UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the quarterly period ended |
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Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from _________ to ________ |
Commission File Number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(
(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:
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Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
None |
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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.
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).
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.
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Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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Smaller reporting company |
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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 November 11, 2024, the issuer had
CV SCIENCES, INC.
FORM 10-Q
TABLE OF CONTENTS
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PAGE |
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Condensed Consolidated Statements of Comprehensive Income (Loss) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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33 |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CV SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
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September 30, |
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December 31, |
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Assets |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Inventory |
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Prepaid expenses and other |
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Total current assets |
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Property and equipment, net |
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Right of use assets |
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Intangibles, net |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses |
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Operating lease liability - current |
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Debt |
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Total current liabilities |
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Operating lease liability - net of current portion |
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Deferred tax liability |
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Other liabilities |
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Total liabilities |
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Stockholders' equity |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Accumulated other comprehensive income |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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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)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Operating expenses: |
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Research and development |
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Selling, general and administrative |
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Benefit from reversal of accrued payroll taxes (Note 12) |
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Total operating expenses |
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Operating income (loss) |
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( |
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( |
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( |
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Other expense, net |
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Income (loss) before income taxes |
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Income tax expense |
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Net income (loss) |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Weighted average common shares outstanding, basic and diluted |
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Net income (loss) per common share, basic and diluted |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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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)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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Net income (loss) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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$ |
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Other comprehensive loss: |
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Foreign currency translation adjustment |
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Total comprehensive income (loss) |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
3
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated Other Comprehensive |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Total |
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Balance at December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Issuance of common stock for services |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Balance at March 31, 2024 |
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( |
) |
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Issuance of common stock for acquisition |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at June 30, 2024 |
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( |
) |
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( |
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Issuance of common stock for services |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at September 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Preferred Stock |
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Common Stock |
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Additional |
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Accumulated |
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Accumulated Other Comprehensive |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Deficit |
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Income (Loss) |
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Total |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance at March 31, 2023 |
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( |
) |
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Issuance of common stock for services |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at June 30, 2023 |
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( |
) |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance at September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
— |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements.
4
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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Nine Months Ended September 30, |
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2024 |
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2023 |
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OPERATING ACTIVITIES |
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Net income (loss) |
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$ |
( |
) |
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$ |
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Adjustments to reconcile net income (loss) to net cash flows provided by (used in) |
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Depreciation and amortization |
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Stock-based compensation |
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Amortization of debt discount |
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Amortization of right of use assets |
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Gain in fair value of contingent consideration liabilities |
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( |
) |
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Benefit from reversal of accrued payroll tax (Note 12) |
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( |
) |
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Other |
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Change in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other |
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Accounts payable and accrued expenses |
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( |
) |
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( |
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Net cash flows provided by (used in) operating activities |
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( |
) |
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INVESTING ACTIVITIES |
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Acquisition of business, net of cash acquired |
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( |
) |
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Net cash flows used in investing activities |
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( |
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FINANCING ACTIVITIES |
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Proceeds from note payable |
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Debt issuance costs related to note payable |
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( |
) |
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Repayment of note payable |
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( |
) |
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( |
) |
Repayment of unsecured debt |
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( |
) |
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( |
) |
Net cash flows provided by (used in) financing activities |
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( |
) |
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Effect of exchange rate changes on cash |
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( |
) |
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Net increase (decrease) in cash |
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( |
) |
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Cash, beginning of period |
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Cash, end of period |
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$ |
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$ |
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Supplemental cash flow disclosure: |
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Interest paid |
|
$ |
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$ |
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Income taxes paid |
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$ |
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$ |
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|
||
Supplemental disclosures of non-cash transactions: |
|
|
|
|
|
|
||
Services paid with common stock |
|
$ |
|
|
$ |
|
||
Debt issuance cost for note payable |
|
$ |
( |
) |
|
$ |
|
|
Working capital adjustment due from seller |
|
$ |
|
|
$ |
|
||
Fair value of net assets acquired, excluding cash |
|
$ |
|
|
$ |
|
||
Goodwill on acquisition |
|
|
|
|
|
|
||
Common stock consideration |
|
|
( |
) |
|
|
|
|
Contingent consideration |
|
|
|
|
|
|
||
Cash paid for acquisition |
|
$ |
|
|
$ |
|
||
See accompanying notes to the unaudited condensed consolidated financial statements.
5
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 +PlusCBD™Pet. 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 European manufacturer and distributor of plant-based protein products. The Company's plant-based food products are sold under the Cultured Foods brand.
On May 13, 2024, the Company acquired Elevated Softgels LLC, a Delaware limited liability company ("Elevated Softgels"). Elevated Softgels is a manufacturer of encapsulated softgels and tinctures for the supplement and nutrition industry.
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 and on May 13, 2024, the Company acquired Elevated Softgels, both of which are now wholly owned subsidiaries of the Company. 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 $
In July 2024, the Company received net proceeds of $
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.
6
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 September 30, 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 September 30, 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.
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 and nine months ended September 30, 2024 and 2023:
|
|
Three months ended September 30, 2024 |
|
|
Three months ended September 30, 2023 |
|
||||||||||
|
|
Amount |
|
|
% of product |
|
|
Amount |
|
|
% of product |
|
||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||
Retail sales (B2B) |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
E-Commerce sales (B2C) |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Product sales, net |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
|
|
Nine months ended September 30, 2024 |
|
|
Nine months ended September 30, 2023 |
|
||||||||||
|
|
Amount |
|
|
% of product |
|
|
Amount |
|
|
% of product |
|
||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||
Retail sales (B2B) |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
E-Commerce sales (B2C) |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||
Product sales, net |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
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”
7
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(“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 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.
In November of 2024, FASB issued ASU 2024-03, “Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.” Under ASU 2024-03, a public entity would be required to disclose information about purchases of inventory, employee compensation, depreciation, intangible asset amortization, and depletion for each income statement line item that contains those expenses. Entities would also have to disclose other specific expenses, gains, or losses that are already required to be disclosed under GAAP in this same disclosure, a qualitative description of the amounts remaining that are not separately disaggregated quantitatively, and the total amount of selling expenses, as well as an entity’s definition of selling expenses. ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. ASU 2024-03 allows for early adoption and requires either prospective adoption to financial statements issued for reporting periods after the effective date of ASU 2024-03 or retrospectively to any or all prior periods presented in the financial statements. 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.
