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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2024

 

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _________ to ________

Commission File Number: 000-54677

CV Sciences, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

80-0944970

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

9530 Padgett Street, Suite 107

San Diego, CA 92126

(Address of principal executive offices)

(866) 290-2157

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

None

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 7, 2024, the issuer had 163,228,469 shares of issued and outstanding common stock, par value $0.0001 per share.

 

 

 


 

CV SCIENCES, INC.

FORM 10-Q

TABLE OF CONTENTS

 

PAGE

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations

2

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

Condensed Consolidated Statements of Stockholders’ Equity

4

Condensed Consolidated Statements of Cash Flows

5

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

25

Item 4.

Controls and Procedures

25

 

PART II – OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosure

26

Item 5.

Other Information

26

Item 6.

Exhibits

27

 

SIGNATURES

29

 

 

i


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

CV SCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except per share data)

 

 

March 31,
2024

 

 

December 31,
2023

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

662

 

 

$

1,317

 

Accounts receivable, net

 

 

507

 

 

 

431

 

Inventory

 

 

5,756

 

 

 

5,655

 

Prepaid expenses and other

 

 

426

 

 

 

535

 

Total current assets

 

 

7,351

 

 

 

7,938

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

319

 

 

 

379

 

Right of use assets

 

 

139

 

 

 

167

 

Intangibles, net

 

 

73

 

 

 

78

 

Goodwill

 

 

340

 

 

 

342

 

Other assets

 

 

244

 

 

 

296

 

Total assets

 

$

8,466

 

 

$

9,200

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

2,460

 

 

$

2,309

 

Accrued expenses

 

 

3,248

 

 

 

3,422

 

Operating lease liability - current

 

 

134

 

 

 

130

 

Debt

 

 

117

 

 

 

254

 

Total current liabilities

 

 

5,959

 

 

 

6,115

 

 

 

 

 

 

 

 

Operating lease liability - net of current portion

 

 

23

 

 

 

58

 

Deferred tax liability

 

 

19

 

 

 

19

 

Other liabilities

 

 

103

 

 

 

105

 

Total liabilities

 

 

6,104

 

 

 

6,297

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Preferred stock, par value $0.0001; 10,000 shares authorized; 1 share issued as of
   March 31, 2024 and December 31, 2023; and
no shares outstanding as of
   March 31, 2024 and December 31, 2023

 

 

 

 

 

 

Common stock, par value $0.0001; 790,000 shares authorized as of
   March 31, 2024 and December 31, 2023;
163,228 and 161,678 shares issued
   and outstanding as of March 31, 2024 and December 31, 2023, respectively

 

 

16

 

 

 

16

 

Additional paid-in capital

 

 

87,556

 

 

 

87,464

 

Accumulated deficit

 

 

(85,215

)

 

 

(84,587

)

Accumulated other comprehensive income

 

 

5

 

 

 

10

 

Total stockholders' equity

 

 

2,362

 

 

 

2,903

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

8,466

 

 

$

9,200

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

1


 

CV SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Product sales, net

 

$

4,002

 

 

$

4,148

 

Cost of goods sold

 

 

2,149

 

 

 

2,366

 

Gross profit

 

 

1,853

 

 

 

1,782

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

36

 

 

 

35

 

Selling, general and administrative

 

 

2,437

 

 

 

2,156

 

Benefit from reversal of accrued payroll taxes (Note 12)

 

 

 

 

 

(6,171

)

Total operating expenses

 

 

2,473

 

 

 

(3,980

)

 

 

 

 

 

 

 

Operating income (loss)

 

 

(620

)

 

 

5,762

 

 

 

 

 

 

 

 

Other expense, net

 

 

2

 

 

 

56

 

Income (loss) before income taxes

 

 

(622

)

 

 

5,706

 

Income tax expense

 

 

6

 

 

 

 

Net income (loss)

 

$

(628

)

 

$

5,706

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic and diluted

 

 

163,075

 

 

 

152,104

 

 

 

 

 

 

 

 

Net income (loss) per common share, basic and diluted

 

$

(0.00

)

 

$

0.04

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

2


 

CV SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands, except per share data)

 

 

Three Months Ended March 31,

 

 

2024

 

 

2023

 

Net income (loss)

 

$

(628

)

 

$

5,706

 

Other comprehensive loss:

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(5

)

 

 

 

Total comprehensive income (loss)

 

$

(633

)

 

$

5,706

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

3


 

CV SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands)

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Total

 

Balance at December 31, 2023

 

 

 

 

$

 

 

 

161,678

 

 

$

16

 

 

$

87,464

 

 

$

(84,587

)

 

$

10

 

 

$

2,903

 

Issuance of common stock for services

 

 

 

 

 

 

 

 

1,550

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

62

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(628

)

 

 

 

 

 

(628

)

Balance at March 31, 2024

 

 

 

 

$

 

 

 

163,228

 

 

$

16

 

 

$

87,556

 

 

$

(85,215

)

 

$

5

 

 

$

2,362

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Accumulated Other Comprehensive

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Total

 

Balance at December 31, 2022

 

 

 

 

$

 

 

 

152,104

 

 

$

15

 

 

$

86,897

 

 

$

(87,689

)

 

$

 

 

$

(777

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

118

 

 

 

 

 

 

 

 

 

118

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,706

 

 

 

 

 

 

5,706

 

Balance at March 31, 2023

 

 

 

 

$

 

 

 

152,104

 

 

$

15

 

 

$

87,015

 

 

$

(81,983

)

 

$

 

 

$

5,047

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

CV SCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 

For the Three Months Ended March 31,

 

 

2024

 

 

2023

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

(628

)

 

$

5,706

 

Adjustments to reconcile net income (loss) to net cash flows provided by (used in)
   operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

63

 

 

 

59

 

Stock-based compensation

 

 

30

 

 

 

118

 

Note discount and interest expense

 

 

 

 

 

100

 

Non-cash lease expense, net

 

 

28

 

 

 

26

 

Benefit from reversal of accrued payroll tax (Note 12)

 

 

 

 

 

(6,171

)

Other

 

 

108

 

 

 

59

 

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(70

)

 

 

102

 

Inventory

 

 

(102

)

 

 

37

 

Prepaid expenses and other

 

 

109

 

 

 

1,087

 

Accounts payable and accrued expenses

 

 

(56

)

 

 

