UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2017
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934March 31, 2023
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From ________ to ________
Commission File Number: 001-36338
22nd Century Group, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 98-0468420 | |
(State or other jurisdiction | | (IRS Employer |
of incorporation) | | Identification No.) |
9530 Main500 Seneca Street Clarence, , Suite 507, Buffalo, New York 1403114204
(Address of principal executive offices)
(716) (716) 270-1523
(Registrant’s telephone number, including area code)
���
Securities registered under Section 12(b) of the Act:
Title of each class | Ticker symbol | Name of Exchange on Which Registered | ||
Common Stock, $0.00001 par value | XXII | NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ◻
Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ⌧ No ◻
Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
Yes ☐ No ☒
As of November 9, 2017,May 2, 2023, there were 123,564,117222,504,346 shares of common stock issued and outstanding.
22nd CENTURY GROUP, INC.
INDEX
INDEX
| ||
Page Number | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
| 3 | |
| ||
| 4 | |
| ||
| ||
5 | ||
| ||
| 6 | |
| ||
| Notes to Condensed Consolidated Financial Statements (unaudited) | 7 |
| ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 | |
| | |
Quantitative and Qualitative Disclosures | 44 | |
44 | ||
45 | ||
45 | ||
45 | ||
46 | ||
47 | ||
47 | ||
47 | ||
48 | ||
49 |
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 15,022,570 | $ | 13,468,188 | ||||
Accounts receivable, net | 126,198 | 40,992 | ||||||
Inventory, net | 4,034,164 | 3,092,686 | ||||||
Prepaid expenses and other assets | 542,953 | 195,569 | ||||||
Total current assets | 19,725,885 | 16,797,435 | ||||||
Machinery and equipment, net | 3,099,614 | 2,434,663 | ||||||
Other assets: | ||||||||
Intangible assets, net | 7,468,932 | 7,389,946 | ||||||
Investment | 1,366,493 | 1,020,313 | ||||||
Total other assets | 8,835,425 | 8,410,259 | ||||||
Total assets | $ | 31,660,924 | $ | 27,642,357 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of note payable | $ | 326,924 | $ | 307,938 | ||||
Accounts payable | 1,627,971 | 1,340,156 | ||||||
Accrued expenses | 1,307,684 | 1,401,566 | ||||||
Accrued severance | 38,793 | 199,657 | ||||||
Deferred income | 158,478 | - | ||||||
Total current liabilities | 3,459,850 | 3,249,317 | ||||||
Warrant liability | 197,494 | 58,681 | ||||||
Total liabilities | 3,657,344 | 3,307,998 | ||||||
Commitments and contingencies (Note 13) | - | - | ||||||
Shareholders' equity | ||||||||
10,000,000 preferred shares, $.00001 par value | ||||||||
300,000,000 common shares, $.00001 par value | ||||||||
Capital stock issued and outstanding: | ||||||||
102,888,117 common shares (90,698,113 at December 31, 2016) | 1,029 | 907 | ||||||
Capital in excess of par value | 115,434,541 | 102,471,907 | ||||||
Accumulated deficit | (87,431,990 | ) | (78,138,455 | ) | ||||
Total shareholders' equity | 28,003,580 | 24,334,359 | ||||||
Total liabilities and shareholders' equity | $ | 31,660,924 | $ | 27,642,357 |
2017 | 2016 | |||||||
Revenue: | ||||||||
Sale of products, net | $ | 4,530,865 | $ | 3,097,648 | ||||
Cost of goods sold (exclusive of depreciation shown separately below): | ||||||||
Products | 4,871,234 | 3,282,266 | ||||||
Gross loss | (340,369 | ) | (184,618 | ) | ||||
Operating expenses: | ||||||||
Research and development (including equity based compensation of $26,851 and $34,656, respectively) | 784,587 | 691,970 | ||||||
General and administrative (including equity based compensation of $194,296 and $157,844, respectively) | 1,635,226 | 1,230,967 | ||||||
Sales and marketing (including equity based compensation of $38,268 and $12,360, respectively) | 279,254 | 277,096 | ||||||
Depreciation | 88,711 | 81,354 | ||||||
Amortization | 145,934 | 129,807 | ||||||
2,933,712 | 2,411,194 | |||||||
Operating loss | (3,274,081 | ) | (2,595,812 | ) | ||||
Other income (expense): | ||||||||
Warrant liability loss - net | (55,886 | ) | (46,995 | ) | ||||
Loss on investment | - | (29,997 | ) | |||||
Interest income | 20,317 | 2,131 | ||||||
Interest expense | (6,984 | ) | (9,315 | ) | ||||
(42,553 | ) | (84,176 | ) | |||||
Loss before income taxes | (3,316,634 | ) | (2,679,988 | ) | ||||
Income taxes | - | - | ||||||
Net loss | $ | (3,316,634 | ) | $ | (2,679,988 | ) | ||
Loss per common share - basic and diluted | $ | (0.03 | ) | $ | (0.03 | ) | ||
Common shares used in basic and diluted earnings per share calculation | 100,673,834 | 80,386,519 |
2017 | 2016 | |||||||
Revenue: | ||||||||
Sale of products, net | $ | 10,659,588 | $ | 8,944,362 | ||||
Cost of goods sold (exclusive of depreciation shown separately below): | ||||||||
Products | 11,438,909 | 9,146,247 | ||||||
Gross loss | (779,321 | ) | (201,885 | ) | ||||
Operating expenses: | ||||||||
Research and development (including equity based compensation of $59,051 and $117,937, respectively) | 2,148,725 | 1,799,289 | ||||||
General and administrative (including equity based compensation of $428,022 and $560,766, respectively) | 5,060,823 | 4,799,349 | ||||||
Sales and marketing (including equity based compensation of $95,325 and $29,246, respectively) | 842,558 | 1,230,816 | ||||||
Depreciation | 265,296 | 243,018 | ||||||
Amortization | 429,832 | 380,689 | ||||||
8,747,234 | 8,453,161 | |||||||
Operating loss | (9,526,555 | ) | (8,655,046 | ) | ||||
Other income (expense): | ||||||||
Warrant liability (loss) gain - net | (138,813 | ) | 14,602 | |||||
Gain (loss) on investment | 346,180 | (172,068 | ) | |||||
Interest income | 48,197 | 6,729 | ||||||
Interest expense | (22,544 | ) | (29,011 | ) | ||||
233,020 | (179,748 | ) | ||||||
Loss before income taxes | (9,293,535 | ) | (8,834,794 | ) | ||||
Income taxes | - | - | ||||||
Net loss | $ | (9,293,535 | ) | $ | (8,834,794 | ) | ||
Loss per common share - basic and diluted | $ | (0.10 | ) | $ | (0.11 | ) | ||
Common shares used in basic and diluted earnings per share calculation | 94,369,953 | 76,826,949 |
Common | Par Value | Capital in | ||||||||||||||||||
Shares | of Common | Excess of | Accumulated | Shareholders' | ||||||||||||||||
Outstanding | Shares | Par Value | Deficit | Equity | ||||||||||||||||
Balance at December 31, 2016 | 90,698,113 | $ | 907 | $ | 102,471,907 | $ | (78,138,455 | ) | $ | 24,334,359 | ||||||||||
Equity based compensation | - | - | 582,398 | - | 582,398 | |||||||||||||||
Stock issued in connection with warrant exercises | 12,138,077 | 121 | 12,380,237 | - | 12,380,358 | |||||||||||||||
Stock issued in connection with stock option exercises | 51,927 | 1 | (1 | ) | - | - | ||||||||||||||
Net loss | - | - | - | (9,293,535 | ) | (9,293,535 | ) | |||||||||||||
Balance at September 30, 2017 | 102,888,117 | $ | 1,029 | $ | 115,434,541 | $ | (87,431,990 | ) | $ | 28,003,580 |
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (9,293,535 | ) | $ | (8,834,794 | ) | ||
Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
Amortization and depreciation | 621,612 | 550,191 | ||||||
Amortization of license fees | 73,516 | 73,516 | ||||||
(Gain) loss on investment | (346,180 | ) | 172,068 | |||||
Accretion of interest on note payable and accrued severance | 22,544 | 29,011 | ||||||
Warrant liability loss (gain) | 138,813 | (14,602 | ) | |||||
Equity based employee compensation expense | 582,398 | 677,076 | ||||||
Equity based payments for outside services | - | 30,873 | ||||||
Decrease in allowance for doubtful accounts | (10,000 | ) | - | |||||
Increase in inventory reserve | 95,000 | 45,000 | ||||||
(Increase) decrease in assets: | ||||||||
Accounts receivable | (75,205 | ) | 34,776 | |||||
Inventory | (1,036,478 | ) | (386,072 | ) | ||||
Prepaid expenses and other assets | (347,384 | ) | 204,641 | |||||
Increase (decrease) in liabilities: | ||||||||
Accounts payable | 53,740 | (91,945 | ) | |||||
Accrued expenses | (93,882 | ) | (298,970 | ) | ||||
Accrued severance | (164,423 | ) | (173,078 | ) | ||||
Deferred income | 158,478 | - | ||||||
Net cash used in operating activities | (9,620,986 | ) | (7,982,309 | ) | ||||
Cash flows from investing activities: | �� | |||||||
Acquisition of patents and trademarks | (312,804 | ) | (236,723 | ) | ||||
Acquisition of machinery and equipment | (892,186 | ) | (125,511 | ) | ||||
Net cash used in investing activities | (1,204,990 | ) | (362,234 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from exercise of warrants | 12,380,358 | 196 | ||||||
Net proceeds from February 2016 registered direct offering | - | 5,091,791 | ||||||
Net proceeds from July 2016 registered direct offering | - | 4,682,764 | ||||||
Net cash provided by financing activities | 12,380,358 | 9,774,751 | ||||||
Net increase in cash | 1,554,382 | 1,430,208 | ||||||
Cash - beginning of period | 13,468,188 | 3,760,297 | ||||||
Cash - end of period | $ | 15,022,570 | $ | 5,190,505 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Net cash paid for: | ||||||||
Cash paid during the period for interest | $ | 3,558 | $ | 10,507 | ||||
Cash paid during the period for income taxes | $ | - | $ | - | ||||
Non-cash transactions: | ||||||||
Patent and trademark additions included in accounts payable | $ | 196,014 | $ | 180,560 | ||||
Machinery and equipment additions included in accounts payable | $ | 38,061 | $ | 9,749 | ||||
Reclassification of warrant liability to capital in excess of par due to voiding of exchange rights clause in Crede Tranche 1A warrant | $ | - | $ | 2,810,000 |
2
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands, except share and per-share data)
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2023 |
| 2022 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 10,952 | | $ | 3,020 |
Short-term investment securities | |
| 5,275 | |
| 18,193 |
Accounts receivable, net | |
| 9,131 | |
| 5,641 |
Inventories | |
| 10,528 | |
| 10,008 |
Insurance recoveries | |
| 3,000 | |
| 5,000 |
Prepaid expenses and other current assets | |
| 2,252 | |
| 2,743 |
Total current assets | |
| 41,138 | |
| 44,605 |
Property, plant and equipment, net | |
| 14,322 | |
| 13,093 |
Operating lease right-of-use assets, net | |
| 5,309 | |
| 2,675 |
Goodwill | |
| 33,160 | |
| 33,160 |
Intangible assets, net | |
| 18,385 | |
| 16,853 |
Investments | |
| 682 | |
| 682 |
Restricted cash | |
| 7,500 | |
| — |
Other assets | | | 3,642 | | | 3,583 |
Total assets | | $ | 124,138 | | $ | 114,651 |
| |
|
| |
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Notes and loans payable - current | | $ | 314 | | $ | 908 |
Operating lease obligations | |
| 862 | |
| 681 |
Accounts payable | |
| 4,602 | |
| 4,168 |
Accrued expenses | |
| 6,306 | |
| 1,428 |
Accrued payroll | |
| 1,276 | |
| 3,199 |
Accrued excise taxes and fees | |
| 2,330 | |
| 1,423 |
Deferred income | | | 257 | | | 831 |
Other current liabilities | |
| 923 | |
| 380 |
Total current liabilities | |
| 16,870 | |
| 13,018 |
Long-term liabilities: | |
|
| |
|
|
Notes and loans payable | |
| 154 | |
| 3,001 |
Operating lease obligations | |
| 4,602 | |
| 2,141 |
Long-term debt | |
| 16,417 | |
| — |
Other long-term liabilities | | | 4,736 | | | 516 |
Total liabilities | | | 42,779 | | | 18,676 |
Commitments and contingencies (Note 11) | |
| | |
| |
Shareholders' equity | |
|
| |
|
|
Preferred stock, $.00001 par value, 10,000,000 shares authorized | |
|
| |
|
|
Common stock, $.00001 par value, 300,000,000 shares authorized | |
|
| |
|
|
Capital stock issued and outstanding: | |
|
| |
|
|
217,057,927 common shares (215,238,198 at December 31, 2022) | |
| | |
| |
Common stock, par value | | | 2 | | | 2 |
Capital in excess of par value | |
| 337,512 | |
| 333,898 |
Accumulated other comprehensive loss | |
| (41) | |
| (111) |
Accumulated deficit | |
| (256,114) | |
| (237,814) |
Total shareholders' equity | |
| 81,359 | |
| 95,975 |
Total liabilities and shareholders’ equity | | $ | 124,138 | | $ | 114,651 |
See accompanying notes to condensed consolidated financial statements.
3
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND SUBSIDIARIESCOMPREHENSIVE LOSS
(Unaudited)
(amounts in thousands, except per-share data)
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Revenues, net | | $ | 21,962 | | $ | 9,045 |
Cost of goods sold | |
| 23,139 | |
| 8,736 |
Gross (loss) profit | |
| (1,177) | |
| 309 |
Operating expenses: | |
| | |
| |
Sales, general and administrative | |
| 14,231 | |
| 7,262 |
Research and development | |
| 1,517 | |
| 1,141 |
Other operating expense, net | |
| 898 | |
| 52 |
Total operating expenses | |
| 16,646 | |
| 8,455 |
Operating loss | |
| (17,823) | |
| (8,146) |
Other income (expense): | |
| | |
| |
Unrealized loss on investments | |
| — | |
| (817) |
Other income, net | |
| 5 | |
| — |
Interest income, net | |
| 57 | |
| 50 |
Interest expense | |
| (421) | |
| (5) |
Total other expense | |
| (359) | |
| (772) |
Loss before income taxes | |
| (18,182) | | | (8,918) |
(Benefit) provision for income taxes | |
| — | |
| — |
Net loss | | $ | (18,182) | | $ | (8,918) |
| | | | | | |
Net loss per common share - basic and diluted | | $ | (0.08) | | $ | (0.05) |
Weighted average common shares outstanding - basic and diluted | | | 215,784 | | | 163,157 |
| | | | | | |
| | | | | | |
Net loss | | $ | (18,182) | | $ | (8,918) |
Other comprehensive loss: | |
| | |
| |
Unrealized gain (loss) on short-term investment securities | |
| 61 | |
| (400) |
Foreign currency translation | |
| (4) | |
| — |
Reclassification of realized losses to net loss | |
| 13 | |
| — |
Other comprehensive income (loss) | | | 70 | | | (400) |
Comprehensive loss | | $ | (18,112) | | $ | (9,318) |
See accompanying notes to condensed consolidated financial statements.
4
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | |||||||||||||||
| | | | | | | | | | Accumulated | | | | | | | |
| | Common | | Par Value | | Capital in | | Other | | | | | Total | ||||
| | Shares | | of Common | | Excess of | | Comprehensive | | Accumulated | | Shareholders’ | |||||
|
| Outstanding |
| Shares |
| Par Value |
| Income (Loss) |
| Deficit |
| Equity | |||||
Balance at January 1, 2023 |
| 215,238,198 | | $ | 2 |
| $ | 333,898 |
| $ | (111) |
| $ | (237,814) | | $ | 95,975 |
Stock issued in connection with RSU vesting, net of 474,091 shares withheld for taxes |
| 1,353,891 | |
| — |
| | (414) |
| | — |
| | — | |
| (414) |
Stock issued in connection with acquisition | | 465,838 | | | — | | | 503 | | | — | | | — | | | 503 |
Equity-based compensation |
| — | |
| — |
| | 1,175 |
| | — |
| | — | |
| 1,175 |
Adoption of ASU 2016-13 |
| — | |
| — |
| | — |
| | — |
| | (118) | |
| (118) |
Equity detachable warrants |
| — | |
| — |
| | 2,350 |
| | — |
| | — | |
| 2,350 |
Other comprehensive income |
| — | |
| — |
| | — |
| | 70 |
| | — | |
| 70 |
Net loss |
| — | |
| — |
| | — |
| | — |
| | (18,182) | |
| (18,182) |
Balance at March 31, 2023 | | 217,057,927 | |
| 2 |
| | 337,512 |
| | (41) |
| | (256,114) | |
| 81,359 |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | |||||||||||||||
| | | | | | | | | | Accumulated | | | | | | | |
| | Common | | Par Value | | Capital in | | Other | | | | | Total | ||||
| | Shares | | of Common | | Excess of | | Comprehensive | | Accumulated | | Shareholders’ | |||||
|
| Outstanding |
| Shares |
| Par Value |
| Income (Loss) |
| Deficit |
| Equity | |||||
Balance at January 1, 2022 |
| 162,872,875 | | $ | 2 |
| $ | 244,247 |
| $ | (162) |
| $ | (178,013) | | $ | 66,074 |
Stock issued in connection with RSU vesting |
| 1,663,691 | |
| — |
| | — |
| | — |
| | — | |
| — |
Equity-based compensation |
| — | |
| — |
| | 1,213 |
| | — |
| | — | |
| 1,213 |
Other comprehensive income |
| — | |
| — |
| | — |
| | (400) |
| | — | |
| (400) |
Net loss |
| — | |
| — |
| | — |
| | — |
| | (8,918) | |
| (8,918) |
Balance at March 31, 2022 | | 164,536,566 | |
| 2 |
| | 245,460 |
| | (562) |
| | (186,931) | |
| 57,969 |
See accompanying notes to condensed consolidated financial statements.
5
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
| | | | | | |
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net loss | | $ | (18,182) | | $ | (8,918) |
Adjustments to reconcile net loss to cash used in operating activities: | |
|
| |
|
|
Amortization and depreciation | |
| 881 | |
| 329 |
Amortization of right-of-use asset | |
| 294 | |
| 92 |
Unrealized loss on investment | |
| — | |
| 817 |
Realized loss on short-term investment securities | | | 13 | | | — |
Provision for credit losses | | | 61 | | | — |
Loss on the sale of machinery and equipment | |
| 103 | |
| — |
Accretion of non-cash interest expense (income), net | | | (7) | | | 119 |
Debt related charges included in interest expense | | | 231 | | | — |
Equity-based employee compensation expense | |
| 1,175 | |
| 1,213 |
Loss on change of contingent consideration | |
| 22 | |
| — |
Loss on change of warrant liabilities | | | 139 | | | — |
Changes in operating assets and liabilities, net of acquisition: | |
|
| |
|
|
Accounts receivable | |
| (3,624) | |
| (635) |
Inventory | |
| (495) | |
| (872) |
Prepaid expenses and other assets | |
| 1,971 | |
| 794 |
Accounts payable | |
| 312 | |
| (661) |
Accrued expenses | |
| 1,544 | |
| 647 |
Accrued payroll | |
| (1,923) | |
| (1,850) |
Accrued excise taxes and fees | |
| 906 | |
| 739 |
Other liabilities | | | (921) | |
| 258 |
Net cash used in operating activities | |
| (17,500) | |
| (7,928) |
Cash flows from investing activities: | |
|
| |
| |
Acquisition of patents, trademarks, and licenses | |
| (116) | |
| (105) |
Acquisition of property, plant and equipment | |
| (1,910) | |
| (258) |
Proceeds from the sale of property, plant and equipment | |
| 200 | |
| — |
Acquisition, net of cash acquired | | | 90 | | | — |
Investment in Change Agronomy Ltd. | | | — | | | (682) |
Property, plant and equipment insurance proceeds | | | 3,500 | | | — |
Sales and maturities of short-term investment securities | |
| 15,726 | |
| 13,595 |
Purchase of short-term investment securities | |
| (2,767) | |
| (3,778) |
Net cash provided by investing activities | |
| 14,723 | |
| 8,772 |
Cash flows from financing activities: | |
|
| |
| |
Payments on note payables | | | (3,512) | | | (596) |
Proceeds from issuance of notes payable | | | 71 | | | — |
Proceeds from issuance of long-term debt | | | 16,849 | | | — |
Payment of debt issuance costs | | | (801) | | | — |
Proceeds from issuance of detachable warrants | | | 6,016 | | | — |
Taxes paid related to net share settlement of RSUs | | | (414) | | | — |
Net cash provided by (used in) financing activities | |
| 18,209 | |
| (596) |
Net increase in cash, cash equivalents and restricted cash | |
| 15,432 | |
| 248 |
Cash, cash equivalents and restricted cash - beginning of period | |
| 3,020 | |
| 1,336 |
Cash, cash equivalents and restricted cash - end of period | | $ | 18,452 | | $ | 1,584 |
| | | | | | |
Reconciliation of cash and cash equivalents and restricted cash | | | | | | |
Cash and cash equivalents at beginning of period | | $ | 3,020 | | $ | 1,336 |
Restricted cash at beginning of period | | | — | | | — |
Cash, cash equivalents and restricted cash at beginning of period | | $ | 3,020 | | $ | 1,336 |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 10,952 | | $ | 1,584 |
Restricted cash at end of period | | | 7,500 | | | — |
Cash, cash equivalents and restricted cash at end of period | | $ | 18,452 | | $ | 1,584 |
| | | | | | |
Supplemental disclosures of cash flow information: | |
|
| |
|
|
Non-cash transactions: | |
|
| |
|
|
Capital expenditures incurred but not yet paid | | $ | 142 | | $ | 91 |
Right-of-use assets and corresponding operating lease obligations | | $ | 2,928 | | $ | — |
Non-cash consideration RXP acquisition | | $ | 1,926 | | $ | — |
See accompanying notes to condensed consolidated financial statements.
6
22nd CENTURY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2023
(unaudited)(Unaudited)
Amounts in thousands, except for share and per-share data
NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation –- 22nd Century Group, Inc. (together with its consolidated subsidiaries, “22nd Century Group” or the “Company”) is a publicly traded Nevada corporation on the NASDAQ Capital Market under the symbol “XXII.” 22nd Century Group is a leading agricultural biotechnology and intellectual property company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science.
The accompanying unauditedcondensed consolidated financial statements have been preparedare presented in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial informationthe rules and withregulations of the instructions to Form 10-Q. Accordingly, theyUnited States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the information and footnotesdisclosures normally required by GAAP for complete financial statements. InU.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair and non-misleading presentation of the financial statements have been included.
Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.
These interimCompany’s Annual Report on Form 10-K. Accordingly, these condensed consolidated financial statements should be read in conjunction with the December 31, 2016 audited consolidated financial statements and notes thereto included in the notes thereto.Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
PrinciplesIn the opinion of Consolidation-The accompanyingmanagement, the condensed consolidated financial statements includereflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the accountsresults of 22nd Century Group, Inc. (“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobaccothe Company LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”) (collectively, “the Company”). All intercompany accounts and transactions have been eliminated.
