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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 June 30, 2020 |
| |
☐ | 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.) |
10070 Barnes Canyon Road
San Diego, CA 92121
(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 ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 4, 2020, the issuer had 99,885,553 shares of issued and outstanding common stock, par value $0.0001.
DOCUMENTS INCORPORATED BY REFERENCE. None
CV SCIENCES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CV SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 7,576 | | | $ | 9,107 | |
Restricted cash | 501 | | | 501 | |
Accounts receivable, net | 1,145 | | | 2,177 | |
Inventory | 8,418 | | | 9,971 | |
Prepaid expenses and other | 8,809 | | | 10,611 | |
Total current assets | 26,449 | | | 32,367 | |
| | | |
Property & equipment, net | 3,039 | | | 3,615 | |
Operating lease assets | 8,147 | | | 8,709 | |
Intangibles, net | 3,748 | | | 3,766 | |
Goodwill | 2,788 | | | 2,788 | |
Other assets | 1,524 | | | 1,442 | |
Total assets | $ | 45,695 | | | $ | 52,687 | |
| | | |
Liabilities and stockholders' equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 743 | | | $ | 1,617 | |
Accrued expenses | 10,132 | | | 10,856 | |
Operating lease liability - current | 837 | | | 723 | |
Total current liabilities | 11,712 | | | 13,196 | |
| | | |
Operating lease liability | 8,826 | | | 9,517 | |
Debt | 2,906 | | | — | |
Deferred tax liability | 263 | | | 421 | |
Other liabilities | — | | | 406 | |
Total liabilities | 23,707 | | | 23,540 | |
| | | |
Commitments and contingencies (Note 7) | | | |
| | | |
Stockholders' equity | | | |
Preferred stock, par value $0.0001; 10,000 shares authorized; no shares issued and outstanding | — | | | — | |
Common stock, par value $0.0001; 190,000,000 shares authorized; 99,886 and 99,416 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | 10 | | | 10 | |
Additional paid-in capital | 73,448 | | | 70,774 | |
Accumulated deficit | (51,470) | | | (41,637) | |
Total stockholders' equity | 21,988 | | | 29,147 | |
| | | |
Total liabilities and stockholders' equity | $ | 45,695 | | | $ | 52,687 | |
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Product sales, net | $ | 5,396 | | | $ | 16,854 | | | $ | 13,666 | | | $ | 31,765 | |
Cost of goods sold | 3,074 | | | 4,903 | | | 7,336 | | | $ | 9,255 | |
Gross Profit | $ | 2,322 | | | $ | 11,951 | | | $ | 6,330 | | | $ | 22,510 | |
| | | | | | | |
Operating expenses: | | | | | | | |
Research and development | 746 | | | 1,688 | | | 2,255 | | | 3,030 | |
Selling, general and administrative | 6,233 | | | 9,009 | | | 14,052 | | | 27,604 | |
| 6,979 | | | 10,697 | | | 16,307 | | | 30,634 | |
| | | | | | | |
Operating Income (Loss) | (4,657) | | | 1,254 | | | (9,977) | | | (8,124) | |
| | | | | | | |
Interest (income) expense, net | 4 | | | (1) | | | (6) | | | 5 | |
Income (loss) before income taxes | (4,661) | | | 1,255 | | | (9,971) | | | (8,129) | |
Income tax expense (benefit) | 20 | | | 26 | | | (138) | | | 26 | |
Net Income (Loss) | $ | (4,681) | | | $ | 1,229 | | | $ | (9,833) | | | $ | (8,155) | |
| | | | | | | |
Weighted average common shares outstanding | | | | | | | |
Basic | 99,863 | | | 98,633 | | | 99,771 | | | 98,557 | |
Diluted | 99,863 | | | 120,929 | | | 99,771 | | | 98,557 | |
Net income (loss) per common share | | | | | | | |
Basic | $ | (0.05) | | | $ | 0.01 | | | $ | (0.10) | | | $ | (0.08) | |
Diluted | $ | (0.05) | | | $ | 0.01 | | | $ | (0.10) | | | $ | (0.08) | |
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Deficit | | |
| Shares | | Amount | | | | | | Total |
Balance at December 31, 2019 | 99,416 | | | $ | 10 | | | $ | 70,774 | | | $ | (41,637) | | | $ | 29,147 | |
Issuance of common stock under employee benefit plan | 436 | | | — | | | 161 | | | — | | | 161 | |
Stock-based compensation | — | | | — | | | 1,258 | | | — | | | 1,258 | |
Net loss | — | | | — | | | — | | | (5,152) | | | (5,152) | |
Balance at March 31, 2020 | 99,852 | | | 10 | | | 72,193 | | | (46,789) | | | 25,414 | |
