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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒ |
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 June 30, 2021
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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:
000-54677
CV Sciences, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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80-0944970 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
10070 Barnes Canyon Road
San Diego, CA 92121
(Address of principal executive offices)
(866) 290-2157
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
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Securities registered pursuant to Section 12(b) of the
Act: |
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
None |
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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. Yes
ý
No
o
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes
ý
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer”,
“smaller reporting company”, and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
Accelerated filer |
☐ |
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Non-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
☒
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date. As of
August 11, 2021, the issuer had 109,018,698 shares of issued
and outstanding common stock, par value $0.0001.
CV SCIENCES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
CV SCIENCES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
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June 30,
2021 |
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December 31,
2020 |
Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
2,460 |
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$ |
4,024 |
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Restricted cash |
501 |
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501 |
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Accounts receivable, net |
1,119 |
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1,126 |
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Inventory |
9,176 |
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8,840 |
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Prepaid expenses and other |
1,771 |
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2,372 |
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Total current assets |
15,027 |
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16,863 |
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Property & equipment, net |
2,493 |
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2,877 |
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Operating lease assets |
2,789 |
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3,057 |
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Intangibles, net |
3,730 |
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3,730 |
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Goodwill |
2,788 |
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2,788 |
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Other assets |
983 |
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1,310 |
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Total assets |
$ |
27,810 |
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$ |
30,625 |
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Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
$ |
646 |
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$ |
1,677 |
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Accrued expenses |
10,233 |
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9,805 |
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Operating lease liability - current |
686 |
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680 |
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Current portion of long-term debt |
2,998 |
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2,174 |
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Total current liabilities |
14,563 |
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14,336 |
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Operating lease liability |
3,113 |
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3,467 |
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Debt |
— |
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1,453 |
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Deferred tax liability |
157 |
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157 |
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Total liabilities |
17,833 |
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19,413 |
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Commitments and contingencies (Note 7) |
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Stockholders' equity |
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Preferred stock, par value $0.0001; 10,000 shares authorized; no
shares issued and outstanding
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— |
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— |
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Common stock, par value $0.0001; 190,000 shares authorized; 108,462
and 100,664 shares issued and outstanding as of June 30, 2021 and
December 31, 2020, respectively
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10 |
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Additional paid-in capital |
80,544 |
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75,123 |
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Accumulated deficit |
(70,578) |
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(63,921) |
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Total stockholders' equity |
9,977 |
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11,212 |
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Total liabilities and stockholders' equity |
$ |
27,810 |
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$ |
30,625 |
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See accompanying notes to the condensed financial
statements.
CV SCIENCES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
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Three months ended June 30, |
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Six months ended June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
Product sales, net |
$ |
5,128 |
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$ |
5,396 |
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$ |
9,972 |
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$ |
13,666 |
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Cost of goods sold |
2,838 |
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3,074 |
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5,324 |
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7,336 |
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Gross Profit |
2,290 |
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2,322 |
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4,648 |
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6,330 |
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Operating expenses: |
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Research and development |
225 |
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746 |
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411 |
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2,255 |
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Selling, general and administrative |
5,575 |
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6,233 |
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10,860 |
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14,052 |
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Total operating expenses |
5,800 |
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6,979 |
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11,271 |
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16,307 |
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Operating Loss |
(3,510) |
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(4,657) |
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(6,623) |
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(9,977) |
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Interest (income) expense, net |
9 |
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4 |
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23 |
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(6) |
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Loss before income taxes |
(3,519) |
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(4,661) |
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(6,646) |
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(9,971) |
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Income tax expense (benefit) |
11 |
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20 |
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11 |
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(138) |
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Net Loss |
$ |
(3,530) |
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$ |
(4,681) |
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$ |
(6,657) |
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$ |
(9,833) |
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Weighted average common shares outstanding, basic and
diluted |
107,623 |
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99,863 |
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106,074 |
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99,771 |
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Net loss per common share, basic and diluted |
$ |
(0.03) |
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$ |
(0.05) |
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$ |
(0.06) |
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$ |
(0.10) |
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See accompanying notes to the condensed financial
statements.
CV SCIENCES, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands)
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Common Stock |
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Additional
Paid-In
Capital |
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Accumulated
Deficit |
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Shares |
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Amount |
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Total |
Balance at December 31, 2020 |
100,664 |
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$ |
10 |
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$ |
75,123 |
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$ |
(63,921) |
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$ |
11,212 |
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Issuance of common stock under equity commitment |
6,127 |
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1 |
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3,221 |
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— |
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3,222 |
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Stock-based compensation |
— |
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— |
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657 |
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— |
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657 |
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Net loss |
— |
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— |
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— |
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(3,127) |
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(3,127) |
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Balance at March 31, 2021 |
106,791 |
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11 |
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79,001 |
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(67,048) |
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11,964 |
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Issuance of common stock from net exercise of stock
options
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2 |
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— |
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— |
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— |
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— |
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Issuance of common stock under equity commitment |
1,669 |
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— |
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631 |
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— |
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631 |
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Stock-based compensation |
— |
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— |
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912 |
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— |
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912 |
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Net loss |
— |
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— |
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— |
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(3,530) |
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(3,530) |
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Balance at June 30, 2021 |
108,462 |
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$ |
11 |
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$ |
80,544 |
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$ |
(70,578) |
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$ |
9,977 |
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Common Stock |
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Additional
Paid-In
Capital |
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Accumulated
Deficit |
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Shares |
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Amount |
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Total |
Balance at December 31, 2019 |
99,416 |
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$ |
10 |
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$ |
70,774 |
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$ |
(41,637) |
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$ |
29,147 |
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Issuance of common stock from exercise of stock
options
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436 |
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— |
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161 |
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— |
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161 |
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Stock-based compensation |
— |
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— |
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1,258 |
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— |
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1,258 |
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Net loss |
— |
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— |
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— |
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(5,152) |
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(5,152) |
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Balance at March 31, 2020 |
99,852 |
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10 |
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72,193 |
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(46,789) |
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25,414 |
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Issuance of common stock from exercise of stock
options
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34 |
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— |
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12 |
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— |
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12 |
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Stock-based compensation |
— |
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— |
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|
1,243 |
|
|
— |
|
|
1,243 |
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
(4,681) |
|
|
(4,681) |
|
Balance at June 30, 2020 |
99,886 |
|
|
$ |
10 |
|
|
$ |
73,448 |
|
|
$ |
(51,470) |
|
|
$ |
21,988 |
|
See accompanying notes to the condensed financial
statements.
CV SCIENCES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
2021 |
|
2020 |
OPERATING ACTIVITIES |
|
|
|
Net loss |
$ |
(6,657) |
|
|
$ |
(9,833) |
|
Adjustments to reconcile net loss to net cash flows used in
operating activities: |
|
|
|
Depreciation and amortization |
402 |
|
|
389 |
|
Stock-based compensation |
1,569 |
|
|
2,501 |
|
Non-cash lease expense, net |
268 |
|
|
562 |
|
Deferred taxes |
— |
|
|
(158) |
|
Loss on sale of property and equipment |
— |
|
|
176 |
|
Other |
211 |
|
|
99 |
|
Change in operating assets and liabilities: |
|
|
|
Accounts receivable, net |
(85) |
|
|
1,032 |
|
Inventory |
(336) |
|
|
1,738 |
|
Prepaid expenses and other |
822 |
|
|
2,208 |
|
Accounts payable and accrued expenses |
(947) |
|
|
(2,818) |
|
Net cash used in operating activities |
(4,753) |
|
|
(4,104) |
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
Purchases of property and equipment |
(35) |
|
|
(506) |
|
Net cash flows used in investing activities |
(35) |
|
|
(506) |
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
Proceeds from debt |
— |
|
|
2,906 |
|
Repayment of unsecured debt |
(629) |
|
|
— |
|
Proceeds from issuance of common stock |
3,853 |
|
|
— |
|
Proceeds from exercise of stock options |
— |
|
|
173 |
|
Net cash flows provided by financing activities |
3,224 |
|
|
3,079 |
|
|
|
|
|
Net decrease in cash, cash equivalents and restricted
cash |
(1,564) |
|
|
(1,531) |
|
Cash, cash equivalents and restricted cash, beginning of
period |
4,525 |
|
|
9,608 |
|
Cash, cash equivalents and restricted cash, end of
period |
$ |
2,961 |
|
|
$ |
8,077 |
|
|
|
|
|
Supplemental cash flow disclosures: |
|
|
|
Income taxes paid |
$ |
— |
|
|
$ |
18 |
|
|
|
|
|
Supplemental disclosures of non-cash transactions: |
|
|
|
Purchase of property and equipment in accounts payable and accrued
expenses |
$ |
— |
|
|
$ |
327 |
|
Sale of property and equipment in exchange for note receivable
(recorded in prepaid expenses and other) and inventory |
$ |
— |
|
|
$ |
675 |
|
See accompanying notes to the condensed financial
statements.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BUSINESS
Historical Information
- CV Sciences, Inc. (the “Company”) was incorporated under the name
Foreclosure Solutions, Inc. in the State of Texas on December 9,
2010. On July 25, 2013, CannaVest Corp., a Texas corporation
(“CannaVest Texas”), merged with the Company, a wholly-owned
Delaware subsidiary of CannaVest Texas, to effectuate a change in
the Company’s state of incorporation from Texas to Delaware. On
January 4, 2016, the Company filed a Certificate of Amendment of
Certificate of Incorporation reflecting its corporate name change
to “CV Sciences, Inc.”, effective on January 5, 2016. In addition,
on January 4, 2016, the Company amended its Bylaws to reflect its
corporate name change to “CV Sciences, Inc.”
