ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our consolidated financial condition and results of operations for the years ended December 31, 2025 and 2024 should be read in conjunction with our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report. 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 various factors, many of which are out of our control. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
OVERVIEW
We are a consumer wellness company specializing in nutraceuticals and plant-based foods. Our hemp extracts and other proven, science-backed, natural ingredients and products are sold through a range of sales channels from B2B to B2C.
Our +PlusCBD branded products are sold at select retail locations throughout the U.S. and are the top-selling brands of hemp extracts in the natural products market, according to SPINS, the leading provider of syndicated data and insights for the natural, organic and specialty products industry. With a commitment to science, +PlusCBD product benefits in healthy people are supported by human clinical research data, in addition to three published clinical case studies available on PubMed.gov. +PlusCBD was the first hemp extract supplement brand to invest in the scientific evidence necessary to receive self-affirmed GRAS status.
On December 7, 2023, we entered into a Membership Interest Purchase Agreement, pursuant to which we purchased all of the outstanding equity interests in Cultured Foods Sp. z.o.o., resulting in Cultured Foods becoming a wholly owned subsidiary of the Company. Cultured Foods is a leading European manufacturer and distributor of plant-based protein products. In January 2025, we launched Lunar Fox , a brand that is focused on distribution of plant-based products in the U.S. market. Our Cultured Foods and Lunar Fox brands provide a variety of 100% plant-based food products. Committed to crafting nutritious and flavorful alternatives, Cultured Foods and Lunar Fox cater to individuals seeking vegan, gluten-free, or flexitarian options for a nutritious and satisfying culinary experience.
In May 2024, we acquired all outstanding membership interests of Elevated Softgels, LLC, a Delaware limited liability company. Elevated Softgels is a leading manufacturer of encapsulated softgels and tinctures for the supplement and nutrition industry, based in Colorado.
In August 2024, we engaged Maxim Group, LLC as a non-exclusive financial advisor and investment banker to provide strategic financial advisory and investment banking services. Working with Maxim, the Company intends to continue building an efficient and cost effective consumer products platform. We intend to continue to evaluate inbound and outbound merger, sale, acquisition or other opportunities for the Company.
We also have a dormant drug development program focused on developing and commercializing CBD-based novel therapeutics, which may be pursued further, subject to available capital.
Our primary offices and facilities are located in San Diego, California; Grand Junction, Colorado; and Warsaw, Poland.
Our common stock is traded on the OTC:QB market under the trading symbol CVSI.
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Results of Operations
Comparison of the Years ended December 31, 2025 vs. December 31, 2024
Revenues and gross profit
Year Ended December 31,
Change
Amount
(in thousands)
Product sales, net
Cost of goods sold
Gross profit
Gross margin
Revenue by channel
Year Ended December 31, 2025
Year Ended December 31, 2024
Amount
% of product
sales, net
Amount
% of product
sales, net
(in thousands)
(in thousands)
Business-to-business ("B2B") sales
Business-to-consumer ("B2C") sales
Product sales, net
We had product sales of $13.8 million and gross profit of $6.8 million, representing a gross margin of 49.0%, in 2025 compared to product sales of $15.7 million and gross profit of $7.2 million, representing a gross margin of 45.6%, in 2024. Our net product sales decreased by $1.9 million, or 12.2%, in 2025 when compared to 2024. The decline is primarily due to lower sales volume in 2025 compared to 2024. The total number of units sold during the year ended December 31, 2025 decreased by 12.6% compared to the year ended December 31, 2024, partially offset by slightly higher average sales price per unit of 0.3%.
In addition, 39% of our net revenue for the year ended December 31, 2025 was from new products launched since January 1, 2023. During this time period, we launched 39 new products. The overall market continues to be fragmented and highly competitive, which we believe is largely due to the lack of a clear regulatory framework and a patchwork of state regulation.
