~~We file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act~~

Table of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at~~http://www.sec.gov.~~

~~On our Internet website,~~ ~~http://www.cvsciences.com~~, we post the following recent filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K; our quarterly reports on Form 10-Q; our current reports on Form 8-K; and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

When we use the terms “CV Sciences”, “Company”, “we”, “our” and “us” we mean CV Sciences, Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.

~~FORWARD LOOKING STATEMENTS~~

This Quarterly Report on Form 10-Q, the other reports, statements, and information that the Company has previously filed with or furnished to, or that we may subsequently file with or furnish to, the SEC and public announcements that we have previously made or may subsequently make include, may include, or may incorporate by reference certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. To the extent that any statements made in this report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation: marketability of our products; legal and regulatory risks associated with the OTC: QB; our ability to raise additional capital to finance our activities; the future trading of our common stock; our ability to operate as a public company; our ability to protect our proprietary information; general economic and business conditions; the volatility of our operating results and financial condition; our ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time to time in our filings with the SEC, or otherwise.

Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.

Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

(unaudited)

CV SCIENCES, INC. ~~AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (Audited)
September 30, December 31,
2018 2017
Assets
Current assets
Cash (Note 2) $ 10,271,599 $ 2,012,965
Restricted cash (Note 2) 738,356 778,579
Accounts receivable, net (Note 2) 2,493,091 1,507,824
Inventory (Note 3) 5,727,569 2,822,585
Prepaid expenses and other current assets 1,847,048 813,218
21,077,663 7,935,171

Inventory, net (Note 3) 803,100 5,667,101
Other assets 400,000 400,000
Property & equipment, net (Note 2) 2,158,666 2,083,433
Intangibles, net (Note 5) 3,809,650 3,836,200
Goodwill (Note 5) 2,788,300 2,788,300

Total assets $ 31,037,379 $ 22,710,205

Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 1,165,014 $ 678,271
Accrued expenses (Note 4) 1,808,734 1,931,920
Secured convertible promissory notes payable, net (Note 7) – 609,926
Unsecured notes payable (Note 7) – 116,370
Total current liabilities 2,973,748 3,336,487

Non-current liabilities
Unsecured note payable, net (Note 7) – 850,000
Deferred rent 1,234,329 1,067,459
Deferred tax liability 1,074,800 1,074,800
Total liabilities 5,282,877 6,328,746

Commitments and contingencies (Note 11)

Stockholders' equity (Notes 8 and 9)
Preferred stock, par value $0.0001; 10,000,000 shares authorized; no shares issued and outstanding – –
Common stock, par value $0.0001; 190,000,000 shares authorized; 94,355,178 and 90,512,563 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 9,435 9,051
Additional paid-in capital 53,672,778 51,400,336
Accumulated deficit (27,927,711 ) (35,027,928 )
Total stockholders' equity 25,754,502 16,381,459

Total liabilities and stockholders' equity $ 31,037,379 $ 22,710,205

(UNAUDITED)

(in thousands, except per share data)



	September 30, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	13,738		$	12,684
Restricted cash	500			251
Accounts receivable, net	3,542			3,340
Inventory	10,025			7,132
Prepaid expenses and other	8,469			2,059
Total current assets	36,274			25,466

Inventory	—			1,418
Property & equipment, net	3,454			2,844
Operating lease assets	9,021			—
Intangibles, net	3,774			3,801
Goodwill	2,788			2,788
Other assets	1,227			585
Total assets	$	56,538		$	36,902

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,110		$	1,245
Accrued expenses	10,366			2,673
Operating lease liability - current	669			—
Notes payable	—			474
Total current liabilities	12,145			4,392

Operating lease liability	9,787			—
Deferred rent	—			1,329
Deferred tax liability	1,065			1,065
Other liabilities	298			—
Total liabilities	23,295			6,786

Commitments and contingencies (Note 8)

Stockholders' equity
Preferred stock, par value $0.0001; 10,000 shares authorized; no shares issued and outstanding	—			—
Common stock, par value $0.0001; 190,000,000 shares authorized; 98,767 and 94,940 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively	10			9
Additional paid-in capital	68,184			55,134
Accumulated deficit	(34,951		)	(25,027		)
Total stockholders' equity	33,243			30,116

Total liabilities and stockholders' equity	$	56,538		$	36,902

See accompanying notes to the condensed consolidated financial statements.

CV SCIENCES, INC. ~~AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~UNAUDITED~~

For the three months ended September 30, For the nine months ended September 30,
2018 2017 2018 2017

Product sales, net $ 13,600,881 $ 5,591,210 $ 34,020,341 $ 13,437,233
Cost of goods sold 3,655,458 1,593,561 9,452,939 4,162,122
Gross Profit 9,945,423 3,997,649 24,567,402 9,275,111

Operating Expenses:
Selling, general and administrative (5,890,332 ) (4,311,078 ) (15,951,529 ) (11,513,560 )
Research and development (529,562 ) (179,338 ) (1,125,270 ) (573,701 )
(6,419,894 ) (4,490,416 ) (17,076,799 ) (12,087,261 )

Gain on changes in derivative liabilities – 10,987 – 248,875
Royalty buy-out – – – (2,432,000 )
(6,419,894 ) (4,479,429 ) (17,076,799 ) (14,270,386 )

Operating Income (Loss) 3,525,529 (481,780 ) 7,490,603 (4,995,275 )

Other (expense) income:
Interest income – – – 7
Interest expense (30,556 ) (108,203 ) (150,386 ) (371,678 )
Total Other Expense (30,556 ) (108,203 ) (150,386 ) (371,671 )

Income (loss) before provision for income taxes 3,474,973 (589,983 ) 7,340,217 (5,366,946 )
Provision for income taxes 200,000 – 240,000 –
Net Income (Loss) $ 3,294,973 $ (589,983 ) $ 7,100,217 $ (5,366,946 )

Weighted average common shares outstanding
Basic 91,639,488 88,114,604 90,959,121 77,126,737
Diluted 115,888,788 88,114,604 110,601,488 77,126,737
Net income (loss) per common share
Basic $ 0.04 $ (0.01 ) $ 0.08 $ (0.07 )
Diluted $ 0.03 $ (0.01 ) $ 0.06 $ (0.07 )

(UNAUDITED)

(in thousands, except per share data)



	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019			2018
Product sales, net	$	12,603		$	13,601	$	44,368		$	34,020
Cost of goods sold	4,175			3,655		13,430			9,453
Gross Profit	8,428			9,946		30,938			24,567

Operating expenses:
Research and development	1,544			530		4,574			1,125
Selling, general and administrative	8,657			5,890		36,261			15,952
	10,201			6,420		40,835			17,077

Operating Income (Loss)	(1,773		)	3,526		(9,897		)	7,490

Interest (income) expense, net	(7		)	31		(2		)	150
Income (loss) before income taxes	(1,766		)	3,495		(9,895		)	7,340
Income tax expense	3			200		29			240
Net Income (Loss)	$	(1,769	)	$	3,295	$	(9,924	)	$	7,100

Weighted average common shares outstanding
Basic	98,733			91,639		97,524			90,959
Diluted	98,733			115,889		97,524			110,601
Net income (loss) per common share
Basic	$	(0.02	)	$	0.04	$	(0.10	)	$	0.08
Diluted	$	(0.02	)	$	0.03	$	(0.10	)	$	0.06

See accompanying notes to the condensed consolidated financial statements.

CV SCIENCES, INC. ~~AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018~~

~~UNAUDITED~~

Common Stock
Additional
Paid-In
Accumulated
Shares Amount Capital Deficit Total
Balance - December 31, 2017 90,512,563 $ 9,051 $ 51,400,336 $ (35,027,928 ) $ 16,381,459
Issuance of common stock for professional services 225,000 23 295,303 – 295,326
Issuance of common stock from exercise of stock options 994,433 99 343,217 – 343,316
Issuance of common stock from exercise of warrants on a net issuance basis 2,623,182 262 (262 ) – –
Stock based compensation – – 1,634,184 – 1,634,184
Net Income – – – 7,100,217 7,100,217
Balance - September 30, 2018 94,355,178 $ 9,435 $ 53,672,778 $ (27,927,711 ) $ 25,754,502

(UNAUDITED)

(in thousands)



	Common Stock			Additional Paid-In Capital		Accumulated Deficit
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at January 1, 2019	94,940	$	9	$	55,134	$	(25,027	)	$	30,116
Issuance of common stock under employee benefit plan	3,539	1		196		—			197
Stock-based compensation	—	—		2,091		—			2,091
Stock-based compensation associated with employment settlement	—	—		7,857		—			7,857
Net loss	—	—		—		(9,384		)	(9,384		)
Balance at March 31, 2019	98,479	10		65,278		(34,411		)	30,877
Issuance of common stock under employee benefit plan	225	—		57		—			57
Stock-based compensation	—	—		2,125		—			2,125
Net income	—	—		—		1,229			1,229
Balance at June 30, 2019	98,704	10		67,460		(33,182		)	34,288
Issuance of common stock under employee benefit plan	63	—		25		—			25
Stock-based compensation	—	—		699		—			699
Net loss	—	—		—		(1,769		)	(1,769		)
Balance at September 30, 2019	98,767	$	10	$	68,184	$	(34,951	)	$	33,243



	Common Stock			Additional Paid-In Capital		Accumulated Deficit
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at January 1, 2018	90,513	$	9	$	51,400	$	(35,028	)	$	16,381
Stock-based compensation	—	—		1,036		—			1,036
Net income	—	—		—		619			619
Balance at March 31, 2018	90,513	9		52,436		(34,409		)	18,036
Issuance of stock for professional services	150	—		62		—			62
Exercise of stock options	283	—		108		—			108
Stock-based compensation	—	—		360		—			360
Net income	—	—		—		3,186			3,186
Balance at June 30, 2018	90,946	9		52,966		(31,223		)	21,752
Issuance of stock for professional services	75	—		233		—			233
Exercise of stock options	711	—		236		—			236
Issuance of common stock from exercise of warrants on a net issuance basis	2,623	—		—		—			—
Stock-based compensation	—	—		238		—			238
Net income	—	—		—		3,295			3,295
Balance at September 30, 2018	94,355	$	9	$	53,673	$	(27,928	)	$	25,754

See accompanying notes to the condensed consolidated financial statements.

CV SCIENCES, INC. ~~AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

~~UNAUDITED~~

For the nine months ended September 30,
2018 2017
OPERATING ACTIVITIES
Net income (loss) $ 7,100,217 $ (5,366,946 )
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Depreciation and amortization 375,671 144,294
Amortization of debt issuance costs and accrued interest 50,074 163,599
Amortization of beneficial conversion feature of convertible debts – 26,076
Common stock issued for professional services 295,326 –
Stock-based compensation 1,634,184 3,072,224
Royalty buy-out – 2,432,000
Bad debt expense 46,779 400,435
Accrued interest payable – 103,603
Gain on changes in derivative liabilities – (248,875 )
Change in operating assets and liabilities:
Accounts receivable (1,029,546 ) (774,473 )
Inventory 1,959,017 856,229
Prepaid expenses and other current assets (1,036,330 ) (971,567 )
Accounts payable and accrued expenses 363,557 810,617
Deferred rent 166,870 –
Net cash provided by operating activities 9,925,819 647,216

INVESTING ACTIVITIES
Purchase of equipment (331,101 ) (6,410 )
Tenant improvements to leasehold real estate (93,253 ) –
Net cash flows used in investing activities (424,354 ) (6,410 )

FINANCING ACTIVITIES
Borrowings from secured convertible debt, net of costs – 750,000
Repayment of convertible debt in cash (660,000 ) –
Repayment of unsecured debt in cash (850,000 ) –
Repayment of unsecured notes payable (116,370 ) (125,964 )
Proceeds from exercise of stock options 343,316 –
Net cash flows provided by (used in) financing activities (1,283,054 ) 624,036

Net increase in cash and restricted cash 8,218,411 1,264,842
Cash and restricted cash, beginning of period 2,791,544 1,057,468
Cash and restricted cash, end of period $ 11,009,955 $ 2,322,310

Supplemental disclosures of non-cash transactions:
Conversion of convertible promissory notes and accrued interest to common stock $ – $ 1,655,000
Value of embedded derivative at inception – 29,300
Issuance of common stock in consideration for royalty buyout – 1,500
Issuance of common stock to settle restricted stock units – 200
Issuance of common stock for prepaid expenses and other current assets – 202,000
Stock Redemptions – 75,000
Supplemental cash flow disclosures:
Interest paid $
150,386
$ 78,397
Taxes paid 70,380 39,584

(UNAUDITED)

(in thousands)



	Nine Months Ended September 30,
	2019			2018
OPERATING ACTIVITIES
Net income (loss)	$	(9,924	)	$	7,100
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Depreciation and amortization	533			376
Amortization of beneficial conversion feature of convertible debts	—			50
Common stock issued for professional services	—			295
Stock-based compensation	4,915			1,634
Stock-based compensation associated with employment settlement	7,857			—
Bad debt expense	38			47
Non-cash lease expense	497			—
Change in operating assets and liabilities:
Accounts receivable	(240		)	(1,030		)
Inventory	(1,475		)	1,959
Prepaid expenses and other	(659		)	(1,036		)
Accounts payable and accrued expenses	857			364
Deferred rent	—			167
Net cash provided by operating activities	2,399			9,926

INVESTING ACTIVITIES
Purchase of equipment	(872		)	(331		)
Tenant improvements to leasehold real estate	(29		)	(94		)
Net cash flows used in investing activities	(901		)	(425		)

FINANCING ACTIVITIES
Repayment of convertible debt in cash	—			(660		)
Repayment of unsecured debt	(474		)	(966		)
Proceeds from exercise of stock options	279			343
Net cash flows used in financing activities	(195		)	(1,283		)

Net increase in cash, cash equivalents and restricted cash	1,303			8,218
Cash, cash equivalents and restricted cash, beginning of period	12,935			2,792
Cash, cash equivalents and restricted cash, end of period	$	14,238		$	11,010

Supplemental cash flow disclosures:
Interest paid	$	9		$	150
Income taxes paid	$	70		$	70

Supplemental disclosures of non-cash transactions:
Purchase of property and equipment in accounts payable and accrued expenses	$	21		$	—
Operating ROU lease assets obtained in exchange for operating lease liabilities	$	5,405		$	—

See accompanying notes to the condensed consolidated financial statements.