Issuance of common stock under employee benefit plan | 34 | | | — | | | 12 | | | — | | | 12 | |
Stock-based compensation | — | | | — | | | 1,243 | | | — | | | 1,243 | |
Net loss | — | | | — | | | — | | | (4,681) | | | (4,681) | |
Balance at June 30, 2020 | 99,886 | | | $ | 10 | | | $ | 73,448 | | | $ | (51,470) | | | $ | 21,988 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-In Capital | | Accumulated Deficit | | |
| Shares | | Amount | | | | | | Total |
Balance at December 31, 2018 | 94,940 | | | $ | 9 | | | $ | 55,134 | | | $ | (25,027) | | | $ | 30,116 | |
Issuance of common stock under employee benefit plan | 3,539 | | | 1 | | | 196 | | | — | | | 197 | |
Stock-based compensation | — | | | — | | | 2,091 | | | — | | | 2,091 | |
Stock-based compensation associated with founders employment settlements | — | | | — | | | 7,857 | | | — | | | 7,857 | |
Net loss | — | | | — | | | — | | | (9,384) | | | (9,384) | |
Balance at March 31, 2019 | 98,479 | | | 10 | | | 65,278 | | | (34,411) | | | 30,877 | |
Issuance of common stock under employee benefit plan | 225 | | | — | | | 57 | | | — | | | 57 | |
Stock-based compensation | — | | | — | | | 2,125 | | | — | | | 2,125 | |
Net income | — | | | — | | | — | | | 1,229 | | | 1,229 | |
Balance at June 30, 2019 | 98,704 | | | $ | 10 | | | $ | 67,460 | | | $ | (33,182) | | | $ | 34,288 | |
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
OPERATING ACTIVITIES | | | |
Net loss | $ | (9,833) | | | $ | (8,155) | |
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: | | | |
Depreciation and amortization | 389 | | | 354 | |
Stock-based compensation | 2,501 | | | 4,216 | |
Stock-based compensation associated with employment settlement | — | | | 7,857 | |
Loss on sale of property and equipment | 176 | | | — | |
Non-cash lease expense | 562 | | | 251 | |
Deferred taxes | (158) | | | — | |
Other | 99 | | | 32 | |
Change in operating assets and liabilities: | | | |
Accounts receivable | 1,032 | | | (1,380) | |
Inventory | 1,738 | | | (557) | |
Prepaid expenses and other | 2,208 | | | (622) | |
Accounts payable and accrued expenses | (2,818) | | | 1,461 | |
Net cash provided by (used in) operating activities | (4,104) | | | 3,457 | |
| | | |
INVESTING ACTIVITIES | | | |
Purchases of property and equipment | (506) | | | (504) | |
Net cash flows used in investing activities | (506) | | | (504) | |
| | | |
FINANCING ACTIVITIES | | | |
Proceeds from debt | 2,906 | | | — | |
Repayment of unsecured debt | — | | | (405) | |
Proceeds from exercise of stock options | 173 | | | 254 | |
Net cash flows provided by (used in) financing activities | 3,079 | | | (151) | |
| | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | (1,531) | | | 2,802 | |
Cash, cash equivalents and restricted cash, beginning of period | 9,608 | | | 12,935 | |
Cash, cash equivalents and restricted cash, end of period | $ | 8,077 | | | $ | 15,737 | |
| | | |
Supplemental cash flow disclosures: | | | |
Interest paid | $ | — | | | $ | 9 | |
Income taxes paid | $ | 18 | | | $ | 54 | |
| | | |
Supplemental disclosures of non-cash transactions: | | | |
Purchase of property and equipment in accounts payable and accrued expenses | $ | 327 | | | $ | 50 | |
Sale of property and equipment in exchange for note receivable (recorded in prepaid expenses and other) and inventory | $ | 675 | | | $ | — | |
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. On July 25, 2013, CannaVest Corp., a Texas corporation (“CannaVest Texas”), merged with the Company, a wholly-owned Delaware subsidiary of CannaVest Texas, 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 has two operating segments; consumer products and specialty pharmaceutical. The consumer products segment develops, manufactures and markets products based on hemp-based Cannabidiol ("CBD"), under the name PlusCBD™ in a variety of market sectors including nutraceutical, beauty care and specialty foods. The specialty pharmaceutical segment is developing drug candidates which use CBD as a primary active ingredient.
