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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2024
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From ________ to ________
Commission File Number: 001-36338
22nd Century Group, Inc.
(Exact name of registrant as specified in its charter)
Nevada |
|
98-0468420 |
(State or other jurisdiction |
|
(IRS Employer |
of incorporation) |
|
Identification No.) |
321 Farmington Road Mocksville, North Carolina 27028
(Address of principal executive offices)
(716) 270-1523
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of each class |
|
Ticker symbol |
|
Name of Exchange on Which Registered |
Common Stock, $0.00001 par value |
|
XXII |
|
NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ◻
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).
Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
Non-accelerated filer |
☒ |
Smaller reporting company |
☒ |
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of November 8, 2024, there were 46,359,227 shares of common stock issued and outstanding.
22nd CENTURY GROUP, INC.
INDEX
|
|
Page Number |
PART I. |
FINANCIAL INFORMATION |
|
|
|
|
Item 1. |
Financial Statements |
|
|
|
|
|
Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 (unaudited) |
3 |
|
|
|
|
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and |
4 |
|
|
|
|
5 |
|
|
|
|
|
7 |
|
|
|
|
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
8 |
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
35 |
|
|
|
|
46 |
||
|
|
|
46 |
||
|
|
|
47 |
||
|
|
|
47 |
||
|
|
|
47 |
||
|
|
|
47 |
||
|
|
|
47 |
||
|
|
|
47 |
||
|
|
|
48 |
||
|
|
|
48 |
||
|
|
|
49 |
2
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands, except share and per-share data)
|
|
September 30, |
|
December 31, |
||
|
|
2024 |
|
2023 |
||
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,341 |
|
$ |
2,058 |
Accounts receivable, net |
|
|
1,784 |
|
|
1,671 |
Inventories |
|
|
2,340 |
|
|
4,346 |
Insurance recoveries |
|
|
3,768 |
|
|
3,768 |
GVB promissory note |
|
|
500 |
|
|
2,000 |
Prepaid expenses and other current assets |
|
|
979 |
|
|
1,180 |
Current assets of discontinued operations held for sale |
|
|
1,051 |
|
|
1,254 |
Total current assets |
|
|
15,763 |
|
|
16,277 |
Property, plant and equipment, net |
|
|
2,970 |
|
|
3,393 |
Operating lease right-of-use assets, net |
|
|
1,705 |
|
|
1,894 |
Intangible assets, net |
|
|
5,725 |
|
|
5,924 |
Other assets |
|
|
15 |
|
|
15 |
Total assets |
|
$ |
26,178 |
|
$ |
27,503 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Notes and loans payable - current |
|
$ |
569 |
|
$ |
543 |
Current portion of long-term debt |
|
|
1,500 |
|
|
5,848 |
Operating lease obligations |
|
|
252 |
|
|
231 |
Accounts payable |
|
|
3,098 |
|
|
4,445 |
Accrued expenses |
|
|
1,367 |
|
|
1,322 |
Accrued litigation |
|
|
3,768 |
|
|
3,768 |
Accrued payroll |
|
|
183 |
|
|
883 |
Accrued excise taxes and fees |
|
|
2,159 |
|
|
2,234 |
Deferred income |
|
|
54 |
|
|
726 |
Other current liabilities |
|
|
194 |
|
|
1,849 |
Current liabilities of discontinued operations held for sale |
|
|
1,295 |
|
|
3,185 |
Total current liabilities |
|
|
14,439 |
|
|
25,034 |
Long-term liabilities: |
|
|
|
|
|
|
Operating lease obligations |
|
|
1,506 |
|
|
1,698 |
Long-term debt |
|
|
5,529 |
|
|
8,058 |
Other long-term liabilities |
|
|
1,232 |
|
|
1,123 |
Total liabilities |
|
|
22,706 |
|
|
35,913 |
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
Shareholders' equity (deficit): |
|
|
|
|
|
|