CV SCIENCES, INC. ~~AND SUBSIDIARIES~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~UNAUDITED~~

(UNAUDITED)

1.
1.	ORGANIZATION AND BUSINESS

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

The Company ~~previously operated~~has two operating segments; consumer products and specialty pharmaceutical. The consumer products segment develops, manufactures and markets products based on hemp-based Cannabidiol ("CBD"), under the ~~corporate~~ name ~~of CannaVest Corp. The change~~PlusCBD™ in ~~corporate name was undertaken in connection with the acquisition of CanX Inc.,~~ a Florida-based, specialty pharmaceutical corporation (the “CanX Acquisition”) as more fully set forth in our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on January 4, 2016. On June 8, 2016, the Company announced that the Financial Industry Regulatory Authority (“FINRA”) had approved a change in the trading symbol for the Company’s common stock to “CVSI.” The Company’s common stock formerly traded under the symbol “CANV.”

~~The Company operates two distinct business segments: a consumer product segment in manufacturing, marketing and selling plant-based Cannabidiol (“CBD”) products to a range~~variety of market ~~sectors;~~sectors including nutraceutical, beauty care and a specialty ~~pharmaceutical segment focused on developing and commercializing novel therapeutics utilizing synthetic CBD.~~foods. The specialty pharmaceutical segment ~~began development activities during the second quarter of 2016.~~

is developing drug candidates which use CBD as a primary active ingredient.

~~SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~

Basis of Presentation – - The condensed consolidated financial statements include, as applicable, the accounts of CV Sciences, Inc. and its wholly-owned subsidiaries Plus CBD, LLC and CANNAVEST Acquisition, LLC; and the accounts of a 70% interest in CannaVest Europe, GmbH (collectively, as applicable, the “Company”). All intercompany accounts and transactions have been eliminated in consolidation. The Company commenced commercial operations for its current business model on January 29, 2013. On January 20, 2017, the Company filed for dissolution of CannaVest Europe, GmbH, an entity that, prior to dissolution, the Company had a 70% interest in, with the District Court, Dusseldorf Germany, effective December 31, 2016. On April 27, 2018, the Company filed a Certificate of Cancellation for its wholly-owned subsidiary, CANNAVEST Acquisition, LLC, with the Secretary of State of Delaware, effective as of April 27, 2018. Neither CANNAVest Acquisition, LLC nor CannaVest Europe, GmbH had any material assets or liabilities at the time of their respective dissolutions.

The unaudited condensed consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods and ensure that the financial statements are not misleading. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States ~~of America (“GAAP”~~("U.S. GAAP"). All intercompany accounts and transactions have been ~~omitted pursuant to such rules and regulations. These unaudited~~eliminated in consolidation.

Use of Estimates – The preparation of the condensed consolidated financial statements ~~should be read~~ in ~~conjunction~~conformity with the audited financial statements and notes for the year ended December 31, 2017, filed with the SEC on the Company’s Annual Report on Form 10-K filed on March 29, 2018. The results for the interim periods ended September 30, 2018, are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.

~~Liquidity~~– For the three months ended September 30, 2018 and 2017, the Company had net income (losses) of $3,294,973 and ($589,983), respectively. For the nine months ended September 30, 2018 and 2017, the Company had net income (losses) of $7,100,217 and ($5,366,946), respectively. In addition, for the nine months ended September 30, 2018 and 2017, the Company had positive cash flows from operations of $9,925,819 and $647,216, respectively. Management believes the Company has the funds necessary to continue its consumer product and specialty pharmaceutical business segments and meet its other obligations over the next year solely from current revenues and cash flow for the next 12-month period through November 6, 2019.

~~Derivative Financial Instruments~~ – Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and subsequently remeasured at fair value on a quarter-end reporting basis. Changes in the fair value of derivative financial instruments are recognized as a gain or loss in the Company’s Condensed Consolidated Statements of Operations.

~~Goodwill and Intangible Assets –~~The Company evaluates the carrying value of goodwill and intangible assets annually during the fourth quarter in accordance with Financial Accounting Standards Board (“FASB”) 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. When evaluating whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of a reporting unit’s goodwill to its carrying amount. In calculating the implied fair value of a reporting unit’s goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.

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

We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives to their estimated residual values, generally five years. In process research and development (“IPR&D”) has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. If the related project is not completed in a timely manner or the project is terminated or abandoned, the Company may have an impairment related to the IPR&D, calculated as the excess of the asset’s carrying value over its fair value. This method of amortization approximates the expected future cash flow generated from their use. During the three and nine months ended September 30, 2018 and 2017, there were no impairments.

~~Use of Estimates~~ ~~– The Company’s condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements~~U.S. GAAP requires usmanagement to make ~~significant~~judgments, estimates and ~~judgments~~assumptions that affect the reported amounts ~~of assets, liabilities, revenues, expenses~~in the condensed consolidated financial statements and related disclosures of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.accompanying notes. Actual results may differ from these ~~estimates under different assumptions or conditions.~~estimates. Significant estimates include the valuation of intangible assets, the amortization lives of intangible assets, valuation of contingent consideration, inputs for valuing derivative financial instruments, inputs for valuing warrants, inputs for valuing notes payable beneficial conversion features and stock-based compensation, valuation of inventory, ~~classification~~and assumptions related to revenue recognition.

Fair Value Measurements – Fair value is defined as the price that would be received from the sale of ~~current and non-current inventory amounts,~~an asset or paid to transfer a liability (an exit price) in the ~~allowance~~principal or most advantageous market for ~~doubtful accounts and determining whether potential losses from legal actions brought against~~ the ~~Company are probable and estimable.~~

~~Reportable Segments~~ –asset or liability in an orderly transaction between market participants on the measurement date. The ~~Company has two business segments; consumer products and specialty pharmaceuticals. Our consumer products segment develops, manufactures and markets products~~accounting guidance establishes a three-level hierarchy for disclosure that is based on ~~plant-based CBD, including under~~ the ~~name PlusCBD™~~extent and level of judgment used to estimate the fair value of assets and liabilities.

Level 1 - uses unadjusted quoted prices that are available in ~~a variety~~active markets for identical assets or liabilities. The Company's Level 1 assets are comprised of $4.0 million in money market ~~sectors including nutraceutical, beauty care, specialty foods and beverages. Our specialty pharmaceutical segment~~funds which are classified as cash equivalents. In addition, the Company's restricted cash of $0.5 million is ~~developing drug candidates which use synthetic CBD as a primary active ingredient.~~comprised of certificates of deposit. The ~~specialty pharmaceuticals segment began development activities during the second quarter of 2016.~~

~~Cash and Cash Equivalents~~ ~~– For purposes~~carrying value of the ~~condensed consolidated statements of~~ cash ~~flows, the Company considers amounts held by financial institutions~~equivalents and short-term investments with an original maturity of three months or less when purchased to be cash and cash equivalents. As of September 30, 2018 and December 31, 2017, the Company had no cash equivalents.

~~Restricted Cash~~ – The Company’s current and past arrangements with its credit card processors require that its credit card processors withhold a cash reserve balance from the Company’s credit card receipt transactions for a period of time not to exceed 270 days, for which the credit card processors will refund the Company the entire amounts withheld at its sole discretion. The Company had $738,356 and $778,579 in restricted cash ~~withheld by former credit card processors~~approximated the fair value as of September 30, ~~2018 and~~2019. The Company did not have any cash equivalents as of December 31, 2017, respectively. The following table provides a reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets to the total of the same amounts shown in the statement of cash flows:

September 30,
2018

December 31,
2017

Cash $ 10,271,599 $ 2,012,965
Restricted cash 738,356 778,579
Total cash and restricted cash shown in the statement of cash flows $ 11,009,955 $ 2,791,544

On October 22, 2018, the Company received un-restricted control of $450,000 of restricted cash held at September 30, 2018 in connection with the settlement of a complaint filed by the Company against a former credit card processor of the Company (Note 11).2018. The Company ~~recognized bad debt expense of $40,223 in connection with this settlement during the three months ended September 30, 2018.~~

~~Concentrations of Credit Risk~~ – As of September 30, 2018, the Federal Deposit Insurance Corporation (“FDIC”) provided insurance coverage of up to $250,000 per depositor per bank. The Company has not experienced any losses in such accounts and does not ~~believe~~have any liabilities that ~~the Company is exposed to significant risks from excess deposits. The Company’s cash balance in excess of FDIC limits totaled $10,027,090~~are valued using inputs identified under a Level 1 hierarchy as of September 30, ~~2018.~~

~~There was no concentration of accounts receivable, revenue and purchases as of, and for the period and year ended September 30, 2018~~2019 and December 31, ~~2017.~~

~~Accounts Receivable~~ – Generally, the Company requires payment prior to shipment. However, in certain circumstances, the Company extends credit to companies located throughout the U.S. Accounts receivable consists of trade accounts arising in the normal course of business. Accounts for which no payments have been received after 30 days are considered delinquent and customary collection efforts are initiated. Accounts receivable are carried at original invoice amount less a reserve made for doubtful receivables based on a review of all outstanding amounts on a quarterly basis.

Management has determined the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history, and current economic conditions. As of September 30, 2018 and December 31, 2017, the Company maintained an allowance for doubtful accounts related to accounts receivable in the amount of $200,000.

~~Revenue Recognition~~2018.

Level 2 - Our revenue is generated from the sale of products consisting primarily of nutritional supplements and beauty products. We recognize revenue when control of our products is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. We consider a performance obligation satisfied once we have transferred control of a product to the customer or distributor, meaning the customer has the ability to use and obtain the benefit of the product. We recognize revenue for satisfied performance obligations only when we determine there are no uncertainties regarding payment terms or transfer of control. Revenue from product sales is generally recognized upon shipment to the end customer, which is when control of the product is deemed to be transferred. Payment or invoicing typically occurs upon shipment and the term between invoicing and when payment is due is not significant. Revenue is recorded net of discounts and promotions.

~~Sales Tax~~ – The Company is responsible for collecting tax on sales made directly to end customers without a valid sales tax exemption certificate, and remitting these taxes to applicable jurisdictions. These taxes are assessed based on the location of the end customer and the laws of the jurisdiction in which they reside. Such taxes are accounted for on a net basis, and notuses inputs other than quoted prices included in ~~revenues.~~

~~Shipping~~Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and ~~Handling~~ – Shipping and handling expenses are recorded in cost of goods sold and totaled $490,881 and $265,685 for the three months ended September 30, 2018 and 2017, respectively, and for the nine months ended September 30, 2018 and 2017 totaled $1,297,844 and $589,687, respectively.

~~Returns~~–~~Finished Products~~ ~~– Within ten (10) days of a customer’s receipt of the Company’s finished products, the customer may return (i) finished products~~inputs to valuation models or other pricing methodologies that do not ~~conform to~~require significant judgment because the Company’s product specifications or, (ii) finished products which are defective, provided that notice of condition is given within five (5) days of the customer’s receipt of the finished products. The failure to comply with the foregoing time requirements shall be deemed a waiver of customer’s claim for incorrect or defective shipments. In the event of the existence of one or more material defects in any finished product upon delivery to the customer, the Company shall, at its sole option and cost, either (a) take such measures as are required to cure the defect(s) designatedinputs used in the ~~customer’s notice, or (b) replace~~model, such ~~defective finished product(s).~~as interest rates and volatility, can be corroborated by readily observable market data. The Company ~~may, at its sole option, require the return~~did not have any assets or ~~destruction of the defective finished products. The customer shall afford the Company the opportunity to verify~~liabilities that ~~such defects existed prior to shipment and were not, for purposes of example and not limitation, the result of improper transport, handling, storage, product rotation or misuse by the customer.~~

~~Bulk Oil Products~~ ~~– Sales of bulk oil products~~ are ~~final and the Company does not accept returns~~valued using inputs identified under ~~any circumstances.~~

~~There was no allowance for customer returns~~a Level 2 hierarchy as of September 30, ~~2018 or~~2019 and December 31, ~~2017 due to insignificant return amounts experienced during~~2018.

Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the ~~nine months ended September 30, 2018~~use of significant management judgment. Level 3 assets and ~~the year ended December 31, 2017.~~

~~Compensation~~liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and ~~Benefits~~ –significant management judgment or estimation. The Company records compensation and benefits expense for all cash and deferred compensation, benefits, and related taxes as earned by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees, primarily information technology and project management activities.

