10.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 were premised on the same events that were the subject of a purported class action filed in the Southern District of New York on April 23, 2014 (the “Sallustro Case”). On July 2, 2019, the court in the Sallustro Case entered a final order dismissing the complaint with prejudice. The Company did not make any settlement payment, and at no time was there a finding of wrongdoing by the Company or any of its directors. Regarding the Ruth Complaint, the parties previously agreed to stay the action pending the conclusion of discovery in the Sallustro Case. Once the Sallustro Case was dismissed, the stay was lifted. Plaintiff’s counsel later informed the Court that Mr. Ruth sold his shares of CVSI stock and thus he no longer had standing to pursue this claim. However, the Court allowed plaintiff’s counsel to substitute CVSI shareholder Otilda Lamont as the named plaintiff. On September 20, 2019, defendants filed a motion to dismiss the Ruth Complaint and the court issued a ruling denying the motion to dismiss on November 24, 2020. A Third Amended Complaint was filed on December 11, 2020 substituting Otilda Lamont as plaintiff. The Company filed an answer to the Ruth complaint on January 11, 2021. The parties agreed to a settlement in principle in January 2022 whereby the Company agreed to make certain corporate governance reforms in exchange for dismissal of the lawsuit. Plaintiff filed a motion for preliminary approval of proposed settlement on June 1, 2022. The court granted preliminary approval of the proposed settlement on February 7, 2023. A hearing seeking final approval of the proposed settlement was held on May 15, 2023, and the court indicated it would likely approve the proposed settlement and reschedule the hearing with regard to plaintiff's motion for attorney's fees. On June 23, 2023, the Company received notice of a court order dated May 23, 2023 without any hearing, granting plaintiff's motion for attorney's fees and expenses of approximately $250,000. On or about May 1, 2024, the Company and plaintiff executed a stipulation for the payment of the plaintiff's attorney's fees and expenses over the course of approximately eighteen months subject to a confession of judgment.
On December 3, 2019, Michelene Colette and Leticia Shaw filed a putative class action complaint in the Central District of California, alleging the labeling on the Company’s products violated the Food, Drug, and Cosmetic Act of 1938 (the “Colette Complaint”). On February 6, 2020, the Company filed a motion to dismiss the Colette Complaint. Instead of opposing the Company's motion, plaintiffs elected to file an amended complaint on February 25, 2020. On March 10, 2020, the Company filed a motion to dismiss the amended complaint. The court issued a ruling on May 22, 2020 that stayed this proceeding in its entirety and dismissed part of the amended complaint. The court's order stated that the portion of the proceeding that is stayed will remain stayed until the U.S. Food and Drug Administration (the "FDA") completes its rulemaking regarding the marketing, including labelling, of CBD ingestible products. However, on January 26, 2023, the FDA announced that it does not intend to pursue rulemaking allowing the use of cannabidiol products in dietary supplements or conventional foods. As a result, on February 13, 2023, Plaintiffs filed a status report with the court asking to have the stay lifted. The Company filed a written opposition. The court has taken no action since Plaintiffs filed that status report, and the case remains stayed pursuant to the court's original order.
On February 12, 2025, the Company initiated an arbitration with JAMS asserting claims against its long-time legal counsel, Procopio. The Company’s engagement agreement with Procopio requires the resolution of such disputes through arbitration. Procopio provided the Company legal advice and guidance on when Mona would recognize W-2 income and be subject to payroll and income tax withholding resulting from the settlement of RSU's previously awarded to Mona. According to Procopio, because Mona was then an insider within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and he was subject to suit and disgorgement of short-swing profits if he sells stock within six months of the settlement date of the RSU's, Mona does not recognize W-2 income on the settlement date and that Mona would recognize W-2 income and be subject to tax withholding upon the expiration of the six month period under Section 16(b). Consequently, the Company issued to Mona a share certificate evidencing his ownership of shares of the Company’s stock then valued at more than $13 million that Mona constructively received upon the settlement of his RSU's without withholding taxes. After Mona received the certificate, without acknowledging its prior advice and guidance, Procopio changed its prior advice and advised the Company that tax withholding was required as of the settlement date. Procopio continued to represent the Company to resolve the lack of withholding, address the fallout therefrom, report the same in its periodic reports filed with the SEC and numerous other legal matters. The Company disclosed the lack of withholding in its Form 10-Q for the quarter ended, March 31, 2019, and in subsequent quarterly and annual reports. The Company has also disclosed in its prior reports filed with the SEC that the lack of withholding has been the subject of multiple legal proceedings, the most recent of which involved a case brought by Mona against the Company that was resolved in November 2024 in the Company’s favor in a binding arbitration. After that case was submitted to the arbitrator for decision, the Company sought to address with Procopio the legal advice and guidance it provided. Procopio responded by terminating the Company as a client on January 10, 2025, ending the Company’s 12-year relationship with Procopio as its legal counsel. The Company seeks to recover damages from Procopio resulting from its reliance on Procopio’s advice and guidance, including fees and expenses paid to Procopio and other professionals, expenses incurred by the Company and other harm to it. In April 2025, JAMS appointed an arbitrator to the 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.
