CV Sciences Inc (OTCMKTS:CVSI) Looking To Overcome Headwinds

When we last reviewed CV Sciences, Inc (OTCMKTS:CVSI) on June 9 2017, we mentioned that the Company had an upcoming meeting with the U.S. Food and Drug Administration (FDA) on June 15, 2017, to discuss its initial drug candidate (CVSI-007), a chewing gum that combines plant-based cannabidiol (CBD) and nicotine for the purpose of treading smokeless tobacco addiction. The meeting did take place and had positive results. However, since then, the Securities and Exchange Commission (SEC) has filed fraud charge against the Company and CEO Michael Mona Jr.Before we get into the details, a little background for those not familiar with CV Sciences, Inc. The company operates two distinct business segments: a drug development division focused on developing and commercializing novel therapeutics utilizing synthetic cannabidiol (CBD); and a consumer product division in manufacturing, marketing and selling plant-based CBD products to a range of market sectors. CV Sciences, Inc. has primary offices and facilities in Las Vegas, Nevada and San Diego, California. The company has pivoted into drug development focused on the development and commercialization of cannabis derived innovative medicines.The SEC Complaint filed on June 16, 2016 alleges that CannaVEST Corp. (now known as CV Sciences, Inc.) and CEO Michael Mona Jr. materially overstated the company's total assets in quarterly reports for the first and second quarters of 2013.According to the complaint, CannaVEST reported purchasing a company called PhytoSphere Systems LLC, including its existing rights under contracts with hemp production and processing facilities, for $35 million, even though Mona knew that the purported purchase price was substantially inflated. The complaint alleges that CannaVEST agreed to the purported purchase price only because CannaVEST could pay for the acquisition primarily with CannaVEST shares which Mona believed had little value at the time.The complaint further alleges that in the third quarter of 2013, CannaVEST obtained a third-party valuation of PhytoSphere for $8 million as of the date CannaVest acquired PhytoSphere. The complaint charges CannaVEST with fraud, filing false financial reports, and other federal securities law violations, and seeks a permanent injunction and civil money penalties. The complaint also charges CEO Michael Mona Jr. with fraud and other violations, including the deceit of auditors, and seeks a permanent injunction, civil money penalties, an officer and director bar, and reimbursement of his $10,000 cash bonus for 2013, as provided for under Section 304(a) of the Sarbanes-Oxley Act.Mr. Mona immediately responded to the complaint on June 19, 2017 in a letter to the Company’s shareholders and customers. In the letter, Mr. Mona explains that the complaint relates to the acquisition of the assets of PhytoSphere Systems, LLC in January 2013, including the seller's European inventory supply chain which was the asset critical in launching the Company’s successful consumer products division. Mr. Mona further states in the letter:

“the SEC does not question the legality of the transaction nor does the SEC criticize our operations. Further, the SEC does not suggest that any officer or director sold shares of stock in connection with this transaction, or at any other time. The SEC simply takes issue with how the Company reported the transaction in its quarterly reports to the SEC during the first three quarters of 2013. More specifically, with the benefit of hindsight, the SEC takes issue with the negotiated acquisition price and the timing of our valuation to determine asset reporting value.”

The Company has retained Paul Hastings as litigation counsel and intends to vigorously defend this matter.In other positive news on June 19, 2017, the Company announced that it held its pre-IND meeting with the U.S. Food and Drug Administration (FDA) on June 15, 2017, to review its drug development plan for CVSI-007, the Company's patent-pending product for smokeless tobacco addiction therapy. CEO Michael J. Mona, Jr. commented:

"Our pre-IND meeting with the FDA was very constructive and provided the Company with a favorable development roadmap for this important combination drug candidate. We have immediately commenced preparation of our Investigational New Drug application (IND) to initiate human trials. Our New Drug Application will be under the 505(b)2 pathway using nicotine-polacrilex gum, an FDA-approved nicotine replacement therapy”

CVSI stock has been hovering near a support level around $.27. On Monday, June 19, 2017, the first trading day after the SEC made its announcement, the stock gapped down from $.2950 to $.2650, and closed at $.2397. The stock seems to have stabilized and is currently trading at $.2307. Current market capitalization is holding at $20.52 million, on 88.95 million shares outstanding as of June 23, 2017.Although the stock price did dip a little, the adverse news of the SEC complaint, and the favorable news of the FDA meeting seem to have countered each other. There will be however, lingering effects from both news events, both positive and negative. We will be watching closely to see if CVSI prevails. We will be updating our subscribers as soon as we know more. For the latest updates on CVSI, sign up below!Image courtesy of FlickrDisclosure: We have no position in CVSI and have not been compensated for this article.