Item 1. Financial Statements (unaudited)
CV SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash
|
$
|
13,638
|
|
|
$
|
12,684
|
|
Restricted cash
|
—
|
|
|
251
|
|
Accounts receivable, net
|
3,771
|
|
|
3,340
|
|
Inventory
|
7,900
|
|
|
7,132
|
|
Prepaid expenses and other
|
8,367
|
|
|
2,059
|
|
Total current assets
|
33,676
|
|
|
25,466
|
|
|
|
|
|
Inventory
|
771
|
|
|
1,418
|
|
Property & equipment, net
|
2,730
|
|
|
2,844
|
|
Operating lease assets
|
3,997
|
|
|
—
|
|
Intangibles, net
|
3,792
|
|
|
3,801
|
|
Goodwill
|
2,788
|
|
|
2,788
|
|
Other assets
|
637
|
|
|
585
|
|
Total assets
|
$
|
48,391
|
|
|
$
|
36,902
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
938
|
|
|
$
|
1,245
|
|
Accrued expenses
|
9,499
|
|
|
2,673
|
|
Operating lease liability - current
|
634
|
|
|
—
|
|
Notes payable, net
|
273
|
|
|
474
|
|
Total current liabilities
|
11,344
|
|
|
4,392
|
|
|
|
|
|
Operating lease liability
|
4,668
|
|
|
—
|
|
Deferred rent
|
—
|
|
|
1,329
|
|
Deferred tax liability
|
1,065
|
|
|
1,065
|
|
Other liabilities
|
437
|
|
|
—
|
|
Total liabilities
|
17,514
|
|
|
6,786
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
Preferred stock, par value $0.0001; 10,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, par value $0.0001; 190,000 shares authorized, 98,479 and 94,940 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
|
10
|
|
|
9
|
|
Additional paid-in capital
|
65,278
|
|
|
55,134
|
|
Accumulated deficit
|
(34,411
|
)
|
|
(25,027
|
)
|
Total stockholders' equity
|
30,877
|
|
|
30,116
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
48,391
|
|
|
$
|
36,902
|
|
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
|
2018
|
Product sales, net
|
$
|
14,911
|
|
|
$
|
8,071
|
|
Cost of goods sold
|
4,352
|
|
2,509
|
Gross Profit
|
10,559
|
|
5,562
|
|
|
|
|
Operating expenses:
|
|
|
|
Research and development
|
1,342
|
|
|
154
|
|
Selling, general and administrative
|
18,595
|
|
4,740
|
|
19,937
|
|
4,894
|
|
|
|
|
Operating Income (Loss)
|
(9,378
|
)
|
|
668
|
|
|
|
|
Interest expense
|
6
|
|
49
|
Income (loss) before provision for income taxes
|
(9,384
|
)
|
|
619
|
Provision for income taxes
|
—
|
|
|
—
|
|
Net Income (Loss)
|
$
|
(9,384
|
)
|
|
$
|
619
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
Basic
|
95,168
|
|
|
90,513
|
|
Diluted
|
95,168
|
|
|
95,636
|
|
Net income (loss) per common share
|
|
|
|
Basic
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
Diluted
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
|
|
Accumulated
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
Balance at January 1, 2019
|
94,940
|
|
|
$
|
9
|
|
|
$
|
55,134
|
|
|
$
|
(25,027
|
)
|
|
$
|
30,116
|
|
Issuance of common stock under employee benefit plan
|
3,539
|
|
|
1
|
|
|
196
|
|
|
—
|
|
|
197
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
2,091
|
|
|
—
|
|
|
2,091
|
|
Stock-based compensation associated with employment settlement
|
—
|
|
|
—
|
|
|
7,857
|
|
|
—
|
|
|
7,857
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,384
|
)
|
|
(9,384
|
)
|
Balance at March 31, 2019
|
98,479
|
|
|
$
|
10
|
|
|
$
|
65,278
|
|
|
$
|
(34,411
|
)
|
|
$
|
30,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
|
|
Accumulated
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
Balance at January 1, 2018
|
90,513
|
|
|
$
|
9
|
|
|
$
|
51,400
|
|
|
$
|
(35,028
|
)
|
|
$
|
16,381
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,036
|
|
|
—
|
|
|
1,036
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
619
|
|
|
619
|
|
Balance at March 31, 2018
|
90,513
|
|
|
$
|
9
|
|
|
$
|
52,436
|
|
|
$
|
(34,409
|
)
|
|
$
|
18,036
|
|
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
|
2018
|
OPERATING ACTIVITIES
|
|
|
|
Net income (loss)
|
$
|
(9,384
|
)
|
|
$
|
619
|
|
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
|
|
|
|
Depreciation and amortization
|
177
|
|
|
119
|
|
Amortization of beneficial conversion feature of convertible debts
|
—
|
|
|
13
|
|
Stock-based compensation
|
2,091
|
|
|
1,036
|
|
Stock-based compensation associated with employment settlement
|
7,857
|
|
|
—
|
|
Bad debt expense
|
25
|
|
|
3
|
|
Noncash lease expense
|
124
|
|
|
—
|
|
