CVSI CV Sciences Inc (QB)

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PART I

ITEM 1. BUSINESS

Overview

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

On December 30, 2015, we completed the acquisition of CanX, Inc., a Florida-based specialty pharmaceutical corporation ("CanX"). Acquired assets included in-process research and development, trade names and non-compete agreements associated with pharmaceutical product development programs and a line of consumer products.

We have two business segments; consumer products and specialty pharmaceutical. The consumer products segment develops, manufactures and markets products based on hemp-based Cannabidiol ("CBD"), including under the brand name PlusCBD™ in a variety of market sectors including nutraceutical, beauty care and specialty foods. The specialty pharmaceutical segment is developing drug candidates which use CBD as a primary active ingredient.

Current Operations

Consumer Products

We manufacture, market and sell consumer products containing hemp-based CBD under our PlusCBD™ brand in a range of market sectors including nutraceutical, beauty care, specialty foods and vape. We currently manufacture and distribute more than 50 stock-keeping units and we expect to continue to add new products to our PlusCBD™ portfolio to enhance our line of CBD and hemp-based consumer products. During 2018, we introduced gummies to our existing line of industry leading hemp extract products that included balms, sprays, drops, capsules, and softgels. We also expect to develop and launch new brands to more effectively market and sell certain products. We also sell raw materials acquired through our supply relationships in Europe to various customers that produce products for resale into the market.

We seek to take advantage of an emerging worldwide trend to re-energize the production of hemp and to foster its many uses for consumers. Historically cultivated for industrial and practical purposes, hemp is used today for textiles, paper, auto parts, biofuel, cosmetics, animal feed, nutritional supplements, and much more. The market for hemp-based products is expected to increase substantially over the next five years, and we believe CV Sciences is well positioned to be a significant player in the hemp industry.

Hemp-based CBD is one of at least 80 cannabinoids found in hemp, and is non-psychoactive. Our U.S. based operations oversee our raw material supply chain, raw material processing, product development and manufacturing, and sales and marketing. We will continue to scale-up our processing capability to accommodate new products in our pipeline.

We expect to realize revenue to fund our working capital needs through the sale of finished products and raw materials to third parties. However, in order to fund our drug development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to raise sufficient additional capital to fund our drug development efforts, we may need to curtail or delay such activity.

Specialty Pharmaceuticals

Our specialty pharmaceutical segment is developing cannabinoids to treat a range of medical indications. Cannabinoids are compounds derived from the Cannabis sativa plant, which contain two primary cannabinoids, CBD, and tetrahydrocannabinol (“THC”). Clinical and preclinical data suggest that CBD has promising results in treating a range of medical indications. We acquired several drug development assets in the CanX acquisition, utilizing CBD as the active pharmaceutical ingredient.

Our first patent-pending product candidate, CVSI-007, combines CBD and nicotine in treatment of smokeless tobacco use and addiction. There are currently no drugs approved by the U.S. Food & Drug Administration (“FDA”) for treatment of smokeless tobacco use and addiction. We believe this product candidate will provide treatment options for this significant unmet medical need. We are hopeful to be in a position to file an Investigational New Drug Application (“IND”) with the FDA in the next 12 months. We completed a pre-IND meeting with the FDA in June 2017 and obtained guidance on this development program. CVSI-007 is based on proprietary formulations, processes and technology that we believe are patent-protectable. In May 2016, we filed a patent application for these formulations and processes with the U.S. Patent and Trademark Office. We are awaiting notice of a hearing with the U.S. Patent and Trademark Office. We anticipate the hearing to take place during 2019.

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We currently contract with qualified parties and contract research organizations for our preclinical research and IND preparation and development. Commercialization of future specialty pharmaceutical products in the United States and other territories may rely on licensing and co-promotion agreements with strategic partners. If we choose to build a commercial infrastructure to support marketing in the United States, such commercial infrastructure could include a sales organization, internal sales support, an internal marketing group and distribution support, and will require significant investment.

Description of our Subsidiaries

We own 100% of the issued and outstanding membership interests of two subsidiaries: Plus CBD, LLC (formerly, “Global Hemp Source, LLC”) (“Plus CBD”), and CANNAVEST Acquisition, LLC, a Delaware limited liability company formed in connection with the CanX Acquisition. We previously owned a 70% interest in CannaVest Europe, GmbH. On January 20, 2017, we filed for dissolution of CannaVest Europe, GmbH, with the District Court, Dusseldorf Germany, effective December 31, 2016. CannaVest Europe GmbH did not have any assets or liabilities at the time of its dissolution.

Inventory and Sales

Based on expected increasing demand, we have invested significant capital to develop and maintain relationships with growers on a global scale to ensure access to raw materials to support anticipated revenue growth. We have historically sourced our raw materials from well-established and well-recognized hemp growers in Europe. We have maintained access to these growers for their raw material supply, and continue to explore and develop other relationships to ensure that we can meet the expected demand for hemp-based consumer products well into the future. Our current raw material inventory levels are sufficient to support sales through 2019, resulting in reduced cash outflow for raw material inventory purchases.

Government Regulation

We are subject to local and federal laws in our operating jurisdictions. We hold required licenses for product production and distribution and monitor changes in laws, regulations, treaties and agreements.

The Agriculture Improvement Act of 2018 known as the "2018 Farm Bill" is United States federal legislationsigned into law on December 20, 2018 which provides much of the legal framework for the hemp-based CBD product category. The 2018 Farm Bill permanently removed “hemp” from the purview of the Controlled Substances Act, and accordingly, the Drug Enforcement Administration (the “DEA”) no longer has any claim to interfere with the interstate commerce of hemp products. Some of the immediate impact from this legislation includes the ability for farmers to access crop insurance and U.S. Department of Agriculture programs for certification and competitive grants. While the DEA is now officially not involved in hemp regulation, the FDA retains its authority to regulate ingestible and topical products, including those that contain hemp and hemp extracts such as CBD.

A range of federal regulations govern our product development, manufacturing, distribution, sales and marketing, including the Dietary Supplement Health and Education Act of 1994 (the “DSHEA”). Under DSHEA, supplements are effectively regulated by the FDA for Good Manufacturing Practices under 21 CFR Part 111. DSHEA defines a “dietary supplement” as a product intended to supplement the diet that contains one or more of the following: (a) a vitamin; (b) a mineral; (c) an herb or other botanical; (d) an amino acid; (e) a dietary substance for use by man to supplement the diet by increasing the total dietary intake; or (f) a concentrate, metabolite, constituent, extract, or combination of any ingredient described in clause (a) through (e). Thus, the law permits a wide range of dietary ingredients in dietary supplements, including CBD which is an extract of a botanical ( Cannabis sativa L. plant). CBD also falls under clause (e) as it is a dietary substance for use by man to supplement the diet by increasing the total dietary intake.