(148

)

Net cash flows provided by (used in) operating activities

 

 

(518

)

 

 

975

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

Repayment of note payable

 

 

(50

)

 

 

(764

)

Repayment of unsecured debt

 

 

(86

)

 

 

(108

)

Net cash flows used in financing activities

 

 

(136

)

 

 

(872

)

Effect of exchange rate changes on cash

 

 

(1

)

 

 

 

Net increase (decrease) in cash

 

 

(655

)

 

 

103

 

Cash, beginning of period

 

 

1,317

 

 

 

611

 

Cash, end of period

 

$

662

 

 

$

714

 

 

 

 

 

 

 

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

Interest paid

 

$

4

 

 

$

3

 

Income taxes paid

 

$

6

 

 

$

 

 

 

 

 

 

 

 

Supplemental disclosures of non-cash transactions:

 

 

 

 

 

 

Services paid with common stock

 

$

62

 

 

$

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

1.
ORGANIZATION AND BUSINESS

Historical Information - CV Sciences, Inc. (the “Company”) was incorporated under the name Foreclosure Solutions, Inc. in the State of Texas on December 9, 2010. The Company subsequently changed its name to CannaVest Corp. (Texas) on January 29, 2013. On July 25, 2013, the Company merged with and into its wholly-owned Delaware subsidiary, CannaVest Corp (Delaware), to effectuate a change in the Company’s state of incorporation from Texas to Delaware. On January 4, 2016, the Company filed a Certificate of Amendment of Certificate of Incorporation reflecting its corporate name change to “CV Sciences, Inc.”, effective on January 5, 2016. In addition, on January 4, 2016, the Company amended its Bylaws to reflect its corporate name change to “CV Sciences, Inc.”

Description of Business - The Company develops, manufactures, markets and sells herbal supplements and hemp-based cannabidiol ("CBD"). The Company sells its products under tradenames, such as +PlusCBD™ and +PlusCBDPet. The Company's products are sold in a variety of market sectors including nutraceutical, beauty care and specialty foods. In addition, subject to available capital, the Company is developing drug candidates which use CBD as a primary active ingredient.

On December 7, 2023, the Company acquired Cultured Foods Sp. z.o.o., a limited liability company organized under the laws of Poland ("Cultured Foods"). Cultured Foods is a leading European manufacturer and distributor of plant-based protein products. The Company's plant-based food products are sold under the Cultured Foods brand.

Basis of Presentation - The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information includes all normal recurring adjustments necessary for a fair statement of the results for the interim periods. On December 7, 2023, the Company acquired Cultured Foods. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements are unaudited and should be read in conjunction with the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission on March 29, 2024. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

Liquidity Considerations - U.S. GAAP requires management to assess a company's ability to continue as a going concern for a period of one year from the financial statement issuance date and to provide related note disclosure in certain circumstances. The accompanying financial statements and notes have been prepared assuming the Company will continue as a going concern. The Company generated negative cash flows from operations of $0.5 million for the three months ended March 31, 2024 and had an accumulated deficit of $85.2 million as of March 31, 2024. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund operations, growth initiatives and to continue to make and implement strategic cost reductions, including reductions in employee headcount, vendor spending, and delaying expenses related to its drug development activities. The Company is positioning itself to raise additional funds through the capital markets, issuance of debt, and/or securing lines of credit.

The Company's financial operating results and accumulated deficit, amongst other factors, raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.

Use of Estimates - The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results may differ from these estimates. Significant estimates include the valuation of intangible assets, inputs for valuing equity awards, valuation of inventory and assumptions related to revenue recognition.

Fair Value Measurements - Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The carrying values of accounts receivable, other current assets, accounts payable, and certain accrued expenses as of March 31, 2024 and December 31, 2023, approximate their fair value due to the short-term nature of these items. The Company's insurance financing balance also approximates fair value as of March 31, 2024 and December 31, 2023 and the note payable balance as of December 31, 2023 also approximates fair value, as the interest rate on the note payable and insurance financing approximates the rates available to the Company as of such dates. The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

Level 1 - uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. The Company does not have any assets or liabilities that are valued using inputs identified under a Level 1 hierarchy as of March 31, 2024 and December 31, 2023.

6


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Level 2 - uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. Except as described below in Note 3. Acquisitions, the Company did not have any assets or liabilities that are valued using inputs identified under a Level 2 hierarchy as of March 31, 2024 and December 31, 2023.
Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. The Company did not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of March 31, 2024 and December 31, 2023.

Revenues - The majority of the Company's revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of its products. Net sales reflect the transaction prices for these contracts based on the Company's selling list price, which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness. The Company recognizes revenue at the point in time that control of the ordered product is transferred to the customer, which is typically upon shipment to the customer or other customer-designated delivery point. The Company accrues for estimated sales returns by customers based on historical sales return results. The computation of the sales return and other allowances require that management makes certain estimates and assumptions that effect the timing and amounts of revenue and liabilities recorded. Shipping and handling fees charged to customers are included in product sales. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.

The following represents product sales by retail (B2B) and e-commerce (B2C) channels for the three months ended March 31, 2024 and 2023:

 

 

Three months ended March 31, 2024

 

 

Three months ended March 31, 2023

 

 

Amount

 

 

% of product
sales, net

 

 

Amount

 

 

% of product
sales, net

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

 

 

 

Retail sales (B2B)

 

$

2,235

 

 

 

55.8

%

 

$

2,439

 

 

 

58.8

%

E-Commerce sales (B2C)

 

 

1,767

 

 

 

44.2

%

 

 

1,709

 

 

 

41.2

%

Product sales, net

 

$

4,002

 

 

 

100.0

%

 

$

4,148

 

 

 

100.0

%

 

Recent Accounting Pronouncements Not Yet Adopted

In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”). This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification (“ASC”). The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of ASC Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the ASC with the SEC’s regulations. The ASU has an unusual effective date and transition requirements since it is contingent on future SEC rule setting. If the SEC fails to enact required changes by June 30, 2027, this ASU is not effective for any entities. Early adoption is not permitted.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires companies to enhance the disclosures about segment expenses. The new standard requires the disclosure of the Company’s Chief Operating Decision Maker (“CODM”), expanded incremental line-item disclosures of significant segment expenses used by the CODM for decision-making, and the inclusion of previous annual only segment disclosure requirements on a quarterly basis. This ASU should be applied retrospectively for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on the Company's consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Taxes Disclosures, which requires greater disaggregation of income tax disclosures. The new standard requires additional information to be disclosed with respect to the income tax rate reconciliation and income taxes paid disaggregated by jurisdiction. This ASU should be applied prospectively for

7


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

fiscal years beginning after December 15, 2024, with retrospective application permitted. The Company is currently evaluating the impacts of this guidance on the Company’s consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02 “Codification Improvements – Amendments to Remove References to the Concepts Statements.” The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early application of the amendments in this update is permitted for all entities, for any fiscal year or interim period for which financial statements have not yet been issued (or made available for issuance). If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

Recent Adopted Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 was to be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for the Company, as a smaller reporting company, until fiscal year 2023. The Company adopted this guidance as of January 1, 2023. Adoption of this guidance did not have a material impact on the Company's consolidated financial statements or its disclosures.

