CV SCIENCES, INC. The following discussion of our financial condition and results of operations for the years endedDecember 31, 2022 and 2021 should be read in conjunction with our 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
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We are a consumer wellness company specializing in hemp extracts and other proven, science-backed, natural ingredients and products, which are sold through a range of sales channels from B2B to B2C. Our +PlusCBD™ branded products are sold at select retail locations throughout theU.S. and are one of the top-selling brands of hemp extracts in the natural products market, according to SPINS, the leading provider of syndicated data and insights for the natural, organic and specialty products industry. We follow all guidelines for GMP and the Company's products are processed, produced, and tested throughout the manufacturing process to confirm strict compliance with company and regulatory standards and specifications. With a commitment to science, +PlusCBD™ product benefits in healthy people are supported by human clinical research data, in addition to three published clinical case studies available on PubMed.gov. +PlusCBD™ was the first hemp extract supplement brand to invest in the scientific evidence necessary to receive self-affirmed GRAS status. Our primary offices and facilities are located inSan Diego, California . Our common stock is traded on the OTC:QB market under the trading symbol CVSI.
We also have a drug development program focused on developing and commercializing CBD-based novel therapeutics.
We continue to work on our strategic review, which includes consideration of an inbound or outbound merger, sale, acquisition or other options for the Company.
Results of Operations
Comparison of the Years ended
Revenues and gross profit
Year ended December 31, Change
2022 2021 Amount %
(in thousands)
Product sales, net $ 16,205 $ 20,048 $ (3,843) (19) %
Cost of goods sold 10,655 11,432 (777) (7) %
Gross profit $ 5,550 $ 8,616 $ (3,066) (36) %
Gross margin 34.2 % 43.0 %
Revenue by channel
Year ended December 31, 2022 Year ended December 31, 2021
% of product % of product
Amount sales, net Amount sales, net
(in thousands) (in thousands)
Business-to-business ("B2B") sales $ 9,040 55.8 % $ 12,548 62.6 %
Business-to-consumer ("B2C") sales 7,165 44.2 % 7,500 37.4 %
Product sales, net $ 16,205 100.0 % $ 20,048 100.0 %
We had product sales of $16.2 million and gross profit of $5.6 million ,
representing a gross margin of 34.2% in 2022 compared to product sales of $20.0
million and gross profit of $8.6 million , representing a gross margin of 43.0%
in 2021. Our net product sales decreased by $3.8 million or 19% in 2022 when
compared to 2021. The decline is primarily due to lower retail sales in our
retail channel, mostly resulting from reduced sales to independent natural
product retailers and FDM accounts. The total number of units sold during the
year ended December 31, 2022 decreased by 22% compared to the year ended
December 31, 2021 , partially offset by higher sales prices of 3% in the second
half of 2022. Our revenue in 2022 was negatively impacted by supply chain
challenges with certain contract manufacturers. In addition, 36% of our net
revenue for the year ended December 31, 2022 was from new products launched
since May 2021 . During this time period, we launched the following new products:
•PlusCBDTM Calm and Sleep, to support healthy stress response and improve sleep cycles,
•PlusCBDTM Relief Softgels, to promote healthy inflammatory response and manage occasional soreness,
•PlusCBDTM Pain Relief topicals, to pinpoint sources of minor pain and aches, and
•ProCBDTM, a full product line exclusively through health care practitioners.
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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 2022 increased as a percentage of revenue compared to 2021, mostly due to higher product costs, partially offset by warehouse and production cost savings. The gross profit decrease of$3.1 million or 36% to$5.6 million in 2022 was mostly driven by the decline in product sales. Gross margins decreased from 43.0% in 2021 to 34.2% in 2022. The decrease is primarily due to higher overhead cost and associated volume deleverage and increased production cost.
Research and development expense
Year ended December 31, Change
2022 2021 Amount %
(in thousands)
Research and development expense $ 307 $ 1,185 $ (878) (74) %
Percentage of product sales, net 1.9 % 5.9 %
Research and development ("R&D") expense decreased to $0.3 million in 2022
compared to $1.2 million in 2021. The decrease is mostly related to reduced
activities in our drug development program of $0.7 million as a result of
reduced activities for preclinical work, development cost associated with the
active pharmaceutical ingredient ("API") and expenses paid to outside
consultants. The remaining decrease in R&D expense is related to reduced new
product development activities for our consumer products.
