EDGAR 10-K Filing

Company CIK: 1510964
Filing Year: 2022
Filename: 1510964_10-K_2022_0001510964-22-000033.json

---

ITEM 1. BUSINESS
ITEM 1. BUSINESS
Overview
CV Sciences, Inc. ("CV Sciences," "we," "our" or "us") is a life science company that operates two distinct business segments: (i) a consumer product division focused on developing, manufacturing, marketing and selling plant-based dietary supplements and hemp-based cannabidiol ("CBD") products to a range of market sectors; and (ii) a specialty pharmaceutical segment focused on developing and commercializing CBD-based novel therapeutics. The Company’s consumer products are marketed and sold at more than 8,400 retail locations throughout the United States. According to SPINS, a leading provider of syndicated data and insights for the natural, organic, and specialty products industry, the Company's PlusCBD™ product is the top-selling brand of hemp-derived CBD in the natural product retail market. Our state-of-the-art facility follows all guidelines for Good Manufacturing Practices ("GMP") and our hemp extracts are processed, produced, and tested throughout the manufacturing process to confirm that the cannabinoid content meets strict company standards. With a commitment to science, the benefits of our products when utilized by individuals that are in good health are supported by human clinical research data and three published clinical case studies available on PubMed.gov. In addition, PlusCBD™ was the first hemp CBD supplement brand to invest in the scientific evidence necessary to achieve self-affirmed Generally Recognized as Safe ("GRAS") status. Our primary offices and facilities are located in San Diego, California.
Current Operations
Consumer Products
We manufacture and distribute more than 50 products and expect to continue to add new products to our portfolio to enhance our line of CBD and plant-based dietary supplements. We also expect to develop and launch new product lines and brands to address consumer needs and demand. Our mission and core values inform our product development and market positioning.
Our Mission:
Our mission is to improve quality of life through nature and science.
Our Core Values:
•Provide the best products.
•Look to nature and lean into science to create extraordinary products that transform health, so people can best navigate the course of their lives.
•Have a net positive impact on our customers, our employees, and our planet.
•Be bold and brave.
•Positively affect people's lives - even if it means taking a bold or unconventional approach.
We develop, manufacture, market and sell plant-based dietary supplements and CBD products under the following brands: PlusCBD™, ProCBD™, HappyLane™, CV™Acute, CV™Defense, and PlusCBD™ Pet in the Health Care market sector including nutraceutical, beauty care, specialty foods, and pet products.
•PlusCBD™ - Our award-winning line of products available in softgel, tinctures, topicals, and gummies. It was our first brand to market in 2014 and the top-selling brand of hemp-derived CBD in the natural product retail market. PlusCBD™ is backed by published research, third party safety testing, and rigorous quality standards.
•PlusCBD™ Pet - Products under our PlusCBD™ Pet brand offer all the hemp extract benefits offered by PlusCBD™ formulated just for cats and dogs. PlusCBD™ Pet provides physical and emotional support to help address the stress and physical discomfort keeping pets from being their best. Available in easy to use liquids and flavors: beef, chicken, salmon, and peanut butter.
•ProCBD™ - Products under our ProCBD™ brand are available exclusively through health practitioners. These clinical strength formulas were designed to fit seamlessly with patient care plans. Available in softgels, liquids, and roll-ons.
•HappyLane™ - Our worry-free CBD for those looking to avoid even trace amounts of THC. HappyLane™ features different softgels, roll-ons, liquids, chews, and gummies in unique flavors, and easy to use form factors, all with less than 0.00% THC.
•CV™Immunity - Our award-winning line of non-CBD daily and intensive immune support products.
◦CV™Acute - A clinically supported immunity product for intense support. CV™Acute features formulas and ingredients backed by clinical research and cited by the World Health Organization for immune support.
◦CV™Defense - A clinically supported immunity product for daily support. CV™Defense features formulas and ingredients (PEA) backed by six double-blind placebo-controlled clinical trials.
Hemp-based CBD is one of more than 100 cannabinoids found in hemp and is non-psychoactive. Our U.S. based operations oversee our raw material supply chain, raw material processing, product development and manufacturing, and sales and marketing. We will continue to scale operations to accommodate market conditions.
Specialty Pharmaceuticals
Our specialty pharmaceutical segment is developing cannabinoids intended to treat medical indications. Cannabinoids are compounds derived from the Cannabis sativa plant, which contains two primary cannabinoids, CBD, and tetrahydrocannabinol (“THC”). Clinical and preclinical data suggest that CBD has promising results in treating a range of medical indications. We acquired drug development assets utilizing CBD as the active pharmaceutical ingredient in our CanX acquisition.
Our first product candidate, CVSI-007, combines CBD and nicotine in treatment of smokeless tobacco use and addiction. There are currently no drugs approved by the U.S. Food and Drug Administration (“FDA”) for treatment of smokeless tobacco use and addiction. The worldwide smokeless tobacco addiction treatment market is estimated at greater than $2 billion. We believe this product candidate will provide treatment options for this significant unmet medical need. CVSI-007 is based on proprietary formulations, processes and technology. In May 2016, we filed a patent application for the technology implemented for CVSI-007 with the U.S. Patent and Trademark Office ("USPTO"). On May 19, 2020, we received a formal notice of issuance from the USPTO for our patent application 15/426,617. The patent covers methods of treating smokeless tobacco addiction by administering pharmaceutical formulations containing CBD and nicotine. We are pursuing similar patent protection in other key markets throughout the world. In 2020, we received a notice of allowance from the Japan Patent Office.