Change in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
(456
|
)
|
|
235
|
|
Inventory
|
(121
|
)
|
|
509
|
|
Prepaid expenses and other current assets
|
(551
|
)
|
|
94
|
|
Accounts payable and accrued expenses
|
999
|
|
|
(1,062
|
)
|
Deferred rent
|
—
|
|
|
88
|
|
Net cash provided by operating activities
|
761
|
|
|
1,654
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
Purchase of equipment
|
(54
|
)
|
|
(138
|
)
|
Tenant improvements to leasehold real estate
|
—
|
|
|
(71
|
)
|
Net cash flows used in investing activities
|
(54
|
)
|
|
(209
|
)
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
Repayment of convertible debt in cash
|
—
|
|
|
(300
|
)
|
Repayment of unsecured debt in cash
|
(201
|
)
|
|
(49
|
)
|
Proceeds from exercise of stock options
|
197
|
|
|
—
|
|
Net cash flows used in financing activities
|
(4
|
)
|
|
(349
|
)
|
|
|
|
|
Net increase in cash and restricted cash
|
703
|
|
|
1,096
|
|
Cash and restricted cash, beginning of period
|
12,935
|
|
|
2,792
|
|
Cash and restricted cash, end of period
|
$
|
13,638
|
|
|
$
|
3,888
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
Interest paid
|
$
|
6
|
|
|
$
|
34
|
|
Taxes paid
|
$
|
4
|
|
|
$
|
—
|
|
See accompanying notes to the condensed consolidated financial statements.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
1.
|
ORGANIZATION AND BUSINESS
|
Description of Business
- 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.”
The Company has
two
operating segments; consumer products and specialty pharmaceutical. The consumer products segment develops, manufactures and markets products based on hemp-based Cannabidiol ("CBD"), under the name
PlusCBD™
in a variety of market sectors including nutraceutical, beauty care and specialty foods. The specialty pharmaceutical segment is developing drug candidates which use CBD as a primary active ingredient.
Basis of Presentation
- The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
– The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Actual results may differ from these estimates. Significant estimates include the valuation of intangible assets, valuation of inventory, classification of current and non-current inventory amounts, and assumptions related to revenue recognition.
Recent Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 requires the entity to apply these amendments on a prospective basis for which it is required to disclose the nature of and reason for the change in accounting upon transition. This disclosure shall be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments. The Company shall adopt these amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact of ASU 2017-04 on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. For public business entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company is evaluating the potential impact of ASU 2018-15 on the Company's condensed consolidated financial statements.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02,
Leases
(Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the optional alternative transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. The Company has elected
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company elected to apply the hindsight practical expedient when determining lease term and assessing impairment of operating lease assets. The Company also applied the short-term lease recognition exemption for leases with terms at inception not greater than 12 months. The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of operating lease assets of approximately
$4.1 million
and lease liabilities for operating leases of approximately
$5.5 million
on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. See Note 4 for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.
In June 2018, the FASB issued ASU No. 2018-07,
Compensation - Stock Compensation (Topic 718)
, Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. ASU 2018-07 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606. This ASU became effective for the Company on January 1, 2019. The Company measured non-employee awards at fair value at the adoption date. Adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements.