~~Stock-Based Compensation~~ ~~– Certain employees, officers, directors, and consultants of the Company participate in various long-term incentive plans~~did not have any assets or liabilities that ~~provide for granting stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. Stock options generally vest in equal increments over~~are valued using inputs identified under a two- to four-year period and expire on the tenth anniversary following the date of grant. Performance-based stock options vest once the applicable performance condition is satisfied. Restricted stock awards generally vest 100% at the grant date.

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

~~Inventory~~– Inventory is stated at lower of cost or net realizable value, with cost being determined on an average cost basis. As of September 30, 2018, the Company had $312,626 of inventory in Germany and The Netherlands.

~~Property & Equipment~~ – Equipment is stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Depreciation is provided on a straight-line basis over the assets’ estimated useful lives. Tenant improvements are amortized on a straight-line basis over the remaining life of the related lease. Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the historically-recorded asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to other income (expense).

~~Property and equipment, net,~~Level 3 hierarchy as of September 30, ~~2018~~2019 and December 31, ~~2017 were as follows:~~

Useful Lives
September 30,
2018
December 31,
2017

Office furniture and equipment 3 years $ 731,135 $ 537,607
Laboratory and other equipment 5 years 536,570 398,997
Tenant improvements 14 to 39 months 1,639,138 1,545,885
2,906,843 2,482,489
Less: accumulated depreciation (748,177 ) (399,056 )
$ 2,158,666 $ 2,083,433

~~Depreciation expense for~~2018.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the ~~three months ended September 30, 2018 and 2017 was $121,911 and $30,897, respectively, and for the nine months ended September 30, 2018 and 2017 was $349,121 and $117,744, respectively.~~

~~Fair Value of~~ Financial ~~Instruments~~ ~~– In accordance with ASC Topic 825,~~~~Financial Instruments~~, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to its financial statements when the fair value is different than the carrying value of those financial instruments. The estimated fair value of the Company’s current assets and current liabilities approximates their carrying amount due to their readily available nature and short maturity.

~~Long-Lived Assets~~ ~~– In accordance with ASC Topic 360,~~~~Accounting for the Impairment or Disposal of Long-Lived Assets~~, the Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of property and equipment is measured by comparing its carrying value to the undiscounted projected future cash flows that the asset(s) are expected to generate. If the carrying amount of an asset is not recoverable, we recognize an impairment loss based on the excess of the carrying amount of the long-lived asset over its respective fair value, which is generally determined as the present value of estimated future cash flows or at the appraised value. The impairment analysis is based on significant assumptions of future results made by management, including revenue and cash flow projections. Circumstances that may lead to impairment of property and equipment include a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition and a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset including an adverse action or assessment by a regulator.

~~Debt Issuance Costs –~~ Debt issuance costs, when incurred, are capitalized as a discount to the related debt and are amortized to interest expense using the interest method over the expected terms of the related debt agreements.

~~Earnings (net loss) per Share~~ ~~– The Company calculates earnings or loss per share (“EPS”) in accordance with ASC Topic 260,~~~~Earnings per Share~~, which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock outstanding plus all potentially dilutive shares of common stock outstanding during the period. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. The Company had 19,562,475 stock options and 79,891 warrants outstanding that were potentially dilutive as of September 30, 2018. In addition, the Company may be required to issue 10,750,000 additional shares of common stock related to certain performance-based stock options outstanding.

~~Research and Development Expense~~– Research and development costs are charged to expense as incurred and include, but are not limited to, employee salaries and benefits, cost of inventory used in product development, consulting service fees, the cost of renting and maintaining our laboratory facility and depreciation of laboratory equipment. Research and development expense for the consumer products segment was $170,466 and $76,520 for the three months ended September 30, 2018 and 2017, respectively, and for the nine months ended September 30, 2018 and 2017 was $362,933 and $181,509, respectively. Research and development expense for the specialty pharmaceutical segment was $359,096 and $102,818 for the three months ended September 30, 2018 and 2017, respectively, and for the nine months ended September 30, 2018 and 2017 was $762,337 and $392,192, respectively.

~~Advertising~~~~– The Company supports its products with advertising to build brand awareness of the Company’s various products in addition to other marketing programs executed by the Company’s marketing team.The Company believes the continual investment in advertising is critical to the development and sale of its~~~~PlusCBD™~~~~brandproducts.~~Advertising costs of $231,715 and $152,687 were expensed as incurred during the three months ended September 30, 2018 and 2017, respectively, and for the nine months ended September 30, 2018 and 2017 were $634,274 and $261,462, respectively.

~~Income Taxes –~~Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. In accordance with ASC Topic 740,~~Income Taxes~~, the Company recognizes the effect of uncertain income tax positions only if the positions are more likely than not of being sustained in an audit, based on the technical merits of the position. Recognized uncertain income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which those changes in judgment occur. The Company recognizes both interest and penalties related to uncertain tax positions as part of the income tax provision. As of September 30, 2018, and December 31, 2017, the Company did not have a liability for unrecognized tax uncertainties. The Company is subject to routine audits by taxing jurisdictions. Management believes the Company is no longer subject to tax examinations for the years prior to 2014.

~~Recently Issued and Newly Adopted Accounting Pronouncements~~

~~In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,~~~~Revenue from Contracts with Customers (Topic 606)~~ ~~(“ASU 2014-09”), as amended by ASU 2015-14,~~~~Revenue from Contracts with Customers (Topic 606)~~~~, ASU 2016-08,~~~~Revenue from Contracts with Customers (Topic 606),~~~~ASU 2016-10,~~~~Revenue from Contracts with Customers (Topic 606),~~~~ASU 2016-12,~~~~Revenue from Contracts with Customers (Topic 606)~~ ~~and ASU 2016-20,~~~~Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,~~ ~~which completes the joint effort by the FASB and the International~~ Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for GAAP and the International Financial Reporting Standards. ASU 2014-09 became effective for the Company beginning on January 1, 2018. The Company implemented ASU 2014-09 for the interim and annual reporting periods of 2018, which resulted in no changes to how we recognize revenue.

~~In July 2015, the FASB~~("FASB") issued ASU ~~2015-11,~~~~Inventory: Simplifying the~~No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of ~~Inventory~~(“Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU ~~2015-11”~~2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”)~~, which~~. Topic 326 requires ~~inventory measured using any method other than last-in, first out or the retail inventory method to be subsequently measured at the lower~~measurement and recognition of ~~cost or net realizable value, rather than at the lower of cost or market. ASU 2015-11~~expected credit losses for financial assets held. Topic 326 is effective for ~~annual reporting periods beginning after December 15, 2016~~fiscal years and ~~for~~ interim periods within ~~such annual periods. Early application is permitted. The Company implemented ASU 2015-11 during the annual reporting period of 2017.~~

~~In February 2016, the FASB issued ASU 2016-02,~~~~Leases~~(“ASU 2016-02”), which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. ASU 2016-02 also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies forthose fiscal years beginning after December 15, ~~2018, including interim periods within those fiscal years.~~2019. Early adoption is permitted. The Company is currently evaluating the potential impact of ~~ASU 2016-02~~Topic 326 on

CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

the Company’s condensed consolidated financial statements.

~~In March 2016, the FASB issued ASU 2016-09,~~~~Compensation – Stock Compensation~~ (“ASU 2016-09”), which involves multiple aspects of the accounting for share-based transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company implemented ASU 2016-09 during the annual reporting period of 2017.

~~In August 2016, the FASB issued ASU 2016-15,~~~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the FASB Emerging Issues Task Force)~~ (“ASU 2016-15”), which provides amendments to specific statement of cash flows classification issues. ASU 2016-15 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company implemented ASU 2016-15 for the interim and annual reporting periods of 2018.

~~In January 2017, the FASB issued ASU 2017-01,~~~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~(“ASU 2017-01”), which revises the definition of a business. ASU 2017-01 requires that for an acquisition to be considered a business, the business would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 also narrows the definition of the term “outputs,” which are now considered the result of inputs and substantive processes that provide goods and services to customers, other revenue, or investment income, such as dividends and interest. ASU 2017-01 is effective for public companies for annual periods beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU 2017-01 for the interim and annual reporting periods of 2018.

In January 2017, the FASB issued ASU 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment(“ (“ASU 2017-04”), which eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 requires the entity to apply these amendments on a prospective basis for which it is required to disclose the nature of and reason for the change in accounting upon transition. This disclosure shall be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments. The Company ~~plans to~~shall adopt these amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the potential impact of ASU 2017-04 on the Company’s condensed consolidated financial statements.

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under prior GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the optional alternative transition method through a cumulative-effect adjustment at the beginning of the first quarter of 2019. The Company has elected the package of practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any existing leases as of the adoption date. The Company elected to apply the hindsight practical expedient when determining lease term and assessing impairment of operating lease assets. The Company also applied the short-term lease recognition exemption for leases with terms at inception not greater than 12 months. The adoption of ASU 2016-02 on January 1, 2019 resulted in the recognition of operating lease assets of approximately $4.1 million and lease liabilities for operating leases of approximately $5.5 million on its Condensed Consolidated Balance Sheets, with no material impact to its Condensed Consolidated Statements of Operations. See Note 4 for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.

In June 2018, the FASB issued ASU No. 2018-07,Compensation –- Stock Compensation (Topic 718)~~: Improvement~~, Improvements to Nonemployee Share-Based Payment ~~Accounting~~(“Accounting. This ASU ~~2018-07”), which~~ is intended to ~~reduce cost and complexity and~~simplify aspects of share-based compensation issued to ~~improve financial reporting for share-based payments to nonemployees. Under ASU 2018-07, most of~~non-employees by making the guidance onconsistent with accounting for employee share-based ~~payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.~~compensation. ASU 2018-07 is effective for ~~interim and~~ annual ~~reporting~~ periods beginning after December 15, ~~2018.~~2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of ASC Topic 606. This ASU became effective for the Company on January 1, 2019. Adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements ("ASC 2018-09"). This ASU makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification. The majority of the amendments in ASU 2018-09 are effective for fiscal years beginning after December 15, 2018 and interim periods within those annual periods. The Company ~~is currently evaluating~~adopted ASU 2018-09 in the ~~potential impact~~first quarter of ~~ASU 2018-07 on~~2019. Adoption of the ~~Company’s consolidated financial statements.~~

~~Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC~~new standard did not ~~or are not believed by management to~~ have a material impact on the Company’s ~~present or future~~condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. For public business entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company early adopted this ASU during the quarter ended June 30, 2019, and applied the guidance prospectively to implementation costs incurred in new cloud computing arrangements. As of September 30, 2019, the Company has capitalized $0.8 million of implementation costs which is included in Other Assets.

CV SCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	~~INVENTORY~~
2.	BALANCE SHEET DETAILS

Inventory

Inventory as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 was comprised of the ~~following:~~

September 30,
2018

December 31,
2017

Raw materials $ 4,202,493 $ 6,648,144
Finished goods 2,328,176 1,841,542
$ 6,530,669 $ 8,489,686

4.	~~ACCRUED EXPENSES~~

following (in thousands):



	September 30, 2019		December 31, 2018
Raw materials	$	4,594	$	4,747
Finished goods	5,431		3,803
	$	10,025	$	8,550

As of September 30, 2019 and December 31, 2018, the Company had inventory outside the United States of $0.7 million and $0.5 million, respectively.

Accrued expenses

Accrued expenses as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as ~~follows:~~

September 30,
2018

December 31,
2017

Accrued payroll expenses $ 908,179 $ 1,037,122
Other accrued liabilities 900,555 894,798
$ 1,808,734 $ 1,931,920

follows (in thousands):



	September 30, 2019		December 31, 2018
Accrued payroll expenses(1)	$	8,607	$	1,222
Other accrued liabilities	1,759		1,451
	$	10,366	$	2,673
(1) This includes a $6.6 million tax liability associated with a related party transaction as discussed in Note 11.

	11
3.	INTANGIBLES, NET

5.	~~INTANGIBLE ASSETS, NET~~

Intangible assets consisted of the following at September 30, ~~2018~~2019 and December 31, ~~2017:~~

Original Fair Market Value Accumulated Amortization Net Useful Life
(Years)

Balance - September 30, 2018:
In-process research and development $ 3,730,000 $ – $ 3,730,000 –
Trade names 100,000 55,000 45,000 5
Non-compete agreements 77,000 42,350 34,650 5
$ 3,907,000 $ 97,350 $ 3,809,650
Balance - December 31, 2017:
In-process research and development $ 3,730,000 $ – $ 3,730,000 –
Trade names 100,000 40,000 60,000 5
Non-compete agreements 77,000 30,800 46,200 5
$ 3,907,000 $ 70,800 $ 3,836,200

~~Amortization expense~~2018 (in thousands):

Company's September 30, ~~2018 and 2017 totaled $26,550 and $26,550, respectively.~~

6.	~~RELATED PARTIES~~

~~During~~2019 Condensed Consolidated Balance Sheet. Based on the ~~nine months ended September 30, 2018 and 2017, the Company paid a Company stockholder who is a supplier of raw material inventory to the Company $0 and $9,060, respectively.~~

During the three months ended September 30, 2018 and 2017, the Company paid $0 and $5,250, respectively, to a company partially owned by a Company director that provides quality control and quality assurance consulting to the Company. During the nine months ended September 30, 2018 and 2017, the Company paid the same company $10,500 and $15,750, respectively.

