The following discussion of our financial condition and results of operations for the years ended
December 31, 2021and 2020 should be read in conjunction with our financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as "anticipate", "estimate", "plan", "project", "continuing", "ongoing", "expect", "believe", "intend", "may", "will", "should", "could", and similar expressions to identify forward-looking statements.
We are a life science company with two distinct business segments. Our consumer product segment is focused on manufacturing, marketing and selling hemp-based CBD products to a range of market sectors. Our specialty pharmaceutical segment is focused on developing and commercializing novel therapeutics utilizing CBD. We are traded on the OTC:QB, and our trading symbol is CVSI. 7
Table of Contents
Our consumer product business segment manufactures, markets and sells a variety of consumer products containing hemp-based CBD under our PlusCBD™ brand in a range of market sectors including nutraceutical, beauty care and specialty foods. Our specialty pharmaceutical business segment is developing cannabinoids to treat a range of medical indications. Our product candidates are based on proprietary formulations, processes and technology that we believe are patent-protectable, and we plan to vigorously pursue patent protection on our drug candidates. This business segment has not yet generated any revenue and requires significant additional capital to effect its business plan. We expect to realize revenue from our consumer products business segment to help fund our working capital needs. However, in order to fund our pharmaceutical product development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to fund our drug development efforts, we may need to curtail, partner or delay such activity. Our priorities for FY22 reflect our focus on delivering value to our shareholders. We have taken the next step to improve shareholder value by commencing a strategic review, which will include consideration of inbound and outbound merger, sale, acquisition or other options for the Company as a whole or for any business segment. We have engaged A.G.P./
Alliance Global Partnersto assist the Company with the strategic review.
Results of Operations
Comparison of the Years ended
Revenues and gross profit Year ended December 31, Change 2021 2020 Amount % (in thousands) Product sales, net
$ 20,048 $ 24,429$
(4,381) (18) %
Cost of goods sold 11,432 13,420 (1,988) (15) % Gross profit
$ 8,616 $ 11,009 $ (2,393)(22) % Gross margin 43.0 % 45.1 % Revenue by channel Year ended December 31, 2021 Year ended December 31, 2020 % of product % of product Amount sales, net Amount sales, net (in thousands) (in thousands) Retail - FDM $ 1,4947.5 % $ 1,6516.8 % Retail - Natural products and other 11,054 55.1 % 15,073 61.7 % E-Comm 7,500 37.4 % 7,705 31.5 % Product sales, net $ 20,048100.0 % $ 24,429100.0 % We had product sales of $20.0 millionand gross profit of $8.6 million, representing a gross margin of 43.0% in 2021 compared with product sales of $24.4 millionand gross profit of $11.0 million, representing a gross margin of 45.1% in 2020. Our product sales decreased by $4.4 millionor 18% in 2021 when compared to 2020 results. The decline is primarily due to lower retail sales in the natural products retail channel, as 2021 had a full year impact of COVID-19. In addition, increased market competition, which is largely due to the lack of a clear regulatory framework, is another main driver for the decline. As of December 31, 2021, our products were in 8,495 retail stores, of which 5,709 were with retailers in the FDM channel. The store count increased from 7,346 stores as of December 31, 2020and provides us with an increased distribution footprint for future growth. For the years ended December 31, 2021and 2020, e-commerce sales accounted for 37.4% and 31.5% of revenue, respectively. 44% of our net revenue for the year ended December 31, 2021was from new products launched since 2020.
During 2021, we launched the following new products:
•PlusCBDTM Calm and Sleep, to support healthy stress response and improve sleep cycles, and
Table of Contents
•ProCBDTM, a full product line exclusively through health care practitioners.
Cost of goods sold consists primarily of raw materials, packaging, manufacturing overhead (including payroll, employee benefits, stock-based compensation, facilities, depreciation, supplies and quality assurance costs), merchant card fees and shipping. Cost of goods sold in 2021 increased as a percentage of revenue due to higher overhead and production cost compared to 2020. The gross profit decrease of
$2.4 millionor 22% to $8.6 millionin 2021 is mostly driven by the decline in product sales. Gross margins decreased from 45.1% in 2020 to 43.0% in 2021. The decrease is primarily due to higher overhead cost and associated volume deleverage, increased production cost, and reduced sales pricing as a result of increased market competition.