Basis of Presentation - The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). All intercompany accounts and transactions have been eliminated in consolidation.
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, assumptions related to revenue recognition and the allowance for doubtful accounts.
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 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. As of June 30, 2020, the Company's Level 1 assets are comprised of $3.0 million in money market funds which are classified as cash equivalents, and restricted cash of $0.5 million comprised of certificates of deposit. As of December 31, 2019, the Company's Level 1 assets are comprised of $4.0 million in money market funds which are classified as cash equivalents, and restricted cash of $0.5 million comprised of certificates of deposit. The carrying value of the cash equivalents and restricted cash approximated the fair value as of June 30, 2020 and December 31, 2019. The Company does not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of June 30, 2020 and December 31, 2019.
•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. The Company did not have any assets or liabilities that are valued using inputs identified under a Level 2 hierarchy as of June 30, 2020 and December 31, 2019.
•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 June 30, 2020 and December 31, 2019.
Cash, cash equivalents, and restricted cash - The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the total of the same amounts shown in the statement of cash flows for the three and six months ended June 30, 2020 and 2019 (in thousands):
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | |
| June 30, 2020 | | June 30, 2019 |
Cash and cash equivalents | $ | 7,576 | | | $ | 15,237 | |
Restricted cash | 501 | | | 500 | |
Total cash and restricted cash shown in the statements of cash flows | $ | 8,077 | | | $ | 15,737 | |
Revenues - The following presents revenue product sales by channel, food, drug and mass ("FDM"), natural products and other, and e-commerce, for the three and six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2020 | | | | Three months ended June 30, 2019 | | |
| Amount | | % of product sales, net | | Amount | | % of product sales, net |
| (in thousands) | | | | (in thousands) | | |
Retail - FDM | $ | 445 | | | 8.2 | % | | $ | 1,669 | | | 9.9 | % |
Retail - Natural products and other | 2,914 | | | 54.0 | % | | 12,539 | | | 74.4 | % |
E-Comm | 2,037 | | | 37.8 | % | | 2,646 | | | 15.7 | % |
Product sales, net | $ | 5,396 | | | 100.0 | % | | $ | 16,854 | | | 100.0 | % |
| | | | | | | |
| Six months ended June 30, 2020 | | | | Six months ended June 30, 2019 | | |
| Amount | | % of product sales, net | | Amount | | % of product sales, net |
| (in thousands) | | | | (in thousands) | | |
Retail - FDM | $ | 876 | | | 6.4 | % | | $ | 1,766 | | | 5.6 | % |
Retail - Natural products and other | 8,739 | | | 63.9 | % | | 25,063 | | | 78.9 | % |
E-Comm | 4,051 | | | 29.7 | % | | 4,936 | | | 15.5 | % |
Product sales, net | $ | 13,666 | | | 100.0 | % | | $ | 31,765 | | | 100.0 | % |
Liquidity Considerations - In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. The COVID-19 pandemic, as it was declared by the World Health Organization, has continued to spread and has already caused severe global disruptions. The extent of COVID-19’s continued effect on the Company's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape.
Management expects COVID-19, along with the resulting government-imposed restrictions on businesses, shelter-in place orders and temporary retail and grocery store closures to negatively impact its operations due to decreased consumer demand as well as potential production and warehouse limitations which results in an event or condition, before consideration of management’s plans, that could impact its ability to meet future obligations. In response to the continuing uncertainty resulting from COVID-19, management has implemented, and as necessary will continue to make, strategic cost reductions, including reductions in employee headcount, vendor spending, and the delay of expenses related to its drug development activities.