7.	~~NOTES PAYABLE~~

~~Iliad Secured Convertible Promissory Notes Payable~~

On May 25, 2016 (the “Purchase Price Date”), the Company entered into a Securities Purchase Agreement (“Iliad SPA”) with Iliad Research and Trading, L.P. (the “Lender” or “Iliad”) pursuant to which the Lender loaned the Company $2,000,000. On the Purchase Price Date, the Company issued to Lender a Secured Convertible Promissory Note (the “Iliad Note”) in the principal amount of $2,055,000 in exchange for payment by Lender of $2,000,000. The principal sumpresent value of the Iliad Note reflected the amount invested, plus a 2.25% “Original Issue Discount” (“OID”) and a $10,000 reimbursement of Lender’s legal fees. Out of the proceeds from the Iliad Note, the Company paid the sum of $25,000 to its placement agent, Myers & Associates, L.P., which is a registered broker-dealer. The Company received net proceeds of $1,975,000 in exchangelease payments for the Iliad Note. The Iliad Note required the repayment of all principal and any interest, fees, charges and late fees on the date that was thirteen months after the Purchase Price Date (the “Maturity Date”). Interest was to be paid on the outstanding balance at a rate of ten percent (10%) per annum from the Purchase Price Date until the Iliad Note was paid in full. Interest was accrued during theremaining lease term of the ~~Iliad Note~~Company's existing leases, the Company recognized operating lease assets of $4.1 million and ~~all interest calculations~~lease liabilities for operating leases of $5.5 million on January 1, 2019, which includes derecognition of previously recorded deferred rent of $1.3 million. As of September 30, 2019, the Company had an additional operating lease obligation of $5.5 million and operating lease asset of $5.3 million related to the lease for the new 45,500 square foot production and warehouse facility located in San Diego, California with a lease term of 7.0 years. As of September 30, 2019, total operating lease assets and operating lease liabilities were ~~computed~~$9.0 million and $10.5 million, respectively. The Company has entered into one short-term facility operating lease, with an initial term of twelve months or less. This lease is not recorded on the ~~basis of~~Company's balance sheet. All operating lease expense is recognized on a 360-day year comprised of twelve (12) thirty (30)-day months and compounded daily. Subject to adjustment as set forth in the Iliad Note, the conversion price for each Lender conversion was $0.50 (the “Lender Conversion Price”), convertible into shares of fully paid and non-assessable common stock. Beginning on the date that was six months after the Purchase Price Date and continuing until the Maturity Date, Iliad had the right to redeem a portion of the Iliad Note in any amount up to the “Maximum Monthly Redemption Amount” ($275,000, which was the maximum aggregate redemption amount that could be redeemed in any calendar month), for which payments could be made in cash or by converting the redemption amount into shares of Company common stock at a conversion price which was the lesser of (a) the Lender Conversion Price of $0.50 and (b) the Market Price, defined as 70% (“the Conversion Factor”), subject to adjustment as follows: if at any time (1) the average of the three lowest closing bid prices in the previous twenty (20) trading days was below $0.25 per share then the Conversion Factor would have been reduced by 10%, (2) the Company was not Deposit/Withdrawal At Custodian eligible, then the Conversion Factor would have been reduced by an additional 5%, or (3) there occurred a “Major Default” then the Conversion Factor would have been reduced by an additional 5%. The Company was permitted to prepay the Iliad Note at any time by payment to Lender of 125% of the principal, interest and other amounts then due under the Note. The Company was permitted to prepay the Iliad Note notwithstanding an earlier notice of conversion from the Lender, provided that in such event the Lender could convert an amount not to exceed $300,000 under the Iliad Note. In connection with the Iliad Note, as set forth above, the Company incurred an original issue discount of $45,000 and $35,000 of other debt issuance costs, which were amortizedstraight-line basis over the ~~Iliad Note~~lease term. ~~The Iliad Note was securitized by the Company’s accounts receivable, inventory and equipment.~~

In November 2016, the Company entered into an Amendment to the Iliad Note (the “Iliad Amendment”), whereby the Lender and the Company agreed that the Maximum Monthly Redemption Amount for the period from November 2016 to January 2017 (the “Reduction Period”) be reduced from $275,000 to $166,667 (the “Reduced Maximum Monthly Redemption Amount”). In addition, if the Lender failed to convert the full Reduced Maximum Monthly Redemption Amount during any month in the Reduction Period, then any such unconverted amount would increase the Reduced Maximum Monthly Redemption Amount in the following month or months. Furthermore, the Company was not allowed to pay any of the Reduced Maximum Monthly Redemption Amounts in cash. As such, all amounts converted would be converted into “Redemption Conversion Shares” of the Company’s common stock. Also, as part of the Iliad Amendment, the Lender agreed that, with respect to any Redemption Conversion Shares received during the Reduction Period, in any given calendar week its Net Sales of such Redemption Conversion Shares would not exceed the greater of (a) 10% of the Company’s weekly dollar trading volume in such week or (b) $50,000 (the “Volume Limitation”). However, if the Lender’s Net Sales were less than the Volume Limitation for any given week, then in the following week or weeks, the Lender would be allowed to sell an additional amount of Redemption Conversion Shares equal to the difference between the amount the Lender was allowed to sell and the amount the Lender actually sold. For the purpose of the Iliad Amendment, Net Sales was defined as the gross proceeds from sales of the Redemption Conversion Shares sold in a calendar week during the Reduction Period minus any trading commissions or costs associated with clearing and selling such Redemption Conversion Shares minus the purchase price paid for any shares of the Company’s common stock purchased in the open market during such week. The Lender and the Company both agreed that in the event the Lender breached the Volume Limitation where its Net Sales of Redemption Conversion Shares during any week during the Reduction Period exceeded the dollar volume the Lender was permitted to sell during such week pursuant to the Volume Limitation (the “Excess Sales”), then the Company’s sole and exclusive remedy for such breach was the reduction of the outstanding balance of the Iliad Note by an amount equal to 200% of the Excess Sales upon delivery of written notice to the Lender setting forth its basis for such reduction.

In January 2017, the Company entered into Amendment #2 to the Iliad Note (the “Iliad Amendment 2”). In accordance with the Iliad Amendment 2, during the period between January 27, 2017 and February 24, 2017, the Company agreed to allow the Lender to convert up to $500,000 (the “Additional Redemption Amount”) in “Redemption Conversions” under the Note, provided that the Lender not effectuate a Redemption Conversion of any Maximum Monthly Redemption Amount between January 27, 2017 and March 1, 2017. During this time period, the Company was not allowed to pay any of the Additional Redemption Amount in cash and all such amounts had to be converted into Redemption Conversion Shares of the Company’s common stock. In addition, the Lender agreed that the sale of any Redemption Conversion Shares between January 27, 2017 and April 30, 2017 (the “Limitation Period”) was subject to the Volume Limitation. Immediately following the expiration of the Limitation Period, the Volume Limitation was cancelled.

In March 2017, the Company entered into Amendment #3 to the Iliad Note (the “Iliad Amendment 3”). In accordance with the Iliad Amendment 3, during the period from March 1, 2017 to March 31, 2017, the Company agreed to allow the Lender to convert up to $500,000 (the “Additional Redemption Amount 2”) in Redemption Conversions under the Note, provided that the Lender not effectuate a Redemption Conversion of any Maximum Monthly Redemption Amount from March 1, 2017 until April 1, 2017. During this time period, the Company was not allowed to pay any of the Additional Redemption Amount 2 in cash and all such amounts had to be converted into Redemption Conversion Shares of the Company’s common stock. In addition, the Lender agreed that the sale of any Redemption Conversion Shares between March 1, 2017 and May 31, 2017 (the “Limitation Period 2”) was subject to the Volume Limitation. Immediately following the expiration of the Limitation Period 2, the Volume Limitation was cancelled.

In August 2017, the Company entered into Amendment #4 to the Iliad Note (the “Iliad Amendment 4”), whereby the Lender and the Company agreed to extend the Maturity Date of the Iliad Note to April 1, 2018. In addition, the parties agreed to amend the Volume Limitation in the Iliad Note, with respect to any “Conversion Shares”, such that in any given calendar week the Lender’s Net Sales of such Conversion Shares would not exceed the greater of (a) 15% of the Company’s weekly dollar trading volume in such week or (b) $50,000 (the “New Volume Limitation”). However, if the Lender’s Net Sales were less than the New Volume Limitation for any given week, then in the following week or weeks, the Lender would be allowed to sell an additional amount of Conversion Shares equal to the difference between the amount the Lender was allowed to sell and the amount the Lender actually sold. For the purpose of the Iliad Amendment 4, Net Sales was defined as the gross proceeds from sales of the Conversion Shares sold in a calendar week minus any trading commissions or costs associated with clearing and selling such Conversion Shares minus the purchase price paid for any shares of the Company’s common stock purchased in the open market during such week. The Lender and the Company both agreed that in the event the Lender breached the New Volume Limitation where its Net Sales of Conversion Shares during any week exceeded the dollar volume the Lender was permitted to sell during such week pursuant to the New Volume Limitation (the “Excess Sales”), then the Company’s sole and exclusive remedy for such breach was the reduction of the outstanding balance of the Iliad Note by an amount equal to 200% of the Excess Sales upon delivery of written notice to the Lender setting forth its basis for such reduction. In connection with the Iliad Amendment 4, Lender confirmed that no Events of Default or other material breaches existed under the Iliad Note and related Transaction Documents (as defined in the Iliad SPA).

During the nine months ended September 30, 2017, the Company issued 5,793,791 shares of its common stock to Iliad in connection with the conversions of the Iliad Note in the aggregate principal amount of $1,344,359 and $55,641 of accrued interest. The total of $1,400,000 was allocated to common stock and additional paid-in capital.

~~The Company’s borrowings and conversions under the Iliad SPA for the nine months ended September 30, 2018 and for the year ended December 31, 2017 are summarized in the table below:~~

Maturity September 30,
2018 December 31,
2017 Interest
Rate

Secured promissory note payable April 1, 2018 $ – $ 1,897,976 10%
Interest accrued – 137,334
Unamortized original issue discount and debt issuance costs – 35,335
Conversion of convertible promissory notes and accrued interest to common stock – (1,805,000 )
Conversion of convertible promissory notes and accrued interest to accrued liabilities – 75,000
Cash repayment of promissory notes and accrued interest – (340,645 )

Net carrying amount of debt – –
Less current portion – –
Long-term borrowings - net of current portion $ – $ –

On the Purchase Price Date, the Company recorded a beneficial conversion feature of $370,000 (the “Iliad Instrument”), which was originally recorded in additional paid-in capital (“APIC”) and was scheduled for amortization over six months. The Company determined in 2016 that the Iliad Instrument qualified for derivative accounting treatment. The $370,000 fair value of the Iliad Instrument at the Purchase Price Date is unchanged as a result of the change in derivative accounting treatment, however, in 2016 we reclassified the Iliad Instrument from APIC to a liability in accordance with derivative accounting treatment. During the three and nine months ended September 30, ~~2017,~~2019, the Company ~~recorded a gain of $0~~recognized approximately $0.5 million and ~~$222,800,~~$1.0 million, respectively, ~~for the change~~ in fair value of the Iliad Instrument as part of a separate line item in the Company’s Condensed Consolidated Statement of Operations. The assumptions used by the Company for calculating the fair value of the Iliad Instrument at the Purchase Price Date using the Binomial Lattice valuation model were: (i) Volatility of 74.0%; (ii) Risk-Free Interest Rate of 0.44%; and (iii) Expected Term of five months; and at September 30, 2017 were (i) Volatility of 61%, (ii) Risk-Free Interest Rate of 0.74%; and (iii) Expected Term of zero months.

In March 2017, the Company entered into another Securities Purchase Agreement (“Iliad SPA 2”) with Iliad pursuant to which the Lender loaned the Company $750,000. On March 1, 2017 (the “Subsequent Purchase Price Date”), the Company issued to Lender a Secured Convertible Promissory Note (the “Iliad Note 2”) in the principal amount of $770,000 in exchange for payment by Lender of $750,000. The principal sum of the Iliad Note 2 reflected the amount invested, plus a $15,000 OID and a $5,000 reimbursement of Lender’s legal fees. The Company received net proceeds of $750,000 in exchange for the Iliad Note 2. The Iliad Note 2 required the repayment of all principal and any interest, fees, charges and late fees on the date that was fourteen months after the Subsequent Purchase Price Date (the “Maturity Date”). Interest was to be paid on the outstanding balance at a rate of eight percent (8%) per annum from the Subsequent Purchase Price Date until the Iliad Note 2 was paid in full. Interest accrued during the term of the Iliad Note 2 and all interest calculations were computed on the basis of a 360-day year comprised of twelve (12) thirty (30)-day months and compounded daily. Subject to adjustment as set forth in the Iliad Note 2, the conversion price for each Lender conversion was the Lender Conversion Price, convertible into shares of fully paid and non-assessable common stock. Beginning on the date that was six months after the Subsequent Purchase Price Date and continuing until the Maturity Date, Iliad had the right to redeem a portion of the Iliad Note 2 in an amount not to exceed $100,000. Provided the Company had not suffered an “Event of Default” and was in compliance with certain “Equity Conditions” (unless waived by Iliad, in either case), the Company was permitted to make payments on such redemptions in cash or by converting the redemption amount into shares of Company common stock at a conversion price which was the lesser of (a) $0.50 per share and (b) 70% (“the Conversion Factor”) of the average of the three (3) lowest closing bid prices in the previous 20 trading days, subject to adjustment as follows: if at any time (1) the average of the three lowest closing bid prices in the previous twenty (20) trading days was below $0.25 per share then the Conversion Factor would have been reduced by 10%, (2) the Company was not Deposit/Withdrawal At Custodian eligible, then the Conversion Factor would have been reduced by 5%, (3) the Company was not DTC eligible, then the Conversion Factor would have been reduced by an additional 5% or (4) there occurred a “Major Default” then the Conversion Factor would have been reduced by an additional 5% for each of the first three Major Defaults that occurred after the effective date. The Company was permitted to prepay the Iliad Note 2 at any time by payment to Lender of 125% of the principal, interest and other amounts then due under the Note. The Company was permitted to prepay the Iliad Note notwithstanding an earlier notice of conversion from the Lender, provided that in such event the Lender could have converted an amount not to exceed $200,000 under the Iliad Note 2. In connection with the Iliad Note 2, as set forth above, the Company incurred an original issue discount of $15,000 and $5,000 of other debt issuancetotal lease costs, which was ~~amortized~~mostly comprised of operating lease costs. Short-term lease costs related to short-term operating leases and variable lease costs were immaterial.

