Resume SCIENCE, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)

The following discussion of our financial condition and results of operations
for the years ended December 31, 2021 and 2020 should be read in conjunction
with our financial statements and the notes to those statements that are
included elsewhere in this Annual Report on Form 10-K. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors. We use words such as "anticipate", "estimate", "plan", "project",
"continuing", "ongoing", "expect", "believe", "intend", "may", "will", "should",
"could", and similar expressions to identify forward-looking statements.

PREVIEW

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

————————————————– ——————————

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 Partners to
assist the Company with the strategic review.


Operating results

Comparison of years ended December 31, 2021 vs. December 31, 2020

Revenues and gross profit

                                      Year ended December 31,                 Change
                                     2021                  2020          Amount         %
                                                 (in thousands)
           Product sales, net   $    20,048             $ 24,429       $ 

(4,381) (18)%

           Cost of goods sold        11,432               13,420         (1,988)      (15) %
           Gross profit         $     8,616             $ 11,009       $ (2,393)      (22) %
           Gross margin                43.0   %             45.1  %



Revenue by channel

                                             Year ended December 31, 2021                   Year ended December 31, 2020
                                                                % of product                                   % of product
                                            Amount               sales, net                Amount               sales, net
                                        (in thousands)                                 (in thousands)
Retail - FDM                           $       1,494                     7.5  %       $       1,651                     6.8  %
Retail - Natural products and other           11,054                    55.1  %              15,073                    61.7  %
E-Comm                                         7,500                    37.4  %               7,705                    31.5  %
Product sales, net                     $      20,048                   100.0  %       $      24,429                   100.0  %


We had product sales of $20.0 million and gross profit of $8.6 million,
representing a gross margin of 43.0% in 2021 compared with product sales of
$24.4 million and gross profit of $11.0 million, representing a gross margin of
45.1% in 2020. Our product sales decreased by $4.4 million or 18% in 2021 when
compared to 2020 results. The decline is primarily due to lower retail sales in
the natural products retail channel, as 2021 had a full year impact of COVID-19.
In addition, increased market competition, which is largely due to the lack of a
clear regulatory framework, is another main driver for the decline. As of
December 31, 2021, our products were in 8,495 retail stores, of which 5,709 were
with retailers in the FDM channel. The store count increased from 7,346 stores
as of December 31, 2020 and provides us with an increased distribution footprint
for future growth. For the years ended December 31, 2021 and 2020, e-commerce
sales accounted for 37.4% and 31.5% of revenue, respectively. 44% of our net
revenue for the year ended December 31, 2021 was from new products launched
since 2020.

In 2021, we launched the following new products:

• PlusCBDTM Calm and Sleep, to support a healthy stress response and improve sleep cycles, and

                                       8

————————————————– ——————————

Contents

•ProCBDTM, a full line of products exclusively by healthcare professionals.

Cost of goods sold consists primarily of raw materials, packaging, manufacturing
overhead (including payroll, employee benefits, stock-based compensation,
facilities, depreciation, supplies and quality assurance costs), merchant card
fees and shipping. Cost of goods sold in 2021 increased as a percentage of
revenue due to higher overhead and production cost compared to 2020. The gross
profit decrease of $2.4 million or 22% to $8.6 million in 2021 is mostly driven
by the decline in product sales. Gross margins decreased from 45.1% in 2020 to
43.0% in 2021. The decrease is primarily due to higher overhead cost and
associated volume deleverage, increased production cost, and reduced sales
pricing as a result of increased market competition.

Research and development costs

                                             Year ended December 31,                  Change
                                            2021                    2020         Amount         %
                                                         (in thousands)
   Research and development expense    $     1,185               $ 2,943       $ (1,758)      (60) %
   Percentage of revenue                       5.9   %              12.0  %


Research and development ("R&D") expense decreased to $1.2 million in 2021
compared to $2.9 million in 2020. The decrease is related to reductions in R&D
expenses for our specialty pharmaceutical segment of $1.5 million and for our
consumer products segment of $0.2 million. We incurred $0.5 million and $0.7
million of R&D expense related to our consumer products segment in 2021 and
2020, respectively. The reduction in R&D expense in our consumer products
segment is mostly related to lower personnel cost and cost for outside services
for new consumer product developments. We incurred $0.7 million and $2.2 million
of R&D expenses related to our specialty pharmaceutical segment in 2021 and
2020, respectively. The reduction in R&D expense in our specialty pharmaceutical
segment is mostly related to reduced activities related to preclinical work,
development cost associated with our active pharmaceutical ingredient ("API"),
and expenses paid to outside consultants.

