SEC Form 10-Q filed by 22nd Century Group Inc.
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction | (IRS Employer | |
of incorporation) | Identification No.) |
(Address of principal executive offices)
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(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of each class |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
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 | ☐ |
☒ | 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
As of May 14, 2024, there were
22nd CENTURY GROUP, INC.
INDEX
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PART I. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (unaudited) | 3 | |
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Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | |
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2
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands, except share and per-share data)
March 31, | December 31, | |||||
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| 2024 |
| 2023 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net |
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Inventories |
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Insurance recoveries |
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GVB promissory note |
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Prepaid expenses and other current assets |
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Current assets of discontinued operations held for sale |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use assets, net |
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Intangible assets, net |
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Other assets | | | ||||
Total assets | $ | | $ | | ||
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LIABILITIES AND SHAREHOLDERS' DEFICIT |
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Current liabilities: |
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Notes and loans payable - current | $ | — | $ | | ||
Current portion of long-term debt | | | ||||
Operating lease obligations |
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Accounts payable |
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Accrued expenses |
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Accrued litigation |
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Accrued payroll |
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Accrued excise taxes and fees |
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Deferred income | | | ||||
Other current liabilities |
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Current liabilities of discontinued operations held for sale |
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Total current liabilities |
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Long-term liabilities: |
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Operating lease obligations |
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Long-term debt | | | ||||
Other long-term liabilities | | | ||||
Total liabilities | | | ||||
Commitments and contingencies (Note 11) |
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Shareholders' equity (deficit) |
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Preferred stock, $ |
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Common stock, $ |
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Capital stock and : |
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Common stock, par value | ||||||
Capital in excess of par value |
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Accumulated deficit |
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Total shareholders' deficit |
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Total liabilities and shareholders’ deficit | $ | | $ | |
See accompanying notes to Condensed Consolidated Financial Statements.
3
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(amounts in thousands, except share and per-share data)
Three Months Ended | |||||
March 31, | |||||
2024 |
| 2023 | |||
Revenues, net | $ | | $ | | |
Cost of goods sold | | | |||
Excise taxes and fees on products |
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Gross (loss) profit |
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Operating expenses: |
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Sales, general and administrative |
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Research and development |
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Other operating expense (income), net |
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Total operating expenses |
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Operating loss from continuing operations |
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Other income (expense): |
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Other income (expense), net |
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Interest income, net |
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Interest expense |
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Total other expense |
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Loss from continuing operations before income taxes |
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Provision (benefit) for income taxes |
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Net loss from continuing operations | $ | ( | $ | ( | |
Discontinued operations: | |||||
Loss from discontinued operations before income taxes | $ | ( | $ | ( | |
Provision (benefit) for income taxes | — | — | |||
Net loss from discontinued operations | $ | ( | $ | ( | |
Net loss | $ | ( | $ | ( | |
Deemed dividends | ( | — | |||
Net loss available to common shareholders | $ | ( | $ | ( | |
Basic and diluted loss per common share from continuing operations | $ | ( | $ | ( | |
Basic and diluted loss per common share from discontinued operations | $ | ( | $ | ( | |
Basic and diluted loss per common share from deemed dividends | $ | ( | $ | — | |
Basic and diluted loss per common share | $ | ( | $ | ( | |
Weighted average common shares outstanding - basic and diluted | | | |||
Net loss | $ | ( | $ | ( | |
Other comprehensive income: |
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Unrealized gain on short-term investment securities |
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Foreign currency translation |
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Reclassification of realized losses to net loss |
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Other comprehensive income | — | | |||
Comprehensive loss | $ | ( | $ | ( |
See accompanying notes to Condensed Consolidated Financial Statements.
4
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(amounts in thousands, except share data)
Three Months Ended March 31, 2024 | |||||||||||||||||
Accumulated | |||||||||||||||||
Common | Par Value | Capital in | Other | Total | |||||||||||||
Shares | of Common | Excess of | Comprehensive | Accumulated | Shareholders’ | ||||||||||||
| Outstanding* |
| Shares* |
| Par Value* |
| Income (Loss) |
| Deficit |
| Deficit | ||||||
Balance at January 1, 2024 |
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| $ | ( | $ | ( | ||
Stock issued in connection with RSU vesting, net of |
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Stock issued in connection with licensing arrangement | | — | | — | — | | |||||||||||
Stock issued in connection with warrant exercises, net of fees of $ | | — | | — | — | | |||||||||||
Equity-based compensation |
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Fractional shares issued for reverse stock split |
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Net loss |
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Balance at March 31, 2024 | | $ | — |
| $ | |
| $ | — |
| $ | ( | $ | ( | |||
*Giving retroactive effect to the reverse stock split on July 5, 2023 and subsequently reverse stock split on April 2, 2024. |
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 |
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| $ | |
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Stock issued in connection with RSU vesting, net of |
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Stock issued in connection with acquisition | | — | | — | — | | |||||||||||
Equity-based compensation |
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Adoption of ASU 2016-13 |
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Equity detachable warrants |
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Other comprehensive income |
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Net loss |
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Balance at March 31, 2023 | | $ | — |
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| $ | ( | $ | | |||
*Giving retroactive effect to the reverse stock split on July 5, 2023 and subsequently reverse stock split on April 2, 2024. |
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, | ||||||
| 2024 |
| 2023 | |||
Cash flows from operating activities: |
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Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to cash used in operating activities: |
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Amortization and depreciation |
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Amortization of right-of-use asset |
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Other non-cash losses | — | | ||||
Provision for credit losses | | | ||||
Loss on the sale of machinery and equipment |
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Debt related charges included in interest expense | | | ||||
Equity-based employee compensation expense |
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Gain on change of contingent consideration |
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Change in fair value of warrant liabilities | — | | ||||
Change in fair value of derivative liability | | — | ||||
Increase in inventory reserves | | — | ||||
Changes in operating assets and liabilities, net of acquisition: |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other assets |
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Accounts payable |
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Accrued expenses |
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Accrued payroll |
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Accrued excise taxes and fees |
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Other liabilities | ( |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Acquisition of patents, trademarks, and licenses |
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Acquisition of property, plant and equipment |
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Proceeds from the sale of property, plant and equipment |
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Acquisition, net of cash acquired | — | | ||||
Property, plant and equipment insurance proceeds | — | | ||||
Sales and maturities of short-term investment securities |
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Purchase of short-term investment securities |
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Net cash provided by investing activities |
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Cash flows from financing activities: |
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Payments on notes payable | ( | ( | ||||
Proceeds from issuance of notes payable | — | | ||||
Proceeds from issuance of long-term debt | — | | ||||
Payment of debt issuance costs | — | ( | ||||
Proceeds from issuance of detachable warrants | — | | ||||
Net proceeds from warrant exercise | | — | ||||
Taxes paid related to net share settlement of RSUs | ( | ( | ||||
Net cash provided by financing activities |
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Net (decrease) increase in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash - beginning of period |
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Cash, cash equivalents and restricted cash - end of period | $ | | $ | | ||
Reconciliation of cash and cash equivalents and restricted cash | ||||||
Cash and cash equivalents at beginning of period | $ | | $ | | ||
Restricted cash at beginning of period | — | — | ||||
Cash, cash equivalents and restricted cash at beginning of period | $ | | $ | | ||
Cash and cash equivalents at end of period | $ | | $ | | ||
Restricted cash at end of period | — | | ||||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Supplemental disclosures of cash flow information: |
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Non-cash transactions: |
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Capital expenditures incurred but not yet paid | $ | | $ | | ||
Right-of-use assets and corresponding operating lease obligations | $ | — | $ | | ||
Deemed dividends | $ | | $ | — | ||
Non-cash consideration RXP acquisition | $ | — | $ | |
See accompanying notes to Condensed Consolidated Financial Statements.