Cost of goods sold consists primarily of raw materials, packaging, manufacturing overhead (including payroll, employee benefits, stock-based compensation, facilities, depreciation, supplies and quality assurance costs), merchant card fees and shipping. We were able to reduce our cost of goods sold in 2025 compared to 2024 by $1.5 million or 17.6%. The reduction is partially due to the lower number of units sold in 2025. In addition, cost of goods sold in 2025 decreased as a percentage of revenue compared to 2024, mostly due to lower shipping and fulfillment costs and other production cost savings, partially offset by higher cost of goods sold for Elevated Softgels and Cultured Foods. Our gross profit declined by $0.4 million, or 5.8%, to $6.8 million in 2025 and gross margins improved from 45.6% in 2024 to 49.0% in 2025. The improvement in our gross margin is primarily due to lower shipping and fulfillment costs and other production cost savings, partially offset by higher cost of goods sold for Elevated Softgels and Cultured Foods.
Research and development expense
Year Ended December 31,
Change
Amount
(in thousands)
Research and development expense
Percentage of product sales, net
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Research and development (“R&D”) expense increased slightly due to additional product development activity associated with the in-sourcing of the manufacturing of our vegan softgels.
Selling, general and administrative expense
Year Ended December 31, 2025
Year Ended December 31, 2024
Change
Amount
% of product
sales, net
Amount
% of product
sales, net
Amount
(in thousands)
(in thousands)
(in thousands)
Sales expense
Marketing expense
General and administrative expense
Selling, general and administrative expense
Selling, general and administrative (“SG&A”) expenses decreased by $1.6 million, or 17.5%, to $7.6 million in 2025, from $9.2 million in 2024. Additionally, SG&A expense as a percentage of product sales, net decreased from 58.8% in 2024 to 55.3% in 2025.
Sales expense decreased by $0.4 million, or 11.5%, due to lower commission, payroll, travel and other expense, partially offset by an increase in stock-based compensation.
Marketing expense decreased by $0.4 million, or 20.2%, due to lower digital marketing spend, partially offset by an increase in stock-based compensation expense. Our digital marketing expense declined due to lower advertising activity during the year ended December 31, 2025.
General and administrative (“G&A”) expense decreased by $0.8 million, or 20.9% from the prior year due to lower legal and professional fees, insurance expense, depreciation expense and other administrative cost reductions, partially offset by an increase in stock-based compensation expense. In addition, we recognized a gain in fair value of contingent consideration liabilities of $0.2 million during the year ended December 31, 2024.
Benefit from reversal of accrued payroll taxes
We previously recorded a contingent liability for payroll taxes associated with the RSU release to our founder. We believe that on April 15, 2025, the statute of limitation on both the employer and employee Medicare portion of FICA taxes expired. As a result of the expiration of the relevant statutes of limitations, we believe the IRS does not have the right to assess and collect the $0.5 million of employer and employee Medicare portion of FICA taxes from CV Sciences and we made a change in accounting estimate and no longer expect to incur a loss with respect to this matter. As a result, we derecognized the contingent liability of $0.5 million during the year ended December 31, 2025. For more information, please see Note 12, Related Parties , to our consolidated financial statements included in Part IV in this Annual Report.
Interest expense, net
Interest expense, net consists of interest expense and interest income. Interest expense, net was $0.5 million and $0.2 million during the years ended December 31, 2025 and 2024, respectively. Interest expense, net increased by $0.3 million due to the amortization of debt discount and debt issuance costs for the note payable to an institutional investor.
Non-GAAP Financial Measures
We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent generally accepted accounting principles (“GAAP”)
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measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net loss plus depreciation, amortization, interest and income tax expense, minus income tax benefit), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it helps to provide insights in trends in our business in addition to GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.
We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Annual Report, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.
Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Annual Report, including our consolidated financial statements, to aid in their analysis and understanding of our performance and in making comparisons.