We expect to continue our development efforts as we seek approval from the FDA to commercialize the world's first and only FDA-approved treatment for smokeless tobacco addiction. We currently contract with qualified parties and contract research organizations for our preclinical research and Investigational New Drug application (“IND”) preparation and development. Commercialization of future specialty pharmaceutical products in the United States and other territories may rely on licensing and co-promotion agreements with strategic partners. If we choose to build a commercial infrastructure to support marketing in the United States, such commercial infrastructure could include a sales organization, internal sales support, an internal marketing group and distribution support. However, we anticipate that building such a commercial infrastructure will require significant investment.
Description of our Subsidiaries
CV Sciences was incorporated under the name Foreclosure Solutions, Inc. in the State of Texas on December 9, 2010. On July 25, 2013, CannaVest Corp., a Texas corporation (“CannaVest Texas”), merged with CV Sciences, a wholly-owned Delaware subsidiary of CannaVest Texas, to effectuate a change in the Company’s state of incorporation from Texas to Delaware. On January 4, 2016, we filed a Certificate of Amendment of Certificate of Incorporation reflecting our corporate name change to “CV Sciences, Inc.”, effective on January 5, 2016. In addition, on January 4, 2016, we amended our Bylaws to reflect our corporate name change to “CV Sciences, Inc.” As of the date of this report, we don't own any interest in any subsidiaries.
Government Regulation
We are subject to local and federal laws and regulations pertaining to the sale of hemp derived CBD products in our operating jurisdictions. We maintain required licenses for sourcing, manufacturing, and distribution; we also monitor changes in laws, regulations, treaties, and agreements.
The Agriculture Improvement Act of 2018, known as the "2018 Farm Bill", is United States federal legislation signed into law on December 20, 2018, that provides the legal framework for hemp-based products. The 2018 Farm Bill permanently removed “hemp” from the purview of the Controlled Substances Act, and accordingly, the U.S. Drug Enforcement Administration (“DEA”) no longer has any claim to interfere with the interstate commerce of hemp products. Some of the immediate impact from
this legislation includes the ability for hemp farmers to access crop insurance and U.S. Department of Agriculture (“USDA”) programs for competitive grants.
Notwithstanding the removal of the DEA from enforcement of hemp regulations; the U.S. Food and Drug Administration (“FDA”) retains authority to regulate ingestible and topical hemp products, including hemp extracts that contain CBD. Although no longer a controlled substance under federal law, cannabinoids derived from industrial hemp are still subject to a patchwork of state regulations. We have dedicated staff that actively monitors state regulations and proposed regulations to ensure compliance.
A range of federal laws and regulations govern sourcing, manufacturing, distribution, sales, and marketing of hemp-derived CBD products in the U.S. Products sold for oral consumption as liquids, tablets, capsules, softgels, or gummies are under the purview of The Dietary Supplement Health and Education Act of 1994 (“DSHEA”). Under DSHEA, supplement manufacturing is regulated by the FDA for current Good Manufacturing Practices (“cGMP”) under 21 CFR Part 111. Furthermore, DSHEA defines a “dietary supplement” as a product intended to supplement the diet that contains one or more of the following: (a) a vitamin; (b) a mineral; (c) an herb or other botanical; (d) an amino acid; (e) a dietary substance for use by man to supplement the diet by increasing the total dietary intake; or (f) a concentrate, metabolite, constituent, extract, or combination of any ingredient described in clause (a) through (e). Thus, the law permits a wide range of dietary ingredients in dietary supplements, including CBD, which is an extract of hemp (Cannabis sativa L.), which is a legal botanical. CBD also falls under clause (e) as it is a dietary substance for use by man to supplement the diet by increasing the total dietary intake.
In conjunction with the enactment of the 2018 Farm Bill, the FDA released a statement about the regulatory status of CBD. The statement noted that the 2018 Farm Bill explicitly preserved the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds under the U.S. Federal Food, Drug, and Cosmetic Act (“FDCA”) and Section 351 of the Public Health Service Act. This authority allows the FDA to continue enforcing the law to protect the public while also providing potential regulatory pathways for products containing cannabis and cannabis-derived compounds. The statement also noted the growing public interest in cannabis and cannabis-derived products, including CBD, and informed the public that the FDA will treat products containing cannabis or cannabis-derived compounds as it does any other FDA-regulated products - meaning the products will be subject to the same authorities and requirements as FDA-regulated products containing any other substance, regardless of the source of the substance, including whether the substance is derived from a plant that is classified as hemp under the 2018 Farm Bill. The FDA’s CBD enforcement discretion and regulatory actions with regards to CBD provide regulatory guidance to the CBD industry.
In October 2021, Assembly Bill 45 passed in California, permitting the retail sale of products containing hemp-derived CBD including dietary supplements, topicals, over-the-counter and pet products.
As of the date of this Annual Report on Form 10-K, and based upon publicly available information, to our knowledge the FDA has not taken any enforcement actions against CBD companies that are compliant with the FDCA. The FDA, however, has sent Warning Letters to companies demanding they cease and desist from the production, distribution, or advertising of CBD products when these companies have made prohibited, misleading, and unapproved drug claims. We continue to monitor the FDA’s position on CBD.
We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-public information; the handling of customer complaints; the requirement to provide warnings about exposures to chemicals with adverse health effects; and regulations prohibiting unfair and deceptive trade practices.
The growth and demand for online commerce has resulted in more stringent consumer protection laws that impose additional compliance burdens on online companies. These laws cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, product safety, content and quality of products and services, taxation, electronic contracts and other communications and information security.
There is uncertainty over whether or how existing laws governing issues such as sales and other taxes, auctions, libel, and personal privacy apply to the internet and commercial online services. These issues are predicted to take years to resolve. For example, tax authorities in some states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce. Furthermore, new state tax regulations may subject CV Sciences to additional state sales and income taxes. Other areas that may result in significant additional taxes or regulatory restrictions include, without limitation, new legislation or regulation; the application of laws and regulations from jurisdictions whose laws do not currently apply; or the application of existing laws and regulations to the internet and commercial online services. These taxes or restrictions could have an adverse effect on our cash flow, output, and overall financial condition. Furthermore, there is a possibility that we may be financially responsible for past failures to comply with requirements.