Market, Customers and Distribution Methods

The market, customers and distribution methods for hemp-based products are large and diverse. These markets range from hemp-based bio plastics to textiles. This is an ever-evolving distribution system that today includes early adopter retailers and ecommerce entities, and product development companies that use our PlusCBD™ brand oil to develop consumer products for distribution. The number of “mainstream” commercial and retail stores that currently stock and sell our products is increasing primarily through customer awareness. We believe that as awareness grows for the “green”, environmentally-friendly products derived from hemp/cannabis, the consumer market will adapt its current product lines to integrate them with hemp-based additives or replace harmful components in their existing products with the components of hemp.

Our target customers for our consumer product segment are first and foremost end consumers via internet sales, direct-to-consumer health and wellness stores, collectives, cooperatives, affiliate sales and master distributors. Secondarily, we are targeting manufacturers of products that can readily replace their raw base materials for our base materials, making the products more environmentally friendly and sustainable. In the future, we intend to target national and regional broker networks and major distribution companies who have preexisting relationships with major retail chain stores. In addition, we are directly pursuing distribution opportunities

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with national retailers. As we continue to develop our business, these markets may change, be re-prioritized or eliminated as management responds to consumer and regulatory developments.

Competition

There are several companies developing cannabinoid therapeutics for a range of medical indications. The cannabinoid therapeutic area currently includes formulated extracts of the Cannabis plant and synthetic formulations. These formulations include CBD and THC, or a combination of CBD/THC as the active pharmaceutical ingredient. Certain companies such as GW Pharmaceuticals, PLC have focused on hemp-based CBD formulations; while other companies such as Zynerba Pharmaceuticals Inc. and Insys Therapeutics Inc. have focused on synthetic CBD formulations.

The CBD-based consumer product industry is highly fragmented with numerous companies, consisting of publicly- and privately-owned companies. There are also large, well-funded companies that have indicated their intention to compete in the hemp-based product category in the U.S. We routinely evaluate internal and external opportunities to optimize value for shareholders through new product development or by asset acquisitions or sales, and believe we are well-positioned to capitalize in the growing CBD product category.

Intellectual Property

We have filed trademark applications on our brands, logos and marks including, but not limited to CV Sciences and Plus CBD . On January 30, 2016, we received a Notice of Allowance from the U.S. Patent and Trademark Office for our utility patent application number 14/791,184, Novel Process for Generating Hemp Oil with a High CBD Content. This patent covers our solvent-free and highly repeatable process for producing hemp oil with higher concentrations of CBD and expires in 2033.

We have a pending patent application for our product candidate CVSI-007 in the United States that will expire in 2036. CVSI-007 combines CBD and nicotine in treatment of smokeless tabacco use and addiction.

We review our intellectual property portfolio on a periodic basis and we will continue to broaden our portfolio in a fiscally prudent manner. We intend to file for patent protection on our pharmaceutical products based on proprietary formulations, processes and technology.

Research and Development

Our research and development costs have consisted primarily of salaries and related personnel expense, facilities and equipment expense and other costs related to both our consumer product and drug development business segments. We charge all research and development expenses to operations as incurred in the ongoing development of new consumer products and in development of our drug candidate CVSI-007. We incurred research and development expenses of $1.9 million and $0.7 million, respectively, for the years ended December 31, 2018 and 2017 .

Source and Availability of Raw Materials

We have historically sourced raw materials from well-established and well-recognized hemp growers in Europe. We have maintained access to these growers for their raw material supply, and continue to explore and develop other relationships to ensure that we can meet the expected demand for hemp-based consumer products well into the future. Our current inventory levels are sufficient to support sales through 2019, resulting in reduced cash outflow for raw material inventory purchases.

Environmental Matters

Compliance with federal, state and local requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had, nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company.

Employees

As of December 31, 2018 , we had a total of 81 employees, which included 78 full-time and 3 part-time employees. In addition to our full-time employees, we contract with third-parties for the conduct of certain preclinical, clinical and manufacturing activities related to drug development efforts. We have no collective bargaining agreements with our employees and none are represented by labor unions. Management believes the Company has good relationships with its employees. 

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ITEM 1A. RISK FACTORS

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None. 

ITEM 2. PROPERTIES

As of December 31, 2018 , our primary facility consists of approximately 30,000 square feet of leased office, laboratory and warehouse space located in San Diego, California, which is leased through January 2026 and used by both of our business segments. We lease an additional facility in San Diego related to our distribution activities that cover an aggregate of approximately 2,500 square feet, which is leased through March 2021. In addition, we lease an office facility in Las Vegas on a month-to-month basis. We believe that our existing facilities are suitable but we may require additional space to accommodate our growing organization. We believe such space will be available on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

On April 23, 2014, Tanya Sallustro filed a purported class action complaint (the “Complaint”) in the Southern District of New York (the “Court”) alleging securities fraud and related claims against CV Sciences and certain of its officers and directors and seeking compensatory damages including litigation costs. Ms. Sallustro alleges that between March 18-31, 2014, she purchased certain shares of CV Sciences common stock for a total investment of $16,000. The Complaint refers to Current Reports on Form 8-K and Current Reports on Form 8-K/A filings made by us on April 3, 2014 and April 14, 2014, in which we amended previously disclosed sales (sales originally stated at $1.3 million were restated to $1.1 million - reduction of $0.2 million) and restated goodwill as $1.9 million (previously reported at net zero). Additionally, the Complaint states after the filing of our Current Report on Form 8-K on April 3, 2014 and the following press release, our stock price “fell $7.30 per share, or more than 20%, to close at $25.30 per share.” Subsequent to the filing of the Complaint, six different individuals filed a motion asking to be designated the lead plaintiff in the litigation. On March 19, 2015, the Court issued a ruling appointing Steve Schuck as lead plaintiff. Counsel for Mr. Schuck filed a “consolidated amended complaint” on September 14, 2015. On December 11, 2015, we filed a motion to dismiss the consolidated amended complaint. After requesting several extensions, counsel for Mr. Schuck filed an opposition to the motion to dismiss on March 21, 2016. Our reply brief was filed on April 25, 2016. On April 2, 2018, the Court issued a ruling granting in part and denying in part the motion to dismiss. Thereafter, on October 3, 2018, plaintiff’s counsel filed a motion to withdraw Mr. Schuck as Lead Plaintiff and to substitute Jane Ish as new Lead Plaintiff. This motion was granted by the Court. Management intends to vigorously defend the allegations and an estimate of possible loss cannot be made at this time.

On March 17, 2015, stockholder Michael Ruth filed a shareholder derivative suit in Nevada District Court alleging two causes of action: 1) Breach of Fiduciary Duty, and 2) “Gross Mismanagement.” The claims are premised on the same event as the already-pending securities class action case in New York discussed above - it is alleged that the Form 8-K filings misstated goodwill and sales of CV Sciences, which when corrected, lead to a significant drop in stock price. We filed a motion to dismiss the suit on June 29, 2015. Instead of opposing our motion, Mr. Ruth filed an amended complaint on July 20, 2015. Thereafter, Mr. Ruth and CV Sciences agreed to stay the action pending the outcome of the securities class action case in New York discussed above. Management intends to vigorously defend the allegations. Since no discovery has been conducted and the case remains stayed, an estimate of the possible loss or recovery cannot be made at this time.