Description of Business
- The Company has two operating segments: consumer products and
specialty pharmaceutical. The consumer products segment develops,
manufactures, markets and sells plant-based dietary supplements and
hemp-based cannabidiol ("CBD"). The Company sells its products
under tradenames, such as
PlusCBD™,
HappyLane™,
ProCBD™,
CV™Acute,
and
CV™Defense.
The Company's products are sold in a variety of market sectors
including nutraceutical, beauty care and specialty foods. The
specialty pharmaceutical segment is developing drug candidates
which use CBD as a primary active ingredient.
Basis of Presentation
- The unaudited condensed financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP").
Use of Estimates
- The preparation of the condensed financial statements in
conformity with U.S. GAAP requires management to make judgments,
estimates and assumptions that affect the reported amounts in the
condensed financial statements and accompanying notes. Actual
results may differ from these estimates. Significant estimates
include the valuation of intangible assets, inputs for valuing
equity awards, valuation of inventory and assumptions related to
revenue recognition.
Fair Value Measurements
- Fair value is defined as the price that would be received from
the sale of an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset
or liability in an orderly transaction between market participants
on the measurement date. The carrying values of accounts
receivable, other current assets, accounts payable, and certain
accrued expenses as of June 30, 2021 and December 31,
2020, approximate their fair value due to the short-term nature of
these items. The Company's notes payable balance also approximates
fair value as of June 30, 2021 and December 31, 2020, as
the interest rate on the notes payable approximates the rates
available to the Company as of this date. The accounting guidance
establishes a three-level hierarchy for disclosure that is based on
the extent and level of judgment used to estimate the fair value of
assets and liabilities.
•Level
1 - uses unadjusted quoted prices that are available in active
markets for identical assets or liabilities. The Company's Level 1
assets are comprised of $1.5 million and $2.4 million in money
market funds which are classified as cash equivalents as of
June 30, 2021 and December 31, 2020, respectively. In
addition, the Company's restricted cash of $0.5 million as of
June 30, 2021 and December 31, 2020 is comprised of
certificates of deposit. The carrying value of the cash equivalents
and restricted cash approximated the fair value as of June 30,
2021 and December 31, 2020. The Company does not
have any liabilities that are valued using inputs identified under
a Level 1 hierarchy as of June 30,
2021 and December 31, 2020.
•Level
2 - uses inputs other than quoted prices included in Level 1 that
are either directly or indirectly observable through correlation
with market data. These include quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are not active; and
inputs to valuation models or other pricing methodologies that do
not require significant judgment because the inputs used in the
model, such as interest rates and volatility, can be corroborated
by readily observable market data. The Company did not have any
assets or liabilities that are valued using inputs identified under
a Level 2 hierarchy as of June 30,
2021 and December 31, 2020.
•Level
3 - uses one or more significant inputs that are unobservable and
supported by little or no market activity, and that reflect the use
of significant management judgment. Level 3 assets and liabilities
include those whose fair value measurements are determined using
pricing models, discounted cash flow methodologies or similar
valuation techniques, and significant management judgment or
estimation. The Company did not have any assets or liabilities that
are valued using inputs identified under a Level 3 hierarchy as of
June 30, 2021 and December 31, 2020.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Cash, cash equivalents, and restricted cash
- The following table provides a reconciliation of cash, cash
equivalents, and restricted cash reported within the balance sheets
to the total of the same amounts shown in the statement of cash
flows for the six months ended June 30, 2021 and 2020 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
June 30,
2020 |
Cash and cash equivalents |
$ |
2,460 |
|
|
$ |
7,576 |
|
Restricted cash |
501 |
|
|
501 |
|
Total cash and restricted cash shown in the statements of cash
flows |
$ |
2,961 |
|
|
$ |
8,077 |
|
Revenues
- The following presents revenue product sales by channel, food,
drug and mass ("FDM"), natural products and other, and e-commerce,
for the three and six months ended June 30, 2021 and
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2021 |
|
Three months ended June 30, 2020 |
|
Amount |
|
% of product sales, net |
|
Amount |
|
% of product sales, net |
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
Retail - FDM |
$ |
222 |
|
|
4.3 |
% |
|
$ |
445 |
|
|
8.2 |
% |
Retail - Natural products and other |
3,013 |
|
|
58.8 |
% |
|
2,914 |
|
|
54.0 |
% |
E-Commerce |
1,893 |
|
|
36.9 |
% |
|
2,037 |
|
|
37.8 |
% |
Product sales, net |
$ |
5,128 |
|
|
100.0 |
% |
|
$ |
5,396 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2021 |
|
Six months ended June 30, 2020 |
|
Amount |
|
% of product sales, net |
|
Amount |
|
% of product sales, net |
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
Retail - FDM |
$ |
445 |
|
|
4.5 |
% |
|
$ |
876 |
|
|
6.4 |
% |
Retail - Natural products and other |
5,765 |
|
|
57.8 |
% |
|
8,739 |
|
|
63.9 |
% |
E-Commerce |
3,762 |
|
|
37.7 |
% |
|
4,051 |
|
|
29.7 |
% |
Product sales, net |
$ |
9,972 |
|
|
100.0 |
% |
|
$ |
13,666 |
|
|
100.0 |
% |
Liquidity Considerations
- The Company believes that a combination of factors, mainly
consisting of increased competition and the effects of the COVID-19
pandemic, have adversely impacted its business operations for the
three and six month period ended June 30, 2021. Due to a low
barrier entry market with a lack of a clear regulatory framework,
the Company faces intense competition from both licensed and
illicit market operators that may also sell plant-based dietary
supplements and hemp-based CBD consumer products.
COVID-19 also had a significant impact on the Company's results of
operations as government-imposed restrictions on businesses and
retail store closures impacted its sales revenue. Although the
Company cannot predict how sales for its products will continue to
be impacted by the increase in competition and these preventative
measures, the Company expects that these factors may continue to
negatively impact its operations due to decreased consumer demand
as well as potential production and warehouse limitations. These
factors result in events or conditions, before consideration of
management’s plans, that could impact the Company's continuing
operations and its ability to meet future obligations.
Although the Company’s revenue was impacted for the six months
ended June 30, 2021 and the year ended December 31, 2020 due to
increased competition and the effects of COVID-19, the Company was
able to mitigate, to some degree, these conditions as the Company’s
management implemented, and continues to make and implement,
strategic cost reductions, including reductions in employee
headcount, vendor spending, and the delay of expenses related to
its drug development activities.
On December 8, 2020, the Company entered into a common stock
purchase agreement (“SPA”) with Tumim Stone Capital, LLC (“Tumim”),
pursuant to which Tumim committed to purchase up to
$10.0 million in shares of our common stock, from time to
time, as further discussed in Note 4.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Management believes that its cash and cash equivalents on
hand
together with the equity commitment with Tumim and
the cost reduction measures, as needed, will provide sufficient
liquidity to fund its operations for the next 12 months from the
issuance of these condensed financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board ("FASB")
issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments and
subsequent amendments to the initial guidance: ASU 2018-19, ASU
2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326
requires measurement and recognition of expected credit losses for
financial assets held. Topic 326 was to be effective for reporting
periods beginning after December 15, 2019, with early adoption
permitted. In November 2019, the FASB issued ASU 2019-10, Financial
Instruments - Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842) Effective Dates, which deferred
the effective dates for the Company, as a smaller reporting
company, until fiscal year 2023. The Company currently plans to
adopt the guidance at the beginning of fiscal 2023. The Company is
currently evaluating the potential impact of Topic 326 on the
Company’s condensed financial statements.
Recent Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the
Accounting for Income Taxes ("ASU 2019-12"), which simplifies the
accounting for income taxes, eliminates certain exceptions within
ASC 740, Income Taxes, and clarifies certain aspects of the current
guidance to promote consistency among reporting entities. The new
standard is effective for fiscal years beginning after December 15,
2020. Most amendments within the standard are required to be
applied on a prospective basis, while certain amendments must be
applied on a retrospective or modified retrospective basis. The
Company's adoption of ASU 2019-12 during the three and six months
ended June 30, 2021, did not have a material impact on the
Company's condensed financial statements.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
2. BALANCE SHEET DETAILS
Inventory
Inventory as of June 30, 2021 and December 31, 2020 was
comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
December 31,
2020 |
Raw materials |
$ |
4,603 |
|
|
$ |
4,923 |
|
Work in process |
1,685 |
|
|
785 |
|
Finished goods |
2,888 |
|
|
3,132 |
|
|
$ |
9,176 |
|
|
$ |
8,840 |
|
The Company recorded inventory write-downs of $0.1 million for the
three and six months ended June 30, 2021, respectively.
Inventory write-downs for the three and six months ended
June 30, 2020 were $0.2 million and $0.3 million,
respectively.
Intangibles, net
Intangibles, net as of June 30, 2021 and December 31,
2020 consisted of in-process research and development of $3.7
million with an indefinite life.