6
22nd CENTURY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2024
(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 Nevada corporation publicly traded on the NASDAQ Capital Market under the symbol “XXII.” 22nd Century Group is a tobacco products company with sales and distribution of the Company’s own proprietary new reduced nicotine tobacco products authorized as Modified Risk Tobacco Products by the FDA. Additionally, the Company provides contract manufacturing services for conventional combustible tobacco products for third-party brands.
The accompanying Condensed Consolidated Financial Statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. The results for interim periods are not necessarily indicative of results or trends that may be expected for the fiscal year as a whole. The Condensed Consolidated Financial Statements were prepared using U.S. GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates.
Liquidity and Capital Resources – These Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred significant losses and negative cash flows from operations since inception and expects to incur additional losses until such time that it can generate significant revenue and profit in its tobacco business. The Company had negative cash flow from operations of $
Given the Company’s projected operating requirements and its existing cash and cash equivalents,
In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. The Company has engaged a financial advisor to assist it in identifying strategic partners and financing to fund operations and to take actions to maximize the Company’s liquidity. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.
7
The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Reclassifications – The Company has revised the presentation and classification of Excise taxes on products, net which was previously recorded in Cost of goods sold in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
Reverse Stock Split – On April 2, 2024, the Company effected a reverse stock split of its common stock in order to regain compliance with Nasdaq's continued listing requirements. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share, which resulted in the issuance of a total of
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 5 and Note 9.
Deemed dividends associated with anti-dilution or down round provisions (commonly referred to as “ratchets”) represent the economic transfer of value to holders of equity-classified freestanding financial instruments when these provisions are triggered. These deemed dividends are presented as a reduction in net income or an increase in net loss available to common stockholders and a corresponding increase to additional paid-in-capital resulting in no change to shareholders’ equity/deficit.
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).
8
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. With the exception of the bifurcated embedded conversion option as described in Note 6 “Debt”, 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 6 “Debt” contains additional information on the Company’s debt issuance costs and discounts.
Impairment of Long-Lived Assets - The Company reviews all long-lived assets to be held and used for recoverability, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the assets from the expected future cash flows (undiscounted and without interest expense) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss for the difference between the estimated fair value and carrying value is recorded. The Company determined that there were no impairment indicators during the quarter ended March 31, 2024.
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.
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.
Severance charges - From time to time, the Company evaluates its resources and optimizes its business plan to align to changing needs of executing on its strategy. These actions may result in voluntary or involuntary employee termination benefits. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination.
9
The following table summarizes the change in accrued severance liabilities, presented within Other current liabilities on the Condensed Consolidated Balance Sheets:
Balance at January 1, 2024 | $ | |
Cash payments | ( | |
Balance at March 31, 2024 | $ | |
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 related to certain state, local, or franchise taxes, or 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 $
Accounting Guidance Not Yet Elected or Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280)-Improvements to Reportable Segment Disclosures. The ASU enhances disclosure of significant segment expenses by requiring disclosure of significant segment expenses regularly provided to the chief operating decision maker, extend certain annual disclosures to interim periods, and permits more than one measure of segment profit or loss to be reported under certain conditions. The amendments are effective for the Company in years beginning after December 15, 2023, and interim periods within years beginning after December 15, 2024. Early adoption of the ASU is permitted, including adoption in any interim period for which financial statements have not been issued. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740)-Improvements to Income Tax Disclosures. The ASU requires additional quantitative and qualitative income tax disclosures to allow readers of the consolidated financial statements to assess how the Company’s operations, related tax risks and tax planning affect its tax rate and prospects for future cash flows. For public business entities, the ASU is effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.
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.
10
NOTE 2. DISCONTINUED OPERATIONS AND DIVESTITURES
As of March 31, 2024, all assets and liabilities of the hemp/cannabis disposal group are presented as current in the Condensed Consolidated Balance Sheets. The carrying amounts of the hemp/cannabis disposal group assets and liabilities that were classified as assets and liabilities of discontinued operations held for sale were as follows:
March 31, | December 31, | ||||
| 2024 | 2023 | |||
Prepaid expenses and other current assets | $ | | $ | | |
Property, plant and equipment, net |
| | | ||
Other assets | | | |||
Current assets of discontinued operations held for sale | $ | | $ | | |
Notes and loans payable - current | $ | — | $ | | |
Operating lease obligations |
| |
| | |
Accounts payable |
| |
| | |
Accrued expenses |
| |
| | |
Deferred income | — | | |||
Other current liabilities | | — | |||
Current liabilities of discontinued operations held for sale | $ | | $ | | |
Net liabilities | $ | ( | $ | ( |
Net loss from discontinued operations for the three months ended March 31, 2024 and 2023 was as follows:
Three Months Ended | |||||
March 31, | |||||
2024 |
| 2023 | |||
Revenues, net | $ | — | $ | | |
Cost of goods sold | — | | |||
Gross loss | — | ( | |||
Operating expenses: | |||||
Sales, general and administrative | | | |||
Research and development | | | |||
Other operating expense, net | | | |||
Total operating expenses | | | |||
Operating loss from discontinued operations | ( | ( | |||
Other income (expense): | |||||
Other income, net | — | | |||
Interest expense | ( | ( | |||
Total other expense | ( | ( | |||
Loss from discontinued operations before income taxes | ( | ( | |||
Provision (benefit) for income taxes | — | — | |||
Net loss from discontinued operations | $ | ( | $ | ( |
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Cash flow information from discontinued operations for the three months ended March 31, 2024 and 2023 was as follows:
Three Months Ended | |||||
March 31, | |||||
2024 |
| 2023 | |||
Cash used in operating activities | $ | | $ | | |
Cash provided by investing activities | $ | | $ | | |
Depreciation and amortization | $ | - | $ | | |
Capital expenditures | $ | - | $ | |
NOTE 3. – INVENTORIES
Inventories at March 31, 2024 and December 31, 2023 consisted of the following:
| March 31, |
| December 31, | |||
| 2024 |
| 2023 | |||
Raw materials | $ | | $ | | ||
Work in process | — | — | ||||
Finished goods |
| | | |||
$ | | $ | |
NOTE 4. – INTANGIBLE ASSETS, NET
Intangible Assets, Net
Our intangible assets, net at March 31, 2024 and December 31, 2023 consisted of the following:
Gross | Accumulated |
| Net Carrying | ||||||
March 31, 2024 |
| Carrying Amount |
| Amortization |
| Amount | |||
Definite-lived: | |||||||||
Patent | $ | | $ | ( | $ | | |||
License fees |
| | ( | | |||||
Total amortizing intangible assets | $ | | $ | ( | $ | | |||
Indefinite-lived: |
| ||||||||
Trademarks | $ | | |||||||
MSA signatory costs | | ||||||||
License fee for predicate cigarette brand | | ||||||||
Total indefinite-lived intangible assets | $ | | |||||||
Total intangible assets, net | $ | |
12
Gross | Accumulated |
| Net Carrying | |||||||||
December 31, 2023 |
| Carrying Amount |
| Amortization |
| Impairment | Amount | |||||
Definite-lived: | ||||||||||||
Patent | $ | | $ | ( | $ | ( | $ | | ||||
License fees |
| | ( | ( | | |||||||
Total amortizing intangible assets | $ | | $ | ( | $ | ( | $ | | ||||
Indefinite-lived: |
| |||||||||||
Trademarks | $ | | ||||||||||
MSA signatory costs | | |||||||||||
License fee for predicate cigarette brand | | |||||||||||
Total indefinite-lived intangible assets | $ | | ||||||||||
Total intangible assets, net | $ | |
Aggregate intangible asset amortization expense comprises of the following:
Three Months Ended | |||||
March 31, | |||||
2024 |
| 2023 | |||
Cost of goods sold | $ | | $ | | |
Research and development |
| |
| | |
Total amortization expense | $ | | $ | |
Estimated future intangible asset amortization expense based on the carrying value as of March 31, 2024 is as follows:
| Remainder of 2024 |
| 2025 |
| 2026 | 2027 | 2028 | Thereafter | ||||||||||
Amortization expense | $ | | $ | | $ | | $ | | $ | | $ | |
NOTE 5. – 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 on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
13
The following table presents information about our liabilities measured at fair value as of March 31, 2024 and December 31, 2023, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
Fair Value | ||||||||||||
March 31, 2024 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Liabilities | ||||||||||||
Detachable warrants | $ | — | $ | — | $ | | $ | | ||||
Derivative liability | — | — | | | ||||||||
Total liabilities | $ | — | $ | — | $ | | $ | |
Fair Value | ||||||||||||
December 31, 2023 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Liabilities |
|
|
|
|
|
|
|
| ||||
Detachable warrants | $ | — | $ | — | $ | | $ | | ||||
Derivative liability |
| — |
| — |
| |
| | ||||
Total liabilities | $ | — | $ | — | $ | | $ | |
Detachable Warrants
The following table sets forth a summary of the changes in fair value of the Company’s stock warrants accounted for as liabilities (Level 3) for the period ended March 31, 2024:
Fair value measurement at January 1, 2024 | $ | | |
Fair value measurement adjustment | — | ||
Fair value measurement at March 31, 2024 | $ | |
The Omnia detachable warrants were measured at March 31, 2024 and December 31, 2023 using a Monte Carlo valuation model with the following assumptions:
March 31, | December 31, | ||||||
2024 | 2023 | ||||||
Risk-free interest rate per year |
| | % |
| | % | |
Expected volatility per year |
| | % |
| | % | |
Expected dividend yield |
| — | % |
| — | % | |
Contractual expiration |
| | years |
| | years | |
Exercise price | $ | $ | |||||
Stock price | $ | $ |
The detachable warrants are measured at fair value using certain estimated factors 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 detachable warrants include the volatility factor, anti-dilution provisions, and contingent put option. Significant increases or decreases in the volatility factor would have resulted in a significantly higher or lower fair value measurement. Additionally, a change in probability regarding the anti-dilution provision or put option would have resulted in a significantly higher or lower fair value measurement. The detachable warrants were terminated in April 2024. See Note 12 – Subsequent Events for additional information.