For the three months ended March 31, 2025 and 2024, the Company generated taxable losses for which no tax benefit has been recognized due to uncertainties regarding the future realization of the tax benefit. The tax effects of the taxable losses 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.
During the year ended December 31, 2019, the Company's former President and Chief Executive Officer, Mona, and the Company entered into a Settlement Agreement (the “Settlement Agreement”), pursuant to which the Company acknowledged 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 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 March 31, 2025. The Company and Mona also agreed to mutually release all claims arising out of and related to Mona’s resignation and separation from the Company. As a result of Mona's Restricted Stock Unit Award Agreement, the Company recorded stock-based compensation expense related to (i) the accelerated vesting of the RSU's of $5.1 million and (ii) due to the Settlement Agreement's modification of certain stock options of $2.7 million during the year ended December 31, 2019. During the year ended December 31, 2024, the Company cancelled 11,300,000 fully vested outstanding stock options of Mona with a weighted average exercise price of $0.42 per share, as these stock options remained unexercised and the deadline to exercise these stock options lapsed.
In addition, 2,950,000 shares of stock were issued to Mona upon the vesting and settlement of the RSU's. The settlement of the RSU's by the payment of shares was treated as taxable compensation to Mona and thus subject to income tax withholdings. No amounts were withheld (either in cash or the equivalent of shares of common stock from the settlement of the RSU's) or included in the original Company’s payroll tax filing. The compensation was 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 was $0.2 million and was recorded as a component of selling, general and administrative expenses in the 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 settlement to the taxing authorities and included the amount in Mona's W-2 for 2019. Although the primary tax liability is the responsibility of the employee, the Company is secondarily liable to the taxing authorities and thus has continued to reflect this liability on its balance sheet through December 31, 2022 in an amount of $6.7 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 with extensions was on October 15, 2020. To date, notwithstanding repeated requests from the Company, Mona has not provided to the Company the appropriate documentation substantiating that he properly filed and paid his taxes for 2019, and Mona has recently confirmed that he has not paid his personal income tax 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 would have been relieved once the tax amount was paid by Mona and the Company had received the required taxing authority documentation from Mona. If the tax amount was not paid by Mona, the Company could have been liable for such tax due.
The Company believes that the statute of limitations for federal payroll tax withholding expired on April 15, 2023. In addition, the statute of limitations for the state tax withholding expired during the three months ended March 31, 2023. As a result of the expiration of the relevant statutes of limitations, the Company believes that neither the IRS nor the State of California have the rights to assess and collect the $6.2 million of income taxes from the Company and the Company has made a change in accounting estimate and no longer expects to incur a loss with respect to this matter. As a result, the Company derecognized the contingent liability of $6.2 million during the three months ended March 31, 2023.
The Company believes that the statute of limitations for employer and employee Medicare portion of FICA taxes expired on April 15, 2025. As a result of the expiration of the relevant statutes of limitations, the Company believes that the IRS does not have the rights to
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When we use the terms “CV Sciences,” “Company,” “we,” “our” and “us,” we mean CV Sciences, Inc., a Delaware corporation, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.
The following discussion of our financial condition and results of operations for the three months ended March 31, 2025 and 2024, respectively, should be read in conjunction with our condensed consolidated financial statements and the notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
OVERVIEW
We are a consumer wellness company specializing in hemp extracts and other proven, science-backed, natural ingredients and products, which are sold through a range of sales channels from B2B to B2C.