The Company entered an 8-year lease agreement (the “Lease”) consolidating its operations of approximately 24,000 square feet in San Diego, California that commenced on February 1, 2018. The Company is required to pay monthly base rent, utilities and common area maintenance expenses. The Company received a landlord rent incentive of $1,067,459 for tenant improvements. The Lease rent incentive is recorded as a deferred liability and is amortized over the Lease term to rent expense.

The Company entered a 3-year lease agreement for additional warehouse space of approximately 5,000 square feet in San Diego, California that commenced on April 1, 2018. In August 2018, the Company entered a lease agreement for additional office space of approximately 6,600 in San Diego, California that commenced on October 15, 2018.

~~The following table provides the Company’s future minimum payments under all Company lease commitments as of September 30, 2018:~~

The Company incurred rent expense of $164,397 and $110,938 for the three months ended September 30, 2018 and 2017, respectively, and incurred rent expense of $500,214 and $353,555 for the nine months ended September 30, 2018 and 2017, respectively.

As part of ~~$40,223~~the Settlement Agreement described in ~~connection with this settlement.~~

Note 6, 2,950,000 RSUs vested and were issued to Mona Jr. The vesting of the RSU's is treated as taxable compensation and thus subject to income tax withholdings. No amounts were withheld (either in cash or the equivalent of shares of common stock from the vesting of the RSU's) and included in the Company’s payroll tax filing at the time of vesting. The compensation is subject to Federal and State income tax withholding and Federal Insurance Contributions Act (“FICA”) taxes withholding estimated to be $6.4 million for the employee portions. The employer portion of the FICA taxes is $0.2 million and has been recorded as a component of selling, general and administrative expenses in the condensed consolidated statement of operations for the nine months ended September 30, 2019. Although the primary tax liability is the responsibility of the employee, the Company is secondarily liable and thus has recorded the liability on its condensed consolidated balance sheet as of September 30, 2019 in an amount of $6.6 million which was recorded as a component of Accrued expenses. The Company has recorded an offsetting receivable for the total estimated Federal and State income taxes which should have been withheld in addition to the employee portion of the FICA payroll taxes as the primary liability is ultimately the responsibility of the employee. This resulted in a receivable of $6.4 million as of September 30, 2019 which was recorded in the line item Prepaid expenses and other on the condensed consolidated balance sheet. The associated liability may be relieved once the tax amount is paid by Mona Jr. and the Company has received the required taxing authority documentation from Mona Jr. However, if the amount is not paid, the Company would be liable for such withholding tax due. Additionally, the Company could be subject to negligence penalties if the amounts are ultimately not paid. The Company does not believe that any such penalties are probable or reasonably possible as of September 30, 2019.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, should be read in conjunction with ~~the~~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 life science company with~~operate two distinct business segments. Our consumer products segment is focused on manufacturing, marketing and selling hemp-based CBD products to a range of market sectors. Our specialty pharmaceutical segment is focused on developing and commercializing novel therapeutics utilizing ~~synthetic Cannabidiol (“CBD”).~~ CBD. We are traded on the OTC:QB, and our trading symbol is CVSI.

Our consumer ~~product~~products business segment ~~is focused on manufacturing, marketing~~manufactures, markets and ~~selling plant-based~~sells consumer products containing hemp-based CBD ~~products to~~under our PlusCBD™ brand in a range of market ~~sectors. On June 8, 2016, the Company changed its trading symbol from “CANV” to “CVSI”,~~sectors including nutraceutical, beauty care and ~~continues to be traded on the OTC: QB.~~

specialty foods.

Our specialty pharmaceutical business segment is developing ~~synthetic~~ cannabinoids to treat a range of medical ~~conditions. The Company’s~~indications. Our product candidates are based on proprietary formulations, processes and technology that we believe are patent-protectable, and we ~~plan to vigorously pursue~~are actively pursuing patent protection on our drug candidate.

Results of Operations

Revenues and gross profit



	Three months ended September 30,						Change					Nine months ended September 30,						Change
	2019			2018			Amount			%		2019			2018			Amount		%
	(in thousands)											(in thousands)
Product sales, net	$	12,603		$	13,601		$	(998	)	(7	)%	$	44,368		$	34,020		$	10,348	30	%
Cost of goods sold	4,175			3,655			$	520		14	%	13,430			9,453			3,977		42	%
Gross profit	$	8,428		$	9,946		$	(1,518	)	(15	)%	$	30,938		$	24,567		$	6,371	26	%
Gross margin	66.9		%	73.1		%						69.7		%	72.2		%

Third quarter 2019 vs. 2018

We had product sales of $12.6 million and gross profit of $8.4 million, representing a gross margin of 66.9% in the ~~Company’s two~~third quarter of 2019 compared with product sales of $13.6 million and gross profit of $9.9 million, representing a gross margin of 73.1% in the third quarter of 2018. Our product sales decreased by $1.0 million or 7% in the third quarter of 2019 when compared to third quarter 2018 results. The decline is primarily due to lower sales as a result of increased market competition which started early in the third quarter of 2019. The increased market competition, primarily in the natural product channel, is partially due to the lack of a clear regulatory framework. As of September 30, 2019, our products were in 5,435 retail stores, of which 2,319 were with retailers in the food, drug ~~candidates.~~

~~Our consumer~~and mass channel. This store count has increased from 2,093 as of September 30, 2018. During the three months ended September 30, 2019 and 2018, e-commerce sales directly to consumers accounted for 21.6% and 13.0%, respectively.

Cost of goods sold consists primarily of raw materials, packaging, manufacturing overhead, merch card fees and shipping. Overhead cost includes manufacturing related personnel costs, facilities, depreciation, supplies, and quality assurance costs. Manufacturing related personnel costs payroll, employee benefits and stock-based compensation. Cost of goods sold in the third quarter of 2019 increased due to higher overhead cost compared to the third quarter of 2018. The gross profit decrease in the third quarter 2019 compared with 2018 is the result of our lower product ~~business~~sales and increased overhead cost to support our long-term growth.

First nine months 2019 vs. 2018

For the nine months ended September 30, 2019, our product sales increased by $10.3 million or 30%. The increase is primarily due to an increase in distribution, customer awareness and demand for our branded PlusCBD™ products. We also launched new products and formulations, including softgels, gummies, and most recently topicals, which helped drive our overall sales. During the nine months ended September 30, 2019 and 2018, e-commerce sales accounted for 17.3% and 13.2%, respectively.

The gross profit increase of $6.4 million or 26% to $30.9 million for the nine months ended September 30, 2019 is in-line with increased product sales. Gross margins decreased from 72.2% for the nine months ended September 30, 2018 to 69.7% for the nine months ended September 30, 2019. The decrease is mostly due to higher overhead cost.

Operating expense



	Three months ended September 30,						Change				Nine months ended September 30,						Change
	2019			2018			Amount		%		2019			2018			Amount		%
	(in thousands)										(in thousands)
Research and development	$	1,544		$	530		$	1,014	191	%	$	4,574		$	1,125		$	3,449	307	%
Percentage of revenue	12		%	4		%					10		%	3		%
Selling, general and administrative	8,657			5,890			$	2,767	47	%	36,261			15,952			$	20,309	127	%
Percentage of revenue	69		%	43		%					82		%	47		%

Third quarter 2019 vs. 2018

Research and development (“R&D”) expense increased to $1.5 million in the third quarter of 2019 compared to $0.5 million in the third quarter of 2018. The increase of $1.0 million or 191% is related to additional R&D expenses for our specialty pharmaceutical segment ~~manufactures, markets~~of $0.7 million and ~~sells consumer products containing plant-based CBD under our~~~~PlusCBD™~~~~brand in a range of market sectors including nutraceutical, beauty care, specialty foods and vape.~~

~~We expect to realize revenue from~~for our consumer products ~~business~~ segment of $0.3 million. The increase in our specialty pharmaceutical segment is mostly related to ~~fund~~preclinical work, development cost associated with our ~~working capital needs~~active pharmaceutical ingredient ("API"), and expenses paid to outside consultants. The additional R&D expense in our consumer products segment is mostly related to additional personnel cost, cost for clinical trials, and cost for outside services for our new consumer product developments.

Selling, general and administrative (“SG&A”) expenses increased to $8.7 million in the third quarter of 2019 compared to $5.9 million in the third quarter of 2018. The increase of $2.8 million or 47% is mostly related to increases in our consumer products segment for marketing activities to support our growth, sales commissions and payroll expense as a result of our increased headcount.

First nine months 2019 vs. 2018

Research and development (“R&D”) expense increased to $4.6 million during the nine months ended September 30, 2019 compared to $1.1 million in the first nine months of 2018. ~~However,~~The increase of $3.4 million or 307% is related to additional R&D expenses for our specialty pharmaceutical segment of $2.0 million and for our consumer products segment of $1.5 million. The increase in our specialty pharmaceutical segment is mostly related to preclinical work, development cost associated with our API, and expenses paid to outside consultants. The additional R&D expense in our consumer products segment is mostly related to additional personnel cost and cost for outside services for our new consumer product developments.

Selling, general and administrative (“SG&A”) expenses increased to $36.3 million during the ~~Company’s pharmaceutical business segment may require~~nine months ended September 30, 2019 compared to $16.0 million in the first nine months of 2018. The increase of $20.3 million or 127% is mostly related to additional ~~capital over~~stock-based compensation expense, payroll expense related to the ~~next 12 months. Management believes~~retirement of our former President and Chief Executive Officer ("Mona Jr.") and increases in our marketing activities to support our growth, sales commissions and payroll expense as a result of our increased headcount, driven by our consumer products segment. During the first quarter of 2019, we entered into a Settlement Agreement (the “Settlement Agreement”) with Mona Jr., pursuant to which we agreed that ~~it will be able~~Mona Jr.’s resignation on January 22, 2019 was for Good Reason (as defined in Mona Jr.’s Employment Agreement) and agreed to ~~fund~~extend the deadline for Mona Jr.’s exercise of his stock options for a period of five years. In exchange, Mona Jr. agreed that notwithstanding the terms of his Employment Agreement providing for acceleration of vesting of all stock options and Restricted Stock Units (RSU's) upon a Good Reason resignation, certain of his unvested stock options would not immediately vest, but rather continue to vest if, and only if, certain of our milestones are achieved related to the our drug development ~~efforts~~efforts. These stock options were issued in ~~2018 solely through current cash flow, however, there can be no assurances that~~July 2016 (6,000,000 options) and March 2017 (5,000,000 options). We also agreed to mutually release all claims arising out of and related to Mona Jr.’s resignation and separation from us. As a result of the ~~Company will be successful. If~~Settlement Agreement, we recorded stock-based compensation expense related to the ~~Company is unable to generate sufficient cash flow or, alternatively, raise additional capital,~~accelerated vesting of the ~~Company would likely be forced to curtail pharmaceutical development.~~

RSU's and the modification of certain stock options of $5.1 million and $2.7 million in the first quarter of 2019, respectively.

Non-GAAP Financial Measures

We ~~currently focus on~~use Adjusted EBITDA internally to evaluate our ~~operating~~ performance and make financial ~~position.~~and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net income (loss) ~~minus~~plus depreciation expense, amortization expense, interest ~~income, plus interest expense,~~and income tax expense, ~~depreciation and amortization)~~minus income tax benefit), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We ~~present~~use Adjusted EBITDA because we ~~consider~~believe it also highlights trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.

We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Quarterly Report, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with greater transparency and a greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.

Adjusted EBITDA is not presented in accordance with, or as an ~~important measure~~alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Quarterly Report, including our condensed consolidated financial statements, to aid in their analysis and understanding of our performance and ~~it is a meaningful financial metric~~ in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business, such as certain non-cash items and other adjustments. The Company believes that Adjusted EBITDA, viewed in addition to, and not in lieu of, our reported results in accordance with accounting principles generally accepted in the United States (“GAAP”), provides useful information to investors regarding the Company’s performance.

Adjusted EBITDA is a non-GAAP measure and does not purport to be an alternative to net income (loss) as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. The term “Adjusted EBITDA” is not defined under GAAP, and Adjusted EBITDA is not a measure of net income (loss), operating income or any other performance measure derived in accordance with GAAP. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. CV Sciences’ management compensates for these limitations by relying primarily on GAAP results and using Adjusted EBITDA as supplemental information.

making comparisons.