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Derivative Liability
The following table sets forth a summary of the changes in fair value of the Company’s derivative liability accounted for as liabilities (Level 3) for the period ended March 31, 2024:
Fair value measurement at January 1, 2024 | $ | | |
Fair value measurement adjustment | | ||
Fair value measurement at March 31, 2024 | $ | |
The derivative liability related to the debentures and embedded conversion option using was measured at March 31, 2024 and December 31, 2023 using a binomial lattice valuation model under a “with and without” approach and contained the following assumptions:
March 31, | December 31, | ||||||
2024 | 2023 | ||||||
Stock price volatility |
| | % |
| | % | |
Expected term |
| | years |
| | years | |
Stock price | $ | | $ | | |||
Risk-free rate |
| | % |
| | % | |
Credit rating | CCC | CCC | |||||
Market yield (credit risk) | % | % |
The debentures and derivative liability are measured at fair value using certain estimated factors 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 liability include a decrease/increase in our stock price, stock price volatility, credit rating, and simulated stock price upon conversion could significantly change the fair value measurement as either an increase or decrease.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three months ended March 31, 2024 and 2023 respectively, the Company did not have any financial assets or liabilities measured at fair value on a nonrecurring basis.
NOTE 6. DEBT
The Company has a senior secured credit facility (the “Senior Secured Credit Facility”), which consists of Debentures (as defined below) and a subordinated promissory note (the “Subordinated Note). The Debentures were issued at a
15
Debt related to the Senior Secured Credit Facility and Subordinate Note as of March 31, 2024 and December 31, 2023 consists of the following:
March 31, | December 31, | |||||
| 2024 |
| 2023 | |||
Senior Secured Credit Facility |
| $ | |
| $ | |
Subordinated Note | | | ||||
Unamortized discount on loan and deferred debt issuance costs | ( | ( | ||||
Total debt | $ | | $ | | ||
Current portion of long-term debt | ( | ( | ||||
Total long-term debt | $ | | $ | |
Debentures
On March 3, 2023, the Company entered into a Securities Purchase Agreement with each of the purchasers party thereto (collectively, the “Purchasers”) and JGB Collateral, LLC, as collateral agent for the Purchasers (the “Agent”) which pursuant to the agreement, the Company sold
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.
The Debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict 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 entering into transactions with 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 was required to maintain at least $
In connection with the sale of the Debentures, the Company issued warrants to purchase up to
16
On October 16, 2023, the Company entered into a Waiver and Amendment Agreement (the “October Amendment”) with each of the subsidiaries of the Company executing the Debentures, the Holders and the Agent, pursuant to which, among other things, (a) the Holders waived an event of default under Section 7(d) of the Debentures which required the Company to achieve revenue of at least $
As additional consideration for the waiver, the Company agreed to assign, transfer and convey to the Agent, the Company’s entire right, title and interest in and to (i) the Promissory Note made by J&N Real Estate Company, L.L.C. (“J&N”) payable to the Company in the principal amount of $
In connection with the waiver, the Company and Holders agreed to exercise the outstanding put provision to redeem
Subsequently, on December 22, 2023, the Company, the Holders and the Agent entered into an Amendment Agreement (the “December Amendment”) pursuant to which the Holders and the Agent consented to the Purchase Agreement, as amended by the GVB Amendment (see Note 2 “Discontinued Operations and Divestitures”). In consideration of the Holders and the Agents’ consent, the Company agreed to (i) pay to the Agent, a cash payment of $
Additionally, the Company, the Holders and the Agent agreed to amend the Debentures to (i) allow the Holders to voluntarily convert the Debentures, in whole or in part, into shares of the Company’s common stock (“Voluntary Conversion Option”) on the earlier of (i) June 30, 2024 and (ii) the public announcement of a Fundamental Transaction at a conversion price equal to the lower of (x) $
Additional terms of the December Amendment include a financial covenant holiday through the third quarter of 2024 and revised certain covenants thereafter to reflect the sale of the Purchased Interests, including lowering the Company’s quarterly revenue targets.
In accordance with ASC 470-60 Troubled Debt Restructurings by Debtors and ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be a troubled debt restructuring, and if no, whether the transaction was deemed modification of existing debt, or an extinguishment of existing debt and new debt.
17
The October Amendment was concluded to be a modification, and not an extinguishment, based on an analysis of the present value of future cash flows. A new effective interest rate was determined, and the debt continued to be amortized. The December Amendment was concluded to be an extinguishment, due to the addition of a substantive conversion option. As a result, the pre-amended debt carrying value was extinguished and the new debt was recorded at fair value, which is subsequently amortized using the effective interest method. Extinguishment charges were $
The Company analyzed the conversion feature of the December Amendment for derivative accounting consideration under ASC 815-15 and determined that the embedded conversion features should be classified as a bifurcated derivative because the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability at fair value in the amount of $
Subordinated Note
On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $
Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues monthly at a compounding rate of
In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to
As discussed above, the Company has pledged to JGB the $
18
The fair values of the warrants at issuance of $
Total | |||
January 1, 2023 | $ | - | |
Issuance | | ||
Amortization during the year | ( | ||
Debt extinguishment charges | ( | ||
December 31, 2023 | | ||
Amortization during the period | ( | ||
March 31, 2024 | $ | |
NOTE 7. – REVENUE RECOGNITION
The Company’s 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. 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
Disaggregation of Revenue
The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by the timing of revenue. Revenue recognized from Tobacco products transferred to customers over time represented
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, | ||||||
| 2024 | 2023 | ||||
Customer A | | % | | % | ||
Customer B | | % | | % | ||
Customer C | | % | | % | ||
All other customers | | % | | % |
19
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
Total contract assets and contract liabilities are as follows:
March 31, | December 31, | |||||
| 2024 |
| 2023 | |||
Unbilled receivables |
| $ | |
| $ | |
Deferred income | ( | ( | ||||
Net contract assets | $ | | $ | |
During the three months ended March 31, 2024, the Company recognized $
NOTE 8 – EQUITY- BASED COMPENSATION
The Company maintains certain stock-based compensation plans that were approved by the Company’s shareholders and are administered by the Compensation Committee of the Company’s Board of Directors. The stock-based compensation plans provide for the granting of stock options, time and performance based restricted stock units (RSU’s), among other awards to employees, non-employee directors, consultants, and service providers. The 2021 Omnibus Incentive Plan was amended on June 16, 2023, increasing the authorized shares by
20
Compensation Expense – The Company recognized the following compensation costs, net of actual forfeitures, related to restricted stock units (“RSUs”) and stock options:
Three Months Ended | |||||||
March 31, | |||||||
| 2024 |
| 2023 | ||||
Sales, general, and administrative | $ | | $ | | |||
Research and development |
| |
| | |||
Total equity based compensation - continuing operations | |
| | ||||
Total equity based compensation - discontinued operations | — |
| | ||||
Total equity based compensation | $ | | $ | |
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, 2024 through March 31, 2024.