Inventory
Inventory as of
March 31, 2019
and
December 31, 2018
was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Raw materials
|
$
|
3,755
|
|
|
$
|
4,747
|
|
Finished goods
|
4,916
|
|
|
3,803
|
|
|
$
|
8,671
|
|
|
$
|
8,550
|
|
As of
March 31, 2019
and
December 31, 2018
, the Company had
$0.8 million
and
$0.5 million
of inventory internationally.
Accrued expenses
Accrued expenses as of
March 31, 2019
and
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
Accrued payroll expenses
|
$
|
7,718
|
|
|
$
|
1,222
|
|
Other accrued liabilities
|
1,781
|
|
|
1,451
|
|
|
$
|
9,499
|
|
|
$
|
2,673
|
|
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
3.
|
INTANGIBLE ASSETS, NET
|
Intangible assets consisted of the following at
March 31, 2019
and
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Useful Life
(Years)
|
Balance - March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
3,730
|
|
|
$
|
—
|
|
|
$
|
3,730
|
|
|
—
|
Trade names
|
100
|
|
|
65
|
|
|
35
|
|
|
5
|
Non-compete agreements
|
77
|
|
|
50
|
|
|
27
|
|
|
5
|
|
$
|
3,907
|
|
|
$
|
115
|
|
|
$
|
3,792
|
|
|
|
Balance - December 31, 2018:
|
|
|
|
|
|
|
|
In-process research and development
|
$
|
3,730
|
|
|
$
|
—
|
|
|
$
|
3,730
|
|
|
—
|
Trade names
|
100
|
|
|
60
|
|
|
40
|
|
|
5
|
Non-compete agreements
|
77
|
|
|
46
|
|
|
31
|
|
|
5
|
|
$
|
3,907
|
|
|
$
|
106
|
|
|
$
|
3,801
|
|
|
|
The Company has entered into operating leases primarily for real estate. These leases are for the Company's operations, production, warehouse, sales, marketing and back office functions and have terms which range from
2
to
7
years, and do not include an option to renew. These operating leases are included in "Operating lease assets" on the Company's March 31, 2019 Condensed Consolidated Balance Sheet, and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments are included in "Operating lease liability - current" and "Operating lease liability" on the Company's March 31, 2019 Condensed Consolidated Balance Sheet. Based on the present value of the lease payments for the remaining lease term of the Company's existing leases, the Company recognized operating lease assets of
$4.1 million
and lease liabilities for operating leases of
$5.5 million
on January 1, 2019. No operating lease assets or liabilities commenced after January 1, 2019. As of March 31, 2019, total operating lease assets and operating lease liabilities were
$4.0 million
and
$5.3 million
, respectively. The Company has entered into
one
short-term facility operating lease, with an initial term of twelve months or less. This lease is not recorded on the Company's balance sheet. All operating lease expense is recognized on a straight-line basis over the lease term. In the three months ended March 31, 2019, the Company recognized approximately
$0.3 million
in total lease costs, which was mostly comprised of operating lease costs. Short-term lease costs related to short-term operating leases and variable lease costs were immaterial.
Because the rate implicit in each lease is not readily determinable, the Company uses the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company has certain contracts for real estate which may contain lease and non-lease components which it has elected to treat as a single lease component. Information related to the Company's operating lease assets and related lease liabilities were as follows:
|
|
|
|
|
|
March 31,
2019
|
Cash paid for operating lease liabilities (in thousands)
|
$
|
237
|
|
Weighted average remaining lease term (in months)
|
79.87
|
|
Weighted average discount rate
|
6.5
|
%
|
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Maturities of lease liabilities as of March 31, 2019 were as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
|
2019 (remaining nine months)
|
$
|
713
|
|
2020
|
981
|
|
2021
|
928
|
|
2022
|
925
|
|
2023
|
957
|
|
Thereafter
|
2,086
|
|
|
6,590
|
|
Less imputed interest
|
(1,288
|
)
|
Total lease liabilities
|
$
|
5,302
|
|
|
|
Current operating lease liabilities
|
$
|
634
|
|
Non-current operating lease liabilities
|
4,668
|
|
Total lease liabilities
|
$
|
5,302
|
|
The following table provides the Company's operating lease commitment as of December 31, 2018 (in thousands):
|
|
|
|
|
|
Operating Lease Commitment
|
2019
|
$
|
925
|
|
2020
|
961
|
|
2021
|
923
|
|
2022
|
929
|
|
2023
|
957
|
|
Thereafter
|
2,085
|
|
|
$
|
6,780
|
|
The Company incurred rent expense of
$0.2 million
for the three months ended
March 31, 2018
.