A reconciliation from our net loss to Adjusted EBITDA, a non-GAAP measure, for the years ended December 31, 2025 and 2024 is detailed below:
Year ended December 31,
(in thousands)
Net loss
Depreciation expense
Amortization expense
Interest expense, net
Income tax expense (benefit)
EBITDA
Stock-based compensation (1)
Professional fees associated with legal dispute (2)
Gain on extinguishment of debt (3)
Benefit from reversal of accrued payroll taxes (4)
Adjusted EBITDA
Represents stock-based compensation expense related to stock options awarded to employees, consultants and non-executive directors based on the grant date fair value using the Black-Scholes valuation model. For more information, please see Note 10, Stock-Based Compensation , to our consolidated financial statements included in Part IV in this Annual Report.
Represents legal and other professional expenses incurred during 2024 associated with the legal dispute with founder.
Represents gain on extinguishment of debt related to our Streeterville note payable. For more information, please see Note 8, Debt , to our consolidated financial statements included in Part IV in this Annual Report.
Represents benefit for reversal of accrued payroll tax associated with the RSU release to founder in 2019. For more information, please see Note 12, Related Parties , to our consolidated financial statements included in Part IV in this Annual Report.
Liquidity and Capital Resources
During the year ended December 31, 2025, our primary sources of capital came from (i) cash generated from our operations, (ii) existing cash, and (iii) proceeds from note payable financings. As of December 31, 2025, we had approximately $0.3 million of cash and working capital of 133,000.
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For the year ended December 31, 2025, we generated negative cash flows from operations of $0.4 million, and we had an accumulated deficit of $87.9 million as of December 31, 2025.
We believe that a combination of factors have adversely impacted our business operations for the year ended December 31, 2025. Due to a low barrier entry market with a lack of a clear regulatory framework, we face intense competition from both licensed and illicit market operators that may also sell herbal supplements and hemp-based CBD consumer products. Because we operate in a market that is rapidly evolving and expanding globally, our customers may choose to obtain CBD products from our competitors, and our success depends on our ability to attract and retain our customers from purchasing CBD products elsewhere. To remain competitive, we intend to continue to innovate new products, build brand awareness, and make significant investments in our business strategy by introducing new products into the markets in which we operate, adopt quality assurance protocols and procedures, build our market presence, and undertake further research and development. In addition, we intend to evaluate and pursue additional acquisitions to further diversify our product offerings.
In October 2025, we entered into a securities purchase agreement with an institutional investor (the “Investor”), pursuant to which we issued and sold to the Investor a secured promissory note and received net proceeds of $0.3 million. For more information refer to Note 8, Debt , to our consolidated financial statements included in Part IV of this Annual Report.
In November 2025, Congress passed, and the President signed into law, a government funding bill that includes provisions affecting hemp-derived products. The legislation provides that, effective November 13, 2026, the sale of hemp-derived products containing more than 0.4 milligrams of total tetrahydrocannabinol (“THC”) per container will be prohibited under federal law. Products containing less than this amount may continue to be sold, but such products currently represent a small portion of the overall hemp-derived product market.
We are evaluating the potential impact of this legislation on our product portfolio, supply chain, and future operating results. We have until November 13, 2026 to assess and, if necessary, modify our product formulations, labeling, and related compliance measures in response to this legislation. While management cannot reasonably estimate the financial effect of this legislation at this time, it could have a material adverse impact on our business, results of operations, and cash flows.
Management implemented, and continues to make and implement, strategic cost reductions, including reductions in employee headcount, vendor spending, and the delaying of certain expenses related to our drug development activities. To the extent that we feel it is necessary and in the best interest of the Company and our stockholders, we may also take further actions that alter our operations in order to ensure the success of our business.
Note Payable
In February 2025, we entered into a securities purchase agreement with an institutional investor (the “Investor”), pursuant to which we issued and sold to the Investor a secured promissory note in the original principal amount of $1,600,000 (the “Note”). The Note carries an original issuance discount of $400,000 and we paid $10,000 to the Investor to cover legal fees. We incurred additional legal and professional fees of $72,424. The original issuance discount was deducted from the proceeds of the Note received by us which resulted in a purchase price received by us of $1,200,000.
The Note was due and payable on August 12, 2026 and we were required to make monthly repayments to the Investor of $106,667 starting on June 12, 2025.