Unvested RSUs | |||||
Weighted | |||||
Average | |||||
Number of | Grant-date | ||||
| Shares |
| Fair Value | ||
$ per share | |||||
Unvested at January 1, 2024 |
| | $ | | |
Vested | ( | | |||
Forfeited | ( | | |||
Unvested at March 31, 2024 | | $ | |
The fair value of RSUs that vested during the three months ended March 31, 2024 was approximately $
Stock Options – Our outstanding stock options were valued using the Black-Scholes option-pricing model on the date of the award. There was no stock option grant activity during the three months ended March 31, 2024. A summary of the status of stock options activity since January 1, 2024 and at March 31, 2024 is as follows:
Weighted | |||||||||||
Weighted | Average | ||||||||||
Average | Remaining | Aggregate | |||||||||
Number of | Exercise | Contractual | Intrinsic | ||||||||
| Options |
| Price |
| Term |
| Value | ||||
$ per share | |||||||||||
Outstanding at January 1, 2024 |
| | $ | |
|
|
|
|
| ||
Expired |
| ( | |
|
|
|
|
| |||
Forfeited |
| ( | |
|
|
|
|
| |||
Outstanding at March 31, 2024 |
| | $ | |
| years |
| $ | — | ||
Exercisable at March 31, 2024 |
| | $ | |
| 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.
21
NOTE 9. – CAPITAL RAISES AND WARRANTS FOR COMMON STOCK
The following tables summarize the Company’s warrant activity:
Warrants outstanding at January 1, 2024 | | |
Issued | | |
Exercised | ( | |
Warrants outstanding at March 31, 2024 | |
# of warrants outstanding | Exercise price | Expiration date | |||||
July 2022 RDO warrants | $ | | July 25, 2027 | ||||
Senior Secured Credit Facility - JGB | $ | | September 3, 2028 | ||||
Subordinated Note - Omnia* | $ | | September 3, 2030 | ||||
July 19, 2023 RDO warrants** | $ | | July 20, 2028 | ||||
October 2023 CMPO warrants** | $ | | October 19, 2028 | ||||
Inducement warrants** | $ | | February 15, 2029 | ||||
*Omnia warrants were terminated in April 2024. See Note 12 "Subsequent Events." | |||||||
**The exercise price on the outstanding warrants was subsequently adjusted to $ |
Warrant Inducement Offering
On November 28, 2023, the Company commenced a warrant inducement offering with the holders of the Company’s outstanding
For the period from January 1, 2024 to February 15, 2024, the date of shareholder approval, the Company entered into warrant inducement agreements with certain holders of the Existing Warrants to purchase an aggregate of
22
NOTE 10. – LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss per common share for the three months ended March 31, 2024 and 2023, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive.
Three Months Ended | ||||||
March 31, | ||||||
| 2024 |
| 2023 | |||
Net loss from continuing operations | $ | ( | $ | ( | ||
Net loss from discontinued operations | ( | ( | ||||
Net loss | $ | ( | $ | ( | ||
Deemed dividends | ( | — | ||||
Net loss available to common shareholders | $ | ( | $ | ( | ||
Weighted average common shares outstanding - basic and diluted | | | ||||
Basic and diluted loss per common share from continuing operations | $ | ( | $ | ( | ||
Basic and diluted loss per common share from discontinued operations | ( | ( | ||||
Basic and diluted loss per common share from deemed dividends | ( | — | ||||
Basic and diluted loss per common share | $ | ( | $ | ( | ||
Anti-dilutive shares are as follows as of March 31: | ||||||
Warrants | | | ||||
Options | | | ||||
Restricted stock units | | | ||||
| |
NOTE 11. - COMMITMENTS AND CONTINGENCIES
License agreements and sponsored research – The Company has entered into various consulting, license and tobacco growing agreements (the “Agreements”) with various counter parties in connection with the Company’s plant biotechnology business relating to tobacco. The schedule below summarizes the Company’s commitments, both financial and other, associated with each Agreement. Costs incurred under the Agreements are generally recorded as research and development expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
Future Commitments | |||||||||||||||||||||||
Commitment |
| Counter Party |
| Commitment Type |
| 2024 |
| 2025 |
| 2026 |
| 2027 | 2028 & After | Total |
| ||||||||
License Agreement | NCSU | Minimum annual royalty | $ | | $ | | $ | | $ | | $ | | $ | | (1) | ||||||||
License Agreement | NCSU | Contract fee | | | | — | — | | (2) | ||||||||||||||
Consulting Agreements | Various | Contract fee | | | | — | — | | (3) | ||||||||||||||
Growing Agreements | Various | Contract fee | | — | — | — | — | | (4) | ||||||||||||||
$ | | $ | | $ | | $ | | $ | | $ | |
(1) | 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. |
23
(2) | On November 1, 2023, the Company entered into a license agreement with NCSU for an exclusive sublicensable right and license under specific patent rights and plant variety rights for the field of use in specific licensed territories. Additional milestone fees could be required pending achievement of events pursuant to the agreement. |
(3) | As a requirement for a modified risk tobacco product and condition of the marketing authorization by the FDA, the Company engaged various consulting firms to conduct post-market studies and research. |
(4) | Various R&D growing agreements for tobacco. |
Litigation - The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future. 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 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 connection with ongoing restructuring efforts and the hemp/cannabis disposal group (see Note 2 “Divestitures and discontinued operations,” the Company has received unasserted claims related to disputed contracts, which could result in accrual of an additional amount up to $
Class Action
On January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a Complaint 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 Eastern District of New York entitled: Matthew Bull, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 1:19 cv 00409.
On January 29, 2019, Ian M. Fitch, a resident of Essex County Massachusetts, filed a Complaint 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 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, where it remains pending as Case No. 1:19-cv-01285.
Plaintiffs in the Bull case filed an Amended Complaint on November 19, 2019 that alleges
24
On January 29, 2020, the Company and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On January 14, 2021, the Court granted the motion, 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.
The 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. On April 25, 2023, the parties filed with the Court the Motion for Preliminary Approval of the Settlement, which includes the final terms of the proposed settlement. The Court preliminarily approved the settlement on June 30, 2023, and scheduled a further settlement hearing for October 3, 2023. The Court entered the Final Judgment and Order of Dismissal with Prejudice of the action on October 23, 2023. The settlement amount that the defendants paid is $
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.
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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 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 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 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
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 Complaint 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 Company'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 Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties. 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 if the case is not resolved. No trial date has been set.
