Introduction to CV Sciences
CV Sciences (OTCQB:CVSI) is a Las Vegas-based company that is involved in the production and sale of CBD-infused products under its brand PlusCBD. These products include topical ointments, gummies, tinctures (concentrated liquid herbal extracts), capsules, and pet products. The company also has a specialty pharmaceuticals segment that is focused on developing pharmaceutical uses for cannabidiol.
Shares have been in a sharp uptrend since mid-2017 due to growing popularity and awareness of cannabidiol (CBD), a compound that has purported anti-anxiety, anti-depressant, and pain-relieving properties, among others.
CVSI is one of the largest and most attractively valued CBD companies, which makes it an interesting opportunity for investors looking to get involved in the space.
Financial Snapshot as of June 26, 2019 (in millions USD)
|
Market cap |
394.95 |
|
Debt |
0 |
|
Cash |
13.64 |
|
Enterprise Value |
386.61 |
|
Share Price (OTCQB:CVSI) |
4.15 |
|
Shares Outstanding |
95.2 million |
(Source: Yahoo Finance)
Business Segments
CV Sciences operates two business segments:
Consumer Products
CV Sciences is involved in the manufacturing, marketing, and sale of CBD-infused products through its Consumer Products division. The company sells these products under the brand name PlusCBD, which include sprays, drops, capsules, soft gels, balms, and gummies. This segment generates all of CVSI’s revenue.
The company sells its products in 4,591 retail stores throughout the country, which include 945 Kroger (NYSE:KR) stores and certain CVS (NYSE:CVS) stores – management has done a good job of expanding distribution into mainstream retail channels, which is a positive sign for future top-line growth.
Specialty Pharmaceuticals
This unit, as mentioned earlier, is focused on developing pharmaceutical applications for CBD. One patent that is currently pending is for a CBD/nicotine product that is geared towards those interested in “smokeless tobacco”, which the company claims is safer and less harmful than cigarettes. Thus far, the company has not generated any revenue from this segment, and it is unclear when (if at all) it will be able to do so.
CBD’s Popularity is Booming
Part of the reason for our optimism about CV Sciences stems from the soaring popularity of cannabidiol (CBD), which has become the subject of intense public interest and scrutiny for its potential as a remedy for a wide range of ailments.
Just take a look at the following graph from Google Trends:
(Source: Google Trends)
Search interest for CBD surpassed that of marijuana in late 2018, a sign of growing public curiosity and interest in the compound.
This rise in public interest is translating into a booming industry. Investment bank and financial services firm Cowen & Co. estimates that 2018 sales of CBD ranged between $600 million and $2 billion and forecasts this number to rise to $16 billion by 2025.
The Brightfield Group forecasts $22 billion in annual hemp-derived CBD sales by 2022. Note the following excerpt (from the linked article):
“CBD is the next healthcare phenomenon. It is so effective for so many conditions, is natural, non-psychoactive and has no known serious side effects. It is the next hot, functional ingredient beauty ingredient, like collagen, shea butter or aloe. It can be grown domestically as a substitute for tobacco and provide a much-needed cash crop for American farmers”.
Fundamental Valuation
CV Sciences generated $55, $48, $21, and $11 million in revenue over the LTM, FY 2018, FY 2017, and FY 2016 periods, respectively:
The company’s EV/sales multiple based on 2018 numbers is just 8x, which is markedly less than its peers. Charlotte’s Web’s (OTCQX:CWBHF) current EV/sales multiple is 21x, cbdMD’s (NYSE: YCBD) is 15x, and Elixinol’s (OTCQX:ELLXF) is 26x.
(Source: CVSI SEC filings)
CVSI is one of just a few profitable CBD/cannabis companies: it generated $10 million of net income in 2018, or $0.09 a share. Gross and operating margins in FY 2018 were 70.2% and 21.2%, respectively. CBD is free of the burdensome taxes and regulatory measures that have been placed on cannabis, which allows companies such as CVSI and Charlotte’s Web to generate superior margins.
While increased future competition will likely negatively impact profitability, we believe that CV Sciences can continue to increase shareholder value by growing revenues and managing operating expenses. CV Sciences has leg-up on competitors given its relatively early adoption of CBD, which provides the company with a first-mover advantage.
In addition, CV Sciences has managed to avoid excessive leverage: it has a clean balance sheet with $13 million in cash and no long-term debt.