Inventory
Inventory as of September 30, 2024 and December 31, 2023 was comprised of the following (in thousands):
8
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
September 30, |
|
|
December 31, |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Accrued expenses
Accrued expenses as of September 30, 2024 and December 31, 2023 were as follows (in thousands):
|
|
September 30, |
|
|
December 31, |
|
||
Accrued payroll taxes (Note 12) |
|
$ |
|
|
$ |
|
||
Accrued payroll expenses |
|
|
|
|
|
|
||
Other accrued liabilities |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Cultured Foods
On December 7, 2023, the Company acquired all the issued and outstanding equity interests 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 periods from December 7, 2023 through December 31, 2023, and for the three and nine months ended September 30, 2024. As a result of the business combination, acquisition costs of $
The following table outlines the total consideration transferred (in thousands):
Cash |
|
$ |
|
|
Common shares |
|
|
|
|
Earn-out |
|
|
|
|
Total consideration transferred |
|
$ |
|
The following table summarizes the assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash |
|
$ |
|
|
Accounts receivable and other receivables |
|
|
|
|
Inventories |
|
|
|
|
Intangible assets |
|
|
|
|
Other current assets |
|
|
|
|
Fixed assets |
|
|
|
|
Goodwill |
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
Current notes payable |
|
|
|
|
Deferred tax liabilities |
|
|
|
|
Total liabilities |
|
|
|
|
Net assets acquired |
|
$ |
|
|
9
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
Included in the purchase agreement is an earn-out provision whereby the Company agreed to pay the Cultured Foods' selling equityholder additional consideration contingent on achievement of certain annual revenue results of Cultured Foods in 2024. During the three months ended September 30, 2024, the Company adjusted its previously recorded accrual of $
Elevated Softgels
On May 13, 2024, the Company acquired all the issued and outstanding membership interests in Elevated Softgels. Elevated Softgels manufactures encapsulated softgels and tinctures for the supplement and nutrition industry. Elevated Softgels is based in Grand Junction, Colorado. This acquisition creates opportunity to further increase the Company's sales to current and new clients. In addition, the Company intends to in-source production of certain key products.
The acquisition closed on May 13, 2024 and, accordingly, the consolidated statements of operations and comprehensive income (loss) included Elevated Softgels' results of operations for the period from May 13, 2024 through September 30, 2024. As a result of the business combination, acquisition costs of $
The following table outlines the total consideration transferred (in thousands):
Cash |
|
$ |
|
|
Common shares |
|
|
|
|
Earn-out |
|
|
|
|
Total consideration transferred |
|
$ |
|
The following table summarizes the assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash |
|
$ |
|
|
Inventories |
|
|
|
|
Intangible assets |
|
|
|
|
Other non-current assets |
|
|
|
|
Fixed assets |
|
|
|
|
Goodwill |
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
Total liabilities |
|
|
|
|
Net assets acquired |
|
$ |
|
|
The fair value of acquired intangible assets were determined using a forecasted cash flow approach. Acquired intangible assets consists of customer relationships. The Company assigned a
Included in the purchase agreement is an earn-out provision whereby the Company agreed to pay the Elevated Softgels' selling equityholders additional consideration contingent on achievement of certain net revenue of Elevated Softgels for the 12-months period starting on May 13, 2024. During the three months ended September 30, 2024, the Company adjusted its previously recorded accrual of $
10
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the Company recorded the change in the fair value of the earn-out subsequent to the acquisition date of $
Goodwill
The following table summarizes the changes in the carrying amounts of goodwill (in thousands):
|
|
Carrying |
|
|
Balance - December 31, 2023: |
|
$ |
|
|
Acquisition of Elevated Softgels |
|
|
|
|
Translation adjustment |
|
|
|
|
Balance - September 30, 2024: |
|
$ |
|
|
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
Intangible Assets
The following table summarizes the intangible assets and the related accumulated amortization (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Gross carrying amount |
|
$ |
|
|
$ |
|
||
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Translation adjustment |
|
|
|
|
|
|
||
Net carrying amount |
|
$ |
|
|
$ |
|
||
Changes in the carrying amounts of intangible assets are summarized below (in thousands):
|
|
Trade names |
|
|
Customer relationships |
|
|
Total |
|
|||
Balance - December 31, 2023: |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Acquisition of Elevated Softgels |
|
|
|
|
|
|
|
|
|
|||
Amortization |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Translation adjustments |
|
|
|
|
|
|
|
|
|
|||
Balance - September 30, 2024: |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The above stated amounts are provisional amounts and subject to adjustment in future periods. The Company did not incur costs to renew or extend the term of acquired intangible assets for the three and nine months ended September 30, 2024. The estimated
11
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
amortization expense for the Company's intangible assets is not significant in any future individual fiscal year.
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
The Company's operating leases are included in "Right of use assets" on the Company's September 30, 2024 Condensed Consolidated Balance Sheet, and represents the Company's right to use the underlying assets 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 September 30, 2024 Condensed Consolidated Balance Sheet. Operating lease expense is recognized on a straight-line basis over the lease term. During the three and nine months ended September 30, 2024, the Company's total lease cost was $
Because the rate implicit in the leases 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.