Selling, general and administrative expense
Year ended December 31, 2022 Year ended December 31, 2021
% of product % of product
Amount sales, net Amount sales, net
(in thousands) (in thousands)
Sales expense $ 3,773 23.3 % $ 4,889 24.4 %
Marketing expense 4,425 27.3 % 7,056 35.2 %
General & administrative expense 3,892 24.0 % 13,932 69.5 %
Selling, general and administrative expense $ 12,090 74.6 % $ 25,877 129.1 %
Selling, general and administrative ("SG&A") expenses decreased by
•Sales expense decreased due to lower payroll, commission, technology expense and outside services fees. Payroll decreased as a result of lower sales employee headcount. Commission expense decreased as a result of lower B2B sales.
•Marketing expense decreased due to lower payroll, stock-based compensation and reduced marketing activities.
•General and administrative ("G&A") expense decreased by $10.0 million compared
to 2021, of which $3.8 million was due to lower impairment charges in 2022
compared to 2021. In 2022, we recorded an intangible asset impairment charge of
$1.2 million compared to a goodwill and intangible asset impairment charge of
$5.0 million in 2021. In addition, G&A expense in 2022 decreased as a result of
the recognition of the employee retention credit of $2.5 million , offset by the
impact of the lease modification of $0.7 million in 2021. The remaining decrease
of $4.4 million is a result of our ongoing efforts to reduce our overall cost
structure. We were able to reduce our expenses for rent, legal, professional
services, insurance, payroll, depreciation and stock-based compensation.
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") measures or that
supplement the information provided by our GAAP measures. Adjusted EBITDA is
defined by us as EBITDA (net loss plus depreciation expense and interest
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
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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 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, 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,
2022 2021
Net loss $ (8,214) $ (15,554)
Depreciation 992 1,153
Interest expense 1,541 140
Income tax benefit (47) (87)
EBITDA (5,728) (14,348)
Stock-based compensation (1) 1,009 3,210
Gain on extinguishment of debt (2) (127)
(2,945)
Gain on lease termination (3) -
(906)
Goodwill and intangible asset impairment (4) 1,234
5,033
Employee retention credit benefit (5) (2,516) - Adjusted EBITDA$ (6,128) $ (9,956) (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. (2)Represents gain on extinguishment of debt related to the forgiveness of our PPP loan during the year endedDecember 31, 2021 . For more information, please see Note 8, Debt, to our financial statements included in Part IV in this Annual Report. It also represents the gain on extinguishment of our convertible note during the year endedDecember 31, 2022 . For more information, please see Note 7, Convertible Note, to our financial statements included in Part IV in this Annual Report. (3)Represents gain associated with the lease termination agreement for our main facility during the year endedDecember 31, 2021 . For more information, please see Note 14, Leases, to our financial statements included in Part IV in this Annual Report. (4)Represents the goodwill and intangible asset impairment charge. For more information, please see Note 5,Goodwill and Intangible Assets, to our financial statements included in Part IV in this Annual Report. (5)Represents benefits related to the employee retention credit. For more information, please see Note 2, Summary of Significant Accounting Policies, to our financial statements included in Part IV in this Annual Report. 11 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources During the year endedDecember 31, 2022 , our primary sources of capital came from (i) cash generated from our operations, (ii) existing cash, (iii) government loans, and (iv) proceeds from third-party financings, including the sale of shares of our common stock and convertible preferred stock, as well as convertible and non-convertible promissory notes, to certain investors. As ofDecember 31, 2022 , we had approximately$0.6 million of cash and negative working capital of approximately$2.2 million . During the year endedDecember 31, 2022 , we used cash in operating activities of approximately$1.9 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 endedDecember 31, 2022 . 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. Furthermore, COVID-19 and international conflicts still continue to have an impact on worldwide economic activity, and the ongoing effects thereof, amongst other factors, have adversely impacted, and may continue to adversely impact, many aspects of our business. 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. In addition, onJuly 12, 2021 , we entered into a lease termination agreement for our old facility located inSan Diego, California . Our old facility consisted of approximately 30,000 square feet of leased office, production, lab and warehouse space and had a total lease obligation of$3.8 million . We ceased using the old facility onJune 2, 2022 . Our new facility consists of approximately 6,000 square feet of leased office and warehouse space located inSan Diego , with a total lease obligation of$0.4 million . During the year endedDecember 31, 2022 , we started outsourcing the majority of our manufacturing, warehousing and fulfillment functions. To the extent that we feel it is necessary and in the best interest of the Company and our shareholders, we may also take further actions that alter our operations in order to ensure the success of our business.