Research and development expense
Year ended December 31, Change 2021 2020 Amount % (in thousands) Research and development expense
$ 1,185 $ 2,943 $ (1,758)(60) % Percentage of revenue 5.9 % 12.0 % Research and development ("R&D") expense decreased to $1.2 millionin 2021 compared to $2.9 millionin 2020. The decrease is related to reductions in R&D expenses for our specialty pharmaceutical segment of $1.5 millionand for our consumer products segment of $0.2 million. We incurred $0.5 millionand $0.7 millionof R&D expense related to our consumer products segment in 2021 and 2020, respectively. The reduction in R&D expense in our consumer products segment is mostly related to lower personnel cost and cost for outside services for new consumer product developments. We incurred $0.7 millionand $2.2 millionof R&D expenses related to our specialty pharmaceutical segment in 2021 and 2020, respectively. The reduction in R&D expense in our specialty pharmaceutical segment is mostly related to reduced activities related to preclinical work, development cost associated with our active pharmaceutical ingredient ("API"), and expenses paid to outside consultants.
Selling, general and administrative expense
Year ended December 31, 2021 Year ended December 31, 2020 % of product % of product Amount sales, net Amount sales, net (in thousands) (in thousands) Sales expense
$ 4,88924.4 % $ 4,54318.6 % Marketing expense 7,056 35.2 % 6,759 27.7 % General & administrative expense 13,932 69.5 % 19,356 79.2 % Selling, general and administrative expense $ 25,877129.1 % $ 30,658125.5 %
Selling, general and administrative ("SG&A") expenses decreased by
•Sales expense increased due to the amortization of capitalized implementation cost for customer relationship management (CRM) technology and associated licensing fees.
•Marketing expense increased due to higher expense for digital marketing activities, such as programmatic and paid advertisement.
•General and administrative expense decreased primarily due to decreased payroll and outside services expense. General and administrative expense also decreased due to the gain on lease modification during 2021. We also recorded a goodwill and intangible asset impairment charge of
$5.0 millionduring 2021. In addition, during 2020, we derecognized the tax receivable for founder RSU settlement of $6.2 million. For more information regarding the founder RSU settlement, please see Note 12, Related Parties, to our financial statements included in Part IV in this Annual Report on Form 10-K.
Non-GAAP Financial Measures
We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net loss plus depreciation expense, amortization expense, interest 9
Table of Contents
expense, and income tax expense, minus income tax benefit), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it helps to provide insights in trends in our business in addition to GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance. We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Annual Report on Form 10-K, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with additional understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance. Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Annual Report on Form 10-K, including our financial statements, to aid in their analysis and understanding of our performance and in making comparisons.