2.
BALANCE SHEET DETAILS

Inventory

Inventory as of March 31, 2024 and December 31, 2023 was comprised of the following (in thousands):

 

 

March 31,
 2024

 

 

December 31,
2023

 

Raw materials

 

$

2,864

 

 

$

2,892

 

Work in process

 

 

1,291

 

 

 

1,181

 

Finished goods

 

 

1,601

 

 

 

1,582

 

 

$

5,756

 

 

$

5,655

 

Accrued expenses

Accrued expenses as of March 31, 2024 and December 31, 2023 were as follows (in thousands):

 

 

 

March 31,
2024

 

 

December 31,
2023

 

Accrued payroll taxes (Note 12)

 

$

522

 

 

$

522

 

Accrued payroll expenses

 

 

1,354

 

 

 

1,388

 

Other accrued liabilities

 

 

1,372

 

 

 

1,512

 

 

$

3,248

 

 

$

3,422

 

 

8


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3.
ACQUISITIONS

On December 7, 2023, the Company acquired all the issued and outstanding shares of Cultured Foods. Cultured Foods manufactures and distributes plant-based food products. Cultured Foods is based in Poland. This acquisition provided the Company with growth opportunities in both plant-based food products and distribution of CBD products into Europe.

The acquisition closed on December 7, 2023 and, accordingly, the consolidated statements of operations and comprehensive income (loss) included Cultured Foods' results of operations for the period from December 7, 2023 through December 31, 2023. As a result of the business combination, acquisition costs of $0.1 million was expensed as incurred during the year ended December 31, 2023.

The following table outlines the total consideration transferred (in thousands):

 

Cash

 

$

192

 

Common shares

 

 

250

 

Earn-out

 

 

88

 

Total consideration transferred

 

$

530

 

The following table summarizes the assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Cash

 

$

18

 

Accounts receivable and other receivables

 

 

11

 

Inventories

 

 

133

 

Intangible assets

 

 

78

 

Other current assets

 

 

17

 

Fixed assets

 

 

38

 

Goodwill

 

 

334

 

Total assets

 

 

629

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

27

 

Current note payable

 

 

50

 

Deferred tax liabilities

 

 

22

 

Total liabilities

 

 

99

 

Net assets acquired

 

$

530

 

The fair value of acquired intangible assets were determined using a forecasted cash flow and a cost approach. Acquired intangible assets consists of trade names and customer relationships. The Company assigned a 5-year useful life to the acquired intangible assets. The Company determined that Cultured Foods carrying costs approximates fair value for all other acquired assets and assumed liabilities.

Included in the purchase agreement is an earn-out provision whereby the Company agreed to pay the Cultured Foods' selling shareholder additional consideration contingent on achievement of certain annual revenue results of Cultured Foods in 2024. The Company accrued the fair value of $88,000 for this earn-out provision and recorded this amount as additional goodwill and accrued expenses as of March 31, 2024. The valuation and purchase price allocation for the Cultured Foods acquisition remains preliminary and will be finalized no later than one year after the acquisition date. As of the date of this Quarterly Report, management is still in the process of evaluating the estimated fair value of the consideration transferred. In addition, management is still evaluating the allocation of the acquisition purchase price to the tangible and intangible assets acquired, liabilities assumed, and the resulting goodwill. Management's analysis of these items has not yet been completed because of the inherent complexities of estimating fair values. Therefore, the business combination amounts presented were determined by management based on its consideration of all currently available information; however, management has not fully completed its business combination analysis and such amounts must be considered provisional amounts.

 

9


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

4.
GOODWILL AND INTANGIBLE ASSETS

Goodwill

The following table summarizes the changes in the carrying amounts of goodwill (in thousands):

 

Carrying
Amount

 

Balance - December 31, 2023:

 

$

342

 

Translation adjustment

 

 

(2

)

Balance - March 31, 2024:

 

$

340

 

As of December 31, 2023, the Company performed its annual goodwill impairment analysis following the steps laid out in ASC 350-20-35-3C. The Company's annual impairment analysis included a qualitative assessment to determine if it was necessary to perform the quantitative impairment test. After performing a qualitative test the Company concluded that it was more likely than not that the fair value of the Company exceeds its carrying value of goodwill. Accordingly, there was no indication of impairment and the qualitative impairment test was not performed. The Company did not record any goodwill impairment charges for the year ended December 31, 2023. No indicators of impairment were identified during the three months ended March 31, 2024. The Company's annual impairment testing date is December 31 of each year.

Intangible Assets

The following table summarizes the intangible assets and the related accumulated amortization (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

Gross carrying amount

 

$

78

 

 

$

78

 

Accumulated amortization

 

 

(5

)

 

 

(1

)

Translation adjustment

 

 

 

 

 

1

 

Net carrying amount

 

$

73

 

 

$

78

 

Changes in the carrying amounts of intangible assets are summarized below (in thousands):

 

 

Trade names

 

 

Customer relationships

 

 

Total

 

Balance - December 31, 2023:

 

$

52

 

 

$

26

 

 

$

78

 

Amortization

 

 

(3

)

 

 

(1

)

 

 

(4

)

Translation adjustments

 

 

 

 

 

(1

)

 

 

(1

)

Balance - March 31, 2024:

 

$

49

 

 

$

24

 

 

$

73

 

 

The Company did not incur costs to renew or extend the term of acquired intangible assets for the three months ended March 31, 2024. The estimated amortization expense for the Company's intangible assets is not significant in any future individual fiscal year. No indicators of impairment were identified during the three months ended March 31, 2024.