The parties participated in a mediation on March 21, 2023, and a subsequent mediation on October 17, 2023. On December 5, 2023, the parties entered into a Memorandum of Settlement to fully resolve all claims pending the Court’s approval of a motion for preliminary approval of settlement. The settlement amount is $
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On September 1, 2023, Kenneth Troup 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 Board of Directors in the United States District Court for the Western District of New York entitled: Kenneth Troup, derivatively on behalf of 22nd Century Group v. Nora Sullivan, James Mish, Michael Koganov, Anthony Johnson, Richard Sanders, Lucille Salhany, Andy Arno, James W. Cornell, Henry Sicignano, III, and John T. Brodfuehrer, and 22nd Century Group, Inc., Case No. 1:23-cv-00916. Mr. Troup 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 February 9, 2024, defendants filed an unopposed Motion to Consolidate the Troup action with the consolidated derivative cases, which would include the Troup case in the preliminary settlement described above.
We believe that the claims are frivolous, meritless and that the Company 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.
Insurance Litigation
In November 2022, there was a fire at the Company’s Grass Valley manufacturing facility in Oregon, which resulted in a total loss of the facility. The Company submitted an insurance claim with Dorchester Insurance Company, Ltd. (“Dorchester”) for casualty loss and business interruption coverage which was acknowledged on November 23, 2022. Dorchester funded $
On July 19, 2023, the Company filed a Complaint against Dorchester in the United States District Court for the District of Oregon, Pendleton Division, Case No. 2:23-cv-01057-HL. The Company is alleging breach of contract and breach of duty of good faith and fair dealing. The Company is seeking full recovery of its business interruption claim of approximately $
Needle Rock Farms – Settlement Agreement
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 $
KeyGene Dispute
On April 11, 2024 the Company received a Request for Arbitration from Keygene N.V. (“Keygene”) in connection with the Company’s termination of various framework collaborative research agreements described below. On April 3, 2019, the Company entered into the Framework Collaborative Research Agreement with KeyGene in the field of hemp/cannabis. On April 30, 2021, the Company and KeyGene entered into a First Amended and Restated Framework Collaborative Research Agreement which extended the agreement term, from first quarter 2024 to first quarter 2027. On March 30, 2022, the Company and KeyGene entered into a new Framework Collaborative Research Agreement for a term of
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Maison Dispute
On January 23, 2024, the Company received a Notice of Intent to Arbitrate from Maison Placements Canada Inc. (“Maison”) in connection with the Company’s March 2023 Senior Secured Credit Facility transaction. Maison claims it is owed fees for closure of the Senior Secured Credit Facility transaction as a result of discussions with former Company personnel and a purported letter of engagement dating from 2021. The Company believes it has substantial defenses to Maison’s claims and intends to defend itself vigorously.
NOTE 12. – SUBSEQUENT EVENTS
Senior Secured Credit Facility
On December 28, 2023, the Company entered into that certain Amendment Agreement (the “Amendment Agreement”) to that certain Securities Purchase Agreement dated March 3, 2023 (the “JGB SPA”) and debentures (the “Debentures”) with JGB Partners, LP (“JGB Partners”), JGB Capital, LP (“JGB Capital”) and JGB Capital Offshore Ltd. (“JGB Offshore” and collectively with JGB Partners and JGB Capital, the “Holders”) and JGB Collateral, LLC, as collateral agent for the Holders (the “Agent”).
On April 8, 2024, the Company, the Holders and the Agent entered into that certain Letter Agreement to modify the terms of the Amendment Agreement, the JGB SPA and the Debentures, as amended.
Under the terms of the Letter Agreement, the Holders are permitted to convert their debt to common stock at anytime and the Conversion Price (as defined in the Debentures) at which the Holders may convert the principal amount of their Debentures to the Company’s common stock is reduced to $
The provisions in Section 3(c)(i) of the Debentures requiring
On May 10, 2024, the Company, the Holders and the Agent entered into that certain May 2024 Exchange Agreement and May 2024 Letter Agreement to modify the terms of the Amendment Agreement, the Securities Purchase Agreement and the Debentures, as amended.
Under the terms of the May 2024 Letter Agreement, the Company and Holders have agreed the Company shall incur an aggregate amendment charge to the undersigned holders equal to $
Under the terms of the May 2024 Exchange Agreement, the Company and Holders exchanged an aggregate of $
As a result of the transaction, the exercise price on 5,876,887 of the Company’s outstanding warrants is reduced to $
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Securities Purchase Agreement
On April 8, 2024, the Company and certain investors (the “Investors”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) relating to the issuance and sale of shares of common stock (or pre-funded warrants in lieu of common stock) pursuant to a registered direct offering and a private placement of warrants to purchase shares of common stock (collectively, the “Offering”). The Investors purchased approximately $
The Company agreed to pay the Placement Agent a cash fee of
The net proceeds to the Company from the Offering, after deducting placement agent fees and the Company’s estimated offering expenses, were approximately $
Subordinated Note - Omnia Settlement and General Release
On April 29, 2024, the Company entered into a General Release and Settlement Agreement (the “Omnia Agreement”) with Omnia Capital LP (“Omnia”). The Omnia Agreement settles and extinguishes all outstanding debt and interest owed to Omnia under the outstanding Subordinated Promissory Note dated March 3, 2023 (the “Old Note”) and the put provision contained the outstanding common stock purchase warrant dated March 3, 2023 (the “Old Warrant”), amounting to a total of approximately $
Other Agreements
On April 29, 2024, the Company settled an aggregate of $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The 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, 2023, 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. Forward looking statements include, but are not limited to, statements regarding (i) our ability to continue as a going concern, (ii) our expectations regarding our debt obligations, (iii) our financial and operating performance, (iv) our strategic alternatives, including our cost savings initiatives, (v) our expectations regarding regulatory enforcement (vi) our products, and (vii) the volatility of our common stock and warrants. 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” herein and in our Annual Report on Form 10-K filed on March 28, 2024. 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.
Our Business
22nd Century Group, Inc. is an agricultural biotechnology company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science. With dozens of patents allowing it to control nicotine biosynthesis in the tobacco plant, the Company has developed proprietary reduced nicotine content (RNC) tobacco plants and cigarettes, which have become the cornerstone of the FDA’s Comprehensive Plan to address the widespread death and disease caused by smoking. The Company received the first and only FDA Modified Risk Tobacco Product (MRTP) authorization for a combustible cigarette in December 2021. 22nd Century uses modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the life science and consumer products industries by creating new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits.
To support the launch and expansion of VLN®, we are vertically integrated and utilize our tobacco assets for contract manufacturing operations (“CMO”) that consists primarily of branded filtered cigars and conventional cigarettes. With high-speed manufacturing capabilities we continue to attract additional CMO business to absorb our manufacturing overhead and help keep our unit cost profile low. The Company is a subsequent participating manufacturer under the Master Settlement Agreement (“MSA”), of which all cigarette products are compliant.