A reconciliation from our net loss to Adjusted EBITDA, a non-GAAP measure, for
the years ended
Year ended December 31, 2021 Year ended December 31, 2020 Specialty Consumer Specialty Consumer Products Pharma Total Products Pharma Total (in thousands) Net loss
$ (9,861) $ (5,693) $ (15,554) $ (19,908) $ (2,376) $ (22,284)Depreciation 1,153 - 1,153 836 - 836 Amortization - - - - 36 36 Interest expense 140 - 140 9 - 9 Income tax expense (benefit) 7 (94) (87) (317) - (317) EBITDA (8,561) (5,787) (14,348) (19,380) (2,340) (21,720) Stock-based compensation (1) 3,209 1 3,210 3,744 137 3,881 Gain on extinguishment of debt (2) (2,945) - (2,945) - - - Gain on lease termination (3) (906) - (906) (352) - (352) Goodwilland intangible asset impairment (4) - 5,033 5,033 - - - Derecognition of tax receivable for founder RSU settlement (5) - - - 6,229 - 6,229 Adjusted EBITDA $ (9,203) $ (753) $ (9,956) $ (9,759) $ (2,203) $ (11,962)(1)Represents stock-based compensation expense related to stock options awarded to employees, consultants and non-executive directors based on the grant date fair value using the Black-Scholes valuation model. For more information, please see Note 10, Stock-Based Compensation, to our financial statements included in Part IV in this Annual Report on Form 10-K. (2)Represents gain on extinguishment of debt related to the forgiveness of our PPP loan. For more information, please see Note 8, Debt, to our financial statements included in Part IV in this Annual Report on Form 10-K. (3)Represents gain associated with the lease termination agreement for our main facility during the year ended December 31, 2021and lease termination of one of our San Diegofacilities during the year ended December 31, 2020. For more information, please see Note 14, Leases, to our financial statements included in Part IV in this Annual Report on Form 10-K. (4)Represents the goodwill and intangible asset impairment charge. For more information, please see Note 5, Intangible Assets, to our financial statements included in Part IV in this Annual Report on Form 10-K. (5)Represents the derecognition of the tax receivable related to founder RSU settlement. For more information, please see Note 12, Related Parties, to our financial statements included in Part IV in this Annual Report on Form 10-K. 10 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources During the year ended December 31, 2021, our primary sources of capital came from (i) cash flows from our operations, predominantly from the sale of our CBD products, (ii) existing cash, (iii) government loans, and (iv) proceeds from third-party financings, including the sale of our common stock to certain investors. As of December 31, 2021, our cash was approximately $1.4 million. During the year ended December 31, 2021, we used cash in operating activities of approximately $7.5 million. We believe that a combination of factors, mainly consisting of the highly competitive environment and the continued effects of the COVID-19 pandemic, have adversely impacted our business operations for the year ended December 31, 2021. Due to a low barrier entry market with a lack of a clear regulatory framework, we face intense competition from both licensed and illicit market operators that may also sell plant-based dietary supplements and hemp-based CBD consumer products. Because we operate in a market that is rapidly evolving and expanding globally, our customers may choose to obtain CBD products from our competitors, and our success depends on our ability to attract and retain our customers from purchasing CBD products elsewhere. To remain competitive, we intend to continue to innovate new products, build brand awareness, and make significant investments in our business strategy by introducing new products into the markets in which we operate, adopt quality assurance protocols and procedures, build our market presence, and undertake further research and development. Furthermore, although there are signs that COVID-19 may be beginning to taper off, COVID-19 still has an impact on worldwide economic activity, and the ongoing effects of the COVID-19 pandemic has adversely impacted, and may continue to adversely impact, many aspects of our business. We may also take further actions that alter our operations which we determine are in our best interests. Management implemented, and continues to make and implement, strategic cost reductions, including reductions in employee headcount, vendor spending, and the delay of certain expenses related to our drug development activities. On April 15, 2020, we applied for a loan from JPMorgan Chase Bank, N.A., as lender, pursuant to the Paycheck Protection Program (the "PPP") of the CARES Act as administered by the U.S. Small Business Administration(the "SBA"). On April 17, 2020, the loan was approved, and we received proceeds in the amount of $2.9 million(the "PPP Loan"). On September 8, 2021, we received confirmation from the Lender that the SBA approved our PPP Loan forgiveness application for the entire PPP Loan, including all accrued interest to date. The forgiveness of the PPP Loan was recognized as a gain on debt extinguishment in our financial results for the year ended December 31, 2021. The CARES Act also provides an employee retention credit, which is a refundable tax credit against certain employment taxes of up to 70% of qualified wages up to $10,000paid to employees during each of the quarters ended March 31, 2021, June 30, 2021and September 30, 2021. We determined that we qualify for the tax credit under the CARES Act and filed our amended tax returns in March 2022. We expect to receive $2.0 millionof tax credits under the relief provisions.