Nature of Business-22nd Century Ltd is a plant biotechnology company specializing in technology that allows (i) for the levelperiods presented. The results for interim periods are not necessarily indicative of nicotine and other nicotinic alkaloids in tobacco plants toresults or trends that may be decreased or increased through genetic engineering and plant breeding and (ii) the levels of cannabinoids in cannabis/hemp plants to be decreased or increased through genetic engineering and plant breeding. Goodrich Tobacco and Heracles Pharma are business unitsexpected for the Company’s (i) potential modified risk tobacco products and premium cigarettes and (ii) smoking cessation product, respectively.fiscal year as a whole. The Company acquired the membership interests of NASCO on August 29, 2014. NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA, and operates the Company’s cigarette manufacturing business in North Carolina. Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group, and was incorporated to facilitate an investment more fully described in Note 9.
Preferred stock authorized-The Company is authorized to issue “blank check” preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.
Accounts receivable- The Company periodically reviews aged account balances for collectability. At September 30, 2017 and December 31, 2016, the Company established an allowance for doubtful accounts in the amount of $0 and $10,000, respectively.
Inventory-Inventories are valued at the lower of cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory and standard cost is primarily used for finished goods inventory. Inventories are evaluated to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved as appropriate. Inventories at September 30, 2017 and December 31, 2016 consisted of the following:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Inventory - tobacco leaf | $ | 1,890,477 | $ | 1,936,039 | ||||
Inventory - finished goods | ||||||||
Cigarettes and filtered cigars | 528,925 | 340,523 | ||||||
Inventory - raw materials | ||||||||
Cigarette and filtered cigar components | 1,965,385 | 1,071,747 | ||||||
4,384,787 | 3,348,309 | |||||||
Less: inventory reserve | 350,623 | 255,623 | ||||||
$ | 4,034,164 | $ | 3,092,686 |
8
Machinery and equipment-Machinery and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives ranging from 3 to 10 years. Depreciation commences when the asset is placed in service.
Intangible Assets-Intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand. The amounts capitalized relate to intellectual property that the Company owns or to which it has exclusive rights. The Company’s intellectual property capitalized costs are amortized using the straight-line method over the remaining statutory life of the primary patent in each of the Company’s two primary groupings of patent families, which expire in 2018 and 2028 (the assets’ estimated lives, respectively). Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which patent expiration dates range from 2028 through 2035. The Company believes costs associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such, no amortization is taken. Total intangible assets at September 30, 2017 and December 31, 2016 consisted of the following:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Intangible assets, net | ||||||||
Patent and trademark costs | $ | 6,197,258 | $ | 5,688,440 | ||||
Less: accumulated amortization | 2,378,241 | 2,021,926 | ||||||
Patent and trademark costs, net | 3,819,017 | 3,666,514 | ||||||
License fees, net (see Note 13) | 1,450,000 | 1,450,000 | ||||||
Less: accumulated amortization | 302,085 | 228,568 | ||||||
License fees, net | 1,147,915 | 1,221,432 | ||||||
MSA signatory costs | 2,202,000 | 2,202,000 | ||||||
License fee for predicate cigarette brand | 300,000 | 300,000 | ||||||
$ | 7,468,932 | $ | 7,389,946 |
Amortization expense relating to the above intangible assets for the three and nine months ended September 30, 2017 amounted to $145,934 and $429,832, respectively ($129,807 and $380,689 for the three and nine months ended September 30, 2016, respectively).
The estimated annual average amortization expense for the next five years is approximately $396,000 for patent costs and $98,000 for license fees.
Impairment of Long-Lived Assets-The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be recoverable. The Company assesses recoverability of the asset by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition. If the estimated future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and its fair value. There was no impairment loss recorded during the nine months ended September 30, 2017 or 2016, respectively.
Income Taxes-The Company recognizes deferred tax assets and liabilities for any basis differences in its assets and liabilities between tax and GAAP reporting, and for operating loss and credit carry-forwards.
Considering the Company’s history of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance to fully offset its net deferred tax assets as of September 30, 2017 and December 31, 2016.
The Company’s federal and state tax returns for the years ended December 31, 2014 through December 31, 2016 are currently open to audit under the statutes of limitations. There were no pending audits as of September 30, 2017.
Stock Based Compensation-The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and others receive shares or options to purchase common shares of the Company. Stock based compensation expense is recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For accounting purposes, the shares will be considered issued and outstanding upon vesting.
Revenue Recognition-The Company recognizes revenue from product sales at the point the product is shipped to a customer and title has transferred. Revenue from the sale of the Company’s products is recognized net of cash discounts, sales returns and allowances. Cigarette and filtered cigar federal excise taxes and other regulatory fees in the approximate amount of $2,436,000 and $5,980,000 are included in net sales for the three and nine months ended September 30, 2017, respectively (approximately $1,810,000 and $5,387,000 for the three and nine months ended September 30, 2016, respectively), except on sales ofSPECTRUMresearch cigarettes, exported cigarettes, exported filtered cigars and in-bond sales of filtered cigars to other federally licensed tobacco products manufacturers, to which such taxes do not apply.
The Company was chosen to be a subcontractor for a 5-year government contract between RTI International (“RTI”) and the National Institute on Drug Abuse (“NIDA”) to supply NIDA with research cigarettes. The contract was renewed in 2015 for an additional 5 years. These government research cigarettes are distributed under the Company’s markSPECTRUM.There were noSPECTRUMresearch cigarettes delivered during the nine months ended September 30, 2017. Revenue generated from the sale ofSPECTRUMresearch cigarettes amounted to $0 and $329,321 for the nine months ended September 30, 2017 and 2016, respectively. In May 2017, the Company received a purchase order from RTI for approximately 2.4 millionSPECTRUMresearch cigarettes that are expected to be shipped in the fourth quarter of 2017 and generate sales revenue of approximately $325,000. The Company recorded deferred income in the approximate amount of $158,000 during the third quarter of 2017 primarily resulting from a down payment from RTI on theSPECTRUM research cigarette order.
Derivatives-The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting date, with changes in fair value reported in the Consolidated Statements of Operations. The methodology for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model, which includes probability weighted estimates of future events, including volatility of our common stock. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified on the balance sheet as current or non-current based on if the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.
Research and Development-Research and development costs are expensed as incurred.
Advertising- The Company expenses advertising costs as incurred. Advertising expense was approximately $6,000 and $49,000 for the three and nine months ended September 30, 2017, respectively ($24,000 and $259,000 for the three and nine months ended September 30, 2016, respectively).
Loss Per Common Share-Basic loss per common share is computed using the weighted-average number of common shares outstanding. Diluted loss per share is computed assuming conversion of all potentially dilutive securities. Potential common shares outstanding are excluded from the computation if their effect is anti-dilutive.
Commitment and Contingency Accounting-The Company evaluates each commitment and/or contingency in accordance with accounting standards, which state that if the item is more likely than not to become a direct liability, then the Company will record the liability in the financial statements. If not, the Company will disclose any material commitments or contingencies that may arise.
Use of Estimates-The preparation ofcondensed consolidated financial statements in conformity with accounting principles generally accepted in thewere prepared using U.S. requiresGAAP, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and liabilities and disclosure of contingent assets and liabilitiesrelated disclosures at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ materially from thosethese estimates.
Fair ValueReclassifications –As a result of Financial Instrumentsthe acquisition of GVB Biopharma (see Note 2), the Company has revised the presentation and classification of depreciation and amortization in the Condensed Consolidated Statement of Operations and Comprehensive Loss to conform with the acquiree, as follows:
| | | | | | | | |
| Three Months Ended | |||||||
| March 31, 2022 | |||||||
| As originally | | | | | | | |
| reported |
| Reclass |
| Revised | |||
Revenues, net | $ | 9,045 | | $ | — | | $ | 9,045 |
Cost of goods sold |
| 8,585 | |
| 151 | |
| 8,736 |
Gross profit | | 460 | | | (151) | | | 309 |
Operating expenses: | | | | | | | | |
Sales, general and administrative | | 7,305 | | | (43) | | | 7,262 |
Research and development | | 972 | | | 169 | | | 1,141 |
Depreciation | | 168 | | | (168) | | | — |
Other operating (income) expenses, net | | — | | | 52 | | | 52 |
Amortization | | 161 | | | (161) | | | — |
Total operating expenses | | 8,606 | | | (151) | | | 8,455 |
Operating loss | $ | (8,146) | | $ | — | | $ | (8,146) |
Restricted Cash - Restricted cash includes minimum escrow funds the Company maintains in a money market account pursuant to the terms of the Senior Secured Credit Facility.
7
Credit Losses -FinancialThe Company estimates and records a provision for its expected credit losses related to its financial instruments, include cash,including its trade receivables and contract assets. The Company considers historical collection rates, current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable accounts payable, accrued expenses, accrued severance, note payable and warrant liability. Other than warrant liability,contract assets, the Company believes that the carrying value, net of excepted losses, approximates fair value is assumed to approximate carrying valuesand therefore, relies more on historical and current analysis of such financial instruments.
To determine the provision for these financial instruments, since they are short term in nature, they arecredit losses for accounts receivable, including consideration of contract assets or payable on demand, or have stated interest rates that approximate the interest rates available tounbilled receivables, the Company has disaggregated its accounts receivable by nature and type of product being sold, as the Company determined that risk profile of its customers is consistent based on the type of product and industry in which they operate. These customer classes include tobacco distributors/wholesalers for its CMO cigarette and filtered cigar tobacco product sales, hemp/cannabis bulk ingredient product sales, and hemp/cannabis white label product sales. Each class of customer is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the related industry, including unemployment rates, industry indices, and other factors, to estimate if there are current expected credit losses within its trade receivables based on the trends and the Company’s expectation of the future status of such economic and industry-specific factors. The Company believes that its customers, the majority of which are in industries with sound financial condition, and therefore, the Company’s evaluation of macroeconomic and industry-specific factors did not have a material impact on the provision for credit losses. As of March 31, 2023 and December 31, 2022, the Company recorded a provision for credit losses of $551 and $372 respectively.
Acquisitions - The Company accounts for acquisitions under the acquisition method of accounting for business combinations. Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill.
All direct acquisition-related costs are expensed as incurred and are recognized in operating expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.
Contingent Consideration - Contingent consideration arising from a business acquisition is included as part of the purchase price and is recorded at fair value as of the acquisition date. Subsequent to the acquisition date, the Company remeasures contingent consideration arrangements at fair value at each reporting period until the contingency is resolved. The changes in fair value are recognized within Other Operating Expenses, Net in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. See Note 2 for the contingent consideration arising from the acquisition of RX Pharmatech Ltd.
Warrants - The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815) depending on the specific terms of the warrant agreement. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Warrants that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities pursuant to ASC 480 and are initially and subsequently measured at their estimated fair values. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For additional discussion on warrants, see Note 6 and Note 10.
8
Debt Issued with Detachable Warrants - The Company considers guidance within ASC 470-20, Debt (ASC 470), ASC 480, and ASC 815 when accounting for the issuance of debt with detachable warrants. As described above under the caption “Warrants”, the Company classifies stock warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with detachable warrants, the proceeds from the issuance of the debt are first allocated to the warrants at their full estimated fair value with a corresponding debt discount. The remaining proceeds, as further reduced by discounts (including those created by the bifurcation of embedded derivatives), is allocated to the debt. The Company accounts for debt as liabilities measured at amortized cost and amortizes the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument pursuant to ASC 835, Interest (ASC 835).
Embedded Derivatives - The Company considers whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to ASC 815. Embedded derivatives are initially and subsequently measured at fair value. The embedded derivatives associated with the Company’s Senior Secured Credit Facility and Subordinated Note are not material.
Debt Issuance Costs and Discounts - Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the term of the related debt. Debt issuance costs and discounts related to the Company’s Senior Secured Credit Facility and Subordinated Note are recorded as a reduction of the carrying value of the related debt and are amortized to Interest expense using the effective interest method over the period from the date of issuance to the maturity date, whichever is earlier. The amortization of debt issuance costs and discounts are included in Debt related charges included in interest expense in the Condensed Consolidated Statements of Cash Flows. Note 7 “Debt” contains additional information on the Company’s debt issuance costs and discounts.
Goodwill - Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company’s reporting units are the same as its two reportable segments, which is (1) Tobacco, and (2) Hemp/Cannabis. The Company tests its reporting unit’s goodwill for impairment at least annually as of the measurement date year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.
During the three-month period ended March 31, 2023, there were no indicators of impairment and accordingly a goodwill impairment test was not performed.
Gain and Loss Contingencies –The Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
In accordance with ASC 450-30, Gain Contingencies, gain contingencies are recognized when earned and realized, which typically will occur at the time of final settlement or when cash is received. Insurance recoveries may be realized earlier than cash receipt if a claim and amount of reimbursement is acknowledged by the insurance company that payment is due and collection is probable.
9
The Company maintains general liability insurance policies for its facilities. Under the terms of our insurance policies, in the case of loss to a property, the Company follows the guidance in ASC 610-30, Other Income —Gains and Losses on Involuntary Conversions, for the conversion of nonmonetary assets (the properties) to monetary assets (insurance recoveries). Under ASC 610-30, once the recovery is deemed probable the Company recognizes an asset for the insurance recovery receivable in the Condensed Consolidated Balance Sheets, with corresponding income that is offsetting to the casualty losses recorded in the Condensed Consolidated Statements of Operations and Comprehensive Loss. If the insurance recovery is less than the amount of the casualty charges recognized, the Company will recognize a loss whereas if the insurance recovery is greater than the amount of casualty loss recognized, the Company will only recognize a recovery up to the amount of the casualty loss and will account for the excess as a gain contingency. Business interruption insurance is treated as a gain contingency.
Refer to further discussion of all commitments and contingencies in Note 11.
Income Taxes-For interim income tax reporting, due to a full valuation allowance on net deferred tax assets, no income tax expense or benefit is recorded unless it is an unusual or infrequently occurring item. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.
Recent Accounting Pronouncements – Adoption of Accounting Standards Codification Topic 326
The Company adopted ASU 2016-13, or ASC 326 Financial Instruments-Credit Losses, effective January 1, 2023 under a modified retrospective approach. Under the current expected credit losses (“CECL”) model, the Company immediately recognizes an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are recognized each period. The new guidance applies to the Company’s trade receivables and contract asset balances. Due to the nature of business operations and contracts with customers, the Company has historically not experienced significant bad debt expense or write-offs and as a result, the adoption of ASC 326 did not have a material impact to the Company’s Condensed Consolidated Financial Statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $118 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2023.
We consider the applicability and impact of all ASUs. If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our financial statements and related disclosures.
NOTE 2. – BUSINESS ACQUISITIONS
RX Pharmaceutical, Ltd.
On January 19, 2023, the Company acquired RX Pharmatech Ltd (“RXP”) a privately held distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. RXP is included in the Company’s Hemp/cannabis reportable segment.
10
The initial consideration paid to acquire RXP included $200 in cash and $503 in common stock (consisting of 465,838 unregistered shares of common stock), and an initial estimate of target working capital true-up of $286. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. Additionally, the contingent consideration in the transaction represents the estimated fair value of the Company’s obligation, under the share purchase agreement, to make additional payments of up to $1,550 over the next three years based on specified conditions being met, which has an initial fair value of contingent consideration of $1,138. The fair value of the aggregate consideration in the transaction is $2,127.
Based on the preliminary purchase price allocation, the assets acquired and liabilities assumed principally comprise $1,744 of intangible assets, and other immaterial working capital items representing a net asset of $93 (net of cash acquired of $290). There was no excess purchase price and therefore no goodwill recorded as part of the business combination. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Condensed Consolidated Financial Statements were prepared.
Intangible assets include the intellectual property associated with the 1,276 novel food applications with the FSA., which is determined to be indefinite lived. The preliminary fair value was determined by utilizing the cost approach, and considered market data to evaluate the replacement cost per application.
The Company utilizes third-party valuation experts to assist in estimating the fair value of the warrant liability includescontingent consideration and develops estimates by considering weighted-average probabilities of likely outcomes and discounted cash flow analysis. These estimates require the Company to make various assumptions about forecasted revenues and discount rates, which are unobservable inputs and is therefore categorized as aconsidered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement as further discussed in Note 12.at the reporting date.
Equity Investments -The Company accounts for investments in equity securitiesfollowing table provides quantitative information associated with the initial fair value measurement of other entities under the equity method of accounting if the Company’s investment in the voting stock is greater than or equal to 20% and less than a majority, and the Company has the ability to have significant influence over the operating and financial policies of the investee. When the Company’s investment in equity securities falls below 20% and the Company does not have the ability to have significant influence over the operating and financial policies of the investee, the Company carries the equity investment at its cost basis.
Accounting Pronouncements -In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects theliabilities for contingent consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The revised effective date for the ASU is for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods therein, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations,” to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing,” which clarifies the identifying performance obligations and licensing implementation guidance. January 19, 2023:
| | | | | | | | | | |
| | Maximum Payout | | | | | | Weighted Average | ||
Contingency Type | | (undiscounted) | | Fair Value | | Unobservable Inputs | or Range | |||
Revenue-based payments | | $ | 1,550 | | $ | 1,138 | | Discount rate | 16 | % |
| | | | | | | | Projected year(s) of payment | 2024-2026 |
The Company is continuing to evaluate the effect this guidance will have on its consolidated financial statements, including potential impacts on the amount and timing of revenue recognition and additional information that may be necessary for the required expanded disclosures. The Company has substantially completed its review of all outstanding contracts and is in the process of applying the five-step model to those contracts to evaluate the quantitative and qualitative impacts the new standard will have on its business andamounts reported revenues. Within this process, the Company has begun to assess when to recognize revenues related to certain manufacturing contracts to produce customers’ products and the presentation of certain federal excise taxes and other regulatory fees. At this time,are considered provisional as the Company is unable to quantifyfinalizing the impact this new guidance will have on its reported revenues.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which supersedes existing lease guidance under GAAP. Under the new guidance, lessees will bevaluations that are required to recognize leasesallocate the purchase price through the measurement period, which remains open as right of use assets and liabilities for leases with lease terms of more than twelve months. The guidance will apply for both finance and operating leases. The effective date forMarch 31, 2023. As a result, the ASU is for annual periods beginning after December 15, 2018 and interim periods therein. The Company is currently evaluating the impactallocation of the ASU on its consolidated financial statements.provisional purchase price may change in the future, which could be material.
NOTE 2. – JUNE 2017 WARRANT EXERCISE AGREEMENTSGVB Biopharma
On June 19, 2017,May 13, 2022, the Company entered into Warrant Exercise Agreementsand closed the transactions contemplated by the Reorganization and Acquisition Agreement (the “Agreements”“Reorganization Agreement”) with GVB Biopharma (“GVB”). Under the terms of the Reorganization Agreement, the Company acquired substantially all of the holdersassets of GVB’s business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development (the “Holders”“Transaction”). The acquisition of outstanding warrantsGVB allows the Company to purchase upleverage its expertise in receptor and plant science to 7,043,211develop its hemp/cannabis franchise and add significant scale. GVB is included in the Company’s Hemp/cannabis reportable segment.
11
The aggregate consideration for the Transaction consisted of (i) the assumption of approximately $4,637 of debt, (ii) the assumption and direct payment of certain third-party transaction costs incurred by GVB in connection with the Transaction totaling approximately $1,753 and (iii) the issuance to GVB of 32,900,000 unregistered shares of common stock of the Company at $1.00 per share and warrants to purchase up to 4,250,000 shares(the “Shares”) with a fair value of common stock of the Company at $1.45 per share (collectively, the “Warrants”). These Warrants to purchase shares$51,653. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. The Shares were subject to a lock-up and restrictions on transfer for at least six months following closing and thereafter, one-third of the Shares will be released from the lock-up after six months, one-third will be released from the lock-up after nine months and the remainder will be released after one year.
The Transaction was structured as a tax-free re-organization pursuant to Internal Revenue Code Section 368(a)(1)(c). Accordingly, the tax basis of net assets acquired retain their carry over tax basis and holding period in purchase accounting.
The Company recorded provisional estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition during the second quarter of 2022, resulting in goodwill of $44,200. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Consolidated Financial Statements were prepared.
During the measurement period, the preliminary fair values of the assets acquired and liabilities assumed as of May 13, 2022 were adjusted to reflect the ongoing acquisition valuation analysis procedures of property and equipment, intangible assets, deferred taxes, and working capital adjustments. These adjustments resulted in a combined reduction to goodwill of $11,040. The impact of depreciation and amortization to Operating loss recorded in the third quarter of 2022 as a result of completing valuation procedures for property and equipment and intangible assets, that would have been recorded in the prior period since the date of acquisition was $70.
The amounts reported are considered provisional as the Company is finalizing the valuations that are required to allocate the purchase price through the measurement period, which remains open as of March 31, 2023, as the final stub period income tax returns have not yet been completed. As a result, the allocation of the provisional purchase price may change in the future, which could be material.
The following table presents management’s purchase price allocation:
| | |
Cash | $ | 456 |
Accounts receivable | | 2,944 |
Inventory | | 3,551 |
Other assets | | 519 |
Property, plant & equipment | | 11,388 |
Operating leases right-of-use assets, net | | 1,231 |
Goodwill | | 33,161 |
Tradename | | 4,600 |
Customer relationships | | 5,800 |
Accounts payable and accrued expenses | | (2,777) |
Other current liabilities | | (944) |
Lease liabilities | | (1,259) |
Auto loans | | (387) |
Deferred tax liability | | (627) |
Bridge loan | | (4,250) |
Fair value of net assets acquired | $ | 53,406 |
The fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the Holdersasset.
12
The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, tradename life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in registered direct offeringsvalue due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Current Assets and Liabilities
The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the income approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance for these remaining efforts. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in Octoberan increase in inventory of 2016$978, which was fully amortized in the three month period ended June 30, 2022 in the Consolidated Statement of Operations and in JulyComprehensive Loss.
Property, Plant and Equipment
The fair value of 2016, respectively, as more fully described in Notes 3PP&E acquired was estimated by applying the cost approach for personal property and 4 below. leasehold improvements. The cost approach was applied by developing a replacement cost and adjusting for economic depreciation and obsolescence.
Leases
The Company recognized operating lease liabilities and operating lease right-of-use assets for office and manufacturing facilities in (i) Las Vegas, Nevada (ii) Grass Valley, Oregon (iii) Prineville, Oregon, and (iv) Tygh Valley, Oregon, accordance with ASC 842, Leases.
The following table summarizes the Company’s discount rate and remaining lease terms as of the acquisition date:
| | | |
Weighted average remaining lease term in years | | 3.8 | |
Weighted average discount rate | | 8.3 | % |
The Company concluded there were no off-market lease intangibles on the date of acquisition based on an evaluation of market rents per square foot, geographic location and nature of use of the underlying asset, among other considerations.
Intangible assets
The purchase price was allocated to intangible assets as follows:
| | | | | | | | |
| | | | Weighted Average | | | | |
| Fair Value | | Amortization Period | | Weighted Average | |||
Definite-lived Intangible Assets | Assigned |
| (Years) | | Discount Rate | |||
Customer relationships | $ | 5,800 | | | 10 | | | 23.50% |
Tradename | $ | 4,600 | | | Indefinite | | | 23.50% |
13
Customer Relationships
Customer relationships represent the estimated fair value of contractual and non-contractual customer relationships GVB had as of the acquisition date. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer relationships was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 20%, as well as management’s understanding of the industry and product life cycles.
Tradename
Tradename represents the estimated fair value of GVB’s corporate and product names. The acquired tradename was valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the tradename was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate of 1.0%. The GVB tradename was assumed to have an indefinite useful life based upon long-term management expectations and future operating plans.