Accrued expenses
Accrued expenses as of June 30, 2021 and December 31,
2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
December 31,
2020 |
Accrued payroll expenses
(1)
|
$ |
8,627 |
|
|
$ |
8,324 |
|
Other accrued liabilities |
1,606 |
|
|
1,481 |
|
|
$ |
10,233 |
|
|
$ |
9,805 |
|
(1) This includes a $6.2 million tax liability associated with a
related party transaction as discussed in Note 10.
|
|
|
|
3. DEBT
Debt as of June 30, 2021 and December 31, 2020 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021 |
|
December 31, 2020 |
PPP loan |
$ |
2,906 |
|
|
$ |
2,906 |
|
Insurance financing |
92 |
|
|
721 |
|
|
2,998 |
|
|
3,627 |
|
Less: Current portion of debt |
(2,998) |
|
|
(2,174) |
|
Long-term portion of debt |
$ |
— |
|
|
$ |
1,453 |
|
Principal payments on the debt are as follows (in
thousands):
|
|
|
|
|
|
|
June 30,
2021 |
2021 |
$ |
1,545 |
|
2022 |
1,453 |
|
Total principal payments |
$ |
2,998 |
|
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Paycheck Protection Program
On April 15, 2020, the Company applied for a loan from JPMorgan
Chase Bank, N.A. (the "Lender"), pursuant to the Paycheck
Protection Program of the CARES Act as administered by the U.S.
Small Business Administration. On April 17, 2020, the loan was
approved, and the Company received proceeds in the amount of $2.9
million (the “PPP Loan”).
The PPP Loan, which took the form of a promissory note, matures on
April 15, 2022 and bears interest at a rate of 0.98% per annum
(the “Promissory Note”). The Company did not provide any collateral
or guarantees for the PPP Loan, nor did the Company pay any
facility charge to obtain the PPP Loan. The Promissory Note
provides for customary events of default, including, among others,
those relating to failure to make payment, bankruptcy, breaches of
representations and material adverse effects. The Company may
prepay the principal of the PPP Loan at any time without incurring
any prepayment charges.
Under the CARES Act, loan forgiveness is available for the sum of
documented payroll costs, covered rent payments, and covered
utilities during the covered period of 8 weeks beginning on the
date of loan approval. For purposes of the CARES Act, payroll costs
exclude compensation of an individual employee in excess of
$100,000, prorated annually. Not more than 25% of the forgiven
amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for
employees with salaries of $100,000 or less annually are reduced by
more than 25%. In the event the PPP Loan, or any portion thereof,
is forgiven pursuant to the PPP, the amount forgiven is applied to
outstanding principal.
The Paycheck Protection Program Flexibility Act of 2020 (the “PPP
Flexibility Act”), enacted on June 5, 2020, amended the Paycheck
Protection Program, among others, as follows: (i) extended the
covered period from 8 weeks to 24 weeks from the date the PPP Loan
is originated, during which PPP funds needed to be expended in
order to be forgiven. A borrower may submit a loan forgiveness
application any time on or before the maturity date of the loan –
including before the end of the covered period – if the borrower
has used all of the loan proceeds for which the borrower is
requesting forgiveness. (ii) at least 60% of PPP funds must be
spent on payroll costs, with the remaining 40% available to spend
on other eligible expenses. (iii) payments are deferred until the
date on which the amount of forgiveness determined is remitted to
the lender. If a borrower fails to seek forgiveness within 10
months after the last day of its covered period, then payments will
begin on the date that is 10 months after the last day of the
covered period. In addition, the PPP Flexibility Act modified the
CARES Act by increasing the maturity date for loans made after the
effective date from two years to a minimum maturity of five years
from the date on which the borrower applies for loan forgiveness.
Existing PPP loans made before the new legislation retain their
original two-year term, but may be renegotiated between a lender
and a borrower to match the 5-year term permitted under the PPP
Flexibility Act.
On July 1, 2021, the Company submitted an application for
forgiveness of its PPP Loan. The forgiveness process is currently
under review, and the Company is awaiting a response from the
Lender and the SBA. No assurance is provided that the Company will
obtain forgiveness of the PPP Loan in whole or in part. The
Promissory Note is classified as current.
Unsecured Note Payable
In October 2020, the Company entered into a finance agreement with
First Insurance Funding in order to fund a portion of its insurance
policies. The amount financed is $0.7 million and incurs interest
at a rate of 3.60%. The Company is required to make monthly
payments of $0.1 million from November 2020 through July 2021. The
outstanding balance as of June 30, 2021 was $0.1
million.
4. STOCKHOLDERS EQUITY
On December 8, 2020, the Company entered into an SPA with Tumim to
issue and sell up to $10.0 million in shares of the Company's
common stock. The SPA provides, among other things, that the
Company may direct, every three trading days, Tumim to purchase a
number of shares not to exceed an amount determined based upon the
trading volume and stock price of the Company's shares. During the
three and six months ended June 30, 2021, the Company sold
1,669,086 and 7,796,356 shares of common stock pursuant to the SPA
and recognized proceeds of $0.6 million and $3.9 million,
respectively. As of August 13, 2021, the Company has sold
556,362 additional shares of common stock and recognized proceeds
of $0.2 million under the SPA since the quarter ended June 30,
2021. The Company has a remaining availability under SPA of
$5.8 million as of August 13, 2021.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
5. STOCK-BASED COMPENSATION
As of December 31, 2020, there were 34,976,000 shares of
Company common stock authorized for issuance under the CV Sciences,
Inc. Amended and Restated 2013 Equity Incentive Plan (the "2013
Plan"). On June 11, 2019, the Company’s stockholders approved an
amendment to the 2013 Plan to add an automatic “evergreen”
provision regarding the number of shares to be annually added to
the 2013 Plan. As a result, the number of shares of common stock
that will be automatically added to the 2013 Plan on January 1 of
each year during the term of the plan, starting with January 1,
2020, will be the lesser of: (a) 4% of the total shares of the
Company’s common stock outstanding on December 31st of the prior
year, (b) 4,000,000 shares of the Company’s common stock, or (c) a
lesser number of shares of the Company’s common stock as determined
by the Company’s Board of Directors. On January 1, 2021, the
Company added 4,000,000 shares of the Company's common stock to the
2013 Plan for a total of 38,976,000 shares authorized for issuance
under the 2013 Plan as of June 30, 2021. As
of June 30, 2021, the Company had 4,052,000 authorized
unissued shares reserved and available for issuance upon exercise
and conversion of outstanding awards under the 2013
Plan.
As of June 30, 2021, total unrecognized compensation cost
related to non-vested stock-based compensation arrangements
was $4.3 million which is expected to be recognized over a
weighted-average period of 1.24 years.
The following summarizes activity related to the Company's stock
options (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Weighted Average
Exercise Price |
|
Weighted Average
Remaining Contract
Term (in years) |
|
Aggregate Intrinsic Value |
Outstanding - December 31, 2020 |
25,225 |
|
$ |
0.48 |
|
|
5.7 |
|
$ |
2,186 |
|
Granted |
6,550 |
|
0.55 |
|
|
— |
|
|
— |
|
Exercised |
(2) |
|
0.26 |
|
|
— |
|
|
— |
|
Forfeited |
(440) |
|
0.58 |
|
|
— |
|
|
— |
|
Outstanding - June 30, 2021 |
31,333 |
|
0.50 |
|
|
6.1 |
|
378 |
|
|
|
|
|
|
|
|
|
Exercisable - June 30, 2021 |
23,829 |
|
0.47 |
|
|
5.1 |
|
354 |
|
Vested or expected to vest - June 30, 2021 |
31,333 |
|
$ |
0.50 |
|
|
6.1 |
|
$ |
378 |
|
The Company has established performance milestones in connection
with drug development efforts for its lead drug candidate CVSI-007.
The above table includes 5,000,000 vested performance-based options
as of June 30, 2021, which were issued outside of the 2013
Plan. As of June 30, 2021, there were 8,000,000 remaining
unvested stock options granted outside of the 2013 Plan which are
not included in the above table. These stock options vest upon the
completion of future performance conditions, including those
related to the Settlement Agreement with Mona Jr. (refer to Note
10).
The total intrinsic value of stock options exercised during the six
months ended June 30, 2020 was $0.3 million. Upon option
exercise, the Company issues new shares of stock. The intrinsic
value of stock option exercises during the six months ended
June 30, 2021 was not material.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the weighted average grant date fair
value of stock options granted and the weighted-average assumptions
used to estimate the fair value on the date of grant using the
Black-Scholes valuation model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Volatility |
132.1% |
|
123.1% |
|
133.7 |
% |
|
132.9 |
% |
Risk-Free Interest Rate |
0.8% |
|
0.4% |
|
0.9 |
% |
|
0.5 |
% |
Expected Term (in years) |
5.49 |
|
5.42 |
|
5.61 |
|
5.32 |
Dividend Rate |
—% |
|
—% |
|
— |
% |
|
— |
% |
Fair Value Per Share on Grant Date |
$0.32 |
|
$0.61 |
|
$ |
0.49 |
|
|
$ |
0.36 |
|
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, non-employees, officers and
directors using the simplified method in accordance with ASC Topic
718, Stock Compensation, because the Company does not have
sufficient relevant historical information to develop reasonable
expectations about future exercise patterns. In the future, as the
Company gains historical data for the actual term over which stock
options are held, the expected term may change, which could
substantially change the grant-date fair value of future stock
option awards, and, consequently, compensation of future
grants.