|
|
September 30, 2024 |
|
|
Remaining lease term (in months) |
|
|
|
|
Discount rate |
|
|
% |
|
Maturities of lease liabilities as of September 30, 2024 were as follows (in thousands):
Year ending December 31, |
|
|
|
|
2024 (remaining three months) |
|
$ |
|
|
2025 |
|
|
|
|
|
|
|
|
|
Less imputed interest |
|
|
( |
) |
Total lease liabilities |
|
$ |
|
|
Current operating lease liabilities |
|
$ |
|
|
Non-current operating lease liabilities |
|
|
|
|
Total lease liabilities |
|
$ |
|
|
Debt as of September 30, 2024 and December 31, 2023 was all current and was as follows (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Note payable, net of discount and costs |
|
$ |
|
|
$ |
— |
|
|
Insurance financing |
|
|
— |
|
|
|
|
|
Cultured Foods note payable (Note 3) |
|
|
— |
|
|
|
|
|
Total debt |
|
$ |
|
|
$ |
|
||
Note Payable
2024 Streeterville Note
12
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In July 2024, the Company entered into a new note purchase agreement with Streeterville, pursuant to which the Company issued and sold to Streeterville a Secured Promissory Note (the "2024 Streeterville Note") in the original principal amount of $
No interest will accrue on the 2024 Streeterville Note until an occurrence of an Event of Default, as defined in Section 4 of the 2024 Streeterville Note, if ever. The 2024 Streeterville Note provides 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 may declare all amounts owed under the 2024 Streeterville Note immediately due and payable. Also, a late fee and interest penalty of equal to either
2022 Streeterville Note
In August 2022, the Company entered into a note purchase agreement with Streeterville, pursuant to which the Company issued and sold to Streeterville a Secured Promissory Note (the "2022 Streeterville Note") in the original principal amount of $
No interest was to accrue on the 2022 Streeterville Note until an occurrence of an Event of Default, as defined in Section 4 of the Streeterville Note, if ever. The 2022 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 2022 Streeterville Note immediately due and payable. Also, a late fee and interest penalty of equal to either
The unpaid amount of the 2022 Streeterville Note, any interest, fees, charges and late fees accrued was due and payable in full within
The Company made principal payments to Streeterville of $
13
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Insurance Financing
In October 2024, 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 was $
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 most recent policy year. The amount financed was $
Cultured Foods Notes Payable
The Company assumed the outstanding notes payable of Cultured Foods in connection with its acquisition of Cultured Foods in December 2023. The notes payable to the prior owner of Cultured Foods were due within the next
Common Stock
During the year ended December 31, 2022, the Company issued
During the three months ended September 30, 2024, the Company issued
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 |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
|||
March 30, 2022 |
|
Equity |
|
$ |
|
|
June 6, 2025 |
|
|
|
|
|
|
|||
March 30, 2022 |
|
Equity |
|
$ |
|
|
June 6, 2025 |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
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
14
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of September 30, 2024, total unrecognized compensation cost related to non-vested stock-based compensation arrangements was $
The following summarizes activity related to the Company's stock options (in thousands, except per share data):
|
|
Number of Shares |
|
|
Weighted Average |
|
|
Weighted Average |
|
|
Aggregate Intrinsic Value |
|
||||
Outstanding - December 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Exercised |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Cancelled |
|
|
( |
) |
|
|
|
|
|
— |
|
|
|
— |
|
|
Outstanding - September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Exercisable - September 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Vested or expected to vest - September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The Company has established performance milestones in connection with drug development efforts for its lead drug candidate CVSI-007. As of September 30, 2024, there were
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:
|
|
|
Nine months ended September 30, |
|
|||||
|
|
|
2024 |
|
|
2023 |
|
||
Volatility |
|
|
|
% |
|
|
% |
||
Risk-Free Interest Rate |
|
|
|
% |
|
|
% |
||
Expected Term (in years) |
|
|
|
|
|
|
|
||
Dividend Rate |
|
|
|
% |
|
|
% |
||
Weighted Average Fair Value Per Share on Grant Date |
|
|
$ |
|
|
$ |
|
||
The Company did
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.
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.
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):
15
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Performance stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 $
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 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
16
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 resumed on May 21, 2024 and concluded on May 23, 2024. Post-hearing briefing have been submitted to the Arbitrator. A decision from the Arbitrator is expected to follow. 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.
For the three and nine months ended September 30, 2024 and 2023, the Company generated taxable losses for which
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
In addition,
17
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $
18
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 and nine months ended September 30, 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.
In May 2024, we acquired all outstanding membership interests 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.
In August 2024, we engaged Maxim Group LLC ("Maxim") as a non-exclusive financial advisor and investment banker to provide strategic financial advisory and investment banking services. With the help of Maxim, the Company intends to continue to build an efficient and cost effective consumer products platform and continue to evaluate inbound and outbound merger, sale, acquisition or other opportunities for the Company.
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; Grand Junction, Colorado; and Warsaw, Poland.
Our common stock is traded on the OTC:QB market under the trading symbol CVSI.
Results of Operations
Revenues and gross profit
|
|
Three months ended |
|
|
Change |
|
|
Nine months ended |
|
|
Change |
|
||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||||||||||||||||||
Product sales, net |
|
$ |
3,865 |
|
|
$ |
4,089 |
|
|
$ |
(224 |
) |
|
|
(5 |
)% |
|
$ |
11,821 |
|
|
$ |
12,203 |
|
|
$ |
(382 |
) |
|
|
(3 |
)% |
Cost of goods sold |
|
|
2,087 |
|
|
|
2,246 |
|
|
|
(159 |
) |
|
|
(7 |
)% |
|
|
6,330 |
|
|
|
6,860 |
|
|
|
(530 |
) |
|
|
(8 |
)% |
Gross profit |
|
$ |
1,778 |
|
|
$ |
1,843 |
|
|
$ |
(65 |
) |
|
|
(4 |
)% |
|
$ |
5,491 |
|
|
$ |
5,343 |
|
|
$ |
148 |
|
|
|
3 |
% |
Gross margin |
|
|
46.0 |
% |
|
|
45.1 |
% |
|
|
|
|
|
|
|
|
46.5 |
% |
|
|
43.8 |
% |
|
|
|
|
|
|
||||
19
Third Quarter 2024 vs. 2023
|
|
Three months ended |
|
|
Three months ended |
|
||||||||||
|
|
Amount |
|
|
% of product |
|
|
Amount |
|
|
% of product |
|
||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||
Retail sales (B2B) |
|
$ |
2,209 |
|
|
|
57.2 |
% |
|
$ |
2,415 |
|
|
|
59.1 |
% |
E-commerce sales (B2C) |
|
|
1,656 |
|
|
|
42.8 |
% |
|
|
1,674 |
|
|
|
40.9 |
% |
Product sales, net |
|
$ |
3,865 |
|
|
|
100.0 |
% |
|
$ |
4,089 |
|
|
|
100.0 |
% |
We had net product sales of $3.9 million and gross profit of $1.8 million, representing a gross margin of 46.0%, in the third quarter of 2024, compared to net product sales of $4.1 million and gross profit of $1.8 million, representing a gross margin of 45.1%, in the third quarter of 2023. Our net product sales decreased in the third quarter of 2024 when compared to the third quarter 2023 mostly due to lower B2B sales. The total number of units sold during the third quarter 2024 decreased by 7.9% compared to the third quarter 2023 and our average sales price per unit decreased slightly by 0.5%. In addition, 52.6% of our net revenue for the third quarter 2024 was from new products launched since January 1, 2022. During this time, we launched 39 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 third quarter of 2024 compared to the third quarter of 2023 by $0.2 million, or 7%. The reduction is mostly due to the lower number of units sold in the third quarter of 2024. In addition, cost of goods sold in the third quarter of 2024 decreased as a percentage of revenue compared to the third quarter of 2023, mostly due to lower freight, cost savings and product mix in the third quarter of 2024 compared to the prior year period. Our gross profit remained flat at $1.8 million in the third quarter of 2024 and gross margin improved from 45.1% in the third quarter 2023 to 46.0% in the third quarter of 2024. The improvement in our gross margin is primarily due to our product and channel mix, lower freight, and cost savings.