 

5.
LEASES

In April 2022, the Company entered into a new lease agreement for its main office facility. The lease is for the Company's operations, warehouse, sales, marketing and back office functions. The facility is approximately 6,000 square feet and located in San Diego, California. The lease term is three years with a total lease obligation of approximately $0.4 million. The lease does not include an option to renew. The operating lease is included in "Right of use assets" on the Company's March 31, 2024 Condensed Consolidated Balance Sheet, and represents the Company's right to use the underlying asset for the lease term. The Company's obligation to make lease payments is included in "Operating lease liability - current" and "Operating lease liability" on the Company's March 31, 2024 Condensed Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term, the Company recognized an operating lease asset of $0.3 million and lease liabilities for operating leases of $0.4 million, respectively, on May 1, 2022. As of March 31, 2024, the Company had an operating lease obligation of $0.2 million and operating lease asset of $0.1 million related to the facility. Operating lease expense is recognized on a straight-line basis over the lease term. During the three months ended March 31, 2024 and 2023, the Company's total lease cost was $28,238 and $26,174, respectively. Total lease costs was mostly comprised of operating lease costs. Short-term lease costs related to short-term operating leases and variable lease costs were immaterial.

10


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Because the rate implicit in the lease is not readily determinable, the Company uses the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. Information related to the Company's operating lease assets and related lease liabilities were as follows:

 

 

March 31, 2024

 

Remaining lease term (in months)

 

 

14

 

Discount rate

 

 

7.0

%

 

Maturities of lease liabilities as of March 31, 2024 were as follows (in thousands):

 

Year ending December 31,

 

 

 

2024 (remaining nine months)

 

$

105

 

2025

 

 

59

 

 

 

164

 

Less imputed interest

 

 

(7

)

Total lease liabilities

 

$

157

 

Current operating lease liabilities

 

$

134

 

Non-current operating lease liabilities

 

 

23

 

Total lease liabilities

 

$

157

 

 

6.
DEBT

Debt as of March 31, 2024 and December 31, 2023 was all current and was as follows (in thousands):

 

 

March 31, 2024

 

 

December 31, 2023

 

Insurance financing

 

$

117

 

 

$

204

 

Cultured Foods note payable (Note 3)

 

 

 

 

 

50

 

Total debt

 

$

117

 

 

$

254

 

Insurance Financing

In October 2023, the Company entered into a financing agreement with First Insurance Funding in order to fund a portion of its insurance policies for the upcoming policy year. The amount financed is $0.3 million, which incurs interest at a rate of 8.42% per annum. The Company is required to make monthly payments of $29,781 from November 2023 through July 2024.

In November 2022, the Company entered into a finance agreement with First Insurance Funding in order to fund a portion of its insurance policies for the most recent policy year. The amount financed was $0.2 million, which incurred interest at a rate of 6.32% per annum. The Company was required to make monthly payments of $27,900 from November 2022 through July 2023. There was no outstanding balance as of March 31, 2024.

Cultured Foods Notes Payable

The Company assumed the outstanding notes payable of Cultured Foods. The notes payable to the prior owner of Cultured Foods was due within the next 12 months. The notes carried an interest of 9% per annum. During the three months ended March 31, 2024, the Company repaid the entire outstanding amount of the notes payable including interest.

Note Payable

In August 2022, the Company entered into a note purchase agreement with Streeterville, pursuant to which the Company issued and sold to Streeterville the secured Streeterville Note in the original principal amount of $2.0 million. The Streeterville Note carried an original issuance discount of $400,000. The Company incurred additional debt issuance costs of $23,000. As a result, the Company received aggregate net proceeds of approximately $1.6 million in connection with the sale and issuance of the Streeterville Note. The Streeterville Note was scheduled to mature on May 19, 2023 and the Company was required to make weekly repayments to Streeterville

11


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

on the Note in the following amounts: (a) $40,000 for the first 8 weeks after issuance; and (b) $56,000 thereafter until the Streeterville Note was paid in full.

No interest was to accrue on the Streeterville Note until an occurrence of an Event of Default, as defined in Section 4 of the Streeterville Note, if ever. The Streeterville Note provided for customary events of default, including, among other things, the event of nonpayment of principal, interest, fees or other amounts, a representation or warranty proving to have been incorrect when made, failure to perform or observe covenants within a specified period of time, a cross-default to certain other indebtedness of the Company, the bankruptcy or insolvency of the Company or any significant subsidiary, monetary judgment defaults of a specified amount and other defaults resulting in liability of a specified amount. In the event of an occurrence of an Event of Default by the Company, Streeterville could have declared all amounts owed under the Streeterville Note immediately due and payable. Also, a late fee and interest penalty of equal to either 22% per annum or the maximum rate allowable under law, whichever is lesser, could have been applied to any outstanding amount not paid when due or that remains outstanding while an Event of Default exists.

The unpaid amount of the Streeterville Note, any interest, fees, charges and late fees accrued was due and payable in full within three trading days of receipt by the Company of any employee retention credit funds owed to the Company under the CARES Act, provided, further, that if at least $1.0 million in CARES Act proceeds were not remitted to Streeterville within ninety days of August 19, 2022, the outstanding balance under the Streeterville Note was to be increased by five percent (5%). The Company did not receive the CARES Act proceeds within 90 days of August 19, 2022; as a result, the outstanding balance of the Streeterville Note was increased by five percent (5%). The Streeterville Note was secured by all of the Company’s assets as set forth in the Security Agreement dated August 19, 2022.

The Company made principal payments to Streeterville of $0.8 million during the three months ended March 31, 2023. Subsequent to March 31, 2023, the Company repaid the entire remaining outstanding balance to Streeterville of $0.4 million. As a result, the Streeterville Note has been fully repaid and satisfied as of December 31, 2023, and the Company's obligations thereunder, were cancelled and terminated.

7.
STOCKHOLDERS' EQUITY

Common Stock

During the year ended December 31, 2022, the Company issued 5,496,000 shares of common stock to a vendor as compensation for $0.4 million of services provided to the Company. In accordance with the agreement, the Company issued 1,549,410 additional shares of common stock to the vendor during the three months ended March 31, 2024.