Our +PlusCBD™ branded products are sold at select retail locations throughout the U.S. and are the top-selling brands of hemp extracts in the natural products market, according to SPINS, the leading provider of syndicated data and insights for the natural, organic and specialty products industry. We follow all guidelines for good manufacturing practices ("GMP") and our products are processed, produced, and tested throughout the manufacturing process to confirm strict compliance with company and regulatory standards and specifications. With a commitment to science, +PlusCBD™ product benefits in healthy people are supported by human clinical research data, in addition to three published clinical case studies available on PubMed.gov. +PlusCBD™ was the first hemp extract supplement brand to invest in the scientific evidence necessary to receive self-affirmed "generally recognized as safe" ("GRAS") status.
In addition, on December 7, 2023, we entered into a Membership Interest Purchase Agreement, pursuant to which we purchased all of the outstanding equity interests in Cultured Foods Sp. z.o.o., resulting in Cultured Foods becoming a wholly owned subsidiary of the Company. Cultured Foods is a leading European manufacturer and distributor of plant-based protein products.
In May 2024, we acquired all outstanding membership interests of Elevated Softgels, LLC, a Delaware limited liability company, for a total purchase price of up to $1.0 million. Elevated Softgels is a leading manufacturer of encapsulated softgels and tinctures for the supplement and nutrition industry, based in Colorado.
In August 2024, we engaged Maxim Group LLC ("Maxim") as a non-exclusive financial advisor and investment banker to provide strategic financial advisory and investment banking services. With the help of Maxim, the Company intends to continue to build an efficient and cost effective consumer products platform and continue to evaluate inbound and outbound merger, sale, acquisition or other opportunities for the Company.
We also have a drug development program focused on developing and commercializing CBD-based novel therapeutics, subject to available capital.
Our primary offices and facilities are located in San Diego, California; Grand Junction, Colorado; and Warsaw, Poland.
Our common stock is traded on the OTC:QB market under the trading symbol CVSI.
Results of Operations
Revenues and gross profit
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Three months ended
March 31, |
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Change |
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2025 |
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2024 |
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Amount |
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% |
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|
|
(in thousands) |
|
|
|
|
Product sales, net |
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$ |
3,606 |
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|
$ |
4,002 |
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|
$ |
(396 |
) |
|
|
(9.9 |
)% |
Cost of goods sold |
|
|
1,948 |
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|
|
2,149 |
|
|
|
(201 |
) |
|
|
(9.4 |
)% |
Gross profit |
|
$ |
1,658 |
|
|
$ |
1,853 |
|
|
$ |
(195 |
) |
|
|
(10.5 |
)% |
Gross margin |
|
|
46.0 |
% |
|
|
46.3 |
% |
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Three months ended
March 31, 2025 |
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Three months ended
March 31, 2024 |
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Amount |
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% of product
sales, net |
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Amount |
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% of product
sales, net |
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(in thousands) |
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(in thousands) |
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Retail sales (B2B) |
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$ |
1,991 |
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|
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55.2 |
% |
|
$ |
2,235 |
|
|
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55.8 |
% |
E-commerce sales (B2C) |
|
|
1,615 |
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|
|
44.8 |
% |
|
|
1,767 |
|
|
|
44.2 |
% |
Product sales, net |
|
$ |
3,606 |
|
|
|
100.0 |
% |
|
$ |
4,002 |
|
|
|
100.0 |
% |
We had net product sales of $3.6 million and gross profit of $1.7 million, representing a gross margin of 46.0%, in the first quarter of 2025, compared to net product sales of $4.0 million and gross profit of $1.9 million, representing a gross margin of 46.3%, in the first quarter of 2024. Our net product sales decreased in the first quarter of 2025 when compared to the first quarter 2024 mostly due to lower sales volume. The total number of units sold during the first quarter 2025 decreased by 11.8% compared to the first quarter 2024, partially offset by an increase of our average sales price per unit of 0.9%. In addition, 35.0% of our net revenue for the first quarter 2025 was from new products launched since January 1, 2023. During this time, we launched 34 new products. The overall market continues to be fragmented and highly competitive, which we believe is largely due to the lack of a clear regulatory framework and a patchwork of state regulation.