On October 21, 2016, Dun Agro B.V. (“Dun Agro”) filed a complaint against us in the District Court of the North Netherlands, location Groningen, the Netherlands, alleging non-performance under a contract, seeking compensatory damages of approximately €2.1 million, excluding interest and costs. We settled this matter on August 31, 2018 with no compensatory damages.

On June 15, 2017, the SEC filed an enforcement action against CV Sciences and its then-Chief Executive Officer, Michael Mona, Jr. In the complaint, filed in the United States District Court of Nevada (Case No. 2:17-cv-01681), the SEC alleged that we and Mr. Mona violated federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5(b), through alleged misrepresentations made in certain SEC reports regarding the value of CV Sciences assets acquired from PhytoSphere Systems, LLC. On May 31, 2018, we and Mr. Mona settled all claims. Pursuant to the terms of the settlement, without admitting or denying the allegations made by the SEC, we agreed to a consent judgment pursuant to which (a) we agreed to pay a penalty in the amount of $0.2 million, and (b) we are permanently enjoined from violations of federal securities laws.  We have made this payment in full.  Mr. Mona, without admitting or denying any allegations, agreed to an order (a) prohibiting him from serving as an officer or director of a publicly held company for five (5) years, (b) providing for payment in the aggregate amount of $0.1 million, payable in 12 installments commencing 30 days after entry of final judgment, and (c) permanently enjoining him from

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violations of federal securities laws.  Effective concurrent with the settlement, Mr. Mona resigned as our President and Chief Executive Officer, and resigned his position on our Board of Directors.

We are a plaintiff in two litigation matters involving former credit card processors. On September 10, 2017, we filed a complaint against one such credit card processor, PayToo Merchant Services Corporation (“PayToo”), a Florida corporation, in the Circuit Court in Broward County, Florida, asserting breach of contract claims for PayToo’s failure to remit approximately $251,000 to us for credit card sales processed by PayToo from January 2017 to February 2017. A summary judgment hearing on the PayToo matter is scheduled for March 11, 2019. On December 11, 2017, we filed a complaint against the other credit card processor, T1 Payments, LLC (“T1”), a Nevada corporation, in District Court, Clark County, Nevada, asserting breach of contract claims for T1’s failure to remit approximately $0.5 million to us for credit card sales processed by T1 from February 2017 to October 2017. The T1 matter was resolved on October 22, 2018 with $0.5 million of previously restricted cash being released to us by T1 in full settlement of our complaint.

On August 24, 2018, David Smith filed a purported class action complaint in Nevada District Court alleging certain misstatements were contained in financial filings that led to stock price fluctuations and resulting financial harm. Several additional individuals filed similar claims. On November 15, 2018, the Court consolidated the actions and appointed Richard Ina, Trustee for the Ina Family Trust as Lead Plaintiff for the consolidated actions. On January 4, 2019, Counsel for Lead Plaintiff Richard Ina, Trustee for the Ina Family Trust filed a “consolidated amended complaint”. On March 5, 2019, we filed a motion to dismiss the action. Management intends to vigorously defend the allegations. Since no discovery has been conducted and the case remains stayed, an estimate of the possible loss or recovery cannot be made at this time.

On October 10, 2018, stockholder Girard Depoti filed a shareholder derivative suit in District Court, Clark County Nevada alleging causes of action for: 1) Breach of Fiduciary Duty, and 2) Unjust Enrichment. The claims are premised on the same events as the already-pending securities class action case in Nevada. We recently accepted service of the Complaint but have not filed a responsive pleading because the parties stipulated to a stay of this action until thirty days after a ruling is issued on the motion to dismiss in the matter of In re CV Sciences, Inc., Securities Litigation, Case No. 2:18-cv-01602-JAD-PAL, United States District Court, District of Nevada. Management intends to vigorously defend the allegations. Since no discovery has been conducted and the case remains stayed, an estimate of the possible loss or recovery cannot be made at this time.

On December 3, 2018, stockholder David Francis filed a shareholder derivative suit in Nevada District Court alleging causes of action for: 1) Breach of Fiduciary Duty, 2) Unjust Enrichment, and 3) Waste of Corporate Assets.  The claims are primarily premised on the same events as the already-pending securities class action cases. A responsive pleading was due from us on February 22, 2019.  However, the parties have agreed to a stay of this action and a stipulation and proposed order requesting a stay has been filed with the court. Management intends to vigorously defend the allegations.  Since no discovery has been conducted and the case remains stayed, an estimate of the possible loss or recovery cannot be made at this time.

On February 11, 2019, stockholder Richard Tarangelo filed a shareholder derivative suit in Nevada District Court alleging causes of action for: 1) Violations of Section 14(a) of the Exchange Act, 2) Breach of Fiduciary Duty, and 3) Unjust Enrichment. The claims are primarily premised on the same events as the already-pending securities class action cases and the Tarangelo Complaint is essentially a duplicate of the Depoti shareholder derivative suit. Service of the Complaint has not been made but the parties are discussing a stay of this action. Management intends to vigorously defend the allegations. Since no discovery has been conducted and the case may be stayed, an estimate of the possible loss or recovery cannot be made at this time.

In the normal course of business, CV Sciences a party to a variety of agreements pursuant to which we 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, consolidated results of operations or financial condition.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the OTC:QB under the symbol "CVSI." Trading of securities on the OTC:QB is often sporadic and investors may have difficulty buying and selling or obtaining market quotations.

The following table sets forth the reported high and low closing bid prices for our common stock as reported on the OTC:QB for the following periods. These market quotations reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

Fiscal Year Ended December 31, 2018
	High				Low
First Quarter	$	0.63			$	0.38
Second Quarter	2.41				0.41
Third Quarter	7.13				1.60
Fourth Quarter	6.40				3.55

Fiscal Year Ended December 31, 2017
	High				Low
First Quarter	$	0.59			$	0.36
Second Quarter	0.41				0.22
Third Quarter	0.36				0.21
Fourth Quarter	0.68				0.14

Holders of Common Stock

As of March 4, 2019, there were more than 40,000 beneficial shareholders of our common stock.

Dividend Policy

No cash dividends have been paid on our common stock for the 2018 and 2017 fiscal years and the Board of Directors has not considered any change in this practice, and has no intentions of considering any such change in the foreseeable future.

The payment of cash dividends in the future will be determined by our Board of Directors, in light of conditions then existing, including our earnings, financial requirements, and opportunities for reinvesting earnings, business conditions, and other factors. There are otherwise no restrictions on the payment of dividends.

Equity Compensation Plan Information

See Part III, Item 12. "Securities Ownership of Certain Owners and Management and Related Stockholder Matters" for information regarding securities authorized for issuance under equity compensation plans.

Issuer Repurchases of Equity Securities

We did not repurchase any shares of our common stock during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations for the years ended December 31, 2018 and December 31, 2017 should be read in conjunction with our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations

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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 life science company with two distinct business segments. Our consumer product segment is focused on manufacturing, marketing and selling hemp-based CBD products to a range of market sectors. Our specialty pharmaceutical segment is focused on developing and commercializing novel therapeutics utilizing CBD. On June 8, 2016, the Company changed its trading symbol from CANV to CVSI, and continues to be traded on the OTC:QB.