6. NET LOSS PER
SHARE
The Company computes basic net loss per share using the
weighted-average number of common shares outstanding during the
period. Diluted net loss per share is calculated by dividing net
loss by the weighted-average number of common shares plus potential
common shares. The Company's stock options, including those with
performance conditions, are included in the calculation of diluted
net loss per share using the treasury stock method when their
effect is dilutive. Potential common shares are excluded from the
calculation of diluted net loss per share when their effect is
anti-dilutive.
The following common stock equivalents were not included in the
calculation of net loss per diluted share because their effect were
anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Six months ended June 30, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Stock options |
26,333 |
|
|
21,661 |
|
|
26,333 |
|
|
21,661 |
|
Performance stock options |
5,000 |
|
|
5,000 |
|
|
5,000 |
|
|
5,000 |
|
Total |
31,333 |
|
|
26,661 |
|
|
31,333 |
|
|
26,661 |
|
The above table excludes 8,000,000 unvested performance stock
options for the three and six months ended June 30, 2021 and
2020, which vest upon the completion of future performance
conditions.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
7. COMMITMENTS AND
CONTINGENCIES
On March 17, 2015, Michael Ruth filed a shareholder derivative suit
in Nevada District Court alleging breach of fiduciary duty and
gross mismanagement (the “Ruth Complaint”). The claims are premised
on the same events that were the subject of a purported class
action filed in the Southern District of New York on April 23, 2014
(the “Sallustro Case”). On July 2, 2019, the court in the Sallustro
Case entered a final order dismissing the complaint with prejudice.
The Company did not make any settlement payment, and at no time was
there a finding of wrongdoing by the Company or any of its
directors. Regarding the Ruth Complaint, the Company and Mr. Ruth
previously agreed to stay the action pending the conclusion of
discovery in the Sallustro Case. Now that the Sallustro Case has
been dismissed, the stay has been lifted. Plaintiff’s counsel
recently informed the Court that Mr. Ruth sold his shares of CVSI
stock and thus he no longer has 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, the Company 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 and discovery is
ongoing. The Court issued a schedule whereby discovery ends on
November 19, 2021. Management intends to vigorously defend the
allegations.
On August 24, 2018, David Smith filed a purported class action
complaint in Nevada District Court (the "Smith Complaint") alleging
certain misstatements in the Company's public filings that led to
stock price fluctuations and financial harm. Several additional
individuals filed similar claims, and the Smith Complaint and each
of the other suits all arise out of a report published by Citron
Research on Twitter on August 20, 2018, suggesting that the Company
misled investors by failing to disclose that the Company’s efforts
to secure patent protection for CVSI-007 had been “finally
rejected” by the United States Patent and Trademark Office
("USPTO"). On November 15, 2018, the court consolidated the actions
and appointed Richard Ina, Trustee for the Ina Family Trust, as
Lead Plaintiff for the consolidated actions. On January 4, 2019,
Counsel for Lead Plaintiff Richard Ina, Trustee for the Ina Family
Trust, filed a “consolidated amended complaint”. On March 5, 2019,
we filed a motion to dismiss the action. The Court denied the
motion to dismiss on December 10, 2019, and the parties have
commenced discovery in the action with a discovery cutoff date of
August 23, 2021.
Arising out of the same facts and circumstances in the Smith
Complaint, on June 11, 2020, Phillip Berry filed a derivative suit
in the United States District Court for the Southern District of
California alleging breaches of fiduciary duty against the Company
and various defendants, and waste of corporate assets (the “Berry
Complaint”). The Company accepted service of the Berry Complaint
and filed a motion to dismiss. On May 14, 2021, the District Court
issued an order denying the motion to dismiss without prejudice but
staying the action pending resolution of the Ina case. In addition
to the Berry Complaint, five additional shareholder derivative
suits have been filed which are premised on the same event as the
Smith Complaint. This includes a new shareholder derivative action
filed on April 13, 2021 by David Menna in the Superior Court of the
State of California, County of San Diego. This case is stayed by
stipulation of the parties until August 11, 2021. With respect to
the other four shareholder derivative cases, all four actions are
also currently stayed. On May 19, 2020, the USPTO issued a patent
pertaining to CVSI-007, which the Company believes negates and
defeats any claims that the Company and the various defendants
misled the market by not disclosing that the USPTO had finally
rejected the patent. Management intends to vigorously defend the
allegations in each of these matters as the result of the issuance
of a patent and the failure of the plaintiffs’ causes of action on
various other grounds.
On December 3, 2019, Michelene Colette and Leticia Shaw filed a
putative class action complaint in the Central District of
California, alleging the labeling on the Company’s products
violated the Food, Drug, and Cosmetic Act of 1938 (the “Colette
Complaint”). On February 6, 2020, the Company filed a motion to
dismiss the Colette Complaint. Instead of opposing our motion,
plaintiffs elected to file an amended complaint on February 25,
2020. On March 11, 2020, we filed a motion to dismiss the amended
complaint. The court issued a ruling on May 22, 2020 that stayed
this proceeding in its entirety and dismissed part of the amended
complaint. The portion of the proceeding that is stayed will remain
stayed until the U.S. Food and Drug Administration promulgates
rules that govern cannabidiol products (the “FDA Rules”). When such
FDA Rules are promulgated, the plaintiffs will be allowed to ask
the court to reopen the proceeding. Management intends to
vigorously defend the allegations.
On July 22, 2020, the Company filed a complaint in the San Diego
Superior Court for declaratory relief to confirm the termination of
Mona Jr.’s severance and other post-termination compensation and
benefits, as well as to recover amounts owed to the Company by Mona
Jr. in connection with his purchase of a personal seat license for
the Raiders Stadium and certain advance payments made on Mona Jr.’s
behalf. The complaint also requests that Mona Jr. provides the
Company with appropriate taxing authority documentation to show
that he paid the tax associated with the vesting of the RSU's. For
more
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
information refer to Note 10, Related Parties. The parties have
commenced the discovery process, and the Company intends to
vigorously pursue its claims.
In the normal course of business, the Company is a party to a
variety of agreements pursuant to which they may be obligated to
indemnify the other party. It is not possible to predict the
maximum potential amount of future payments under these types of
agreements due to the conditional nature of our obligations, and
the unique facts and circumstances involved in each particular
agreement. Historically, payments made by us under these types of
agreements have not had a material effect on our business, results
of operations or financial condition.
8. SEGMENT INFORMATION
The Company operates in two distinct business segments: a consumer
products segment in manufacturing, marketing and selling hemp-based
CBD products to a range of market sectors; and a specialty
pharmaceutical segment focused on developing and commercializing
novel therapeutics utilizing CBD. The Company’s segments maintain
separate financial information for which operating results are
evaluated on a regular basis by the Company’s senior management in
deciding how to allocate resources and in assessing performance.
The Company evaluates its consumer products segment based on net
product sales, gross profit and operating income or loss. The
Company currently evaluates its specialty pharmaceutical segment
based on the progress of its clinical development
programs.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents information by reportable operating
segment for the three and six months ended June 30, 2021 and
2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products
Segment |
|
Specialty Pharmaceutical Segment |
|
Consolidated Totals |
Three months ended June 30, 2021: |
|
|
|
|
|
Product sales, net |
$ |
5,128 |
|
|
$ |
— |
|
|
$ |
5,128 |
|
|
|
|
|
|
|
Gross profit |
$ |
2,290 |
|
|
$ |
— |
|
|
$ |
2,290 |
|
Research and development expense |
126 |
|
|
99 |
|
|
225 |
|
Selling, general and administrative expense |
5,565 |
|
|
10 |
|
|
5,575 |
|
Operating loss |
$ |
(3,401) |
|
|
$ |
(109) |
|
|
$ |
(3,510) |
|
|
|
|
|
|
|
Three months ended June 30, 2020: |
|
|
|
|
|
Product sales, net |
$ |
5,396 |
|
|
$ |
— |
|
|
$ |
5,396 |
|
|
|
|
|
|
|
Gross profit |
$ |
2,322 |
|
|
$ |
— |
|
|
$ |
2,322 |
|
Research and development expense |
152 |
|
|
594 |
|
|
746 |
|
Selling, general and administrative expense |
6,180 |
|
|
53 |
|
|
6,233 |
|
Operating loss |
$ |
(4,010) |
|
|
$ |
(647) |
|
|
$ |
(4,657) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products
Segment |
|
Specialty Pharmaceutical Segment |
|
Consolidated Totals |
Six months ended June 30, 2021: |
|
|
|
|
|
Product sales, net |
$ |
9,972 |
|
|
$ |
— |
|
|
$ |
9,972 |
|
|
|
|
|
|
|
Gross profit |
4,648 |
|
|
— |
|
|
4,648 |
|
Research and development expense |
254 |
|
|
157 |
|
|
411 |
|
Selling, general and administrative expense |
10,835 |
|
|
25 |
|
|
10,860 |
|
Operating loss |
$ |
(6,441) |
|
|
$ |
(182) |
|
|
$ |
(6,623) |
|
|
|
|
|
|
|
Six months ended June 30, 2020: |
|
|
|
|
|
Product sales, net |
$ |
13,666 |
|
|
$ |
— |
|
|
$ |
13,666 |
|
|
|
|
|
|
|
Gross profit |
6,330 |
|
|
— |
|
|
$ |
6,330 |
|
Research and development expense |
457 |
|
|
1,798 |
|
|
2,255 |
|
Selling, general and administrative expense |
13,990 |
|
|
62 |
|
|
$ |
14,052 |
|
Operating loss |
$ |
(8,117) |
|
|
$ |
(1,860) |
|
|
$ |
(9,977) |
|
The Company's specialty and pharmaceutical segment includes
goodwill of $2.8 million and intangible assets of $3.7 million as
of June 30, 2021 and December 31, 2020. All other assets
are included in the consumer products segment as of June 30,
2021 and December 31, 2020. The majority of the Company's
sales are to U.S. based customers.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
9. INCOME TAXES
For the six months ended June 30, 2021 and 2020, the Company
generated a net loss for which no tax benefit has been recognized
due to uncertainties regarding the future realization of the tax
benefit. The tax effects of the net loss will be recognized when
realization of the tax benefit becomes more likely than not or the
tax effects of the previous interim losses are
utilized.