Cost of goods sold consists primarily of raw materials, packaging, manufacturing overhead (including payroll, employee benefits, stock-based compensation, facilities, depreciation, supplies and quality assurance costs), merchant card fees and shipping. We were able to reduce our cost of goods sold in the first quarter of 2025 compared to the first quarter of 2024 by $0.2 million, or 9.4%. The reduction is mostly due to the lower number of units sold in the first quarter of 2025. In addition, cost of goods sold in the first quarter of 2025 increased slightly as a percentage of revenue compared to the first quarter of 2024, mostly due to cost of goods sold for Elevated Softgels, partially offset by lower freight, cost savings and product mix in the first quarter of 2025 compared to the prior year period. Our gross profit declined to $1.7 million in the first quarter of 2025 from $1.9 million in the first quarter of 2024. Our gross margin declined from 46.3% in the first quarter 2024 to 46.0% in the first quarter of 2025. The decline in our gross margin is primarily due to our lower sales and cost of goods sold for Elevated Softgels, partially offset by improvements to our gross margin due to product and channel mix, lower freight, and additional cost savings.
Research and development expense
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Three months ended
March 31, |
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Change |
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2025 |
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2024 |
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Amount |
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% |
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(in thousands) |
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|
Research and development expense |
|
$ |
30 |
|
|
$ |
36 |
|
|
$ |
(6 |
) |
|
|
(17 |
)% |
Percentage of product sales, net |
|
|
0.8 |
% |
|
|
0.9 |
% |
|
|
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|
Research and development (“R&D”) expense remained relatively consistent and represents overall reduced R&D spend associated with new consumer products development expenses.
Selling, general and administrative expense
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Three months ended
March 31, |
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Change |
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2025 |
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2024 |
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Amount |
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% |
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(in thousands) |
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|
Sales expense |
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$ |
731 |
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|
$ |
813 |
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$ |
(82 |
) |
|
|
(10 |
)% |
Marketing expense |
|
|
448 |
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|
|
622 |
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|
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(174 |
) |
|
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(28 |
)% |
General & administrative expense |
|
|
960 |
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|
|
1,002 |
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|
|
(42 |
) |
|
|
(4 |
)% |
Selling, general and administrative |
|
$ |
2,139 |
|
|
$ |
2,437 |
|
|
$ |
(298 |
) |
|
|
(12 |
)% |
Percentage of product sales, net |
|
|
59.3 |
% |
|
|
60.9 |
% |
|
|
|
|
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|
Selling, general and administrative (“SG&A”) expense decreased to $2.1 million in the first quarter of 2025 compared to $2.4 million in the first quarter of 2024, which was primarily a result of the following:
•Sales expense decreased due to lower commission, payroll and travel expense.
•Marketing expense decreased due to lower digital advertising spend and reduced tradeshow expense. Our reduced digital marketing expense declined due to lower advertising activity during the first quarter of 2025.
•General and administrative ("G&A") expense for the first quarter of 2025 decreased from the prior year period due to lower legal fees, insurance expense and other administrative cost reductions, partially offset by an increase in stock-based compensation expense.
Benefit from reversal of accrued payroll taxes
We previously recorded a contingent liability for payroll taxes associated with the RSU release to our founder. On April 15, 2025, the statute of limitations for employer and employee Medicare portion of FICA taxes expired. As a result of the expiration of the relevant statutes of limitations, the IRS does not have the rights to assess and collect the $0.5 million of employer and employee Medicare portion of FICA taxes from the Company and we have made a change in accounting estimate and no longer expect to incur a loss with respect to this matter. As a result, we derecognized the contingent liability of $0.5 million during the three months ended March 31, 2025. For more information, please see Note 12, Related Parties, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other expense, net
Other expense, net consists of interest expense and interest income. Other expense increased by approximately $0.1 million in the three month period ended March 31, 2025 as compared to the three month period ended March 31, 2024 due to the amortization of debt discount and debt issuance costs for the Streeterville note payable and the note payable with an institutional investor.
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, amortization, interest and income tax expense), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it also highlights trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.
We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Quarterly Report on Form 10-Q, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with greater transparency and a greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.
Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Quarterly Report on Form 10-Q, including our condensed financial statements, to aid in their analysis and understanding of our performance and in making comparisons.