Our consumer product business segment manufactures, markets and sells consumer products containing hemp-based CBD under our PlusCBD™ brand in a range of market sectors including nutraceutical, beauty care and specialty foods.

Our specialty pharmaceutical business segment is developing cannabinoids to treat a range of medical indications. Our product candidates are based on proprietary formulations, processes and technology that we believe are patent-protectable, and we plan to vigorously pursue patent protection on our drug candidates.

We expect to realize revenue from our consumer products business segment to fund our working capital needs. However, in order to fund our pharmaceutical product development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to fund our drug development efforts, we may need to curtail or delay such activity.

Results of Operations

Comparison of the Years ended December 31, 2018 vs. December 31, 2017

Revenues and gross profit

	Year ended December 31,								Change
	2018				2017				Amount				%
	(in thousands)
Product sales, net	$	48,244			$	20,679			$	27,565			133	%
Cost of good sold	14,366				6,190				8,176				132	%
Gross profit	$	33,878			$	14,489			$	19,389			134	%
Gross margin	70.2		%		70.1		%

We had product sales of $48.2 million and gross profit of $33.9 million, representing a gross margin of 70.2% in 2018 compared with product sales of $20.7 million and gross profit of $14.5 million, representing a gross margin of 70.1% in 2017. We increased our product sales by $27.6 million or 133% in 2018 when compared to 2017 results. The sales increase in 2018 compared with 2017 is primarily due to an increase in distribution, customer awareness and demand for our branded PlusCBD™ products, as we continued to expand and maintain our core customer base. We also launched new products and formulations, including gel, capsules and gummies, which helped drive our overall sales.

The gross profit increase in 2018 compared with 2017 is the result of our increased product sales. Gross margin increased mostly due to sales mix and production efficiencies.

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Operating expense

	Year ended December 31,								Change
	2018				2017				Amount				%
	(in thousands)
Research and development expense	$	1,885			$	724			$	1,161			160	%
Percentage of revenue	3.9		%		3.5		%
Selling, general and administrative expense	$	21,746			$	16,193			$	5,553			34	%
Percentage of revenue	45.1		%		78.3		%

Research and development (“R&D”) expense increased to $1.9 million in 2018 compared to $0.7 million in 2017 . The increase of $1.2 million or 160% is mostly related to our cost of process development, rental of our laboratory facility, payroll expenses, laboratory supplies, product development and testing, outsourced research personnel, and R&D expenses related to our specialty pharmaceutical segment. We incurred $1.0 million and $0.2 million of R&D expense related to our consumer products segment in 2018 and 2017 , respectively. The increase is mostly related to new product development and testing. We incurred $0.9 million and $0.5 million of R&D expenses related to our specialty pharmaceutical segment in 2018 and 2017 , respectively. The increase is mostly related to expenses paid to outside consultants, preclinical work and development cost associated with our active pharmaceutical ingredient (API).

Selling, general and administrative (“SG&A”) expenses increased to $21.7 million in 2018 compared to $16.2 million in 2017 . The increase of $5.6 million or 34% is mostly related to increase in our marketing activities to support our growth, sales commissions and payroll expense as a result of our increased headcount.

Royalty buy-out – Royalty buyout of $2.4 million in 2017 relates to our share-based royalty buy-out associated with the CanX Acquisition (See Note 9 of the Company’s consolidated financial statements).

Interest expense - Interest expense decreased to $0.2 million in 2018 compared with $0.5 million in 2017 . The decrease in interest expense was due to lower borrowings, accrued interest and the amortization of debt discounts and the derivative liability.

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 expense, amortization expense, interest and income tax expense, minus income tax benefit), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it more clearly highlight 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 Annual Report, 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 Annual Report, including our consolidated financial statements, to aid in their analysis and understanding of our performance and in making comparisons.

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A reconciliation from our net income (loss) to Adjusted EBITDA, a non-GAAP measure, for the years ended December 31, 2018 and 2017 is detailed below:

	Year ended December 31,
	2018				2017
	(in thousands)
Net income (loss)	$	10,001			$	(4,897	)
Depreciation expense	484				147
Amortization expense	35				35
Interest expense	153				507
Income tax expense (benefit)	93				(482		)
EBITDA	10,766				(4,690		)
Stock-based compensation expense (1)	2,925				3,419
Common stock issued for professional services (2)	295				—
Royalty buy-out (3)	—				2,432
Loss on extinguishment of debt (4)	—				189
Gain on derivative liability (5)	—				(249		)
Bad debt expense (6)	—				483
Adjusted EBITDA	$	13,986			$	1,584

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(1)	Represents stock-based compensation expense related to stock options and warrants awarded to employees, consultants and non-executive directors based on the grant date fair value using the Black-Scholes valuation model.

(2)	Represents common stock issued for professional services

(3)	Represents the share-based royalty buy-out associated with the CanX acquisition (see Note 9 of our consolidated financial statements).

(4)	Represents loss on extinguishment of debt associated with our long-term note payable with Wiltshire, LLC ("Wiltshire") (see Note 7 of our consolidated financial statements).

(5)	Represents gain on change in derivative liability associated with our convertible notes with Iliad Research Trading, L.P. ("Iliad") (see Note 7 of our consolidated financial statements).

(6)	Write-off of certain accounts receivable during 2017 that were not considered normal write offs.

Liquidity and Capital Resources

A summary of our changes in cash flows for the years ended December 31, 2018 and 2017 is provided below:

	Year ended December 31,
	2018				2017
	(in thousands)
Net cash flows provided by (used in):
Operating activities	$	12,559			$	3,615
Investing activities	(1,244		)		(2,000		)
Financing activities	(1,172		)		119
Net increase in cash and restricted cash	10,143				1,734
Cash and restricted cash, beginning of year	2,792				1,058
Cash and restricted cash, end of year	$	12,935			$	2,792

Operating Activities

Net cash provided by or used in operating activities includes net income (loss) adjusted for non-cash expenses such as depreciation and amortization, bad debt expense, deferred taxes, amortization of debt issuance costs and beneficial conversion features, stock-based compensation, accrued interest expense and the value of common stock issued for services. 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 behavior.

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Net cash provided in operating activities increased to $12.6 million in 2018 compared to $3.6 million in 2017, an improvement of $9.0 million. The primary reason for this change is the generation of our net income of $10.0 million in 2018 compared to a net loss of $4.9 million in 2017, a $14.9 million improvement. Our increased sales, gross margins, and ability to convert our inventory investment into cash are the primary contributors to this improvement.

Investing Activities

Net cash used in investing activities decreased to $1.2 million in 2018 compared with $2.0 million for 2017. Net cash used in investing activity in 2018 consisted of tenant improvements of $0.3 million to our new corporate facility and $0.9 million in equipment purchases. The decrease in cash used in investing activities is mostly related to lower payments by $1.2 million for our tenant improvements as we completed the majority of the build-out of our new facility in 2017, partially offset by increases in equipment purchases.