A reconciliation from our net income (loss) to Adjusted EBITDA, a non-GAAP measure, for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 is detailed below:

For the three months ended
September 30, For the nine months ended
September 30,
2018 2017 2018 2017

Net income (loss) $ 3,294,973 $ (589,983 ) $ 7,100,217 $ (5,366,946 )
Interest income – – – 7
Interest expense 30,556 108,203 150,386 371,678
Provision for income taxes 200,000 – 240,000 –
Amortization of purchased intangible assets 8,850 8,850 26,550 26,550
Depreciation of property & equipment 121,911 30,897 349,121 117,744
EBITDA 3,656,290 (442,033 ) 7,866,274 (4,850,967 )

EBITDA Adjustments:
Stock-based compensation expense (1) 237,882 1,328,096 1,634,184 3,072,224
Common stock issued for professional services (2) 233,751 – 295,326 –
Gain on changes in derivative liabilities (3) – (10,987 ) – (248,875 )
Royalty buy-out (4) – – – 2,432,000
Total EBITDA Adjustments 471,633 1,317,109 1,929,510 5,255,349

Adjusted EBITDA $ 4,127,923 $ 875,076 $ 9,795,784 $ 404,382



	Three months ended September 30, 2019									Three months ended September 30, 2018
	Consumer Products			Specialty Pharma			Total			Consumer Products		Specialty Pharma			Total
	(in thousands)
Net income (loss)	$	(651	)	$	(1,118	)	$	(1,769	)	$	3,674	$	(379	)	$	3,295
Depreciation	170			—			170			122		—			122
Amortization	—			9			9			—		9			9
Interest expense (income)	(7		)	—			(7		)	31		—			31
Income tax expense	3			—			3			200		—			200
EBITDA	(485		)	(1,109		)	(1,594		)	4,027		(370		)	3,657
Stock-based compensation (1)	657			42			699			238		—			238
Common stock issued for professional services (2)	—			—			—			233		—			233
Adjusted EBITDA	$	172		$	(1,067	)	$	(895	)	$	4,498	$	(370	)	$	4,128

	Nine months ended September 30, 2019									Nine months ended September 30, 2018
	Consumer Products			Specialty Pharma			Total			Consumer Products		Specialty Pharma			Total
	(in thousands)
Net income (loss)	$	(7,134	)	$	(2,790	)	$	(9,924	)	$	7,898	$	(798	)	$	7,100
Depreciation	506			—			506			349		—			349
Amortization	—			27			27			—		27			27
Interest expense (income)	(2		)	—			(2		)	150		—			150
Income tax expense	29			—			29			240		—			240
EBITDA	(6,601		)	(2,763		)	(9,364		)	8,637		(771		)	7,866
Stock-based compensation (1)	4,794			121			4,915			1,634		—			1,634
Common stock issued for professional services (2)	—			—			—			295		—			295
Stock-based compensation associated with employment settlement (3)	7,857			—			7,857			—		—			—
Payroll expense associated with employment settlement (4)	934			—			934			—		—			—
Adjusted EBITDA	$	6,984		$	(2,642	)	$	4,342		$	10,566	$	(771	)	$	9,795

_________________


(1)	Represents stock-based compensation expense related to stock options and ~~RSU’s~~warrants awarded to employees, consultants and non-executive directors based on the grant date fair value ~~under~~using the Black-Scholes valuation ~~model (See Note 9 of the Company’s condensed consolidated financial statements)~~model.


	(2)	Represents common stock issued for professional ~~services~~services.


	(3)	Represents stock-based compensation expense related to accelerated vesting of RSU's and the ~~gain on changes in derivative liabilities~~modification of certain stock options associated with the ~~Iliad Notes (See Note 7 of the Company’s condensed consolidated financial statements)~~settlement agreement with our former President and Chief Executive Officer.


	(4)	Represents ~~the share-based royalty buy-out~~accrued payroll and related benefits associated with the ~~CanX acquisition~~retirement of our former President and Chief Executive Officer.

As illustrated above, Adjusted EBITDA improved by $3.25 million and $9.39 million for the three and nine months ended September 30, 2018 compared with the same period in 2017. This improvement is primarily due to the Company’s increase in sales.

~~Critical Accounting Policies~~

We have disclosed in the notes to our consolidated financial statements and in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2017 Annual Report on Form 10-K, those accounting policies that we consider to be significant in determining our results of operation and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our 2017 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.

~~Recent Accounting Pronouncements~~

~~See Note 2 in the accompanying notes to condensed consolidated financial statements.~~

~~Results of Operations~~

~~Comparison of the three and nine months ended September 30, 2018 and 2017~~

~~Revenues and gross profit~~ -We had sales of $13.60 million and gross profit of $9.95 million representing a gross profit percentage of 73.1% for the three months ended September 30, 2018 compared to sales of $5.59 million and gross profit of $4.00 million, representing a gross profit percentage of 71.5% for the three months ended September 30, 2017. The Company increased sales by $8.01 million, or a 143.2% increase, for the three months ended September 30, 2018, when compared to results for three months ended September 30, 2017.

For the nine months ended September 30, 2018, we had sales of $34.02 million and gross profit of $24.57 million, representing a gross profit percentage of 72.2% compared with sales of $13.49 million and gross profit of $9.28 million, representing a gross profit percentage of 68.8% for the nine months ended September 30, 2017. The Company increased sales by $20.53 million, or a 152% increase, for the nine months ended September 30, 2018 when compared to results for nine months ended September 30, 2017.

The sales increase for the three and nine months ended September 30, 2018 compared with the three and nine months ended September 30, 2017 is primarily due to an increase in distribution, customer awareness and demand for our branded~~PlusCBD™products, as we continued to expand and maintain our core customer base which further supports our decision to focus our sales strategy primarily on branded consumer products.~~

The gross profit increase for the three and nine months ended September 30, 2018 compared with the three and nine months ended September 30, 2017 is the result of our change in sales mix and increased sales.

~~Selling, general and administrative expenses~~ – Selling, general and administrative (“SG&A”) expenses increased to $5.89 million for the three months ended September 30, 2018, compared with $4.31 million for the three months ended September 30, 2017. SG&A expenses include non-cash expenses of $0.41 million and $1.37 million for the three months ended September 30, 2018 and 2017, respectively, which consisted primarily of stock-based compensation, amortization of intangible assets, depreciation of fixed assets and bad debt expense. After adjusting for these non-cash expenses, SG&A expenses increased by $2.46 million for the three months ended September 30, 2018 compared to three months ended September 30, 2017, an approximate 83% increase. This increase relates primarily to increased employee headcount and higher commissions, both directly related to our 143.2% increase in sales for the three months ended September 30, 2018, as compared to three months ended September 30, 2017.

For the nine months ended September 30, 2018 and 2017, we incurred SG&A expenses in the amount of $15.97 million and $11.51 million, respectively. SG&A expenses include non-cash expenses of $2.14 million and $3.22 million for the nine months ended September 30, 2018 and 2017, respectively, which consisted primarily of stock-based compensation, amortization of intangible assets, depreciation of fixed assets and bad debt expense. After adjusting for these non-cash expenses, SG&A expenses increased by $6.34 million for the nine months ended September 30, 2018 compared to nine months ended September 30, 2017, an approximate 75% increase. This increase relates primarily to increased employee headcount and higher commissions, both directly related to our 152% increase in sales for the nine months ended September 30, 2018, as compared to nine months ended September 30, 2017.

~~Research and development expenses~~- For the three months ended September 30, 2018 and 2017, the Company incurred research and development (“R&D”) expenses of $0.53 million and $0.18 million, respectively. These expenses are related to our cost of process development, rental of our laboratory facility, payroll expenses, laboratory supplies, product development and testing, outsourced research personnel, and R&D expenses related to our specialty pharmaceutical segment.

During the three months ended September 30, 2018, we incurred $0.36 million of R&D expenses related to our specialty pharmaceutical segment compared with $0.18 million for the three months ended September 30, 2017. We expect R&D expense related to our pharmaceutical segment to increase each quarter over the next 12 months.

For the nine months ended September 30, 2018 and 2017, the Company incurred R&D expenses of $1.13 million and $0.57 million, respectively. These costs are related to the same costs incurred during the three months ended September 30, 2018 and 2017, respectively. During the nine months ended September 30, 2018, we incurred $0.76 million of R&D expenses related to our specialty pharmaceutical segment compared with $0.39 million in the nine months ended September 30, 2017.

~~Gain on changes in derivative liabilities~~- Gain on changes in derivative liabilities of $0 and $0.01 million during the three months ended September 30, 2018 and 2017, respectively, relates to the change in the derivative liability from the Iliad Note and the change in the derivative liability from inception for the Iliad Note 2 (See Note 7 of the Company’s condensed consolidated financial statements). The gain results primarily from the reduction in the expected term of the derivative liabilities.

Gain on changes in derivative liabilities of $0 and $0.25 million during the nine months ended September 30, 2018 and 2017, respectively, relates to the change in the derivative liability from December 31, 2016 on the Iliad Notes (See Note 7 of the Company’s condensed consolidated financial statements). The gain results primarily from the reduction in the expected term of the derivative liabilities.

~~Royalty buy-out~~- Royalty buy-out of $0 and $2.43 million during the nine months ended September 30, 2018 and 2017, respectively relates to the Company’s share-based royalty buy-out associated with the Company’s acquisition of CanX, Inc., Florida-based, specialty pharmaceutical corporation, as disclosed by the Company in that certain Current Report on Form 8-K filed by the Company with the SEC on March 22, 2017.

Liquidity and Capital Resources

A summary of our changes in cash flows for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 is provided below:

For the nine months ended September 30,
2018 2017
Net cash flows provided by (used in):
Operating activities $ 9,925,819 $ 647,216
Investing activities (424,354 ) (6,410 )
Financing activities (1,283,054 ) 624,036
Net increase in cash and restricted cash 8,218,411 1,264,842
Cash and restricted cash, beginning of period 2,791,544 1,057,468
Cash and restricted cash, end of period $ 11,009,955 $ 2,322,310

Nine months ended September 30,
2019 2018
(in thousands)
Net cash flows provided by (used in):
Operating activities $ 2,399
$ 9,926
Investing activities (901 ) (425 )
Financing activities (195 ) (1,283 )
Net increase in cash and restricted cash 1,303
8,218
Cash, cash equivalents and restricted cash, beginning of period 12,935
2,792
Cash, cash equivalents and restricted cash, end of period $ 14,238
$ 11,010

Operating Activities

Net cash provided by or used in operating activities includes ~~our~~ net income (loss) adjusted for non-cash expenses such as depreciation and amortization, bad debt expense, ~~amortizations of debt issuance costs, gains or losses on our derivative liabilities, expenses related to issuance of common stock for professional services,~~and stock-based ~~compensation and accrued interest expense.~~compensation. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable. Operating assets and liabilities that arise from the funding of inventory purchases and customer accounts receivable can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer behavior.

Net cash provided by operating activities ~~increased~~decreased by $7.5 million to ~~$9.92~~$2.4 million ~~for~~in the nine months ended September 30, ~~2018~~2019 compared to ~~$0.65~~$9.9 million ~~for~~in the nine months ended September 30, ~~2017, an improvement of $9.27 million.~~2018. The primary ~~reasons~~reason for this ~~improvement include~~decrease is our ~~increased sales, gross margins,~~change in operating assets and ~~ability~~liabilities, mostly driven by additional inventory of $1.5 million to ~~convert~~support our ~~inventory investment into cash, as well as the Company’s transition from a net loss~~future growth. We also invested in our drug and product development activities, additional marketing expense, payroll and cost for outside consultants to ~~net income position during the first nine months~~support our future growth of ~~2018.~~

our consumer products operating segment. In addition, we incurred additional cost of $2.0 million for our pharmaceutical operating segment.

Investing Activities

~~The Company had $0.42 million and $0.01 million~~

Net cash used in investing activities ~~for~~increased by $0.5 million in the nine months ended September 30, ~~2018 and 2017, respectively. The~~2019 compared to the prior year period. Net cash used in investing ~~activities for the first nine months of 2018 included purchase~~activity consists of equipment purchases and ~~leasehold~~tenant improvements.

During 2019, we purchased additional manufacturing equipment and completed tenant improvements to our main facility. We also invested in additional technology to support our e-commerce activities.

Financing Activities

Net cash ~~(used in) provided by~~used in financing activities ~~for~~decreased by $1.1 million in the nine months ended September 30, ~~2018 and 2017 totaled ($1.28)~~2019 compared to the prior year period. The primary reason for the decrease is the repayment of our unsecured debt of $0.5 million and ~~$0.62 million, respectively. Cash flows used by financing activities for the nine months ended September 30, 2018 consisted of $0.66 million of cash repayments on~~ convertible debt ~~$0.85 million~~ of repayment of unsecured debt, $0.12 million of repayments on an unsecured note payable, and proceeds from exercise of stock options of $0.34 million. Cash flows provided by financing activities for the nine months ended September 30, 2017 consisted of $0.75$0.6 million in ~~borrowing net proceeds from~~2018.

Critical Accounting Policies

We have disclosed in the ~~issuance~~notes to our consolidated financial statements and in “Item 7 – Management’s Discussion and Analysis of ~~secured convertible debt~~Financial Condition and ~~$0.13 million~~Results of ~~repayments~~Operations” included in our 2018 Annual Report on ~~an unsecured note payable. (See~~Form 10-K, those accounting policies that we consider to be significant in determining our results of operation and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our 2018 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.