Preferred stock, $.00001 par value, 10,000,000 shares authorized |
|
|
|
|
|
|
Common stock, $.00001 par value, 250,000,000 shares authorized |
|
|
|
|
|
|
Capital stock issued and outstanding: |
|
|
|
|
|
|
29,378,321 common shares (2,720,437 at December 31, 2023) |
|
|
|
|
|
|
Common stock, par value |
|
|
— |
|
|
— |
Capital in excess of par value |
|
|
392,787 |
|
|
370,297 |
Accumulated deficit |
|
|
(389,315) |
|
|
(378,707) |
Total shareholders' equity (deficit) |
|
|
3,472 |
|
|
(8,410) |
Total liabilities and shareholders’ equity (deficit) |
|
$ |
26,178 |
|
$ |
27,503 |
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 |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Revenues, net |
|
$ |
5,946 |
|
$ |
7,871 |
|
$ |
20,361 |
|
$ |
24,848 |
Cost of goods sold |
|
|
3,102 |
|
|
3,921 |
|
|
11,184 |
|
|
13,327 |
Excise taxes and fees on products |
|
|
3,432 |
|
|
3,873 |
|
|
10,324 |
|
|
12,388 |
Gross (loss) profit |
|
|
(588) |
|
|
77 |
|
|
(1,147) |
|
|
(867) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
2,547 |
|
|
6,939 |
|
|
7,814 |
|
|
27,058 |
Research and development |
|
|
240 |
|
|
623 |
|
|
915 |
|
|
2,152 |
Other operating expense (income), net |
|
|
2 |
|
|
768 |
|
|
(18) |
|
|
622 |
Total operating expenses |
|
|
2,789 |
|
|
8,330 |
|
|
8,711 |
|
|
29,832 |
Operating loss from continuing operations |
|
|
(3,377) |
|
|
(8,253) |
|
|
(9,858) |
|
|
(30,699) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
100 |
|
|
1,272 |
|
|
439 |
|
|
504 |
Interest income, net |
|
|
3 |
|
|
79 |
|
|
26 |
|
|
201 |
Interest expense |
|
|
(311) |
|
|
(1,179) |
|
|
(1,828) |
|
|
(2,578) |
Total other income (expense) |
|
|
(208) |
|
|
172 |
|
|
(1,363) |
|
|
(1,873) |
Loss from continuing operations before income taxes |
|
|
(3,585) |
|
|
(8,081) |
|
|
(11,221) |
|
|
(32,572) |
Provision for income taxes |
|
|
— |
|
|
— |
|
|
27 |
|
|
46 |
Net loss from continuing operations |
|
$ |
(3,585) |
|
$ |
(8,081) |
|
$ |
(11,248) |
|
$ |
(32,618) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes |
|
$ |
(172) |
|
$ |
(64,639) |
|
$ |
640 |
|
$ |
(78,823) |
Provision for income taxes |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Net income (loss) from discontinued operations |
|
$ |
(172) |
|
$ |
(64,639) |
|
$ |
640 |
|
$ |
(78,823) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,757) |
|
$ |
(72,720) |
|
$ |
(10,608) |
|
$ |
(111,441) |
Deemed dividends |
|
|
(3,677) |
|
|
(564) |
|
|
(7,711) |
|
|
(931) |
Net loss available to common shareholders |
|
$ |
(7,434) |
|
$ |
(73,284) |
|
$ |
(18,319) |
|
$ |
(112,372) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share from continuing operations |
|
$ |
(0.27) |
|
$ |
(6.70) |
|
$ |
(1.35) |
|
$ |
(33.35) |
Basic and diluted loss per common share from discontinued operations |
|
$ |
(0.01) |
|
$ |
(53.58) |
|
$ |
0.08 |
|
$ |
(80.58) |
Basic and diluted loss per common share from deemed dividends |
|
$ |
(0.27) |
|
$ |
(0.47) |
|
$ |
(0.93) |
|
$ |
(0.95) |
Basic and diluted loss per common share |
|
$ |
(0.55) |
|
$ |
(60.75) |
|
$ |
(2.20) |
|
$ |
(114.88) |
Weighted average common shares outstanding - basic and diluted |
|
|
13,507,441 |
|
|
1,206,368 |
|
|
8,316,768 |
|
|
978,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,757) |
|
$ |
(72,720) |
|
$ |
(10,608) |
|
$ |
(111,441) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investment securities |
|
|
— |
|
|
— |
|
|
— |
|
|
71 |
Foreign currency translation |
|
|
— |
|
|
(69) |
|
|
— |
|
|
(31) |
Reclassification of realized losses to net loss |