Sales and Distribution
Our products are currently sold online through our websites (www.pluscbdoil.com and www.cvsciences.com), select distributors, brick and mortar retailers, and select e-tailers. We have relationships with wholesalers, distributors and retailers across the food, drug and mass ("FDM"), natural product, specialty, professional market, and convenience industries. We utilize our knowledgeable partners to display and present our products to customers in their brick and mortar stores. These relationships are important to ensure consumers across a variety of sales channels have access to our products. These partnerships and our expansive distribution allow us to build consumer trust in our brand and products. We have additional partners in the natural product channel to service our retail customers by stocking and displaying products and explaining product attributes and health benefits. We also utilize e-commerce platforms to reach consumers and guide them through the CBD buying process as we believe consumers rely heavily on digital research.
Markets, Geography, Seasonality, and Major Customers
Our products are predominantly sold in North America and primarily in the retail space. Based on our current and historical balance sheets and statement of operations, it does not appear that our business or operations experience any seasonality with respect to our sales as any such seasonality appears to be unpredictable. Although we believe our customers’ historical buying patterns and budgetary cycles may be a factor that impacts our annual and quarterly sales results, we are not able to reliably predict our sales based on seasonality because outside factors (timing of orders, introduction of new products, and other economic factors impacting our industry) can also substantially impact our sales patterns during the year.
Furthermore, because the majority of our sales are spread amongst various retailers, distributors, and direct consumers, our largest customer only accounted for approximately 4% of our sales. As a result, we do not believe our financial condition and results of operations is dependent on any one particular major customer.
Working Capital Items
Our inventory levels are currently adequate for our short-term needs based upon present level of demand. We consider our products to be generally available and current suppliers to be reliable and capable of satisfying anticipated needs.
Competition
The CBD-based consumer product industry is highly competitive and fragmented with numerous companies, consisting of publicly- and privately-owned companies, such as Charlotte's Web Holdings Inc., cbdMD, Inc., Medterra CBD, Inc., and many others. There are also large, well-funded companies that have indicated their intention to compete in the hemp-based product category in the U.S. We routinely evaluate internal and external opportunities to optimize value for shareholders through new product development or by asset acquisitions or sales and believe we are well-positioned to capitalize in the growing CBD product category.
There are several companies developing cannabinoid therapeutics for a range of medical indications. The cannabinoid therapeutic area currently includes formulated extracts of the Cannabis plant and synthetic formulations. These formulations include CBD or THC, or a combination of CBD and THC as the active pharmaceutical ingredient. Certain companies such as GW Pharmaceuticals plc have focused on plant-based CBD formulations, while other companies such as Zynerba Pharmaceuticals, Inc. and Insys Therapeutics, Inc. have focused on synthetic CBD formulations.
Intellectual Property
We have filed trademark applications on our brands, logos and marks in the U.S. and internationally. On January 30, 2016, we received a Notice of Allowance from the U.S. Patent and Trademark Office for our utility patent application number 14/791,184, Novel Process for Generating Hemp Oil with a High CBD Content. This patent covers our solvent-free and highly repeatable process for producing hemp oil with higher concentrations of CBD and expires in 2033.
In May 2016, we filed a patent application for our product candidate CVSI-007 with the USPTO. On May 19, 2020, we received formal notice of issuance from the USPTO for our patent application 15/426,617. The patent covers methods of treating smokeless tobacco addiction by administering pharmaceutical formulations containing CBD and nicotine. We are pursuing similar patent protection in other key markets throughout the world. During the year ended December 31, 2020, we received a notice of allowance from the Japan Patent Office.
We review our intellectual property portfolio on a periodic basis, and we will continue to broaden our portfolio in a fiscally prudent manner. We rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights.
Research and Development
Our research and development costs have consisted primarily of salaries and related personnel expense, facilities and equipment expense and other costs related to both our consumer product and drug development business segments. We charge all research and development expenses to operations as incurred in the ongoing development of new consumer products and in development of our drug candidate CVSI-007. We established a cross-functional innovation process for our consumer products development using a modified stage gate process. Our new product development activities include ideation and feasibility, product development, scaleup and validation, and product launch. We incurred research and development expenses of $1.2 million and $2.9 million, respectively, for the years ended December 31, 2021 and 2020.
Raw Materials and Product Manufacturing
We have invested significant capital to develop and maintain relationships with growers on a global scale to ensure access to raw materials to support anticipated revenue growth. We have historically sourced our raw materials from well-established and well-recognized hemp growers in Europe. In addition, we have developed relationships with hemp growers in the United States and purchase raw materials domestically as well. We have maintained access to these growers for their raw material supply and continue to explore and develop other relationships to ensure that we can meet the expected demand for hemp-based consumer products well into the future.
We are committed to producing a quality product and testing transparency. Our goals include the optimization of our product manufacturing processes and the sourcing of reliable, high-quality raw materials. Our testing procedures are robust and comprehensive, starting with a supply chain built through our supplier verification program. All incoming cannabinoid ingredients are required to be first tested by the supplier at an independent, ISO accredited, third-party laboratory before they reach our production facilities and a Certificate of Analysis provided with each delivery. We then have the cannabinoid ingredients re-tested by an independent, ISO accredited, third-party laboratory to verify the supplier results before they are released into our production process. We test in-house throughout the production process before sending the finished goods off for final verification by an independent ISO accredited third-party laboratory to ensure the finished products meet our high standards.