Deferred Taxes
The Company determined the deferred tax position to be recorded at the time of the GVB acquisition in accordance with ASC Topic 740, Income Taxes, resulting in recognition of deferred tax liabilities for future reversing of taxable temporary differences primarily for intangible assets and property, plant and equipment. This resulted in a preliminary net deferred tax liability of $627, which includes the carryover basis of historical recognized deferred tax assets, liabilities and valuation allowance.
The net deferred tax liabilities recorded as a result of the acquisition of GVB was determined by the Company to also provide future taxable temporary differences that allow for the Company to utilize certain previously fully reserved deferred tax assets. Accordingly, the Company recognized a reduction to its valuation allowance resulting in a net tax benefit of approximately $434 for the year ended December 31, 2022.
Goodwill
The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. A variety of factors contributed to the goodwill recognized, including the value of GVB’s assembled work force, the incremental value resulting from GVB’s capabilities in hemp/cannabis, operational synergies across the plant science platform, and the Holders agreedexpected revenue growth over time that the Holders would, subjectis attributable to beneficial ownership limitations on exercise containedincreased market share from future products and customers. Goodwill recorded in the Warrants, exercise alltransaction will be non-deductible.
Actual and Pro Forma (unaudited) disclosures
For segment reporting purposes, the Warrantsresults of operations and net assets from the RXP and GVB acquisitions have been included in the Company’s Hemp/cannabis reportable segment since the respective acquisition dates. For the three-month period ended March 31, 2023, net revenues related to GVB were $12,874, and net loss was $4,791. The operating results of RXP for cash. In June 2017, the Holders exercised 3,229,711 Warrantsthree-month period ended March 31, 2023 were immaterial.
14
The following unaudited pro forma information presents the consolidated results of operations of the Company and assumes the acquisition occurred on January 1, 2021:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
| | 2023 |
| 2022 | ||
| | (in thousands, except for per-share data) | ||||
Revenues, net | | $ | 21,962 | | $ | 16,058 |
Net loss | | $ | (18,182) | | $ | (7,747) |
Net loss per common share - basic and diluted | | $ | (0.08) | | $ | (0.04) |
Weighted average common shares outstanding - basic and diluted | | | 215,784 | | | 196,057 |
The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These unaudited pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future. These unaudited pro forma results include certain adjustments, primarily due to amortization expense due to the fair value adjustment of inventory, acquisition related costs and the impact of income taxes on the pro forma adjustments.
Acquisition costs
During the three-month period ended March 31, 2023, direct costs incurred as a result of the acquisition of RXP were $68 as compared to direct costs incurred as a result of the acquisition of GVB were $52 during the three-month period ended March 31, 2022. Acquisition costs are expensed as incurred and included in Other operating expenses, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
NOTE 3. – INVENTORIES
Inventories at $1.00March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | |
|
| March 31, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
Raw materials | | $ | 8,133 | | $ | 8,743 |
Work in process | | | 1,238 | | | 441 |
Finished goods | |
| 1,157 | | | 824 |
| | $ | 10,528 | | $ | 10,008 |
NOTE 4. – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The change in the carrying amount of goodwill during the three month period ended March 31, 2023 is as follows:
| | | |
Balance at January 1, 2023 | | $ | 33,160 |
Balance at March 31, 2023 | | $ | 33,160 |
15
Other Intangible Assets, Net
Our other intangible assets, net at March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | | | | |
| | Gross | | Accumulated |
| Net Carrying | |||
March 31, 2023 |
| Carrying Amount |
| Amortization |
| Amount | |||
Definite-lived: | | | | | | | | | |
Patent | | $ | 6,690 | | $ | (3,821) | | $ | 2,869 |
License Fees | |
| 3,876 | | | (1,510) | | | 2,366 |
Customer relationships | | | 5,800 | | | (259) | | | 5,541 |
Total amortizing intangible assets | | $ | 16,366 | | $ | (5,590) | | $ | 10,776 |
Indefinite-lived: | |
| | | | | | | |
Tradename and trademarks | |
| | | | | | $ | 3,313 |
U.K. FSA portfolio | |
| | | | | | | 1,744 |
MSA signatory costs | | | | | | | | | 2,202 |
License fee for predicate cigarette brand | |
| | | | | | | 350 |
Total indefinite-lived intangible assets | | | | | | | | $ | 7,609 |
Total intangible assets, net | | | | | | | | $ | 18,385 |
| | | | | | | | | |
| | Gross | | Accumulated |
| Net Carrying | |||
December 31, 2022 |
| Carrying Amount |
| Amortization |
| Amount | |||
Definite-lived: | | | | | | | | | |
Patent | | $ | 6,513 | | $ | (3,711) | | $ | 2,802 |
License Fees | |
| 3,876 | | | (1,446) | | | 2,430 |
Customer relationships | | | 5,800 | | | (20) | | | 5,780 |
Total amortizing intangible assets | | $ | 16,189 | | $ | (5,177) | | $ | 11,012 |
Indefinite-lived: | |
| | | | | | | |
Tradename and trademarks | |
| | | | | | $ | 3,289 |
MSA signatory costs | | | | | | | | | 2,202 |
License fee for predicate cigarette brand | |
| | | | | | | 350 |
Total indefinite-lived intangible assets | | | | | | | | $ | 5,841 |
Total intangible assets, net | | | | | | | | $ | 16,853 |
See Note 2 “Business Acquisitions” for additional details regarding goodwill and intangible assets acquired as a result of the acquisitions of RXP and GVB, including any measurement period adjustments.
Aggregate intangible asset amortization expense comprises of the following:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Cost of goods sold | | $ | 4 | | $ | 3 |
Sales, general, and administrative | | | 239 | | | — |
Research and development | |
| 170 | |
| 158 |
Total amortization expense | | $ | 413 | | $ | 161 |
Estimated future intangible asset amortization expense based on the carrying value as of March 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | |
|
| Remainder of 2023 |
| 2024 |
| 2025 |
| 2026 | | 2027 | | Thereafter | ||||||
Amortization expense | | $ | 1,240 | | $ | 1,644 | | $ | 1,502 | | $ | 1,268 | | $ | 1,128 | | $ | 3,994 |
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NOTE 5. – INVESTMENTS & OTHER ASSETS
The total carrying value of the Company’s investments and other assets at March 31, 2023 and December 31, 2022 consisted of the following:
| | | | | | |
| | March 31, | | December 31, | ||
| | 2023 | | 2022 | ||
Change Agronomy Ltd. ordinary shares |
| $ | 682 |
| $ | 682 |
Total investments | | $ | 682 | | $ | 682 |
Investment in Change Agronomy Ltd.
On December 10, 2021, the Company entered into a subscription agreement to invest £500 (pounds sterling, in thousands), in exchange for 592,888 ordinary shares of Change Agronomy Ltd. (“CAL”), a private company existing under the laws of England, at a price per share of £0.84333. CAL is a vertically integrated sustainable industrial hemp business that combines world-class genetics with leading agronomic techniques and 2,354,948 Warrantsinfrastructure to provide full-service industrial hemp products to multiple global end markets. CAL presently has operations in Manitoba, Canada, and Italy. This equity investment was part of an Offer for Subscription by CAL for a minimum total of £3,000 at $1.45the same price per share, resultingordinary share. Approximately U.S. $682 in net proceedsfunds were wired to CAL on January 26, 2022, and our investment of £500 equates to approximately 1.8% of CAL’s total equity.
In accordance with ASU 2019-04, a foreign currency-denominated equity investments that are measured using the measurement alternative are nonmonetary items that should be remeasured using their historical exchange rates. Accordingly, for the three-month periods ended March 31, 2023 and 2022 there is no foreign currency exchange gain or loss recorded in the Condensed Consolidated Statement of Operations and Comprehensive Loss related to the investment in Change Agronomy Ltd.
During the three months ended March 31, 2023 and 2022, respectively, there were no impairment triggering events identified for investments.
Panacea Investment – Promissory Note:
On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc. (“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders. The promissory note was issued in the amount of $6,169,212, after deducting expenses associated$4,300 (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0% interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado.
The Promissory note receivable was originally valued at $3,684 ($4,300 face value less $616 discount) and is included within the transaction. In JulyCondensed Consolidated Balance Sheets as “Other Assets.” Subsequently, on December 31, 2022 the Company and August of 2017,Panacea Life Sciences Holdings, Inc. entered into a settlement agreement in which the Holders exercised 3,813,500 Warrants at $1.00 per share and 1,895,052 Warrants at $1.45 per share, resulting in net proceedsCompany agreed to a reduction to the Company in the amount of $6,167,646, after deducting expenses associated with the transaction.
In consideration for the Holders exercising their Warrants for cash, the Company issued to each Holder a new warrant (the “New Warrants”) to purchase shares of common stockface value of the Company equalPromissory note receivable of $500, in exchange for resolution to the number of shares of common stock received by each Holder upon the cash exercise of the Holder’s Warrants. The terms of the New Warrants are substantially similar to the terms of the Warrants exercised, except the New Warrants (i) have an exercise price equal to $2.15 per share and (ii) are exercisable six monthsall contractual requirements from the date of issuance ofJune 30, 2021 Promissory Note Exchange Agreement and Securities Exchange Agreement surrounding the New Warrants for a period of five (5) years.investment and business relationship. Accordingly, the Company issued an aggregaterecognized extinguishment charge of 11,293,211 New Warrantsnote receivable of $500 less adjusted discount of $51 during the year-ended December 31, 2022. The Company intends to hold the Holders, upon exerciseremaining outstanding Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the Holder’s Warrants as described above. note.
The New Warrants hadfollowing table provides the promissory note receivable balance:
| | | | | | |
| | March 31, | | December 31, | ||
| | 2023 | | 2022 | ||
Promissory note receivable | | $ | 3,437 | | $ | 3,410 |
17
NOTE 6. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value of $16,049,031 at issuance and have been recorded as an adjustment to capital in excess of par.
NOTE 3. – OCTOBER 2016 REGISTERED DIRECT OFFERING
On October 19, 2016,on a recurring basis (each reporting period). For the Company, closedthese financial assets and liabilities include its short-term investment securities and equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
The following table presents information about our assets and liabilities measured at fair value as of March 31, 2023 and December 31, 2022, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| | | | | | | | | | | | |
| | Fair Value | ||||||||||
| | March 31, 2023 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets |
| |
|
| |
|
| |
|
| |
|
Money market funds | | $ | 4,728 | | $ | — | | $ | — | | $ | 4,728 |
Restricted cash | | | 7,500 | | | — | | | — | | | 7,500 |
Corporate bonds | |
| — | |
| 4,353 | |
| — | |
| 4,353 |
Change Agronomy Ltd. ordinary shares | | | — | | | — | | | 682 | | | 682 |
Total assets | | $ | 12,228 | | $ | 4,353 | | $ | 682 | | $ | 17,263 |
Liabilities | | | | | | | | | | | | |
Detachable warrants | | $ | — | | $ | — | | $ | 3,666 | | $ | 3,666 |
Contingent consideration | | | — | | | — | | | 1,160 | | | 1,160 |
Total liabilities | | $ | — | | $ | — | | $ | 4,826 | | $ | 4,826 |
| | | | | | | | | | | | |
| | Fair Value | ||||||||||
| | December 31, 2022 | ||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets |
| |
|
| |
|
| |
|
| |
|
Money market funds | | $ | 10,163 | | $ | — | | $ | — | | $ | 10,163 |
Corporate bonds | |
| — | |
| 7,031 | |
| — | |
| 7,031 |
U.S. treasury securities | |
| — | |
| 999 | |
| — | |
| 999 |
Change Agronomy Ltd. ordinary shares | | | — | | | — | | | 682 | | | 682 |
Total assets | | $ | 10,163 | | $ | 8,030 | | $ | 682 | | $ | 18,875 |
Money market funds
Money market mutual funds are valued at their daily closing price as reported by the fund. Money market mutual funds held by the Company are open-end mutual funds that are registered direct offering with two institutional investorsthe SEC that generally transact at a stable $1.00 Net Asset Value (“NAV”) representing its estimated fair value. On a daily basis the fund’s NAV is determined by the fund based on the amortized cost of units consistingthe funds underlying investments.
Corporate bonds
Corporate bonds are valued using pricing models maximizing the use of 8,500,000 sharesobservable inputs for similar securities.
18
The following tables set forth a summary of the Company’s common stockavailable-for-sale debt securities from amortized cost basis to fair value as of March 31, 2023 and warrants to purchase 4,250,000 sharesDecember 31, 2022:
| | | | | | | | | | | | |
| | Available for Sale Debt Securities | ||||||||||
| | March 31, 2023 | ||||||||||
| | Amortized | | Gross | | Gross | | | | |||
| | Cost | | Unrealized | | Unrealized | | Fair | ||||
|
| Basis |
| Gains |
| Losses |
| Value | ||||
Corporate bonds | | $ | 4,391 | | $ | — | | $ | (38) | | $ | 4,353 |
| | | | | | | | | | | | |
| | Available for Sale Debt Securities | ||||||||||
| | December 31, 2022 | ||||||||||
| | Amortized | | Gross | | Gross | | | | |||
| | Cost | | Unrealized | | Unrealized | | Fair | ||||
|
| Basis |
| Gains |
| Losses |
| Value | ||||
Corporate bonds | | $ | 7,143 | | $ | — | | $ | (112) | | $ | 7,031 |
The following table sets forth a summary of the Company’s common stockavailable-for-sale securities at an exercise price of $1.45 per share. The warrants were exercisable for a period of sixty-six (66) months after issuance, were not exercisable for a period of six months immediately following the issuanceamortized cost basis and had a fair value by contractual maturity as of approximately $3,380,000March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | |
| | Available for Sale Debt Securities | ||||||||||
| | March 31, 2023 | | December 31, 2022 | ||||||||
| | Amortized | | | | | Amortized | | | | ||
|
| Cost Basis |
| Fair Value |
| Cost Basis |
| Fair Value | ||||
Due in one year or less | | $ | 4,391 | | $ | 4,353 | | $ | 7,143 | | $ | 7,031 |
Investment in Change Agronomy
The investment in Change Agronomy Ltd. is in a privately held company and its stock does not have a readily determinable fair value; therefore, the investment is carried at issuance. The holderscost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the warrants did not havesame issuer.
Contingent Consideration
The following table presents the right to exercise any portion ofchanges in the warrants if the holders, together with its respective affiliates, would beneficially own in excess of 4.99% of the number of sharesestimated fair values of the Company’s common stock (including securities convertible into common stock) outstanding immediately after the exercise; provided, however, that the holder could increase or decrease this limitation at any time, although any increase shall not be effective until the 61st day following the notice of increase and the holder could not increase this limitation in excess of 9.99%. The common stock and warrants were soldliabilities for $1.3425 per unit, resulting in net proceeds to the Company in the amount of $10,707,823, after deducting expenses associated with the transaction. All of the warrants issued in the offering were exercised as described in Note 2 above.
NOTE 4. – JULY 2016 REGISTERED DIRECT OFFERING
On July 27, 2016, the Company closed a registered direct offering of common stock and warrants consisting of 6,172,840 shares of the Company’s common stock and warrants to purchase 7,043,211 shares of the Company’s common stock. The warrants provided for an exercise price of $1.00 per share and 1,543,210 of the warrants were exercisable immediately and had a fair value of approximately $858,000 at issuance and 5,500,001 of the warrants were exercisable six months from the date of issuance and had a fair value of approximately $3,058,000 at issuance. All the warrants had a term of 5.5 years. The common stock and warrants were sold for $0.81 per unit, resulting in net proceeds to the Company in the amount of $4,682,764, after deducting expenses associated with the transaction. All of the warrants issued in the offering were exercised as described in Note 2 above. In addition, on July 27, 2016, the Company terminated an aggregate of 5.5 million warrants with exercise prices of $1.21 and $1.25 per share previously issued in conjunction with registered direct offerings in February of 2016 and June of 2015.
NOTE 5. - FEBRUARY 2016 REGISTERED DIRECT OFFERING
On February 5, 2016, the Company closed a registered direct offering of common stock and warrants consisting of 5,000,000 shares of the Company’s common stock and warrants to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $1.21 per share. The warrants were exercisable for a period of sixty-six (66) months after issuance, were not exercisable for a period of six months immediately following the issuance and had a fair value of approximately $1,940,000 at issuance. The common stock and warrants were sold for $1.10 per unit, resulting in net proceeds to the Company in the amount of $5,091,791, after deducting expenses associated with the transaction. The warrants associated with this transaction were terminated on July 27, 2016.
NOTE 6. - JOINT VENTURE, CONSULTING AGREEMENT AND ASSOCIATED WARRANTS
On June 22, 2015, the Company terminated its joint venture arrangement with Crede CG III, Ltd. (“Crede”) and a third-party due to non-performance and other breaches of the arrangement by Crede and its principals. The Company also notified Crede that the Company reserved and did not waive any rights that the Company may have to assert any and all claims that it may have against Crede, its employees, agents, representatives or affiliates thereof, which are allowable by law or in equity, including claims for breach of the warrant agreements entered into with Crede.
The six-month Consulting Agreement (the “Consulting Agreement”), entered into with Crede on September 29, 2014, expired on March 29, 2015. The value of the warrants issued in conjunction with the Consulting Agreement in the aggregate amount of $4,070,000 and initially recorded as prepaid consulting fees have been fully amortized. The final amortization of the prepaid consulting fees amounted to $1,978,785contingent consideration measured using significant unobservable inputs (Level 3) for the three months ended March 31, 2015,2023:
| | | |
Fair value measurement at January 1, 2023 | | $ | — |
Initial measurement (see Note 2) | | | 1,138 |
Fair value measurement adjustment | | | 22 |
Fair value measurement at March 31, 2023 | | $ | 1,160 |
On January 19, 2023, the Company acquired the assets and were included in General and administrative expensesliabilities of RXP, a privately-held company based in the Company’s Consolidated Statements of Operations.
Four tranches of warrants were issued to Crede in conjunction withU.K. The contingent consideration at March 31, 2023 is the Consulting Agreement as follows: Tranche 1A warrant to purchase 1,250,000 shares of Company common stock, Tranche 1B warrant to purchase 1,000,000 shares of Company common stock, Tranche 2 warrant to purchase 1,000,000 shares of Company common stock and Tranche 3 warrant to purchase 1,000,000 shares of Company common stock. The Tranche 1A warrant contained an exchange rights clause that required derivative liability treatment under FASB ASC 480 - “Distinguishing Liabilities from Equity.” The Company valued the derivative liability associated with the Tranche 1A warrant at inception at $2,810,000 and the liability was recorded on the Company’s Consolidated Balance Sheets in Warrant liability. In March 2016, the Company provided notice to Crede that Crede repeatedly breached the activity restrictions contained in the warrant agreements and because the terms of the Tranche 1A warrant provide that the availability of the exchange feature was subject to compliance with such activity restrictions, the exchange rights clause contained in the Tranche 1A warrant was no longer available and was thereafter void (although the remaining amount of shares underlying the warrant without the exchange feature remained fully exercisable at $3.36 per share through the warrant expiration date of September 29, 2016). Accordingly, the Company reclassified the warrant liability associated with the Tranche 1A warrant to Capital in excess of par on its Consolidated Balance Sheets during March 2016. The Tranche 1A and Tranche 1B warrants all expired without exercise on September 29, 2016.
The Tranche 2 and Tranche 3 warrants were not exercisable unless and until certain revenue milestones were attained, as defined in the prior joint venture agreement between Crede and the Company. As stated above, the Company terminated the joint venture agreement on June 22, 2015. Accordingly, such revenue milestones will never be satisfied, and the Tranche 2 and Tranche 3 warrants will never be exercisable.
NOTE 7. - MANUFACTURING FACILITY
The Company’s manufacturing operations at its North Carolina factory were not at full production capacity throughout the nine months ended September 30, 2017, and the Company significantly expanded capacity during the second and third quarters of 2017 in order to fulfill anticipated new manufacturing contracts. In mid-May of 2017, the Company began the first phase of a manufacturing contract for an existing brand of filtered cigars under a new contract manufacturing agreement (the “New Agreement”) with a third-party and continued manufacturing a third-party MSA cigarette brand and other filtered cigars on a contract basis. The New Agreement has increased revenue, has resulted in an increase in the utilization of production capacity, and has required the hiring of additional personnel. Raw material component costs, direct manufacturing costs, and an overhead allocation are included in the Cost of goods sold and Finished goods inventory. General and administrative expenses of the factory amounted to $300,824 and $635,514 for the three and nine months ended September 30, 2017, respectively ($140,690 and $422,626 for the three and nine months ended September 30, 2016, respectively).
NOTE 8. - MACHINERY AND EQUIPMENT
Machinery and equipment at September 30, 2017 and December 31, 2016 consisted of the following:
Useful Life | September 30, 2017 | December 31, 2016 | ||||||||
Cigarette manufacturing equipment | 3 - 10 years | $ | 4,109,559 | $ | 3,193,580 | |||||
Office furniture, fixtures and equipment | 5 years | 105,096 | 103,945 | |||||||
Laboratory equipment | 5 years | 32,193 | 19,076 | |||||||
4,246,848 | 3,316,601 | |||||||||
Less: accumulated depreciation | 1,147,234 | 881,938 | ||||||||
Machinery and equipment, net | $ | 3,099,614 | $ | 2,434,663 |
Depreciation expense was $88,711 and $265,296 for the three and nine months ended September 30, 2017, respectively ($81,354 and $243,018 for the three and nine months ended September 30, 2016, respectively).
NOTE 9. - INVESTMENT IN ANANDIA
The Company (through its wholly-owned subsidiary, Botanical Genetics) used the equity method of accounting to record its 24.4% ownership interest in Anandia Laboratories, Inc., a Canadian plant biotechnology company (“Anandia”). The Company’s ownership was 25% prior to a dilutive event on September 8, 2016, that reduced the Company’s ownership in Anandia to 24.4%. On February 17, 2017, an additional dilutive event (the “Dilutive Event”) reduced the Company’s ownership in Anandia to 19.4%, an ownership percentage below the 20% threshold for use of the equity method of accounting. Accordingly, the Company discontinued applying the equity method of accounting for the investment in Anandia, effective on the date of the Dilutive Event. At September 30, 2017 and December 31, 2016, the Company’s investment balance in Anandia was $1,366,493 and $1,020,313, respectively, and is classified within Other assets on the accompanying Consolidated Balance Sheets. After the Dilutive Event, the Company accounts for its investment in Anandia under the cost method. On July 25, 2017, a third dilutive event occurred resulting in an additional reduction of the Company’s ownership in Anandia to 19.0%.
The Company recorded a gain on investment of $0 and $16,872 for the three and nine months ended September 30, 2017, respectively, and a loss of $15,585 and $128,832 for the three and nine months ended September 30, 2016, respectively (the gain for the nine months ended September 30, 2017, reflects the Company’s proportionate gain through the Dilutive Event). As of September 15, 2014, the carryingestimated fair value of the Company’s investmentobligations, under the sale and purchase agreement for RXP, to make additional payments if certain revenue goals are met.
As of March 31, 2023, the current portion of contingent consideration liabilities included in AnandiaOther current liabilities was approximately $1,199,000$566, and the non-current portion included in excessOther long-term liabilities on the Condensed Consolidated Balance Sheets was $594.
