments due on the Note. I view debt free companies as fiscally responsible.

Nasdaq-On July 23rd, CV Sciences submitted its application to list the Company’s common stock in the U.S. on the Nasdaq Capital Market. Nasdaq opens the doors to numerous opportunities for growth for smaller companies. Below is the estimated timeline for Nasdaq to respond.

Week 1. Company submits application for listing and Nasdaq Listing Qualifications Staff begins its review.

Weeks 2-3. Staff completes its preliminary review and prepares comment letter.

Weeks 3-4. Company addresses any issues raised by Staff.

Weeks 5-6. Staff completes their review and company is approved for listing.

The required share price to uplist to the Nasdaq is $4 and according to the Nasdaq website, the applicable bid price requirement is for 90 consecutive trading days before applying. Since we know CVSI has already applied, we need to figure out how that happened. There is a second way: uplisting companies can also qualify under the closing price alternative, which is $3 per share and seemingly in my opinion doesn't require the 90 day waiting period.

I believe that CVSI qualifies for the $3 per share alternative. As far as I know there isn't a U.S. Hemp stock on the Nasdaq market. Will that be an impediment to them getting listed? If anyone has knowledge on this matter please comment below.

Buyout or equity stake target-Constellation Brands made news two weeks ago when they announced that they had made a $4 billion investment in Canopy Growth Corporation (CGC), Canada’s leading legal cannabis company. Execs from Anheuser-Busch InBev (BUD), Pernod Ricard SA (OTC:PRRDF), Heineken (OTCQX:HEINY), Coca-Cola (KO) and Diageo (DEO) have been meeting with various Canadian cannabis producers and touring their operations, sources tell The Globe and Mail. Analysts expect the beverage giants to take equity stakes and make JV arrangements, instead of seeking a full takeover of legal cannabis players. Unlike cannabis, CBD is non-psychotoxic and is derived from agricultural hemp. There are always companies that will invest in growth.

CVSI-007-On the pharmaceutical side of CVSI's business, CV Sciences is in development of CBD-based potential FDA approved drugs. CVSI-007 is a chewing gum containing nicotine and synthetic CBD to support cessation of smokeless tobacco use and addiction. I view CVSI's pharma drugs as a kicker. FDA approval doesn't come easy if at all and often takes more time than companies expect.

U.S. Federal approval of the Farm bill-Hemp is moving closer to legalization in the U.S. In July, Senate Majority Leader Mitch McConnell successfully inserted hemp provisions into the Farm Bill. Congress is expected to approve the Farm Bill this fall which would among other things, make Hemp legal. It is legal to sell Hemp products in the U.S. but the the law is murky and open to differing interpretations. Approval on the Federal level would certainly increase the sales of companies that sell CBD Oil.

Charlotte's Web-CVSI's competitor Charlotte’s Web (CWEB) went public on last week in Canada on the Canadian Securities Exchange. The company has a market cap of approximately $750 million in U.S. dollars. As of this writing CVSI has a market cap of $378 million. In a sign of demand for CBD stocks, Charlotte's Web shares were priced at CA$7, the high end of its initially announced range of between CA$6 and CA$7. What's more the company increased its IPO by 52% to CA$100.1 million ($77 million U.S.). Revenues are similar for CWEB and CVSI. CWEB reported $40 million in sales last year and $17.2 million in their most recent quarter. CWEB reported net income of $3.7 million in that quarter almost identical to CVSI's $3.8 million in its last quarter.

Risks

The valuations for cannabis/CBD companies could reset lower. CVSI is a speculative stock. There is risk the farm bill may not be passed. There is risk they may never be able to place their product in larger stores. Even though CVSI is a leader and has a head start on the CBD Oil industry there is risk of competition. There is risk that the recent volatility continues shaking out shareholders. There is risk they never uplist to the Nasdaq. Please don't invest money here you can't afford to lose.

Conclusion

CV Sciences is a growing stock in an industry in its infancy. The company's products are in almost 2000 health food stores, a number that continues to rise. Revenues and earnings and rising significantly and the company has no debt.

We expect to deliver a strong second half and believe we have the ability to continue this growth momentum in 2019 and beyond.”- CEO Joseph Dowling

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Disclosure: I am/we are long CVSI.

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.