First nine months 2024 vs. 2023
|
|
Nine months ended |
|
|
Nine months ended |
|
||||||||||
|
|
Amount |
|
|
% of product |
|
|
Amount |
|
|
% of product |
|
||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||
Retail sales (B2B) |
|
$ |
6,660 |
|
|
|
56.3 |
% |
|
$ |
7,144 |
|
|
|
58.5 |
% |
E-commerce sales (B2C) |
|
|
5,161 |
|
|
|
43.7 |
% |
|
|
5,059 |
|
|
|
41.5 |
% |
Product sales, net |
|
$ |
11,821 |
|
|
|
100.0 |
% |
|
$ |
12,203 |
|
|
|
100.0 |
% |
We had net product sales of $11.8 million and gross profit of $5.5 million, representing a gross margin of 46.5%, in the nine months ended September 30, 2024, compared to net product sales of $12.2 million and gross profit of $5.3 million, representing a gross margin of 43.8%, in the nine months ended September 30, 2023. Our net product sales decreased by $0.4 million, or 3%, in the first nine months of 2024 when compared to first nine months of 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 nine months of 2024 decreased by 11.8% compared to the first nine months of 2023, partially offset by higher average sales price per unit of 7.7%. 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 nine months of 2023, mostly due to additional revenue from our subscriptions customers. In addition, 48.5% of our net revenue for the first nine months 2024 was from new products launched since January 1, 2022. During this time, we launched 39 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.
20
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 nine months of 2024 compared to the first nine months of 2023 by $0.5 million, or 8%. The reduction is mostly due to the lower number of units sold in the first nine months of 2024. In addition, cost of goods sold in the first nine months of 2024 decreased as a percentage of revenue compared to the first nine months of 2023, mostly due to lower inventory losses, lower freight and cost savings in the first nine months of 2024 compared to the prior year period. Our gross profit improved by $0.2 million, or 3%, to $5.5 million in the first nine months of 2024 and gross margin improved from 43.8% in the first nine months of 2023 to 46.5% in the first nine months of 2024. The improvement in our gross margin is primarily due to our product and channel mix, lower inventory losses, lower freight and cost savings.
Research and development expense
|
|
Three months ended |
|
|
Change |
|
|
Nine months ended |
|
|
Change |
|
||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||||||||||||||||||
Research and development expense |
|
$ |
29 |
|
|
$ |
40 |
|
|
$ |
(11 |
) |
|
|
(28 |
)% |
|
$ |
93 |
|
|
$ |
111 |
|
|
$ |
(18 |
) |
|
|
(16 |
)% |
Percentage of product sales, net |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
0.8 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
||||
Third Quarter 2024 vs. 2023
Research and development (“R&D”) expense remained relatively consistent and represents overall reduced R&D spend associated with new consumer products development expenses.
First Nine Months 2024 vs. 2023
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 |
|
|
Change |
|
|
Nine months ended |
|
|
Change |
|
||||||||||||||||||||
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||||||
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
|
|
|
||||||||||||||||||||
Sales expense |
|
$ |
820 |
|
|
$ |
727 |
|
|
$ |
93 |
|
|
|
13 |
% |
|
$ |
2,426 |
|
|
$ |
2,298 |
|
|
$ |
128 |
|
|
|
6 |
% |
Marketing expense |
|
|
530 |
|
|
|
793 |
|
|
|
(263 |
) |
|
|
(33 |
)% |
|
|
1,526 |
|
|
|
2,280 |
|
|
|
(754 |
) |
|
|
(33 |
)% |
General & administrative expense |
|
|
740 |
|
|
|
720 |
|
|
|
20 |
|
|
|
3 |
% |
|
|
2,990 |
|
|
|
2,576 |
|
|
|
414 |
|
|
|
16 |
% |
Selling, general and administrative |
|
$ |
2,090 |
|
|
$ |
2,240 |
|
|
$ |
(150 |
) |
|
|
(7 |
)% |
|
$ |
6,942 |
|
|
$ |
7,154 |
|
|
$ |
(212 |
) |
|
|
(3 |
)% |
Percentage of product sales, net |
|
|
54.1 |
% |
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
58.7 |
% |
|
|
58.6 |
% |
|
|
|
|
|
|
||||
Third Quarter 2024 vs. 2023
Selling, general and administrative (“SG&A”) expense decreased to $2.1 million in the third quarter of 2024 compared to $2.2 million in the third quarter of 2023, which was primarily a result of the following:
First Nine Months 2024 vs. 2023
21
SG&A expense decreased from $7.2 million for the first nine months of 2023 to $6.9 million for the first nine months of 2024, and included the following:
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 six months ended June 30, 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 the Company 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 nine months ended September 30, 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 increased by approximately $0.1 million in the three month period ended September 30, 2024 as compared to the three month period ended September 30, 2023 due to the interest expense associated with the new Streeterville note payable. Other expense, net decreased by approximately $0.1 million in the nine month period ended September 30, 2024 as compared to the nine month period ended September 30, 2023. Other expense, net included fair value increases for our financial instruments of $0.2 million in the first nine months of 2023 and interest expense for the new Streeterville note payable of $0.1 million in the first nine months of 2024.
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.