December 8, 2020, we entered into a Common Stock Purchase Agreement ("SPA") with Tumim Stone Capital, LLC("Tumim"), pursuant to which Tumim committed to purchase up to $10.0 millionin shares of our common stock from time to time. The SPA provides, among other things, that we may direct, every three trading days, Tumim to purchase a number of shares of our common stock not to exceed an amount determined based upon the trading volume and stock price of our shares. Effective November 15, 2021, the Company and Tumim mutually agreed to terminate the SPA. During the year ended December 31, 2021, we sold 10,021,804 shares of common stock pursuant to the SPA and recognized proceeds of $4.4 million. In November 2021, we entered into a Securities Purchase Agreement (the " November 2021SPA") with an institutional investor providing for the sale and issuance of convertible notes due 2022 in the aggregate original principal amount of $1.06 million. Upon filing with the Securities and Exchange Commissionof an additional prospectus supplement and supplemental indenture and our satisfaction of certain other closing conditions, we may elect to offer and sell up to and additional $4.2 millionin aggregate principal amount of the notes at additional closings, resulting in potential gross proceeds for this offering and such additional offerings, of approximately $5.3 million. During the year ended December 31, 2021, holders of the convertible notes converted amounts payable under such notes into 1,794,291 shares of the Company's common stock at a weighted average conversion price of $0.13, resulting in a reduction of the convertible note balance of $0.2 million. Subsequent to December 31, 2021, holders of the convertible notes converted amounts payable under such notes into 6,804,281 shares of the Company's 11
Table of Contents
common stock at a weighted average conversion price of
March 25, 2022, we issued an additional note for an aggregate principal amount of $1.06 million(the "Second Tranche"). As a result, we received gross proceeds of $1.06 million, before original issuance discount of 6% and other debt issuance costs. The Second Tranche matures on September 25, 2022. There is no guarantee we will be able to consume additional closings for the remaining $3,180,000in aggregate principal amount of the notes. The additional closing conditions include the satisfaction of certain equity conditions set forth in the November 2021SPA. On March 30, 2022, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with an institutional investor, pursuant to which we agreed to issue and sell 700 shares of our preferred stock which has supervoting rights of 170,000 votes per share of preferred stock on certain stockholder proposals and warrants to purchase an aggregate of 10,000,000 shares of common stock. The preferred stock has a stated value of $1,000per share and is convertible into an 10,000,000 shares of common stock at a conversion price of $0.07per share. We received aggregate gross proceeds of $0.7 millionbefore deducting placement agent's fees and other offering expenses. During the first quarter of 2019, we issued 2,950,000 Restricted Stock Units ("RSU") to our founder, former President and Chief Executive Officer, Michael Mona Jr. (" Mona Jr."). The vesting of the RSU is treated as a taxable compensation and thus subject to income tax withholdings. No amounts were withheld (either in cash or the equivalent of shares of common stock from the vesting of the RSU's) or included in our payroll tax filing at the time of vesting. During the year ended December 31, 2020, we reported the taxable compensation associated with the RSU release to the taxing authorities and included the amount in Mona Jr'sW-2 for 2019. Although the primary tax liability is the responsibility of Mona Jr., we are secondarily liable and thus have recorded the liability on our balance sheet as of December 31, 2021. The liability may be relieved once the tax amount is paid by Mona Jr. and the Company has received the required taxing authority documentation from Mona Jr.. As of March 31, 2022, Mona Jr. has not provided us with proof that he filed and paid his taxes for 2019. Refer to Note 12. Related Parties and Note 13. Commitments and Contingencies to our financial statements included in Part IV in this Annual Report on Form 10-K for additional information. U.S.GAAP requires management to assess a company's ability to continue as a going concern within one year from the financial statement issuance and to provide related note disclosure in certain circumstances. Our financial statements and notes have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2021, the Company generated negative cash flows from operations of $7.5 millionand had an accumulated deficit of $79.5 million. Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund our operations and growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, issuance of debt, and/or securing lines of credit. The Company's financial operating results and accumulated deficit, besides other factors, raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability. A summary of our changes in cash flows for the years ended December 31, 2021and 2020 is provided below: Year ended December 31, 2021 2020 (in thousands) Net cash flows provided by (used in): Operating activities $ (7,485) $ (7,300)Investing activities (35) (1,057) Financing activities 4,370 3,274 Net decrease in cash, cash equivalents and restricted cash (3,150) (5,083)
