CV Sciences Inc (OTCMKTS:CVSI) stock came tumbling by more than 30% after litigation firm Block & Leviton LLP stated it was launching an investigation over possible violation of securities laws. The sell-off comes just days after the company reported impressive second quarter financial results depicted by a 203% increase in revenues.
The solid financial results had catapulted the stock to highs of $6 a share in the market. However, it appears the stock might have run ahead of fundamentals as Block & Levinton continues to question whether the company did indeed hide valuable information about a certain key intellectual property.
The stock has since pulled back to the $4.20 a share level on massive turnover of shares traded. It remains to be seen if concerns about the company’s intellectual property will strengthen short selling pressure resulting in a further slide.
A close below the $4 a share handle could see the stock plummeting to the $2.80 mark seen as the next substantial support level. On the upside, the stock needs to stabilize above the $4.20 handle to have any chance of bouncing back to record highs.
What Does CV Sciences Do?
CV Sciences operates through two segments of specialty pharmaceuticals and consumer products. Its core business involves coming up and commercial prescription drugs, utilizing synthetic CBD. CVSI-007 is the company’s lead product that combines CBD and nicotine for the treatment of tobacco addiction.
Why the Stock Imploded
Investor confidence in CV Sciences appears to have taken a hit after Citron Research published a report claiming that the company’s management team continues to misrepresent the status of one of its core patents. According to the research firm, the company has consistently failed to admit that one of its high profile patents was rejected’, even as it continues to hype it.
In response to the Citron Research publication, litigation firm Block & Leviton LLP has since launched class action investigation. The firm in its investigation is trying to unravel whether senior directors and managers did violate federal security laws on failing to disclose vital information about the patent in question.
What Next For CVSI Sciences Stock
CV Sciences stock has been running wild in the market after reporting 203% increase in sales for the quarter ended June 30, 2018, that came in at $12.3 million. Gross profit was also up by 219% to $9 million leading to a first time net income of $3.2 million.
The stock surge has come on growing investors’ confidence about the company’s sale growth and operational efficiency in the highly competitive industry. Given that the concerns raised by Citron Research have little impact on the company’s sales growth momentum, it remains to be seen how investors will react going forward.
Second quarter financial results is a catalyst that should continue to affirm CV Sciences long-term prospects amidst the patent concerns raised by Citron Research. The stellar financial results also underscore the fact that the company has been successful in executing its strategy of aggressive and consistent sales growth.
CV Sciences has also done an excellent job in expanding its distribution channels, a move that has allowed it to strengthen its market share within the CBD natural products market. PlusCBD product line continues to affirm the company’s operating performance which is the number one product in the hemp CBD product category.
Drug Development program CVSI-007 which addresses the multi-billion smokeless tobacco use and addiction market is another development with the potential to offset the patent claims raised by Citron Research.
“We continue to make progress with our pre-clinical program as we advance toward filing an Investigational New Drug application in 2019. We are confident that our continued growth and profitability will allow us to initially pursue our drug development plans without the need for additional outside capital in the near term,” said CEO, Joseph Dowling.
CV Science share price has dipped significantly in response to the claims about a key patent. Amidst the concerns, the company’s fundamentals remain intact, if the recent quarterly financial results are anything to go by.
Speculation about the company’s patent should subside going forward, given that the company has shown it has what it takes to be a force to reckon with in the industry. The fact that the company turned in a profit for the first time in the second quarter, also underlines what is at stake as it continues to execute on its business strategy.
In our view, the dip in value could as well be an opportunity to buy the stock on the low given that long-term growth fundamentals remain intact.
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Disclosure: We have no position in CVSI and have not been compensated for this article.