CARES Act
OnApril 15, 2020 , we applied for a loan fromJPMorgan Chase Bank, N.A ., as lender, pursuant to the Paycheck Protection Program (the "PPP") of the CARES Act as administered by theU.S. Small Business Administration (the "SBA"). OnApril 17, 2020 , the loan was approved, and we received proceeds in the amount of$2.9 million (the "PPP Loan"). OnSeptember 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 endedDecember 31, 2021 . The CARES Act also provides an employee retention credit, which is a refundable tax credit against certain employment taxes of up to a maximum of$5,000 for each employee in 2020 and$7,000 per employee per quarter from January toSeptember 2021 . We determined that we qualify for the tax credit under the CARES Act and filed our amended tax returns in March andAugust 2022 . We expect to receive$2.5 million of tax credits under the relief provisions. However, as discussed in further detail below, pursuant to the Streeterville Note, within three trading days of receipt by the Company of any employee retention credit funds owed to the Company under the CARES Act, such amounts must be paid to Streeterville pursuant to the terms of the Streeterville Note.
First Insurance Funding Agreements
InNovember 2022 , we entered into a finance agreement withFirst Insurance Funding in order to fund a portion of our insurance policies. The amount financed is$0.2 million , which incurs interest at an annual rate of 6.32%. We are required to make monthly payments of$27,900 fromNovember 2022 throughJuly 2023 . The outstanding balance as ofDecember 31, 2022 was$0.2 million .
In
Tumim SPA
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OnDecember 8, 2020 , we entered into a Common Stock Purchase Agreement ("SPA") withTumim Stone Capital, LLC ("Tumim"), pursuant to which Tumim committed to purchase up to$10.0 million in shares of our common stock from time to time. The SPA provided, 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. EffectiveNovember 15, 2021 , the Company and Tumim mutually agreed to terminate the SPA. During the year endedDecember 31, 2021 , we sold 10,021,804 shares of common stock pursuant to the SPA and recognized proceeds of$4.4 million .
InNovember 2021 , we entered into a Securities Purchase Agreement (the "November 2021 SPA"), in addition to certain other agreements, with an institutional investor providing for the sale and issuance in series of registered direct offerings of convertible promissory notes (each a "Note", and collectively, the "Notes") in the aggregate original principal amount of up to$5.3 million , which Notes were offered pursuant to prospectus supplements to the Company's shelf registration statement Form S-3 (Registration No. 333-237772). At the initial closing of the offering, we sold and issued Notes in the aggregate original principal amount of$1.06 million . The Notes issued in November were fully converted into an aggregate of 12,597,580 shares of our common stock at a price of$0.08 per share . The Notes had an original issue discount ("OID") of 6%, resulting in gross proceeds to the Company of$1.0 million at the initial closing. OnMarch 25, 2022 , we sold and issued additional Notes in the aggregate principal amount of$1.06 million (the "Second Tranche"). The Notes issued in the Second Tranche also had an OID of 6%, resulting in gross proceeds of the Company of$1.0 million . The Notes issued in the Second Tranche were scheduled to mature onSeptember 25, 2022 .
The Notes did not bear interest except upon the occurrence of an event of default. After the occurrence of an event of default, the Notes accrued interest at the rate of 15% per annum.
InApril 2022 , the volume weighted average price ("VWAP") of the Company's common stock was below$0.10 for more than 5 days, which constituted a price default in accordance with the Notes. As a result, from the date of such default and for so long as such default remained uncured, the Notes that remained outstanding accrued interest at a rate of 15% per annum. Following such default, the holder also added a 15% per annum default premium to the outstanding balance in accordance with the Notes. OnAugust 18, 2022 , we entered into the Cancellation Agreement and Mutual General Release (the "Cancellation Agreement") with the holder of the Notes issued in March, pursuant to which we paid the investor a total sum of$675,000 in full satisfaction and repayment of the Notes issued in March. Upon execution of the Cancellation Agreement, the March Notes, including the Company's obligations thereunder, were canceled and terminated.