We are dedicated to providing the highest quality CBD consumer products on the market. We strive to meet or exceed the FDAs GMP guidelines. These guidelines provide a system of processes, procedures and documentation to assure a product has the identity, strength, composition, quality and purity that appear on its label. Our third party manufacturers use FDA-registered facilities which are independently GMP certified and subject to continuing independent audit and certification.
Environmental Matters
No significant pollution or other types of hazardous emission result from the Company's operations, and it is not anticipated that our operations will be materially affected by federal, state or local provisions concerning environmental controls. Our costs of complying with environmental health and safety requirements have not been material.
Furthermore, compliance with federal, state and local requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have not had, nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position of the Company. However, we will continue to monitor emerging developments in this area.
Employees
We believe that our future success will depend, in part, on our ability to continue to attract, hire, and retain qualified personnel. As of December 31, 2021, we had a total of 71 employees, which included 69 full-time and 2 part-time employees. In addition to our full-time employees, we contract with third-parties for the conduct of certain marketing, sales and manufacturing efforts as well as certain preclinical, clinical and manufacturing activities related to drug development efforts. Employee health and safety in the workplace is one of our core values. The COVID-19 pandemic has underscored for us the importance of keeping our employees safe and healthy. In response to the pandemic, we have taken actions aligned with the World Health Organization and the Centers for Disease Control and Prevention in an effort to protect our employees, so they can more safely and effectively perform their work. We have no collective bargaining agreements with our employees, and none are represented by labor unions. Management believes the Company has good relationships with its employees.
Company Websites
We maintain a corporate Internet website at: www.cvsciences.com. In addition, we sell our products online at: www.pluscbdoil.com. The contents of these websites are not incorporated in or otherwise to be regarded as part of this Annual Report on Form 10-K.
We file reports with the SEC, which are available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, “Section 16” filings on Form 3, Form 4, and Form 5, and other related filings, each of which is provided on our website as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.

---

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

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2021, our primary facility consists of approximately 30,000 square feet of leased office, laboratory and warehouse space located in San Diego, California, which we use for both of our business segments. On July 12, 2021, we entered into a lease termination agreement (the "Termination Agreement") for the current facility that we use in San Diego. Under the Termination Agreement, we will need to vacate the facility no later than July 31, 2022. Please see Note 14, Leases, to our financial statements included in Part IV in this Annual Report on Form 10-K for more information.

---

ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, please see Note 13, Commitments and Contingencies, to our financial statements included in Part IV in this Annual Report on Form 10-K.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the OTC:QB under the symbol "CVSI." Trading of securities on the OTC:QB is often sporadic and investors may have difficulty buying and selling or obtaining market quotations. Any OTC:QB market quotations reflect inter-dealer quotations, without adjustment for retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
Holders of Common Stock
As of March 23, 2022, there were 32 registered holders of our common stock.
Dividend Policy
No cash dividends were paid on our common stock in the 2021 and 2020 fiscal years and the Board of Directors has not considered any change in this practice, and it is not expected to consider any such change in this practice in the foreseeable future.
The payment of cash dividends in the future, if ever, will be determined by our Board of Directors, in light of conditions then existing, including our earnings, financial requirements, and opportunities for reinvesting earnings, business conditions, and other factors. There are otherwise no restrictions on the payment of dividends.
Equity Compensation Plan Information
See Part III, Item 12. "Securities Ownership of Certain Owners and Management and Related Stockholder Matters" for information regarding securities authorized for issuance under equity compensation plans.
Unregistered Sales of Equity Securities
During the year ended December 31, 2021, there were no unregistered sales of our securities that were not reported in a Current Report on Form 8-K or our Quarterly Reports on Form 10-Q.
Issuer Repurchases of Equity Securities
We did not repurchase any shares of our common stock during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. RESERVED
Not applicable.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations for the years ended December 31, 2021 and 2020 should be read in conjunction with our financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, and similar expressions to identify forward-looking statements.
OVERVIEW
We are a life science company with two distinct business segments. Our consumer product segment is focused on manufacturing, marketing and selling hemp-based CBD products to a range of market sectors. Our specialty pharmaceutical segment is focused on developing and commercializing novel therapeutics utilizing CBD. We are traded on the OTC:QB, and our trading symbol is CVSI.
Our consumer product business segment manufactures, markets and sells a variety of consumer products containing hemp-based CBD under our PlusCBD™ brand in a range of market sectors including nutraceutical, beauty care and specialty foods.
Our specialty pharmaceutical business segment is developing cannabinoids to treat a range of medical indications. Our product candidates are based on proprietary formulations, processes and technology that we believe are patent-protectable, and we plan to vigorously pursue patent protection on our drug candidates. This business segment has not yet generated any revenue and requires significant additional capital to effect its business plan.
We expect to realize revenue from our consumer products business segment to help fund our working capital needs. However, in order to fund our pharmaceutical product development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to fund our drug development efforts, we may need to curtail, partner or delay such activity.
Our priorities for FY22 reflect our focus on delivering value to our shareholders. We have taken the next step to improve shareholder value by commencing a strategic review, which will include consideration of inbound and outbound merger, sale, acquisition or other options for the Company as a whole or for any business segment. We have engaged A.G.P./Alliance Global Partners to assist the Company with the strategic review.