In September 2025, we entered into an agreement (the “Agreement”) with the Investor. The Agreement amended the Note among other things: (a) to provide for a new maturity date of February 12, 2027, (b) to provide that the monthly redemption amount consists of (i) $106,667 of the outstanding principal amount of the Note on each of the first 3 monthly redemption dates, (ii) $0 of the outstanding principal amount of the Note on each of the next 6 monthly redemption dates, and (iii) $106,667 of the outstanding principal amount of the Note on each of the subsequent 12 monthly redemption dates, and (c) to provide the Investor $150,000 in cash.
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We can pay all or any portion of the outstanding balance earlier than it is due without penalty. In the event we paid the Note in full on or before August 12, 2025, we would have received a $100,000 discount from the outstanding balance. The Note is secured by all of our assets pursuant to a security agreement and intellectual property security agreement entered into with the Investor on February 12, 2025. Our obligations under the Note are guaranteed by each of our subsidiaries. No interest will accrue on the Note unless and until an occurrence of an event of default, as defined in the Note.
In October 2025, we entered into a new note with the Investor, pursuant to which we issued and sold to the Investor a secured promissory note in the original principal amount of $600,000 (the “New Note”). The New Note carries an original issuance discount of $150,000 and we paid $13,125 to the Investor to cover legal and other fees. The original issuance discount for the New Note and modification fees related to the original Note were deducted from the proceeds of the New Note received by the Company which resulted in a purchase price received by the Company of $300,000. The other terms of the New Note are substantially similar to the Note.
In March 2026, the Company amended the Note and the New Note (collectively, the “Notes”) to include a conversion feature pursuant to which the outstanding balance of the Notes may be converted into shares of common stock of the Company at a fixed conversion price of $0.06 per share. The outstanding principal amounts of the Notes was increased by 20% and, after such adjustment, the amended Notes have an aggregate outstanding principal amount of $2,256,000. The Company’s obligation to make monthly redemptions on the Notes was eliminated. The amendments also provide that if, after the sale of the conversion shares received upon a conversion, the holder receives net proceeds of less than 100% of the principal amount of the Notes converted, and the aggregate shortfall under both Notes exceeds $94,000, the Company will issue a new note on substantially the same terms and conditions of the amended Notes (the "Third Note") with a principal amount equal to the aggregate shortfall in excess of $94,000. If issued, the Third Note will be due April 6, 2027. There is no stated maximum number of shares of common stock that may be issuable in respect of conversions pursuant to the Third Note.
Streeterville Note
In July 2024, we entered into a note purchase agreement with Streeterville, pursuant to which we issued and sold to Streeterville a Secured Promissory Note (the "Streeterville Note") in the original principal amount of $1.2 million. The Streeterville Note carried an original issuance discount of $283,500. We incurred additional debt issuance costs of $5,000. As a result, we received aggregate net proceeds of approximately $0.9 million in connection with the sale and issuance of the Streeterville Note. The Streeterville Note was to mature on July 3, 2025 and we were required to make weekly repayments to Streeterville on the note in the amount of $22,856 until the Streeterville Note was paid in full. We were able to pay all or any portion of the outstanding balance earlier than it is due without penalty. In the event we repaid the Streeterville Note in full on or before December 31, 2024, we would have received a $75,000 discount from the outstanding balance.
No interest was to accrue on the Streeterville Note until an occurrence of an event of default, as defined in the Streeterville Note, if ever. The Streeterville Note provided for customary events of default, including, among other things, the event of nonpayment of principal, interest, fees or other amounts, a representation or warranty proving to have been incorrect when made, failure to perform or observe covenants within a specified period of time, a cross-default to certain other indebtedness of the Company, the bankruptcy or insolvency of the Company or any significant subsidiary, monetary judgment defaults of a specified amount and other defaults resulting in liability of a specified amount. In the event of an occurrence of an event of default by us, Streeterville could have declared all amounts owed under the Streeterville Note immediately due and payable. Also, a late fee and interest equal to either 22% per annum or the maximum rate allowable under law, whichever is lesser, could have been applied to any outstanding amount not paid when due or that remained outstanding while an event of existed. The Streeterville Note was secured by all of our assets as set forth in the Security Agreement dated July 3, 2024.