In November 2017, the Company entered into a finance agreement with First Insurance Funding in order to fund a portion of its insurance policies. The amount financed was
$0.1 million
and bore interest at a rate of
4.65%
. The Company was required to make
9
monthly payments of
$17
thousand. The note was fully repaid during the year ended
December 31, 2018
.
In October 2018, the Company entered into another finance agreement with First Insurance Funding in order to fund a portion of its insurance policies, which was amended in January 2019. The amount financed was
$0.5 million
and bears interest at a rate of
5.15%
. The Company is required to make monthly payments of
$69
thousand through July 2019. The outstanding balance was
$0.3 million
and
$0.5 million
as of
March 31, 2019
and
December 31, 2018
, respectively.
|
|
6.
|
STOCK-BASED COMPENSATION
|
The Company recognized stock-based compensation expense of
$9.9 million
and
$1.0 million
in its operating income (loss) for the three months ended
March 31, 2019
and
2018
, respectively. During the three months ended
March 31, 2019
, the former President and Chief Executive Officer ("Mona") and the Company entered into a Settlement Agreement (the “Settlement Agreement”), pursuant to which the Company agreed that Mona’s resignation from the Company on January 22, 2019 was for Good Reason (as defined in Mona’s Employment Agreement) and agreed to extend the deadline for Mona’s exercise of his stock options for a period of
five
years. In exchange, Mona agreed that notwithstanding the terms of his Employment Agreement providing for acceleration of vesting of all stock options and restricted stock units (RSU's) upon a Good Reason resignation, certain of his unvested stock options would not immediately vest, but rather continue to vest if, and only if, certain Company milestones are achieved related to the Company’s drug development efforts. These stock options were issued in July 2016 (
6,000,000
options) and March 2017 (
5,000,000
options). The Company and Mona also agreed to mutually release all claims arising out of and related to Mona’s
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 three months ended
March 31, 2019
.
As of
March 31, 2019
, total unrecognized compensation cost related to non-vested stock-based compensation arrangements was
$6.8 million
which is expected to be recognized over a weighted-average period of
1.8
years.
The following summarizes activity related to the Company's stock options and includes
7,250,000
options issued prior to
December 31, 2018
outside of the Amended and Restated 2013 Equity Incentive Plan (the "Amended 2013 Plan") (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, 2018
|
24,775
|
|
|
$
|
0.51
|
|
|
7.5
|
|
|
$
|
94,206
|
|
Granted
|
1,730
|
|
|
4.45
|
|
|
—
|
|
|
—
|
|
Exercised
|
(589)
|
|
|
0.35
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(86)
|
|
|
0.62
|
|
|
—
|
|
|
—
|
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding - March 31, 2019
|
25,830
|
|
|
0.77
|
|
|
6.7
|
|
|
132,904
|
|
|
|
|
|
|
|
|
|
Exercisable - March 31, 2019
|
22,071
|
|
|
0.46
|
|
|
6.3
|
|
|
120,525
|
|
Vested or expected to vest - March 31, 2019
|
25,830
|
|
|
$
|
0.77
|
|
|
6.7
|
|
|
$
|
132,904
|
|
The total intrinsic value of stock options exercised during the three months ended
March 31, 2019
was
$3.3 million
. Upon option exercise, the Company issues new shares of stock. There were
no
stock option exercises during the three months ended
March 31, 2018
.