Financing Activities

Net cash used in financing activities increased by $1.3 million to $1.2 million in 2018 compared to cash provided by financing activities of $0.1 million in 2017. The primary reason for the increase is our ability to operate and expand from current operating cash flow, allowing us to repay our outstanding notes payable. Cash flows used in financing activities in 2018 consisted of the repayments of our convertible note with Iliad and our long-term note payable with Wiltshire of $0.7 million and $0.8 million, respectively, payments on our annual insurance financing of $0.2 million, partially offset by cash receipts from the exercise of stock options of $0.5 million. Cash flows provided by financing activities in 2017 consisted of new external convertible debt financing of $0.8 million, partially offset by repayment of convertible debt financing of $0.5 million and insurance financing of $0.2 million.

Critical Accounting Policies

The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.

A “critical accounting policy” is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective, or complex judgments, and often requires management to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:

Goodwill and Intangible Assets – We evaluate the carrying value of goodwill and intangible assets annually during the fourth quarter in accordance with ASC Topic 350, Intangibles Goodwill and Other and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, we compare the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of a reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of a reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.

We make critical assumptions and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, market competition, inflation and discount rates.

We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives to their estimated residual values, generally five years. In-process research and development (" IPR&D") has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or

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abandoned, we may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value. This method of amortization approximates the expected future cash flow generated from their use. No impairments were noted during the years ended December 31, 2018 and 2017.

Revenue Recognition – The majority of the our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, which is primarily related to our Plus CBD™ line of products. Net sales reflect the transaction prices for these contracts based on our 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. We recognize 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. We accrue for estimated sales returns by customers based on historical sales return results. The computation of the sales return and discount 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 and totaled $0.4 million and $0.2 million for the years ended December 31, 2018 and 2017 , respectively. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.

Stock-Based Compensation – Certain employees, officers, directors, and consultants participate in various long-term incentive plans that provide for granting stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. Stock options generally vest in equal increments over a two- to four-year period and expire on the tenth anniversary following the date of grant. Performance-based stock options vest once the applicable performance condition is satisfied. Restricted stock awards generally vest 100% at the grant date.

We recognize stock-based compensation for equity awards granted to employees, officers and directors as compensation and benefits expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the closing price of our stock on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is satisfied. Forfeited stock options are accounted for as they occur.

We recognize stock-based compensation for equity awards granted to consultants as selling, general and administrative expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant and unvested awards are revalued at each reporting period. The fair value of restricted stock awards is equal to our stock closing price on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. Forfeited stock options are accounted for as they occur.

Recent Accounting Pronouncements

Refer to Note 2 of our consolidated financial statements for a discussion of recent accounting standards and pronouncements.

Off-Balance Sheet Arrangements

None.

ITEM 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item are set forth at the pages indicated in Part IV, Item 15(a)(1) of this Annual Report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. 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) 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 (CEO) and Chief Financial Officer (CFO), with assistance from other members of management, has reviewed the effectiveness of our disclosure controls and procedures as of December 31, 2018 and, based on his evaluation, has concluded that the disclosure controls and procedures were not sufficient as of such date due to a material weakness in internal control over financial reporting, described below.

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We identified a material weakness in internal control related to management’s lack of maintaining appropriate staffing in its accounting department with the appropriate level of technical expertise and experience during a period of the year ended December 31, 2018, resulting in insufficient oversight and detailed review of the financial reporting function. As previously reported in our Current Report on Form 8-K filed on June 5, 2018, on May 31, 2018, Joseph Dowling was appointed as our CEO, which he has served concurrently with his role as our CFO. The result of Mr. Dowling's dual role required the need to hire additional qualified financial and accounting personnel. As a result, management was not able to perform its assessment of the effectiveness of internal control over financial reporting in a timely manner, which resulted in deficiencies that were not remediated as of December 31, 2018. The material weakness did not result in any identified material misstatements to the financial statements, and there were no changes to previously released financial results. Based on this material weakness, management concluded that at December 31, 2018, internal control over financial reporting was not effective.

Our independent registered public accounting firm, Tanner LLC, has issued an adverse audit report on the effectiveness of internal control over financial reporting as of December 31, 2018, which appears on page F-3 and F-4.

Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended December 31, 2018. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO has certified that, based on his knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all

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material respects the financial condition, results of operations and cash flows of CV Sciences as of, and for, the periods presented in this Form 10-K. Tanner LLC has issued an unqualified opinion on our financial statements, which appears on page F-2.

REMEDIATION

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include: (i) the hiring of our Chief Accounting Officer (CAO) on December 26, 2018 to assist our CEO/CFO in our financial reporting and accounting matters; (ii) the hiring of additional finance and accounting individuals performing supervisory review and monitoring activities during the period-end financial reporting process; (iii) the implementation of additional controls to ensure all risks have been addressed; (iv) the implementation of additional review procedures to ensure control activities are appropriately performed and documented; and (v) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board of Directors.

We believe that these actions will remediate the material weakness, once management has performed its assessment of our internal controls over financial reporting including the remedial measures described above. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of fiscal 2019.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Except for the material weakness identified during the quarter, as of December 31, 2018, and except for the remedial measures described above, including the hiring of our CAO, there have been no other 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 fourth quarter of fiscal 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2019 Annual Meeting of Stockholders, or the Definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2018, under the headings "Election of Directors," "Corporate Governance," "Our Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item will be contained in our Definitive Proxy Statement under the heading "Executive Compensation and Other Information," and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this item will be contained in our Definitive Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this item will be contained in our Definitive Proxy Statement under the headings "Certain Relationships and Related Person Transactions," "Board Independence" and "Committees of the Board of Directors" and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this item will be contained in our Definitive Proxy Statement under the heading "Independent Registered Public Accountants' Fee" and is incorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

1.	Financial Statements

The following consolidated financial statements of the Company are submitted herewith:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2018 and 2017

Consolidated Statements of Operations for the years ended December 31, 2018 and 2017

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2018 and 2017

Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017

Notes to Consolidated Financial Statements

2.	Financial Statement Schedules

Schedules are not submitted because they are not applicable or not required under Regulation S-X or because the required information is included in the financial statements or notes thereto.

3.	Exhibits required to be filed by Item 601 of Regulations S-K

The information called for by this Item is incorporated by reference from the Index to Exhibits included in this Annual Report on Form 10-K.

ITEM 16. FORM 10-K SUMMARY

None.