Securities Fraud Allegations
CV Sciences has been persistently dogged by a number of securities fraud allegations. Below is a quick summary (fellow SA contributor Wallace Lee does an excellent job of describing these issues):
A 2017 lawsuit filed by the SEC alleged that Michael Mona (founder and former CEO of CVSI) engaged in a fraudulent transaction in January 2013 whereby he used a shell company called Foreclosure Solutions, Inc. to purchase a company called PhytoSPHERE Systems with shares of CVSI (then known as Cannavest Inc.). The transaction was started at a value of $35 million, inflating CV Sciences’ balance sheet.
This lawsuit was resolved in 2018 as follows: Mona was barred by serving as a director or officer of a publicly-traded company for five years and paid a personal penalty of $50,000; CVSI paid a fine of $150,000. CVSI and Mona neither denied nor admitted the allegations, a provision that the SEC claims leads to quicker and more efficient resolution of cases.
In our view, there are two ways that investors can look at these allegations:
- Mona’s misconduct disadvantages the company in several ways: it may lose some competitive advantages when negotiating with retailers and other distributors of PlusCBD products; investors may be less willing to provide the company with the capital that it needs to expand; and it is uncertain whether Mona (and CVSI) will engage in fraudulent activities in the future.
- On the other hand, CVSI has matured into a full-fledged consumer products company over the past few years: management has partnered with CVS and other retail outlets to sell CBD-infused products, sales have grown to ~$50m annually, and the company has reached profitability. Mona and other CVSI employees have an opportunity to create significant wealth by scaling CVSI, which makes it unlikely that they will risk this by engaging in fraudulent activity in the future.
A balanced view incorporating both of these perspectives is necessary to accurately evaluate CV Sciences. Although this is certainly a serious concern for investors, this may already be priced into CVSI shares, given a wide valuation gap between it and Charlotte’s Web (more on this later).
Future of CBD in the United States
Continued growth in the United States is still uncertain, given regulatory concerns and questions about CBD’s efficacy, but we are optimistic about CBD’s potential for a number of reasons:
WHO Report
CBD is considered safe by the World Health Organization. According to a report published by the WHO in November 2017, “there is no evidence of recreational use of CBD or any public health-related problems associated with the use of pure CBD”.
The industry will also benefit a great deal from the Agricultural Improvements Act of 2018, which we’ll describe below.
2018 Farm Bill
The Agricultural Improvements Act of 2018 (also known as the 2018 Farm Bill) was signed into law on December 20, 2018. The parts of the bill that are most relevant to CBD are as follows:
- Industrial hemp cultivation is now legal nationally. Hemp is a strain of the Cannabis sativa plant that can be refined into textiles, plastics, clothing, paint, animal feed, etc.
- Legalized hemp is restricted to 0.3% THC; any hemp that contains more than this amount of THC is still illegal at the federal level.
- This legislation also explicitly allows for the interstate movement and commercial sale of hemp-derived products.
The act also expands the research efforts enacted by the Agricultural Act of 2014 by re-extending protections for hemp research and including hemp under the Critical Agricultural Materials Act.
This is a major step forward for CV Sciences in terms of legitimizing cannabidiol in the eyes of American consumers and allowing commercial activity in the space to flourish. In addition, this brings the company one step closer to listing on the NASDAQ, a move that was discussed during the last earnings call. This would pave the way for institutional investors to get involved in CBD and would likely generate significant interest in the company.
FDA Perspective on CBD
The Food and Drug Administration currently views the sale of CBD-based products marketed as dietary supplements illegal because a dietary supplement cannot be legally considered as such if it is already under investigation as a drug with pharmaceutical uses.
However, the FDA did note in its first public hearing about CBD regulation (held last Friday) that “given the strong public interest in CBD as a wellness aid, it will seek to help provide pathways to regulatory approval”.
In addition, the FDA has generally been lax in regards to enforcement of CBD-infused food products, as described on page 63 of Charlotte Web’s prospectus. This is part of the reason why CBD food products can be found at stores across the United States, despite the fact that they are illegal in the eyes of the FDA.
Final Thoughts
CV Sciences is one of the most attractively valued cannabis/CBD companies and looks to have a significant growth runway ahead of it. The company is also benefiting from growing nationwide interest in CBD, which has shown promise as a way to treat anxiety, pain, soreness, and other common ailments (as well as serious conditions such as epilepsy).
We believe that it deserves the attention of investors eyeing the CBD industry. However, there are issues that investors must first get comfortable with, including Mona’s run-ins with the SEC and a highly competitive, fragmented industry. We will continue publishing articles on companies in the CBD/cannabis space (as well as other industries) and welcome comments and feedback from readers!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CVSI over 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.
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