The Company has established performance milestones in connection with the drug development efforts for its lead drug candidate CVSI-007. As of
March 31, 2019
, there were
10,750,000
remaining unvested stock options granted outside of the Amended 2013 Plan which vest upon the completion of future performance conditions, including those related to the Settlement Agreement with Mona.
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:
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
|
2018
|
Volatility
|
113.9%
|
|
90.5%
|
Risk-Free Interest Rate
|
2.5%
|
|
2.6%
|
Expected Term (in years)
|
5.72
|
|
5.37
|
Dividend Rate
|
—%
|
|
—%
|
Fair Value Per Share on Grant Date
|
$4.03
|
|
$0.30
|
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. 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. Expected volatility is calculated based on the Company’s peer group, consisting of
five
companies in the industry in which the Company does business because the Company does not have sufficient historical volatility data. The Company will continue to use peer group volatility information until historical volatility of the Company is available to measure expected volatility for future grants. In the future, as the Company gains historical data for volatility of its own stock and the actual
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
term over which stock options are held, expected volatility and the expected term may change, which could substantially change the grant-date fair value of future stock option awards, and, consequently, compensation of future grants.
The following summarizes RSU activity that contain only service requirements to vest for the Amended 2013 Plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average Grant Date Fair Value
|
RSU's outstanding - December 31, 2018
|
2,950
|
|
$
|
2.14
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(2,950
|
)
|
|
2.14
|
Cancellations
|
—
|
|
|
—
|
|
RSU's outstanding - March 31, 2019
|
—
|
|
|
$
|
—
|
|
The total fair value of RSU's vested during the three months ended
March 31, 2019
was
$6.3 million
. The associated stock-based compensation expense is included in selling, general and administrative expense.
|
|
7.
|
NET INCOME (LOSS) PER SHARE
|
The Company computes basic net income (loss) per share using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) assumes the conversion, exercise or issuance of all potential common stock equivalents, unless the effect of inclusion would be anti-dilutive. For purposes of this calculation, common stock equivalents include the Company's stock options, including those with performance or market conditions, unvested RSU's, and warrants.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
Net income (loss)
|
$
|
(9,384
|
)
|
|
$
|
619
|
|
Denominator for basic and diluted net income (loss) per share:
|
|
|
|
Weighted average common shares outstanding for basic
|
95,168
|
|
90,513
|
Dilutive potential common stock outstanding:
|
|
|
|
Stock options
|
—
|
|
|
707
|
RSU's
|
—
|
|
|
2,000
|
|
Performance stock options
|
—
|
|
|
1,014
|
|
Warrants
|
—
|
|
|
1,402
|
Weighted average common shares outstanding for diluted
|
95,168
|
|
95,636
|
Basic net income (loss) per share
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
Diluted net income (loss) per share
|
$
|
(0.10
|
)
|
|
$
|
0.01
|
|
The following common stock equivalents were not included in the calculation of net income (loss) per diluted share because their effect were anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
|
2018
|
Stock options
|
18,580
|
|
|
—
|
|
Performance stock options
|
7,250
|
|
—
|
|
Total
|
25,830
|
|
—
|
|
The above table excludes
10,750,000
unvested stock options for the three months ended
March 31, 2019
and
2018
, which vest upon the completion of future performance conditions.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
|
8.