10. RELATED PARTIES
During the year ended December 31, 2019, the Company's former
President and Chief Executive Officer, Michael Mona Jr. ("Mona
Jr."), and the Company entered into a Settlement Agreement (the
“Settlement Agreement”), pursuant to which the Company agreed that
Mona Jr.’s resignation from the Company on January 22, 2019 was for
Good Reason (as defined in Mona Jr.’s Employment Agreement) and
agreed to extend the deadline for Mona Jr.’s exercise of his stock
options for a period of five years. As of June 30, 2021, Mona
Jr. has 11,300,000 fully vested outstanding stock options with a
weighted average exercise price of $0.42 per share. In exchange,
Mona Jr. agreed that notwithstanding the terms of his Employment
Agreement providing for acceleration of vesting of all stock
options and RSU's upon a Good Reason resignation, certain of his
unvested stock options would not immediately vest, but rather
continue to vest if, and only if, certain Company milestones are
achieved related to the Company’s drug development efforts. These
stock options were issued in July 2016 (6,000,000 options) and
March 2017 (5,000,000 options) and 6,750,000 of these stock options
have not vested as of June 30, 2021. The Company and Mona Jr.
also agreed to mutually release all claims arising out of and
related to Mona Jr.’s resignation and separation from the Company.
As a result of the Settlement Agreement, the Company recorded
stock-based compensation expense related to the accelerated vesting
of the RSU's of $5.1 million and the modification of certain stock
options of $2.7 million during the year ended December 31,
2019.
As part of the Settlement Agreement, 2,950,000 vested RSU's were
issued to Mona Jr. The vesting of the RSU's and payment of shares
is treated as taxable compensation and thus subject to income tax
withholdings. No amounts were withheld (either in cash or the
equivalent of shares of common stock from the vesting of the RSU's)
or included in the original Company’s payroll tax filing. The
compensation is subject to Federal and State income tax withholding
and Federal Insurance Contributions Act (“FICA”) taxes withholding
estimated to be $6.4 million for the employee portions. The
employer portion of the FICA taxes is $0.2 million and has
been recorded as a component of selling, general and administrative
expenses in the condensed statement of operations for the year
ended December 31, 2019. During the year ended
December 31, 2020, the Company reported the taxable
compensation associated with the RSU release to the taxing
authorities and included the amount in Mona Jr.'s W-2 for 2019. In
addition, the Company paid the employer and employee portion of the
FICA taxes of $0.2 million, respectively. Although the primary tax
liability is the responsibility of the employee, the Company is
secondarily liable and thus has recorded the liability on its
condensed balance sheet as of December 31, 2020 in an amount
of $6.2 million which was recorded as a component of accrued
expenses. The Company initially recorded an offsetting receivable
of $6.2 million during the second quarter of 2019 for the total
estimated Federal and State income taxes which should have been
withheld in addition to the employee portion of the FICA payroll
taxes as the primary liability is ultimately the responsibility of
the employee. The receivable was recorded as a component of prepaid
expense and other on the condensed balance sheet. The deadline to
file and pay personal income taxes for 2019 was on October 15,
2020. To date, Mona Jr. has not provided to the Company the
appropriate documentation substantiating that he properly filed and
paid his taxes for 2019. As a result, the Company derecognized its
previously recorded receivable of $6.2 million during the fourth
quarter of 2020. The associated liability may be relieved once the
tax amount is paid by Mona Jr. and the Company has received the
required taxing authority documentation from Mona Jr. If the tax
amount is not paid by Mona Jr., the Company would be liable for
such withholding tax due. Additionally, the Company could be
subject to penalties if the amounts are ultimately not paid. The
Company does not believe that any such penalties are probable or
reasonably possible as of June 30, 2021.
On July 22, 2020, the Company filed a complaint in the San Diego
Superior Court for declaratory relief to confirm the termination of
Mona Jr.'s severance and other post-termination compensation and
benefits, and to recover amounts owed to the Company by Mona Jr. in
connection with his purchase of personal seat licenses for the
Raiders stadium and certain advance payments made on Mona Jr.'s
behalf. The complaint also requests that Mona Jr. provides the
Company with appropriate taxing authority documentation to show
that he paid the tax associated with the vesting of the RSU's. The
Company recorded a payable to Mona Jr. of $0.4 million as of
June 30, 2021 and December 31, 2020. The amounts are
mostly related to termination benefits associated with his
separation from the Company and are payable via regular payroll
through June 2021. The Company has not paid any termination
benefits to Mona Jr. since filing the complaint. As of
June 30, 2021 and December 31, 2020, the entire amount is
included in accrued expenses.
CV SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
11. SUBSEQUENT EVENT
On July 12, 2021, the Company entered into a lease termination
agreement (the "Agreement") for its main facility in San Diego.
Under the Agreement, the Company will need to vacate its facility
no later than July 31, 2022. As of June 30, 2021, the Company
has an operating lease obligation of $3.8 million and operating
lease asset of $2.8 million related to the lease.
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, and its
consolidated subsidiaries, 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 six months ended June 30, 2021
and 2020, respectively, should be read in conjunction with our
condensed 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 operate two distinct business segments. Our consumer products
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. We are traded on the OTC:QB, and
our trading symbol is CVSI.
Our consumer products 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 prosecution on our drug candidates. On May
19, 2020, the USPTO issued a patent pertaining to
CVSI-007.
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, partner or delay
such activity.
Recent Corporate Developments
On June 10, 2021, we amended Article III, Section 3.13 of our
Bylaws to provide that, subject to certain limitations, our Board
or any director may be removed from office, with or without cause,
by the affirmative vote of holders of at least a majority of the
shares then entitled to vote at an election of directors (the
“Bylaw Amendment”). The Bylaw Amendment was unanimously approved by
the our Board.
Results of Operations
Revenues and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Change |
|
Six months ended June 30, |
|
Change |
|
2021 |
|
2020 |
|
Amount |
|
% |
|
2021 |
|
2020 |
|
Amount |
|
% |
|
(in thousands) |
|
|
|
(in thousands) |
|
|
Product sales, net |
$ |
5,128 |
|
|
$ |
5,396 |
|
|
$ |
(268) |
|
|
(5) |
% |
|
$ |
9,972 |
|
|
$ |
13,666 |
|
|
$ |
(3,694) |
|
|
(27) |
% |
Cost of goods sold |
2,838 |
|
|
3,074 |
|
|
$ |
(236) |
|
|
(8) |
% |
|
5,324 |
|
|
7,336 |
|
|
$ |
(2,012) |
|
|
(27) |
% |
Gross profit |
$ |
2,290 |
|
|
$ |
2,322 |
|
|
$ |
(32) |
|
|
(1) |
% |
|
$ |
4,648 |
|
|
$ |
6,330 |
|
|
$ |
(1,682) |
|
|
(27) |
% |
Gross margin |
44.7 |
% |
|
43.0 |
% |
|
|
|
|
|
46.6 |
% |
|
46.3 |
% |
|
|
|
|
Second Quarter 2021 vs. 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2021 |
|
Three months ended June 30, 2020 |
|
Amount |
|
% of product sales, net |
|
Amount |
|
% of product sales, net |
|
(in thousands) |
|
|
|
(in thousands) |
|
|
Retail - FDM |
$ |
222 |
|
|
4.3 |
% |
|
$ |
445 |
|
|
8.2 |
% |
Retail - Natural products and other |
3,013 |
|
|
58.8 |
% |
|
2,914 |
|
|
54.0 |
% |
E-Commerce |
1,893 |
|
|
36.9 |
% |
|
2,037 |
|
|
37.8 |
% |
Product sales, net |
$ |
5,128 |
|
|
100.0 |
% |
|
$ |
5,396 |
|
|
100.0 |
% |
We had net product sales of $5.1 million and gross profit of $2.3
million, representing a gross margin of 44.7% in the second quarter
of 2021 compared with net product sales of $5.4 million and gross
profit of $2.3 million, representing a gross margin of 43.0% in the
second quarter of 2020. Our net product sales decreased by $0.3
million or 5% in the second quarter of 2021 when compared to second
quarter 2020 results. The decline is primarily due to lower sales
to FDM retailers. We also experienced increased market competition,
which we believe is largely due to the lack of a clear regulatory
framework. As of June 30, 2021, our products were in more than
7,800 retail stores, of which approximately 4,900 were with
retailers in the food, drug and mass ("FDM") channel. Our current
total store count has increased from about 6,300 as of
June 30, 2020.