22
A reconciliation from our net income (loss) to Adjusted EBITDA, a non-GAAP measure, for the three and nine months ended September 30, 2024 and 2023 is detailed below:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(in thousands) |
|
|
(in thousands) |
|
||||||||||
Net income (loss) |
|
$ |
(456 |
) |
|
$ |
(447 |
) |
|
$ |
(1,668 |
) |
|
$ |
3,971 |
|
Depreciation expense |
|
|
93 |
|
|
|
58 |
|
|
|
223 |
|
|
|
176 |
|
Amortization expense |
|
|
6 |
|
|
|
— |
|
|
|
15 |
|
|
|
— |
|
Interest expense (income) |
|
|
115 |
|
|
|
(4 |
) |
|
|
118 |
|
|
|
61 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
6 |
|
|
|
3 |
|
EBITDA |
|
|
(242 |
) |
|
|
(393 |
) |
|
|
(1,306 |
) |
|
|
4,211 |
|
Stock-based compensation (1) |
|
|
87 |
|
|
|
32 |
|
|
|
154 |
|
|
|
185 |
|
Professional fees associated with legal dispute (2) |
|
|
80 |
|
|
|
— |
|
|
|
773 |
|
|
|
— |
|
Benefit for reversal of accrued payroll tax (3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,171 |
) |
Adjusted EBITDA |
|
$ |
(75 |
) |
|
$ |
(361 |
) |
|
$ |
(379 |
) |
|
$ |
(1,775 |
) |
Liquidity and Capital Resources
During the nine months ended September 30, 2024 and the year ended December 31, 2023, our primary sources of capital came from (i) cash generated from our operations, (ii) existing cash, (iii) proceeds from note payable financings, and (iv) funds received from the IRS related to employee retention credits during the year ended December 31, 2023. As of September 30, 2024, we had approximately $1.0 million of cash and working capital of approximately $0.6 million.
Excluding the funds for employee retention credits, we generated negative cash flows from operations of $0.5 million for the year ended December 31, 2023. For the nine months ended September 30, 2024, the Company generated negative cash flows from operations of $0.7 million, and we had an accumulated deficit of $86.3 million as of September 30, 2024.
We believe that a combination of factors have adversely impacted our business operations for the nine months ended September 30, 2024 and the year ended December 31, 2023. Due to a low barrier entry market with a lack of a clear regulatory framework, we face intense competition from both licensed and illicit market operators that may also sell herbal supplements and hemp-based CBD consumer products. Because we operate in a market that is rapidly evolving and expanding globally, our customers may choose to obtain CBD products from our competitors, and our success depends on our ability to attract and retain our customers from purchasing CBD products elsewhere. To remain competitive, we intend to continue to innovate new products, build brand awareness, and make significant investments in our business strategy by introducing new products into the markets in which we operate, adopt quality assurance protocols and procedures, build our market presence, and undertake further research and development. In addition, we intend to make additional acquisitions to further diversify our product offerings.
Management implemented, and continues to make and implement, strategic cost reductions, including reductions in employee headcount, vendor spending, and the delaying of certain expenses related to our drug development activities. To the extent that we feel it is necessary and in the best interest of the Company and our shareholders, we may also take further actions that alter our operations in order to ensure the success of our business.
Cultured Foods Acquisition
On December 7, 2023, the Company entered into a Membership Interest Purchase Agreement (the “Cultured Foods Purchase Agreement”), by and among the Company, Cultured Foods, Brian Carl McWhorter (the “Cultured Foods Member”) and Barbara McWhorter, pursuant to which the Company purchased all of the outstanding equity interests in Cultured Foods, resulting in Cultured Foods becoming a wholly owned subsidiary of the Company (the “Cultured Foods Acquisition”). Cultured Foods is a leading European manufacturer and distributor of plant-based protein products. The Cultured Foods Acquisition closed on December 7, 2023.
23
In consideration for the Cultured Foods Acquisition, at closing, the Company (i) made a cash payment of $175,000 to the Cultured Foods Member, less a $17,500 holdback (the “Holdback Amount”) and certain other adjustments provided for in the Cultured Foods Purchase Agreement (the “Cultured Foods Closing Payment”), and (ii) issued an aggregate of 7,074,270 restricted shares of Company common stock to the Cultured Foods Member, valued at $250,000 based on the three day volume weighted average price of the Company’s common stock on the three trading days prior to closing (the “Cultured Foods Closing Shares,” and together with the Cultured Foods Closing Payment, the “Cultured Foods Closing Consideration”). The Cultured Foods Closing Payment is subject to adjustment, upward or downward, based on post-closing adjustments to the net working capital of Cultured Foods within 120 days of closing, as reflected in the Final Working Capital Statement (as defined in the Cultured Foods Purchase Agreement). Additionally, within 90 days following the final determination of the Final Working Capital Statement (the “Cultured Foods Receivables Date”), the Company shall be entitled to recover from the Cultured Foods Member an amount equal to the unpaid balance, as of the Cultured Foods Receivables Date, of all accounts receivable which were included in as assets in the Final Working Capital Statement.
The Company shall release the Holdback Amount, less any amounts owed to the Company by the Cultured Foods Member pursuant to the Cultured Foods Purchase Agreement, including without limitation as a result of the post-closing adjustments discussed above, to the Cultured Foods Member one year from the Closing Date.
In addition to the Cultured Foods Closing Consideration, and as further consideration for the Cultured Foods Acquisition, the Company shall make an additional cash payment to the Cultured Foods Member in the form of an earn-out (the “Cultured Foods Earnout Amount”), which shall be based on Company revenues generated in fiscal 2024 and will be calculated as follows:
The Cultured Foods Earnout Payment shall be paid within 10 business days after the final determination of Cultured Foods net revenue for fiscal 2024, as determined in accordance with the Cultured Foods Purchase Agreement. Net revenues of Cultured Foods are expected to be insufficient to trigger any earn-out payments.
Pursuant to the Cultured Foods Purchase Agreement, the Cultured Foods Member agreed that he will not, on any single trading day sell, transfer or otherwise dispose of any Company common stock, including the Cultured Foods Closing Shares, in an aggregate amount exceeding the greater of (i) 15% of the of the Company’s common stock sold in the aggregate based on the greater of the current or proceeding trading day, and (ii) $3,000 in gross value; provided, however, that in the event that the Company enters into a leak-out agreement with any third party on terms more favorable than the foregoing, the Cultured Foods Member shall be afforded the same more favorable terms offered to such third party.
Additionally, for a period of one year following the closing date, the Cultured Foods Member and Ms. McWhorter, including their affiliates, shall be prohibited from engaging in certain competitive and/or solicitation activities within the United States and the European Union, as more particularly set forth in the Cultured Foods Purchase Agreement.