Selling, general and administrative expenses

                                                  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                               $       4,889                    24.4  %       $       4,543                    18.6  %
Marketing expense                                   7,056                    35.2  %               6,759                    27.7  %
General & administrative expense                   13,932                    69.5  %              19,356                    79.2  %
Selling, general and administrative expense $      25,877                   129.1  %       $      30,658                   125.5  %


Selling, general and administrative (“SG&A”) expenses decreased by $4.8 million
or 16% to $25.9 million in 2021, from $30.7 million in 2020.

•Commercial expenses increased due to the amortization of capitalized customer relationship management (CRM) technology implementation costs and associated licensing fees.

• Marketing spend increased due to higher spending on digital marketing activities, such as programmatic and paid advertising.

•General and administrative expense decreased primarily due to decreased payroll
and outside services expense. General and administrative expense also decreased
due to the gain on lease modification during 2021. We also recorded a goodwill
and intangible asset impairment charge of $5.0 million during 2021. In addition,
during 2020, we derecognized the tax receivable for founder RSU settlement of
$6.2 million. For more information regarding the founder RSU settlement, please
see Note 12, Related Parties, to our financial statements included in Part IV in
this Annual Report on Form 10-K.

Non-GAAP Financial Measures

We use Adjusted EBITDA internally to evaluate our performance and make financial
and operational decisions that are presented in a manner that adjusts from their
equivalent GAAP measures or that supplement the information provided by our GAAP
measures. Adjusted EBITDA is defined by us as EBITDA (net loss plus depreciation
expense, amortization expense, interest
                                       9

————————————————– ——————————

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 of our net loss to Adjusted EBITDA, a non-GAAP measure, for the years ended December 31, 2021 and 2020 is detailed below:

                                                Year ended December 31, 2021                                  Year ended December 31, 2020
                                                             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)
Goodwill and intangible asset
impairment (4)                                 -                5,033              5,033                     -                  -                  -
Derecognition of tax receivable
for founder RSU settlement (5)                 -                    -                  -                 6,229                  -              6,229
Adjusted EBITDA                   $       (9,203)           $    (753)         $  (9,956)         $     (9,759)         $  (2,203)         $ (11,962)



(1)Represents stock-based compensation expense related to stock options awarded
to employees, consultants and non-executive directors based on the grant date
fair value using the Black-Scholes valuation model. For more information, please
see Note 10, Stock-Based Compensation, to our financial statements included in
Part IV in this Annual Report on Form 10-K.
(2)Represents gain on extinguishment of debt related to the forgiveness of our
PPP loan. For more information, please see Note 8, Debt, to our financial
statements included in Part IV in this Annual Report on Form 10-K.
(3)Represents gain associated with the lease termination agreement for our main
facility during the year ended December 31, 2021 and lease termination of one of
our San Diego facilities during the year ended December 31, 2020. For more
information, please see Note 14, Leases, to our financial statements included in
Part IV in this Annual Report on Form 10-K.
(4)Represents the goodwill and intangible asset impairment charge. For more
information, please see Note 5, Intangible Assets, to our financial statements
included in Part IV in this Annual Report on Form 10-K.
(5)Represents the derecognition of the tax receivable related to founder RSU
settlement. For more information, please see Note 12, Related Parties, to our
financial statements included in Part IV in this Annual Report on Form 10-K.

                                       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 $10,000 paid to employees during each of the quarters ended March 31, 2021,
June 30, 2021 and September 30, 2021. We determined that we qualify for the tax
credit under the CARES Act and filed our amended tax returns in March 2022. We
expect to receive $2.0 million of tax credits under the relief provisions.

In October 2020we have entered into a financing agreement with First insurance funding to fund part of our insurance policies. The amount financed was $0.7 million and incurred interest at the rate of 3.60%. We had to make monthly payments of $0.1 million from November 2020 by
July 2021. There was no outstanding balance at December 31, 2021.

In October 2021we have entered into a financing agreement with First insurance funding to fund part of our insurance policies. The financed amount is $0.4 million and bears interest at 4.17%. We are required to make monthly installments of $45,000 from November 2021 by July 2022.