On April 17, 2020, the Company received $2.9 million pursuant to the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as administered by the U.S. Small Business Administration (the "SBA"), as further discussed in Note 4.
Management believes that its cash and cash equivalents on hand and these cost reduction measures, as needed, will provide sufficient liquidity to fund its operations for the next 12 months from the issuance of the condensed consolidated financial statements.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("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 currently plans to adopt the guidance at the beginning of fiscal 2023. The Company is currently evaluating the potential impact of Topic 326 on the Company’s condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently evaluating the potential impact of ASU 2019-12 on the Company’s condensed consolidated financial statements.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 requires the entity to apply these amendments on a prospective basis for which it is required to disclose the nature of and reason for the change in accounting upon transition. This disclosure shall be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments. This ASU became effective for the Company on January 1, 2020. Adoption of ASU 2017-04 did not have an immediate impact on the Company’s condensed consolidated financial statements and only has the potential to impact the amount of any goodwill impairment recorded after the adoption of the ASU.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. BALANCE SHEET DETAILS
Inventory
Inventory as of June 30, 2020 and December 31, 2019 was comprised of the following (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Raw materials | $ | 5,177 | | | $ | 4,503 | |
Work in process | 676 | | | 415 | |
Finished goods | 2,565 | | | 5,053 | |
| $ | 8,418 | | | $ | 9,971 | |
As of June 30, 2020, the Company had no inventory outside the United States. As of December 31, 2019, the Company had inventory outside the United States of $0.3 million. The Company recorded inventory write-downs of $0.2 million and $0.3 million for the three and six months ended June 30, 2020, respectively. The Company had no inventory write-downs for the three and six months ended June 30, 2019.
Accrued expenses
Accrued expenses as of June 30, 2020 and December 31, 2019 were as follows (in thousands):
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
Accrued payroll expenses (1) | $ | 8,234 | | | $ | 8,787 | |
Other accrued liabilities | 1,898 | | | 2,069 | |
| $ | 10,132 | | | $ | 10,856 | |
(1) This includes a $6.2 million tax liability associated with a related party transaction as discussed in Note 10. | | | |
3. INTANGIBLES, NET
Intangible assets consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Useful Life (Years) |
Balance - June 30, 2020: | | | | | | | |
In-process research and development | $ | 3,730 | | | $ | — | | | $ | 3,730 | | | — |
Trade names | 100 | | | 90 | | | 10 | | | 5 |
Non-compete agreements | 77 | | | 69 | | | 8 | | | 5 |
| $ | 3,907 | | | $ | 159 | | | $ | 3,748 | | | |
Balance - December 31, 2019: | | | | | | | |
In-process research and development | $ | 3,730 | | | $ | — | | | $ | 3,730 | | | — |
Trade names | 100 | | | 80 | | | 20 | | | 5 |
Non-compete agreements | 77 | | | 61 | | | 16 | | | 5 |
| $ | 3,907 | | | $ | 141 | | | $ | 3,766 | | | |
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. DEBT
Paycheck Protection Program
On April 15, 2020, the Company applied for a loan from JPMorgan Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program (the "PPP") of the CARES Act as administered by the U.S. Small Business Administration (the "SBA"). On April 17, 2020, the loan was approved, and the Company received proceeds in the amount of $2.9 million (the “PPP Loan”).
The PPP Loan, which took the form of a promissory note, matures on April 15, 2022 and bears interest at a rate of 0.98% per annum (the “Promissory Note”). Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence on November 15, 2020. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The Promissory Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.
Under the original rules, all or a portion of the PPP Loan may be forgiven by the SBA and lender upon application by the Company beginning 60 days but not later than 120 days after loan approval and upon documentation of expenditures in accordance with the SBA's requirements.
Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities during the covered period of 8 weeks beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $100,000, prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100,000 or less annually are reduced by more than 25%. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal.
The Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), enacted on June 5, 2020, amended the Paycheck Protection Program, among others, as follows: (i) extended the covered period from 8 weeks to 24 weeks from the date the PPP Loan is originated, during which PPP funds needed to be expended in order to be forgiven. A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. (ii) at least 60% of PPP funds must be spent on payroll costs, with the remaining 40% available to spend on other eligible expenses. (iii) payments are deferred until the date on which the amount of forgiveness determined is remitted to the lender. If a borrower fails to seek forgiveness within 10 months after the last day of its covered period, then payments will begin on the date that is 10 months after the last day of the covered period. In addition, the PPP Flexibility Act modified the CARES Act by increasing the maturity date for loans made after the effective date from two years to a minimum maturity of five years from the date on which the borrower applies for loan forgiveness. Existing PPP loans made before the new legislation retain their original two-year term, but may be renegotiated between a lender and a borrower to match the 5-year term permitted under the PPP Flexibility Act.
The Company intends to apply for full loan forgiveness within the required timeframe. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
Unsecured Note Payable
In October 2018, the Company entered into a finance agreement with First Insurance Funding in order to fund a portion of its insurance policies, which was amended in January 2019. The amount financed was $0.5 million and incurred interest at a rate of 5.15%. The Company was required to make monthly payments of $0.1 million through July 2019. As of June 30, 2020 and December 31, 2019, there was no outstanding balance.
5. STOCK-BASED COMPENSATION
On June 11, 2019, the Company's stockholders approved an amendment to the CV Sciences, Inc. Amended and Restated 2013 Equity Incentive Plan (the "2013 Plan") to increase the number of shares that may be issued under the 2013 Plan by an additional 3,000,000 shares. The Company’s stockholders also approved to add an automatic “evergreen” provision regarding the number of shares to be annually added to the 2013 Plan. As a result, the number of shares of common stock that will be
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
automatically added to the 2013 Plan on January 1 of each year during the term of the plan, starting with January 1, 2020, will be the lesser of: (a) 4% of the total shares of the Company’s common stock outstanding on December 31st of the prior year, (b) 4,000,000 shares of the Company’s common stock, or (c) a lesser number of shares of the Company’s common stock as determined by the Company’s Board of Directors. On January 1, 2020, the Company added 3,976,000 shares to the 2013 plan. There are currently 34,976,000 shares authorized for issuance under the 2013 Plan. As of June 30, 2020, the Company had 4,872,000 of authorized unissued shares reserved and available for issuance upon exercise and conversion of outstanding awards under the 2013 Plan.
The Company recognized stock-based compensation expense of $1.2 million and $2.5 million during the three and six months ended June 30, 2020, respectively, and $2.1 million on and $12.1 million for the three and six months ended June 30, 2019, respectively. During the six months ended June 30, 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 agreed 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 and restricted stock units (RSU's) 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). 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 the Settlement Agreement, the Company recorded stock-based compensation expense related to the accelerated vesting of the RSU's of $5.1 million and the modification of certain stock options of $2.7 million during the six months ended June 30, 2019.
In June 2020, the Company’s board of directors approved a stock option modification that reduced certain employees’ and directors’ stock option exercise prices to $0.66. No other terms were modified. Stock options to purchase a total of 2,130,000 shares of common stock were modified. The modification to the existing stock options resulted in $0.2 million incremental increase in the value of the stock options. The incremental value associated with the modification will be recognized over the life of the remaining service period of the options. During the three months ended June 30, 2020, the Company recorded $0.1 million in stock-based compensation associated with the repriced options.
As of June 30, 2020, total unrecognized compensation cost related to non-vested stock-based compensation arrangements was $4.3 million which is expected to be recognized over a weighted-average period of 1.7 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, 2019 | 28,105 | | $ | 0.80 | | | 5.4 | | $ | 12,335 | |
Granted | 6,105 | | 0.41 | | | — | | | — | |
Exercised | (469) | | 0.97 | | | — | | | — | |
Forfeited | (7,080) | | 1.15 | | | — | | | — | |
Outstanding - June 30, 2020 | 26,661 | | 0.44 | | | 5.5 | | 5,370 | |
| | | | | | | |
Exercisable - June 30, 2020 | 21,082 | | 0.38 | | | 4.5 | | 4,465 | |
Vested or expected to vest - June 30, 2020 | 26,661 | | $ | 0.44 | | | 5.5 | | $ | 5,370 | |
The Company has established performance milestones in connection with the drug development efforts for its lead drug candidate CVSI-007. The above table includes 5,000,000 vested performance-based options as of June 30, 2020, which were issued outside of the 2013 Plan. As of June 30, 2020, there were 8,000,000 remaining unvested stock options granted outside of the 2013 Plan which vest upon the completion of future performance conditions, including those related to the Settlement Agreement with Mona Jr. (refer to Note 10).