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EXHIBIT INDEX

Exhibit No.		Description of Exhibit
2.1 (1)		Agreement and Plan of Merger, dated as of July 25, 2013, by and between CannaVest Corp., a Texas corporation, and CannaVest Corp., a Delaware corporation.
2.2 (8)		Agreement and Plan of Merger, dated December 30, 2015, by and among the Company, CANNAVEST Merger Sub, Inc., CANNAVEST Acquisition LLC, CanX, Inc. and The Starwood Trust.
2.3 (14)		Amendment No. 1 dated March 16, 2017, to the Agreement and Plan of Reorganization by and among the Company, CANNAVEST Merger Sub, Inc., CANNAVEST Acquisition LLC, CanX, Inc. and the Starwood Trust.
3.1 (1)		Certificate of Incorporation of CannaVest Corp., as filed on January 26, 2013.
3.2 (1)		Bylaws of CannaVest Corp., dated as of January 26, 2013.
3.3 (1)		Certificate of Amendment to Certificate of Incorporation of CannaVest Corp., as filed on January 4, 2016
3.4 (1)		Certificate of Incorporation of the Company, as amended.
3.5 (1)		Certificate of Amendment to the Bylaws of the Company, as amended.
3.6 (15)		Certificate of Amendment to the Bylaws of the Company, as amended.
3.7 (14)		Bylaws of the Company, as amended.
4.1 (6)		CannaVest Corp. Specimen Stock Certificate
10.1 † (7)		Form of Stock Option Award Grant Notice and Form of Stock Award Agreement.
10.3 (9)		Promissory Note, dated January 29, 2016, issued by the Company to Wiltshire, LLC.
10.4 (9)		Common Stock Purchase Warrant, dated January 29, 2016, issued by the Company to Wiltshire, LLC.
10.5 (10)		Form of Common Stock Purchase Warrant, issued by the Company to Bart Mackay, dated July 6, 2016.
10.6 † (11)		Amended and Restated 2013 Equity Incentive Plan, as amended.
10.7 † (12)		Employment Agreement, dated July 6, 2016, by and between the Company and Michael J. Mona, Jr.
10.8 † (12)		Employment Agreement, dated July 6, 2016, by and between the Company and Joseph Dowling
10.9 † (12)		Employment Agreement, dated July 6, 2016, by and between the Company and Michael Mona, III.
10.10 † (12)		Non-Qualified Stock Option Agreement, by and between the Company and Michael J. Mona, Jr., dated July 6, 2016.
10.11 †  (12)		Non-Qualified Stock Option Agreement, by and between the Company and Joseph Dowling, dated July 6, 2016.
10.12 †  (12)		Non-Qualified Stock Option Agreement, by and between the Company and Michael Mona, III, dated July 6, 2016.
10.13 (13)		Form of Securities Purchase Agreement, dated March 1, 2017, by and between the Company and Iliad Research and Trading, L.P.
10.14 (13)		Form of Secured Convertible Promissory Note, issued by the Company on March 1, 2017, to Iliad Research and Trading, L.P.
10.15 (13)		Security Agreement, dated March 1, 2017, by and between the Company and Iliad Research and Trading, L.P.
10.17 † (14)		Amendment dated March 16, 2017, to Employment Agreement by and between the Company and Michael Mona, Jr.
10.18 † (14)		Amendment dated March 16, 2017, to Employment Agreement by and between the Company and Michael Mona, III.
10.19 † (14)		Amendment dated March 16, 2017, to Non-Qualified Stock Option Agreement, dated July 6, 2016, by and between the Company and Michael Mona, Jr.
10.20 † (14)		Amendment dated March 16, 2017, to Non-Qualified Stock Option Agreement, dated July 6, 2016, by and between the Company and Joseph Dowling.
10.21 † (14)		Amendment dated March 16, 2017, to Non-Qualified Stock Option Agreement, dated July 6, 2016, by and between the Company and Michael Mona, III.
10.22 † (14)		Non-Qualified Stock Option Agreement, dated March 16, 2017, by and between the Company and Michael Mona, Jr.
10.23 † (17)		Non-Qualified Stock Option Agreement, dated April 7, 2017, by and between the Company and Joseph Dowling.
10.24 † (17)		Non-Qualified Stock Option Agreement, dated April 7, 2017, by and between the Company and Michael Mona, III.

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Exhibit No.		Description of Exhibit
10.25 (16)		Amendment No. 4 dated August 2, 2017, to the Secured Convertible Promissory Note by and between the Company and Iliad Research and Trading, L.P., dated May 25, 2016.
10.26 † (18)		Employment Agreement, dated June 8, 2018, by and between the Company and Mr. Mona, Jr.
10.27 † (18)		CV Sciences, Inc. Restricted Stock Unit Award Agreement, dated June 8, 2018, by and between the Company and Mr. Michael Mona, Jr.
10.28 † (18)		Employment Agreement, dated June 14, 2018, by and between the Company and Mr. Joseph Dowling.
10.29 † (18)		Employment Agreement, dated June 14, 2018, by and between the Company and Mr. Michael Mona, III.
10.30 (18)		Consent to Judgment.
10.31 (18)		Consent to Judgment.
10.32*		Employment Agreement, dated December 26, 2018, by and between the Company and Mr. Joerg Grasser.
21.1*		List of Subsidiaries
23.1*		Consent of Independent Registered Public Accounting Firm
31.1*		Certification of the Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 INS*		XBRL Instance Document**
101 SCH*		XBRL Schema Document**
101 CAL*		XBRL Calculation Linkbase Document**
101 LAB*		XBRL Labels Linkbase Document**
101 PRE*		XBRL Presentation Linkbase Document**
101 DEF*		XBRL Definition Linkbase Document**
* Filed herewith.
† Indicates a management contract or compensatory plan or arrangement.

 ** 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.

(1)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on August 13, 2013.

(2)	Incorporated by reference from an exhibit to our Annual Report on Form 10-K filed on April 14, 2016.

(3)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on May 16, 2016.

(4)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on May 26, 2016.

(5)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on August 12, 2016.

(6)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 31, 2013.

(7)	Incorporated by reference from an exhibit to our Form S-8 filed on October 6, 2014.

(8)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on January 4, 2016.

(9)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on February 3, 2016.

(10)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on July 11, 2016.

(11)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on August 9, 2018.

(12)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on November 1, 2016.

(13)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on March 7, 2017.

(14)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on May 9, 2017.

(15)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on March 22, 2017.

(16)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on August 11, 2017.

(17)	Incorporated by reference from an exhibit to our Annual Report on Form 10-K filed on March 30, 2018.

(18)	Incorporated by reference from an exhibit to our Quarterly Report on Form 10-Q filed on August 1, 2018.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
		Dated March 12, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Joseph D. Dowling	Chief Executive Officer, Chief Financial	March 12, 2019
Joseph D. Dowling	Officer and Director
/s/ Michael Mona, III	Chief Operating Officer and	March 12, 2019
Michael Mona, III	Director
/s/ James McNulty	Director	March 12, 2019
James McNulty
/s/ Gary Sligar	Director	March 12, 2019
Gary Sligar
/s/ Dr. Joseph C. Maroon	Director	March 12, 2019
Dr. Joseph C. Maroon
/s/ Joerg Grasser	Chief Accounting Officer	March 12, 2019
Joerg Grasser

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CV Sciences, Inc.

Index to Financial Statements

Annual Financial Statements	Page
Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2018 and 2017	F-5
Consolidated Statements of Operations for the years ended December 31, 2018 and 2017	F-6
Consolidated Statements of Stockholders Equity for the years ended December 31, 2018 and 2017	F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017	F-8
Notes to Consolidated Financial Statements	F-10

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

CV Sciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CV Sciences, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 12, 2019, expressed an adverse opinion.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Tanner LLC

Salt Lake City, Utah

March 12, 2019

We have served as the Company’s auditors since 2016.