Results of Operations
Comparison of the Years ended December 31, 2021 vs. December 31, 2020
Revenues and gross profit
Year ended December 31, Change
2021 2020 Amount %
(in thousands)
Product sales, net $ 20,048 $ 24,429 $ (4,381) (18) %
Cost of goods sold 11,432 13,420 (1,988) (15) %
Gross profit $ 8,616 $ 11,009 $ (2,393) (22) %
Gross margin 43.0 % 45.1 %
Revenue by channel
Year ended December 31, 2021 Year ended December 31, 2020
Amount % of product sales, net Amount % of product sales, net
(in thousands) (in thousands)
Retail - FDM $ 1,494 7.5 % $ 1,651 6.8 %
Retail - Natural products and other 11,054 55.1 % 15,073 61.7 %
E-Comm 7,500 37.4 % 7,705 31.5 %
Product sales, net $ 20,048 100.0 % $ 24,429 100.0 %
We had product sales of $20.0 million and gross profit of $8.6 million, representing a gross margin of 43.0% in 2021 compared with product sales of $24.4 million and gross profit of $11.0 million, representing a gross margin of 45.1% in 2020. Our product sales decreased by $4.4 million or 18% in 2021 when compared to 2020 results. The decline is primarily due to lower retail sales in the natural products retail channel, as 2021 had a full year impact of COVID-19. In addition, increased market competition, which is largely due to the lack of a clear regulatory framework, is another main driver for the decline. As of December 31, 2021, our products were in 8,495 retail stores, of which 5,709 were with retailers in the FDM channel. The store count increased from 7,346 stores as of December 31, 2020 and provides us with an increased distribution footprint for future growth. For the years ended December 31, 2021 and 2020, e-commerce sales accounted for 37.4% and 31.5% of revenue, respectively. 44% of our net revenue for the year ended December 31, 2021 was from new products launched since 2020.
During 2021, we launched the following new products:
•PlusCBDTM Calm and Sleep, to support healthy stress response and improve sleep cycles, and
•ProCBDTM, a full product line exclusively through health care practitioners.
Cost of goods sold consists primarily of raw materials, packaging, manufacturing overhead (including payroll, employee benefits, stock-based compensation, facilities, depreciation, supplies and quality assurance costs), merchant card fees and shipping. Cost of goods sold in 2021 increased as a percentage of revenue due to higher overhead and production cost compared to 2020. The gross profit decrease of $2.4 million or 22% to $8.6 million in 2021 is mostly driven by the decline in product sales. Gross margins decreased from 45.1% in 2020 to 43.0% in 2021. The decrease is primarily due to higher overhead cost and associated volume deleverage, increased production cost, and reduced sales pricing as a result of increased market competition.
Research and development expense
Year ended December 31, Change
2021 2020 Amount %
(in thousands)
Research and development expense $ 1,185 $ 2,943 $ (1,758) (60) %
Percentage of revenue 5.9 % 12.0 %
Research and development (“R&D”) expense decreased to $1.2 million in 2021 compared to $2.9 million in 2020. The decrease is related to reductions in R&D expenses for our specialty pharmaceutical segment of $1.5 million and for our consumer products segment of $0.2 million. We incurred $0.5 million and $0.7 million of R&D expense related to our consumer products segment in 2021 and 2020, respectively. The reduction in R&D expense in our consumer products segment is mostly related to lower personnel cost and cost for outside services for new consumer product developments. We incurred $0.7 million and $2.2 million of R&D expenses related to our specialty pharmaceutical segment in 2021 and 2020, respectively. The reduction in R&D expense in our specialty pharmaceutical segment is mostly related to reduced activities related to preclinical work, development cost associated with our active pharmaceutical ingredient ("API"), and expenses paid to outside consultants.
Selling, general and administrative expense
Year ended December 31, 2021 Year ended December 31, 2020
Amount % of product sales, net Amount % of product sales, net
(in thousands) (in thousands)
Sales expense $ 4,889 24.4 % $ 4,543 18.6 %
Marketing expense 7,056 35.2 % 6,759 27.7 %
General & administrative expense 13,932 69.5 % 19,356 79.2 %
Selling, general and administrative expense $ 25,877 129.1 % $ 30,658 125.5 %
Selling, general and administrative (“SG&A”) expenses decreased by $4.8 million or 16% to $25.9 million in 2021, from $30.7 million in 2020.
•Sales expense increased due to the amortization of capitalized implementation cost for customer relationship management (CRM) technology and associated licensing fees.
•Marketing expense increased due to higher expense for digital marketing activities, such as programmatic and paid advertisement.
•General and administrative expense decreased primarily due to decreased payroll and outside services expense. General and administrative expense also decreased due to the gain on lease modification during 2021. We also recorded a goodwill and intangible asset impairment charge of $5.0 million during 2021. In addition, during 2020, we derecognized the tax receivable for founder RSU settlement of $6.2 million. For more information regarding the founder RSU settlement, please see Note 12, Related Parties, to our financial statements included in Part IV in this Annual Report on Form 10-K.
Non-GAAP Financial Measures
We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net loss plus depreciation expense, amortization expense, interest
expense, 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 helps to provide insights in trends in our business in addition to GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.
We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Annual Report on Form 10-K, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with additional understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.
Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Annual Report on Form 10-K, including our 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 years ended December 31, 2021 and 2020 is detailed below:
Year ended December 31, 2021 Year ended December 31, 2020
Consumer Products Specialty Pharma Total Consumer Products Specialty Pharma Total
(in thousands)
Net loss $ (9,861) $ (5,693) $ (15,554) $ (19,908) $ (2,376) $ (22,284)
Depreciation 1,153 - 1,153 836 - 836
Amortization - - - - 36 36
Interest expense 140 - 140 9 - 9
Income tax expense (benefit) 7 (94) (87) (317) - (317)
EBITDA (8,561) (5,787) (14,348) (19,380) (2,340) (21,720)
Stock-based compensation (1) 3,209 1 3,210 3,744 137 3,881
Gain on extinguishment of debt (2) (2,945) - (2,945) - - -
Gain on lease termination (3) (906) - (906) (352) - (352)
Goodwill and intangible asset impairment (4) - 5,033 5,033 - - -
Derecognition of tax receivable for founder RSU settlement (5) - - - 6,229 - 6,229
Adjusted EBITDA $ (9,203) $ (753) $ (9,956) $ (9,759) $ (2,203) $ (11,962)
(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 10, Stock-Based Compensation, to our financial statements included in Part IV in this Annual Report on Form 10-K.