We made principal payments to Streeterville of $0.6 million during the year ended December 31, 2025. We repaid the outstanding Streeterville Note prior to its maturity date and recognized a gain on extinguishment of $37,500. As a result, the Streeterville Note has been fully repaid and satisfied as of December 31, 2025, and our obligations thereunder, were cancelled and terminated.
First Insurance Funding Agreements
In October 2025, we entered into a financing agreement with First Insurance Funding in order to fund a portion of our insurance policies for the upcoming policy year. The amount financed was $0.2 million, which incurs interest at a rate of 7.72% per annum. We are required to make monthly payments of $18,299 from November 2025 through July 2026.
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In October 2024, we entered into a finance agreement with First Insurance Funding in order to fund a portion of our insurance policies. The amount financed was $0.2 million, which incurred interest at an annual rate of 8.42%. We were required to make monthly payments of $20,396 from November 2024 through July 2025. There was no outstanding balance as of December 31, 2025.
Going Concern
U.S. GAAP requires management to assess a company's ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosure in certain circumstances. Our consolidated financial statements and corresponding notes have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2025, we generated negative cash flows from operations of $0.4 million, and we had an accumulated deficit of $87.9 million as of December 31, 2025. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund our operations and growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, issuance of debt, and/or securing lines of credit in order to continue its operations. However, there can be no assurances that additional working capital will be available to us on favorable terms, or at all, which would be likely to have a material adverse effect on the Company's ability to continue its operations.
The Company's financial operating results and accumulated deficit, besides other factors, raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in generating positive cash flows from operations or any capital-raising efforts that it may undertake, and the failure of the Company to generate positive cash flows or raise additional capital could adversely affect its future operations and viability.
A summary of our changes in cash flows for the years ended December 31, 2025 and 2024 is provided below:
Year ended December 31,
(in thousands)
Net cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net decrease in cash
Cash, beginning of year
Cash, end of year
Operating Activities
Net cash used in operating activities includes net loss adjusted for non-cash items such as depreciation, amortization, stock-based compensation, benefit of reversal of payroll tax liability, gain on debt extinguishment, and amortization of debt discount related to our promissory notes. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable. Operating assets and liabilities that arise from the funding of inventory purchases and customer accounts receivable can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer payment behavior.
Cash used by operating activities was $0.4 million in the year ended December 31, 2025, compared to $0.9 million in the year ended December 31, 2024. Our net loss of $0.9 million for the year ended December 31, 2025, adjusted for non-cash items of $1.0 million, resulted in a net income, adjusted for non-cash items of $0.1 million, compared to a net loss, adjusted for non-cash items, of $1.3 million in the prior year, an improvement of $1.4 million. Non-cash adjustments slightly declined by $0.1 million due to the benefit for the reversal of accrued payroll tax of $0.5 million related to the RSU's previously issued to our founder and lower depreciation and amortization, partially offset by higher stock-based compensation expense and higher amortization of debt discount. Our net loss declined by $1.4 million, mostly due to the benefit for the reversal of accrued payroll taxes of $0.5 million in 2025 and our improved operating performance and reduced SG&A expenses.
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Investing Activities
Cash used in investing activities was $109,000 in the year ended December 31, 2025, mostly related to the purchase of additional manufacturing equipment for Elevated Softgels. Cash used in investing activities was $28,000 in the year ended December 31, 2024 and was related to our acquisition of Elevated Softgels of $10,000 in May 2024 and the purchase of additional equipment for Elevated Softgels of $18,000.