Warrants

The following represents a summary of the warrants outstanding at each of the dates identified:

 

 

 

 

 

 

 

 

 

Number of Shares Underlying Warrants

 

Issue Date

 

Classification

 

Exercise Price

 

 

Expiration Date

 

March 31, 2024

 

 

December 31, 2023

 

March 30, 2022

 

Equity

 

$

0.1000

 

 

June 6, 2025

 

 

10,000,000

 

 

 

10,000,000

 

March 30, 2022

 

Equity

 

$

0.0875

 

 

June 6, 2025

 

 

750,000

 

 

 

750,000

 

 

 

 

 

 

 

 

 

 

10,750,000

 

 

 

10,750,000

 

 

8.
STOCK-BASED COMPENSATION

On June 1, 2023, the Company’s shareholders approved the adoption of a new 2023 Equity Incentive Plan (the “2023 Plan”), and the Company adopted the 2023 Plan. As a result, the CV Sciences, Inc. Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan") terminated and was replaced by the 2023 Plan; future issuances of incentive instruments will be made under and governed by the 2023 Plan. Outstanding awards issued under the 2013 Plan will remain subject to the terms and conditions of the 2013 Plan, provided that to the extent that outstanding awards under the 2013 Plan are forfeited or lapse unexercised, the shares of common stock subject to such awards will no longer be available for future issuance under the 2013 Plan or any other equity incentive plan of the Company.

The 2023 Plan has a term of 10 years. The number of shares of the Company’s common stock authorized for issuance under the 2023 Plan is initially 34,976,000 shares, which number shall automatically increase on January 1 of each fiscal year (for a period of ten years after adoption of the 2023 Plan) during the term of the 2023 Plan, commencing on January 1, 2024, by the lesser of (a) 4% of the total

12


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

shares of the Company's common stock outstanding on December 31st of the prior year, and (b) a lesser number of the Company's common stock as determined by the Company's Board of Directors. As of December 31, 2023, the Company had 34,726,000 authorized but unissued shares reserved for issuance under the 2023 Plan. On January 1, 2024, the Company did not add any shares to the 2023 Plan.

As of March 31, 2024, total unrecognized compensation cost related to non-vested stock-based compensation arrangements was $0.2 million, which is expected to be recognized over a weighted-average period of 1.9 years.

The following summarizes activity related to the Company's stock options (in thousands, except per share data):

 

 

Number of Shares

 

 

Weighted Average
Exercise Price

 

 

Weighted Average
Remaining Contract
Term (in years)

 

 

Aggregate Intrinsic Value

 

Outstanding - December 31, 2023

 

 

24,435

 

 

$

0.32

 

 

 

4.4

 

 

$

6

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(11,687

)

 

 

0.42

 

 

 

 

 

 

 

Outstanding - March 31, 2024

 

 

12,748

 

 

 

0.24

 

 

 

7.9

 

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable - March 31, 2024

 

 

7,059

 

 

 

0.39

 

 

 

7.1

 

 

 

3

 

Vested or expected to vest - March 31, 2024

 

 

12,748

 

 

$

0.24

 

 

 

7.9

 

 

$

6

 

 

The Company has established performance milestones in connection with drug development efforts for its lead drug candidate CVSI-007. As of March 31, 2024, there were 6,750,000 unvested performance-based stock options previously granted to Michael Mona Jr. ("Mona Jr.") outside of the 2013 Plan and 2023 Plan which are not included in the above table. These stock options vest upon the satisfaction of future performance conditions (refer to Note 12).

The following table presents the weighted average grant date fair value of stock options granted and the weighted-average assumptions used to estimate the fair value on the date of grant using the Black-Scholes valuation model:

 

 

Three months ended March 31,

 

 

2024

 

2023

 

Volatility

 

*

 

 

132.0

%

Risk-Free Interest Rate

 

*

 

 

3.8

%

Expected Term (in years)

 

*

 

 

5.77

 

Dividend Rate

 

*

 

 

%

Weighted Average Fair Value Per Share on Grant Date

 

*

 

$

0.04

 

 

* There were no grants during the three months ended March 31, 2024.

The risk-free interest rates are based on the implied yield available on U.S. Treasury constant maturities with remaining terms equivalent to the respective expected terms of the options. Expected volatility is based on the historical volatility of the Company's common stock. The Company estimates the expected term for stock options awarded to employees, officers and directors using the simplified method in accordance with ASC Topic 718, Stock Compensation, because the Company does not have sufficient relevant historical information to develop reasonable expectations about future exercise patterns. In the future, as the Company gains historical data for the actual term over which stock options are held, the expected term may change, which could substantially change the grant-date fair value of future stock option awards, and, consequently, compensation of future grants.

9.
NET INCOME (LOSS) PER SHARE

The Company computes basic net income (loss) per share using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated by dividing net income (loss) by the weighted-average number of common shares plus potential common shares. The Company's stock options, including those with performance conditions, are included in the calculation of diluted net income (loss) per share using the treasury stock method when their effect is dilutive. Potential common shares are excluded from the calculation of diluted net income (loss) per share when their effect is anti-dilutive.

13


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following common stock equivalents were not included in the calculation of net income (loss) per diluted share because their effect were anti-dilutive (in thousands):

 

 

Three months ended March 31,

 

 

2024

 

 

2023

 

Stock options

 

 

12,748

 

 

 

20,481

 

Performance stock options

 

 

6,750

 

 

 

11,000

 

Warrants

 

 

10,750

 

 

 

10,750

 

Total

 

 

30,248

 

 

 

42,231

 

 