The Notes were senior to other indebtedness of the Company. There was no
outstanding balance on any of the Notes as of
OnMarch 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 Series A Convertible Preferred Stock (the "Preferred Stock"), which had limited voting rights, including "supervoting" rights equal to 170,000 votes per share of preferred stock on certain stockholder proposals, and warrants to purchase an aggregate of 10,000,000 shares of Company common stock. Shares of the Preferred Stock had a stated value of$1,000 per share and were convertible at any time into an aggregate of 10,000,000 shares of common stock at a conversion price of$0.07 per share. We received aggregate gross proceeds of$0.7 million before deducting placement agent's fees and other offering expenses in connection with this offering. InApril 2022 , the investor converted all of the 700 outstanding shares of Preferred Stock into an aggregate of 10,000,000 shares of our common stock. We recognized a beneficial conversion charge of$0.9 million during the year endedDecember 31, 2022 , which represents the in-the-money value of the conversion rate as of the date of the conversion. 13
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Streeterville Note
InAugust 2022 , we entered into a note purchase agreement withStreeterville Capital, LLC ("Streeterville"), pursuant to which we issued and sold to Streeterville a secured promissory note ("Streeterville Note") in the original principal amount of$2.0 million . The Streeterville Note carries an original issuance discount of$400,000 . We incurred additional debt issuance costs of$23,000 . As a result, we received aggregate net proceeds of approximately$1.6 million in connection with the sale and issuance of the Streeterville Note. We are required to make weekly repayments to Streeterville on the Streeterville Note in the following amounts: (a)$40,000 for the first eight weeks; and (b)$56,000 thereafter until the Streeterville Note is paid in full. The unpaid amount of the Streeterville Note, any interest, fees, charges and late fees accrued shall be due and payable in full nine months fromAugust 19, 2022 (the "Maturity Date"); provided, however, that within three trading days of the Company's receipt of any employee retention credit funds owed under the CARES Act, such amounts are required to be paid to Streeterville; provided, further, that if at least$1.0 million in CARES Act proceeds are not remitted to Streeterville within ninety days ofAugust 19, 2022 , the outstanding balance under the Streeterville Note will be increased by five percent (5%). The Company did not receive the CARES Act proceeds within ninety days ofAugust 19, 2022 ; as a result, the outstanding balance of the Streeterville Note was increased by five percent (5%). The Streeterville Note is secured by all of the Company's assets. The outstanding balance of the Streeterville Note as ofDecember 31, 2022 was$1.0 million . Tax Liability During the first quarter of 2019, we issued 2,950,000 Restricted Stock Units ("RSU's") to our founder, former President and Chief Executive Officer,Michael Mona Jr . ("Mona Jr ."). The vesting of the RSU's 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 endedDecember 31, 2020 , we reported the taxable compensation associated with the RSU release to the taxing authorities and included the amount inMona Jr's W-2 for 2019. Although the primary tax liability is the responsibility ofMona Jr ., we are secondarily liable and thus have recorded the liability on our balance sheet as ofDecember 31, 2021 andDecember 31, 2022 . The liability may be relieved once the tax amount is paid byMona Jr . and the Company has received the required taxing authority documentation fromMona Jr . As ofDecember 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. Going ConcernU.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 corresponding notes have been prepared assuming the Company will continue as a going concern. For the year endedDecember 31, 2022 , the Company generated negative cash flows from operations of$1.9 million and had an accumulated deficit of$87.7 million . Management anticipates that the Company will be dependent, for the near future, on additional investment capital to fund our operations and growth initiatives. The Company intends to position itself so that it will be able to raise additional funds through the capital markets, issuance of debt, and/or securing lines of credit in order to continue its operations. However, there can be no assurances that additional working capital will be available to us on favorable terms, or at all, which would be likely to have a material adverse effect on the Company's ability to continue its operations. The Company's financial operating results and accumulated deficit, besides other factors, raise substantial doubt about the Company's ability to continue as a going concern. The Company will continue to pursue the actions outlined above, as well as work towards increasing revenue and operating cash flows to meet its future liquidity requirements. However, there can be no assurance that the Company will be successful in any capital-raising efforts that it may undertake, and the failure of the Company to raise additional capital could adversely affect its future operations and viability. 14
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A summary of our changes in cash flows for the years endedDecember 31, 2022 and 2021 is provided below: Year ended December 31, 2022 2021 (in thousands) Net cash flows provided by (used in): Operating activities$ (1,885) $ (7,485) Investing activities - (35) Financing activities 1,121 4,370 Net decrease in cash (764) (3,150) Cash, beginning of year 1,375 4,525 Cash, end of year $ 611$ 1,375 Operating Activities Net cash used in operating activities includes our net loss adjusted for non-cash expenses such as stock-based compensation, depreciation and amortization, bad debt expense and other non-cash items. Operating assets and liabilities primarily include balances related to funding of inventory purchases and customer accounts receivable and can fluctuate significantly from day to day and period to period depending on the timing of inventory purchases and customer behavior. Net cash used in operating activities was$1.9 million in 2022 compared to$7.5 million in 2021, a reduction of$5.6 million . The reduction in our cash usage in operating activities was due to our reduced net loss, adjusted for non-cash items of$4.0 million and improvements in our changes in working capital by$1.6 million . Our changes in working capital improved from$1.9 million in 2021 to$3.6 million in 2022, mostly due to additional cash collections from accounts receivable, improved usage of our inventory, and reductions in prepaids and other assets, partially offset by increased cash outflow for accounts payables and accrued expenses. Our net loss, adjusted for non-cash items, improved from$9.4 million in 2021 to$5.4 million in 2022 mostly related to our cost reduction measures across the organization. Our net loss declined by$7.3 million from$15.6 million in 2021 to$8.2 million in 2022. Non-cash adjustments declined by$3.4 million from a total of$6.2 million in 2021 to$2.8 million in 2022, mostly due to lower intangible/goodwill impairment and reduced stock-based compensation. In addition, non-cash adjustments for 2022 included note discount and interest expense of$1.6 million and our recognized ERC credit of$2.5 million . In 2021, we recognized a gain on debt extinguishment for our PPP loan of$2.9 million and a gain on lease modification of$1.0 million .