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The following table provides quantitative information associated with the fair value measurement of the Company’s shareliabilities for contingent consideration as of the book value of the net assets of Anandia, with such difference being attributable to intangible assets. This intangible asset was being amortized over the expected benefit period and this amortization expense amounted to $0 and $7,526 for the three and nine months ended September 30, 2017, respectively ($14,412 and $43,236 for the three and nine months ended September 30, 2016, respectively). After the Dilutive Event, the Company discontinued amortizing this intangible asset. In addition, and as a result of the Dilutive Event, the Company recorded a gain in accordance with the derecognition provisions of Accounting Standards Codification 323 (“ASC 323”). ASC 323 states that an investor (the Company) shall account for an issuance by an investee (Anandia) as if the investor had sold a proportionate share of its investment in the investee and the investor will record a gain or loss resulting from the investee share issuance. As such, the Company recorded a gain of $336,834 during the three months ended March 31, 2017, as a result of the Dilutive Event. The Company’s overall gain (loss) on the investment when aggregating the Company’s share of Anandia’s gain (loss), the intangible asset amortization and the gain recorded under ASC 323 amounted to $0 and $346,180 for the three and nine months ended September 30, 2017, respectively, and amounted to ($29,997) and ($172,068) for the three and nine months ended September 30, 2016, respectively.2023:
NOTE 10. - NOTES PAYABLE AND PATENT ACQUISITION
| | | | | | | | | | |
| | Maximum Payout | | | | | | Weighted Average | ||
Contingency Type | | (undiscounted) | | Fair Value | | Unobservable Inputs | or Range | |||
Revenue-based payments | | $ | 1,550 | | $ | 1,160 | | Discount rate | 16 | % |
| | | | | | | | Projected year(s) of payment | 2024-2026 |
Detachable Warrants
On December 22, 2014, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with the National Research Council of Canada (“NRC”) to acquire certain patent rights that the Company had previously licensed from NRC under a license agreement between the parties. The Purchase Agreement provided for payment by the Company to NRC for the NRC patent rights of a total amount of $1,213,000, of which $213,000 was paid in cash at the closing on December 23, 2014, and with the remaining $1,000,000 balance to be paid in three equal installments of $333,333 in December of 2015, 2016 and 2017, respectively, with no interest on the installment payments unless the Company defaults on any such installment payments. As such, the Company computed the present value of the note payable using the Company’s incremental borrowing rate. The resulting present value of the note payable amounted to $925,730 at December 31, 2014. After the scheduled installment payments of $333,333 made by the Company to NRC on each of December 22, 2016 and 2015, and the accretion of interest, the remaining present value of the note payable amounts to $326,924 and $307,938 at September 30, 2017 and December 31, 2016, respectively, and the amounts are reported as Current portion of note payable on the Company’s Consolidated Balance Sheets. The cost of the acquired patents in the amount of $1,138,730 (cash of $213,000 plus the original discounted notes payable in the amount of $925,730) are included in Intangible assets, net on the Company’s Consolidated Balance Sheets. All previous license agreements between NRC and the Company were terminated as a condition of the Purchase Agreement. NRC has a security interest in these patent rights acquired by the Company from NRC until the note payable has been satisfied.
NOTE 11. - SEVERANCE LIABILITY
The Company recorded an accrual for severance during the fourth quarter of 2014 in the initial amount of $624,320 in accordance with FASB ASC 712 - “Compensation - Nonretirement Postemployment Benefits.” The severance accrual relates to the October 25, 2014 termination of Joseph Pandolfino, the Company’s former Chairman of the Board and Chief Executive Officer. The prior Employment Agreement with Mr. Pandolfino provided that in certain circumstances Mr. Pandolfino would receive severance payments in the gross amount of $18,750 per month, subject to customary withholdings, over a term of 36 months. Amounts owed to Mr. Pandolfino have been discounted using the Company’s incremental borrowing rate. As a result of the severance benefit payments made through the third quarter of 2017, the discounted current balance of the severance liability amounted to $38,793 and $199,657, at September 30, 2017 and December 31, 2016, respectively. The severance liability will be fully satisfied during the fourth quarter of 2017.
NOTE 12. - WARRANTS FOR COMMON STOCK
At September 30, 2017, the Company had outstanding warrants to purchase 12,204,580 shares of common stock of the Company, of which warrants to purchase 94,721 shares contain an anti-dilution feature, and excluding 2,000,000 Tranche 2 and 3 warrants that will never become exercisable, as discussed in Note 6.
During the third quarter of 2017, warrants to purchase 240,667 shares of common stock were exercised on a cashless basis resulting in the issuance of 146,320 shares of the Company’s common stock and 5,708,552 warrants to purchase shares of common stock were exercised on a cash basis under the June 2017 Warrant Exercise Agreements discussed in Note 2.
During July and August of 2017, the Company issued warrants to purchase 5,708,552 shares of common stock with an exercise price of $2.15 per share. These warrants have a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, do not contain an anti-dilution feature and had a fair value of $9,135,223 at issuance. See Note 2 for additional details.
During the second quarter of 2017, warrants to purchase 843,110 shares of common stock were exercised on a cashless basis resulting in the issuance of 525,118 shares of the Company’s common stock and 5,657,157 warrants to purchase shares of common stock were exercised on a cash basis (including 5,584,659 warrants to purchase shares of common stock under the June 2017 Warrant Exercise Agreements discussed in Note 2). On May 15, 2017, warrants to purchase 45,834 shares of common stock expired without being exercised.
During June of 2017, the Company issued warrants to purchase 5,584,659 shares of common stock with an exercise price of $2.15 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, do not contain an anti-dilution feature and had a fair value of approximately $6,913,031 at issuance. See Note 2 for additional details.
During March of 2017, warrants to purchase 202,500 shares of common stock were exercised on a cashless basis resulting in the issuance of 100,928 shares of the Company’s common stock. On February 8, 2017, warrants to purchase 172,730 shares of common stock expired without being exercised.
On January 25, 2016, warrants to purchase 67,042 shares of common stock were exercised, primarily on a cashless basis, resulting in the issuance of 2,618 shares of the Company’s common stock. On January 25, 2016, warrants to purchase 6,831,115 shares of common stock expired without being exercised.
Pursuant to the registered direct offering that closed on October 19, 2016, and discussed in Note 3, the Company issued warrants to purchase 4,250,000 shares of common stock with an exercise price of $1.45 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $3,380,000 at issuance. Pursuant to the June 2017 Warrant Exercise Agreements, as discussed in Note 2, warrants to purchase 4,250,000 shares of common stock were exercised on a cash basis at an exercise price of $1.45 per share (2,354,948 Warrants were exercised in June of 2017 and 1,895,052 Warrants were exercised in July and August of 2017).
Pursuant to the registered direct offering that closed on July 27, 2016, and discussed in Note 4, the Company issued warrants to purchase 7,043,211 shares of common stock. The warrants provide for an exercise price of $1.00 per share and 1,543,210 of the warrants were exercisable immediately and had a fair value of approximately $858,000 at issuance and 5,500,001 of the warrants were exercisable six months from the date of issuance and had a fair value of approximately $3,058,000 at issuance. All the warrants had a term of 5.5 years and do not contain an anti-dilution feature. In addition, on July 27, 2016, the Company terminated an aggregate of 5.5 million warrants with exercise prices of $1.21 and $1.25 per share previously issued in conjunction with registered direct offerings in February of 2016 and June of 2015. Pursuant to the June 2017 Warrant Exercise Agreements, as discussed in Note 2, warrants to purchase 7,043,211 shares of common stock were exercised on a cash basis at an exercise price of $1.00 per share (3,229,711 Warrants were exercised in June of 2017 and 3,813,500 Warrants were exercised in July and August of 2017).
Pursuant to the registered direct offering that closed on February 5, 2016, and discussed in Note 5, the Company issued warrants to purchase 2,500,000 shares of common stock with an exercise price of $1.21 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $1,940,000 at issuance. The warrants associated with this transaction were terminated on July 27, 2016 (see Note 4 – July 2016 Registered Direct Offering for additional information).
Pursuant to the registered direct offering that closed on June 2, 2015, the Company issued warrants to purchase 3,000,000 shares of common stock with an exercise price of $1.25 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $2,067,000 at issuance. The warrants associated with this transaction were terminated on July 27, 2016 (see Note 4 – July 2016 Registered Direct Offering for additional information).
Outstanding warrants at September 30, 2017 consisted of the following:
Warrant Description | Number of Warrants | Exercise Price | Expiration | |||||||
December 2011 convertible NP warrants | 700,148 | $ | 1.3816 | February 6, 2018 | ||||||
November 2012 PPO warrants | 116,500 | $ | 0.6000 | November 9, 2017 | ||||||
August 2012 convertible NP warrants(1) | 94,721 | $ | 0.9310 | August 8, 2018 | ||||||
June 2017 warrants pursuant to warrant exercise agreements | 11,293,211 | $ | 2.1500 | December 20, 2022 | ||||||
Total warrants outstanding(2) | 12,204,580 |
(1) Includes anti-dilution features.
(2) Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.
The Company estimates the value of warrant liability upon issuance of the warrants and at each balance sheet date using the binomial lattice model to allocate total enterprise value to the warrants and other securities in the Company’s capital structure. Volatility was estimated based on historical observed equity volatilities and implied (forward) or expected volatilities for a sample group of guideline companies and consideration of recent market trends.
As a result of the previously exercisable exchange rights contained in the Tranche 1A warrants, the financial instrument was previously considered a liability in accordance with FASB Accounting Standards Codification Topic 480 - “Distinguishing Liabilities from Equity” (“ASC 480”). More specifically, ASC 480 requires a financial instrument to be classified as a liability if such financial instrument contains a conditional obligation that the issuer must or may settle by issuing a variable number of its equity securities if, at inception, the monetary value of the obligation is based on a known fixed monetary amount. As a result of the actions by Crede that caused the exchange rights feature to be voided (see Note 6 - Joint Venture, Consulting Agreement and Associated Warrants for additional information), the Company reclassified the Tranche 1A warrant liability to Capital in excess of par.
The following table issets forth a roll-forward summary of the warrant liability:
Fair value at December 31, 2015 | $ | 2,898,296 | ||
Reclassification of warrant liability to capital in excess of par | (2,810,000 | ) | ||
Gain as a result of change in fair value | (29,615 | ) | ||
Fair value at December 31, 2016 | 58,681 | |||
Loss as a result of change in fair value | 138,813 | |||
Fair value at September 30, 2017 | $ | 197,494 |
The aggregate loss as a resultchanges in fair value of the Company’s warrant liabilitystock warrants (Level 3 asset) for the three and nine monthsthree-month period ended September 30, 2017 amounted to $55,886 and $138,813, respectively (the aggregate net (loss) gain forMarch 31, 2023:
| | | |
Fair value measurement at January 1, 2023 | | $ | — |
Initial measurement | | | 3,527 |
Fair value measurement adjustment | | | 139 |
Fair value measurement at March 31, 2023 | | $ | 3,666 |
The JGB detachable warrants were valued at the three and nine months ended September 30, 2016 amounted to ($46,995) and $14,602, respectively), which are included in Other income (expense) under Warrant liability (loss) gain - net in the accompanying Consolidated Statements of Operations.
FASB ASC 820 - “Fair Value Measurements and Disclosures” establishes a valuation hierarchy for disclosureclosing dates of the inputs toSenior Secured Credit Facility using a Monte Carlo valuation used to measure fair value. This hierarchy prioritizesmodel with the inputs into three broad levelsfollowing assumptions:
| | | |
Risk-free interest rate per year |
| 4.2 | % |
Expected volatility per year |
| 88.1 | % |
Expected dividend yield |
| — | % |
Contractual expiration |
| 5.5 | years |
Exercise price | $ | 1.275 | |
Stock price | $ | 0.91 | |
The Omnia detachable warrants were valued at the closing dates of the Subordinated Note using a Monte Carlo valuation model with the following assumptions:
| | | |
Risk-free interest rate per year |
| 4.1 | % |
Expected volatility per year |
| 83.8 | % |
Expected dividend yield |
| — | % |
Contractual expiration |
| 7.5 | years |
Exercise price | $ | 0.855 | |
Stock price | $ | 0.91 | |
There were no material changes in assumptions for valuation of the detachable warrants as follows:
A financial asset’s or a financial liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The warrant liability is measured at fair value using certain estimated factors such as volatility and probability which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs that are used in the fair value measurement of the Company’s derivative warrant liabilitiesdetachable warrants include volatility.the volatility factor. Significant increases (decreases)or decreases in the volatility inputfactor would resulthave resulted in a significantly higher (lower)or lower fair value measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three month periods ended March 31, 2023 and 2022 respectively, the Company did not have any financial assets or liabilities measured at fair value on a nonrecurring basis.
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NOTE 7. DEBT
The following table summarizesCompany has a senior secured credit facility (the “Senior Secured Credit Facility”), which consists of three-year $21,053 debentures (the “Debentures”) and $2,865 subordinated promissory note (the “Subordinated Note). The Debentures were issued at a 5% original issuance discount and are subject to a 5% exit payment.
Long-term debt related to the Senior Secured Credit Facility and Subordinate Note as of March 31, 2023, consists of the following:
| | | |
| | March 31, | |
|
| 2023 | |
Senior Secured Credit Facility |
| $ | 22,105 |
Subordinated Note | | | 2,925 |
Unamortized discount on loan and deferred debt issuance costs | | | (8,613) |
Total debt | | | 16,417 |
Current portion of long-term debt | | | — |
Total long-term debt | | $ | 16,417 |
Debentures
On March 3, 2023, the Company entered into a Securities Purchase Agreement, which pursuant to the agreement, the Company sold 5% original issuance discount senior secured debentures with an aggregate principal amount of $21,053. The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s warrant activity since December 31, 2015:election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. In connection with the sale of the Debentures, the Company issued warrants to purchase up to 5,000,000 shares of common stock for an exercise price of $1.275 per share (the “JGB Warrants”), which had an initial fair value of $4,561 net of issuance costs of $139 (see Note 6 and Note 10).
The Company’s obligations under the Debentures can be accelerated upon the occurrence of certain customary events of default. In the event of a default and acceleration of the Company’s obligations, the Company would be required to pay the Prepayment Amount, liquidated damages and other amounts owing in respect thereof through the date of acceleration.
(1) Tranche 2
The Debentures contain customary representations, warranties and Tranche 3 warrantscovenants including among other things and subject to certain exceptions, covenants that will never become exercisable, as discussed in Note 6.
(2) Tranche 1Arestrict the Company from incurring additional indebtedness, creating or permitting liens on assets, making or holding any investments, repaying outstanding indebtedness, paying dividends or distributions and Tranche 1B warrants expired unexercised on September 29, 2016.
NOTE 13. - COMMITMENTS AND CONTINGENCIES
License Agreements -Under its exclusive worldwide license agreemententering into transactions with North Carolina State University (“NCSU”),affiliates. Substantially all of the company’s assets, including intellectual property, are collateralized and at risk if Debenture obligation is not satisfied. In addition, the Company is required to pay minimum annual royalty payments, which are credited against running royaltiesmaintain at least $7,500 on salesits balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets. As of licensed products.March 31, 2023, the Company was in compliance with these financial covenants.
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Subordinated Note
On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”). The minimum annual royalty is $225,000. The license agreement continues throughSubordinated Note refinanced the life12% Secured Promissory Note with a principal amount of the last-to-expire patent, which is expected$1,000 dated as of October 29, 2021 payable to be 2022. The license agreement also requires a milestone payment of $150,000 upon FDA approval or clearance of a product that uses the NCSU licensed technology. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. These costs vary from year to yearOmnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company has certain rights to directin connection with the activities that result in these costs. Duringacquisition of GVB Biopharma (see Note 8). The accrued PIK interest refinanced from the three and nine months ended September 30, 2017, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $11,022 and $42,730, respectively ($62,303 and $76,299 during the three and nine months ended September 30, 2016, respectively).Original Notes was $365.
On December 8, 2015, the Company entered into an additional license agreement (the “License”) with NCSU. Under the terms of the License, the Company paid NCSU a non-refundable, non-creditable lump sum license fee of $150,000. Additionally, the License calls for the Company to pay NCSU a non-refundable, non-creditable minimum annual royalty beginning on December 31, 2018 in the amount of $10,000. The minimum annual royalty payment increases to $15,000 in 2019, $25,000 in 2020 and 2021, and $50,000 per year thereafter for the remaining term of the License. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During the three and nine months ended September 30, 2017, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $236 and $30,102, respectively ($0 and $6,075 for the three and nine months ended September 30, 2016, respectively). This License continues through the life of the last-to-expire patent, expected to be in 2035.
On February 10, 2014, the Company entered into a sponsored research and development agreement (the “Agreement”) with NCSU. Under the terms of the Agreement, the Company paid NCSU $162,408 over the two-year term of the Agreement, which grants certain licensed rights to the Company. The Company had extended the Agreement through January 31, 2017 at an additional cost of $85,681. The Company is currently negotiating an additional extension to this Agreement.
All payments made under the above referenced license agreements and the sponsored research and development agreement are initially recorded as a Prepaid expense on the Company’s Consolidated Balance Sheets and subsequently expensed on a straight-line basis over the applicable period and included in Research and development costs on the Company’s Consolidated Statements of Operations. The amounts expensed during the three and nine months ended September 30, 2017 were $56,250 and $175,890, respectively ($115,170 and $345,137 for the three and nine months ended September 30, 2016, respectively).
On August 22, 2014, the Company entered into a Commercial License Agreement with Precision PlantSciences, Inc. (the “Precision License”). The Precision License grants the Company a non-exclusive, but fully paid up right and license to use technology and materials owned by Precision PlantSciences for a license fee of $1,250,000. The Precision License continues through the life of the last-to-expire patent, which is expected to be in 2028.
On August 27, 2014, the Company entered into an additional exclusive License Agreement (the “License Agreement”) with NCSU. Under the License Agreement, the Company paid NCSU a non-refundable, non-creditable lump sum license fee of $125,000, and the Company must pay to NCSU an additional non-refundable, non-creditable lump sum fee of $75,000 upon issuance of a U.S. utility patent included in the patent rights. A patent was issued during the first quarter of 2017 under this clause, and accordingly, the $75,000 was due and payable to NCSU. The $75,000 cost was included in Research and development costs on the Company’s Consolidated Statements of Operations for the three months ended March 31, 2017. Additionally, the License Agreement calls for the Company to pay NCSU three non-refundable, non-creditable license maintenance fees in the amount of $15,000 per annum in each of December 2015, 2016 and 2017. Beginning in calendar year 2018,Subordinated Note, the Company is obligated to pay to NCSU an annual minimum royalty feemake interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of $20,000 in 2018, $30,000 in 2019, and $50,00026.5% per year thereafter for the remaining term of the License Agreement.annum, payable monthly. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. Duringnot permitted to prepay all or any portion of the threeoutstanding balance on the Subordinated Note prior to maturity. The Subordinated Note includes customary event of default provisions. The Subordinated Note is subordinated to the Debenture pursuant to a Subordination Agreement between the Company, the Agent and nine months ended September 30, 2017,Omnia.
In connection with the aggregated costs incurred relatedSubordinated Note, the Company issued to capitalized patent costs and patent maintenance expense amountedOmnia, warrants to $12,928 and $37,170, respectively ($4,056 and $37,995 forpurchase up to 675,000 shares of the three and nine months September 30,2016, respectively)Company’s common stock (the “Omnia Warrants”). The License Agreement continues through the lifeOmnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of the last-to-expire patent, which is expected$0.855 per share, subject, with certain exceptions, to be in 2034.
On September 15, 2014, the Company entered into a Sublicense Agreement with Anandia Laboratories, Inc. (the “Anandia Sublicense”). Under the terms of the Anandia Sublicense, the Company was granted an exclusive sublicenseadjustments in the United Statesevent of stock splits, dividends, subsequent dilutive offerings and a co-exclusive sublicensecertain fundamental transactions, as more fully described in the Omnia Warrants. The Omnia warrants initial fair value was $1,316 (see Note 6 and 10).
Contractual maturities under the Senior Secured Credit Facility and Subordinate Note for the remainder of 2023 and through maturity, excluding any discounts or premiums, as of March 31, 2023 is as follows:
| | | | | | | | | | | | | | | | | | |
| | Remainder of | | | | | | | | | | | | | | | | |
|
| 2023 |
| 2024 |
| 2025 |
| 2026 | | 2027 | | Thereafter | ||||||
Future minimum principal payments | | $ | — | | $ | 2,925 | | $ | — | | $ | 22,105 | | $ | — | | $ | — |
The fair values of the world, excluding Canada, towarrants at issuance of $5,877, together with the licensed intellectual property. The Anandia Sublicense required an up-front feeDebentures original issuance discount of $75,000, an annual license fee of $10,000, the$1,053, Debentures exit payment of patent filing$1,053, and maintenancethird-party debt issuance costs and a running royalty on future net sales. The Anandia Sublicense continues throughof $801, are being amortized using the life of the last-to- expire patent, which is expected to be in 2035.
The Precision License, the License Agreement with NCSU and the Anandia Sublicense are included in Intangible assets, net in the Company’s Consolidated Balance Sheets and the applicable license fees will be amortizedeffective interest method over the term of the agreementsrespective debt instrument, recorded as Interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The components and activity of unamortized discount and deferred debt issuance costs related to the Senior Secured Credit Facility and Subordinated Note is as follows:
| | |
| Total | |
Issuance | $ | (8,784) |
Amortization during the period | | 171 |
March 31, 2023 | $ | (8,613) |
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NOTE 8. – NOTES & LOANS PAYABLE
The table below outlines our notes payable balances as of March 31, 2023 and December 31, 2022:
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Insurance loans payable | | $ | 184 | | $ | 780 |
Vehicle loans | | | 130 | | | 128 |
Total current notes and loans payable | | $ | 314 | | $ | 908 |
| | | | | | |
Bridge loan | | $ | — | | $ | 2,814 |
Vehicle loans | | | 154 | | | 187 |
Total long-term notes and loans payable | | $ | 154 | | $ | 3,001 |
Insurance loans payable
During the second quarter of 2022, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $2,394. The Company paid $400 as a premium down payment and financed the remaining $1,994 of policy premiums over ten months at a 3.25% annual percentage rate. Additionally, during the third quarter of 2022, the Company expanded its D&O coverage as a result of the acquisition of GVB, resulting in an additional premium down payment of $90 and financing of $168, under the same terms as the original one-year policy.
The Company also has other insurance loans payables related to pollution, and general liability for GVB.
Vehicle Loans
The Company has various vehicle loans with monthly payments ranging from $0.8 to $2.1, interest rates ranging from 0% to 11%, and maturity dates ranging from May 2024 to September 2026.
Estimated future principal payments to be made under the above notes and loans payable as of March 31, 2023 are as follows:
| | | |
Remainder of 2023 | | $ | 271 |
2024 | | | 131 |
2025 | | | 59 |
2026 | | | 7 |
Total | | $ | 468 |
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NOTE 9. – OTHER OPERATING EXPENSES, NET
The components of “Other operating expenses, net” were as follows:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Grass Valley fire: | | | | | | |
Professional services and supplies | | $ | 68 | | $ | — |
Total Grass Valley fire | | | 68 | | | — |
Acquisition costs | | $ | 68 | | $ | 52 |
Needlerock Farms settlement | | | 747 | | | — |
Loss on change in warrant liability | | | 139 | | | — |
Loss on change in contingent consideration | | | 22 | | | — |
Gain on sale or disposal of property, plant and equipment | | | (146) | | | — |
Total other operating expenses, net | | $ | 898 | | $ | 52 |
NOTE 10. – CAPITAL RAISE AND WARRANT ACTIVITY
2022 Capital Raise
On July 21, 2022, the Company and certain institutional investors (the “Investors”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) relating to the issuance and sale of shares of common stock pursuant to a registered direct offering (the “Registered Offering” and, together with the Private Placement (as defined below), the “Offerings”). The Investors purchased approximately $35,000 of shares, consisting of an aggregate of 17,073,175 shares of common stock at a purchase price of $2.05 per share, subject to certain restrictions. The net proceeds to the Company from the Offerings, after deducting the fees and the Company’s offering expenses, were $32,484. The Offerings closed on July 25, 2022.