10.
COMMITMENTS AND CONTINGENCIES

On March 17, 2015, Michael Ruth filed a shareholder derivative suit in Nevada District Court alleging breach of fiduciary duty and gross mismanagement (the “Ruth Complaint”). The claims were premised on the same events that were the subject of a purported class action filed in the Southern District of New York on April 23, 2014 (the “Sallustro Case”). On July 2, 2019, the court in the Sallustro Case entered a final order dismissing the complaint with prejudice. The Company did not make any settlement payment, and at no time was there a finding of wrongdoing by the Company or any of its directors. Regarding the Ruth Complaint, the parties previously agreed to stay the action pending the conclusion of discovery in the Sallustro Case. Once the Sallustro Case was dismissed, the stay was lifted. Plaintiff’s counsel later informed the Court that Mr. Ruth sold his shares of CVSI stock and thus he no longer had standing to pursue this claim. However, the Court allowed plaintiff’s counsel to substitute CVSI shareholder Otilda Lamont as the named plaintiff. On September 20, 2019, defendants filed a motion to dismiss the Ruth Complaint and the court issued a ruling denying the motion to dismiss on November 24, 2020. A Third Amended Complaint was filed on December 11, 2020 substituting Otilda Lamont as plaintiff. The Company filed an answer to the Ruth complaint on January 11, 2021. The parties agreed to a settlement in principle in January 2022 whereby the Company agreed to make certain corporate governance reforms in exchange for dismissal of the lawsuit. Plaintiff filed a motion for preliminary approval of proposed settlement on June 1, 2022. The court granted preliminary approval of the proposed settlement on February 7, 2023. A hearing seeking final approval of the proposed settlement was held on May 15, 2023, and the court indicated it would likely approve the proposed settlement and reschedule the hearing with regard to plaintiff's motion for attorney's fees. On June 23, 2023, the Company received notice of a court order dated May 23, 2023 without any hearing, granting plaintiff's motion for attorney's fees and expenses of approximately $250,000, which the Company accrued as of March 31, 2024. On or about May 1, 2024, the Company and plaintiff executed a stipulation for the payment of the plaintiff's attorney's fees and expenses over the course of approximately eighteen months subject to a confession of judgment.

On December 3, 2019, Michelene Colette and Leticia Shaw filed a putative class action complaint in the Central District of California, alleging the labeling on the Company’s products violated the Food, Drug, and Cosmetic Act of 1938 (the “Colette Complaint”). On February 6, 2020, the Company filed a motion to dismiss the Colette Complaint. Instead of opposing the Company's motion, plaintiffs elected to file an amended complaint on February 25, 2020. On March 10, 2020, the Company filed a motion to dismiss the amended complaint. The court issued a ruling on May 22, 2020 that stayed this proceeding in its entirety and dismissed part of the amended complaint. The court's order stated that the portion of the proceeding that is stayed will remain stayed until the U.S. Food and Drug Administration (the "FDA") completes its rulemaking regarding the marketing, including labelling, of CBD ingestible products. However, on January 26, 2023, the FDA announced that it does not intend to pursue rulemaking allowing the use of cannabidiol products in dietary supplements or conventional foods. As a result, on February 13, 2023, Plaintiffs filed a status report with the court asking to have the stay lifted. The Company filed a written opposition. The court has taken no action since Plaintiffs filed that status report, and the case remains stayed pursuant to the court's original order.

On November 5, 2021, Mona Jr. filed a complaint against the Company for breach of contract and negligence in Nevada state court seeking to recover from the Company the amount of federal and state taxes, interest and penalties owed by Mona Jr. for taxes on income received by him upon the vesting and settlement of RSU's in 2019 - refer also to Note 12. Related Parties, for further information. On December 22, 2021, after removing the case to United States District Court for the District of Nevada, the Company filed a motion to dismiss the complaint on the grounds that Mona Jr. should have pursued these claims in a prior arbitration between the parties. On September 12, 2022, the court denied the motion to dismiss the case. On November 3, 2022, the court on its own motion ordered the case into arbitration. On December 6, 2022, Mona Jr. filed a demand for arbitration against the Company and its officers with the American Arbitration Association (the "AAA"). On January 31, 2023, the Company and management filed a case in the San Diego Superior Court for declaratory relief, seeking to enjoin the arbitration on the grounds that Mona Jr. is barred from proceeding with the arbitration under the doctrines of res judicata and judicial estoppel based on the results of the prior arbitration between the parties and the position that Mona Jr. took against the Company in the prior arbitration. On February 2, 2023, the AAA stayed the arbitration for 60 days. On February 14, 2023, the Company filed a motion for preliminary injunction to enjoin Mona Jr. from proceeding with the arbitration. The preliminary injunction motion was scheduled for hearing on October 20, 2023. On March 20, 2023, the Company sought

14


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

a temporary restraining order to enjoin Mona Jr. from proceeding with the arbitration, which the court denied. After the denial of the temporary restraining order, the Company withdrew its motion for preliminary injunction. On April 5, 2023, the AAA informed the parties that the stay issued on February 2, 2023 had been lifted. On April 28, 2023, the AAA appointed an arbitrator for the matter. On June 6, 2023, the Company's officers filed a motion to dismiss the claims in the arbitration against them, arguing that they are not party to an agreement with Mona Jr. to arbitrate. On July 6, 2023, the Arbitrator issued an order scheduling the hearing on the merits for April 8 through April 12, 2024. On September 12, 2023, the Arbitrator granted in part and denied in part the motion to dismiss the Company's officers, requiring the case to proceed to a hearing on the merits. The hearing on the merits began on April 8, 2024, and the Arbitrator heard five days of testimony. The hearing is scheduled to resume on May 21, 2024. Management believes that Mona Jr.'s claims lack merit. Nevertheless, an unfavorable outcome would have a material impact on the Company's financial condition and results of operations. Management intends to vigorously defend the allegations.

In the normal course of business, the Company is a party to a variety of agreements pursuant to which they may be obligated to indemnify the other party. It is not possible to predict the maximum potential amount of future payments under these types of agreements due to the conditional nature of our obligations, and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these types of agreements have not had a material effect on our business, results of operations or financial condition.

11.
INCOME TAXES

For the three months ended March 31, 2024 and 2023, the Company generated taxable losses for which no tax benefit has been recognized due to uncertainties regarding the future realization of the tax benefit. The tax effects of the taxable losses will be recognized when realization of the tax benefit becomes more likely than not or the tax effects of the previous interim losses are utilized.

12.
RELATED PARTIES

During the year ended December 31, 2019, the Company's former President and Chief Executive Officer, Mona Jr., and the Company entered into a Settlement Agreement (the “Settlement Agreement”), pursuant to which the Company acknowledged that Mona Jr.’s resignation from the Company on January 22, 2019 was for Good Reason (as defined in Mona Jr.’s Employment Agreement) and agreed to extend the deadline for Mona Jr.’s exercise of his stock options for a period of five years. In exchange, Mona Jr. agreed that notwithstanding the terms of his Employment Agreement providing for acceleration of vesting of all stock options upon a Good Reason resignation, certain of his unvested stock options would not immediately vest, but rather continue to vest if, and only if, certain Company milestones are achieved related to the Company’s drug development efforts. These stock options were issued in July 2016 (6,000,000 options) and March 2017 (5,000,000 options), and 6,750,000 of these stock options have not vested as of March 31, 2024. The Company and Mona Jr. also agreed to mutually release all claims arising out of and related to Mona Jr.’s resignation and separation from the Company. As a result of Mona Jr.'s Restricted Stock Unit Award Agreement, the Company recorded stock-based compensation expense related to (i) the accelerated vesting of the RSU's of $5.1 million and (ii) due to the Settlement Agreement's modification of certain stock options of $2.7 million during the year ended December 31, 2019. As of March 31, 2024, the Company cancelled 11,300,000 fully vested outstanding stock options of Mona Jr. with a weighted average exercise price of $0.42 per share as these stock options remained unexercised and the deadline to exercise these stock options lapsed.