On December 8, 2020, we entered into a Common Stock Purchase Agreement ("SPA")
with Tumim Stone Capital, LLC ("Tumim"), pursuant to which Tumim committed to
purchase up to $10.0 million in shares of our common stock from time to time.
The SPA provides, among other things, that we may direct, every three trading
days, Tumim to purchase a number of shares of our common stock not to exceed an
amount determined based upon the trading volume and stock price of our shares.
Effective November 15, 2021, the Company and Tumim mutually agreed to terminate
the SPA. During the year ended December 31, 2021, we sold 10,021,804 shares of
common stock pursuant to the SPA and recognized proceeds of $4.4 million.

In November 2021, we entered into a Securities Purchase Agreement (the "November
2021 SPA") with an institutional investor providing for the sale and issuance of
convertible notes due 2022 in the aggregate original principal amount of $1.06
million. Upon filing with the Securities and Exchange Commission of an
additional prospectus supplement and supplemental indenture and our satisfaction
of certain other closing conditions, we may elect to offer and sell up to and
additional $4.2 million in aggregate principal amount of the notes at additional
closings, resulting in potential gross proceeds for this offering and such
additional offerings, of approximately $5.3 million. During the year ended
December 31, 2021, holders of the convertible notes converted amounts payable
under such notes into 1,794,291 shares of the Company's common stock at a
weighted average conversion price of $0.13, resulting in a reduction of the
convertible note balance of $0.2 million. Subsequent to December 31, 2021,
holders of the convertible notes converted amounts payable under such notes into
6,804,281 shares of the Company's
                                       11

————————————————– ——————————

Contents

ordinary shares at a weighted average conversion price of $0.10 per share, resulting in a reduction of the convertible note balance of $0.7 million.

On March 25, 2022, we issued an additional note for an aggregate principal
amount of $1.06 million (the "Second Tranche"). As a result, we received gross
proceeds of $1.06 million, before original issuance discount of 6% and other
debt issuance costs. The Second Tranche matures on September 25, 2022. There is
no guarantee we will be able to consume additional closings for the remaining
$3,180,000 in aggregate principal amount of the notes. The additional closing
conditions include the satisfaction of certain equity conditions set forth in
the November 2021 SPA.

On March 30, 2022, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with an institutional investor, pursuant to which we
agreed to issue and sell 700 shares of our preferred stock which has supervoting
rights of 170,000 votes per share of preferred stock on certain stockholder
proposals and warrants to purchase an aggregate of 10,000,000 shares of common
stock. The preferred stock has a stated value of $1,000 per share and is
convertible into an 10,000,000 shares of common stock at a conversion price of
$0.07 per share. We received aggregate gross proceeds of $0.7 million before
deducting placement agent's fees and other offering expenses.

During the first quarter of 2019, we issued 2,950,000 Restricted Stock Units
("RSU") to our founder, former President and Chief Executive Officer, Michael
Mona Jr. ("Mona Jr."). The vesting of the RSU is treated as a taxable
compensation and thus subject to income tax withholdings. No amounts were
withheld (either in cash or the equivalent of shares of common stock from the
vesting of the RSU's) or included in our payroll tax filing at the time of
vesting. During the year ended December 31, 2020, we reported the taxable
compensation associated with the RSU release to the taxing authorities and
included the amount in Mona Jr's W-2 for 2019. Although the primary tax
liability is the responsibility of Mona Jr., we are secondarily liable and thus
have recorded the liability on our balance sheet as of December 31, 2021. The
liability may be relieved once the tax amount is paid by Mona Jr. and the
Company has received the required taxing authority documentation from Mona Jr..
As of March 31, 2022, Mona Jr. has not provided us with proof that he filed and
paid his taxes for 2019. Refer to Note 12. Related Parties and Note 13.
Commitments and Contingencies to our financial statements included in Part IV in
this Annual Report on Form 10-K for additional information.

U.S. GAAP requires management to assess a company's ability to continue as a
going concern within one year from the financial statement issuance and to
provide related note disclosure in certain circumstances. Our financial
statements and notes have been prepared assuming the Company will continue as a
going concern. For the year ended December 31, 2021, the Company generated
negative cash flows from operations of $7.5 million and had an accumulated
deficit of $79.5 million. Management anticipates that the Company will be
dependent, for the near future, on additional investment capital to fund our
operations and growth initiatives. The Company intends to position itself so
that it will be able to raise additional funds through the capital markets,
issuance of debt, and/or securing lines of credit.

The Company's financial operating results and accumulated deficit, besides other
factors, raise substantial doubt about the Company's ability to continue as a
going concern. The Company will continue to pursue the actions outlined above,
as well as work towards increasing revenue and operating cash flows to meet its
future liquidity requirements. However, there can be no assurance that the
Company will be successful in any capital-raising efforts that it may undertake,
and the failure of the Company to raise additional capital could adversely
affect its future operations and viability.