|
COMMITMENTS AND CONTINGENCIES
|
On April 23, 2014, Tanya Sallustro filed a purported class action complaint (the “Complaint”) in the Southern District of New York (the “Court”) alleging securities fraud and related claims against the Company and certain of its officers and directors and seeking compensatory damages including litigation costs. Ms. Sallustro alleges that between March 18-31, 2014, she purchased certain shares of the Company’s common stock for a total investment of
$16
thousand. The Complaint refers to Current Reports on Form 8-K and Current Reports on Form 8-K/A filings made by the Company on April 3, 2014 and April 14, 2014, in which the Company amended previously disclosed sales (sales originally stated at
$1.3 million
were restated to
$1.1million
, a reduction of
$0.2 million
) and restated goodwill as
$1.9 million
(previously reported at net zero). Additionally, the Complaint states after the filing of the Company’s Current Report on Form 8-K on April 3, 2014 and the following press release, the Company’s stock price “fell
$7.30
per share, or more than
20%
, to close at
$25.30
per share.” Subsequent to the filing of the Complaint,
six
different individuals filed a motion asking to be designated the lead plaintiff in the litigation. On March 19, 2015, the Court issued a ruling appointing Steve Schuck as lead plaintiff. Counsel for Mr. Schuck filed a “consolidated amended complaint” on September 14, 2015. On December 11, 2015, the Company filed a motion to dismiss the consolidated amended complaint. After requesting several extensions, counsel for Mr. Schuck filed an opposition to the motion to dismiss on March 21, 2016. The Company’s reply brief was filed on April 25, 2016. On April 2, 2018, the Court issued a ruling granting in part and denying part the motion to dismiss. Thereafter, on October 3, 2018, plaintiff’s counsel filed a motion to withdraw Mr. Schuck as Lead Plaintiff and to substitute Jane Ish as new Lead Plaintiff. This motion was granted by the Court. Various shareholder derivative suits and complaints have been filed which are premised on the same event as the already-pending securities class action case. These are stayed pending the outcome of the securities class action case. Management intends to vigorously defend these allegations and an estimate of possible loss cannot be made at this time.
On August 24, 2018, David Smith filed a purported class action complaint in Nevada District Court alleging certain misstatements were contained in financial filings that led to stock price fluctuations and resulting financial harm. Several additional individuals filed similar claims, and the Smith suit 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 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. Management intends to vigorously defend the allegations. Since no discovery has been conducted and the case remains stayed, an estimate of the possible loss or recovery cannot be made at this time. Various shareholder derivative suits have been filed which are premised on the same event as the already-pending case. These are stayed pending the outcome of the securities class action case.
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.
The Company operates in
two
distinct business segments: a consumer products segment in manufacturing, marketing and selling hemp-based CBD products to a range of market sectors; and a specialty pharmaceutical segment focused on developing and commercializing novel therapeutics utilizing CBD. The Company’s segments maintain separate financial information for which operating results are evaluated on a regular basis by the Company’s senior management in deciding how to allocate resources and in assessing performance. The Company evaluates its consumer products segment based on net product sales, gross profit and operating income or loss. The Company currently evaluates its specialty pharmaceutical segment based on the progress of its clinical development programs.
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents information by reportable operating segment for the
three
months ended
March 31, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products Segment
|
|
Specialty Pharmaceutical Segment
|
|
Consolidated Totals
|
Three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
Product sales, net
|
$
|
14,911
|
|
|
$
|
—
|
|
|
$
|
14,911
|
|
|
|
|
|
|
|
Gross profit
|
$
|
10,559
|
|
|
$
|
—
|
|
|
$
|
10,559
|
|
Research and development
|
699
|
|
|
643
|
|
|
1,342
|
|
Selling, general and administrative
|
18,585
|
|
|
10
|
|
|
18,595
|
|
Operating loss
|
$
|
(8,725
|
)
|
|
$
|
(653
|
)
|
|
$
|
(9,378
|
)
|
|
|
|
|
|
|
Three months ended March 31, 2018:
|
|
|
|
|
|
Product sales, net
|
$
|
8,071
|
|
|
$
|
—
|
|
|
$
|
8,071
|
|
|
|
|
|
|
|
Gross profit
|
$
|
5,562
|
|
|
$
|
—
|
|
|
$
|
5,562
|
|
Research and development
|
117
|
|
|
37
|
|
|
154
|
|
Selling, general and administrative
|
4,726
|
|
|
14
|
|
|
4,740
|
|
Operating income (loss)
|
$
|
719
|
|
|
$
|
(51
|
)
|
|
$
|
668
|
|
|
|
|
|
|
|
The Company's specialty and pharmaceutical segment includes goodwill of
$2.8 million
as of
March 31, 2019
and
December 31, 2018
. In addition, the Company's intangible assets of
$3.8 million
as of
March 31, 2019
and
December 31, 2018
are included in the specialty pharmaceutical segment. All other assets are included in the consumer products segment as of
March 31, 2019
and
December 31, 2018
.