Recent Highlights and Other Events
● | Capital Markets Transactions |
o | On April 2, 2024, the Company completed a reverse stock split of its outstanding shares of common stock, par value $0.00001 per share at a ratio of 1-for-16 effective. Subsequently, Nasdaq Stock Market LLC ("Nasdaq") notified the Company on April 16, 2024 that it has regained compliance with the minimum bid price requirement under Nasdaq Listing Rule 5550(a)(2) for continued listing. |
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o | Nasdaq notified the Company on April 4, 2024 that it has received a deficiency letter with the minimum shareholders’ equity requirement of $2,500 under Nasdaq Listing Rule 5550(b)(1) for continued listing. |
o | In April 2024, the Company completed a registered direct offering for total net proceeds of $3,913. |
o | In April 2024, the Company reduced the outstanding principle of its Senior Secured Credit Facility by $428 through conversion of 200,000 shares of common stock. |
o | In April 2024, the Company eliminated $5,228 of indebtedness related to the Subordinate Note in a primarily equity transaction. |
o | In April 2024, the Company settled an approximate aggregate of $1,500 of outstanding indebtedness under various commercial agreements in equity issuances. |
o | In May 2024, the Company further reduced debt by exchanging $2,328 of amounts owed under the Senior Secured Credit Facility for 1,375,000 shares of common stock and pre-funded warrants. |
● | Corporate Updates |
o | On February 13, 2024, the Company announced a reduction in board compensation expenses expected to save more than $1 million in annual cost for 2024. Additionally, the board waived cash compensation for the fourth quarter 2023 and first quarter 2024. |
o | On April 8, 2024, The Company announced the appointment of Daniel Otto as Chief Financial Officer and Jonathan Staffeldt as General Counsel. |
o | On April 18, 2024, the Company announced the resignation of Nora Sullivan and James Mish as Directors. The Company reduced the board to 4 seats as part of its focus on corporate cost efficiency. |
Financial Overview
● | Net revenues for the first quarter of 2024 were $6,469, a decrease of 27.5% from $8,926 in 2023, primarily driven by a decrease in volume. |
o | First quarter 2024 cartons sold of 629 compared to 1,002 in the comparable prior year period. |
● | Gross profit for the first quarter of 2024 was a loss of $1,129 compared to profit of $17 in the prior year period. |
● | Total operating expenses for the first quarter of 2024 decreased to $3,305 compared to $10,421 in the prior year quarter driven by: |
o | Sales, general and administrative expenses decreased to $2,906 compared to $9,837 in the prior year period, primarily driven by lower headcount (compensation and benefits), strategic consulting, and sales and marketing costs due to our cost savings initiatives implemented in the second half of 2023. |
o | Research development expenses decreased to $425, compared to $730 in the prior year period, driven by lower headcount (compensation and benefits costs) and continued focus on cost savings with our tobacco research. |
o | Other operating expenses, net was ($26), compared to ($146) in the prior year period, primarily reflecting gains on sale of property, plant and equipment. |
● | Operating loss from continuing operations for the first quarter 2024 was $4,434, compared to a loss of $10,404 in the prior year period for the reasons described above. |
● | Net loss from continuing operations in the first quarter of 2024 was $5,450 and basic and diluted loss from continuing operations per common share was $1.72 compared with net loss from continuing operations in the first quarter of 2023 of $10,830, and basic and diluted net loss from continuing operations per common share of $12.80. |
● | As of March 31, 2024, we had $1,517 in cash and cash equivalents. |
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Our Financial Results
| Three Months Ended | |||||||||||
| March 31 | March 31 | Change | |||||||||
|
| 2024 |
| 2023 | $ | % | ||||||
Revenues, net | $ | 6,469 | $ | 8,926 | (2,457) | (27.5) | ||||||
Cost of goods sold | 4,213 | 4,724 | (511) | (10.8) | ||||||||
Excise taxes and fees on products | 3,385 | 4,185 | (800) | (19.1) | ||||||||
Gross (loss) profit | (1,129) | 17 | (1,146) | NM | ||||||||
Gross (loss) profit as a % of revenues, net | (17.4) | % | 0.2 | % | ||||||||
Operating expenses: | ||||||||||||
Sales, general and administrative ("SG&A") | 2,906 | 9,837 | (6,931) | (70.5) | ||||||||
SG&A as a % of revenues, net | 44.9 | % | 110.2 | % | ||||||||
Research and development ("R&D") | 425 | 730 | (305) | (41.8) | ||||||||
R&D as a % of revenues, net | 6.6 | % | 8.2 | % | ||||||||
Other operating expenses, net ("OOE") | (26) | (146) | 120 | (82.2) | ||||||||
Total operating expenses | 3,305 | 10,421 | (7,116) | (68.3) | ||||||||
Operating loss from continuing operations | (4,434) | (10,404) | 5,970 | (57.4) | ||||||||
Operating loss as a % of revenues, net | (68.5) | % | (116.6) | % | ||||||||
Other income (expense): | ||||||||||||
Other income (expense), net | - | (155) | 155 | NM | ||||||||
Interest income, net | - | 57 | (57) | (100.0) | ||||||||
Interest expense | (1,016) | (328) | (688) | 209.8 | ||||||||
Total other expense | (1,016) | (426) | (590) | 138.5 | ||||||||
Loss before income taxes | (5,450) | (10,830) | 5,380 | (49.7) | ||||||||
Provision for income taxes | - | - | - | - | ||||||||
Net loss from continuing operations | $ | (5,450) | $ | (10,830) | 5,380 | (49.7) | ||||||
Net loss as a % of revenues, net | (84.3) | % | (121.3) | % | ||||||||
Net loss per common share from continuing operations (basic and diluted)* | $ | (1.72) | $ | (12.80) | 11.08 | (86.56) | ||||||
NM - calculated change not meaningful |
*Giving retroactive effect to the 1-for-16 reverse stock split on April 2, 2024 and the 1-for-15 reverse stock split on July 5, 2023.
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Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Revenue, net
|
| Three Months Ended | ||||
|
| March 31 | March 31 | |||
|
| 2024 |
| 2023 | ||
Revenues, net | $ | 6,469 | $ | 8,926 | ||
Cartons sold | 629 | 1,002 |
Tobacco revenue was $6,469, a decrease of 27.5% from $8,926 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources during 2023 at the Company’s NASCO facilities away from negative margin filtered cigars to higher margin VLN® and conventional cigarette products. Price increases and new cigarette export contract volume commence in the second quarter of 2024, among other additional new CMO revenue opportunities, while the Company concurrently exits certain filtered cigar production with negative profitability.
Gross (loss) profit
| Three Months Ended | |||||||
| March 31 | March 31 | ||||||
|
| 2024 | 2023 | |||||
Gross (loss) profit | $ | (1,129) | $ | 17 | ||||
Percent of Revenues, net | (17.4) | % | 0.2 | % |
The decrease in gross profit and gross profit as a percent of revenues, net for the quarter ended March 31, 2024, compared to the quarter ended March 31, 2023, was primarily driven by lower volume due to carryover from 2023 of our intentional shift in product mix, production staffing, and capacity as we stabilize operations in connection with ongoing restructuring efforts. During the quarter ended March 31, 2024, the Company recorded an additional reserve for excess, obsolete or expired leaf inventory of $431 related to the 2023 crop year received in the first quarter 2024 and an additional $233 for excise taxes on products based on an assessment received related to prior periods.
Sales, general and administrative (“SG&A”) expense
|
| Changes From Prior Year | |
Three Months Ended | |||
Compensation and benefits (a) | $ | (2,492) | |
Strategic consulting (b) | (3,062) | ||
Sales and marketing (b) | (401) | ||
Travel and entertainment (b) | (226) | ||
Administrative, public company and other expenses (c) | (750) | ||
Net decrease in SG&A expenses | $ | (6,931) |
(a) Compensation and benefits and equity compensation expense decreased for the three-month period ending March 31, 2024 compared to the prior year period due to a reduction of headcount as part of our cost cut initiatives.
(b) Decreases of strategic consulting, sales and marketing and travel and entertainment for the three-month period ending March 31, 2024, were due to reduced spending as part of our cost cut initiatives.
(c) Other expenses decreased for the three-month ended March 31, 2024, due to decreases of $412 of for public company expenses, $310 of insurance expenses, $150 of facilities expenses and $122 of other.