A reconciliation from our net loss to Adjusted EBITDA, a non-GAAP measure, for the three months ended March 31, 2025 and 2024 is detailed below:
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Three months ended
March 31, |
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2025 |
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2024 |
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(in thousands) |
|
Net loss |
|
$ |
(109 |
) |
|
$ |
(628 |
) |
Depreciation expense |
|
|
76 |
|
|
|
59 |
|
Amortization expense |
|
|
6 |
|
|
|
4 |
|
Interest expense |
|
|
151 |
|
|
|
2 |
|
Income tax expense |
|
|
7 |
|
|
|
6 |
|
EBITDA |
|
|
131 |
|
|
|
(557 |
) |
Stock-based compensation (1) |
|
|
118 |
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|
|
30 |
|
Gain on extinguishment of debt (2) |
|
|
(38 |
) |
|
|
— |
|
Benefit for reversal of accrued payroll tax (3) |
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(522 |
) |
|
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— |
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Adjusted EBITDA |
|
$ |
(311 |
) |
|
$ |
(527 |
) |
(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. For more information, please see Note 8, Stock-Based Compensation, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
(2)Represents gain on extinguishment of debt related to our Streeterville note payable. For more information, please see Note 6, Debt, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
(3)Represents benefit for reversal of accrued payroll tax associated with the RSU release to founder in 2019. For more information, please see Note 12, Related Parties, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
During the three months ended March 31, 2025 and the year ended December 31, 2024, our primary sources of capital came from (i) cash generated from our operations, (ii) existing cash, and (iii) proceeds from note payable financings. As of March 31, 2025, we had approximately $0.8 million of cash and working capital of approximately $0.7 million.
For the three months ended March 31, 2025, the Company generated negative cash flows from operations of $0.1 million, and we had an accumulated deficit of $87.1 million as of March 31, 2025.
We believe that a combination of factors have adversely impacted our business operations for the three months ended March 31, 2025 and the year ended December 31, 2024. Due to a low barrier entry market with a lack of a clear regulatory framework, we face intense competition from both licensed and illicit market operators that may also sell herbal supplements and hemp-based CBD consumer products. Because we operate in a market that is rapidly evolving and expanding globally, our customers may choose to obtain CBD products from our competitors, and our success depends on our ability to attract and retain our customers from purchasing CBD products elsewhere. To remain competitive, we intend to continue to innovate new products, build brand awareness, and make significant investments in our business strategy by introducing new products into the markets in which we operate, adopt quality assurance protocols and procedures, build our market presence, and undertake further research and development. In addition, we intend to make additional acquisitions to further diversify our product offerings.
In February 2025, we received net proceeds of $1.2 million under a secured promissory note with an institutional investor - please see Note 6, Debt, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Management implemented, and continues to make and implement, strategic cost reductions, including reductions in employee headcount, vendor spending, and the delaying of certain expenses related to our drug development activities. To the extent that we feel it is necessary and in the best interest of the Company and our shareholders, we may also take further actions that alter our operations in order to ensure the success of our business.
Elevated Softgels Acquisition
On May 8, 2024, the Company entered into a Membership Interest Purchase Agreement (the “Softgels Purchase Agreement”), by and among the Company, Elevated Softgels, LLC, a Delaware limited liability company (“Elevated Softgels”), Clayton J. Montgomery (a “Softgels Member”), Chris Fagan, Andrew Kester, and Timothy McGreer, pursuant to which the Company purchased all of the
outstanding equity interests in Elevated Softgels, resulting in Elevated Softgels becoming a wholly owned subsidiary of the Company (the “Softgels Acquisition”). Elevated Softgels is a leading manufacturer of softgels. The Softgels Acquisition closed on May 13, 2024.
In consideration for the Softgels Acquisition, at closing, the Company (i) made a cash payment of $100,000 to the Softgels Member, less certain transaction expenses and certain other adjustments provided for in the Softgels Purchase Agreement (the “Softgels Closing Payment”), (ii) issued an aggregate of 15,854,185 restricted shares of Company common stock to the Member valued at $637,000, and (iii) issued an aggregate of 1,567,996 restricted shares of Company common stock to the selling broker of Elevated Softgels valued at $63,000. The Company common stock was valued based on the thirty-day volume weighted average price of the Company’s common stock on the thirty trading days prior to the date of the Softgels Purchase Agreement (the “Softgels Closing Shares,” and together with the Softgels Closing Payment, the “Softgels Closing Consideration”). The Softgels Closing Payment is subject to adjustment, upward or downward, based on post-closing adjustments to the net working capital of Elevated Softgels within 120 days of closing, as reflected in the Final Working Capital Statement (as defined in the Softgels Purchase Agreement). Additionally, within 90 days following the final determination of the Final Working Capital Statement (the “Softgels Receivables Date”), the Company shall be entitled to recover from the Softgels Member an amount equal to the unpaid balance, as of the Softgels Receivables Date, of all accounts receivable which were included in as assets in the Final Working Capital Statement.