In addition, 2,950,000 shares of stock were issued to Mona Jr. upon the vesting and settlement of the RSU's. The settlement of the RSU's by the payment of shares was treated as taxable compensation to Mona Jr. and thus subject to income tax withholdings. No amounts were withheld (either in cash or the equivalent of shares of common stock from the settlement of the RSU's) or included in the original Company’s payroll tax filing. The compensation was subject to Federal and State income tax withholding and Federal Insurance Contributions Act (“FICA”) taxes withholding estimated to be $6.4 million for the employee portions. The employer portion of the FICA taxes was $0.2 million and was recorded as a component of selling, general and administrative expenses in the statement of operations for the year ended December 31, 2019. During the year ended December 31, 2020, the Company reported the taxable compensation associated with the RSU settlement to the taxing authorities and included the amount in Mona Jr.'s W-2 for 2019. Although the primary tax liability is the responsibility of the employee, the Company is secondarily liable to the taxing authorities and thus has continued to reflect this liability on its balance sheet through December 31, 2022 in an amount of $6.7 million, which was recorded as a component of accrued expenses. The Company initially recorded an offsetting receivable of $6.2 million during the second quarter of 2019 for the total estimated Federal and State income taxes which should have been withheld in addition to the employee portion of the FICA payroll taxes as the primary liability is ultimately the responsibility of the employee. The receivable was recorded as a component of prepaid expense and other on the condensed balance sheet. The deadline to file and pay personal income taxes for 2019 with extensions was on October 15, 2020. To date, notwithstanding repeated requests from the Company, Mona Jr. has not provided to the Company the appropriate documentation substantiating that he properly filed and paid his taxes for 2019, and Mona Jr. has recently confirmed that he has not paid his personal income tax for 2019. As a result, the Company derecognized its previously recorded receivable of $6.2

15


CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

million during the fourth quarter of 2020. The associated liability would have been relieved once the tax amount was paid by Mona Jr. and the Company had received the required taxing authority documentation from Mona Jr. If the tax amount was not paid by Mona Jr., the Company could have been liable for such tax due.

The Company believes that the statute of limitations for federal payroll tax withholding expired on April 15, 2023. In addition, the statute of limitations for the state tax withholding expired during the three months ended March 31, 2023. As a result of the expiration of the relevant statutes of limitations, the Company believes that neither the IRS nor the State of California have the rights to assess and collect the $6.2 million of income taxes from the Company and the Company has made a change in accounting estimate and no longer expects to incur a loss with respect to this matter. As a result, the Company derecognized the contingent liability of $6.2 million during the three months ended March 31, 2023. The remaining accrued amount of $0.5 million that the Company may still be liable for relates to employer and employee Medicare portion of FICA taxes for which the related statute of limitations has not yet expired.

 

13.
SUBSEQUENT EVENT

In May 2024, the Company acquired all outstanding membership units of Elevated Softgels, LLC, a Delaware limited liability company for a total purchase price of up to $1.0 million. Elevated Softgels is a leading manufacturer of encapsulated softgels and tinctures, based in Colorado.

16


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

When we use the terms “CV Sciences,” “Company,” “we,” “our” and “us,” we mean CV Sciences, Inc., a Delaware corporation, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.

The following discussion of our financial condition and results of operations for the three months ended March 31, 2024 and 2023, respectively, should be read in conjunction with our condensed consolidated financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

OVERVIEW

We are a consumer wellness company specializing in hemp extracts and other proven, science-backed, natural ingredients and products, which are sold through a range of sales channels from B2B to B2C.

Our +PlusCBD™ branded products are sold at select retail locations throughout the U.S. and are the top-selling brands of hemp extracts in the natural products market, according to SPINS, the leading provider of syndicated data and insights for the natural, organic and specialty products industry. We follow all guidelines for good manufacturing practices ("GMP") and our products are processed, produced, and tested throughout the manufacturing process to confirm strict compliance with company and regulatory standards and specifications. With a commitment to science, +PlusCBD™ product benefits in healthy people are supported by human clinical research data, in addition to three published clinical case studies available on PubMed.gov. +PlusCBD™ was the first hemp extract supplement brand to invest in the scientific evidence necessary to receive self-affirmed "generally recognized as safe" ("GRAS") status.

In addition, on December 7, 2023, we entered into a Membership Interest Purchase Agreement, pursuant to which we purchased all of the outstanding equity interests in Cultured Foods Sp. z.o.o., resulting in Cultured Foods becoming a wholly owned subsidiary of the Company. Cultured Foods is a leading European manufacturer and distributor of plant-based protein products.

We also have a drug development program focused on developing and commercializing CBD-based novel therapeutics, subject to available capital.

Our primary offices and facilities are located in San Diego, California and Warsaw, Poland.

Our common stock is traded on the OTC:QB market under the trading symbol CVSI.

In May 2024, we acquired all outstanding membership interest of Elevated Softgels, LLC, a Delaware limited liability company, for a total purchase price of up to $1.0 million. Elevated Softgels is a leading manufacturer of encapsulated softgels and tinctures for the supplement and nutrition industry, based in Colorado.

Over the last several years, we have built an efficient and cost effective consumer products platform and we continue to evaluate inbound and outbound merger, sale, acquisition or other opportunities for the Company.