The Company has not recognized a tax benefit on the net loss for the three months ended March 31, 2019 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.
No
tax expense will be recognized for income of subsequent quarters in 2019 until the tax effects of previous operating losses are utilized.
As of
March 31, 2019
, the Company recorded a payable to its former President and Chief Executive Officer of
$1.0 million
. The amount is mostly related to his termination benefits associated with his resignation from the Company. The termination benefit is payable to Mona via regular payroll through June 2021. The Company recorded
$0.6 million
in accrued expenses and
$0.4 million
in other liabilities.
As part of the Settlement Agreement described in Note 6,
2,950,000
RSUs vested and were issued to Mona. The vesting of the RSU's 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) and included in the Company’s payroll tax filing at the time of vesting. The compensation is subject to Federal and State income tax withholding and Federal Insurance Contributions Act (“FICA”) taxes withholding estimated to be
$5.6 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 consolidated statement of operations for the three months ended
March 31, 2019
. 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 consolidated balance sheet as of
March 31, 2019
in an amount of
$5.8 million
which was recorded as a component of Accrued expenses. The Company has recorded an offsetting receivable 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. This resulted in a receivable of
$5.6 million
as of
March 31, 2019
which was recorded in the line item Prepaid expenses and other on the condensed consolidated balance sheet. The associated liability may be relieved once the tax amount is paid by Mona and the Company has received the required taxing authority documentation from Mona. However, if the amount is not paid, the Company would be liable for such withholding tax due. Additionally, the Company could be subject to negligence penalties if the amounts
CV SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
are ultimately not paid. The Company does not believe that any such penalties are probable or reasonably possible as of
March 31, 2019
.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations for the three months ended March 31, 2019 and 2018 should be read in conjunction with our condensed consolidated financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, and similar expressions to identify forward-looking statements.
OVERVIEW
We 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. On June 8, 2016, the Company changed its trading symbol from CANV to CVSI, and continues to be traded on the OTC:QB.
Our consumer 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 are already pursuing protection on our drug candidate.
We expect to realize revenue from our consumer products business segment to fund our working capital needs. However, in order to fund our pharmaceutical product development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to fund our drug development efforts, we may need to curtail or delay such activity.
Results of Operations
Comparison of the three months ended March 31, 2019 and 2018
Revenues and gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Change
|
|
2019
|
|
2018
|
|
Amount
|
|
%
|
|
(in thousands)
|
|
|
Product sales, net
|
$
|
14,911
|
|
|
$
|
8,071
|
|
|
$
|
6,840
|
|
|
85
|
%
|
Cost of goods sold
|
4,352
|
|
|
2,509
|
|
|
$
|
1,843
|
|
|
73
|
%
|
Gross profit
|
$
|
10,559
|
|
|
$
|
5,562
|
|
|
$
|
4,997
|
|
|
90
|
%
|
Gross margin
|
70.8
|
%
|
|
68.9
|
%
|
|
|
|
|
We had product sales of
$14.9
million and gross profit of
$10.6
million, representing a gross margin of
70.8%
in the first quarter of 2019 compared with product sales of
$8.1
million and gross profit of
$5.6
million, representing a gross margin of
68.9%
in the first quarter of 2018. We increased our product sales by
$6.8
million or
85%
in the first quarter of 2019 when compared to first quarter 2018 results. The sales increase in the first quarter 2019 compared with 2018 is primarily due to an increase in distribution, customer awareness and demand for our branded
PlusCBD™
products, as we continued to expand and maintain our core customer base. We also launched new products and formulations, including gel capsules and gummies, which helped drive our overall sales.
The gross profit increase in the first quarter 2019 compared with 2018 is the result of our increased product sales. Gross margin increased mostly due to sales mix and production efficiencies.