(2)Represents gain on extinguishment of debt related to the forgiveness of our PPP loan. For more information, please see Note 8, Debt, to our financial statements included in Part IV in this Annual Report on Form 10-K.
(3)Represents gain associated with the lease termination agreement for our main facility during the year ended December 31, 2021 and lease termination of one of our San Diego facilities during the year ended December 31, 2020. For more information, please see Note 14, Leases, to our financial statements included in Part IV in this Annual Report on Form 10-K.
(4)Represents the goodwill and intangible asset impairment charge. For more information, please see Note 5, Intangible Assets, to our financial statements included in Part IV in this Annual Report on Form 10-K.
(5)Represents the derecognition of the tax receivable related to founder RSU settlement. For more information, please see Note 12, Related Parties, to our financial statements included in Part IV in this Annual Report on Form 10-K.
Liquidity and Capital Resources
During the year ended December 31, 2021, our primary sources of capital came from (i) cash flows from our operations, predominantly from the sale of our CBD products, (ii) existing cash, (iii) government loans, and (iv) proceeds from third-party financings, including the sale of our common stock to certain investors. As of December 31, 2021, our cash was approximately $1.4 million. During the year ended December 31, 2021, we used cash in operating activities of approximately $7.5 million.
We believe that a combination of factors, mainly consisting of the highly competitive environment and the continued effects of the COVID-19 pandemic, have adversely impacted our business operations for the year ended December 31, 2021. Due to a low barrier entry market with a lack of a clear regulatory framework, we face intense competition from both licensed and illicit market operators that may also sell plant-based dietary supplements and hemp-based CBD consumer products. Because we operate in a market that is rapidly 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.
Furthermore, although there are signs that COVID-19 may be beginning to taper off, COVID-19 still has an impact on worldwide economic activity, and the ongoing effects of the COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. We may also take further actions that alter our operations which we determine are in our best interests. Management implemented, and continues to make and implement, strategic cost reductions, including reductions in employee headcount, vendor spending, and the delay of certain expenses related to our drug development activities.
On April 15, 2020, we applied for a loan from JPMorgan Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program (the "PPP") of the CARES Act as administered by the U.S. Small Business Administration (the "SBA"). On April 17, 2020, the loan was approved, and we received proceeds in the amount of $2.9 million (the “PPP Loan”). On September 8, 2021, we received confirmation from the Lender that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan, including all accrued interest to date. The forgiveness of the PPP Loan was recognized as a gain on debt extinguishment in our financial results for the year ended December 31, 2021.
The CARES Act also provides an employee retention credit, which is a refundable tax credit against certain employment taxes of up to 70% of qualified wages up to $10,000 paid to employees during each of the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021. We determined that we qualify for the tax credit under the CARES Act and filed our amended tax returns in March 2022. We expect to receive $2.0 million of tax credits under the relief provisions.
In October 2020, we entered into a finance agreement with First Insurance Funding in order to fund a portion of our insurance policies. The amount financed was $0.7 million and incurred interest at a rate of 3.60%. We were required to make monthly payments of $0.1 million from November 2020 through July 2021. There was no outstanding balance as of December 31, 2021.
In October 2021, we entered into a financing agreement with First Insurance Funding in order to fund a portion of our insurance policies. The amount financed is $0.4 million and incurs interest at a rate of 4.17%. We are required to make monthly payments of $45,000 from November 2021 through July 2022.
On December 8, 2020, we entered into a Common Stock Purchase Agreement (“SPA”) with Tumim Stone Capital, LLC (“Tumim”), pursuant to which Tumim committed to purchase up to $10.0 million in shares of our common stock from time to time. The SPA provides, among other things, that we may direct, every three trading days, Tumim to purchase a number of shares of our common stock not to exceed an amount determined based upon the trading volume and stock price of our shares. Effective November 15, 2021, the Company and Tumim mutually agreed to terminate the SPA. During the year ended December 31, 2021, we sold 10,021,804 shares of common stock pursuant to the SPA and recognized proceeds of $4.4 million.
In November 2021, we entered into a Securities Purchase Agreement (the "November 2021 SPA") with an institutional investor providing for the sale and issuance of convertible notes due 2022 in the aggregate original principal amount of $1.06 million. Upon filing with the Securities and Exchange Commission of an additional prospectus supplement and supplemental indenture and our satisfaction of certain other closing conditions, we may elect to offer and sell up to and additional $4.2 million in aggregate principal amount of the notes at additional closings, resulting in potential gross proceeds for this offering and such additional offerings, of approximately $5.3 million. During the year ended December 31, 2021, holders of the convertible notes converted amounts payable under such notes into 1,794,291 shares of the Company's common stock at a weighted average conversion price of $0.13, resulting in a reduction of the convertible note balance of $0.2 million. Subsequent to December 31, 2021, holders of the convertible notes converted amounts payable under such notes into 6,804,281 shares of the Company's
common stock at a weighted average conversion price of $0.10 per share, resulting in a reduction of the convertible note balance of $0.7 million.
On March 25, 2022, we issued an additional note for an aggregate principal amount of $1.06 million (the "Second Tranche"). As a result, we received gross proceeds of $1.06 million, before original issuance discount of 6% and other debt issuance costs. The Second Tranche matures on September 25, 2022. There is no guarantee we will be able to consume additional closings for the remaining $3,180,000 in aggregate principal amount of the notes. The additional closing conditions include the satisfaction of certain equity conditions set forth in the November 2021 SPA.