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. Cost of
goods sold in the second quarter of 2021 slightly decreased as a
percentage of revenue compared to the second quarter of 2020. The
gross margin increase in the second quarter 2021 compared with 2020
is primarily due to changes in our sales mix.
First six months 2021 vs. 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2021 |
|
Six months ended June 30, 2020 |
|
Amount |
|
% of product sales, net |
|
Amount |
|
% of product sales, net |
|
(in thousands) |
|
|
|
(in thousands) |
|
|
Retail - FDM |
$ |
445 |
|
|
4.5 |
% |
|
$ |
876 |
|
|
6.4 |
% |
Retail - Natural products and other |
5,765 |
|
|
57.8 |
% |
|
8,739 |
|
|
63.9 |
% |
E-Commerce |
3,762 |
|
|
37.7 |
% |
|
4,051 |
|
|
29.7 |
% |
Product sales, net |
$ |
9,972 |
|
|
100.0 |
% |
|
$ |
13,666 |
|
|
100.0 |
% |
We had net product sales of $10.0 million and gross profit of $4.6
million, representing a gross margin of 46.6% for the first six
months 2021 compared with net product sales of $13.7 million and
gross profit of $6.3 million, representing a gross margin of 46.3%
in the first six months of 2020. Our net product sales decreased by
$3.7 million or 27% in the first six months of 2021 when compared
to the first six months of 2020. The decline is primarily due to
lower retail sales as a result of COVID-19, which had a partial
impact on the first six months of 2020. We also experienced
increased market competition, which we believe is largely due to
the lack of a clear regulatory framework.
The gross profit decrease of $1.7 million or 27% to $4.6 million
for the six months ended June 30, 2021 is in-line with the
decline in product sales. Gross margins slightly increased due to
changes in our sales mix.
Research and development expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Change |
|
Six months ended June 30, |
|
Change |
|
2021 |
|
2020 |
|
Amount |
|
% |
|
2021 |
|
2020 |
|
Amount |
|
% |
|
(in thousands) |
|
|
|
(in thousands) |
|
|
Research and development expense |
$ |
225 |
|
|
$ |
746 |
|
|
$ |
(521) |
|
|
(70) |
% |
|
$ |
411 |
|
|
$ |
2,255 |
|
|
$ |
(1,844) |
|
|
(82) |
% |
Percentage of product sales, net |
4.4 |
% |
|
13.8 |
% |
|
|
|
|
|
4.1 |
% |
|
16.5 |
% |
|
|
|
|
Second quarter 2021 vs. 2020
Research and development (“R&D”) expense decreased to $0.2
million in the second quarter of 2021 compared to $0.7 million in
the second quarter of 2020. The decrease of $0.5 million or 70% is
mostly related to reductions in R&D expenses for our specialty
pharmaceutical segment. The reduction in R&D in our specialty
pharmaceutical segment is related to reduced activities related to
preclinical work and expenses paid to outside
consultants.
First six months 2021 vs. 2020
R&D expense decreased to $0.4 million during the six months
ended June 30, 2021 compared to $2.3 million in the first six
months of 2020. The decrease of $1.8 million or 82% is related to
reductions in R&D expense for our specialty pharmaceutical
segment. The reduction in R&D in our specialty pharmaceutical
segment is mostly related to reduced activities related to
preclinical work and expenses paid to outside
consultants.
Selling, general and administrative expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
Change |
|
Six months ended June 30, |
|
Change |
|
2021 |
|
2020 |
|
Amount |
|
% |
|
2021 |
|
2020 |
|
Amount |
|
% |
|
(in thousands) |
|
|
|
(in thousands) |
|
|
Sales expense |
$ |
1,271 |
|
|
$ |
992 |
|
|
$ |
279 |
|
|
28 |
% |
|
$ |
2,528 |
|
|
$ |
2,557 |
|
|
$ |
(29) |
|
|
(1) |
% |
Marketing expense |
1,913 |
|
|
1,303 |
|
|
610 |
|
|
47 |
% |
|
3,533 |
|
|
3,756 |
|
|
(223) |
|
|
(6) |
% |
General & administrative expense |
2,391 |
|
|
3,938 |
|
|
(1,547) |
|
|
(39) |
% |
|
4,799 |
|
|
7,739 |
|
|
(2,940) |
|
|
(38) |
% |
Selling, general and administrative |
$ |
5,575 |
|
|
$ |
6,233 |
|
|
$ |
(658) |
|
|
(11) |
% |
|
10,860 |
|
|
14,052 |
|
|
(3,192) |
|
|
(23) |
% |
Percentage of product sales, net |
108.7 |
% |
|
115.5 |
% |
|
|
|
|
|
109 |
% |
|
103 |
% |
|
|
|
|
Second quarter 2021 vs. 2020
Selling, general and administrative (“SG&A”) expenses decreased
to $5.6 million in the second quarter of 2021 compared to $6.2
million in the second quarter of 2020.
•Sales
expense increased due to higher spend on technology.
•Marketing
expense increased due to higher digital activity.
•General
and administrative expense decreased primarily due to decreased
payroll and outside services.
First six months 2021 vs. 2020
SG&A expenses decreased to $10.9 million in the first six
months of 2021 compared to $14.1 million in the first six months of
2020.
•Sales
expense remained flat and reflect lower sales commissions on lower
retail sales, offset by higher technology cost.
•Marketing
expense decreased due to lower general marketing activity,
partially offset by an increase in digital activities.
•General
and administrative expense decreased primarily due to decreased
payroll and outside services.
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 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 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, 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, including our condensed financial statements, to aid in
their analysis and understanding of our performance and in making
comparisons.
A reconciliation from our net loss to Adjusted EBITDA, a non-GAAP
measure, for the three and six months ended June 30, 2021 and
2020 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2021 |
|
Three months ended June 30, 2020 |
|
Consumer Products |
|
Specialty Pharma |
|
Total |
|
Consumer Products |
|
Specialty Pharma |
|
Total |
|
(in thousands) |
Net loss |
$ |
(3,421) |
|
|
$ |
(109) |
|
|
$ |
(3,530) |
|
|
$ |
(4,034) |
|
|
$ |
(647) |
|
|
$ |
(4,681) |
|
Depreciation |
198 |
|
|
— |
|
|
198 |
|
|
195 |
|
|
— |
|
|
195 |
|
Amortization |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9 |
|
|
9 |
|
Interest expense |
9 |
|
|
— |
|
|
9 |
|
|
4 |
|
|
— |
|
|
4 |
|
Income tax expense |
11 |
|
|
— |
|
|
11 |
|
|
20 |
|
|
— |
|
|
20 |
|
EBITDA |
(3,203) |
|
|
(109) |
|
|
(3,312) |
|
|
(3,815) |
|
|
(638) |
|
|
(4,453) |
|
Stock-based compensation (1) |
912 |
|
|
— |
|
|
912 |
|
|
1,209 |
|
|
34 |
|
|
1,243 |
|
Adjusted EBITDA |
$ |
(2,291) |
|
|
$ |
(109) |
|
|
$ |
(2,400) |
|
|
$ |
(2,606) |
|
|
$ |
(604) |
|
|
$ |
(3,210) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2021 |
|
Six months ended June 30, 2020 |
|
Consumer Products |
|
Specialty Pharma |
|
Total |
|
Consumer Products |
|
Specialty Pharma |
|
Total |
|
(in thousands) |
Net loss |
$ |
(6,475) |
|
|
$ |
(182) |
|
|
$ |
(6,657) |
|
|
$ |
(7,973) |
|
|
$ |
(1,860) |
|
|
$ |
(9,833) |
|
Depreciation |
402 |
|
|
— |
|
|
402 |
|
|
371 |
|
|
— |
|
|
371 |
|
Amortization |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
18 |
|
|
18 |
|
Interest expense (income) |
23 |
|
|
— |
|
|
23 |
|
|
(6) |
|
|
— |
|
|
(6) |
|
Income tax expense (benefit) |
11 |
|
|
— |
|
|
11 |
|
|
(138) |
|
|
— |
|
|
(138) |
|
EBITDA |
$ |
(6,039) |
|
|
$ |
(182) |
|
|
$ |
(6,221) |
|
|
$ |
(7,746) |
|
|
$ |
(1,842) |
|
|
$ |
(9,588) |
|
Stock-based compensation (1) |
1,568 |
|
|
1 |
|
|
1,569 |
|
|
2,380 |
|
|
121 |
|
|
2,501 |
|
Adjusted EBITDA |
$ |
(4,471) |
|
|
$ |
(181) |
|
|
$ |
(4,652) |
|
|
$ |
(5,366) |
|
|
$ |
(1,721) |
|
|
$ |
(7,087) |
|
_________________
(1)Represents
stock-based compensation expense related to stock options awarded
to employees, consultants and non-executive directors based on the
grant date fair value using the Black-Scholes valuation
model.