F-2

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

CV Sciences, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of CV Sciences, Inc. and subsidiaries (the Company’s) as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets and the related statements of income, comprehensive income, stockholders’ equity, and cash flows of the Company, and our report dated March 12, 2019, expressed an unqualified opinion.

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. During a period of the year ended December 31, 2018, management failed to maintain appropriate staffing in its accounting department with the appropriate level of technical expertise and experience, resulting in insufficient oversight and detailed review of the financial reporting function. As a result, management did not perform its assessment of the effectiveness of internal control over financial reporting in a timely manner, resulting in deficiencies that were not remediated as of December 31, 2018.

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 financial statements, and this report does not affect our report dated March 12, 2019, on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F-3

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Table of Contents

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Tanner LLC

Salt Lake City, Utah

March 12, 2019

F-4

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Table of Contents

CV SCIENCES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	As of December 31,
	2018				2017
Assets
Current assets:
Cash	$	12,684			$	2,013
Restricted cash	251				779
Accounts receivable, net	3,340				1,507
Inventory	7,132				2,823
Prepaid expenses and other	2,059				813
Total current assets	25,466				7,935
Inventory	1,418				5,667
Property & equipment, net	2,844				2,084
Intangible assets, net	3,801				3,836
Goodwill	2,788				2,788
Other assets	585				400
Total assets	$	36,902			$	22,710
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,245			$	678
Accrued expenses	2,673				1,932
Notes payable, net	474				726
Total current liabilities	4,392				3,336
Notes payable, net	—				850
Deferred rent	1,329				1,068
Deferred income taxes	1,065				1,075
Total liabilities	6,786				6,329
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, par value $0.0001; 10,000 shares authorized; no shares issued and outstanding	—				—
Common stock, par value $0.0001; 190,000 shares authorized; 94,940 and 90,513 shares issued and outstanding as of December 31, 2018 and 2017, respectively	9				9
Additional paid-in capital	55,134				51,400
Accumulated deficit	(25,027		)		(35,028		)
Total stockholders' equity	30,116				16,381
Total liabilities and stockholders' equity	$	36,902			$	22,710

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CV SCIENCES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	For the Years Ended December 31,
	2018				2017
Product sales, net	$	48,244			$	20,679
Cost of goods sold	14,366				6,190
Gross profit	33,878				14,489
Operating expenses:
Research and development	1,885				724
Selling, general and administrative	21,746				16,193
Royalty buy-out	—				2,432
	23,631				19,349
Operating income (loss)	10,247				(4,860		)
Other expense:
Interest expense	153				507
Other	—				12
Total other expense	153				519
Income (loss) before income taxes	10,094				(5,379		)
Income tax benefit (expense)	(93		)		482
Net income (loss)	$	10,001			$	(4,897	)
Weighted average common shares outstanding
Basic	91,916				80,432
Diluted	114,470				80,432
Net income (loss) per common share
Basic	$	0.11			$	(0.06	)
Diluted	$	0.09			$	(0.06	)

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C V SCIENCES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)

	Common Stock							Additional Paid-In Capital				Accumulated Deficit				Total
	Shares			Amount
Balance - December 31, 2016	57,618			$	6			$	43,333			$	(30,131	)		$	13,208
Shares issued pursuant to conversion of senior convertible promissory notes and accrued interest	8,597			1				1,804				—				1,805
Stock redemptions	398			—				75				—				75
Shares issued to settle restricted stock units	2,000			—				—				—				—
Shares issued pursuant to CanX acquisition	15,000			1				(1		)		—				—
Shares issued pursuant to CanX royalty buyout	6,400			1				2,431				—				2,432
Shares issued for purchase of inventory	500			—				202				—				202
Fair value of warrants issued in connection with extinguishment of unsecured note	—			—				137				—				137
Stock-based compensation	—			—				3,419				—				3,419
Net loss	—			—				—				(4,897		)		(4,897		)
Balance - December 31, 2017	90,513			9				51,400				(35,028		)		16,381
Issuance of common stock for professional services	225			—				295				—				295
Issuance of common stock from exercise of stock options	1,489			—				514				—				514
Net issuance of common stock from exercise of warrants	2,713			—				—				—				—
Stock-based compensation	—			—				2,925				—				2,925
Net income	—			—				—				10,001				10,001
Balance - December 31, 2018	94,940			$	9			$	55,134			$	(25,027	)		$	30,116

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CV SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(in thousands)

	For the years ended December 31,
	2018				2017
OPERATING ACTIVITIES
Net income (loss)	$	10,001			$	(4,897	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	519				183
Amortization of debt issuance costs	51				221
Amortization of derivative liability debt discount	—				29
Stock-based compensation	2,925				3,419
Stock-based royalty buy-out	—				2,432
Common stock issued for professional services	295				—
Bad debt expense	49				483
Deferred tax liability	(10		)		(482		)
Change in accrued interest payable included in convertible note payable	—				189
Fair value of warrant expense incurred on extinguishment of note payable	—				137
Loss on sale of fixed assets	—				12
Gain on change in derivative liability	—				(249		)
Change in operating assets and liabilities:
Accounts receivable	(1,882		)		(1,241		)
Note receivable	—				(25		)
Inventory	(60		)		1,043
Prepaid expenses and other	(832		)		(400		)
Accounts payable and accrued expenses	1,308				1,780
Deferred rent	195				981
Net cash provided by operating activities	12,559				3,615
INVESTING ACTIVITIES
Purchase of equipment	(893		)		(454		)
Tenant improvements to leasehold real estate	(351		)		(1,546		)
Net cash used in investing activities	(1,244		)		(2,000		)
FINANCING ACTIVITIES
Borrowing from convertible debt, net of costs	—				750
Repayment of convertible debt in cash	(660		)		(472		)
Repayment of unsecured debt in cash	(850		)		—
Repayment of unsecured notes payable	(176		)		(159		)
Proceeds from exercise of stock options	514				—
Net cash provided by (used in) financing activities	(1,172		)		119
Net increase in cash and restricted cash	10,143				1,734
Cash and restricted cash, beginning of year	2,792				1,058
Cash and restricted cash, end of year	$	12,935			$	2,792

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CV SCIENCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(in thousands)

	For the years ended December 31,
	2018				2017
Supplemental disclosure of non-cash transactions:
Conversion of convertible promissory notes and accrued interest to common stock	$	—			$	1,805
Value of embedded derivative at inception	—				29
Equity consideration for royalty buy-out	—				2
Accrual for required stock redemptions	—				75
Shares issued in exchange for purchase of inventory	—				202
Purchase of insurance through issuance of note payable	533				149
Supplemental cash flow disclosures:
Interest paid	$	153			$	183
Taxes paid	70				44

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1.	ORGANIZATION AND BUSINESS

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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	As of December 31,
	2018				2017
Cash	$	12,684			$	2,013
Restricted cash	251				779
Total cash and restricted cash shown in the statements of cash flows	$	12,935			$	2,792

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3.	INVENTORY

	2018				2017
Raw materials	$	4,747			$	6,648
Finished goods	3,803				1,842
	$	8,550			$	8,490