Financing Activities
Net cash provided by financing activities was $337,000 and $32,000 for the years ended December 31, 2025 and 2024, respectively. Our financing activities for 2025 consisted of proceeds from our note financing of $1.6 million, offset by repayments on our notes payable of $1.1 million and our insurance financing of $0.2 million. Our financing activities for 2024 consisted of proceeds from our note payable financing with Streeterville of $0.9 million, offset by repayments of our insurance financing of $0.2 million, the Streeterville note payable of $0.5 million and the notes payable that we assumed in connection with the Cultured Foods acquisition of $0.1 million.
Inflation
We have not been affected materially by inflation during the periods presented. However, rising inflation may adversely impact our business and corresponding financial position and cash flow.
Known Trends or Uncertainties
There can be no assurance that the Company’s business and corresponding financial performance will not be adversely affected by general economic or consumer trends, which may have a material adverse effect on the Company’s business, financial condition and results of operations. Additionally, inflation has risen, Federal Reserve interest rates remain high after increases during 2023, which may also materially adversely our business and corresponding financial position and cash flows.
Furthermore, such economic conditions have produced downward pressure on share prices and on the availability of credit for financial institutions and corporations. If current levels of market disruption and volatility continue, the Company might experience reductions in business activity, increased funding costs and funding pressures, as applicable, a decrease in the market price of our common stock, a decrease in asset values, additional write-downs and impairment charges and lower profitability.
We have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward.
There is currently a lack of a clear federal regulatory framework regarding the development, sale and use of CBD products in the United States. As a result, differing state regulations have emerged, which regulations are constantly evolving and differ significantly from state to state in many cases. Several states, including without limitation, California, Florida, Maryland, Minnesota, New York, Utah and Virginia, have recently adopted regulations that may impact our ability to sell certain of our products in these states. In September 2024, California Governor Gavin Newsom signed an emergency order into law, effectively banning the sale of hemp products intended for human use that contain detectable amounts of THC or certain other cannabinoids in California, amongst other things. The emergency order was originally in effect through March 25, 2025, and has been extended by one year. We have certain products which fall under this category that we have historically sold in California. It is currently unknown whether the duration of the emergency order will be extended, and/or whether it will be replaced with a permanent law with similar or more stringent prohibitions. This emergency order had a negative impact on our operating results for the year ended December 31, 2025 and we expect that it will continue to have a negative impact on our business going forward for so long as it, or any permanent law with similar or more prohibitions, remains in effect; however, it is currently to quantify the expected impact on our business. There is also substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the FDA and the extent to which manufacturers of products containing cannabinoids may engage in interstate commerce. These uncertainties have had, and may continue to have, an effect on our business. Additionally, restrictive state regulations could impact our revenue and earnings going forward.
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Changes in U.S. and foreign governments’ trade policies have resulted in, and may continue to result in, tariffs on imports into and exports from the U.S., among other restrictions. In February 2025, the U.S. administration announced increased tariffs on imports from China, where certain components of our finished products are sourced. We are closely monitoring this evolving situation and evaluating our responses, which may include price adjustments or other cost-mitigation measures. However, there can be no assurance that we will be able to fully mitigate the impact of such tariffs or trade restrictions. If further tariffs are imposed, we could be forced to raise prices on all or certain of our products or make changes to our operations, any of which could materially harm our revenue or operating results. Any additional future tariffs or quotas imposed may impact our sales, gross margin and profitability if we are unable to pass increased prices onto our customers. Currently, we cannot fully determine how these tariffs will affect our business operations. The overall impact on our business will be influenced by several variables, including the duration and potential expansion of current tariffs, future changes to tariff rates, scope, or enforcement, retaliatory measures by impacted trade partners, inflationary effects and broader macroeconomic responses, changes to consumer purchasing behavior, and the effectiveness of our responses in managing these .
We have been experiencing certain manufacturing constraints that resulted in temporary out-of-stock situations for some of our key products. We are working closely to resolve these issues and expect inventory levels to normalize in 2026. While we do not currently anticipate a material long-term impact, these temporary shortages may affect our near-term revenue and customer order fulfillment.