|
|
— |
|
|
— |
|
|
— |
|
|
41 |
Other comprehensive income |
|
|
— |
|
|
(69) |
|
|
— |
|
|
81 |
Comprehensive loss |
|
$ |
(3,757) |
|
$ |
(72,789) |
|
$ |
(10,608) |
|
$ |
(111,360) |
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)
|
|
Nine Months Ended September 30, 2024 |
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common |
|
Par Value |
|
Capital in |
|
Other |
|
|
|
|
Total |
||||
|
|
Shares |
|
of Common |
|
Excess of |
|
Comprehensive |
|
Accumulated |
|
Shareholders’ |
|||||
|
|
Outstanding* |
|
Shares* |
|
Par Value* |
|
Income (Loss) |
|
Deficit |
|
Equity (Deficit) |
|||||
Balance at January 1, 2024 |
|
2,720,437 |
|
$ |
— |
|
$ |
370,297 |
|
$ |
— |
|
$ |
(378,707) |
|
$ |
(8,410) |
Stock issued in connection with RSU vesting, net of 405 shares withheld for taxes |
|
3,810 |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
|
|
(1) |
Stock issued in connection with licensing arrangement |
|
11,480 |
|
|
— |
|
|
100 |
|
|
— |
|
|
— |
|
|
100 |
Stock issued in connection with warrant exercises, net of fees of $176 |
|
747,001 |
|
|
— |
|
|
2,245 |
|
|
— |
|
|
— |
|
|
2,245 |
Equity-based compensation |
|
— |
|
|
— |
|
|
181 |
|
|
— |
|
|
— |
|
|
181 |
Fractional shares issued for reverse stock split |
|
118,207 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,739) |
|
|
(5,739) |
Balance at March 31, 2024 |
|
3,600,935 |
|
$ |
— |
|
$ |
372,822 |
|
$ |
— |
|
$ |
(384,446) |
|
$ |
(11,624) |
Stock issued in connection with warrant exercises |
|
265,625 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Stock issued for extinguishment of Subordinated Note |
|
1,150,000 |
|
|
— |
|
|
3,864 |
|
|
— |
|
|
— |
|
|
3,864 |
Stock issued in connection with capital raise, net of issuance costs of $324 1 |
|
1,980,000 |
|
|
— |
|
|
3,913 |
|
|
— |
|
|
— |
|
|
3,913 |
Stock issued upon conversion of Senior Secured Credit Facility 2 |
|
1,575,000 |
|
|
— |
|
|
2,756 |
|
|
— |
|
|
— |
|
|
2,756 |
Stock issued in connection with settled indebtedness |
|
700,958 |
|
|
— |
|
|
1,192 |
|
|
— |
|
|
— |
|
|
1,192 |
Equity-based compensation |
|
— |
|
|
— |
|
|
56 |
|
|
— |
|
|
— |
|
|
56 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,112) |
|
|
(1,112) |
Balance at June 30, 2024 |
|
9,272,518 |
|
$ |
— |
|
$ |
384,603 |
|
$ |
— |
|
$ |
(385,558) |
|
$ |
(955) |
Stock issued in connection with settled indebtedness |
|
1,420,744 |
|
|
— |
|
|
425 |
|
|
— |
|
|
— |
|
|
425 |
Stock issued in connection with Reg A Private Placement, net of issuance costs of $332 |
|
9,720,000 |
|
|
— |
|
|
5,208 |
|
|
— |
|
|
— |
|
|
5,208 |
Stock issued in connection with capital raise, net of issuance costs of $121 |
|
5,153,508 |
|
|
— |
|
|
1,054 |
|
|
— |
|
|
— |
|
|
1,054 |
Stock issued in connection with warrant exercises, net of fees of $85 |
|
5,079,244 |
|
|
— |
|
|
1,073 |
|
|
— |
|
|
— |
|
|
1,073 |
Stock issued upon conversion of Senior Secured Credit Facility |
|
440,000 |
|
|
— |
|
|
328 |
|
|
— |
|
|
— |
|
|
328 |
Stock issued in connection with licensing arrangement |
|
349,944 |
|
|
— |
|
|
100 |
|
|
— |
|
|
— |
|
|
100 |
Equity-based compensation |
|
— |
|
|
— |
|
|
(4) |
|
|
— |
|
|
— |
|
|
(4) |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,757) |
|
|
(3,757) |
Shares held in abeyance |
|
(2,057,637) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Balance at September 30, 2024 |
|
29,378,321 |
|
$ |
— |
|
$ |
392,787 |
|
$ |
— |
|
$ |
(389,315) |
|
$ |