In addition to the Softgels Closing Consideration, and as further consideration for the Softgels Acquisition, the Company shall make an additional payment in the form of an earn-out (the “Softgels Earnout Amount”), which shall be based on Company Net Revenue (as defined in the Softgels Purchase Agreement) generated during the 12-month period following the closing date and will be calculated as follows:
•If the Company’s Net Revenue is at least $700,000, then the Softgels Earnout Amount will be $200,000.
•If the Company’s Net Revenue is at least $650,000 but less than $700,000, then the Softgels Earnout Amount will be $125,000.
•If the Company’s Net Revenue is at least $600,000 but less than $650,000, then the Softgels Earnout Amount will be $50,000.
•If the Company’s Net Revenue is at least $550,000 but less than $600,000, then the Softgels Earnout Amount will be $25,000.
•If the Company’s Net Revenue (as defined in the Purchase Agreement) is less than $550,000, then the Softgels Earnout Amount will be $0.
The Softgels Earnout Payment shall be paid within 10 business days after the final determination of the Company’s Net Revenue for the 12-month period following the closing date, as determined in accordance with the Softgels Purchase Agreement. 50% of the Softgels Earnout payment shall be paid in cash and 50% of the Softgels Earnout payment shall be in the form of restricted common stock of the Company, with the number of shares determined based upon the thirty-day volume weighted average price of the Company's common stock as of the 12-month anniversary of the closing date. Net revenues of Elevated Softgels are expected to be insufficient to trigger any earn-out payments.
Pursuant to the Softgels Purchase Agreement, the recipients of the Company's common stock agreed that they will not, on any single trading day sell, transfer or otherwise dispose of any Company common stock, including the Softgels Closing Shares, in an aggregate amount exceeding the greater of (i) 15% of the of the Company’s common stock sold in the aggregate based on the greater of the current or proceeding trading day, and (ii) $3,000 in gross value; provided, however, that in the event that the Company enters into a leak-out agreement with any third party on terms more favorable than the foregoing, the Softgels Member shall be afforded the same more favorable terms offered to such third party.
Additionally, for a period of one year following the closing date, Mr. Montgomery and Mr. Fagan shall be prohibited from engaging in certain competitive and/or solicitation activities within the United States, as more particularly set forth in the Softgels Purchase Agreement.
Note Payable
In February 2025, we entered into a securities purchase agreement with an institutional investor (the “Investor”), pursuant to which we issued and sold to the Investor a secured promissory note in the original principal amount of $1,600,000 (the “Note”). The Note carries an original issuance discount of $400,000 and we agreed to pay $10,000 to the Investor to cover legal fees. We incurred additional legal and professional fees of $72,424. The original issuance discount was deducted from the proceeds of the Note received by us which resulted in a purchase price received by us of $1,200,000.
The Note is due and payable on August 12, 2026 and we are required to make monthly repayments to the Investor of $106,667 starting on June 12, 2025. We can pay all or any portion of the outstanding balance earlier than it is due without penalty. In the event we pay the Note in full on or before August 12, 2025, we will receive a $100,000 discount from the outstanding balance. The Note is secured by all of our assets pursuant to a security agreement and intellectual property security agreement entered into with the Investor on February 12, 2025. Our obligations under the Note are guaranteed by each of our subsidiaries. No interest will accrue on the Note unless and until an occurrence of an event of default, as defined in the Note.
Streeterville Note
In July 2024, we entered into a note purchase agreement with Streeterville, pursuant to which we issued and sold to Streeterville a Secured Promissory Note (the "Streeterville Note") in the original principal amount of $1.2 million. The Streeterville Note carried an original issuance discount of $283,500. We incurred additional debt issuance costs of $5,000. As a result, we received aggregate net proceeds of approximately $0.9 million in connection with the sale and issuance of the Streeterville Note. The Streeterville Note was to mature on July 3, 2025 and we weres required to make weekly repayments to Streeterville on the note in the amount of $22,856 until the Streeterville Note was paid in full. We were able to pay all or any portion of the outstanding balance earlier than it is due without penalty. In the event we repaid the Streeterville Note in full on or before December 31, 2024, we would have received a $75,000 discount from the outstanding balance.