Liquidity and Capital Resources
During the six months ended June 30, 2021 and year ended December
31, 2020, our primary sources of capital came from (i) cash flows
from our operations, predominantly from the sale of our CBD
products, (ii) existing cash, (iii) government loans, and (iv)
proceeds from third-party financings, including the sale of our
common stock to certain investors. As of June 30, 2021, the
Company’s cash and cash equivalents were approximately $3.0 million
and working capital was approximately $0.5 million. During the six
month period ended June 30, 2021 and the year ended December 31,
2020, the Company experienced a net operating loss of approximately
$6.6 million and $22.6 million, respectively.
We believe that a combination of factors, mainly consisting of
increased competition and the effects of the COVID-19 pandemic,
have adversely impacted our business operations for the three and
six month period ended June 30, 2021. 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 plant-based dietary supplements and hemp-based CBD
consumer products. Because we operate in a market that is rapidly
growing 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.
Furthermore, although there are signs that COVID-19 may begin to
taper off, COVID-19 still has an impact on worldwide economic
activity, and the ongoing effects of the COVID-19 pandemic has
adversely impacted, and may continue to adversely impact, many
aspects of our business. In response to the COVID-19 pandemic, many
state, local, and foreign governments have put in place
restrictions in order to control the spread of the disease. Such
restrictions, or the perception that further restrictions could
occur, have resulted in business closures, work stoppages,
slowdowns and delays, work-from-home policies, travel restrictions,
and cancellation or postponement of events, among other effects
that impacted productivity and disrupted our operations and those
of our partners, suppliers, contractors, vendors, and
customers.
During the pandemic, as state, local, and foreign governments
implemented (and may continue to implement) preventive measures to
contain or mitigate the outbreak of COVID-19, sales of our products
fluctuated. COVID-19 had a significant impact on our results of
operations for the six months ended June 30, 2021 and the year
ended December 31, 2020 as government-imposed restrictions on
businesses, shelter-in place orders, and temporary retail store
closures impacted our sales revenue. Although we cannot predict how
sales for our products will continue to be impacted by these
preventative measures, the Company's management expects that such
preventative measures will continue to negatively impact our
operations due to decreased consumer demand as well as potential
production and warehouse limitations which results in an event or
condition, before consideration of management’s plans, that could
impact our ability to meet future obligations.
In addition, there is no assurance that customers will continue to
buy our products, or to the same extent, as the COVID-19 pandemic
begins to taper off or when it has ended. As a result, it has been
difficult to accurately forecast our revenues or financial results,
especially given that the near and long term impact of the pandemic
remains uncertain. Furthermore, while the potential impact and
duration of the COVID-19 pandemic on the economy and our business
in particular may be difficult to assess or predict, the pandemic
has resulted in, and may continue to result in, significant
disruption of global financial markets, and may reduce our ability
to access additional capital, which could negatively affect our
liquidity in the future. Our results of operations could be
materially below our forecast as well, which could adversely affect
our results of operations, disappoint analysts and investors, or
cause our stock price to decline.
We may also take further actions that alter our operations as may
be required by federal, state, or local authorities, or which we
determine are in our best interests. While certain aspects of our
operations can be performed remotely, other activities often
require personnel to be on-site, and our ability to carry out these
activities have been, and may continue to be negatively impacted if
our employees or local personnel are not able to travel. In
addition, for activities that may be conducted remotely, there is
no guarantee that we will be as effective while working remotely
because our team is dispersed and many employees and their families
have been negatively affected, mentally or physically, by the
COVID-19 pandemic. Decreased effectiveness and availability of our
team could harm our business. In addition, we may decide to
postpone or cancel planned investments in our business in response
to changes in our business as a result of the spread of COVID-19
which could affect our sales.
We do not yet know the full extent of potential delays or impacts
that COVID-19 may have on our business, operations, or the global
economy as a whole. While there have recently been vaccines
developed and administered, and certain government orders and
restrictions in particular cities, counties, and states have been
lifted as the spread of COVID-19 starts to get contained and
mitigated, we cannot predict the timing of the vaccine roll-out
globally or the efficacy of such vaccines, and we do not yet know
how businesses, customers, contractors, suppliers, vendors, or our
partners will operate in a post COVID-19 environment, especially if
additional or supplemental governmental orders, limitations, and
restrictions are reinstated. There
may be additional costs or impacts to our business and operations,
including when we are able to resume in-person activities, travel,
and events. In addition, there is no guarantee that a future
outbreak of this or any other widespread epidemics will not occur,
or that the global economy will recover, either of which could harm
our business. In addition, a recession or financial market
correction resulting from the lack of containment and spread of
COVID-19 could continue to impact overall spending, which would
adversely affect demand for our products, our business, and the
value of our common stock.
Although our revenue was impacted for the six months ended June 30,
2021 and the year ended December 31, 2020 due to increased
competition and the effects of COVID-19, we were able to mitigate,
to some degree, these conditions as our management implemented, and
continues to make and implement, strategic cost reductions,
including reductions in employee headcount, vendor spending, and
the delay of expenses related to our drug development
activities.
On April 15, 2020, we applied for a loan from JPMorgan Chase Bank,
N.A., as lender, pursuant to the Paycheck Protection Program (the
"PPP") of the CARES Act as administered by the U.S. Small Business
Administration (the "SBA"). On April 17, 2020, the loan was
approved, and we received proceeds in the amount of $2.9 million
(the “PPP Loan”).
The PPP Loan, which took the form of a promissory note, matures on
April 15, 2022 and bears interest at a rate of 0.98% per annum
(the “Promissory Note”). Monthly principal and interest payments,
less the amount of any potential forgiveness (discussed below),
will commence on November 15, 2020. We did not provide any
collateral or guarantees for the PPP Loan, nor did we pay any
facility charge to obtain the PPP Loan. The Promissory Note
provides for customary events of default, including, among others,
those relating to failure to make payment, bankruptcy, breaches of
representations and material adverse effects. We may prepay the
principal of the PPP Loan at any time without incurring any
prepayment charges.
Under the original rules, all or a portion of the PPP Loan may be
forgiven by the SBA and lender upon application by the Company
beginning 60 days but not later than 120 days after loan approval
and upon documentation of expenditures in accordance with the SBA's
requirements.
Under the CARES Act, loan forgiveness is available for the sum of
documented payroll costs, covered rent payments, and covered
utilities during the covered period of 8 weeks beginning on the
date of loan approval. For purposes of the CARES Act, payroll costs
exclude compensation of an individual employee in excess of
$100,000, prorated annually. Not more than 25% of the forgiven
amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for
employees with salaries of $100,000 or less annually are reduced by
more than 25%. In the event the PPP Loan, or any portion thereof,
is forgiven pursuant to the PPP, the amount forgiven is applied to
outstanding principal.
The Paycheck Protection Program Flexibility Act of 2020 (the “PPP
Flexibility Act”), enacted on June 5, 2020, amended the Paycheck
Protection Program, among others, as follows: (i) extended the
covered period from 8 weeks to 24 weeks from the date the PPP Loan
is originated, during which PPP funds needed to be expended in
order to be forgiven. A borrower may submit a loan forgiveness
application any time on or before the maturity date of the loan –
including before the end of the covered period – if the borrower
has used all of the loan proceeds for which the borrower is
requesting forgiveness. (ii) at least 60% of PPP funds must be
spent on payroll costs, with the remaining 40% available to spend
on other eligible expenses. (iii) payments are deferred until the
date on which the amount of forgiveness determined is remitted to
the lender. If a borrower fails to seek forgiveness within 10
months after the last day of its covered period, then payments will
begin on the date that is 10 months after the last day of the
covered period. In addition, the PPP Flexibility Act modified the
CARES Act by increasing the maturity date for loans made after the
effective date from two years to a minimum maturity of five years
from the date on which the borrower applies for loan forgiveness.
Existing PPP loans made before the new legislation retain their
original two-year term, but may be renegotiated between a lender
and a borrower to match the 5-year term permitted under the PPP
Flexibility Act.
As of June 30, 2021, the balance due on the Promissory Note was
$2.9 million. We submitted an application for forgiveness of our
PPP Loan. The forgiveness process is currently under review and we
are awaiting a response from the Lender and the SBA. No assurance
is provided that we will obtain forgiveness of the PPP Loan in
whole or in part. The Promissory Note is classified as
current.
In October 2020, we entered into a finance agreement with First
Insurance Funding in order to fund a portion of our insurance
policies. The amount financed is $0.7 million and incurs interest
at a rate of 3.60%. We are required to make monthly payments of
$0.1 million through July 2021. The outstanding balance as of June
30, 2021 was $0.1 million.
On December 8, 2020, we entered into a common stock purchase
agreement (“SPA”) with Tumim Stone Capital, LLC (“Tumim”), pursuant
to which Tumim committed to purchase up to $10.0 million in shares
of our common stock, from time to time. The SPA provides, among
other things, that we may direct, every three trading days, Tumim
to purchase a number of shares of our common stock not to exceed an
amount determined based upon the trading volume and stock price of
our shares.