3,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Giving retroactive effect to the 1-for-15 reverse stock split on July 5, 2023 and subsequently 1-for-16 reverse stock split on April 2, 2024. | |||||||||||||||||
1 includes exercises of 125,000 shares of prefunded warrants in the period | |||||||||||||||||
2 includes exercises of 980,000 shares of prefunded warrants in the period | |||||||||||||||||
| |||||||||||||||||
5
|
|
Nine Months Ended September 30, 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 |
|
843,731 |
|
$ |
— |
|
$ |
333,900 |
|
$ |
(111) |
|
$ |
(237,814) |
|
$ |
95,975 |
Stock issued in connection with RSU vesting, net of 1,976 shares withheld for taxes |
|
5,644 |
|
|
— |
|
|
(414) |
|
|
— |
|
|
— |
|
|
(414) |
Stock issued in connection with acquisition |
|
1,941 |
|
|
— |
|
|
503 |
|
|
— |
|
|
— |
|
|
503 |
Equity-based compensation |
|
— |
|
|
— |
|
|
1,175 |
|
|
— |
|
|
— |
|
|
1,175 |
Adoption of ASU 2016-13 |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(118) |
|
|
(118) |
Equity detachable warrants |
|
— |
|
|
— |
|
|
1,577 |
|
|
— |
|
|
— |
|
|
1,577 |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
70 |
|
|
— |
|
|
70 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(18,182) |
|
|
(18,182) |
Balance at March 31, 2023 |
|
851,316 |
|
$ |
— |
|
$ |
336,741 |
|
$ |
(41) |
|
$ |
(256,114) |
|
$ |
80,586 |
Stock issued in connection with RSU vesting, net of shares withheld for taxes |
|
1,534 |
|
|
— |
|
|
(5) |
|
|
— |
|
|
— |
|
|
(5) |
Stock issued in connection with ATM, net of fees of $178 |
|
17,783 |
|
|
— |
|
|
2,563 |
|
|
— |
|
|
— |
|
|
2,563 |
Stock issued in connection with capital raise, net of issuance costs of $422 |
|
46,753 |
|
|
— |
|
|
4,851 |
|
|
— |
|
|
— |
|
|
4,851 |
Stock issued in connection with licensing arrangement |
|
20,834 |
|
|
— |
|
|
3,570 |
|
|
— |
|
|
— |
|
|
3,570 |
Equity-based compensation |
|
— |
|
|
— |
|
|
1,486 |
|
|
— |
|
|
— |
|
|
1,486 |
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
80 |
|
|
— |
|
|
80 |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(20,539) |
|
|
(20,539) |
Fractional shares issued for reverse stock split |
|
4,128 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Balance at June 30, 2023 |
|
942,348 |
|
$ |
— |
|
$ |
349,206 |
|
$ |
39 |
|
$ |
(276,653) |
|
$ |
72,592 |
Stock issued in connection with capital raises, net of issuance costs of $1,219 |
|
343,463 |
|
|
— |
|
|
13,416 |
|
|
— |
|
|
— |
|
|
13,416 |
Equity-based compensation |
|
— |
|
|
— |
|
|
576 |
|
|
— |
|
|
— |
|
|
576 |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
(69) |
|
|
— |
|
|
(69) |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(72,720) |
|
|
(72,720) |
Balance at September 31, 2023 |
|
1,285,811 |
|
$ |
— |
|
$ |
363,198 |
|
$ |
(30) |
|
$ |
(349,373) |
|
$ |
13,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Giving retroactive effect to the 1-for-15 reverse stock split on July 5, 2023 and subsequently 1-for-16 reverse stock split on April 2, 2024. | |||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
6
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2024 |
|
2023 |
||
Cash flows from operating activities: |
|
|
|
|
|
|
Net loss |
|
$ |
(10,608) |
|
$ |
(111,441) |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
Impairment of goodwill and long-lived assets |
|
|
— |
|
|
57,311 |
Amortization and depreciation |
|
|
762 |
|
|
3,427 |
Amortization of right-of-use asset |
|
|
189 |
|
|
823 |
Other non-cash losses |
|
|
(947) |
|
|
(72) |
Provision for credit losses |
|
|
4 |
|
|
246 |
Loss on the sale of machinery and equipment |