No interest was to accrue on the Streeterville Note until an occurrence of an Event of Default, as defined in Section 4 of the Streeterville Note, if ever. The Streeterville Note provided for customary events of default, including, among other things, the event of nonpayment of principal, interest, fees or other amounts, a representation or warranty proving to have been incorrect when made, failure to perform or observe covenants within a specified period of time, a cross-default to certain other indebtedness of the Company, the bankruptcy or insolvency of the Company or any significant subsidiary, monetary judgment defaults of a specified amount and other defaults resulting in liability of a specified amount. In the event of an occurrence of an Event of Default by us, Streeterville could have declaree all amounts owed under the Streeterville Note immediately due and payable. Also, a late fee and interest penalty of equal to either 22% per annum or the maximum rate allowable under law, whichever is lesser, could have been applied to any outstanding amount not paid when due or that remained outstanding while an Event of Default exists. The Streeterville Note was secured by all of our assets as set forth in the Security Agreement dated July 3, 2024.
We made principal payments to Streeterville of $0.6 million during the three months ended March 31, 2025. As a result, the Streeterville Note has been fully repaid and satisfied as of March 31, 2025, and our obligations thereunder, were cancelled and terminated.
First Insurance Funding Agreements
In October 2024, we entered into a new finance agreement with First Insurance Funding in order to fund a portion of our insurance policies for the upcoming policy year. The amount financed is $0.2 million, which incurs interest at an annual rate of 8.42%. We are required to make monthly payments of $20,396 from November 2024 through July 2025. The outstanding balance as of March 31, 2025 was $0.1 million.
In November 2023, we entered into a finance agreement with First Insurance Funding in order to fund a portion of our insurance policies. The amount financed was $0.3 million, which incurred interest at an annual rate of 8.42%. We were required to make monthly payments of $29,781 from November 2023 through July 2024. There was no outstanding balance as of March 31, 2025.
Going Concern
U.S. GAAP requires management to assess a company's ability to continue as a going concern within one year from the financial statement issuance date and to provide related note disclosure in certain circumstances. Our condensed consolidated financial statements and corresponding notes have been prepared assuming the Company will continue as a going concern. We generated negative cash flows from operations of $0.1 million for the three months ended March 31, 2025, and had an accumulated deficit of $87.1 million as of March 31, 2025. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund our operations and growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, issuance of debt, and/or securing lines of credit in order to continue its operations. However, there can be no
assurances that additional working capital will be available to us on favorable terms, or at all, which would be likely to have a material adverse effect on the Company's ability to continue its operations.
The Company's financial operating results and accumulated deficit, amongst other factors, raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.
A summary of our changes in cash flows for the three months ended March 31, 2025 and 2024 is provided below:
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|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, |
|
|
|
2025 |
|
|
2024 |
|
|
|
(in thousands) |
|
Net cash flows provided by (used in): |
|
|
|
|
|
|
Operating activities |
|
$ |
(81 |
) |
|
$ |
(518 |
) |
Investing activities |
|
|
(40 |
) |
|
|
— |
|
Financing activities |
|
|
480 |
|
|
|
(136 |
) |
Effect of exchange rate changes on cash |
|
|
(1 |
) |
|
|
(1 |
) |
Net increase (decrease) in cash |
|
|
358 |
|
|
|
(655 |
) |
Cash, beginning of period |
|
|
454 |
|
|
|
1,317 |
|
Cash, end of period |
|
$ |
812 |
|
|
$ |
662 |
|
Operating Activities
Net cash used in operating activities includes net loss adjusted for non-cash items such as depreciation, amortization, bad debt expense, stock-based compensation, benefit of reversal of payroll tax liability, interest expense related to our promissory notes, and gain on debt extinguishment. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable. Operating assets and liabilities that arise from the funding of inventory purchases and customer accounts receivable can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer payment behavior.
Cash used in operating activities was $0.1 million in the three months ended March 31, 2025, compared to $0.5 million in the three months ended March 31, 2024. Our net loss for the three months ended March 31, 2025, adjusted for non-cash items, resulted in a net loss of $0.2 million, compared to a net loss, adjusted for non-cash items, of $0.4 million in the prior year period, an improvement of $0.2 million. Changes in working capital generated $0.1 million during the first three months of 2025, compared to cash used of $0.1 million during the same period of 2024, an improvement of $0.2 million. Our changes in working capital improved primarily due to continued usage and conversion of our inventory, partially offset by increased payments to our accounts payable. Our net loss declined by $0.5 million, mostly due to the benefit for the reversal of accrued payroll taxes. Non-cash adjustments decreased by $0.3 million, as we recognized a benefit for the reversal of accrued payroll tax of $0.5 million related to the RSU's previously issued to Mona during the three months ended March 31, 2025. Recurring non-cash adjustments consists of depreciation, amortization, interest expense and stock-based compensation.