Cash, cash equivalents and restricted cash, beginning of year 4,525
Cash, cash equivalents and restricted cash, end of year
Operating Activities 12 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities includes our net loss adjusted for non-cash expenses such as stock-based compensation, depreciation and amortization, bad debt expense and other non-cash items. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable and can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer behavior. Net cash used in operating activities was
$7.5 millionin 2021 compared to $7.3 millionin 2020, an increase of $0.2 million. The increase in our cash usage in operating activities was due to a decline in our changes in working capital by $1.5 million, partially offset by our reduced net loss, adjusted for non-cash items of $1.4 million. Our changes in working capital declined from $3.5 millionin 2020 to $1.9 millionin 2021, mostly due to reduced cash collections from accounts receivable, lower inventory usage, and reductions in prepaids and other assets, partially offset by reduced cash outflow for accounts payables and accrued expenses. Our net loss, adjusted for non-cash items, in 2021 decreased by $1.4 millionwhen compared to 2020. Our net loss declined by $6.7 millionfrom $22.3 millionin 2020 to $15.6 millionin 2021. Non-cash adjustments declined by $5.4 millionfrom a total of $11.5 millionin 2020 to $6.2 millionin 2021. The reduction in non-cash adjustments related mostly to the derecognition of the tax receivable for founder RSU settlement of $6.2 millionin 2020. In addition in 2021, we recorded a goodwill and intangible asset impairment charge of $5.0 millionoffset by the gain on debt extinguishment for our PPP loan of $2.9 million. Recurring non-cash adjustments consists of depreciation, amortization and stock-based compensation. Investing Activities Net cash used in investing activities decreased by $1.0 millionin 2021 when compared to 2020. During 2020, we invested in additional technology to support our e-commerce activities. Financing Activities Net cash provided by financing activities increased by $1.1 millionfrom $3.3 millionin 2020 to $4.4 millionin 2021. Our financing activity for 2021 consisted of proceeds from issuance of common stock under our SPA with Tumim of $4.4 million, net proceeds of our convertible note financing of $0.8 million, offset by repayments of our insurance financing of $0.8 million. In 2020, we received proceeds from a PPP Loan of $2.9 million, proceeds from the issuance of common stock under our SPA with Tumim of $0.2 million, and proceeds from stock option exercises of $0.2 million.
We have not been affected materially by inflation during the periods presented. However, recent trends towards rising inflation may adversely impact our business and corresponding financial position and cash flow.
Known Trends or Uncertainties
There can be no assurance that the Company's business and corresponding financial performance will not be adversely affected by general economic or consumer trends. In particular, global economic conditions remain constrained, and if such conditions continue, recur or worsen, this may have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the recent trends towards rising inflation may also materially adversely our business and corresponding financial position and cash flows. Furthermore, such economic conditions have produced downward pressure on share prices and on the availability of credit for financial institutions and corporations. If current levels of market disruption and volatility continue, the Company might experience reductions in business activity, increased funding costs and funding pressures, as applicable, a decrease in the market price of the Common Shares, a decrease in asset values, additional write-downs and impairment charges and lower profitability. We have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on our total sales; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our revenues and earnings going forward. As discussed in this Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic, and thus, there remains uncertainty as to the effect of COVID-19 on our business in both the short and long-term.