|
|
65 |
|
|
75 |
Debt related charges included in interest expense |
|
|
1,906 |
|
|
1,978 |
Equity-based employee compensation expense |
|
|
233 |
|
|
3,237 |
Gain on change of contingent consideration |
|
|
— |
|
|
(186) |
Change in fair value of warrant liabilities |
|
|
(424) |
|
|
(540) |
Change in fair value of derivative liability |
|
|
(482) |
|
|
— |
Increase in inventory reserves |
|
|
431 |
|
|
1,687 |
Changes in operating assets and liabilities, net of acquisition: |
|
|
|
|
|
|
Accounts receivable |
|
|
(117) |
|
|
(1,171) |
Inventories |
|
|
1,575 |
|
|
(7,609) |
Prepaid expenses and other assets |
|
|
284 |
|
|
(605) |
Accounts payable |
|
|
(466) |
|
|
2,669 |
Accrued expenses |
|
|
(509) |
|
|
2,051 |
Accrued payroll |
|
|
(700) |
|
|
(2,457) |
Accrued excise taxes and fees |
|
|
(75) |
|
|
1,270 |
Other liabilities |
|
|
(1,068) |
|
|
(877) |
Net cash used in operating activities |
|
|
(9,947) |
|
|
(50,184) |
Cash flows from investing activities: |
|
|
|
|
|
|
Acquisition of patents, trademarks, and licenses |
|
|
— |
|
|
(433) |
Acquisition of property, plant and equipment |
|
|
(141) |
|
|
(3,951) |
Proceeds from the sale of property, plant and equipment |
|
|
22 |
|
|
251 |
Acquisition, net of cash acquired |
|
|
— |
|
|
(254) |
Property, plant and equipment insurance proceeds |
|
|
— |
|
|
3,500 |
Sales and maturities of short-term investment securities |
|
|
— |
|
|
21,714 |
Purchase of short-term investment securities |
|
|
— |
|
|
(3,475) |
Net cash (used in) provided by investing activities |
|
|
(119) |
|
|
17,352 |
Cash flows from financing activities: |
|
|
|
|
|
|
Payments on notes payable |
|
|
(1,231) |
|
|
(4,672) |
Proceeds from issuance of notes payable |
|
|
1,256 |
|
|
2,360 |
Payments of long-term debt |
|
|
(670) |
|
|
— |
Proceeds from issuance of long-term debt |
|
|
— |
|
|
16,849 |
Payment of debt issuance costs |
|
|
— |
|
|
(801) |
Proceeds from issuance of detachable warrants |
|
|
— |
|
|
6,016 |
Net proceeds from warrant exercise |
|
|
3,403 |
|
|
— |
Proceeds from issuance of common stock related to the ATM |
|
|
— |
|
|
2,741 |
Payment of common stock issuance costs related to the ATM |
|
|
— |
|
|
(178) |
Proceeds from issuance of common stock |
|
|
10,916 |
|
|
19,908 |
Payment of common stock issuance costs |
|
|
(324) |
|
|
(1,641) |
Taxes paid related to net share settlement of RSUs |
|
|
(1) |
|
|
(420) |
Net cash provided by financing activities |
|
|
13,349 |
|
|
40,162 |
Net increase in cash, cash equivalents and restricted cash |
|
|
3,283 |
|
|
7,330 |
Cash, cash equivalents and restricted cash - beginning of period |
|
|
2,058 |
|
|
3,020 |
Cash, cash equivalents and restricted cash - end of period |
|
$ |
5,341 |
|
$ |
10,350 |
|
|
|
|
|
|
|
Reconciliation of cash and cash equivalents and restricted cash |
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
$ |
2,058 |
|
$ |
3,020 |
Restricted cash at beginning of period |
|
|
— |
|
|
— |
Cash, cash equivalents and restricted cash at beginning of period |
|
$ |
2,058 |
|
$ |
3,020 |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
5,341 |
|
$ |
2,850 |
Restricted cash at end of period |
|
|
— |
|
|
7,500 |
Cash, cash equivalents and restricted cash at end of period |
|
$ |
5,341 |
|
$ |
10,350 |
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
Capital expenditures incurred but not yet paid |
|
$ |
8 |
|
$ |
324 |
Right-of-use assets and corresponding operating lease obligations |
|
$ |
— |
|
$ |
5,166 |
Deemed dividends |
|
$ |