A summary of our changes in cash flows for the years ended December 31, 2021 and
2020 is provided below:

                                                                      Year ended December 31,
                                                                     2021                  2020
                                                                          (in thousands)
Net cash flows provided by (used in):
Operating activities                                           $      (7,485)         $    (7,300)
Investing activities                                                     (35)              (1,057)
Financing activities                                                   4,370                3,274
Net decrease in cash, cash equivalents and restricted cash            (3,150)              (5,083)

Cash, cash equivalents and restricted cash, beginning of year 4,525

                9,608

Cash, cash equivalents and restricted cash, end of year $1,375 $4,525



Operating Activities
                                       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 million in 2021 compared to $7.3
million in 2020, an increase of $0.2 million. The increase in our cash usage in
operating activities was due to a decline in our changes in working capital by
$1.5 million, partially offset by our reduced net loss, adjusted for non-cash
items of $1.4 million. Our changes in working capital declined from $3.5 million
in 2020 to $1.9 million in 2021, mostly due to reduced cash collections from
accounts receivable, lower inventory usage, and reductions in prepaids and other
assets, partially offset by reduced cash outflow for accounts payables and
accrued expenses. Our net loss, adjusted for non-cash items, in 2021 decreased
by $1.4 million when compared to 2020. Our net loss declined by $6.7 million
from $22.3 million in 2020 to $15.6 million in 2021. Non-cash adjustments
declined by $5.4 million from a total of $11.5 million in 2020 to $6.2 million
in 2021. The reduction in non-cash adjustments related mostly to the
derecognition of the tax receivable for founder RSU settlement of $6.2 million
in 2020. In addition in 2021, we recorded a goodwill and intangible asset
impairment charge of $5.0 million offset by the gain on debt extinguishment for
our PPP loan of $2.9 million. Recurring non-cash adjustments consists of
depreciation, amortization and stock-based compensation.

Investing Activities
Net cash used in investing activities decreased by $1.0 million in 2021 when
compared to 2020. During 2020, we invested in additional technology to support
our e-commerce activities.

Financing Activities
Net cash provided by financing activities increased by $1.1 million from $3.3
million in 2020 to $4.4 million in 2021. Our financing activity for 2021
consisted of proceeds from issuance of common stock under our SPA with Tumim of
$4.4 million, net proceeds of our convertible note financing of $0.8 million,
offset by repayments of our insurance financing of $0.8 million. In 2020, we
received proceeds from a PPP Loan of $2.9 million, proceeds from the issuance of
common stock under our SPA with Tumim of $0.2 million, and proceeds from stock
option exercises of $0.2 million.

Inflation

We have not been materially affected by inflation during the periods presented. However, recent upward trends in inflation could adversely impact our business and our related financial condition and cash flows.

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

————————————————– ——————————

Contents

A “critical accounting policy” is one that is both important to understanding the Company’s financial condition and results of operations and that requires management’s most difficult, subjective or complex judgments, and that requires management often make estimates about the effect of matters that are inherently uncertain. Management believes that the following accounting policies meet this definition:

Goodwill and Intangible Assets - We evaluate the carrying value of goodwill and
intangible assets annually during the fourth quarter in accordance with
Accounting Standards Codification ("ASC") Topic 350, Intangibles Goodwill and
Other, and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the reporting unit
below its carrying amount. Such circumstances could include, but are not limited
to (1) a significant adverse change in legal factors or in business climate, (2)
unanticipated competition, or (3) an adverse action or assessment by a
regulator. All of the goodwill and intangible assets are assigned to our
specialty pharmaceutical segment.

Goodwill is evaluated for impairment by first performing a qualitative
assessment to determine whether a quantitative goodwill test is necessary. If it
is determined, based on qualitative factors, that the fair value of the
reporting unit may more likely than not be less than carrying amount, or if
significant adverse changes in our future financial performance occur that could
materially impact fair value, a quantitative goodwill impairment test would be
required. Additionally, we can elect to forgo the qualitative assessment and
perform the quantitative test. If the qualitative assessment indicates that the
quantitative analysis should be performed, or if management elects to bypass a
qualitative assessment, we then evaluate goodwill for impairment by comparing
the fair value of the reporting unit to its carrying amount, including goodwill.
The quantitative assessment for goodwill requires us to estimate the fair value
of our reporting units using either an income or market approach or a
combination thereof.