Pursuant to the Securities Purchase Agreement, in a concurrent private placement, the Company issued and sold to the Investors warrants (the “Warrants”) to purchase up to 17,073,175 shares of common stock (the “Private Placement”). The Warrants are exercisable immediately upon issuance at an exercise price of $2.05 per share of common stock, subject to adjustment in certain circumstances, and expire on July 25, 2027.
JGB Warrants
In connection with the sale of the Debentures, the Company issued the JGB Warrants to purchase up to 5,000,000 shares of common stock for an exercise price of $1.275 per share. The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The JGB warrants initial fair value of $4,561 net of issuance costs of $139 (see Note 6), of which half of the warrants meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $1.00 upon certain conditional events such as change in control or event of default. Accordingly, half of the warrants are recorded as Other long-term liabilities on the Condensed Consolidated Balance Sheets. The remainder of the JGB warrants are equity classified and recorded as a component of Capital in excess of par value.
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Omnia Warrants
In connection with the Subordinated Note, the Company issued to Omnia, the Omnia Warrants to purchase up to 675,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $0.855 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The Omnia warrants initial fair value was $1,316 (see Note 6), and meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $2.00 upon certain conditional events such as change in control or event of default. The Omnia warrants are recorded as Other long-term liabilities on the Condensed Consolidated Balance Sheets.
ATM Offering
During the first quarter of 2023, the Company established an at-the-market common equity offering program (“ATM Program”), through which it may, from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to $50,000. The Company will pay 3.00% sales commission based on their last-to-expire patent date. Amortization amountedthe gross proceeds of the sales price per share of common stock sold. As of March 31, 2023, the Company has $50,000 of available capacity under the ATM Program.
NOTE 11. - COMMITMENTS AND CONTINGENCIES
License agreements and sponsored research – The Company has entered into various license, sponsored research, collaboration, and other agreements (the “Agreements”) with various counterparties in connection with the Company’s plant biotechnology business relating to $24,505tobacco, hemp/cannabis and $73,516 forhops. The schedule below summarizes the three monthsCompany’s commitments, both financial and nine months ended September 30, 2017, respectively ($24,505other, associated with each Agreement. Costs incurred under the Agreements are generally recorded as research and $73,516 for the three and nine months ended September 30, 2016, respectively) and was included in Amortization expensedevelopment expenses on the Company’s Condensed Consolidated Statements of Operations.Operations and Comprehensive Loss.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Future Commitments | | ||||||||||||||||
Commitment |
| Counter Party |
| Product Relationship |
| Commitment Type |
| 2023 |
| 2024 |
| 2025 |
| 2026 | | 2027 & After | | Total |
| ||||||
Research Agreement | | KeyGene | | Hemp / Cannabis | | Contract fee | | $ | 1,955 | | $ | 2,057 | | $ | 1,589 | | $ | 1,302 | | $ | 328 | | $ | 7,231 | (1) |
License Agreement | | NCSU | | Tobacco | | Minimum annual royalty | | | — | | | 100 | | | 100 | | | 100 | | | 1,000 | | | 1,300 | (2) |
Research Agreement | | NCSU | | Tobacco | | Contract fee | | | 99 | | | — | | | — | | | — | | | — | | | 99 | (3) |
Sublicense Agreement | | Anandia Laboratories, Inc. | | Hemp / Cannabis | | Annual license fee | | | 10 | | | 10 | | | 10 | | | 100 | | | — | | | 130 | (4) |
Research Agreement | | Cannametrix | | Hemp / Cannabis | | Contract fee | | | 667 | | | 666 | | | — | | | — | | | — | | | 1,333 | (5) |
License Agreement | | Cannametrix | | Hemp / Cannabis | | Minimum annual royalty | | | — | | | — | | | 75 | | | 100 | | | 1,900 | | | 2,075 | (6) |
Growing Agreements | | Various | | Tobacco | | Contract fee | | | 52 | | | — | | | — | | | — | | | — | | | 52 | (7) |
Consulting Agreements | | Various | | Various | | Contract fee | | | 1,132 | | | 746 | | | — | | | — | | | — | | | 1,878 | (8) |
| | | | | | | | $ | 3,915 | | $ | 3,579 | | $ | 1,774 | | $ | 1,602 | | $ | 3,228 | | $ | 14,098 | |
On September 28, 2015, the Company’s wholly-owned subsidiary, Botanical Genetics, entered into a Sponsored Research Agreement (the “Agreement”)
(1) | Exclusive agreement with |
The Company will exclusively own all results and all intellectual property relating to the cannabis/hemp plant. The Agreement had an initial term of twelve (12) months from the dateresults of the Agreement and can be extended at the sole option of the Company for two (2) additional periods of twelve (12) months each (of which the option on the first twelve (12) month period has been extended)collaboration with KeyGene (the "Results”). The Company paid Anandia $379,800 over the initial term of the Agreement. On March 13, 2017, the Company entered into Amendment No. 1will pay royalties in varying amounts to KeyGene relating to the Agreement (the “Amendment”). The Amendment has a term of twelve (12) months and calls for the Company to pay Anandia a total of $785,100 in equal monthly installments of $65,425. During the three and nine months ended September 30, 2017, expenses related to the Agreement amounted to $196,275 and $457,975, respectively ($84,200 and $263,400, for the three and nine months ended September 30, 2016, respectively) and are included in Research and development costs on the Company’s Consolidated Statements of Operations. Under the terms of the Agreement, the Company will have co-exclusive worldwide rights with Anandia to all the intellectual property resulting from the sponsored research between the Company and Anandia. The party that commercializes such intellectual propertyCompany's commercialization in the futurestated fields of each agreement. The Company has also granted KeyGene a license to commercialize the Results outside of each field and KeyGene will pay royalties in varying amounts to the other party, with the amount of such royalties being dependent upon the type of products that are commercialized in the future. If either party sublicenses such intellectual property to a third-party, then the Company and Anandia will share equally in such sublicensing consideration.
The Company had an R&D agreement with the University of Virginia (“UVA”) relating to nicotine biosynthesis in tobacco plants. The extended termKeyGene's commercialization of the R&D agreement with UVA expired on October 31, 2016. In December 2016, the Company entered into a new sponsored research agreement with UVA and an exclusive license agreement with the UniversityResults outside of Virginia Patent Foundation d/b/a Universityeach field.
(2) | The minimum annual royalty fee is credited against running royalties on sales of licensed products. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred, including capitalized patent costs and patent maintenance costs. These costs vary from year to year and the Company has certain rights to direct the activities that result in these costs. |
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Lease Agreements- The Company leases a manufacturing facility and warehouse located in North Carolina on a triple net lease basis. The lease commenced on January 14, 2014, and had an initial term of twelve (12) months. The lease contains four (4) additional extensions; with one lease extension for an additional one (1) year and with the other three (3) lease extensions each being for an additional two (2) years in duration, exercisable at the option of the Company. The Company is currently in the first two-year lease extension term that will expire on October 31, 2017 and intends to exercise the second two-year lease extension. The lease expense for the three and nine months ended September 30, 2017 amounted to $38,438 and $115,314, respectively, ($36,131 and $108,393, for the three and nine months ended September 30, 2016, respectively). The future minimum lease payments if the Company exercises each of the additional extensions are approximately as follows:
Year ended December 31, 2017 - | $ | 41,000 | ||
Year ended December 31, 2018 - | $ | 169,000 | ||
Year ended December 31, 2019 - | $ | 169,000 | ||
Year ended December 31, 2020 - | $ | 169,000 | ||
Year ended December 31, 2021 - | $ | 141,000 |
(3) | On August 19, 2022, the Company entered into a one-year Sponsored Project Agreement with NCSU for continued research of tobacco alkaloid formation. |
(4) | The Company is also responsible for the payment of certain costs, including, capitalized patent costs and patent maintenance costs, a running royalty on future net sales of products made from the sublicensed intellectual property, and a sharing of future sublicensing consideration received from sublicensing to third parties in all countries except for Canada. Anandia retains all patent rights, and is responsible for all patent maintenance, in Canada. |
(5) | On March 11, 2022, the Company expanded its research agreement with Cannametrix for hemp/cannabis product development, formulation, and validation for a three-year period at an aggregate cost of $2,000. |
(6) | The minimum annual royalty fee is credited against running royalties from the sales of goods or services based on Project IP and/or Background IP. |
(7) | Various R&D growing agreements for hemp/cannabis and tobacco. |
(8) | General corporate consulting agreements. |
The Company has a lease for its office space in Clarence, New York and extended the lease for an additional one-year renewal period that expired on August 31, 2017. The Company is currently leasing the office space on a month-to-month basis at a monthly lease payment of $5,267. On October 4, 2017, the Company entered a new lease for new office space at a new location with an initial three-year term and with a monthly lease payment of $6,375 commencing thirty (30) days after the Company occupies the new office space. The Company expects to occupy the new lease space in early 2018.
On November 1, 2015, the Company entered into a one-year lease for 25,000 square feet of warehouse space in North Carolina to store the Company’s proprietary tobacco leaf. The lease calls for a monthly lease payment of $3,750 and contains a three-year renewal option after the initial one-year term. In October of 2016, the Company exercised the three-year renewal option after the one-year initial term, but intends on terminating this lease, without further obligation, when the tobacco leaf is transferred to a new leased facility in the fourth quarter of 2017.
On May 1, 2016, the Company entered into a sublease for laboratory space in Buffalo, New York. The sublease calls for a monthly payment of $1,471 through April 30, 2018. Additionally, on February 1, 2017, the Company entered into an amendment to the initial sublease calling for the sublease of additional lab space at a cost of $1,219 per month, bringing the total monthly lease obligation to $2,690. On April 26, 2017, the Company entered into an amendment to the sublease to extend the term of the sublease for an additional twelve (12) months, commencing on May 1, 2017 at a total cost of $2,770 per month for the total lease obligation. Future minimum lease payments for the years ended December 31, 2017 and 2018 will be approximately $8,000 and $11,000, respectively.
On September 1, 2016, the Company entered into a sublease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment. The sublease calls for a monthly payment of $1,200 and expired on August 31, 2017. The Company has leased a new space in different facility in North Carolina, more fully described below, and moved the equipment to the new leased facility during the third quarter of 2017. There are no future minimum lease payments due under the sublease.
On April 20, 2017, the Company entered into a lease for warehouse space in North Carolina to store cigarette and filtered cigar raw materials. The lease calls for a monthly payment of $3,500 on a month-to-month basis. Future minimum lease payments remaining for the year ended December 31, 2017 are $10,500 and future minimum lease payments in subsequent years will be $42,000 as long as the Company continues to lease the warehouse space.
On August 14, 2017, the Company entered into a lease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment and to eventually store the Company’s proprietary tobacco leaf. The lease calls for a monthly payment of $4,665, expires on August 14, 2018 and contains twelve-month renewal options as long as the Company continues to lease the warehouse. Future minimum lease payments for the year ended December 31, 2017 are approximately $14,000 and future minimum lease payments will be approximately $56,000 per year for each subsequent year the warehouse space is leased by the Company.
Litigation -Litigation- In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense.related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
Class Action
On April 26, 2016, Crede CG III, LTD. (“Crede”)January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a complaintComplaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the SouthernEastern District of New York (the “SDNY Court”) entitledCrede CG III, LTD.entitled: Matthew Bull, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc. Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 1:19 cv 00409.
On May 19, 2016, CredeJanuary 29, 2019, Ian M. Fitch, a resident of Essex County Massachusetts, filed an Amendeda Complaint that included seven counts, alleging among other things, thatagainst the Company, allegedly breached and/or interfered with certain agreements entered into with Crede, including the joint venture agreement relating to efforts to sell the Company’s proprietary tobacco into China, the Tranche 1A warrantthen Chief Executive Officer, Henry Sicignano III, and the prior securities purchase agreement with Crede. The Amended Complaint seeks money damages, to rescind the securities purchase agreement, to obtain declaratory and injunctive relief to require the Company to issue to Crede 2,077,555 shares of the Company’s common stock under the exchange provision of the Tranche 1A warrant, and entry of an injunction prohibiting the Company from selling tobacco into China without the joint venture’s involvement. The Amended Complaint also seeks attorney’s fees and such other relief as the Court may deem just and proper. We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims.
On May 19, 2016, Crede filed a motion for preliminary injunction, asking the SDNY Court to require the Company to issue 2,077,555 shares of its common stock to Crede under the exchange provision of the Tranche 1A warrant. After conducting an evidentiary hearing on this motion on June 14, 2016, the SDNY Court denied Crede’s motion and held, among other things, that Crede did not prove the potential for irreparable harm or a likelihood of success on its claim for such 2,077,555 shares under the Tranche 1A warrant, and that there was a likelihood that Crede had violated the activity restrictions of the Tranche 1A warrant, which would bar Crede’s claim for such shares from the Company.
Following such ruling, on July 11, 2016, the Company filed a motion to sever the Crede lawsuit into two separate cases, requesting all claims relating to the Tranche 1A warrant and the securities purchase agreement to staythen Chief Financial Officer, John T. Brodfuehrer, in the SDNY Court and all claims relating to the China joint venture agreement to be transferred to the United States District Court for the Eastern District of New York entitled: Ian Fitch, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 2:19 cv 00553.
On May 28, 2019, the plaintiff in the Fitch case voluntarily dismissed that action. On August 1, 2019, the Court in the Bull case issued an order designating Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.
On September 16, 2019, pursuant to a joint motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western District of New York, (the “WDNY Court”), where it remains pending as Case No. 1:19-cv-01285.
Plaintiffs in the Company’s headquarters are located. Bull case filed an Amended Complaint on November 19, 2019 that alleges three counts: Count I sues the Company and Messrs. Sicignano and Brodfuehrer and alleges that the Company's quarterly and annual reports, SEC filings, press releases and other public statements and documents contained false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5; Count II sues Messrs. Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c); and Count III sues Messrs. Sicignano and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act. The Amended Complaint seeks to certify a class, and unspecified compensatory and punitive damages, and attorney's fees and costs.
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On January 20, 2017,29, 2020, the SDNYCompany and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On January 14, 2021, the Court granted the Company’smotion, dismissing all claims with prejudice. The Plaintiffs filed a notice of appeal on February 12, 2021 to the Second Circuit Court of Appeals. On May 24, 2022, after briefing and oral argument, the Second Circuit issued an order affirming in part, and reversing in part, the District Court’s dismissal order. The Second Circuit affirmed the District Court’s dismissal of the claims relating to the non-disclosure of stock promotion articles, but reversed the District Court’s dismissal order of the claims alleging the non-disclosure of an SEC investigation. The Second Circuit noted in its opinion, however, that the District Court had not addressed certain arguments raised by the Company and Messrs. Sicignano and Brodfuehrer in the Motion to Dismiss the Amended Complaint as to these remaining claims, and remanded the case to the District Court to address these arguments for the dismissal of the remaining claims. On August 8, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a renewed motion to dismiss the remaining claims in the Amended Complaint to address the arguments not previously addressed by the District Court. On September 22, 2022, Plaintiffs filed a brief in opposition to the motion. On October 12, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a reply brief in further support of the motion. On January 6, 2023, the District Court denied the motion to dismiss, and the case will proceed forward on the remaining claims. No trial date has been set.
On February 14, 2017, Crede voluntarily dismissed its lawsuitThe parties participated in a mediation on March 21, 2023 and reached an initial memorandum of understanding for settlement in principle to resolve the litigation and release all claims against the Company inCompany. On April 25, 2023, the WDNY Court.
On February 21, 2017,parties filed with the SDNY Court grantedthe Motion for Preliminary Approval of the Settlement, which includes the final terms of the proposed settlement. This motion remains pending, and if preliminarily approved, the Court will then schedule a later hearing to consider the final approval of the settlement to conclude the litigation. The settlement amount that the defendants are expected to pay is $3,000 and is fully covered by the Company’s request to file a motioninsurance. Accordingly, the Company has recorded an accrual for summary judgment for the claims remaining in the SDNY Court, with all discovery in the case being deferred until after the SDNY Court issues its decisionlitigation settlement and corresponding indemnification receivable on the summary judgment motionCondensed Consolidated Balance Sheets as of the Company.
On March 20, 2017, the Company filed its motion for summary judgment for the claims remaining in the SDNY Court. The response by Crede to the Company’s summary judgment motion was filed by Crede on May 1, 2017. On May 15, 2017, the Company filed its response to Crede’s filing. The parties are now awaiting the SDNY Court to issue its decision on such summary judgment motion.
31, 2023.
We believe that the claims are frivolous, meritless and that the Company and Messrs. Sicignano and Brodfuehrer have substantial legal and factual defenses to the remaining claims. We intend to vigorously defend the Company and Messrs. Sicignano and Brodfuehrer against such claims.
Shareholder Derivative Cases
On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement.
On February 11, 2019, Stephen Mathew filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Stephen Mathew, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, John T. Brodfuehrer, Richard M. Sanders, Joseph Alexander Dunn, James W. Cornell, Nora B. Sullivan and 22nd Century Group, Inc., Index No. 801786/2019. Mr. Mathew brings this action derivatively generally alleging the same allegations as in the Klein case. The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.
On August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation by the parties (Western District of New York, Case No. 1-19-cv-0513). On May 3, 2019, the Court ordered the Mathew case stayed. This stay was applied to the Consolidated Action pursuant to the Court’s August 15, 2019 Order Consolidated Related Shareholder Derivative Actions and Establishing a Leadership Structure. As a result of the Court’s denial of the renewed Motion to Dismiss the Amended Complaint, the May 3, 2019 stay will be lifted. No trial date has been set. We believe that the claims are frivolous, meritless and that the Company
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and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.
On June 10, 2019, Judy Rowley filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Judy Rowley, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer, and 22nd Century Group, Inc., Index No. 807214/2019. Ms. Rowley brought the action derivatively alleging that the director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements. The Complaint sought declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs. We believe that the claims are frivolous, meritless and that the Company has defended and intendsthe individual defendants have substantial legal and factual defenses to continuethe claims. We intend to vigorously defend the Company and the individual defendants against these claims vigorously.
NOTE 14. - EARNINGS PER COMMON SHAREsuch claims. On September 13, 2019, the Court ordered the litigation stayed pursuant to a joint stipulation by the parties. On August 3, 2022, Plaintiff dismissed the case with prejudice by filing a stipulation of discontinuance with the Court. This dismissal was not pursuant to a settlement.
On January 15, 2020, Kevin Broccuto filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Kevin Broccuto, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Broccuto brings this action derivatively alleging three counts: Count I alleges that the defendants breached their fiduciary duties; Count II alleges they committed corporate waste; and Count III that they were unjustly enriched, by allegedly allowing the Company to make false statements.
On February 11, 2020, Jerry Wayne filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Jerry Wayne, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Wayne brings this action derivatively alleging generally the same allegations as the Broccuto case. The following table sets forthComplaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement of alleged profits and imposition of constructive trusts, and attorney's fees and costs. The Complaint also seeks to declare as unenforceable the computation of basicCompany's Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company is headquartered.
On March 25, 2020, the Court ordered the Broccuto and diluted earnings per common share for the three month periods ended September 30, 2017Wayne cases consolidated and 2016:
September 30, 2017 | September 30, 2016 | |||||||
Net loss attributed to common shareholders | $ | (3,316,634 | ) | $ | (2,679,988 | ) | ||
Denominator for basic earnings per share-weighted average shares outstanding | 100,673,834 | 80,386,519 | ||||||
Effect of dilutive securities: | ||||||||
Warrants, restricted stock and options outstanding | - | - | ||||||
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities | 100,673,834 | 80,386,519 | ||||||
Loss per common share - basic and diluted | $ | (0.03 | ) | $ | (0.03 | ) |
The following table sets forth the computation of basic and diluted earnings per common share for the nine month periods ended September 30, 2017 and 2016:
September 30, 2017 | September 30, 2016 | |||||||
Net loss attributed to common shareholders | $ | (9,293,535 | ) | $ | (8,834,794 | ) | ||
Denominator for basic earnings per share-weighted average shares outstanding | 94,369,953 | 76,826,949 | ||||||
Effect of dilutive securities: | ||||||||
Warrants, restricted stock and options outstanding | - | - | ||||||
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities | 94,369,953 | 76,826,949 | ||||||
Loss per common share - basic and diluted | $ | (0.10 | ) | $ | (0.11 | ) |
Securities outstanding that were excludedstayed pursuant to a joint stipulation from the computation because they wouldparties. On June 27, 2022, the Court ordered that the stay continue until thirty (30) days after the District Court rules on the renewed Motion to Dismiss the Amended Complaint in the Noto Class Action case. As a result of the Court’s denial of the Motion to Dismiss the Amended Complaint, the June 27, 2022 stay will be lifted. No trial date has been set. The parties participated in a mediation on March 21, 2023, which process is continuing.
We believe that the claims are frivolous, meritless and that the Company and the individual defendants have been anti-dilutive are as follows:substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.
Needle Rock Farms – Settlement Agreement
September 30, 2017 | September 30, 2016 | |||||||
Warrants | 12,204,580 | 9,531,921 | ||||||
Options | 6,856,691 | 5,650,679 | ||||||
19,061,271 | 15,182,600 |
During March 2023, the Company negotiated and entered into a settlement agreement related to water rights dispute with the adjacent property owner for Needle Rock Farms in which the Company agreed to pay $250 in cash upon execution of the settlement, transferred certain farm equipment with net book value of $272, and accrued an additional payment of $225 that is contingent on either the sale of the farm or will be paid within one year. The total charges of $747 recorded in connection with the settlement agreement is included within Other operating expenses, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
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NOTE 15.12 – EQUITYEQUITY- BASED COMPENSATION
On April 12, 2014,May 20, 2021, the stockholdersshareholders of the Company22nd Century Group, Inc. (the “Company”) approved the 22nd Century Group, Inc. 20142021 Omnibus Incentive Plan (the “OIP”“2021 Plan”) and on April 29, 2017, the stockholders approved an amendment to the OIP to increase the number of shares available for issuance by 5,000,000 shares.. The OIP2021 Plan allows for the granting of equity and cash incentive awards to eligible individuals over the life of the OIP,2021 Plan, including the issuance of up to an aggregate of 10,000,0005,000,000 shares of the Company’s common stock, in addition to any remaining shares under the Company’s 2014 Omnibus Incentive Plan pursuant to awards under the OIP.2021 Plan. The OIP2021 Plan has a term of ten years and is administered by the Compensation Committee of the Company’s Board of Directors to determine the various types of incentive awards that may be granted to recipients under this planthe 2021 Plan and the number of shares of common stock to underlie each such award under the OIP.2021 Plan. As of September 30, 2017, weMarch 31, 2023, the Company had available 3,929,765203,691 shares remaining for future awards under the OIP.2021 Plan.