Contractual Obligations
As of December 31, 2025, our primary facility consists of approximately 6,000 square feet of leased office and warehouse space located in San Diego, California. The lease term is one year through May 31, 2026, with a one year renewal period. The total lease obligation over the estimated lease term of two years is approximately $0.3 million. The lease commenced on June 1, 2025.
In February 2025, we entered into a new lease agreement for our existing Elevated Softgels manufacturing facility. The facility is approximately 7,200 square feet and located in Grand Junction, Colorado. The lease term is for one year, with two one year renewal periods. The total lease obligation over the estimated lease term of two years is approximately $0.2 million. The lease commenced on April 1, 2025.
We entered into a lease agreement for our manufacturing facility in Poland. The facility is approximately 2,400 square feet and located outside of Warsaw, Poland. The lease term is for two years and expires on September 30, 2026. Based on the present value of the lease payments, we recognized an operating lease asset and liability for operating leases of $0.1 million on October 1, 2024.
We enter into contracts in the normal course of business with vendors and customers for product manufacturing, logistics, shipping, marketing, professional services and other services as part of our operations. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included as contractual commitments.
Critical Accounting Policies
The preparation of these consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.
A “critical accounting policy” is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective, or complex judgments, and often requires management to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:
Goodwill and Intangible Assets – We evaluate the carrying value of goodwill and intangible assets annually during the fourth quarter in accordance with Accounting Standards Codification (“ASC”) Topic 350, Intangibles Goodwill and Other, and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not
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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.
Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may more likely than not be less than carrying amount, or if significant adverse changes in our future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, we then evaluate goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The quantitative assessment for goodwill requires us to estimate the fair value of our reporting units using either an income or market approach or a combination thereof.
Management makes critical assumptions and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates.
During the fourth quarter of 2025 and 2024, we performed our annual goodwill impairment test and determined, after performing a qualitative test of our reporting unit, that it is more likely than not that the fair value of the reporting unit exceeded its carrying amount. As a result of our goodwill impairment test, we did not record a goodwill impairment charge for the years ended December 31, 2025 and 2024.
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.
We did not record any impairment charge for the years ended December 31, 2025 and 2024, respectively.
Revenue Recognition – The majority of our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, which is primarily related to our Plus CBD line of products. Net sales reflect the transaction prices for these contracts based on our selling list price, which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness. We recognize revenue at the point in time that control of the ordered product is transferred to the customer, which is typically upon shipment to the customer or other customer-designated delivery point. We accrue for estimated sales returns by customers based on historical sales return results. The computation of the sales return and discount allowances require that management makes certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Shipping and handling fees charged to customers are included in product sales and were not material for each of the years ended December 31, 2025 and 2024. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.
Inventory Valuation – Inventory is carried at the lower of cost or net realizable value, with cost determined using the weighted-average method. Determining net realizable value requires significant judgment, particularly with respect to estimating future selling prices, customer demand, and the timing of inventory turnover.
A significant portion of our inventory consists of products with defined shelf lives. As a result, we evaluate inventory for potential excess, obsolescence, or expiration by analyzing product age, remaining shelf life, historical sales velocity, and forecasted demand. Inventory that is not expected to be sold within its usable life is written down to its estimated net realizable value.
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We maintain reserves for excess and obsolete inventory based on a combination of factors, including current and projected demand, recent sales trends, product shelf life, and strategic business plans. In periods of demand volatility, product transitions, or changes in distribution channels, these estimates become more subjective and require increased management judgment.
Given the perishable nature of certain products and the variability in demand across our product portfolio, small changes in key assumptions—such as forecasted demand or expected sell-through rates—could result in materially different reserve levels. For example, a decline in demand or delays in distribution could increase the risk of product expiration and require additional inventory write-downs, which would negatively impact gross profit.
While we believe our assumptions are reasonable and consistent with available information, actual results may differ materially due to changes in market conditions, customer demand, product life cycles, or execution of our sales and distribution strategies.
Recent Accounting Pronouncements
Refer to Note 2 of our consolidated financial statements for a discussion of recent accounting standards and pronouncements.
Off-Balance Sheet Arrangements
None.