Investing Activities
We did not use any cash in investing activities in 2022. Investing activity in 2021 was not material.
Financing Activities Net cash provided by financing activities was$1.1 million in 2022 compared to$4.4 million in 2021. Our financing activities for 2022 consisted of proceeds from issuance of preferred stock of$0.6 million , convertible notes of$1.0 million , and note payable of$1.6 million , partially offset by repayments of our insurance financing of$0.3 million , convertible notes of$0.7 million , and note payable of$1.0 million . In 2021, we received proceeds from the issuance of common stock under our SPA with Tumim of$4.4 million and proceeds from issuance of convertible notes of$0.8 million , partially offset by repayments of our insurance financing of$0.8 million .
Inflation
We have not been affected materially by inflation during the periods presented. However, recent trends towards rising inflation may adversely impact our business and corresponding financial position and cash flow.
Known Trends or Uncertainties
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There can be no assurance that the Company's business and corresponding financial performance will not be adversely affected by general economic or consumer trends. In particular, global economic conditions remain constrained, and if such conditions continue, recur or worsen, this may have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, inflation has risen,Federal Reserve interest rates have increased recently, and the general consensus among economists suggests that we should continue to expect a higher recession risk to continue over the next year, all of which may also materially adversely our business and corresponding financial position and cash flows. Additionally, inMarch 2023 ,Silicon Valley Bank and Signature Bank were closed and taken over by theFDIC , which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system inthe United States , and in particular with respect to regional banks. If other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition. 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, the world has been affected due to the COVID-19 pandemic, and thus, there remains uncertainty as to the effect of COVID-19 on our business in both the short and long-term.
Critical Accounting Policies
The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis management evaluates its critical accounting policies and estimates.
A "critical accounting policy" is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management's most difficult, subjective, or complex judgments, and often requires management to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:
Intangible Assets - 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
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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$1.2 million for the year endedDecember 31, 2022 . As ofDecember 31, 2022 , the carrying value of the Company's IPR&D asset approximates its estimated fair value of$0.3 million . Revenue Recognition - The majority of our revenue contracts represent a single performance obligation related to the fulfillment of customer orders for the purchase of our products, which is primarily related to our Plus CBD™ line of products. Net sales reflect the transaction prices for these contracts based on our selling list price, which is then reduced by estimated costs for trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness. We recognize revenue at the point in time that control of the ordered product is transferred to the customer, which is typically upon shipment to the customer or other customer-designated delivery point. We accrue for estimated sales returns by customers based on historical sales return results. The computation of the sales return and discount allowances require that management makes certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recorded. Shipping and handling fees charged to customers are included in product sales and totaled$0.1 million for each of the years endedDecember 31, 2022 and 2021. 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 onU.S. Treasury constant maturities with remaining terms equivalent to the respective expected terms of the options. Expected volatility is based on the historical volatility of our common stock. We estimate the expected term for stock options awarded to employees, officers and directors using the simplified method in accordance with Accounting Standards Codification ("ASC") Topic 718, Stock Compensation, because we don't have sufficient relevant historical information to develop reasonable expectations about future exercise patterns. In the future, as we gain historical data for the actual term over which stock options are held, the expected term may change, which could substantially change the grant-date fair value of future stock option awards, and, consequently, compensation of future grants. We recognize stock-based compensation as compensation and benefits expense in the statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the closing price of our stock on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is probable of being satisfied.
Recent Accounting Pronouncements
Refer to Note 2 of our financial statements for a discussion of recent accounting standards and pronouncements.
Off-Balance Sheet Arrangements
None.
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