Compensation Expense – TheCompany recognized the following compensation costs, net of actual forfeitures, related to restricted stock units (“RSUs”) and stock options:
During
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Sales, general, and administrative | | $ | 1,124 | | $ | 1,171 |
Research and development | |
| 51 | |
| 42 |
Total RSUs and stock option compensation | | $ | 1,175 | | $ | 1,213 |
Restricted Stock Units – We typically grant RSUs to employees and non-employee directors. The following table summarizes the changes in unvested RSUs from January 1, 2023 through March 31, 2023.
| | | | | |
| | Unvested RSUs | |||
| | | | Weighted | |
| | | | Average | |
| | Number of | | Grant-date | |
|
| Shares |
| Fair Value | |
| | in thousands | | $ per share | |
Unvested at January 1, 2023 |
| 4,033 | | $ | 2.13 |
Granted |
| 4,392 | | | 0.83 |
Vested | | (1,828) | | | 2.08 |
Forfeited | | (28) | | | 2.42 |
Unvested at March 31, 2023 | | 6,569 | | | 1.27 |
29
The fair value of RSUs that vested during the three and nine months ended September 30, 2017,March 31, 2023 was approximately $1,590 based on the Company issued stock option awards fromprice at the OIPtime of vesting. As of March 31, 2023, unrecognized compensation expense for 20,000 and 1,392,000 shares, respectively,RSUs amounted to eligible individuals having vesting periods ranging from one$6,975 which is expected to three years frombe recognized over a weighted average period of approximately 1.7 years. In addition, there is approximately $1,114 of unrecognized compensation expense that requires the dateachievement of the award. During the three and nine months ended September 30, 2016, the Company issuedcertain milestones which are not yet probable.
Stock Options – Our outstanding stock option awards from the OIP for 665,000 shares and 2,389,037 shares, respectively. All stock option awardsoptions were valued using the Black-Scholes option-pricing model on the date of the award.
For There was no stock option grant activity during the three and nine months ended September 30, 2017,March 31, 2023. A summary of the Company recordedstatus of stock options activity since January 1, 2023 and at March 31, 2023 is as follows:
| | | | | | | | | | | |
| | | | | | | Weighted | | | | |
| | | | Weighted | | Average | | | | ||
| | | | Average | | Remaining | | Aggregate | |||
| | Number of | | Exercise | | Contractual | | Intrinsic | |||
|
| Options |
| Price |
| Term |
| Value | |||
| | in thousands | | $ per share | | | | | | | |
Outstanding at January 1, 2023 |
| 4,912 | | $ | 1.65 |
|
|
|
| |
|
Expired |
| (103) | | $ | 2.76 |
|
|
|
| |
|
Forfeited |
| (3) | | $ | 2.76 |
|
|
|
| |
|
Outstanding at March 31, 2023 |
| 4,806 | | $ | 1.65 |
| 2.1 | years |
| $ | — |
Exercisable at March 31, 2023 |
| 4,706 | | $ | 1.63 |
| 2.0 | years |
| $ | — |
The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
As of March 31, 2023, there is approximately $190 of unrecognized compensation expense related to restrictedfor stock options that requires the achievement of certain milestones which are not yet probable.
NOTE 13. – EARNINGS PER SHARE
The following table sets forth the computation of basic and stock option awards granted under the OIP of $259,415 and $582,398, respectively ($204,860 and $677,076diluted loss per common share for the three and nine months ended SeptemberMarch 31, 2023 and 2022, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive.
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
| | (in thousands, except for per-share data) | ||||
Net loss | | $ | (18,182) | | $ | (8,918) |
Weighted average common shares outstanding - basic and diluted | |
| 215,784 | | | 163,157 |
Net loss per common share - basic and diluted | | $ | (0.08) | | $ | (0.05) |
| | | | | | |
Anti-dilutive shares are as follows as of March 31: | | | | | | |
Warrants | | | 22,748 | | | — |
Options | | | 4,806 | | | 5,171 |
Restricted stock units | | | 6,569 | | | 4,037 |
| | | 34,123 | | | 9,208 |
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NOTE 14. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table is a summary of the components and activity of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of and for the three months ended March 31, 2023 and 2022, respectively:
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | |||||||||||||
| | | | | | | | | | | | | |||
| | Corporate | | Foreign | | | | | | | | | | ||
| | securities/ | | Translation | | Pre-tax | | | | | Net of | ||||
|
| investments |
| Adjustment |
| Amount |
| Tax |
| Tax Amount | |||||
Balance at January 1, 2023 |
| $ | (112) | | $ | 1 | | $ | (111) | | $ | — | | $ | (111) |
Unrealized gain on short-term investment securities |
| | 61 | | | — | | | 61 | | | — | | | 61 |
Foreign currency translation | | | — | | | (4) | | | (4) | | | — | | | (4) |
Reclassification of realized losses to net loss | | | 13 | | | — | | | 13 | | | — | | | 13 |
Balance at March 31, 2023 | | $ | (38) | | $ | (3) | | $ | (41) | | $ | — | | $ | (41) |
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 | |||||||||||||
| | | | | | | | | | | | | |||
| | Corporate | | Foreign | | | | | | | | | | ||
| | securities/ | | Translation | | Pre-tax | | | | | Net of | ||||
|
| investments |
| Adjustment |
| Amount |
| Tax |
| Tax Amount | |||||
Balance at January 1, 2022 |
| $ | (162) | | $ | — | | $ | (162) | | $ | — | | $ | (162) |
Unrealized loss on short-term investment securities |
| | (400) | | | — | | | (400) | | | — | | | (400) |
Balance at March 31, 2022 | | $ | (562) | | $ | — | | $ | (562) | | $ | — | | $ | (562) |
NOTE 15. – REVENUE RECOGNITION
Tobacco
The Company’s tobacco reportable segment revenues are derived primarily from contract manufacturing organization (“CMO”) customer contracts that consist of obligations to manufacture the customers’ branded filtered cigars and cigarettes. Additional revenues are generated from sale of the Company’s proprietary low nicotine content cigarettes, sold under the brand name VLN®, or research cigarettes sold under the brand name SPECTRUM®.
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For certain CMO contracts, the performance obligation is satisfied over time as the Company determines, due to contract restrictions, it does not have an alternative use of the product and it has an enforceable right to payment as the product is manufactured. The Company recognizes revenue under those contracts at the unit price stated in the contract based on the units manufactured. Tobacco revenue from the sale of the Company’s products, which include excise taxes and shipping and handling charges billed to customers, is recognized net of cash discounts, sales returns and allowances. There was no allowance for discounts or returns and allowances at March 31, 2023 and December 31, 2022. Excise taxes recorded in Cost of Goods Sold on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 were $2,695 and $2,719, respectively.
Hemp/Cannabis
The Company’s hemp/cannabis reportable segment revenues are derived primarily from a CBD wholesale extracts and bulk ingredient distillate or isolate. Additional revenues are generated from private/white label contract manufacturing.
31
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled. For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.
When applicable, the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.
There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.
Disaggregation of Revenue
The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by major product line because the Company believes it best depicts the nature, amount, and timing of revenue and cash flows. Revenue recognized from Tobacco products transferred to customers over time represented 66% and 74%, for the three months ended March 31, 2023 and 2022, respectively. There was no revenue recognized from Hemp/cannabis products that were transferred to customers over time for the three months ended March 31, 2023 and 2022.
| | | | | |
| Three Months Ended | ||||
| March 31, | ||||
| 2023 |
| 2022 | ||
Tobacco | $ | 8,927 | | $ | 9,045 |
Hemp/cannabis |
| 13,035 | |
| — |
Total revenues, net | $ | 21,962 | | $ | 9,045 |
The following table presents net revenues by significant customers, which are defined as any customer who individually represents 10% or more of disaggregated product line net revenues:
| | | | | | | | | | | | |
| | Three Months Ended | ||||||||||
| | March 31, | ||||||||||
|
| 2023 | | 2022 | ||||||||
| | Tobacco | | Hemp/cannabis | | Tobacco | | Hemp/cannabis | ||||
Customer A | | 36.15 | % | | * | | | 21.69 | % | | * | |
Customer B | | * | | | * | | | 10.98 | % | | * | |
Customer C | | 27.05 | % | | * | | | 26.66 | % | | * | |
Customer D | | 18.51 | % | | * | | | 32.85 | % | | * | |
Customer E | | * | | | 17.75 | % | | * | | | * | |
Customer F | | * | | | 10.29 | % | | * | | | * | |
Customer G | | * | | | * | | | * | | | * | |
All other customers | | 18.29 | % | | 71.96 | % | | 7.82 | % | | * | |
| | | | | | | | | | | | |
*Less than 10% of product line’s total revenues for the period. | | | | | | | | | | | | |
32
Contract Assets and Liabilities
Unbilled receivables (contract assets) represent revenues recognized for performance obligations that have been satisfied but have not been billed. These receivables are included as Accounts receivable, net on the Condensed Consolidated Balance Sheets. Customer payment terms vary depending on the terms of each customer contract, but payment is generally due prior to product shipment or within credit terms up to 30 2016, respectively).days after shipment. Deferred income (contract liabilities) relates to down payments received from customers in advance of satisfying a performance obligation and is included as Deferred income on the Condensed Consolidated Balance Sheets.
Total contract assets and contract liabilities are as follows:
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Unbilled receivables |
| $ | 1,549 |
| $ | 354 |
Deferred income | | | (257) | | | (831) |
Net contract assets (liabilities) | | $ | 1,292 | | $ | (477) |
During the three and nine months ended September 30, 2017, there were no issuances of stock or stock options to third-party service providers. During the threeMarch 31, 2023 and nine months ended September 30, 2016,2022, the Company issued stock to third-party service providersrecognized $802 and $119 of revenue that was included in the amountcontract liability balance as of 0December 31, 2022 and 15,811 shares, respectively, and during the three and nine months ended September 30, 2016, the Company issued stock options in the amount of 0 and 100,000 shares, respectively, to third-party service providers. 2021 respectively.
N
NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company had noorganizes its business into two reportable segments: (1) Tobacco and (2) Hemp/Cannabis. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting.
The Company defines segment income from operations as revenues, net less cost of goods sold and expenses attributable to segment-specific selling, general, administrative, research, development, and other operating activities. The remaining unallocated operating and other income and expenses are primarily administrative corporate overhead expenses such as corporate personnel costs, equity based compensation, expense relatedinvestor relations, strategic consulting, research and development costs that apply broadly to third-party providersthe overall plant science platform, and that are not allocated to reportable segments. Unallocated corporate assets consist of cash and cash equivalents, short-term investment securities, prepaid and other assets, property and equipment, and intangible assets. Transactions between the two segments are not significant.
The following table presents revenues, net by segment for the three and nine months ended September 30, 2017. DuringMarch 31, 2023 and 2022:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Tobacco | | $ | 8,927 | | $ | 9,045 |
Hemp/cannabis | |
| 13,035 | |
| — |
Total revenues, net | | $ | 21,962 | | $ | 9,045 |
33
The following table presents income from continuing operations for the Company’s reportable segments for the three and nine months ended September 30, 2016,March 31, 2023 and 2022:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Tobacco | | $ | 2,904 | | $ | 959 |
Hemp/cannabis | |
| 6,165 | |
| 830 |
Total segment operating loss | | | 9,069 | | | 1,789 |
Unallocated operating expenses | | | 8,754 | | | 6,357 |
Operating loss | | | 17,823 | | | 8,146 |
Unallocated other expense, net | | | 359 | | | 772 |
Loss before income taxes | | $ | 18,182 | | $ | 8,918 |
The following table presents total assets for the Company’s reportable segments as of March 31, 2023 and December 31, 2022:
| | | | | | |
| | | ||||
| | March 31, | | December 31, | ||
|
| 2023 |
| 2022 | ||
Tobacco | | $ | 20,459 | | $ | 15,748 |
Hemp/cannabis | |
| 66,610 | |
| 65,965 |
Total reportable segments | | | 87,069 | | | 81,713 |
Unallocated assets | | | 37,069 | | | 32,938 |
Total assets | | $ | 124,138 | | $ | 114,651 |
The following table presents capital expenditures for the Company’s reportable segments for the three months ended March 31, 2023 and 2022:
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Tobacco | | $ | 277 | | $ | 162 |
Hemp/cannabis | |
| 1,441 | |
| - |
Total reportable segments | | | 1,718 | | | 162 |
Unallocated expenditures for long-lived tangible assets | | | 192 | | | 96 |
Total expenditures | | $ | 1,910 | | $ | 258 |
NOTE 17. – SUBSEQUENT EVENTS
On April 4, 2023, a subsidiary of 22nd Century Group, Inc. (the “Company”) entered into a License and Distribution Agreement (the “Agreement”) with Cookies Creative Consulting & Promotions, Inc. (“Cookies”). Pursuant to the Agreement, Cookies granted the Company recorded equity based compensation expense relatedan exclusive license to third-party providers inmanufacture and distribute certain Cookie’s branded hemp-derived hemp/cannabis products to retailers within the amount of $0 and $30,873, respectively.
As of September 30, 2017, unrecognized compensation expense related to non-vested restricted shares and stock options amounted to approximately $2,165,000, which is expected to be recognized approximately as follows: $262,000, $848,000, $448,000 and $140,000 during 2017, 2018, 2019 and 2020, respectively. Approximately $467,000 of the unrecognized compensation expense relates to previously issued stock options, with the vesting of such stock options being based on the achievement of a certain milestone, and the attainment of such milestone cannot be determined at this time.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the nine months ended September 30, 2017 and 2016:
2017 | 2016 | |||||||
Risk-free interest rate (weighted average) | 2.12 | % | 1.31 | % | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected stock price volatility | 90 | % | 90 | % | ||||
Expected life of options (weighted average) | 5.14 years | 4.87 years |
The Company estimated the expected volatility based on data used by a peer group of public companies. The expected term was estimated using the contract life of the option. The risk-free interest rate assumption was determined using yield of the equivalent U.S. Treasury bonds over the expected term. The Company has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company assumed an expected dividend yield of zero.
A summary of all stock option activity since December 31, 2015 is as follows:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | Remaining | Aggregate | ||||||||||||||
Number of | Average | Contractual | Intrinsic | |||||||||||||
Options | Exercise Price | Term | Value | |||||||||||||
Outstanding at December 31, 2015 | 3,161,642 | $ | 1.10 | |||||||||||||
Granted in 2016 | 2,489,037 | $ | 0.97 | |||||||||||||
Outstanding at December 31, 2016 | 5,650,679 | $ | 1.04 | |||||||||||||
Granted in 2017 | 1,392,000 | $ | 1.40 | |||||||||||||
Exercised in 2017 | (85,988 | ) | $ | 0.79 | ||||||||||||
Expired in 2017 | (100,000) | $ | 1.43 | |||||||||||||
Outstanding at September 30, 2017 | 6,856, 691 | $ | 1.12 | 7.1 years | $ | 11,347,700 | ||||||||||
Exercisable at September 30, 2017 | 3,617,670 | $ | 1.10 | 6.1 years | $ | 6,042,860 |
There were stock options granted during the nine months ended September 30, 2017 and 2016, to purchase a total of 1,392,000 shares and 2,489,037 shares, respectively. The weighted average grant date fair value of options issued during the nine months ended September 30, 2017 was $0.98 ($0.66 for the nine months ended September 30, 2016). The total fair value of options that vested during the nine months ended September 30, 2017 amounted to $750,265 ($1,242,110 for the nine months ended September 30, 2016). There were 85,988 options exercised on a cashless basis during the nine months ended September 30, 2017 resulting in the issuance of 51,927 shares of the Company’s common stock, and during the nine months ended September 30, 2016 no options were exercised.
NOTE 16. - SUBSEQUENT EVENTS
On October 10, 2017, the Company closed a registered direct offering (the “Offering”) with institutional investors purchasing an aggregate of 20,570,000 shares of the Company’s common stock at a price of $2.6250 per share generating net cash proceeds for the Company of approximately $50,700,000, after deducting expenses associated with the transaction.The securities purchase agreement entered into with the institutional investors provides that, subject to certain exceptions,United States for a period of one year followingthree years, with the closingCompany having an option to extend the Agreement for an additional three-year period if certain retailer milestones are met during the initial term.
During the term of the Offering,Agreement, the Company will be prohibited from effecting or entering into an agreementpay Cookies a monthly license fee equal to effect any issuancea percentage of the net profits generated by the Company or any of its subsidiaries of common stock or common stock equivalents (or a combination of units thereof) involving a variable rate transaction, which generally includes any transaction in whichunder the Agreement. In consideration for the exclusivity under the Agreement, the Company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the rightagreed to receive additionalissue Cookies 5,000,000 shares of unregistered common stock either (A) at a conversion price or exchange rate that is based upon and/or varies with the trading prices of or quotations for the shares of common stock at any time after the initial issuance of such securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company, or the market for the common stock or (ii) enters into any agreement, whereby the Company may issue securities at a future determined price. The securities purchase agreement also provides that, subject to certain exceptions,a lock-up during the Company will not enter into any agreement to sell common stock for a periodfirst year after the issuance.
34
Effective on October 31, 2017, the Company appointed James E. Swauger, Ph.D., as our Senior Vice President of Science and Regulatory Affairs. Dr. Swauger entered into an employment agreement with the Company containing customary terms and conditions with an initial three-year term. In connection with his appointment, Dr. Swauger was awarded a time vesting stock option to purchase nine hundred thousand (900,000) shares of the Company’s common stock at an exercise price of $2.12 per share. One-third of this time vesting stock option vests over each of the next three years and such stock option had a fair value upon issuance of approximately $1,400,000. In addition, Dr. Swauger was awarded a performance vesting stock option to purchase three hundred thousand (300,000) shares of the Company’s common stock at an exercise price of $2.12 per share that vests on the attainment of various performance based milestones and had a fair value upon issuance of approximately $480,000.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: our ability to continue to monetize the licensing of our technology and products; our ability to achieve profitability; our ability to manage our growth effectively; our ability to have a Modified Risk Tobacco Product approved by the FDA; our ability to obtain FDA clearance for our Modified Risk Cigarettes; our ability to obtain FDA approval for our X-22 smoking cessation product; our ability to gain market acceptance for our products, our ability to prevail in litigation and our ability to maintain our rights to our intellectual property licenses. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which is available on the SEC’s website at www.sec.gov.All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.
For purposes of thisThe following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as our condensed consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1 of this Form 10-Q.
For purposes of this MD&A, references to the “Company,” “we,” “us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein. In addition, dollars are in thousands, except per share data or unless otherwise specified.
Forward Looking Statements
Except for historical information, all of the statements, expectations, and assumptions contained in this section are forward-looking statements. Forward-looking statements typically contain terms such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “explore,” “foresee,” “goal,” “guidance,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “preliminary,” “probable,” “project,” “promising,” “seek,” “should,” “will,” “would,” and similar expressions. Actual results might differ materially from those explicit or implicit in forward-looking statements. Important factors that could cause actual results to differ materially are set forth in “Risk Factors” in our Annual Report on Form 10-K filed on March 9, 2023. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law. All information provided in this quarterly report is as of the date hereof, and we assume no obligation to and do not intend to update these forward-looking statements, except as required by law.
OverviewOur Business
We are22nd Century Group, Inc. is a plantleading biotechnology company focused on (i) potentiallyutilizing advanced plant technologies to improve health and wellness with reduced risknicotine tobacco, cigaretteshemp/cannabis and hops. We use modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the consumer goods and pharmaceutical industries by creating new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits. Our mission in tobacco products is dedicated to reduce the harms of smoking cessation products produced from modifying theby commercializing our proprietary, very low nicotine content in“VLNC” tobacco plants and cigarette products. We received the first and only Food and Drug Administration (“FDA”) Modified Risk Tobacco Product (“MRTP”) authorization of a combustible cigarette in December 2021. Beginning in April 2022, we launched our proprietary VLN® reduced nicotine cigarettes, first through genetic engineeringa pilot program conducted in select Circle K stores in and around Chicago, Illinois. Following our successful pilot program, we initiated an ongoing state-by-state, region-by-region rollout strategy.
Our mission in hemp/cannabis is to develop and monetize proprietary varieties of hemp with valuable cannabinoid and terpene profiles and other superior agronomic traits. We are a global scale provider of cannabinoid ingredients and Active Pharmaceutical Ingredients (“API”), as well as a contract development and manufacturing organization (CDMO) provider of hemp-derived consumer products.
In hops, our mission is to leverage our experience with tobacco and hemp/cannabis, a close hop plant breeding, and (ii) research andrelative, to accelerate the development of unique cannabis/hemp plants through genetic engineeringproprietary specialty hop varieties with valuable traits, for potential applications in life sciences and plant breeding to alter levels of cannabinoids for new medicines and improved agricultural uses. consumer products.
We have an extensivea significant intellectual property portfolio of issued patents and patent applications relating to theboth tobacco and hemp/cannabis plants. Our management team is focused on monetizing ourplants and have further resources directed towards creating and securing additional intellectual property portfolio, obtaining regulatory approvalpertaining to market bothall three franchises. We continue to prioritize research and development activities to achieve our reduced exposure cigarettesstrategic and our smoking cessation product in development, establishing international strategic partnerships to sellinvestment priorities.
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Recent Business Acquisitions and distribute our proprietary tobacco and products, and developing and commercializing high value products derived from our unique cannabis/hemp plants. Additional information about our business and operations is contained in our Annual Report on Form 10-K for the year ended December 31, 2016.