On March 30, 2022, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an institutional investor, pursuant to which we agreed to issue and sell 700 shares of our preferred stock which has supervoting rights of 170,000 votes per share of preferred stock on certain stockholder proposals and warrants to purchase an aggregate of 10,000,000 shares of common stock. The preferred stock has a stated value of $1,000 per share and is convertible into an 10,000,000 shares of common stock at a conversion price of $0.07 per share. We received aggregate gross proceeds of $0.7 million before deducting placement agent’s fees and other offering expenses.
During the first quarter of 2019, we issued 2,950,000 Restricted Stock Units ("RSU") to our founder, former President and Chief Executive Officer, Michael Mona Jr. ("Mona Jr."). The vesting of the RSU is treated as a taxable compensation and thus subject to income tax withholdings. No amounts were withheld (either in cash or the equivalent of shares of common stock from the vesting of the RSU's) or included in our payroll tax filing at the time of vesting. During the year ended December 31, 2020, we reported the taxable compensation associated with the RSU release to the taxing authorities and included the amount in Mona Jr's W-2 for 2019. Although the primary tax liability is the responsibility of Mona Jr., we are secondarily liable and thus have recorded the liability on our balance sheet as of December 31, 2021. The liability may be relieved once the tax amount is paid by Mona Jr. and the Company has received the required taxing authority documentation from Mona Jr.. As of March 31, 2022, Mona Jr. has not provided us with proof that he filed and paid his taxes for 2019. Refer to Note 12. Related Parties and Note 13. Commitments and Contingencies to our financial statements included in Part IV in this Annual Report on Form 10-K for additional information.
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 and to provide related note disclosure in certain circumstances. Our financial statements and notes have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2021, the Company generated negative cash flows from operations of $7.5 million and had an accumulated deficit of $79.5 million. 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.
The Company's financial operating results and accumulated deficit, besides other factors, raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability.
A summary of our changes in cash flows for the years ended December 31, 2021 and 2020 is provided below:
Year ended December 31,
2021 2020
(in thousands)
Net cash flows provided by (used in):
Operating activities $ (7,485) $ (7,300)
Investing activities (35) (1,057)
Financing activities 4,370 3,274
Net decrease in cash, cash equivalents and restricted cash (3,150) (5,083)
Cash, cash equivalents and restricted cash, beginning of year 4,525 9,608
Cash, cash equivalents and restricted cash, end of year $ 1,375 $ 4,525
Operating Activities
Net cash used in operating activities includes our net loss adjusted for non-cash expenses such as stock-based compensation, depreciation and amortization, bad debt expense and other non-cash items. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable and can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer behavior.
Net cash used in operating activities was $7.5 million in 2021 compared to $7.3 million in 2020, an increase of $0.2 million. The increase in our cash usage in operating activities was due to a decline in our changes in working capital by $1.5 million, partially offset by our reduced net loss, adjusted for non-cash items of $1.4 million. Our changes in working capital declined from $3.5 million in 2020 to $1.9 million in 2021, mostly due to reduced cash collections from accounts receivable, lower inventory usage, and reductions in prepaids and other assets, partially offset by reduced cash outflow for accounts payables and accrued expenses. Our net loss, adjusted for non-cash items, in 2021 decreased by $1.4 million when compared to 2020. Our net loss declined by $6.7 million from $22.3 million in 2020 to $15.6 million in 2021. Non-cash adjustments declined by $5.4 million from a total of $11.5 million in 2020 to $6.2 million in 2021. The reduction in non-cash adjustments related mostly to the derecognition of the tax receivable for founder RSU settlement of $6.2 million in 2020. In addition in 2021, we recorded a goodwill and intangible asset impairment charge of $5.0 million offset by the gain on debt extinguishment for our PPP loan of $2.9 million. Recurring non-cash adjustments consists of depreciation, amortization and stock-based compensation.
Investing Activities
Net cash used in investing activities decreased by $1.0 million in 2021 when compared to 2020. During 2020, we invested in additional technology to support our e-commerce activities.
Financing Activities
Net cash provided by financing activities increased by $1.1 million from $3.3 million in 2020 to $4.4 million in 2021. Our financing activity for 2021 consisted of proceeds from issuance of common stock under our SPA with Tumim of $4.4 million, net proceeds of our convertible note financing of $0.8 million, offset by repayments of our insurance financing of $0.8 million. In 2020, we received proceeds from a PPP Loan of $2.9 million, proceeds from the issuance of common stock under our SPA with Tumim of $0.2 million, and proceeds from stock option exercises of $0.2 million.
Inflation
We have not been affected materially by inflation during the periods presented. However, recent trends towards rising inflation may adversely impact our business and corresponding financial position and cash flow.
Known Trends or Uncertainties
There can be no assurance that the Company’s business and corresponding financial performance will not be adversely affected by general economic or consumer trends. In particular, global economic conditions remain constrained, and if such conditions continue, recur or worsen, this may have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, the recent trends towards rising inflation 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 the Common Shares, 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.
As discussed in this Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic, and thus, there remains uncertainty as to the effect of COVID-19 on our business in both the short and long-term.
Critical Accounting Policies
The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.
A “critical accounting policy” is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective, or complex judgments, and often requires management to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:
Goodwill and Intangible Assets - We evaluate the carrying value of goodwill and intangible assets annually during the fourth quarter in accordance with Accounting Standards Codification (“ASC”) Topic 350, Intangibles Goodwill and Other, and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. All of the goodwill and intangible assets are assigned to our specialty pharmaceutical segment.
Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may more likely than not be less than carrying amount, or if significant adverse changes in our future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, we then evaluate goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The quantitative assessment for goodwill requires us to estimate the fair value of our reporting units using either an income or market approach or a combination thereof.
Management makes critical assumptions and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates.
During the fourth quarter of 2021, we performed our annual goodwill impairment test and determined, after performing a qualitative test of our reporting units, that it is more likely than not that the fair value of the specialty pharmaceutical reporting unit was less than its carrying amount. As a result of our goodwill impairment test, we recorded a goodwill impairment charge of $2.8 million for the year ended December 31, 2021.