Recent Accounting Pronouncements

See Note ~~7 of~~1 in the ~~Condensed Consolidated Financial Statements).~~

~~Liquidity~~

For the three months ended September 30, 2018 and 2017, the Company had net income (loss) of $3.29 million and ($0.59) million, respectively, and for the nine months ended September 30, 2018 and 2017, the Company had net income (loss) of $7.10 million and ($5.37) million, respectively. In addition, for the nine months ended September 30, 2018 and 2017, the Company had positive cash flows from operations of $9.92 million and $0.65 million. Management believes the Company has the funds neededaccompanying notes to continue its consumer product business segment and meet its other obligations over the next year solely from current revenues and cash flow due to increased sales. However, the Company’s pharmaceutical business segment may require additional capital over the next 12 months. Management believes that it will be able to fund our drug development efforts solely from current revenue and cash flow for the next 12-month period through November 6, 2019. If the Company is unable to generate sufficient cash flow or raise additional capital, the Company would likely be forced to curtail pharmaceutical development.

condensed consolidated financial statements.

Off-Balance Sheet Arrangements

The Company previously had two supply arrangements with European farmers to supply raw inventory material through October 2018. Both agreements have been terminated. A new agreement with a European farmer to supply raw inventory material from the 2018 crop was completed in August 2018.

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

~~DISCLOSURE CONTROLS AND PROCEDURES~~

~~Our management, which is comprised~~

Evaluation of ~~one person holding the offices of Chief Executive Officer, Chief Financial Officer~~Disclosure Controls and ~~Secretary, evaluated the effectiveness of the design and operation of our~~Procedures

Our disclosure controls and procedures (as ~~such term is~~ defined in Rules 13a-15(e) ~~and~~or 15d-15(e) ~~promulgated~~ under the Exchange Act) as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, our management concluded that our disclosure controls and procedures were effective, at a reasonable assurance level, as of the Evaluation Date, to ensure that information required to be disclosed in reports that we file or submit under thatSecurities Exchange Act ~~is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and~~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 ~~management in a manner that allows~~principal executive and financial officers, to allow timely decisions regarding ~~required disclosures.~~

~~An evaluation was performed under~~disclosure. The Chief Executive Officer (CEO) and the ~~supervision and~~Chief Financial Officer (CFO), with ~~the participation~~assistance from other members of ~~the Company’s~~ management, ofhave reviewed the effectiveness of our disclosure controls and procedures as of September 30, 2019 and, based on their evaluation, have concluded that the ~~design~~disclosure controls and ~~operation~~procedures were not effective as of ~~the Company’s procedures and~~such date due to a material weakness in internal control over financial reporting ~~as of September 30,~~that was disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018. ~~In making this assessment, the Company used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)~~

Changes in ~~its~~ Internal ~~Control-Integrated Framework (2013).~~

~~CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING~~

Control Over Financial Reporting

There ~~was~~have been no ~~change~~changes in our internal control over financial reporting ~~identified with our evaluation~~(as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended September 30, ~~2018,~~2019 that ~~has~~have materially affected, or isare reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

Remediation

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we began implementing a remediation plan to address the material weakness mentioned above. The weakness will not be considered remediated, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2019.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

~~On April 23, 2014, Tanya Sallustro filed~~

For a ~~purported class action complaint (the “Complaint”)~~description of our material pending legal proceedings, please see Note 8, Commitments and Contingencies, to our condensed consolidated financial statements included in ~~the Southern District~~Part I, Item 1 of New York (the “Court”) alleging securities fraud and related claims against the Company and certain of its officers and directors and seeking compensatory damages including litigation costs. Ms. Sallustro alleges that between March 18-31, 2014, she purchased 325 shares of the Company’s common stock for a total investment of $15,791. The Complaint refers to Current Reportsthis Quarterly Report on Form 8-K and Current Reports on Form 8-K/A filings made by the Company on April 3, 2014 and April 14, 2014, in which the Company amended previously disclosed sales (sales originally stated at $1,275,000 were restated to $1,082,375 - a reduction of $192,625) and restated goodwill as $1,855,512 (previously reported at net zero). On March 19, 2015, the Court issued a ruling appointing Steve Schuck as lead plaintiff. Counsel for Mr. Schuck filed a “consolidated complaint” on September 14, 2015, asserting two claims: (1) for violation of Section 10(b) of the Exchange Act and SEC Rule 10B-5 promulgated thereunder against all defendants, and (2) for violation of Section 20(a) of the Exchange Act against the individual defendants. Plaintiffs sued the Company, Michael Mona, Jr., Bart Mackay, Theodore Sobieski, Edward Wilson, Stuart Titus, and Michael Llamas.

On December 11, 2015, the Company and the individuals (except for Messrs. Titus and Llamas) filed a motion to dismiss the consolidated complaint. On April 2, 2018, the Court issued an order granting in part and denying in part the motion to dismiss. With respect to the First Claim for violation of Section 10(b) of the Exchange Act, the court ruled that plaintiffs failed to allege misstatements or omissions attributable to Messrs. Mackay, Sobieski, or Titus, and so granted the motion on that claim as to those parties. The court found the allegations sufficient as to the Company and Messrs. Wilson, and Mona Jr., and so denied the motion as to those parties. Under plaintiffs’ separate theory of “market manipulation,” the Court granted the motion in favor of all defendants. The parties are currently awaiting entry of a case scheduling order by the Court. Management intends to vigorously defend the allegations and an estimate of possible loss cannot be made at this time.

On March 17, 2015, stockholder Michael Ruth filed a shareholder derivative suit in Nevada District Court alleging two causes of action: 1) Breach of Fiduciary Duty, and 2) “Gross Mismanagement.” The claims are premised on the same events as the already-pending securities class action case in New York discussed above – it is alleged that the Form 8-K filings misstated goodwill and sales of the Company, which when corrected, lead to a significant drop in stock price. The Company filed a motion to dismiss the suit on June 29, 2015. Instead of opposing the Company’s motion, Mr. Ruth filed an amended complaint on July 20, 2015. Thereafter, Mr. Ruth and the Company agreed to stay the action pending the outcome of the securities class action case in New York discussed above. Mr. Ruth and the Company filed a stipulation and proposed order on June 20, 2018 asking the Nevada District Court to continue the stay in the action pending a resolution on the securities class action case. Since no discovery has been conducted and the case has been stayed for nearly three years, an estimate of the possible loss or recovery cannot be made at this time.

On June 15, 2017, the Securities and Exchange Commission (SEC) filed an enforcement action against the Company and its then-Chief Executive Officer, Michael Mona, Jr. In the complaint, filed in the United States District Court of Nevada (Case No. 2:17-cv-01681), the SEC alleged that the Company and Mr. Mona violated federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5(b), through alleged misrepresentations made in certain SEC reports regarding the value of the Company’s assets acquired by the Company from PhytoSphere Systems, LLC. On May 31, 2018, the Company and Mr. Mona settled all claims. Pursuant to the terms of the settlement, without admitting or denying the allegations made by the SEC, the Company agreed to a consent judgment pursuant to which (a) the Company agreed to pay a penalty in the amount of $150,000, and (b) the Company is permanently enjoined from violations of federal securities laws. The Company has made this payment in full. Mr. Mona, without admitting or denying any allegations, agreed to an order (a) prohibiting him from serving as an officer or director of a publicly held company for five (5) years, (b) providing for payment in the aggregate amount of $50,000, payable in 12 installments commencing 30 days after entry of final judgment, and (c) permanently enjoining him from violations of federal securities laws. Effective concurrent with the settlement, Mr. Mona resigned as the Company’s President and Chief Executive Officer, and resigned his position on the Company’s Board of Directors.

10-Q.

On October 21, 2016, Dun Agro B.V. (“Dun Agro”) filed a complaint against the Company in the District Court of the North Netherlands, location Groningen, The Netherlands, alleging non-performance under a contract, seeking compensatory damages of approximately 2,050,000 euros, excluding interest and costs. The plaintiff alleges that the Company was obligated to perform under that certain Supply Agreement between the Company and Dun Agro dated December 19, 2013, and to purchase 1,000,000 kilograms of harvested raw material related to the 2016 crop. The Company settled this matter on August 31, 2018 with no compensatory damages.

The Company is a plaintiff in a litigation matter involving a former credit card processor of the Company and recently settled another matter involving a former credit card processor of the Company. On September 10, 2017, the Company filed a complaint against one such credit card processor, PayToo Merchant Services Corporation (“Pay Too”), a Florida corporation, in the Circuit Court in Broward County, Florida, asserting breach of contract claims for PayToo’s failure to remit approximately $250,000 to the Company for credit card sales processed by PayToo from January 2017 to February 2017. On December 11, 2017, the Company filed a complaint against the other credit card processor, T1 Payments, LLC (“T1”), a Nevada corporation, in District Court, Clark County, Nevada, asserting breach of contract claims for T1’s failure to remit approximately $500,000 to the Company for credit card sales processed by T1 from February 2017 to October 2017. The T1 matter was resolved on October 22, 2018 with $450,000 of previously restricted cash being released to the Company by T1 in full settlement of the Company’s complaint.

The Company has been made aware of a series of complaints and one derivative suit filed by various plaintiffs alleging violations of securities law related to the Company’s disclosures regarding patent prosecution of its various drug development assets. On August 24, 2018, David Smith filed a purported class action complaint against the Company in the United States District Court District of Nevada. This complaint and the other complaints that the Company has been made aware of were filed directly after Citron Research published on Twitter on August 20, 2018 its belief that the Company misled investors by failing to disclose that the Company’s efforts to secure patent protection had been “finally rejected” by the United States Patent and Trademark Office (USPTO). The Company believes these claims are without merit, and intends to vigorously defend any claims in the event it is served with a complaint.

Item ~~1a.~~1A. RISK FACTORS

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

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In August 2018, the Company issued 50,000 shares of common stock to IRTH Communications LLC, the Company’s investor relations consultant, and 25,000 shares of common stock to Larry Raskin, both for compensation related to professional services provided. The total value of the shares issued was $153,500 and $80,251, respectively, which represents the fair market value of the Company’s common stock as of the issuance dates. The issuance of these shares of common stock was exempt from registration under the Securities Act of 1933, as amended (the “Act”), in reliance on exemptions from the registration requirement of the Act in transactions not involved in a public offering pursuant to Section 4(a)(2) under the Act.

None.

Item 3. DEFAULTS ~~UNDER~~UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY ~~DISCLOSURE~~

DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

~~None.~~

None.

Item 6. EXHIBITS



Exhibit No.		Description of Exhibit
2.1 (1)		Agreement and Plan of Merger, dated as of July 25, 2013, by and between CannaVEST Corp., a Texas corporation, and CannaVEST Corp., a Delaware corporation.
2.1 (2)		Agreement and Plan of Reorganization by and among CannaVEST Corp., CannaVEST Merger Sub, Inc., CANNAVEST Acquisition LLC, CanX, Inc. and the Starwood Trust, as the Shareholder Representative.
3.1 (1)		Certificate of Incorporation of CannaVEST Corp., as filed on January 26, 2013.
3.2 (1)		Bylaws of CannaVEST Corp., dated as of January 26, 2013.
3.3 (3)		Certificate of Amendment to Certificate of Incorporation of CannaVest Corp., as filed on January 4, 2016.
3.4 (4)		Certificate of Incorporation of the Company, as amended.
3.5 (5)		Amendment to the Bylaws of the Company, as amended.
3.6 (6)		Bylaws of the Company, as amended.
4.1 (7)		CannaVEST Corp. Specimen Stock Certificate
~~10.1(8)~~ 10.1 † (8)		Amended and Restated 2013 Equity Incentive Plan, as amended.
31.1*		Certification of the Chief Executive Officer ~~and~~pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer ~~and~~pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 ~~INS~~INS*		XBRL Instance Document**
101 ~~SCH~~SCH*		XBRL Schema Document**
101 ~~CAL~~CAL*		XBRL Calculation Linkbase Document**
101 ~~LAB~~DEF*		XBRL Definition Linkbase Document**
101 LAB*		XBRL Labels Linkbase Document**
101 ~~PRE~~PRE*		XBRL Presentation Linkbase Document**
~~101 DEF~~		XBRL Definition Linkbase Document**

________________________

* Filed herewith.

† Indicates a management contract or compensatory plan or arrangement.

** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.


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


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


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


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


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


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


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


(8)	Incorporated by reference from an exhibit to our Current Report on Form 8-K filed on ~~August 9, 2018.~~June 17, 2019.