4.	PROPERTY & EQUIPMENT

	Useful Lives		2018				2017
Office furniture and equipment	3 years		$	1,189			$	538
Tenant improvements	*		1,897				1,546
Laboratory and other equipment	5 years		641				399
			3,727				2,483
Less: accumulated depreciation			(883		)		(399		)
			$	2,844			$	2,084

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5.	INTANGIBLE ASSETS

Intangible assets consist of the following as of December 31, 2018 and 2017 :

	Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Useful Life (Years)
Balance - December 31, 2018:
In-process research and development	$	3,730			$	—			$	3,730			—
Trade names	100				60				40				5
Non-compete agreements	77				46				31				5
	$	3,907			$	106			$	3,801
Balance - December 31, 2017:
In-process research and development	$	3,730			$	—			$	3,730			—
Trade names	100				40				60				5
Non-compete agreements	77				31				46				5
	$	3,907			$	71			$	3,836

6.	ACCRUED EXPENSES

	2018				2017
Accrued payroll expenses	$	1,222			$	1,037
Other accrued liabilities	1,451				895
	$	2,673			$	1,932

7.	NOTES PAYABLE

The Company’s notes payable as of December 31, 2018 and 2017 were as follows:

	2018				2017
Unsecured note payable	$	474			$	116
Convertible note payable	—				610
Notes payable - current	474				726
Notes payable - non-current	—				850
	$	474			$	1,576

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8.	RELATED PARTIES

9.	STOCKHOLDERS EQUITY

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10.	STOCK-BASED COMPENSATION

	Number of Shares			Weighted Average Exercise Price				Weighted Average Remaining Contract Term (in years)			Aggregate Intrinsic Value
Outstanding - December 31, 2017	23,073			$	0.43			7.9			$	5,406
Granted	3,719			0.87				—			—
Exercised	(1,489	)		0.35				—			—
Forfeited	(528	)		0.31				—			—
Expired	—			—				—			—
Outstanding - December 31, 2018	24,775			0.51				7.5			94,206
Exercisable - December 31, 2018	22,181			0.45				7.3			85,712
Vested or expected to vest - December 31, 2018	24,775			$	0.51			7.5			$	94,206

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	For the years ended December 31,
	2018		2017
Volatility	90.1%		95.5%
Risk-Free Interest Rate	2.6%		1.8%
Expected Term (in years)	5.44		4.12
Dividend Rate	0.0%		0.0%
Fair Value Per Share on Grant Date	$0.72		$0.15

	Number of Shares			Weighted Average Grant Date Fair Value
RSU's outstanding - December 31, 2017	—			$	—
Granted	2,950			2.14
Vested	—			—
Cancellations	—			—
RSU's outstanding - December 31, 2018	2,950			$	2.14

11.	NET INCOME (LOSS) PER SHARE

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	For the years ended December 31,
	2018				2017
Numerator:
Net income (loss)	$	10,001			$	(4,897	)
Denominator for basic and diluted net income (loss) per share:
Weighted average common shares outstanding for basic	91,916				80,432
Dilutive potential common stock outstanding:
Stock options	13,389				—
RSU's	2,950				—
Performance stock options	6,215				—
Weighted average common shares outstanding for diluted	114,470				80,432
Basic net income (loss) per share	$	0.11			$	(0.06	)
Diluted net income (loss) per share	$	0.09			$	(0.06	)

	For the years ended December 31,
	2018			2017
Stock options and RSU's	850			23,073
Performance stock options	10,750			18,000
Warrants	—			2,850
Total	11,600			43,923

12.	COMMITMENTS AND CONTINGENCIES

Commitments

The Company entered into an 8 year lease agreement (the “Lease”) consolidating its operations in approximately 30,000 square feet in San Diego, California that commenced on February 1, 2018. The Company is required to pay monthly base rent, utilities and common area maintenance expenses. The Company received a landlord rent incentive of $1,067 for tenant improvements. The Lease rent incentive is recorded as a deferred benefit and is amortized over the Lease term.

The following table provides the Company’s Lease commitment as of December 31, 2018 :

	Operating Lease Commitment
2019	$	925
2020	961
2021	923
2022	929
2023	957
Thereafter	2,085
	$	6,780

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13.	SEGMENT INFORMATION

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CV SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following table presents information by reportable operating segment for the years ended December 31, 2018 and 2017 :

	Consumer Products Segment				Specialty Pharmaceutical Segment				Consolidated Totals
Year ended December 31, 2018:
Product sales, net	$	48,244			$	—			$	48,244
Gross profit	$	33,878			$	—			$	33,878
Research and development	1,008				877				1,885
Selling, general and administrative	21,697				49				21,746
Operating income (loss)	$	11,173			$	(926	)		$	10,247
Year ended December 31, 2017:
Product sales, net	$	20,679			$	—			$	20,679
Gross profit	$	14,489			$	—			$	14,489
Research and development	251				473				724
Selling, general and administrative	15,957				236				16,193
Royalty buy-out	2,432				—				2,432
Operating loss	$	(4,151	)		$	(709	)		$	(4,860	)

14.	INCOME TAXES

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CV SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

The following table summarizes the significant components of the Company's deferred tax assets and liabilities as of December 31, 2018 and 2017 :

	2018				2017
Deferred tax assets:
Net operating loss carryforwards	$	1,608			$	3,593
Business credit carryforwards	100				100
Intangible assets	1,002				1,113
Stock-based compensation	4,535				575
Inventory reserve	—				997
Deferred rent	372				299
Other	129				127
	7,746				6,804
Deferred tax liabilities:
Property and equipment	(687		)		(331		)
CanX intangible assets	(1,064		)		(1,074		)
	(1,751		)		(1,405		)
Valuation allowance	(7,060		)		(6,474		)
Net deferred tax liabilities	$	(1,065	)		$	(1,075	)

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CV SCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

A reconciliation of the expected income tax expense (benefit) at the federal statutory rate of 21% for the year ended December 31, 2018 and 34% for the year ended December 31, 2017 and the income tax expense (benefit) reported in the financial statements is as follows:

	2018							2017
	Amount				% of pretax income (loss)			Amount				% of pretax income (loss)
Income tax expense (benefit) at statutory rate	$	2,120			21.0	%		$	(1,829	)		(34.0	)%
State taxes	(61		)		(0.6	)%		(37		)		(0.7	)%
Effect of change in future tax rate on deferred tax balances	—				—	%		2,226				41.4	%
Stock-based compensation	(2,680		)		(26.6	)%		685				12.7	%
Change in derivative liability	—				—	%		(85		)		(1.6	)%
Non-deductible interest on convertible notes	11				0.1	%		135				2.5	%
Royalty buyout	—				—	%		827				15.4	%
Other permanent differences	117				1.2	%		90				1.7	%
Change in valuation allowance	586				5.8	%		(2,494		)		(46.4	)%
Income tax expense (benefit)	$	93			0.9	%		$	(482	)		(9.0	)%

	2018				2017
Current tax expense before benefit of NOL	$	3,327			$	—
Benefit of NOL carryforwards utilized	(3,224		)		—
Deferred tax benefit	(10		)		(482		)
Income tax expense (benefit)	$	93			$	(482	)