Operating expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Change
|
|
2019
|
|
2018
|
|
Amount
|
|
%
|
|
(in thousands)
|
|
|
Research and development
|
$
|
1,342
|
|
|
$
|
154
|
|
|
$
|
1,188
|
|
|
771
|
%
|
Percentage of revenue
|
9
|
%
|
|
2
|
%
|
|
|
|
|
Selling, general and administrative
|
18,595
|
|
|
4,740
|
|
|
$
|
13,855
|
|
|
292
|
%
|
Percentage of revenue
|
125
|
%
|
|
59
|
%
|
|
|
|
|
Research and development (“R&D”) expense increased to
$1.3
million in the first quarter of 2019 compared to
$0.2
million in the first quarter of 2018. The increase of
$1.1
million or
771%
is related to additional R&D expenses for our specialty pharmaceutical segment of
$0.5
million and for our consumer products segment of
$0.6
million. The increase in our specialty pharmaceutical segment is mostly related to preclinical work, development cost associated with our active pharmaceutical ingredient ("API"), and expenses paid to outside consultants. The additional R&D expense in our consumer products segment is mostly related to additional personnel cost and cost for outside services for our new consumer product developments.
Selling, general and administrative (“SG&A”) expenses increased to
$18.6
million in the first quarter of 2019 compared to
$4.7
million in the first quarter of 2018. The increase of
$13.9
million or
292%
is mostly related to additional stock-based compensation expense, payroll expense related to the retirement of our former President and Chief Executive Officer and increases in our marketing activities to support our growth, sales commissions and payroll expense as a result of our increased headcount. We recognized stock-based compensation expense of
$9.9
million in the first quarter of 2019 compared to
$1.0
million in our first quarter of 2018. During the first quarter of 2019, we entered into a Settlement Agreement (the “Settlement Agreement”) with our former President and Chief Executive Officer ("Mona"), pursuant to which we agreed that Mona’s resignation on January 22, 2019 was for Good Reason (as defined in Mona’s Employment Agreement) and agreed to extend the deadline for Mona’s exercise of his stock options for a period of five years. In exchange, Mona agreed that notwithstanding the terms of his Employment Agreement providing for acceleration of vesting of all stock options and Restricted Stock Units (RSU's) upon a Good Reason resignation, certain of his unvested stock options would not immediately vest, but rather continue to vest if, and only if, certain of our milestones are achieved related to the our drug development efforts. These stock options were issued in July 2016 (6,000,000 options) and March 2017 (5,000,000 options). We also agreed to mutually release all claims arising out of and related to Mona’s resignation and separation from us. As a result of the Settlement Agreement, we recorded stock-based compensation expense related to the
accelerated vesting of the RSU's and the modification of certain stock options of
$5.1
million and
$2.7
million in the first quarter of 2019, respectively.
Non-GAAP Financial Measures
We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net income (loss) plus depreciation expense, amortization expense, interest and income tax expense, minus income tax benefit), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it 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 consolidated financial statements, to aid in their analysis and understanding of our performance and in making comparisons.
A reconciliation from our net income (loss) to Adjusted EBITDA, a non-GAAP measure, for the three months ended March 31, 2019 and 2018 is detailed below:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
|
(in thousands)
|
Net income (loss)
|
$
|
(9,384
|
)
|
|
$
|
619
|
|
Depreciation
|
168
|
|
|
110
|
|
Amortization
|
9
|
|
|
9
|
|
Interest expense
|
6
|
|
|
48
|
|
EBITDA
|
(9,201
|
)
|
|
786
|
|
Stock-based compensation (1)
|
2,091
|
|
|
1,036
|
|
Stock-based compensation associated with employment settlement (2)
|
7,857
|
|
|
—
|
|
Payroll expense associated with employment settlement (3)
|
934
|
|
|
—
|
|
Adjusted EBITDA
|
$
|
1,681
|
|
|
$
|
1,822
|
|
_________________
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|
(1)
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Represents stock-based compensation expense related to stock options and warrants awarded to employees, consultants and non-executive directors based on the grant date fair value using the Black-Scholes valuation model.
|
|
|
(2)
|
Represents stock-based compensation expense related to accelerated vesting of RSU's and the modification of certain stock options associated with the settlement agreement with our former President and Chief Executive Officer.
|
|
|
(3)
|
Represents accrued payroll and related benefits associated with the retirement of our former President and Chief Executive Officer.
|