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The total intrinsic value of stock options exercised during the six months ended June 30, 2020 was $0.3 million. Upon option exercise, the Company issues new shares of stock. The total intrinsic value of stock options exercised during the six months ended June 30, 2019 was $4.1 million.
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 June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Volatility | 123.1% | | 110.9% | | 132.9% | | 113.8% |
Risk-Free Interest Rate | 0.4% | | 1.8% | | 0.5% | | 2.5% |
Expected Term (in years) | 5.42 | | 5.80 | | 5.32 | | 5.70 |
Dividend Rate | —% | | —% | | —% | | —% |
Fair Value Per Share on Grant Date | $0.61 | | $3.31 | | $0.36 | | $4.00 |
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 for the three and six months ended June 30, 2020 is based on the historical volatility of the Company's common stock. Expected volatility for the three and six months ended June 30, 2019 is calculated based on the Company’s peer group, consisting of five companies in the industry in which the Company operates because the Company did not have sufficient historical volatility data. The Company estimates the expected term for stock options awarded to employees, non-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.
6. 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 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 loss per share using the treasury stock method when their effect is dilutive. Potential common shares are excluded from the calculation of diluted net loss per share when their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | |
Net income (loss) | $ | (4,681) | | | $ | 1,229 | | | $ | (9,833) | | | $ | (8,155) | |
Denominator for basic and diluted net income (loss) per share: | | | | | | | |
Weighted average common shares outstanding for basic | 99,863 | | 98,633 | | 99,771 | | 98,557 |
Dilutive potential common stock outstanding: | | | | | | | |
Stock options and RSU's | — | | | 22,296 | | | — | | | — | |
Weighted average common shares outstanding for diluted | 99,863 | | 120,929 | | 99,771 | | 98,557 |
Basic net income (loss) per share | $ | (0.05) | | | $ | 0.01 | | | $ | (0.10) | | | $ | (0.08) | |
Diluted net income (loss) per share | $ | (0.05) | | | $ | 0.01 | | | $ | (0.10) | | | $ | (0.08) | |
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 June 30, | | | | Six months ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Stock options | 21,661 | | | — | | | 21,661 | | | 18,368 | |
Performance stock options | 5,000 | | | — | | | 5,000 | | | 7,250 | |
Total | 26,661 | | | — | | | 26,661 | | | 25,618 | |
The above table excludes 8,000,000 unvested performance stock options for the three and six months ended June 30, 2020 and 10,750,000 unvested performance stock options for the three and six months ended June 30, 2019, which vest upon the completion of future performance conditions.
7. 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 are 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 Company and Mr. Ruth previously agreed to stay the action pending the conclusion of discovery in the Sallustro Case. Now that the Sallustro Case has been dismissed, the stay has been lifted. On September 20, 2019, the Company filed a motion to dismiss the Ruth Complaint. Mr. Ruth filed a response to our motion, and we are currently awaiting a ruling from the court. Management intends to vigorously defend the allegations.
On August 24, 2018, David Smith filed a purported class action complaint in Nevada District Court (the "Smith Complaint") alleging certain misstatements in the Company's public filings that led to stock price fluctuations and financial harm. Several additional individuals filed similar claims, and the Smith Complaint and each of the other suits all arise out of a report published by Citron Research on Twitter on August 20, 2018, suggesting that the Company misled investors by failing to disclose that the Company’s efforts to secure patent protection for CVSI-007 had been “finally rejected” by the United States Patent and Trademark Office ("USPTO"). On November 15, 2018, the court consolidated the actions and appointed Richard Ina, Trustee for the Ina Family Trust, as Lead Plaintiff for the consolidated actions. On January 4, 2019, Counsel for Lead Plaintiff Richard Ina, Trustee for the Ina Family Trust, filed a “consolidated amended complaint”. On March 5, 2019, we filed a motion to dismiss the action. The Court denied the motion to dismiss on December 10, 2019, and the parties have commenced discovery in the action. Arising out of the same facts and circumstances in the Smith Complaint, on June 11, 2020, Phillip Berry filed a derivative suit in the United States District Court for the Southern District of California alleging breaches of fiduciary duty against the Company and various defendants, and waste of corporate assets (the “Berry Complaint”). The Company has accepted service of the Berry Complaint, but has not filed a responsive pleading yet. A responsive pleading is currently due by August 31, 2020. A total of four shareholder derivative suits have been filed which are premised on the same event as the Smith Complaint. Three of these derivative suits are currently stayed with a responsive pleading due in the fourth such suit on September 11, 2020. On May 19, 2020, the USPTO issued a patent pertaining to CVSI-007, which the Company believes negates and defeats any claims that the Company and the various defendants misled the market by not disclosing that the USPTO had finally rejected the patent. Management intends to vigorously defend the allegations in both matters as the result of the issuance of a patent and the failure of the plaintiffs’ causes of action on various other grounds.