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Research and development (“R&D”) expense
| Changes From Prior Year | |||
Three Months Ended | ||||
Compensation and benefits (a) | $ | (152) | ||
Other (b) | (153) | |||
Net decrease in R&D expenses | $ | (305) |
(a) | Decreased compensation and benefits for the three-month period ended March 31, 2024 are mainly related to the a decrease in headcount in the current year period compared to the prior year period. |
(b) | Other expenses decreased for the three months ended March 31, 2024, due to decreases of $57 of patent and license amortization, $48 of consulting and professional services, and $48 of patent maintenance. These decreases are mainly attributable to our continued cost cutting initiatives implanted during the third quarter of 2023. |
Other income (expense)
| Changes From Prior Year | ||
|
| Three Months Ended | |
Other income (expense): | |||
Other income (expense), net (a) | (155) | ||
Interest income, net | 57 | ||
Interest expense (b) | 688 | ||
Net increase in other expense | $ | 590 |
(a) | Other income (expense), net decreased from the prior year period due to a decrease of $16 of realized losses on short term investments and $139 decrease in fair value of warrant liability. |
(b) | Interest expense increased in 2024, as compared to the prior year period, primarily due to increases in cash interest of $66 and a decrease of non-cash interest of $62 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations increased by $37), and additional increases of $82 of derivative liability fair value changes. Additionally, interest expense increased as a result of PIK interest of $639 recognized from the Subordinated Note. |
Liquidity and Capital Resources
We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in our tobacco business. We had negative cash flow from operations of $2,255 for the three months ended March 31, 2024 and an accumulated deficit of $384,446 as of March 31, 2024. As of March 31, 2024, we had cash and cash equivalents of $1,517 and working capital from continuing operations of ($9,497) (compared to working capital from continuing operations of ($6,826) at December 31, 2023). Given our projected operating requirements and existing cash and cash equivalents, there is substantial doubt about our ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements herein are issued.
In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory or assets, cease or curtail operations, seek to negotiate new business deals with our business partners or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Accordingly, there is substantial doubt regarding our ability to continue in operations. Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.
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Our cash, and cash equivalents and working capital as of March 31, 2024 and December 31, 2023 are set forth below:
| March 31 | December 31 | ||||
|
| 2024 |
| 2023 | ||
Cash and cash equivalents | $ | 1,517 | $ | 2,058 | ||
Working capital | $ | (9,497) |
| $ | (6,826) |
Working Capital
As of March 31, 2024, we had working capital from continuing operations, excluding assets and liabilities held for sale, of approximately ($9,497) compared to working capital of approximately ($6,826) at December 31, 2023 a decrease of $2,671. This decrease in working capital was primarily due to a $2,403 decrease in net current assets and an increase in net current liabilities of $268. Cash and cash equivalents decreased by $541 and the remaining net current assets increased by $1,862. As a result of the working capital balance, management has taken a number of steps to improve liquidity. Refer below to “Cash demands on operations.”
Summary of Cash Flows
| Three Months Ended | |||||||
March 31, | Change | |||||||
|
| 2024 |
| 2023 | $ | |||
Cash provided by (used in): | ||||||||
Operating activities | $ | (2,255) | $ | (17,500) | 15,245 | |||
Investing activities |
| 15 |
|
| 14,723 | (14,708) | ||
Financing activities |
| 1,699 |
|
| 18,209 | (16,510) | ||
Net change in cash, cash equivalents and restricted cash | $ | (541) |
| $ | 15,432 |
Net cash used in operating activities
Cash used in operating activities decreased $15,245 from $17,500 in 2023 to $2,255 in 2024. The primary driver for this decrease was lower net loss of $12,443, a decrease of $1,016 related to net adjustments to reconcile net loss to cash, and a decrease in cash used for working capital components related to operations in the amount of $3,818 for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.
Net cash provided by investing activities
Cash provided by investing activities amounted to $15 the three months ended March 31, 2024, as compared to cash provided by investing activities of $14,723 for the three months ended March 31, 2023. The decrease in cash provided by investing activities of $14,708 was the result of (i) a decrease in net proceeds from short-term investments of $12,959; (ii) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the prior year period (iii) $90 from the acquisitions of RXP in the prior year period and (iv) a decrease of $178 of proceeds from the sale of property, plant and equipment. These decreased cash inflows were partially offset by a decrease in cash outflows of $2,019 related to the acquisitions of patents, trademarks and property, plant and equipment.
Net cash provided by financing activities
During the three months ended March 31, 2024, cash provided by financing activities decreased by $16,510, from $18,209 in the prior year period, to $1,699, resulting from decreases in (i) the net proceeds of $16,048 from issuance of long-term debt, (ii) proceeds of $6,016 from issuance of detachable warrants, and (iii) proceeds from issuance of notes payable of $71 offset by an increase in net proceeds from warrant exercise of $2,245. These cash inflows were offset by a decrease in cash outflows of note payable payments of $2,967 and taxes paid related to net share settlement of RSUs of $413.
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Cash demands on operations
As of March 31, 2024, we had approximately $1,517 of cash and cash equivalents. Our principal sources of liquidity are our cash and cash equivalents and cash generated from our tobacco contract manufacturing business and proceeds from debt and equity financing activities, which cash flows provided by financing activities for the quarter ended March 31, 2024 were $1,699.
Senior Secured Credit Facility
On March 3, 2023, the Company entered into that certain Securities Purchase Agreement (the “SPA”) with JGB Partners, LP (“JGB Partners”), JGB Capital, LP (“JGB Capital”) and JGB Capital Offshore Ltd. (“JGB Offshore” and collectively with JGB Partners and JGB Capital, the “Holders”) and JGB Collateral, LLC, as collateral agent for the Holders (the “Agent”) 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 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.
The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $306.00 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. As a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 20,834 shares of the Company’s common stock for an exercise price of $306.00 per share were automatically adjusted to be $205.248 exercise price for up to 31,063 shares of common stock. There are no further anti-dilution adjustments on such warrants. In connection with the JGB October Amendment, the Company and Holders agreed to exercise the outstanding put provision to redeem 10,418 Warrants for an aggregate put price equal to $2,500.
Following the JGB October and December Amendments (as further described in Note 6 “Debt” of the Notes to Condensed Consolidated Financial Statements contained), as of March 31, 2024 and December 31, 2023, respectively, the remaining principal loan balance is approximately $10,752, exit fee of $1,052 and remaining $500 of the put price will be due at maturity in March 2026 in accordance with the original terms of the debenture agreements. As of March 31, 2024, the Company has pledged to JGB the $2,000 GVB promissory note and $1,000 assignment of Needle Rock Farms to be applied as principal reduction in 2024.
On April 8, 2024, the Company, the Holders and the Agent entered into that certain Letter Agreement to modify the terms of the Amendment Agreement, the JGB SPA and the Debentures, as amended.
Under the terms of the Letter Agreement, the Holders are permitted to convert their debt to common stock at anytime and the Conversion Price (as defined in the Debentures) at which the Holders may convert the principal amount of their Debentures to the Company’s common stock is reduced to $2.14 per share in accordance with applicable Nasdaq rules. The principal amount of the Debentures converted shall be applied to the Monthly Allowance (as defined in the Debentures) for that month, and any excess shall be applied to the Monthly Allowances for the succeeding months. The conversions will be a dollar for dollar reduction of the remaining outstanding obligation owed to the Holders. The Agent and Holders have also agreed to daily limits on trading volume and minimum conversion amounts. The Holders converted $428 of debt in exchange for 200,000 shares of common stock during the 20-day period.
The provisions in Section 3(c)(i) of the Debentures requiring 20% of any equity issuances to be paid to the Holders was suspended for 20 days.
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On May 10, 2024, the Company, the Holders and the Agent entered into that certain May 2024 Exchange Agreement and May 2024 Letter Agreement to modify the terms of the Amendment Agreement, the Securities Purchase Agreement and the Debentures, as amended.
Under the terms of the May 2024 Letter Agreement, the Company and Holders have agreed the Company shall incur an aggregate amendment charge to the undersigned holders equal to $275, which shall be added to the principal balance of the Debentures.
Under the terms of the May 2024 Exchange Agreement, the Company and Holders exchanged an aggregate of $2,328 in principal, fees and expenses owed under the Debentures for 395,000 shares of common stock and 895,000 immediately exercisable pre-funded warrants to purchase shares of common stock at an exercise price of $.00001 (at an effective per share price of $1.69). The remaining principal balance of the Debentures is $9,825 of which $3,000 remains current with corresponding pledged assets.