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


~~CV SCIENCES, INC.~~ ~~(Registrant)~~
		CV SCIENCES, INC. (Registrant)

By	/s/ Joseph D. Dowling
	Joseph D. Dowling Chief Executive Officer ~~and Chief Financial Officer~~ (Principal Executive Officer) ~~(Principal Financial Officer)~~
	Dated November ~~7, 2018~~5, 2019

	31
	By	/s/ Joerg Grasser
		Joerg Grasser Chief Financial Officer (Principal Financial Officer)
		Dated November 5, 2019

☒

ý	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 30, ~~2018~~2019

☐	Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from _________ to ________



DELAWARE		~~80-0944870~~80-0944970
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading symbol(s)	Name of exchange on which registered
Common Stock, par value $0.0001	CVSI	OTC:QB



Large accelerated filer	☐o	Accelerated filer	☐ý
Non-accelerated filer	☐o	Smaller reporting company	☒ý
Emerging growth company	☐o

		PAGE
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets ~~as of September 30, 2018 (unaudited) and December 31, 2017 (audited)~~	1
	Condensed Consolidated Statements of Operations ~~(unaudited) for the three and nine months ended September 30, 2018 and 2017~~	2
	Condensed Consolidated Statement of Changes in Stockholders’ Equity ~~(unaudited) for the nine months ended September 30, 2018~~	3
	Condensed Consolidated Statements of Cash Flows ~~(unaudited) for the nine months ended September 30, 2018 and 2017~~	4
	Notes to Condensed Consolidated Financial Statements ~~(unaudited)~~	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 14
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	27 19
Item 4.	Controls and Procedures	27 20

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	28 21
Item 1A.	Risk Factors	29 21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29 21
Item 3.	Defaults Upon Senior Securities	29 21
Item 4.	Mine Safety Disclosure	29 21
Item 5.	Other Information	29 21
Item 6.	Exhibits	30 21

	SIGNATURES	31

	(Unaudited)			(Audited)
	September 30,			December 31,
	2018			2017
Assets
Current assets
Cash (Note 2)	$	10,271,599		$	2,012,965
Restricted cash (Note 2)		738,356			778,579
Accounts receivable, net (Note 2)		2,493,091			1,507,824
Inventory (Note 3)		5,727,569			2,822,585
Prepaid expenses and other current assets		1,847,048			813,218
		21,077,663			7,935,171

Inventory, net (Note 3)		803,100			5,667,101
Other assets		400,000			400,000
Property & equipment, net (Note 2)		2,158,666			2,083,433
Intangibles, net (Note 5)		3,809,650			3,836,200
Goodwill (Note 5)		2,788,300			2,788,300

Total assets	$	31,037,379		$	22,710,205

Liabilities and stockholders' equity
Current liabilities
Accounts payable	$	1,165,014		$	678,271
Accrued expenses (Note 4)		1,808,734			1,931,920
Secured convertible promissory notes payable, net (Note 7)		–			609,926
Unsecured notes payable (Note 7)		–			116,370
Total current liabilities		2,973,748			3,336,487

Non-current liabilities
Unsecured note payable, net (Note 7)		–			850,000
Deferred rent		1,234,329			1,067,459
Deferred tax liability		1,074,800			1,074,800
Total liabilities		5,282,877			6,328,746

Commitments and contingencies (Note 11)

Stockholders' equity (Notes 8 and 9)
Preferred stock, par value $0.0001; 10,000,000 shares authorized; no shares issued and outstanding		–			–
Common stock, par value $0.0001; 190,000,000 shares authorized; 94,355,178 and 90,512,563 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		9,435			9,051
Additional paid-in capital		53,672,778			51,400,336
Accumulated deficit		(27,927,711	)		(35,027,928	)
Total stockholders' equity		25,754,502			16,381,459

Total liabilities and stockholders' equity	$	31,037,379		$	22,710,205

	For the three months ended September 30,						For the nine months ended September 30,
	2018			2017			2018			2017

Product sales, net	$	13,600,881		$	5,591,210		$	34,020,341		$	13,437,233
Cost of goods sold		3,655,458			1,593,561			9,452,939			4,162,122
Gross Profit		9,945,423			3,997,649			24,567,402			9,275,111

Operating Expenses:
Selling, general and administrative		(5,890,332	)		(4,311,078	)		(15,951,529	)		(11,513,560	)
Research and development		(529,562	)		(179,338	)		(1,125,270	)		(573,701	)
		(6,419,894	)		(4,490,416	)		(17,076,799	)		(12,087,261	)

Gain on changes in derivative liabilities		–			10,987			–			248,875
Royalty buy-out		–			–			–			(2,432,000	)
		(6,419,894	)		(4,479,429	)		(17,076,799	)		(14,270,386	)

Operating Income (Loss)		3,525,529			(481,780	)		7,490,603			(4,995,275	)

Other (expense) income:
Interest income		–			–			–			7
Interest expense		(30,556	)		(108,203	)		(150,386	)		(371,678	)
Total Other Expense		(30,556	)		(108,203	)		(150,386	)		(371,671	)

Income (loss) before provision for income taxes		3,474,973			(589,983	)		7,340,217			(5,366,946	)
Provision for income taxes		200,000			–			240,000			–
Net Income (Loss)	$	3,294,973		$	(589,983	)	$	7,100,217		$	(5,366,946	)

Weighted average common shares outstanding
Basic		91,639,488			88,114,604			90,959,121			77,126,737
Diluted		115,888,788			88,114,604			110,601,488			77,126,737
Net income (loss) per common share
Basic	$	0.04		$	(0.01	)	$	0.08		$	(0.07	)
Diluted	$	0.03		$	(0.01	)	$	0.06		$	(0.07	)

	Common Stock				Additional Paid-In			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance - December 31, 2017		90,512,563	$	9,051	$	51,400,336		$	(35,027,928	)	$	16,381,459
Issuance of common stock for professional services		225,000		23		295,303			–			295,326
Issuance of common stock from exercise of stock options		994,433		99		343,217			–			343,316
Issuance of common stock from exercise of warrants on a net issuance basis		2,623,182		262		(262	)		–			–
Stock based compensation		–		–		1,634,184			–			1,634,184
Net Income		–		–		–			7,100,217			7,100,217
Balance - September 30, 2018		94,355,178	$	9,435	$	53,672,778		$	(27,927,711	)	$	25,754,502

	September 30, 2018		December 31, 2017

Cash	$	10,271,599	$	2,012,965
Restricted cash		738,356		778,579
Total cash and restricted cash shown in the statement of cash flows	$	11,009,955	$	2,791,544

	Useful Lives	September 30, 2018			December 31, 2017

Office furniture and equipment	3 years	$	731,135		$	537,607
Laboratory and other equipment	5 years		536,570			398,997
Tenant improvements	14 to 39 months		1,639,138			1,545,885
			2,906,843			2,482,489
Less: accumulated depreciation			(748,177	)		(399,056	)
		$	2,158,666		$	2,083,433

	September 30, 2018		December 31, 2017

Accrued payroll expenses	$	908,179	$	1,037,122
Other accrued liabilities		900,555		894,798
	$	1,808,734	$	1,931,920

	Original Fair Market Value		Accumulated Amortization		Net		Useful Life (Years)

Balance - September 30, 2018:
In-process research and development	$	3,730,000	$	–	$	3,730,000		–
Trade names		100,000		55,000		45,000		5
Non-compete agreements		77,000		42,350		34,650		5
	$	3,907,000	$	97,350	$	3,809,650
Balance - December 31, 2017:
In-process research and development	$	3,730,000	$	–	$	3,730,000		–
Trade names		100,000		40,000		60,000		5
Non-compete agreements		77,000		30,800		46,200		5
	$	3,907,000	$	70,800	$	3,836,200



	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Useful Life (Years)
Balance - September 30, 2019:
In-process research and development	$	3,730	$	—	$	3,730	—
Trade names	100		75		25		5
Non-compete agreements	77		58		19		5
	$	3,907	$	133	$	3,774
Balance - December 31, 2018:
In-process research and development	$	3,730	$	—	$	3,730	—
Trade names	100		60		40		5
Non-compete agreements	77		46		31		5
	$	3,907	$	106	$	3,801



	September 30, 2019
Weighted average remaining lease term (in months)	79.88
Weighted average discount rate	6.5	%



Year ending December 31,
2019 (remaining three months)	$	384
2020	1,370
2021	1,966
2022	1,993
2023	2,058
2024	2,120
Thereafter	3,260
	13,151
Less imputed interest	(2,695		)
Total lease liabilities	$	10,456

Current operating lease liabilities	$	669
Non-current operating lease liabilities	9,787
Total lease liabilities	$	10,456

	Maturity	September 30, 2018			December 31, 2017			Interest Rate

Secured promissory note payable	April 30, 2018	$	609,926		$	770,000		8%
Interest accrued			44,360			51,890
Unamortized original issue discount and debt issuance costs, net			5,714			(5,714	)
Conversion of convertible promissory notes and accrued interest to accrued liabilities			–			(75,000	)
Cash repayment of promissory notes and accrued interest			(660,000	)		(131,250	)

Net carrying amount of debt			–			609,926
Less current portion			–			(609,926	)
Long-term borrowings - net of current portion		$	–		$	–



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

	September 30, 2018			December 31, 2017

Unsecured promissory note payable	$	850,000		$	850,000
Debt extinguishment (Promissory Note)		–			(850,000	)
Cash repayment of Wiltshire Note 2		(850,000	)		–
Unsecured promissory note – principal amount (Wiltshire Note 2)		–			850,000

Net carrying amount of debt		–			850,000
Less current portion		–			–
Long-term borrowings - net of current portion	$	–		$	850,000



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contract Term (in years)	Aggregate Intrinsic Value
Outstanding - December 31, 2018	24,775	$	0.51	7.5	$	94,206
Granted	2,197	4.31		—	—
Exercised	(885)	0.36		—	—
Forfeited	(197)	1.6		—	—
Outstanding - September 30, 2019	25,890	0.83		6.2	29,971

Exercisable - September 30, 2019	23,368	0.62		5.9	28,776
Vested or expected to vest - September 30, 2019	25,890	$	0.83	6.2	$	29,971

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contract Term (Years)		Aggregate Intrinsic Value
Outstanding - December 31, 2017		15,823,277		$	0.48		8.54	$	5,406,499
Granted		6,969,000			0.52		–		–
Exercised		(994,432	)		0.35		–		–
Cancelled/Forfeited		(1,035,278	)		0.36		–		–
Outstanding - September 30, 2018		20,762,567			0.50		7.78		89,820,535

Total exercisable - September 30, 2018		15,654,682			0.49		7.36		67,957,693
Total unvested - September 30, 2018		5,107,885			0.55		9.05		21,862,842
Total vested or expected to vest - September 30, 2018		20,762,567			0.50		7.78		89,820,535

	Number of Shares			Weighted Average Fair Value Per Share on Grant Date
Unvested stock options - December 31, 2017		3,738,615			0.35
Granted		6,969,000			0.52
Vested		(4,564,452	)		0.36
Cancellations		(1,035,278	)		0.31
Unvested stock options - September 30, 2018		5,107,885			0.55



	Number of Shares		Weighted Average Grant Date Fair Value
RSU's outstanding - December 31, 2018	2,950		$	2.14
Vested	(2,950	)	2.14
RSU's outstanding - September 30, 2019	—		$	—

	Operating Lease Commitment

2018 – for the three months ending December 31, 2018	$	178,232
2019		923,889
2020		955,048
2021		917,415
2022		922,638
Thereafter		3,024,659
	$	6,921,881

	Consumer Products Segment			Specialty Pharmaceutical Segment			Consolidated Totals
Three Months Ended
September 30, 2018:
Product sales, net	$	13,600,881		$	–		$	13,600,881
Gross profit		9,945,423			–			9,945,423
Selling, general and administrative expense		(5,869,762	)		(20,570	)		(5,890,332	)
Research and development expense		(170,466	)		(359,096	)		(529,562	)
Operating income (loss)	$	3,905,195		$	(379,666	)	$	3,525,529

Three Months Ended
September 30, 2017:
Product sales, net	$	5,591,210		$	–		$	5,591,210
Gross profit		3,997,649			–			3,997,649
Gain on change in derivative liabilities		10,987			–			10,987
Selling, general and administrative expense		(4,259,725	)		(51,353	)		(4,311,078	)
Research and development expense		(76,520	)		(102,818	)		(179,338	)
Operating loss	$	(327,609	)	$	(154,171	)	$	(481,780	)

Nine Months Ended
September 30, 2018:
Product sales, net	$	34,020,341		$	–		$	34,020,341
Gross profit		24,567,402			–			24,567,402
Selling, general and administrative expense		(15,915,882	)		(35,647	)		(15,951,529	)
Research and development expense		(362,933	)		(762,337	)		(1,125,270	)
Operating income (loss)	$	8,289,587		$	(797,984	)	$	7,490,603

Nine Months Ended
September 30, 2017:
Product sales, net	$	13,437,233		$	–		$	13,437,233
Gross profit		9,275,111			–			9,275,111
Gain on change in derivative liabilities		248,875			–			248,875
Royalty buy-out		–			(2,432,000	)		(2,432,000	)
Selling, general and administrative expense		(11,312,687	)		(200,873	)		(11,513,560	)
Research and development expense		(181,509	)		(392,192	)		(573,701	)
Operating loss	$	(1,970,210	)	$	(3,025,065	)	$	(4,995,275	)

	For the three months ended September 30,					For the nine months ended September 30,
	2018		2017			2018		2017

Net income (loss)	$	3,294,973	$	(589,983	)	$	7,100,217	$	(5,366,946	)
Interest income		–		–			–		7
Interest expense		30,556		108,203			150,386		371,678
Provision for income taxes		200,000		–			240,000		–
Amortization of purchased intangible assets		8,850		8,850			26,550		26,550
Depreciation of property & equipment		121,911		30,897			349,121		117,744
EBITDA		3,656,290		(442,033	)		7,866,274		(4,850,967	)

EBITDA Adjustments:
Stock-based compensation expense (1)		237,882		1,328,096			1,634,184		3,072,224
Common stock issued for professional services (2)		233,751		–			295,326		–
Gain on changes in derivative liabilities (3)		–		(10,987	)		–		(248,875	)
Royalty buy-out (4)		–		–			–		2,432,000
Total EBITDA Adjustments		471,633		1,317,109			1,929,510		5,255,349

Adjusted EBITDA	$	4,127,923	$	875,076		$	9,795,784	$	404,382