Strategic Objectives
Our strategic objectives include the following:
Other Events
● | On March 3, 2023, the |
o | The new three-year credit facility was issued at 5% original issuance discount (OID) and will bear cash interest at a rate of 7% per annum. |
● | In Q1 2023, the company launched a new single source, turnkey contract development, manufacturing and distribution service offering (CDMO+D) for the largest consumer brand companies in the hemp/cannabis sector. This new CDMO+D service offering includes ingredient supply, white label manufacturing and retail category management and distribution . |
o | On April 4, 2023, we entered into a License and Distribution Agreement (the “Agreement”) with Cookies Creative Consulting & Promotions, Inc. (“ |
Financial Overview
● | Net revenues for the first quarter of 2023 were $21,962, an increase of 142.8% from $9,045 in 2022. |
o | Revenue from tobacco-related products for the first quarter was $8,927 compared to $9,045 in the prior year first quarter reflecting a decrease in unit sales of filtered cigars. |
o | Revenue from hemp/cannabis-related products was $13,035, compared to $0 in the prior year first quarter, reflecting the acquisition of GVB. Sequential revenues in the first quarter of 2023 increased by $3,780 compared to the fourth quarter of 2022 due to continued strong demand for bulk ingredients. |
● | Gross profit for the first quarter of 2023 was a loss of $1,177 compared to profit of $309 in the prior year period. |
o | Gross profit from tobacco-related products was $19, a decrease of $290 compared to the prior year period, reflecting lower margin sales mix in contract manufacturing products and increased excise taxes. |
o | Gross profit from hemp/cannabis-related products was a loss of $1,196 compared to $0 in the prior year. Margin declines in the first quarter were primarily due to ongoing impacts of the Grass Valley fire. |
● | Total operating expenses for the first quarter of 2023 increased to $16,646 compared to $8,455 in the prior year quarter driven by: |
o | Sales, general and administrative expenses increased to $14,231 driven primarily by the acquisition of GVB, higher strategic consulting and marketing, legal, and personnel costs to expand the launch of VLN®. |
o | Research and development expenses increased to $1,517, driven by personnel expenses and costs associated with the Company’s hemp/cannabis and hops research programs. |
o | Other operating expenses, net was $898, primarily reflecting settlement, acquisition costs and other non-recurring charges. |
● | Operating loss for the first quarter 2023 was $17,823, compared to a loss of $8,146 in the prior year period. |
● | Net loss in the first quarter of 2023 was $18,182, representing a net loss per share of $0.08 compared with net loss in the first quarter of 2022 of $8,918, representing a net loss per share of $0.05. |
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● | As of March 31, 2023, we had $16,227 in cash, cash equivalents and short-term investments securities and $7,500 in restricted cash pursuant to the |
Our Financial Results
| | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | |||||
| | March 31 | | | March 31 | | | | Change | ||||
|
| 2023 |
| | 2022 | | | $ | | % | |||
Tobacco revenues, net | | $ | 8,927 | | | $ | 9,045 | | | $ | (118) | | (1.3) |
Hemp/cannabis revenues, net | | | 13,035 | | | | — | | | | 13,035 | | NM |
Total revenues, net | | | 21,962 | | | | 9,045 | | | | 12,917 | | 142.8 |
Cost of goods sold | | | 23,139 | | | | 8,736 | | | | 14,403 | | 164.9 |
Gross (loss) profit | | | (1,177) | | | | 309 | | | | (1,486) | | (480.3) |
Gross (loss) profit as a % of revenues, net | | | (5.4) | % | | | 3.4 | % | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Sales, general and administrative ("SG&A") | | | 14,231 | | | | 7,262 | | | | 6,969 | | 96.0 |
SG&A as a % of revenues, net | | | 64.8 | % | | | 80.3 | % | | | | | |
Research and development ("R&D") | | | 1,517 | | | | 1,141 | | | | 376 | | 33.0 |
R&D as a % of revenues, net | | | 6.9 | % | | | 12.6 | % | | | | | |
Other operating expenses, net ("OOE") | | | 898 | | | | 52 | | | | 846 | | NM |
Total operating expenses | | | 16,646 | | | | 8,455 | | | | 8,191 | | 96.9 |
Operating loss | | | (17,823) | | | | (8,146) | | | | (9,677) | | 118.8 |
Operating loss as a % of revenues, net | | | (81.2) | % | | | (90.1) | % | | | | | |
Other income (expense): | | | | | | | | | | | | | |
Unrealized loss on investment | | | - | | | | (817) | | | | 817 | | NM |
Other income, net | | | 5 | | | | - | | | | 5 | | NM |
Interest income, net | | | 57 | | | | 50 | | | | 7 | | 14.0 |
Interest expense | | | (421) | | | | (5) | | | | (416) | | NM |
Total other expense | | | (359) | | | | (772) | | | | 413 | | (53.5) |
Loss before income taxes | | | (18,182) | | | | (8,918) | | | | (9,264) | | 103.9 |
(Benefit) provision for income taxes | | | - | | | | - | | | | - | | - |
Net loss | | $ | (18,182) | | | $ | (8,918) | | | | (9,264) | | 103.9 |
Net loss as a % of revenues, net | | | (82.8) | % | | | (98.6) | % | | | | | |
Net loss per common share (basic and diluted) | | $ | (0.08) | | | $ | (0.05) | | | | (0.03) | | 60.0 |
| | | | | | | | | | | | | |
NM - calculated change not meaningful | | | | | | | | | | | | | |
ForRefer to Note 16, “Segment and Geographic Information,” of the third quarter of 2017, our accomplishments and notable events include:
On July 28, 2017,Notes to the FDA announced it plans to mandate the lowering of nicotine levels in all combustible cigarettes sold in the United States to minimally or non-addictive levels. The FDA announcement stated that “lowering nicotine levels could decrease the likelihood that future generations become addicted to cigarettes and allow more currently addicted smokers to quit smoking.” On July 31, 2017, we announced that we are already capable of achieving the FDA’s new reduced nicotine standard. Our proprietary Very Low Nicotine tobacco, with up to 95% less nicotine than tobaccoCondensed Consolidated Financial Statements contained in conventional cigarettes, is grown on independently-owned farms in the United States – without any artificial extraction or chemical processes. 22nd Century’s proprietary Very Low Nicotine cigarettes have demonstrated that the FDA’s planned mandate for cigarettes with non-addictive levels of nicotine is both achievable and realistic. The Company believes that the implementation of an FDA mandate that lowers nicotine levels in all combustible cigarettes sold in the United States will save millions of lives and billions of dollars in healthcare costs per year. Matthew Myers, the president of anti-smoking group Campaign for Tobacco-Free Kids, asserted in an August 9, 2017 Bloomberg News article that the new FDA plan could lead to “the most fundamental change the tobacco industry has ever seen.”
On August 23, 2017, we also announced that, over the last 6 years, agencies of the U.S. federal government have invested more than $100 million in independent clinical research with our proprietarySPECTRUM cigarettes, with the results of these independent studies supporting the conclusion that lowering nicotine levels in combustible tobacco cigarettes would drastically improve public health. There are at least 17 completed independent clinical trials using our proprietary Very Low Nicotine tobacco and at least 25 on-going clinical trials using our proprietary Very Low Nicotine cigarettes. We have also previously publicly announced that we stand ready to partner with the FDA and with any companies that are committed to improving the health of American smokers.
In July and August of 2017, certain of the holders of warrants exercised warrants for cash to purchase an aggregate of 3,813,500 shares of our common stock at an exercise price of $1.00 per share and exercised for cash warrants to purchase an aggregate of 1,895,052 shares of our common stock at an exercise price of $1.45 per share, resulting in net cash proceeds to us of $6,167,646, after deducting expenses associated with the exercise. In consideration for these holders exercising their warrants for cash, we issued those holders new warrants to purchase shares of our common stock equal to the number of shares of common stock received by each such holder upon cash exercise of the holder’s warrants. The terms of the new warrants are substantially similar to the terms of the warrants exercised, except the new warrants (i) have an exercise price equal to $2.15 per share and (ii) are exercisable beginning December 20, 2017 for a period of five (5) years. Accordingly, we issued new warrants in July and August of 2017 to such exercising warrant holders to purchase an aggregate of 5,708,552 shares of our common stock upon exercise of the existing warrants of such holders.
On September 25, 2017, we announced that the 2013 Research License and Commercial Option Agreement between 22nd Century and British American Tobacco had ended. With the endItem 1 of this agreement, 22nd Century is once again in sole control ofreport for additional information regarding operating results for our extensive intellectual property portfolio. As a result, we have since recommenced discussionstwo operating and reportable segments: (1) Tobacco, (2) Hemp/cannabis.
First Quarter 2023 Compared with global tobacco companies and international pharmaceutical companies that have expressed interest in developing a business relationship with 22nd Century.
Subsequent to the close of the third quarter of 2017, we also announced:
On October 5, 2017, Dr. Dorothy Hatsukami publicly revealed atThe Vermont Center on Behavior and Health’s Tobacco Regulatory Science Conference the findings of a highly anticipated Phase III clinical study conducted with 1,250-patients over a 20-week study period that investigated which application of Very Low Nicotine cigarettes is best: (i) an immediate reduction in nicotine to non-addictive levels or (ii) a gradual reduction in nicotine to non-addictive levels. Though the Phase III study is still under peer review prior to publication, Dr. Hatsukami indicated at the Vermont conference that an immediate reduction in nicotine poses a “greater likelihood of more rapid smoking cessation.” We provided all the research cigarettes used in such Phase III study.
On October 10, 2017, we closed a registered direct common stock offering with institutional investors to receive approximately $54 million in gross proceeds through the sale of 20.57 million shares of common stock at a price of $2.625 per share. This no-warrant financing is the largest capital raise – at the highest offering price per share – in the history of 22nd Century. The net proceeds of the financing will be used for general corporate purposes, including working capital as we enter licensing and strategic partnership discussions with major companies around the world.
On October 19, 2017, we announced that we had successfully completed our hemp field trials with the University of Virginia (“UVA”) in which we used multiple oil and fiber varieties of hemp and UVA identified proprietary varieties of our unique hemp plants that have excellent agronomic properties for growth in the Commonwealth of Virginia. 22nd Century and UVA are currently working on expanded plantings of the most promising varieties of our proprietary hemp plants to optimize plant growth in the legacy tobacco growing region of the United States. 22nd Century is also working with UVA on the development of high-value medicinal cannabinoid varieties and specialized cannabinoid extraction processes for use in human therapeutics, as well as the use of our unique hemp plants for phytoremediation to clean up and reclaim polluted soils in Virginia. We also announced at that same time that we are expanding our hemp activities in our home State of New York after the announcement by New York Governor Andrew Cuomo that New York State intends to become a leading grower and producer of hemp and hemp-derived products. To take advantage of the favorable hemp climate in New York, 22nd Century has obtained a New York hemp research and grower license and looks forward to expanding its Buffalo, NY-based laboratory to include important new hemp research.
Effective on October 31, 2017, the Company appointed James E. Swauger, Ph.D., as our Senior Vice President of Science and Regulatory Affairs. Dr. Swauger was previously the leader of the scientific and regulatory functions at Reynolds American Inc. Dr. Swauger’s primary responsibility at 22nd Century will be to lead and oversee the scientific and regulatory activities of the Company, including the re-submission to the FDA of the Company’s Modified Risk Tobacco Product (“MRTP”) application forBRAND A Very Low Nicotine Content cigarettes. Dr. Swauger will also work with the Company in support of the FDA’s plan to mandate the reduction of nicotine levels in cigarettes to minimally or non-addictive levels.
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
First Quarter 2022
Revenue, - Salenet
| | | | | | | | | | |
| Three Months Ended | | | | | | ||||
| March 31 | | March 31 | | Change | |||||
| 2023 |
| 2022 | | $ | | % | |||
Tobacco | $ | 8,927 | | $ | 9,045 | | $ | (118) | | (1.3) |
Hemp/cannabis | | 13,035 | | | — | | | 13,035 | | NM |
Total revenues, net | $ | 21,962 | | $ | 9,045 | | | 12,917 | | 142.8 |
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In the three months ended September 30, 2017, we realized net sales revenue from the sale of products in the amount of $4,530,865, an increase of $1,433,217, or 46.3%, from net sales revenue of $3,097,648 for the three months ended September 30, 2016. The increase in net sales revenue for the third quarter of 2017 was primarily the result of additional net sales revenue generated from a new contract to manufacture an existing brand of filtered cigars as compared to net sales revenue for the second quarter of 2016. Production under that new contract began in mid-May of 2017.
Cost of goods sold - Products
During the three months ended September 30, 2017, cost of goods sold were $4,871,234, or 107.5%, of net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $2,436,000 are included in the cost of goods sold for the three months ended September 30, 2017. We were not yet operating our factory at full production capacity throughout the third quarter of 2017, but we began utilizing a portion of the excess capacity as a result of the new filtered cigar contract manufacturing agreement that commenced in mid-May of 2017. As a result, the cost of goods sold relating to product sales, which included the cost of raw material components, direct manufacturing costs and an overhead allocation, exceeded net sales revenue.
During the three months ended September 30, 2016, cost of goods sold were $3,282,266, or 106.0%, of net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $1,810,000 are included in the cost of goods sold for the three months ended September 30, 2016. We were not operating our factory at full production capacity during the third quarter of 2016. As a result, the cost of goods sold relating to product sales, which included the cost of raw material components, direct manufacturing costs and an overhead allocation, was in excess of net sales revenue.
Research and development expense
Research and development (“R&D”) expense was $784,587 in the three months ended September 30, 2017, an increase of $92,617, or 13.4%, from $691,970 in the three months ended September 30, 2016. This increase was primarily a result of an increase in R&D sponsored research costs in the approximate amount of $127,000, an increase patent maintenance expenses of approximately $37,000 and an increase in payroll and related benefits of approximately $14,000, partially offset by a decrease in research license fees of approximately $38,000 and a decrease in costs associated with our modified risk tobacco products of approximately $55,000.
General and administrative expense
General and administrative expense was $1,635,226 in the three months ended September 30, 2017, an increase of $404,259, or 32.8%, from $1,230,967 in the three months ended September 30, 2016. The increase was mainly due to an increase in investor relations expenses of approximately $173,000, an increase in payroll and related benefit costs of approximately $147,000, an increase in equity based compensation of approximately $36,000, an increase in industry conferences and related travel expenses of approximately $38,000 and a net increase in other general and administrative expenses of approximately $40,000, partially offset by a decrease in legal and accounting expenses of approximately $30,000.
Sales and marketing expense
During the three months ended September 30, 2017, we incurred sales and marketing expenses of $279,254 an increase of $2,158, or 0.8%, from $277,096 in the three months ended September 30, 2016. The increase in sales and marketing expenses were primarily the result of an increase in payroll and related benefit costs of approximately $23,000, increase in equity based compensation of approximately $26,000 and an increase in industry trade show costs of approximately $36,000, partially offset by a decrease in advertising and promotional costs of approximately $42,000 and a decrease in travel related expenses of approximately $41,000.
Depreciation expense
Depreciation expense for the three months ended September 30, 2017 amounted to $88,711, an increase of $7,357, or 9.0%, from $81,354 for the three months ended September 30, 2016. The increase is due to depreciable additions to machinery and equipment over the last year in the approximate amount of $210,000, primarily consisting of equipment additions in our NASCO operations in North Carolina and our laboratory in Buffalo, New York. During the third quarter of 2017, we acquired approximately $916,000 in additional packaging equipment for our NASCO operations in North Carolina. This equipment was not placed in service during the third quarter of 2017 and accordingly, no depreciation expense was recorded.
Amortization expense
Amortization expense for the three months ended September 30, 2017 amounted to $145,934, an increase of $16,127, or 12.4%, from $129,807 for the three months ended September 30, 2016. The amortization expense relates to amortization taken on capitalized patent costs and license fees. The increase is primarily due to amortization taken on additional patent costs incurred during the nine months ended September 30, 2017 and the year ended December 31, 2016 in the amounts of $457,385 and $541,882, respectively.
Warrant liability loss - net
The warrant liability loss of $55,886 for the third quarter of 2017 was due to an increase in the estimated fair value of the warrants during the period. The increase in the estimated fair value of the warrants was primarily attributable to an increase in our underlying stock price from $1.75 per share at June 30, 2017 as compared to $2.77 per share at September 30, 2017.
The warrant liability loss of $46,995 for the third quarter of 2016 was due to an increase in the estimated fair value of the warrants during the period. The increase in the estimated fair value of the warrants was primarily attributable to an increase in our underlying stock price from $0.81 per share at June 30, 2016 as compared to $1.45 per share at September 30, 2016.
Loss on investment
On February 17, 2017, a dilutive event reduced our ownership in Anandia to 19.4%, an ownership percentage below the 20% ownership threshold for the use of the equity method of accounting. Accordingly, we discontinued applying the equity method of accounting for our equity investment in Anandia, effective on the date of the dilutive event, and as a result, there is no gain or loss recorded on the investment in Anandia during the three months ended September 30, 2017. On July 25, 2017, another dilutive event occurred resulting in an additional reduction in our ownership in Anandia to 19.0%.
The loss on investment of $29,997 for the three months ended September 30, 2016 consisted of (i) our 24.4% (25.0% ownership prior to a dilutive event on September 8, 2016) share of Anandia’s net loss for the three months ending September 30, 2016 in the amount of $15,585 plus (ii) amortization of the intangible asset represented by the difference between our equity investment in Anandia and our portion of the net assets of Anandia in the amount of $14,412.
Interest income
Interest income for the three months ended September 30, 2017 was $20,317, an increase of $18,186 from interest income of $2,131 for the three months ended September 30, 2016. The interest income earned in the three months ended September 30, 2017 and 2016 was generated from excess cash invested in a money market account, with the average cash balance being greater during the third quarter of 2017 as compared to the third quarter of 2016.
Interest expense
Interest expense decreased by $2,331, or 25.0%, in the three months ended September 30, 2017 to $6,984 from $9,315 in the three months ended September 30, 2016 and is derived from the interest component of severance payments made on accrued severance that had previously been recorded on a discounted basis using our incremental borrowing rate and the accretion of interest on the NRC note payable.
Net loss
We had a net loss in the three months ended September 30, 2017 of $3,316,634 as compared to a net loss of $2,679,988 in the three months ended September 30, 2016. The increase in the net loss of $636,646, or 23.8%, was primarily the result of an increase in the gross loss of approximately $156,000, an increase in operating expenses of approximately $523,000, partially offset by a decrease in other income (expense) in the approximate amount of $42,000.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenue - Sale of products
In the nine months ended September 30, 2017, we realized net sales revenue from the sale of products in the amount of $10,659,588, an increase of $1,715,226, or 19.2%, over net sales revenue of $8,944,362 for the nine months ended September 30, 2016. The increase in net sales revenue for the nine months ended September 30, 2017 was primarily the result of additional net sales revenue generated from a new contract to manufacture an existing brand of filtered cigars that began in mid-May of 2017, partially offset by a decrease in net sales revenue from the sale ofSPECTRUMresearch cigarettes in the amount of $329,321 during the first quarter of 2016, as compared to net sales revenue for the nine months ended September 30, 2016.
Cost of goods sold - Products
During the nine months ended September 30, 2017, cost of goods sold were $11,438,909, or 107.3%, of net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $5,980,000 are included in the cost of goods sold for the nine months ended September 30, 2017. We were not yet operating our factory at full production capacity throughout the nine months ended September 30, 2017, but we began utilizing a portion of the excess capacity as a result of the new filtered cigar contract manufacturing agreement that commenced in mid-May of 2017. As a result, the cost of goods sold relating to product sales, which included the cost of raw material components, direct manufacturing costs and an overhead allocation, exceeded net sales revenue. We also recorded an increase in our inventory reserve by $95,000 during the second quarter of 2017 that resulted in an increase in the cost of goods sold by the same amount.
During the nine months ended September 30, 2016, cost of goods sold were $9,146,247, or 102.3%, of net sales revenue. Cost of goods sold relating to the sales SPECTRUM research cigarettes were $55,019, or 16.7%, of related net sales revenue and the remaining cost of goods sold was $9,091,228, or 105.5%, of related net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $5,387,000 are included in the cost of goods sold for the nine months ended September 30, 2016. We were not operating the factory at full production capacity during the first three quarters of 2016. As a result, the cost of goods sold relating to product sales (exclusive of SPECTRUM research cigarettes), which included the cost of raw material components, direct manufacturing costs and an overhead allocation, was in excess of net sales revenue.
Research and development expense
R&D expense was $2,148,725 in the nine months ended September 30, 2017, an increase of $349,289, or 19.4%, from $1,799,289 in the nine months ended September 30, 2016. This increase was primarily a result of increases in sponsored research contract costs of approximately $216,000, an increase of approximately $98,000 in costs related to our modified risk tobacco product, an increase in testing fees of approximately $60,000, an increase in patent maintenance fees of approximately $37,000 and an increase in costs associated with our laboratory in the approximate amount of $91,000, partially offset by a decrease in travel related expenses of approximately $50,000, a decrease in equity based compensation expense of approximately $59,000 and a decrease in research license fees of approximately $38,000.
General and administrative expense
General and administrative expense was $5,060,823 in the nine months ended September 30, 2017, an increase of $261,474, or 5.5%, from $4,799,349 in the nine months ended September 30, 2016. The increase was mainly due to an increase of approximately $346,000 in payroll and related benefits, an increase in investor relations expenses of approximately $141,000, an increase in industry conferences and related travel expenses of approximately $75,000, an increase of approximately $46,000 for costs relating to our annual shareholders meeting, and a net increase in other general and administrative expenses of approximately $8,000, partially offset by a decrease in equity based compensation in the approximate amount of $133,000, a decrease in legal and accounting fees of approximately $142,000, and a decrease in consulting fees of approximately $80,000.
Sales and marketing expense
During the nine months ended September 30, 2017, we incurred sales and marketing expenses of $842,558, a decrease of $388,258, or 31.5%, from $1,230,816 in the nine months ended September 30, 2016. The decrease in sales and marketing expenses were mainly the result of a decrease in advertising and promotional costs, primarily relating to our proprietary cigarette brand,RED SUN, in the approximate amount of $498,000 and a decrease in travel related expenses of approximately $68,000, partially offset by an increase in payroll and related benefit costs of approximately $76,000, an increase in equity based compensation of approximately $66,000 and an increase in industry trade show costs of approximately $38,000.
Depreciation expense
Depreciation expense for the nine months ended September 30, 2017 amounted to $265,296, an increase of 22,278, or 9.2%, from $243,018 for the nine months ended September 30, 2016. The increase is due to additions to machinery and equipment over the last year in the approximate amount of $217,000, primarily consisting of equipment additions in our NASCO operations in North Carolina and our laboratory in Buffalo, New York. During the third quarter of 2017, we acquired approximately $916,000 in additional packaging equipment for our NASCO operations in North Carolina. This equipment was not placed in service during the third quarter of 2017 and accordingly, no depreciation expense was recorded.
Amortization expense.
Amortization expense for the nine months ended September 30, 2017 amounted to $429,832, an increase of $49,143, or 12.9%, from $380,689 for the nine months ended September 30, 2016. The amortization expense relates to amortization taken on capitalized patent costs and license fees. The increase was primarily due to amortization taken on additional patent costs incurred during the nine months ended September 30, 2017 and the year ended December 31, 2016 in the amounts of $457,385 and $541,882, respectively.
Warrant liability (loss) gain - net
The warrant liability loss of $138,813 for the nine months ended September 30, 2017 was due to an increase in the estimated fair value of the warrants during the period. The increase in the estimated fair value of the warrants was primarily attributable to an increase in our underlying stock price from $1.09 per share at December 31, 2016 as compared to $2.77 per share at September 30, 2017.
The warrant liability gain of $14,602 for the nine months ended September 30, 2016 was due to the decrease in the estimated fair value of the warrants during the period. The decrease in the estimated fair value of the warrants was primarily attributable to the expiration of certain warrants and the remaining outstanding warrants aging closer to their expiration date with the passage of time, partially offset by an increase in our underlying stock price from $1.40 per share at December 31, 2015 as compared to $1.45 per share at September 30, 2016.
Gain (loss) on investment
On February 17, 2017, a dilutive event reduced our ownership in Anandia to 19.4%, an ownership percentage below the 20% ownership threshold for the use of the equity method of accounting. Accordingly, we discontinued applying the equity method of accounting for our equity investment in Anandia, effective on the date of the dilutive event, and as a result, there is no gain or loss recorded on the investment in Anandia during the three months ended June 30, 2017. We recorded a gain on investment of $16,872 for three months ended March 31, 2017 (the equity gain for the three months ended March 31, 2017, reflects2023, compared to the three months ended March 31, 2022, was primarily due to the increase in hemp/cannabis revenue of $13,035 due to the acquisition of GVB.
o | Tobacco revenue was $8,927, a decrease of 1.3% from the first quarter of 2022, reflecting a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products. First quarter 2023 cartons sold of 1,002 compared to 1,382 in the comparable prior year period. |
o | Hemp/cannabis revenue was $13,035, compared to $0 in the prior year first quarter, reflecting the acquisition of GVB and continued sequential quarterly growth in ingredient supply sales. First quarter 2023 bulk ingredient sales volume in kilograms was 68,195 compared to 16,524 in the comparable prior year period (prior to the GVB acquisition that occurred on May 13, 2022), and compared to 39,605 in the fourth quarter of 2022. |
Gross (loss) profit
| | | | | | | | |
| Three Months Ended | | | |||||
| March 31 | | March 31 | | | Change | ||
| 2023 |
| 2022 | | | $ | ||
Gross (loss) profit | $ | (1,177) | | $ | 309 | | | (1,486) |
Percent of Revenues, net | | (5.4) | % | | 3.4 | % | | |
The decrease in gross profit and gross profit as a percent of revenues, net for the three month period-ended March 31, 2023 as compared to March 31, 2022 is driven by ($290) decline in tobacco gross profit driven mainly by lower volume and product mix and ($1,196) in hemp/cannabis gross profit resulting from reflecting costs associated with buying and selling ingredients while the Company rebuilds its distillate and isolate manufacturing capacity following the November 2022 Grass Valley fire.
o | Initial expected business interruption insurance claims for the first quarter of 2023 to offset margin losses is anticipated to be approximately $2,258, driven by price increases on raw materials as a result of sourcing through third parties as compared to in-house processing. Additional business interruption claim recoveries are expected during the remainder of 2023. |
Sales, general and administrative (“SG&A”) expense
| | | | |
| Change 2023 vs 2022 | |||
| $ | | % | |
Compensation and benefits (a) | $ | 1,100 | | 39.1 |
Legal | | (22) | | (3.1) |
Strategic consulting (b) | | 1,742 | | 77.3 |
Sales and marketing (c) | | 314 | | 256.8 |
Other (d) | | 504 | | 36.9 |
GVB (e) | | 3,331 | | 100.0 |
Net increase in SG&A expenses | $ | 6,969 | | 96.0 |
(a) Increases in compensation and benefits is mainly attributable to inflationary increases, as well as increases in corporate headcount as our proportionate gain through February 16, 2017)organization continues scaling.