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

During the fourth quarter of 2021, we performed our annual goodwill impairment
test and determined, after performing a qualitative test of our reporting units,
that it is more likely than not that the fair value of the specialty
pharmaceutical reporting unit was less than its carrying amount. As a result of
our goodwill impairment test, we recorded a goodwill impairment charge of $2.8
million for the year ended December 31, 2021.

We classify intangible assets into three categories: (1) intangible assets with
definite lives subject to amortization; (2) intangible assets with indefinite
lives not subject to amortization; and (3) goodwill. We determine the useful
lives of our identifiable intangible assets after considering the specific facts
and circumstances related to each intangible asset. Factors we consider when
determining useful lives include the contractual term of any agreement related
to the asset, the historical performance of the asset, our long-term strategy
for using the asset, any laws or regulations which could impact the useful life
of the asset and other economic factors, including competition and specific
market conditions. Intangible assets that are deemed to have definite lives are
amortized, primarily on a straight-line basis, over their useful lives to their
estimated residual values, generally five years.

In-process research & development ("IPR&D") has an indefinite life and is not
amortized until completion and development of the project, at which time the
IPR&D becomes an amortizable asset. Until such time as the projects are either
completed or abandoned, we test those assets for impairment at least annually at
year end, or more frequently at interim periods, by evaluating qualitative
factors which could be indicative of impairment. Qualitative factors being
considered include, but are not limited to, macro-economic conditions, progress
on drug development activities, and overall financial performance. If impairment
indicators are present as a result of our qualitative assessment, we will test
those assets for impairment by comparing the fair value of the assets to their
carrying value. Quantitative factors being considered include, but are not
limited to, the current project status, forecasted changes in the timing or
amounts required to complete the project, forecasted changes in timing or
changes in the future cash flows to be generated by the completed products, a
probability of success of the ultimate project and changes to other market-based
assumptions, such as discount rates, current Company market capitalization and
estimates of the fair value of the Company's reporting units. Upon completion or
abandonment, the value of the IPR&D assets will be amortized to expense over the
anticipated useful life of the developed products, if completed, or charged to
expense when abandoned if no alternative future use exists.

As a result of our intangible asset impairment test, we recorded an intangible
asset impairment charge of $2.2 million for the year ended December 31, 2021. As
of December 31, 2021, the carrying value of the Company's IPR&D asset
approximates its estimated fair value of $1.5 million.

Our intangible assets are included in our specialty pharmaceutical segment.

Revenue Recognition - The majority of our revenue contracts represent a single
performance obligation related to the fulfillment of customer orders for the
purchase of our products, which is primarily related to our Plus CBD™ line of
products. Net sales
                                       14

————————————————– ——————————

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 million and $0.2 million for the years ended December 31, 2021 and 2020,
respectively. Taxes collected from customers that are remitted to governmental
agencies are accounted for on a net basis and not included as revenue.

Stock-Based Compensation - Certain employees, officers, directors, and
consultants participate in our Amended and Restated 2013 Equity Incentive Plan,
as amended, which provides for the granting of stock options, restricted stock
awards, restricted stock units, stock bonus awards and performance-based awards.
Stock options generally vest in equal increments over a two- to four-year period
and expire on the tenth anniversary following the date of grant.
Performance-based stock options vest once the applicable performance condition
is satisfied.

The risk-free interest rates are based on the implied yield available on
U.S. Treasury constant maturities with remaining terms equivalent to the
respective expected terms of the options. Expected volatility is based on the
historical volatility of our common stock. We estimate the expected term for
stock options awarded to employees, officers and directors using the simplified
method in accordance with ASC Topic 718, Stock Compensation, because we don't
have sufficient relevant historical information to develop reasonable
expectations about future exercise patterns. In the future, as we gain
historical data for the actual term over which stock options are held, the
expected term may change, which could substantially change the grant-date fair
value of future stock option awards, and, consequently, compensation of future
grants.

We recognize stock-based compensation as compensation and benefits expense in
the statements of operations. The fair value of stock options is estimated using
a Black-Scholes valuation model on the date of grant. The fair value of
restricted stock awards is equal to the closing price of our stock on the date
of grant. Stock-based compensation is recognized over the requisite service
period of the individual awards, which generally equals the vesting period. For
performance-based stock options, compensation is recognized once the applicable
performance condition is probable of being satisfied.

Recent accounting pronouncements

Refer to Note 2 of our financial statements for a discussion of recent accounting standards and pronouncements.

Off-balance sheet arrangements

Any.

© Edgar Online, source Previews

Comments are closed.