7,711 |
|
$ |
931 |
Stock issued in connection with settled indebtedness |
|
$ |
1,617 |
|
$ |
— |
Non-cash consideration RXP acquisition |
|
$ |
— |
|
$ |
1,641 |
Non-cash licensing arrangement |
|
$ |
100 |
|
$ |
3,500 |
Equity issuance costs accrued but not yet paid |
|
$ |
537 |
|
$ |
— |
Payment for extinguishment of Subordinated Note |
|
$ |
3,864 |
|
$ |
— |
Payment of GVB Promissory Note |
|
$ |
1,500 |
|
$ |
— |
Payment of debt issuance costs |
|
$ |
603 |
|
$ |
— |
Equity conversion of Senior Secured Credit Facility |
|
$ |
2,481 |
|
$ |
— |
Equity subscription receivable |
|
$ |
37 |
|
$ |
— |
See accompanying notes to Condensed Consolidated Financial Statements.
7
22nd CENTURY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 branded tobacco products and contract manufacturing services for third-party brands. The Company’s flagship product is a reduced nicotine combustible cigarette authorized by the FDA as a Modified Risk Tobacco Product.
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 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 $9,947 and $50,184 for the nine months ended September 30, 2024 and 2023, respectively, and an accumulated deficit of $389,315 and $378,707 as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, the Company had cash and cash equivalents of $5,341.
Given the Company’s projected operating requirements and its existing cash and cash equivalents, there is 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.
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, 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.
8
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.
Other Significant Risks and Uncertainties - The Company is subject to a number of risks, including, but not limited to, the lack of available capital; the possible delisting of our common stock from Nasdaq; future covenant non-compliance with respect to the Company’s Senior Secured Credit Facility giving rise to an event of default; unsuccessful commercialization strategy and launch plans for the Company’s products or market acceptance of the Company’s products; risks inherent in litigation, including purported class actions; and protection of proprietary technology.
Reclassifications – The Company has revised the presentation and classification of Excise taxes on products 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 1-for-16 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 118,207 shares of common stock to implement the reverse stock split. All share and per share amounts, and exercise prices of stock options, and warrants in the Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split.
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 Capital in excess of par value at the time of issuance. For additional discussion on warrants, see Note 5 and Note 10.
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. Additionally, the initial fair value of replacement warrants provided to holders under an inducement similarly is treated as a deemed dividend. These deemed dividends are presented as a reduction in net income or an increase in net loss available to common shareholders and a corresponding increase to Capital in excess of par value resulting in no change to shareholders’ equity (deficit). During the three and nine months ended September 30, 2024, total deemed dividends were $3,677 and $7,711, compared to the three and nine months ended September 30, 2023 of $564 and $931, respectively, resulting from equity offerings (see Note 10).