Elevated Softgels Acquisition
On May 8, 2024, the Company entered into a Membership Interest Purchase Agreement (the “Softgels Purchase Agreement”), by and among the Company, Elevated Softgels, LLC, a Delaware limited liability company (“Elevated Softgels”), Clayton J. Montgomery (a “Softgels Member”), Chris Fagan, Andrew Kester, and Timothy McGreer, pursuant to which the Company purchased all of the outstanding equity interests in Elevated Softgels, resulting in Elevated Softgels becoming a wholly owned subsidiary of the Company (the “Softgels Acquisition”). Elevated Softgels is a leading manufacturer of softgels. The Softgels Acquisition closed on May 13, 2024.
In consideration for the Softgels Acquisition, at closing, the Company (i) made a cash payment of $100,000 to the Softgels Member, less certain transaction expenses and certain other adjustments provided for in the Softgels Purchase Agreement (the “Softgels Closing Payment”), (ii) issued an aggregate of 15,854,185 restricted shares of Company common stock to the Member valued at $637,000, and (iii) issued an aggregate of 1,567,996 restricted shares of Company common stock to the selling broker of Elevated Softgels valued at $63,000. The Company common stock was valued based on the thirty-day volume weighted average price of the Company’s common stock on the thirty trading days prior to the date of the Softgels Purchase Agreement (the “Softgels Closing Shares,” and together with the Softgels Closing Payment, the “Softgels Closing Consideration”). The Softgels Closing Payment is subject to adjustment, upward or downward, based on post-closing adjustments to the net working capital of Elevated Softgels within 120 days of closing, as reflected
24
in the Final Working Capital Statement (as defined in the Softgels Purchase Agreement). Additionally, within 90 days following the final determination of the Final Working Capital Statement (the “Softgels Receivables Date”), the Company shall be entitled to recover from the Softgels Member an amount equal to the unpaid balance, as of the Softgels Receivables Date, of all accounts receivable which were included in as assets in the Final Working Capital Statement.
In addition to the Softgels Closing Consideration, and as further consideration for the Softgels Acquisition, the Company shall make an additional payment in the form of an earn-out (the “Softgels Earnout Amount”), which shall be based on Company Net Revenue (as defined in the Softgels Purchase Agreement) generated during the 12-month period following the closing date and will be calculated as follows:
The Softgels Earnout Payment shall be paid within 10 business days after the final determination of the Company’s Net Revenue for the 12-month period following the closing date, as determined in accordance with the Softgels Purchase Agreement. 50% of the Softgels Earnout payment shall be paid in cash and 50% of the Softgels Earnout payment shall be in the form of restricted common stock of the Company, with the number of shares determined based upon the thirty-day volume weighted average price of the Company's common stock as of the 12-month anniversary of the closing date. Net revenues of Elevated Softgels are expected to be insufficient to trigger any earn-out payments.
Pursuant to the Softgels Purchase Agreement, the recipients of the Company's common stock agreed that they will not, on any single trading day sell, transfer or otherwise dispose of any Company common stock, including the Softgels Closing Shares, in an aggregate amount exceeding the greater of (i) 15% of the of the Company’s common stock sold in the aggregate based on the greater of the current or proceeding trading day, and (ii) $3,000 in gross value; provided, however, that in the event that the Company enters into a leak-out agreement with any third party on terms more favorable than the foregoing, the Softgels Member shall be afforded the same more favorable terms offered to such third party.
Additionally, for a period of one year following the closing date, Mr. Montgomery and Mr. Fagan shall be prohibited from engaging in certain competitive and/or solicitation activities within the United States, as more particularly set forth in the Softgels Purchase Agreement.
July 2024 Streeterville Note
On July 3, 2024, we entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with Streeterville Capital, LLC, a Utah limited liability company (“Streeterville”), pursuant to which we issued and sold to Streeterville a Secured Promissory Note in the original principal amount of $1,188,500 (the “Note”). The Note carries an original issuance discount of $283,500 and we agreed to pay $5,000 to Streeterville to cover legal fees, each of which were deducted from the proceeds of the Note received by us, which resulted in a purchase price received by us of $900,000 (the “Purchase Price”).
The unpaid amount of the Note, any interest, fees, charges and late fees accrued shall be due and payable in twelve months from July 3, 2024 (the “Maturity Date”). We are required to make weekly repayments to Streeterville of $22,855.77. We can pay all or any portion of the outstanding balance earlier than it is due without penalty. In the event we repay the Note in full on or before December 31, 2024, we will receive a $75,000 discount from the outstanding balance. The Note is secured by all of our assets pursuant to a Security Agreement entered into with Streeterville on July 3, 2024. No interest will accrue on the Note unless and until an occurrence of an Event of Default (as discussed below).
The Note provides for customary events of default (each as defined in the Note, an “Event 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 cure period, a cross-default to certain other indebtedness and material agreements of the Company, and the occurrence of a bankruptcy, insolvency or similar event affecting the Company. Upon the occurrence of an Event of Default that is deemed a “Major Trigger Event” as defined in the Note, Streeterville may increase the outstanding balance of the Note by 20%, and upon the occurrence of an Event of Default that is deemed a “Minor Trigger Event” as defined in the Note, Streeterville may increase the outstanding balance of the Note by 5%. Upon the occurrence of an Event of Default, Streeterville may declare all amounts owed under the Note immediately due and payable. In addition, upon the occurrence of an Event
25
of Default, upon the election of Streeterville, interest shall begin accruing on the outstanding balance of the Note from the date of the Event of Default equal to the lesser of 22% per annum and the maximum rate allowable under law.
First Insurance Funding Agreements
In October 2024, we entered into a new finance agreement with First Insurance Funding in order to fund a portion of our insurance policies for the upcoming policy year. The amount financed is $0.2 million, which incurs interest at an annual rate of 8.42%. We are required to make monthly payments of $20,396 from November 2024 through July 2025.
In November 2023, we entered into a finance agreement with First Insurance Funding in order to fund a portion of our insurance policies. The amount financed was $0.3 million, which incurred interest at an annual rate of 8.42%. We were required to make monthly payments of $29,781 from November 2023 through July 2024. There was no outstanding balance as of September 30, 2024.