(b) Increase of strategic consulting due to additional business development, recruitment, and investor relations expenses.
(c) Increases due to the ongoing expansion and accelerated launch of VLN®. In addition,
(d) Other expenses increased due to $154 of travel and entertainment, $120 of technology expenses, and other $343, offset by a decrease in insurance expenses of $113.
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(e) Increased SG&A as a result of the February 17, 2017 dilutive event, we recorded a gain in accordance withacquisition of GVB on May 13, 2022, including corporate personnel costs and general overhead.
Research and development (“R&D”) expense
| | | | |
| Change 2023 vs 2022 | |||
| $ | | % | |
Compensation and benefits (a) | $ | 266 | | 227.9 |
Contract costs | | (17) | | (2.4) |
Consulting and professional services | | 3 | | 5.5 |
Other | | 87 | | 33.9 |
GVB | | 37 | | 100.0 |
Net increase in R&D expenses | $ | 376 | | 33.0 |
(a) Increased compensation and benefits related to the derecognition provisions of Accounting Standards Codification 323 (“ASC 323”)additional executive and R&D personnel in the amountcurrent year.
Other operating expenses, net (“OOE”)
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Grass Valley fire: | | | | | | |
Professional services and supplies | | $ | 68 | | $ | — |
Total Grass Valley fire | | | 68 | | | — |
Acquisition costs | | | 68 | | | 52 |
Needlerock Farms settlement (a) | | | 747 | | | — |
Loss on change in warrant liability (b) | | | 139 | | | — |
Gain on sale or disposal of property, plant and equipment (c) | | | (146) | | | — |
Loss on change in contingent consideration | | | 22 | | | — |
Total other operating expenses, net | | $ | 898 | | $ | 52 |
(a) | Expenses associated with non-ordinary course legal matters and corresponding settlement related to water rights dispute for Needle Rock Farms. |
(b) | Represents change in fair value of warrant liability resulting from remeasurement as of March 31, 2023. |
(c) | Reflects gain on sale resulting from sale of older tobacco manufacturing equipment. |
Refer to Note 9, “Other operating expenses, net,” of $336,834. We recorded a total gain on the equity investment in the amount of $346,180 for the nine months ended September 30, 2017 (pertainingNotes to the period up to February 17, 2017) by aggregating the Company’s shareCondensed Consolidated Financial Statements contained in Item 1 of Anandia’s gain (loss), the gain recorded under ASC 323 and the amortizationthis report for additional information regarding these charges.
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Other income (expense)
| | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | |||||
| | March 31 | | | March 31 | | | Change | |||||
|
| 2023 |
| | 2022 | | | $ | | % | |||
Other income (expense): | | | | | | | | | | | | | |
Unrealized loss on investment (a) | | $ | - | | | $ | (817) | | | $ | 817 | | NM |
Other income, net | | | 5 | | | | - | | | | 5 | | NM |
Interest income, net | | | 57 | | | | 50 | | | | 7 | | 14.0 |
Interest expense (b) | | | (421) | | | | (5) | | | | (416) | | NM |
Total other expense | | $ | (359) | | | $ | (772) | | | $ | 413 | | (53.5) |
| | | | | | | | | | | | | |
NM - calculated change not meaningful | | | | | | | | | | | | | |
The(a) Unrealized loss on investment of $172,068includes fair value adjustments for the nine months ended September 30, 2016 consisted of (i) our 24.4% (25.0% ownership prior to a dilutive event on September 8, 2016) share of Anandia’s net loss for the nine months ending September 30, 2016 in the amount of $128,832, plus (ii) amortization of the intangible asset represented by the difference between our equity investment in Anandia and our portion of the net assets of Anandia in the amount of $43,236.
Interest income
Interest income for the nine months ended September 30, 2017 was $48,197, an increase of $41,468 from interest income of $6,729 for the nine months ended September 30, 2016. The interest income earned in the nine months ended September 30, 2017 and 2016 was generated from excess cash invested in a money market account, with the average cash balance being greaterPanacea Life Sciences Holdings, Inc. (“PLSH”) during the nine months ending September 30, 2017three month-period ended March 31, 2022. The investment was subsequently liquidated during 2022.
(b) Interest expense increased in 2023, as compared to the nine months ended September 30, 2016.
Interest expense
Interest expense decreased by $6,467, or 22.3%, inprior year period, primarily due to the nine months ended September 30, 2017 to $22,544 from $29,011 in the nine months ended September 30, 2016 and is derivedinterest recognized from the interest component of severance payments made on accrued severance that had previously been recorded on a discounted basis using our incremental borrowing rateSenior Secured Credit Facility and the accretion of interest on the NRC note payable.Subordinated Note, as described below under ‘Liquidity and Capital Resources.’
Net loss
We had a net loss in the nine months ended September 30, 2017 of $9,293,535 as compared to a net loss of $8,834,794 in the nine months ended September 30, 2016. The increase in the net loss of $458,741, or 5.2%, was primarily the result of an increase in the gross loss of approximately $577,000, an increase in operating expenses of approximately $294,000, partially offset by a decrease in other income (expense) in the approximate amount of $412,000.
Liquidity and Capital Resources
| | | | | | |
| | March 31 | | December 31, | ||
|
| 2023 |
| 2022 | ||
Cash and cash equivalents | | $ | 10,952 | | $ | 3,020 |
Short-term investment securities | | $ | 5,275 |
| $ | 18,193 |
Restricted cash | | $ | 7,500 |
| $ | — |
Working capital | | $ | 24,268 |
| $ | 31,587 |
Working Capital
As of September 30, 2017,March 31, 2023, we had positive working capital of approximately $16.3 million$24,268 compared to positive working capital of approximately $13.5 million$31,587 at December 31, 2016, an increase2022 a decrease of approximately $2.7 million. The increase$7,319. This decrease in our working capital for the nine months ended September 30, 2017 was primarily due to a $3,467 decrease in net current assets and was offset by an increase in non-cash working capital innet current liabilities of $3,852. Cash, cash equivalents and short-term investment securities decreased by $4,986 and the approximate amountremaining net current assets increased by $1,519.
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Summary of $12.4 million, partially offset byCash Flows
| | | | | | |
| | Three Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Cash provided by (used in): | | | | | | |
Operating activities | | $ | (17,500) | | $ | (7,928) |
Investing activities | |
| 14,723 |
|
| 8,772 |
Financing activities | |
| 18,209 |
|
| (596) |
Net change in cash, cash equivalents and restricted cash | | $ | 15,432 |
| $ | 248 |
Net cash used in operating activities of approximately $9.6 million and cash used to acquire machinery and equipment and intangible assets of approximately $1.2 million.
We must successfully execute our business plan to increase revenue in order to achieve positive cash flows from operations to sustain adequate liquidity without requiring additional funds from capital raises and other external sources to meet minimum operating requirements. On December 30, 2016, we filed a Form S-3, universal shelf registration statement, with the U.S. Securities and Exchange Commission (“SEC”) that was declared effective by the SEC on January 17, 2017. The universal shelf registration statement will allow, but not compel, the Company to raise up to $100 million of capital over a three-year period ending on January 17, 2020 through a wide array of securities at times and in amounts to be determined by the Company. On October 10, 2017, we closed a registered direct common stock offering with institutional investors to receive approximately $54 million in gross proceeds through the sale of 20.57 million shares of common stock at a price of $2.625 per share (net proceeds of approximately $50.7 million). The net proceeds of the financing will be used for general corporate purposes, including working capital as we enter licensing and strategic partnership discussions with major companies around the world. Following the offering, the universal shelf statement has approximately $46 million of remaining capacity. If required, there can be no assurance that additional capital will be available on acceptable terms or at all.
Cash demands on operations
With the net cash proceeds from our October 2017 offering plus cash on hand at September 30, 2017 of $15,022,570, we believe resulting cash balances will be adequate to sustain normal operating expenses and meet all current obligations as they come due for a period of at least five years. During the nine months ended September 30, 2017, we experienced an operating loss of approximately $9,527,000 and used cash in operations of approximately $9,621,000. Excluding discretionary expenses related to R&D, patent and trademark costs, contract growing of our proprietary tobacco, and certain nonrecurring expenses relating to factory capital expenses, investor relations, and marketing costs, our monthly cash expenditures are approximately $900,000.
Net Cash used in operating activities
In increased $9,572 from $7,928 in 2022 to $17,500 in 2023. The primary driver for this increase was higher net loss of $9,264, driven by increased SG&A and R&D both from the nine months ended September 30, 2017, $9,620,986acquisition of cash was used in operating activities as compared to $7,982,309GVB and acceleration of cash used in operating activities in the nine months ended September 30, 2016,launch of VLN®, an increase of $1,638,677. The increase in use of cash in operations was primarily due$342 related to an increase in the cash portion of thenet adjustments to reconcile net loss in the amount of $844,171to cash, and an increase in the use of cash used for working capital components related to operations in the amount of $794,506$650 for the ninethree months ended September 30, 2017March 31, 2023, as compared to the ninethree months ended September 30, 2016.
March 31, 2022.
Net Cash used incash provided by investing activities
InCash provided by investing activities amounted to $14,723 for the ninethree months ended September 30, 2017, net cash used in investing activities was $1,204,990,March 31, 2023, as compared to $362,234 of cash used inprovided by investing activities duringof $8,772 for the ninethree months ended September 30, 2016, an increase of $842,756.March 31, 2022. The increase in cash provided by investing activities of $5,951 was primarily the result of (i) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the current period; (ii) an increase in cash used fornet proceeds from short-term investments of $3,142; (iii) $682 from the investment in Change Agronomy Ltd. in the prior year period; (iv) $200 of proceeds from the sale of property, plant and equipment; and (v) $90 from the acquisition of RXP. These increased cash inflows were partially offset by increased cash outflow of $1,663 related to the acquisitions of patents, trademarks and trademarks in the amount of $76,081property, plant and an increase in the acquisition of machinery and equipment in the amount of $766,675.
equipment.
Net Cashcash provided by (used in) financing activities
During the ninethree months ended September 30, 2017, $12,380,358 of cash was provided by financing activities, as compared to $9,774,751 ofMarch 31, 2023, cash provided by financing activities duringincreased by $18,805 resulting from the nine months ended September 30, 2016. Theproceeds of $16,849 from issuance of long-term debt and the proceeds of $6,016 from issuance of detachable warrants. These cash inflows were offset by payments of debt issuance costs of $801, increased note payable payments of $2,916, and taxes paid related to net share settlement of RSUs of $414.
Cash demands on operations
Our principal sources of liquidity are our cash provided byand cash equivalents, short-term investment securities, cash generated from our tobacco contract manufacturing business and hemp/cannabis business and proceeds from debt and equity financing activitiesactivities. As of March 31, 2023, we had approximately $16,227 of cash and cash equivalents and short-term investments. We also have business interruption coverage, which we continue pursuing in connection with such incident and anticipate initial payments on our claims to commence in the second quarter of 2023.
Our cash, cash equivalents, short-term investment securities, insurance proceeds, and credit facility financing, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, will provide sufficient resources for estimated contractual commitments, described further in Note 11 to our Condensed Consolidated Financial Statements included herein, and normal cash requirements for operations well beyond the next twelve months. We continue evaluating our capital and financing requirements, as compared with the significant anticipated growth with the accelerated launch and expansion of VLN®, rebuild of GVB’s production capabilities following the Grass Valley fire, and our new CDMO+D contracts, to ensure we meet our success based strategic initiatives.
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New Senior Secured Credit Facility
On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the nine months endedPurchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,053 and (ii) warrants to purchase up to 5,000,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000.
The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.
The JGB Warrants are exercisable for five years from September 30, 2017 was3, 2023, at an exercise price of $1.275 per share, a 50% premium to the resultVWAP on the closing date, subject, with certain exceptions, to adjustments in the event of net cash raised fromstock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
Omnia Subordinated Note
On March 3, 2023, the exerciseCompany executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of warrants,$2,865 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the net cash provided12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by financing activities during the nine months ended September 30, 2016, was primarily generated byCompany in connection with the acquisition of GVB Biopharma.
Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of 26.5% per annum, payable monthly. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024.
ATM Offering
On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”). The Company currently intends to use any net proceeds received from registered direct offeringthis ATM Offering for general corporate purposes, including potentially expanding existing businesses, acquiring businesses and investing in Februaryother business opportunities, for expansion and Julyacceleration of 2016.the launch of the Company’s VLN® reduced nicotine content tobacco cigarettes in additional markets, research and development expenses, procurement and development of additional intellectual property rights and working capital.
Subject to the terms and conditions of the Sales Agreement, each time that the Company wishes to issue and sell shares of common stock, it will notify the Sales Agent and the Sales Agent will use its commercially reasonable efforts, consistent with its sales and trading practices, to solicit offers to purchase the common stock shares under the terms and subject to the conditions set forth in the Sales Agreement.
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The Company will pay the Sales Agent 3.00% of the gross proceeds of the sales price per share of common stock sold through the Sales Agent under the Sales Agreement. In addition, the Company will reimburse the Sales Agent for certain fees and disbursements to its legal counsel incurred in connection with entering into the transactions contemplated by the Sales Agreement in an amount not to exceed $75 in the aggregate.
Sales of the Company’s common stock through or to the Sales Agent, if any, will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company is not obligated to make any sales of its common stock under the Sales Agreement and may at any time suspend offers under the Sales Agreement. The Sales Agreement will terminate upon the earlier of (i) the sale of all of the Company’s common stock subject to the Sales Agreement, or (ii) termination of the Sales Agreement as permitted therein.
Critical Accounting Policies and Estimates
ThereThe preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.
Except as described below, there have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
InflationContingent consideration
Inflation did notContingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain revenue milestones. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration liability result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material effectimpact on the results from operations. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.
Detachable Warrants
Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our operatingCondensed Consolidated Financial Statements. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results for the nine months ended September 30, 2017 and 2016, respectively.of operations.
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
Item 4. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures: |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure information required to be disclosed is recorded, processed, summarized and reported within the time period specified by SEC rules, based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
(b) | Changes in Internal Control over Financial Reporting: |
There were no changes inDuring the Company’sthree months ended March 31, 2023, the Company's internal controls over financial reporting expanded to include those inherited from the acquisition of GVB and RXP, which are currently under evaluation by management. There were no additional changes in our internal control over financial reporting during the third quarter of 2017ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal controlscontrol over financial reporting.
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Part II. OTHER INFORMATION
We are subjectSee Note 11 - Commitments and Contingencies – Litigation - to variousour consolidated financial statements included in this Quarterly Report for information concerning our on-going litigation. In addition to the lawsuits described in Note 11, from time to time we may be involved in claims and legal proceedings arising in the ordinary course of business. As ofTo our knowledge other than the date hereof, we are unablecases described in Note 11 to currently assess whether the final resolution of any of such claims orour consolidated financial statements, no material legal proceedings, maygovernmental actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on us.our business and financial condition.
On April 26, 2016, Crede CG III, LTD. (“Crede”) filed a complaint against the Company in the United States District Court for the Southern District of New York (the “SDNY Court”) entitledCrede CG III, LTD. v. 22nd Century Group, Inc. On May 19, 2016, Crede filed an Amended Complaint that included seven counts, alleging among other things, that the Company allegedly breached and/or interfered with certain agreements entered into with Crede, including the joint venture agreement relating to efforts to sell the Company’s proprietary tobacco into China, the Tranche 1A warrant and the prior securities purchase agreement with Crede. The Amended Complaint seeks money damages, to rescind the securities purchase agreement, to obtain declaratory and injunctive relief to require the Company to issue to Crede 2,077,555 shares of the Company’s common stock under the exchange provision of the Tranche 1A warrant, and entry of an injunction prohibiting the Company from selling tobacco into China without the joint venture’s involvement. The Amended Complaint also seeks attorney’s fees and such other relief as the Court may deem just and proper. We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims.
On May 19, 2016, Crede filed a motion for preliminary injunction, asking the SDNY Court to require the Company to issue 2,077,555 shares of its common stock to Crede under the exchange provision of the Tranche 1A warrant. After conducting an evidentiary hearing on this motion on June 14, 2016, the SDNY Court denied Crede’s motion and held, among other things, that Crede did not prove the potential for irreparable harm or a likelihood of success on its claim for such 2,077,555 shares under the Tranche 1A warrant, and that there was a likelihood that Crede had violated the activity restrictions of the Tranche 1A warrant, which would bar Crede’s claim for such shares from the Company.
Following such ruling, on July 11, 2016, the Company filed a motion to sever the Crede lawsuit into two separate cases, requesting all claims relating to the Tranche 1A warrant and the securities purchase agreement to stay in the SDNY Court and all claims relating to the China joint venture agreement to be transferred to the United States District Court for the Western District of New York (the “WDNY Court”), where the Company’s headquarters are located. On January 20, 2017, the SDNY Court granted the Company’s motion.
On February 14, 2017, Crede voluntarily dismissed its lawsuit against the Company in the WDNY Court.
On February 21, 2017, the SDNY Court granted the Company’s request to file a motion for summary judgment for the claims remaining in the SDNY Court, with all discovery in the case being deferred until after the SDNY Court issues its decision on the summary judgment motion of the Company.
On March 20, 2017, the Company filed its motion for summary judgment for the claims remaining in the SDNY Court. The response by Crede to the Company’s summary judgment motion was filed by Crede on May 1, 2017. On May 15, 2017, the Company filed its response to Crede’s filing. The parties are now awaiting the SDNY Court to issue its decision on such summary judgment motion.
We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims. The Company has defended and intends to continue to defend against these claims vigorously.
OurExcept as set forth below, there have been no material changes from the risk factors have not changed materially from those disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016,2022, as filed with the SEC on March 8, 2017.9, 2023.
Nasdaq may delist our common stock from trading on its exchange which could limit investors’ ability to make transactions in our common stock and subject us to additional trading restrictions.
Our common stock is currently listed on the Nasdaq Capital Market. If Nasdaq delists our common stock from trading on its exchange, we could face significant material adverse consequences, including:
● | a limited availability of market quotations for our common stock; |
● | reduced liquidity with respect to our securities; |
● | a determination that shares of our common stock are “penny stock” which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares; |
● | a limited amount of news and analyst coverage; and |
● | a decreased ability to issue additional common stock or obtain additional financing in the future. |
On March 31, 2023, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department notifying the Company that, for the last 30 consecutive business days, the closing bid price for the Company’s common stock has been below the minimum $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been given 180 calendar days, or until September 27, 2023, to regain compliance with Rule 5550(a)(2). If the Company does not regain compliance with Rule 5550(a)(2) by September 27, 2023, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, except for the minimum bid price requirement. In addition, the Company would be required to provide written notice to Nasdaq of its intent to cure the deficiency during the second compliance period. The Company intends to monitor the closing bid price of its common stock and may, if appropriate, consider implementing available options to regain compliance with the Minimum Bid Price Requirement under the Nasdaq Listing Rules such as a reverse stock split.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
RX Pharmaceutical, Ltd.
During
On January 19, 2023, the third quarterCompany acquired RX Pharmatech Ltd (“RXP”). The initial consideration paid to acquire RXP included $200 in cash and $503 in common stock (consisting of 2017, we issued 146,320465,838 unregistered shares of common stock to various investors fromstock), and an initial estimate of target working capital true-up of $286. The fair value of the cashless exercise of 240,667 warrants to purchase shares of our common stock.
During October of 2017, we issued 103,500 shares ofCompany’s common stock to investors that exercised 103,500 warrants for cash to purchaseissued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of our common stock.
the acquisition date.
The issuance of the shares were offered and sold pursuant to exemptionswas exempt from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506506(b) of Regulation D promulgated thereunder.
JGB Warrants
On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,052,632 and (ii) warrants to purchase up to 5,000,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000,000.
The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
The issuance of the warrants was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder.
Omnia Warrants
On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,864,767 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500,000 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma.
In connection with the Subordinated Note, the Company issued to Omnia, the Omnia Warrants to purchase up to 675,000 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $0.855 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
The issuance of the warrants was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder.
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ATM Offering
On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”). The Company currently intends to use any net proceeds from this ATM Offering for general corporate purposes, including potentially expanding existing businesses, acquiring businesses and investing in other business opportunities, for expansion and acceleration of the launch of the Company’s VLN® reduced nicotine content tobacco cigarettes in additional markets, research and development expenses, procurement and development of additional intellectual property rights and working capital.
Subject to the terms and conditions of the Sales Agreement, each time that the Company wishes to issue and sell shares of common stock, it will notify the Sales Agent and the Sales Agent will use its commercially reasonable efforts, consistent with its sales and trading practices, to solicit offers to purchase the common stock shares under the terms and subject to the conditions set forth in the Sales Agreement.
The Company will pay the Sales Agent 3.00% of the gross proceeds of the sales price per share of common stock sold through the Sales Agent under the Sales Agreement. In addition, the Company will reimburse the Sales Agent for certain fees and disbursements to its legal counsel incurred in connection with entering into the transactions contemplated by the Sales Agreement in an amount not to exceed $75,000 in the aggregate.
Sales of the Company’s common stock through or to the Sales Agent, if any, will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company is not obligated to make any sales of its common stock under the Sales Agreement and may at any time suspend offers under the Sales Agreement. The Sales Agreement will terminate upon the earlier of (i) the sale of all of the Company’s common stock subject to the Sales Agreement, or (ii) termination of the Sales Agreement as permitted therein.
The issuance and sale of common stock, if any, by the Company under the Sales Agreement will be made pursuant to the Company’s registration statement on Form S-3(No. 333-270473) which was declared effective by the Securities and Exchange Commission on March 31, 2023 (the “Registration Statement”), and the Company’s prospectus supplement relating to the offering filed therewith that forms part of the Registration Statement.
Item 3. Default Upon Senior Securities.
None
None
Item 4. Mine Safety Disclosures
None
None
None
None
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Exhibit 10.1 | ||||
| | |||
Exhibit 10.2† | ||||
| | |||
Exhibit 31.1 | ||||
Exhibit 31.2 | ||||
Exhibit 32.1 | ||||
101.INS | ||||
Inline XBRL Instance Document | ||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
| | |||
Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL) | |||
| |
†Certain portions of the exhibit have been omitted pursuant Regulation S-K Item 601(b) because it is both (i) not material to investors and (ii) likely to cause competitive harm to the Company is publicly disclosed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
22nd CENTURY GROUP, INC. | |
Date: | /s/ |
James A. Mish | |
Chief Executive Officer | |
(Principal Executive Officer) | |
Date: | /s/ |
R. Hugh Kinsman | |
Chief Financial Officer | |
(Principal Accounting and Financial Officer) |
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