As a result of the transaction, the exercise price on 5,876,887 of the Company’s outstanding warrants is reduced to $1.69 per share in accordance with the adjustment provisions therein.
Omnia 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 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 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 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 was May 1, 2024.
In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 2,813 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $205.248 per share subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
On April 29, 2024, the Company entered into a General Release and Settlement Agreement (the “Omnia Agreement”) with Omnia Capital LP (“Omnia”). The Omnia Agreement settles and extinguishes all outstanding debt and interest owed to Omnia under the outstanding Subordinated Promissory Note dated March 3, 2023 (the “Old Note”) and the put provision contained the outstanding common stock purchase warrant dated March 3, 2023 (the “Old Warrant”), amounting to a total of approximately $5,228, for (i) a cash payment of $249; (ii) 1,150,000 shares of common stock and 1,150,000 immediately exercisable pre-funded warrants to purchase shares of common stock at an exercise price of $0.0001 that are exercisable until May 1, 2029 (at an effective per share price of $2.14) and (iii) 460,000 immediately exercisable warrants to purchase an equal number of shares of common stock at an exercise price of $2.14 until May 1, 2029 (the “New Warrant”). The New Warrant contains a put provision that permits the holder to require the Company to redeem the New Warrants, no earlier than May 1, 2025, for a purchase price equal to $2.675 per New Warrant. Subject to limited exceptions, a holder of pre-funded warrants and New Warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 19.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. As part of the Omnia Agreement, the parties agreed to terminate and cancel the Old Note and the Old Warrant and released all debts, claims or other obligations against each other occurring prior to the date of the Omnia Agreement.
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Warrant Inducement Offering
On November 28, 2023, the Company commenced a warrant inducement offering with the holders of the Company’s outstanding 1,986,229 warrants consisting of: (i) the common stock purchase warrants of the Company issued on or about June 22, 2023; (ii) the common stock purchase warrants of the Company issued on or about July 10, 2023; (iii) the common stock purchase warrants of the Company issued on or about July 21, 2023; and/or (iv) the common stock purchase warrants of the Company issued on or about October 19, 2023 (collectively, the “Existing Warrants”), which Existing Warrants are exercisable for an equal number of shares of common stock at an exercise price of $8.40. The Company agreed to issue new warrants (the “Inducement Warrants”) to purchase up to a number of shares of common stock equal to 200% of the number of shares of common stock issued pursuant to the exercise by the holders of the Existing Warrants during the inducement period, for cash, at a reduced exercise price equal to the Nasdaq Minimum Price (as defined in the as defined in Nasdaq Listing Rule 5635(d)).
For the period from January 1, 2024 to February 15, 2024, the date of shareholder approval, the Company entered into warrant inducement agreements with certain holders of the Existing Warrants to purchase an aggregate of 820,769 shares of common stock at a reduced weighted average exercise price of approximately $2.9504 (which were subsequently reduced to $1.69 in connection with the May 2024 JGB debt for equity exchange). Pursuant to the warrant inducement agreements, the exercising holders of the Existing Warrants received 1,641,535 Inducement Warrants and the Company received aggregate gross proceeds of approximately $2,421 from the exercise of the Existing Warrants. Additionally, on the date of Shareholder Approval, the exercise price of the 3,581,213 outstanding Inducement Warrants, was reduced to $2.8237 based on the lowest Nasdaq Minimum Price (as defined in the as defined in Nasdaq Listing Rule 5635(d)) during the inducement period.
April 2024 Registered Direct Offering.
On April 8, 2024, the Company and certain investors entered into a securities purchase agreement (“April SPA”) relating to the issuance and sale of approximately $4,200 of shares and warrants, consisting of an aggregate of 1,855,000 shares of common stock, 125,000 pre-funded warrants and 1,980,000 warrants to purchase an equal number of shares, at a purchase price of $2.14 per unit. The warrants are exercisable immediately at an exercise price of $2.14 per share of common stock and expire five years after shareholder approval, as defined in the April SPA (which were subsequently reduced to $1.69 in connection with the May 2024 JGB debt for equity exchange). The net proceeds to the Company from the offering were approximately $3,913.
Outstanding Warrants
As of May 13, 2024, we had the following warrants outstanding:
# of warrants outstanding | Exercise price | Expiration date | |||||
July 2022 RDO warrants | 4,067 | $ | 492.00 | July 25, 2027 | |||
Senior Secured Credit Facility - JGB | 20,645 | $ | 205.248 | September 3, 2028 | |||
Senior Secured Credit Facility - JGB Pre-Funded | 895,000 | $ | 0.00001 | NA | |||
July 19, 2023 RDO warrants | 28,125 | $ | 1.69 | July 20, 2028 | |||
October 2023 CMPO warrants | 168,750 | $ | 1.69 | October 19, 2028 | |||
Inducement warrants | 3,581,213 | $ | 1.69 | February 15, 2029 | |||
April 2024 RDO | 1,980,000 | $ | 1.69 | * | |||
April 2024 RDO - Placement Agent | 118,800 | $ | 1.69 | * | |||
Omnia Pre-Funded | 1,150,000 | $ | 0.00001 | NA | |||
Omnia warrants | 460,000 | $ | 1.69 | May 1, 2029 | |||
8,406,600 | |||||||
*5 years after shareholder approval |
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Critical Accounting Policies and Estimates
The 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.
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, 2023.
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 Condensed 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 of operations.
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 about 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, 2023.
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.
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(b) | Changes in Internal Control over Financial Reporting: |
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 - Commitments and Contingencies – Litigation - to our Condensed 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 arising in the ordinary course of business. To our knowledge other than the cases described in Note 11 to our consolidated financial statements, no material legal proceedings, governmental 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 our business and financial condition.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 28, 2024.
Our securities are currently listed on the Nasdaq. If Nasdaq delists our securities from trading on its exchange, we could face significant material adverse consequences, including:
● | a limited availability of market quotations for our securities; |
● | reduced liquidity with respect to our securities; |
● | a determination that shares of our Class A 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 securities or obtain additional financing in the future. |
On April 4, 2024, we received a deficiency letter from the Nasdaq Listing Qualifications Department indicating that we were not in compliance with Nasdaq’s Listing Rule 5550(b)(1) because our stockholders’ equity for the year ended December 31, 2023, as reported in our Form 10-K, was below the minimum stockholders’ equity requirement of $2,500,000 (the “Stockholders’ Equity Requirement”). In accordance with Nasdaq rules, we have been provided 45 calendar days to submit a plan to regain compliance with the Stockholders’ Equity Requirement (the “Compliance Plan”). If the Compliance Plan is accepted, Nasdaq may grant up to 180 calendar days from the date of the notice for us to regain compliance with the Stockholders’ Equity Requirement.
We intend to timely submit a Compliance Plan to Nasdaq to regain compliance with the Stockholders’ Equity Requirement. There can be no assurance that Nasdaq will accept our plan or that we will be able to regain compliance with Listing Rule 5550(b)(1) or maintain compliance with any other Nasdaq requirement in the future. If our securities are delisted from Nasdaq due to non-compliance with Rule 5550(b)(1) or the failure to satisfy another applicable Nasdaq rule, such delisting would have a material adverse impact on the trading price and ability to transfer our securities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Default Upon Senior Securities.
None
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Item 4. Mine Safety Disclosures
None
Item 5. Other Information
During the three months ended March 31, 2024, there were no modifications,
Item 6. Exhibits
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101.INS | Inline XBRL Instance Document | ||
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101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL) | ||
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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. |
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Date: May 15, 2024 | /s/ Lawrence D. Firestone |
| Lawrence D. Firestone |
| Chief Executive Officer |
| (Principal Executive Officer and Authorized Officer) |
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Date: May 15, 2024 | /s/ Daniel A. Otto |
| Daniel A. Otto |
| Chief Financial Officer |
| (Principal Accounting and Financial Officer) |
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