Accrued Payroll Taxes
The Company previously recorded accrued payroll taxes associated with the RSU release to Mona Jr. in 2019. 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 year ended December 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 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 accrued payroll taxes of $6.2 million during the year ended December 31, 2023. For more information, please see Note 12, Related Parties, to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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. The hearing on the merits began on April 8, 2024, and the Arbitrator heard five days of testimony. The hearing resumed on May 21, 2024 and concluded on May 23, 2024. Post-hearing briefing has been submitted to the Arbitrator. A decision from the Arbitrator is expected to follow. 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. For more information, please see Note 10, Commitments and Contingencies, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Going Concern
U.S. GAAP requires management to assess a company's ability to continue as a going concern within one year from the financial statement issuance date and to provide related note disclosure in certain circumstances. Our consolidated financial statements and corresponding notes have been prepared assuming the Company will continue as a going concern. Excluding the funds for employee retention credits, we generated negative cash flows from operations of $0.5 million and $0.7 million for the year ended December 31, 2023 and the nine months ended September 30, 2024, respectively, and had an accumulated deficit of $86.3 million as of September 30, 2024. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund our operations and growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, issuance of debt, and/or securing lines of credit in order to continue its operations. However, there can be no assurances that additional working capital will be available to us on favorable terms, or at all, which would be likely to have a material adverse effect on the Company's ability to continue its operations.
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 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.
26
A summary of our changes in cash flows for the three and nine months ended September 30, 2024 and 2023 is provided below:
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
|
|
(in thousands) |
|
|
(in thousands) |
|
||||||||||
Net cash flows provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating activities |
|
$ |
(127 |
) |
|
$ |
(19 |
) |
|
$ |
(697 |
) |
|
$ |
2,367 |
|
Investing activities |
|
|
34 |
|
|
|
— |
|
|
$ |
(6 |
) |
|
|
— |
|
Financing activities |
|
|
595 |
|
|
|
(28 |
) |
|
|
367 |
|
|
|
(1,335 |
) |
Effect of exchange rate changes on cash |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
Net increase (decrease) in cash |
|
|
502 |
|
|
|
(47 |
) |
|
|
(338 |
) |
|
|
1,032 |
|
Cash, beginning of period |
|
|
477 |
|
|
|
1,690 |
|
|
|
1,317 |
|
|
|
611 |
|
Cash, end of period |
|
$ |
979 |
|
|
$ |
1,643 |
|
|
$ |
979 |
|
|
$ |
1,643 |
|
27
Operating Activities
Net cash provided by (used in) operating activities includes net income (loss) adjusted for non-cash items such as depreciation, amortization, bad debt expense, stock-based compensation, benefit of reversal of payroll tax liability and interest expense related to our promissory notes. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable. Operating assets and liabilities that arise from the funding of inventory purchases and customer accounts receivable can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer payment behavior.
Cash used in operating activities was $0.7 million in the nine months ended September 30, 2024, compared to cash provided by operating activities of $2.4 million in the nine months ended September 30, 2023. The period over period decrease in our cash flow from operating activities by $3.1 million was mostly due to the receipt of the ERC funds in the prior year period and the fact that we did not receive similar funds in the 2024 period. Our net loss for the nine months ended September 30, 2024, adjusted for non-cash items, resulted in a net loss of $1.0 million, compared to a net loss, adjusted for non-cash items, of $1.3 million in the prior year period, an improvement of $0.3 million. Changes in working capital generated $0.3 million during the first nine months of 2024, compared to cash generated of $3.6 million during the same period of 2023, a decrease of $3.3 million. Our changes in working capital decreased primarily due to the fact that we received the ERC funds of $2.5 million from the IRS during the first nine months of 2023 and we did not receive similar funds in the 2024 period. Our net income (loss) declined by $5.8 million from a net income of $4.0 million in the first nine months of 2023 to a net loss of $1.9 million in the first nine months of 2024, mostly due to the benefit for the reversal of accrued payroll taxes. Non-cash adjustments decreased by $6.1 million, as we recognized a benefit for the reversal of accrued payroll tax of $6.2 million related to the RSU's previously issued to Mona Jr. during the nine months ended September 30, 2023. Recurring non-cash adjustments consists of depreciation, amortization, interest expense and stock-based compensation.
Investing Activities
Cash used in investing activities was $6,000 in the nine months ended September 30, 2024 related to our acquisition of Elevated Softgels in May 2024. We did not use any cash in investing activities in the nine months ended September 30, 2023.
Financing Activities
Net cash provided by financing activities was $0.4 million for the nine months ended September 30, 2024 compared net cash used in financing activities of $1.3 million for the nine months ended September 30, 2023. Our financing activities for the nine months ended September 30, 2024 consisted of proceeds from our note payable financing with Streeterville of $0.9 million, offset by repayments of our insurance financing, the Streeterville note payable and the notes payable that we assumed in connection with the Cultured Foods acquisition. Our financing activities for the nine months ended September 30, 2023 consisted of repayments of the Streeterville note payable of $1.1 million and our insurance financing of $0.2 million.
Inflation
We have not been affected materially by inflation during the periods presented. However, recent trends towards rising inflation may adversely impact our business and corresponding financial position and cash flow.
Known Trends or Uncertainties
There can be no assurance that the Company’s business and corresponding financial performance will not be adversely affected by general economic or consumer trends. In particular, global economic conditions remain constrained, and if such conditions continue, recur or worsen, this may have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, inflation has risen and Federal Reserve interest rates remain high after increases during 2023, which may also materially adversely our business and corresponding financial position and cash flows.
Furthermore, such economic conditions have produced downward pressure on share prices and on the availability of credit for financial institutions and corporations. If current levels of market disruption and volatility continue, the Company might experience reductions in business activity, increased funding costs and funding pressures, as applicable, a decrease in the market price of shares of our common stock, a decrease in asset values, additional write-downs and impairment charges and lower profitability. Additionally, it is possible that U.S. policy changes and uncertainty about such changes, including changes and uncertainty as a result of the U.S. presidential election, could increase market volatility.