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).
9
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 three and nine months ended September 30, 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 12.
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.
10
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 |
|
$ |
386 |
Cash payments |
|
|
(64) |
Balance at March 31, 2024 |
|
|
322 |
Cash payments |
|
|
(73) |
Balance at June 30, 2024 |
|
|
249 |
Accruals |
|
|
19 |
Cash payments |
|
|
(51) |
Settlement in common stock |
|
|
(23) |
Balance at September 30, 2024 |
|
$ |
194 |
The following table summarizes the classification of severance charges on the Condensed Consolidated Statements of Operations and Comprehensive Loss:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Sales, general, and administrative |
|
$ |
19 |
|
$ |
(168) |
|
$ |
19 |
|
$ |
400 |
Other operating expense, net |
|
|
— |
|
|
159 |
|
|
— |
|
|
159 |
Total severance charges |
|
$ |
19 |
|
$ |
(9) |
|
$ |
19 |
|
$ |
559 |
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 items. 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.
Recently Issued Accounting Pronouncements –
The Company adopted ASU 2016-13, or ASC 326 Financial Instruments-Credit Losses, effective January 1, 2023 under a modified retrospective approach. Under the current expected credit losses (“CECL”) model, the Company immediately recognizes an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are recognized each period. The new guidance applies to the Company’s trade receivables and contract asset balances. Due to the nature of business operations and contracts with customers, the Company has historically not experienced significant bad debt expense or write-offs and as a result, the adoption of ASC 326 did not have a material impact to the Company’s Condensed Consolidated Financial Statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $118 with an offsetting cumulative-effect adjustment to the opening balance of accumulated deficit as of January 1, 2023.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires additional disclosures regarding segment expenses and other items on an interim and annual basis. The amendments in ASU 2023-07 were adopted by the Company effective January 1, 2024. While this update will result in enhanced disclosures in our annual report for the fiscal year-ended December 31, 2024 and interim reports beginning in fiscal year 2025, the Company does not expect it will have a material impact on the Company’s consolidated financial statements.
11
Accounting Guidance Not Yet Elected or Adopted
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.
NOTE 2. DISCONTINUED OPERATIONS AND DIVESTITURES
As of September 30, 2024, all assets and liabilities of the former hemp/cannabis disposal group are presented as current in the Condensed Consolidated Balance Sheets. The carrying amounts of the former hemp/cannabis disposal group assets and liabilities that were classified as assets and liabilities of discontinued operations held for sale were as follows:
|
September 30, |
|
December 31, |
||
|
2024 |
|
2023 |
||
Prepaid expenses and other current assets |
$ |
— |
|
$ |
9 |
Property, plant and equipment, net |
|
1,051 |
|
|
1,207 |
Other assets |
|
— |
|
|
38 |
Current assets of discontinued operations held for sale |
$ |
1,051 |
|
$ |
1,254 |
|
|
|
|
|
|
Notes and loans payable - current |
$ |
— |
|
$ |
2 |
Operating lease obligations |
|
— |
|
|
1,083 |
Accounts payable |
|
1,219 |
|
|
2,013 |
Accrued expenses |
|
76 |
|
|
79 |
Deferred income |
|
— |
|
|
8 |
Current liabilities of discontinued operations held for sale |