During the six months ended June 30, 2021, we sold 7,796,356 shares
of common stock pursuant to the SPA and recognized proceeds of $3.9
million, and during the year ended December 31, 2021, we sold
450,000 shares of common stock pursuant to the SPA and recognized
proceeds of $0.2 million. As of August 12, 2021, we have sold
556,362 additional shares of common stock and recognized proceeds
of $0.2 million under the SPA since the quarter ended June 30,
2021. We have $5.8 million available under the SPA as of
August 12, 2021.
Our sources of liquidity and cash flows are used to fund ongoing
operations and for research and development projects for new
products. Over the next two fiscal years, we anticipate that we
will use our liquidity and cash flows from our operations to help
fund our growth. In addition, as part of our business strategy, we
occasionally evaluate potential acquisitions of businesses,
products, and/or the development of new products. Accordingly, a
portion of our available cash may be used at any time for the
acquisition of complementary products, businesses, and/or the
research and development of new products. Such potential uses of
funds may require substantial capital resources, which may require
us to seek additional debt or equity financing. We cannot assure
you that we will be able to successfully identify suitable
acquisition or investment candidates, complete acquisitions or
investments, integrate acquired businesses and/or products into our
current operations, expand into new markets, and/or development new
products. Furthermore, we cannot provide assurances that additional
financing will be available to us in any required time frame and on
commercially reasonable terms, if at all.
We are dependent on cash flow from operations to satisfy our
working capital requirements. No assurance can be given that cash
flow from operations will be sufficient to provide for our
liquidity for the next 12 months. However, we believe that our cash
and cash equivalents on hand together with cash generated from our
future operations, the equity commitment with Tumim and cost
reduction measures described above, as needed, will provide
sufficient liquidity to fund our operations for the next 12 months
from the issuance of the condensed financial statements. However,
we shall continue to evaluate our capital expenditure needs based
upon factors including but not limited to our cash from operations,
growth rate, the timing and extent of spending to support
development efforts, the expansion of our sales and marketing, the
timing of new product introductions, and the continuing market
acceptance of our products. Should we be unable to generate
sufficient revenue in the future to achieve positive cash flow from
operations or satisfy our capital requirements, additional working
capital will be required, and we may open a revolving line of
credit with a bank, or we may have to sell additional equity or
debt securities or obtain expanded credit facilities to fund our
operating expenses, pay our obligations, diversify our geographical
reach, and grow our company. In the event such financing is needed
in the future, there can be no assurance that such financing will
be available to us, or, if available, that it will be in amounts
and on terms acceptable to us. If we cannot raise additional funds
when we need or want them, our prospects, financial condition and
results of operations could be negatively affected. However, if
cash flows from operations become insufficient to continue
operations at the current level, and if no additional financing
were obtained, then management would restructure the Company in a
way to preserve its business while maintaining expenses within
operating cash flows.
A summary of our changes in cash flows for the six months ended
June 30, 2021 and 2020 is provided below:
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Six months ended June 30, |
|
2021 |
|
2020 |
|
(in thousands) |
Net cash flows provided by (used in): |
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|
|
Operating activities |
$ |
(4,753) |
|
|
$ |
(4,104) |
|
Investing activities |
(35) |
|
|
(506) |
|
Financing activities |
3,224 |
|
|
3,079 |
|
Net decrease in cash and restricted cash |
(1,564) |
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|
(1,531) |
|
Cash, cash equivalents and restricted cash, beginning of
period |
4,525 |
|
|
9,608 |
|
Cash, cash equivalents and restricted cash, end of
period |
$ |
2,961 |
|
|
$ |
8,077 |
|
Operating Activities
Net cash used in operating activities includes net loss adjusted
for non-cash expenses such as depreciation and amortization, bad
debt expense, and stock-based compensation. 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 $4.8 million in the six
months ended June 30, 2021 and 2020. The primary reason for
the cash usage during the six months ended June 30, 2021 is our net
loss of $6.7 million due to lower sales as a result of COVID-19,
and increased market competition. Our net loss was partially offset
by non-cash items and changes in operating assets and liabilities.
Cash used in operating activities for the six months ended June 30,
2020 was mostly due to our net loss of $9.8 million, adjusted for
non-cash items of $3.6 million.
Investing Activities
Net cash used in investing activities decreased by $0.5 million in
the six months ended June 30, 2021 compared to the same period
in 2020. Net cash used in investing activities during the six
months ended June 30, 2020 consisted of additional technology
to support our e-commerce activities and tenant improvements to our
main facility. During the six months ended June 30, 2021, our
investing activities were not material.
Financing Activities
Net cash provided financing activities was $3.2 million for the six
months ended June 30, 2021 compared to $3.1 million for the
six months ended June 30, 2020. Our financing activities for
the six months ended June 30, 2021 consisted of proceeds from
issuance of common stock under our equity commitment of 3.9
million, partially offset by repayments of our insurance financing
of $0.6 million. Our financing activities for the six months ended
June 30, 2020 consisted of proceeds from the PPP Loan of $2.9
million and stock option exercises of $0.2 million.
Inflation
We have not been affected materially by inflation during the
periods presented, and no material effect is expected in the near
future.
Known Trends or Uncertainties
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.
As discussed in this Quarterly Report on Form 10-Q, the world has
been affected due to the COVID-19 pandemic. Until the pandemic has
passed, there remains uncertainty as to the effect of COVID-19 on
our business in both the short and long-term. Furthermore, it
remains unclear how governmental authorities, including the Food
and Drug Administration (“FDA”), will regulate the products that we
sell, and in the case of the FDA, whether and when it will propose
or implement new or additional regulations. Unforeseen regulatory
obstacles or compliance costs may hinder our business in both the
short and long-term as well.
Critical Accounting Policies
We have disclosed in the notes to our consolidated financial
statements and in “Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in our 2020
Annual Report on Form 10-K, those accounting policies that we
consider to be significant in determining our results of operation
and financial condition. There have been no material changes to
those policies that we consider to be significant since the filing
of our 2020 Annual Report on Form 10-K. The accounting principles
used in preparing our unaudited condensed consolidated financial
statements conform in all material respects to GAAP.
Recent Accounting Pronouncements
See Note 1 in the accompanying notes to condensed financial
statements.
Off-Balance Sheet Arrangements
None.
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 (CEO) and the Chief Financial Officer
(CFO), with assistance from other members of management, have
reviewed the effectiveness of our disclosure controls and
procedures as of June 30, 2021 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 have been 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
June 30, 2021 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, please
see Note 7, 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
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
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Exhibit Number |
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Exhibit Description |
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Form |
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File No. |
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Exhibit |
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Filing Date |
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Filed Herewith |
2.1 |
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10-Q |
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000-54677 |
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2.1 |
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August 13, 2013 |
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2.2 |
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8-K |
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000-54677 |
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2.1 |
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January 4, 2016 |
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3.1 |
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10-Q |
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000-54677 |
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3.1 |
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August 13, 2013 |
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3.2 |
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10-Q |
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000-54677 |
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3.2 |
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August 13, 2013 |
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3.3 |
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10-K |
|
000-54677 |
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3.3 |
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April 14, 2016 |
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3.4 |
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10-Q |
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000-54677 |
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3.4 |
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May 16, 2016 |
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3.5 |
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8-K |
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000-54677 |
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3.1 |
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March 22, 2017 |
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3.6 |
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10-Q |
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000-54677 |
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3.6 |
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May 9, 2017 |
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3.7 |
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8-K |
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000-54677 |
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3.1 |
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June 14, 2021 |
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4.1 |
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8-K |
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000-54677 |
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4.1 |
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July 31, 2013 |
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10.1
†
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14A |
|
000-54677 |
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Attachment B |
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April 26, 2019 |
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10.2
†
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8-K |
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000-54677 |
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10.1 |
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June 29, 2021 |
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10.3
†
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8-K |
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000-54677 |
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10.1 |
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July 30, 2021 |
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31.1* |
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X |
31.2* |
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X |
32.1* |
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X |
32.2* |
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X |
101 INS** |
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Inline XBRL Instance Document |
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X |
101 SCH** |
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Inline XBRL Taxonomy Extension Schema Document |
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X |
101 CAL** |
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Inline XBRL Taxonomy Extension Calculation Linkbase
Document |
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X |
101 LAB** |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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X |
101 PRE** |
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Inline XBRL Taxonomy Extension Presentation Linkbase
Document |
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X |
101 DEF** |
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Inline XBRL Taxonomy Extension Definition Linkbase
Document |
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X |
104** |
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Cover Page Interactive Data File (formatted as Inline XBRL and
contained in Exhibit 101 attachments) |
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X |
________________________
* These certifications are being furnished
solely to accompany this quarterly report pursuant to 18 U.S.C.
Section 1350, and are not being filed for purposes of Section 18 of
the Securities Exchange Act of 1934 and are not to be incorporated
by reference into any filing of the Registrant, whether made before
or after the date hereof, regardless of any general incorporation
language in such filing.
** 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.
† Indicates
a management contract or compensatory plan or
arrangement.
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.
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CV SCIENCES, INC.
(Registrant) |
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By |
/s/ Joseph D. Dowling |
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Joseph D. Dowling
Chief Executive Officer
(Principal Executive Officer) |
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Dated August 13, 2021 |
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By |
/s/ Joerg Grasser |
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Joerg Grasser
Chief Financial Officer
(Principal Financial Officer) |
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Dated August 13, 2021 |
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