Investing Activities
Cash used in investing activities was $40,000 in the three months ended March 31, 2025 related to improvements to our manufacturing facility at Elevated Softgels. We did not use any cash in investing activities in the three months ended March 31, 2024.
Financing Activities
Net cash provided by financing activities was $0.5 million for the three months ended March 31, 2025 compared net cash used in financing activities of $0.1 million for the three months ended March 31, 2024. Our financing activities for the three months ended March 31, 2025 consisted of proceeds from our note payable financing of $1.1 million, offset by repayments of Streeterville note of $0.6 million and our insurance financing. Our financing activities for the three months ended March 31, 2024 consisted of repayments of assumed debt for Cultured Foods of $0.1 million and our insurance financing of $0.1 million.
Inflation
We have not been affected materially by inflation during the periods presented. However, recent trends towards rising inflation may adversely impact our business and corresponding financial position and cash flow.
Known Trends or Uncertainties
There can be no assurance that the Company’s business and corresponding financial performance will not be adversely affected by general economic or consumer trends. In particular, global economic conditions remain constrained, and if such conditions continue, recur or worsen, this may have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, inflation has risen and Federal Reserve interest rates remain high after increases during 2023, which may also materially adversely our business and corresponding financial position and cash flows.
Furthermore, such economic conditions have produced downward pressure on share prices and on the availability of credit for financial institutions and corporations. If current levels of market disruption and volatility continue, the Company might experience reductions in business activity, increased funding costs and funding pressures, as applicable, a decrease in the market price of shares of our common stock, a decrease in asset values, additional write-downs and impairment charges and lower profitability.
We have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
There is currently a lack of a clear federal regulatory framework regarding the development, sale and use of CBD products in the United States. As a result, differing state regulations have emerged, which regulations are constantly evolving and differ significantly from state to state in many cases. Several states, including without limitation, California, Florida, Maryland, Minnesota, New York, Utah and Virginia, have recently adopted regulations that may impact our ability to sell certain of our products in these states. In September 2024,
California Governor Gavin Newsom signed an emergency order into law, effectively banning the sale of hemp products intended for human use that contain detectable amounts of THC or certain other cannabinoids in California, amongst other things. The emergency order was originally in effect through March 25, 2025, and has been extended by one year. We have certain products which fall under this category that we have historically sold in California. It is currently unknown whether the duration of the emergency order will be extended, and/or whether it will be replaced with a permanent law with similar or more stringent prohibitions. This emergency order had a negative impact on our operating results for the three months ended March 31, 2025 and we expect that it will continue to have a negative impact on our business going forward for so long as it, or any permanent law with similar or more stringent prohibitions, remains in effect; however, it is currently impossible to quantify the expected impact on our business. There is also substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the FDA and the extent to which manufacturers of products containing cannabinoids may engage in interstate commerce. These uncertainties have had, and may continue to have, an adverse effect on our business. Additionally, restrictive state regulations could adversely impact our revenue and earnings going forward.
Changes in U.S. and foreign governments’ trade policies have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S., among other restrictions. In February 2025, the U.S. administration announced increased tariff on imports from China, where certain components of our finished products are sourced. We are closely monitoring this evolving situation and evaluating our responses, which may include price adjustments or other cost-mitigation measures. However, there can be no assurance that we will be able to fully mitigate the impact of such tariffs or trade restrictions. If further tariffs are imposed, we could be forced to raise prices on all or certain of our products or make changes to our operations, any of which could materially harm our revenue or operating results. Any additional future tariffs or quotas imposed may impact our sales, gross margin and profitability if we are unable to pass increased prices onto our customers. Currently, we cannot fully determine how these tariffs will affect our business operations. The overall impact on our business will be influenced by several variables, including the duration and potential expansion of current tariffs, future changes to tariff rates, scope, or enforcement, retaliatory measures by impacted trade partners, inflationary effects and broader macroeconomic responses, changes to consumer purchasing behavior, and the effectiveness of our responses in managing these challenges.
Critical Accounting Estimates
We have disclosed in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2024 Annual Report, filed with the SEC March 27, 2025, those accounting policies and estimates that we consider to be significant in determining our results of operation and financial condition. There have been no material changes to those policies and estimates that we consider to be significant since the filing of our 2024 Annual Report. 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 unaudited condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of March 31, 2025 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.