28
We have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
There is currently a lack of a clear federal regulatory framework regarding the development, sale and use of CBD products in the United States. As a result, differing state regulations have emerged, which regulations are constantly evolving and differ significantly from state to state in many cases. Several states, including without limitation, California, Florida, Maryland, Minnesota, New York, Utah and Virginia, have recently adopted regulations that may impact our ability to sell certain of our products in these states. In September 2024, California Governor Gavin Newsom signed an emergency order into law, effectively banning the sale of hemp products intended for human use that contain detectable amounts of THC or certain other cannabinoids in California, amongst other things. The emergency order will remain in effect until March 25, 2025, unless extended in accordance with applicable law. We have certain products which fall under this category that we have historically sold in California. It is currently unknown whether the duration of the emergency order will be extended, and/or whether it will be replaced with a permanent law with similar or more stringent prohibitions. This emergency order had a negative impact on our operating results for the three months ended September 30, 2024 and we expect that it will continue to have a negative impact on our business going forward for so long as it, or any permanent law with similar or more stringent prohibitions, remains in effect; however, it is currently impossible to quantify the expected impact on our business. There is also substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the FDA and the extent to which manufacturers of products containing cannabinoids may engage in interstate commerce. These uncertainties have had, and may continue to have, an adverse effect on our business. Additionally, restrictive state regulations could adversely impact our revenue and earnings going forward.
Critical Accounting Estimates
We have disclosed in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2023 Annual Report, filed with the SEC March 29, 2024, those accounting policies and estimates that we consider to be significant in determining our results of operation and financial condition. There have been no material changes to those policies and estimates that we consider to be significant since the filing of our 2023 Annual Report. The accounting principles used in preparing our unaudited condensed financial statements conform in all material respects to GAAP.
Recent Accounting Pronouncements
See Note 1 in the accompanying notes to unaudited condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2024 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
29
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, please see Note 10, Commitments and Contingencies, to our condensed financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. RISK FACTORS
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30 2024, we issued 3,613,013 shares of restricted common stock to a vendor in accordance with, and pursuant to the terms of, an agreement entered into by and between the Company and such vendor in 2024. The shares were issued in reliance on the exemption from registration provided for under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Section 506 of Regulation D promulgated thereunder.
Except as set forth above, the Company did not sell any other unregistered equity securities during the period covered by this report that were not otherwise disclosed in a Current Report on Form 8-K.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company
30
Item 6. EXHIBITS
Exhibit Number |
|
Exhibit Description |
|
Form |
|
File No. |
|
Exhibit |
|
Filing Date |
|
Filed Herewith |
2.1 |
|
|
10-Q |
|
000-54677 |
|
2.1 |
|
August 13, 2013 |
|
|
|
2.2 |
|
|
8-K |
|
000-54677 |
|
2.1 |
|
January 4, 2016 |
|
|
|
2.3 |
|
|
10-Q |
|
000-54677 |
|
10.4 |
|
May 9, 2017 |
|
|
|
2.4 |
|
|
10-K |
|
000-54677 |
|
2.4 |
|
March 29, 2024 |
|
|
|
2.5 |
|
|
10-Q |
|
000-54677 |
|
2.5 |
|
August 13, 2024 |
|
|
|
3.1 |
|
Certificate of Incorporation of CannaVEST Corp., as filed on July 26, 2013. |
|
10-Q |
|
000-54677 |
|
3.1 |
|
August 13, 2013 |
|
|
3.2 |
|
|
10-Q |
|
000-54677 |
|
3.2 |
|
August 13, 2013 |
|
|
|
3.3 |
|
|
10-K |
|
000-54677 |
|
3.3 |
|
April 14, 2016 |
|
|
|
3.4 |
|
|
10-Q |
|
000-54677 |
|
3.4 |
|
May 16, 2016 |
|
|
|
3.5 |
|
|
8-K |
|
000-54677 |
|
3.1 |
|
March 22, 2017 |
|
|
|
3.6 |
|
|
10-Q |
|
000-54677 |
|
3.6 |
|
May 9, 2017 |
|
|
|
3.7 |
|
|
8-K |
|
000-54677 |
|
3.1 |
|
June 14, 2021 |
|
|
|
3.8 |
|
Certificate of Designation of Preference, Rights and Limitations of Convertible Preferred Stock. |
|
8-K |
|
000-54677 |
|
3.1 |
|
April 1, 2022 |
|
|
3.9 |
|
|
10-Q |
|
000-54677 |
|
3.9 |
|
August 15, 2022 |
|
|
|
4.1 |
|
|
8-K |
|
000-54677 |
|
4.1 |
|
July 31, 2013 |
|
|
|
4.2 |
|
|
8-K |
|
000-54677 |
|
4.1 |
|
April 1, 2022 |
|
|
|
4.3 |
|
|
8-K |
|
000-54677 |
|
4.2 |
|
April 1, 2022 |
|
|
|
10.1 |
|
Note Purchase Agreement between the Company and Streeterville Capital, LLC dated July 3, 2024 |
|
8-K |
|
000-54677 |
|
10.1 |
|
July 9, 2024 |
|
|
10.2 |
|
Secured Promissory Note issued to Streeterville Capital, LLC dated July 3, 2024 |
|
8-K |
|
000-54677 |
|
10.2 |
|
July 9, 2024 |
|
|
31
10.3 |
|
Security Agreement between the Company and Streeterville Capital, LLC dated July 3, 2024 |
|
8-K |
|
000-54677 |
|
10.3 |
|
July 9, 2024 |
|
|
31.1* |
|
|
|
|
|
|
|
|
|
|
X |
|
31.2* |
|
|
|
|
|
|
|
|
|
|
X |
|
32.1* |
|
|
|
|
|
|
|
|
|
|
X |
|
32.2* |
|
|
|
|
|
|
|
|
|
|
X |
|
101 INS* |
|
Inline XBRL Instance Document** |
|
|
|
|
|
|
|
|
|
X |
101 SCH* |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents** |
|
|
|
|
|
|
|
|
|
X |
104** |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101 attachments) |
|
|
|
|
|
|
|
|
|
X |
* Filed herewith.
** The XBRL related information in Exhibit 101 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CV SCIENCES, INC. (Registrant) |
|
|
|
|
|
By |
/s/ Joseph D. Dowling |
|
|
Joseph D. Dowling Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
Dated November 14, 2024 |
|
|
|
|
By |
/s/ Joerg Grasser |
|
|
Joerg Grasser Chief Financial Officer (Principal Financial and Accounting Officer) |
|
|
|
|
|
Dated November 14, 2024 |
33