Critical Accounting Policies
The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates. 13
Table of Contents
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:
Goodwilland Intangible Assets - We evaluate the carrying value of goodwill and intangible assets annually during the fourth quarter in accordance with Accounting Standards Codification ("ASC") Topic 350, Intangibles Goodwill and Other, and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. All of the goodwill and intangible assets are assigned to our specialty pharmaceutical segment. Goodwillis evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may more likely than not be less than carrying amount, or if significant adverse changes in our future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, we can elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, we then evaluate goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The quantitative assessment for goodwill requires us to estimate the fair value of our reporting units using either an income or market approach or a combination thereof. Management makes critical assumptions and estimates in completing impairment assessments of goodwill and other intangible assets. Our cash flow projections look several years into the future and include assumptions on variables such as future sales and operating margin growth rates, economic conditions, probability of success, market competition, inflation and discount rates. During the fourth quarter of 2021, we performed our annual goodwill impairment test and determined, after performing a qualitative test of our reporting units, that it is more likely than not that the fair value of the specialty pharmaceutical reporting unit was less than its carrying amount. As a result of our goodwill impairment test, we recorded a goodwill impairment charge of $2.8 millionfor the year ended December 31, 2021. We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives to their estimated residual values, generally five years. In-process research & development ("IPR&D") has an indefinite life and is not amortized until completion and development of the project, at which time the IPR&D becomes an amortizable asset. Until such time as the projects are either completed or abandoned, we test those assets for impairment at least annually at year end, or more frequently at interim periods, by evaluating qualitative factors which could be indicative of impairment. Qualitative factors being considered include, but are not limited to, macro-economic conditions, progress on drug development activities, and overall financial performance. If impairment indicators are present as a result of our qualitative assessment, we will test those assets for impairment by comparing the fair value of the assets to their carrying value. Quantitative factors being considered include, but are not limited to, the current project status, forecasted changes in the timing or amounts required to complete the project, forecasted changes in timing or changes in the future cash flows to be generated by the completed products, a probability of success of the ultimate project and changes to other market-based assumptions, such as discount rates, current Company market capitalization and estimates of the fair value of the Company's reporting units. Upon completion or abandonment, the value of the IPR&D assets will be amortized to expense over the anticipated useful life of the developed products, if completed, or charged to expense when abandoned if no alternative future use exists. As a result of our intangible asset impairment test, we recorded an intangible asset impairment charge of $2.2 millionfor the year ended December 31, 2021. As of December 31, 2021, the carrying value of the Company's IPR&D asset approximates its estimated fair value of $1.5 million.
Our intangible assets are included in our specialty pharmaceutical segment.
Revenue Recognition - The majority of our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, which is primarily related to our Plus CBD™ line of products. Net sales 14
Table of Contents
reflect the transaction prices for these contracts based on our selling list price, which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness. We recognize revenue at the point in time that control of the ordered product is transferred to the customer, which is typically upon shipment to the customer or other customer-designated delivery point. We accrue for estimated sales returns by customers based on historical sales return results. The computation of the sales return and discount allowances require that management makes certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Shipping and handling fees charged to customers are included in product sales and totaled
$0.1 millionand $0.2 millionfor the years ended December 31, 2021and 2020, respectively. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue. Stock-Based Compensation - Certain employees, officers, directors, and consultants participate in our Amended and Restated 2013 Equity Incentive Plan, as amended, which provides for the granting of stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. Stock options generally vest in equal increments over a two- to four-year period and expire on the tenth anniversary following the date of grant. Performance-based stock options vest once the applicable performance condition is satisfied. The risk-free interest rates are based on the implied yield available on U.S. Treasuryconstant maturities with remaining terms equivalent to the respective expected terms of the options. Expected volatility is based on the historical volatility of our common stock. We estimate the expected term for stock options awarded to employees, officers and directors using the simplified method in accordance with ASC Topic 718, Stock Compensation, because we don't have sufficient relevant historical information to develop reasonable expectations about future exercise patterns. In the future, as we gain historical data for the actual term over which stock options are held, the expected term may change, which could substantially change the grant-date fair value of future stock option awards, and, consequently, compensation of future grants. We recognize stock-based compensation as compensation and benefits expense in the statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the closing price of our stock on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is probable of being satisfied.
Recent Accounting Pronouncements
Refer to Note 2 of our financial statements for a discussion of recent accounting standards and pronouncements.
Off-Balance Sheet Arrangements
© Edgar Online, source