Results of Operations

Revenues and gross profit

 

 

Three months ended
March 31,

 

 

Change

 

 

2024

 

 

2023

 

 

Amount

 

 

%

 

 

(in thousands)

 

 

 

 

Product sales, net

 

$

4,002

 

 

$

4,148

 

 

$

(146

)

 

 

(4

)%

Cost of goods sold

 

 

2,149

 

 

 

2,366

 

 

 

(217

)

 

 

(9

)%

Gross profit

 

$

1,853

 

 

$

1,782

 

 

$

71

 

 

 

4

%

Gross margin

 

 

46.3

%

 

 

43.0

%

 

 

 

 

 

 

 

17


 

 

 

Three months ended
March 31, 2024

 

 

Three months ended
March 31, 2023

 

 

Amount

 

 

% of product
sales, net

 

 

Amount

 

 

% of product
sales, net

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

 

 

 

Retail sales (B2B)

 

$

2,235

 

 

 

55.8

%

 

$

2,439

 

 

 

58.8

%

E-commerce sales (B2C)

 

 

1,767

 

 

 

44.2

%

 

 

1,709

 

 

 

41.2

%

Product sales, net

 

$

4,002

 

 

 

100.0

%

 

$

4,148

 

 

 

100.0

%

 

We had net product sales of $4.0 million and gross profit of $1.9 million, representing a gross margin of 46.3%, in the first quarter of 2024, compared to net product sales of $4.1 million and gross profit of $1.8 million, representing a gross margin of 43.0%, in the first quarter of 2023. Our net product sales decreased by $0.1 million, or 4%, in the first quarter of 2024 when compared to first quarter 2023 results. The decline is primarily due to lower B2B sales in 2024, partially offset by higher B2C sales. The total number of units sold during the first quarter 2024 decreased by 14.7% compared to the first quarter 2023, partially offset by higher average sales price per unit of 11.8%. The average sales price per unit increased due to product and channel mix. Our B2C revenue increased by $0.1 million compared to the first quarter of 2023, mostly due to additional revenue from our subscriptions customers. In addition, 45.6% of our net revenue for the first quarter 2024 was from new products launched since January 1, 2022. During this time, we launched 32 new products. The overall market continues to be fragmented and highly competitive, which we believe is largely due to the lack of a clear regulatory framework and a patchwork of state regulation.

Cost of goods sold consists primarily of raw materials, packaging, manufacturing overhead (including payroll, employee benefits, stock-based compensation, facilities, depreciation, supplies and quality assurance costs), merchant card fees and shipping. We were able to reduce our cost of goods sold in the first quarter of 2024 compared to the first quarter of 2023 by $0.2 million or 9%. The reduction is mostly due to the lower number of units sold in the first quarter of 2024. In addition, cost of goods sold in the first quarter of 2024 decreased as a percentage of revenue compared to the first quarter of 2023, mostly due to lower inventory losses in the first quarter of 2024 compared to the prior year period. Our gross profit improved by $0.1 million, or 4%, to $1.9 million in the first quarter of 2024 and gross margin improved from 43.0% in the first quarter 2023 to 46.3% in the first quarter of 2024. The improvement in our gross margin is primarily due to our product and channel mix and lower inventory losses.

Research and development expense

 

 

Three months ended
March 31,

 

 

Change

 

 

2024

 

 

2023

 

 

Amount

 

 

%

 

 

(in thousands)

 

 

 

 

Research and development expense

 

$

36

 

 

$

35

 

 

$

1

 

 

 

3

%

Percentage of product sales, net

 

 

0.9

%

 

 

0.8

%

 

 

 

 

 

 

 

Research and development (“R&D”) expense remained relatively consistent and represents overall reduced R&D spend associated with new consumer products development expenses.

Selling, general and administrative expense

 

 

Three months ended
March 31,

 

 

Change

 

 

2024

 

 

2023

 

 

Amount

 

 

%

 

 

(in thousands)

 

 

 

 

Sales expense

 

$

813

 

 

$

839

 

 

$

(26

)

 

 

(3

)%

Marketing expense

 

 

622

 

 

 

657

 

 

 

(35

)

 

 

(5

)%

General & administrative expense

 

 

1,002

 

 

 

660

 

 

 

342

 

 

 

52

%

Selling, general and administrative

 

$

2,437

 

 

$

2,156

 

 

$

281

 

 

 

13

%

Percentage of product sales, net

 

 

60.9

%

 

 

52.0

%

 

 

 

 

 

 

 

18


 

 

Selling, general and administrative (“SG&A”) expense increased to $2.4 million in the first quarter of 2024 compared to $2.2 million in the first quarter of 2023, which was primarily a result of the following:

Sales expense decreased due to lower broker commissions and stock-based compensation, partially offset by increases in payroll.
Marketing expense decreased due to lower payroll, stock-based compensation, and outside services.
General and administrative ("G&A") expense increased by $0.3 million. The increase is mostly due to additional legal and professional fees. In addition, during the first quarter of 2023 we received a refund from the state of Nevada for certain payroll related taxes.

Benefit from reversal of accrued payroll taxes

We previously recorded a contingent liability for payroll taxes associated with the RSU release to our founder in 2019 of $6.7 million. On April 15, 2023, the statute of limitations for federal payroll tax withholding expired. In addition, the statute of limitations for the state tax withholding expired during the three months ended March 31, 2023. As a result of the expiration of the relevant statutes of limitations, neither the IRS nor the State of California have the rights to assess and collect the $6.2 million of income taxes from CV Sciences and we have made a change in accounting estimate and no longer expect to incur a loss with respect to this matter. As a result, we derecognized the contingent liability of $6.2 million during the three months ended March 31, 2023. For more information, please see Note 12, Related Parties, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other expense, net

Other expense, net consists of interest expense and interest income. Other expense decreased due to the repayment of our note payable.

Non-GAAP Financial Measures

We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net income (loss) plus depreciation, interest and income tax expense, minus interest income), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it also highlights trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.

We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Quarterly Report on Form 10-Q, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with greater transparency and a greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.

Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Quarterly Report on Form 10-Q, including our condensed financial statements, to aid in their analysis and understanding of our performance and in making comparisons.

19


 

A reconciliation from our net income (loss) to Adjusted EBITDA, a non-GAAP measure, for the three months ended March 31, 2024 and 2023 is detailed below:

 

 

Three months ended
 March 31,

 

 

2024

 

 

2023

 

 

(in thousands)

 

Net income (loss)

 

$

(628

)

 

$

5,706

 

Depreciation expense

 

 

59

 

 

 

59

 

Amortization expense

 

 

4

 

 

 

 

Interest expense

 

 

2

 

 

 

56