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 our motion, plaintiffs elected to file an amended complaint on February 25, 2020. On March 11, 2020, we 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 portion of the proceeding that is stayed will remain stayed until the U.S. Food and Drug Administration promulgates rules that govern cannabidiol products (the “FDA Rules”). When such FDA Rules are promulgated, the plaintiffs will be allowed to ask the court to reopen the proceeding. Management intends to vigorously defend the allegations.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
On July 22, 2020, the Company filed a complaint in the San Diego Superior Court to terminate Mona Jr.’s severance and other post-termination compensation and benefits, as well as recovering amounts owed to the Company by Mona Jr. in connection with his purchase of a personal seat license for the Raiders Stadium and certain advance payments made on Mona Jr.’s behalf.
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.
8. SEGMENT INFORMATION
The Company operates in two distinct business segments: a consumer products segment in manufacturing, marketing and selling hemp-based CBD products to a range of market sectors; and a specialty pharmaceutical segment focused on developing and commercializing novel therapeutics utilizing CBD. The Company’s segments maintain separate financial information for which operating results are evaluated on a regular basis by the Company’s senior management in deciding how to allocate resources and in assessing performance. The Company evaluates its consumer products segment based on net product sales, gross profit and operating income or loss. The Company currently evaluates its specialty pharmaceutical segment based on the progress of its clinical development programs.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents information by reportable operating segment for the three and six months ended June 30, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | |
| Consumer Products Segment | | Specialty Pharmaceutical Segment | | Consolidated Totals |
Three months ended June 30, 2020: | | | | | |
Product sales, net | $ | 5,396 | | | $ | — | | | $ | 5,396 | |
| | | | | |
Gross profit | $ | 2,322 | | | $ | — | | | $ | 2,322 | |
Research and development expense | 152 | | | 594 | | | 746 | |
Selling, general and administrative expense | 6,180 | | | 53 | | | 6,233 | |
Operating loss | $ | (4,010) | | | $ | (647) | | | $ | (4,657) | |
| | | | | |
Three months ended June 30, 2019: | | | | | |
Product sales, net | $ | 16,854 | | | $ | — | | | $ | 16,854 | |
| | | | | |
Gross profit | $ | 11,951 | | | $ | — | | | $ | 11,951 | |
Research and development expense | 679 | | | 1,009 | | | 1,688 | |
Selling, general and administrative expense | 8,999 | | | 10 | | | 9,009 | |
Operating income (loss) | $ | 2,273 | | | $ | (1,019) | | | $ | 1,254 | |
| | | | | | | | | | | | | | | | | |
| Consumer Products Segment | | Specialty Pharmaceutical Segment | | Consolidated Totals |
Six months ended June 30, 2020: | | | | | |
Product sales, net | $ | 13,666 | | | $ | — | | | $ | 13,666 | |
| | | | | |
Gross profit | $ | 6,330 | | | $ | — | | | $ | 6,330 | |
Research and development expense | 457 | | | 1,798 | | | 2,255 | |
Selling, general and administrative expense | 13,990 | | | 62 | | | 14,052 | |
Operating loss | $ | (8,117) | | | $ | (1,860) | | | $ | (9,977) | |
| | | | | |
Six months ended June 30, 2019: | | | | | |
Product sales, net | $ | 31,765 | | | $ | |