We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives to their estimated residual values, generally five years.
In-process research & development ("IPR&D") has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. Until such time as the projects are either completed or abandoned, we test those assets for impairment at least annually at year end, or more frequently at interim periods, by evaluating qualitative factors which could be indicative of impairment. Qualitative factors being considered include, but are not limited to, macro-economic conditions, progress on drug development activities, and overall financial performance. If impairment indicators are present as a result of our qualitative assessment, we will test those assets for impairment by comparing the fair value of the assets to their carrying value. Quantitative factors being considered include, but are not limited to, the current project status, forecasted changes in the timing or amounts required to complete the project, forecasted changes in timing or changes in the future cash flows to be generated by the completed products, a probability of success of the ultimate project and changes to other market-based assumptions, such as discount rates, current Company market capitalization and estimates of the fair value of the Company's reporting units. Upon completion or abandonment, the value of the IPR&D assets will be amortized to expense over the anticipated useful life of the developed products, if completed, or charged to expense when abandoned if no alternative future use exists.
As a result of our intangible asset impairment test, we recorded an intangible asset impairment charge of $2.2 million for the year ended December 31, 2021. As of December 31, 2021, the carrying value of the Company's IPR&D asset approximates its estimated fair value of $1.5 million.
Our intangible assets are included in our specialty pharmaceutical segment.
Revenue Recognition - The majority of our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, which is primarily related to our Plus CBD™ line of products. Net sales
reflect the transaction prices for these contracts based on our selling list price, which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness. We recognize revenue at the point in time that control of the ordered product is transferred to the customer, which is typically upon shipment to the customer or other customer-designated delivery point. We accrue for estimated sales returns by customers based on historical sales return results. The computation of the sales return and discount allowances require that management makes certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Shipping and handling fees charged to customers are included in product sales and totaled $0.1 million and $0.2 million for the years ended December 31, 2021 and 2020, respectively. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.
Stock-Based Compensation - Certain employees, officers, directors, and consultants participate in our Amended and Restated 2013 Equity Incentive Plan, as amended, which provides for the granting of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. Stock options generally vest in equal increments over a two- to four-year period and expire on the tenth anniversary following the date of grant. Performance-based stock options vest once the applicable performance condition is satisfied.
The risk-free interest rates are based on the implied yield available on U.S. Treasury constant maturities with remaining terms equivalent to the respective expected terms of the options. Expected volatility is based on the historical volatility of our common stock. We estimate the expected term for stock options awarded to employees, officers and directors using the simplified method in accordance with ASC Topic 718, Stock Compensation, because we don't have sufficient relevant historical information to develop reasonable expectations about future exercise patterns. In the future, as we gain historical data for the actual term over which stock options are held, the expected term may change, which could substantially change the grant-date fair value of future stock option awards, and, consequently, compensation of future grants.
We recognize stock-based compensation as compensation and benefits expense in the statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the closing price of our stock on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is probable of being satisfied.
Recent Accounting Pronouncements
Refer to Note 2 of our financial statements for a discussion of recent accounting standards and pronouncements.
Off-Balance Sheet Arrangements
None.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth at the pages indicated in Part IV, Item 15(a)(1) of this Annual Report.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. Our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, 2021 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2021.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on the Company’s internal controls as the Company is a non-accelerated filer and is thus not required to provide such a report.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
On March 30, 2022, the Company's Board of Directors approved an amendment to the 2013 Plan to reduce the shares available for issuance under the 2013 Plan by 8,000,000 shares. See Exhibit 10.40 attached to this Annual Report on Form 10-K.
On April 1, 2022, as further described in the Company’s Proxy Statement for its Annual Stockholder Meeting, Ms. Beth Altman, Dr. Paul Blake, and Ms. Terri Funk Graham, each of whom has served as a director on our Board since 2019, have elected not to stand for re-election as a director of the Company. They will all continue to serve as directors until their term concludes as of the date of the Annual Stockholder Meeting. In connection with their departures and as a result of further strategic cost reductions, the Board determined to reduce the authorized size of our Board to three members as of the date of the Annual Stockholder Meeting in an effort to conserve resources and cut costs associated with board of directors activities until such time at a later date when the Board believes such cost-cutting measures are no longer necessary, but will have a vacancy for one spot.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission in connection with our 2022 Annual Meeting of Stockholders, or the Definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2021, under the headings "Election of Directors," "Corporate Governance," "Our Executive Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance," and is incorporated herein by reference.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since we last described such procedures.
The Company has a Code of Ethics which is posted on our website at: www.cvsciences.com.

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in our Definitive Proxy Statement under the heading "Executive Compensation and Other Information," and is incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item will be contained in our Definitive Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," and is incorporated herein by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item will be contained in our Definitive Proxy Statement under the headings "Certain Relationships and Related Person Transactions," "Board Independence" and "Committees of the Board of Directors" and is incorporated herein by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item will be contained in our Definitive Proxy Statement under the heading "Independent Registered Public Accountants' Fee" and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.Financial Statements
The following financial statements of the Company are submitted herewith:
Reports of Independent Registered Public Accounting Firms
Balance Sheets as of December 31, 2021 and 2020
Statements of Operations for the years ended December 31, 2021 and 2020
Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020
Statements of Cash Flows for the years ended December 31, 2021 and 2020
Notes to Financial Statements
2.Financial Statement Schedules
Schedules are not submitted because they are not applicable or not required under Regulation S-X or because the required information is included in the financial statements or notes thereto.
3.Exhibits required to be filed by Item 601 of Regulations S-K
A list of exhibits is set forth on the Exhibit Index as included in this Annual Report on Form 10-K are incorporated by reference.