$ |
1,295 |
|
$ |
3,185 |
|
|
|
|
|
|
Net liabilities |
$ |
(244) |
|
$ |
(1,931) |
12
Net income (loss) from discontinued operations for the three and nine months ended September 30, 2024 and 2023 was as follows:
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
September 30, |
|
September 30, |
||||||||
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Revenues, net |
$ |
— |
|
$ |
9,940 |
|
$ |
— |
|
$ |
38,352 |
Cost of goods sold |
|
— |
|
|
11,983 |
|
|
— |
|
|
42,973 |
Gross loss |
|
— |
|
|
(2,043) |
|
|
— |
|
|
(4,621) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
(46) |
|
|
4,260 |
|
|
(366) |
|
|
12,913 |
Research and development |
|
— |
|
|
990 |
|
|
133 |
|
|
2,771 |
Other operating (income) expense, net |
|
149 |
|
|
23,839 |
|
|
(617) |
|
|
24,834 |
Goodwill impairment |
|
— |
|
|
33,360 |
|
|
— |
|
|
33,360 |
Total operating expenses |
|
103 |
|
|
62,449 |
|
|
(850) |
|
|
73,878 |
Operating (loss) income from discontinued operations |
|
(103) |
|
|
(64,492) |
|
|
850 |
|
|
(78,499) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
— |
|
|
(21) |
|
|
— |
|
|
17 |
Interest expense |
|
(69) |
|
|
(126) |
|
|
(210) |
|
|
(341) |
Total other expense |
|
(69) |
|
|
(147) |
|
|
(210) |
|
|
(324) |
Income (loss) from discontinued operations before income taxes |
|
(172) |
|
|
(64,639) |
|
|
640 |
|
|
(78,823) |
Provision (benefit) for income taxes |
|
— |
|
|
— |
|
|
— |
|
|
— |
Net income (loss) from discontinued operations |
$ |
(172) |
|
$ |
(64,639) |
|
$ |
640 |
|
$ |
(78,823) |
During the three- and nine-month periods ended September 30, 2024, the Company settled outstanding obligations which resulted in reversals of previously accrued liabilities of $10 and $1,561, respectively.
Cash flow information from discontinued operations for the three and nine months ended September 30, 2024 and 2023 was as follows:
|
Nine Months Ended |
||||
|
September 30, |
||||
|
2024 |
|
2023 |
||
Cash used in operating activities |
$ |
(1,135) |
|
$ |
(14,871) |
Cash provided by (used in) investing activities |
$ |
22 |
|
$ |
(550) |
|
|
|
|
|
|
Depreciation and amortization |
$ |
- |
|
$ |
2,290 |
Capital expenditures |
$ |
- |
|
$ |
3,518 |
13
NOTE 3. – INVENTORIES
Inventories at September 30, 2024 and December 31, 2023 consisted of the following:
|
|
September 30, |
|
December 31, |
||
|
|
2024 |
|
2023 |
||
Raw materials |
|
$ |
1,534 |
|
$ |
3,580 |
Work in process |
|
|
— |
|
|
— |
Finished goods |
|
|
806 |
|
|
766 |
|
|
$ |
2,340 |
|
$ |
4,346 |
NOTE 4. – INTANGIBLE ASSETS, NET
Intangible Assets, Net
Our intangible assets, net at September 30, 2024 and December 31, 2023 consisted of the following:
|
|
Gross |
|
Accumulated |
|
Net Carrying |
|||
September 30, 2024 |
|
Carrying Amount |
|
Amortization |
|
Amount |
|||
Definite-lived: |
|
|
|
|
|
|
|
|
|
Patent |
|
$ |
2,924 |
|
$ |
(2,229) |
|
$ |
695 |
License fees |
|
|
4,265 |
|
|
(1,924) |
|
|
2,341 |
Total amortizing intangible assets |
|
$ |
7,189 |
|
$ |
(4,153) |
|
$ |
3,036 |
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
|
$ |
137 |
MSA signatory costs |
|
|
|
|
|
|
|
|
2,202 |
License fee for predicate cigarette brand |
|
|
|
|
|
|
|
|
350 |
Total indefinite-lived intangible assets |
|
|
|
|
|
|
|
$ |
2,689 |
Total intangible assets, net |
|
|
|
|
|
|
|
$ |
5,725 |
|
|
Gross |
|
Accumulated |
|
|
|
|
Net Carrying |
|||
December 31, 2023 |
|
Carrying Amount |
|
Amortization |
|
Impairment |
|
Amount |
||||
Definite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
Patent |
|
$ |
2,913 |
|
$ |
(1,622) |
|
$ |
(487) |
|
$ |
804 |
License fees |
|
|
4,165 |
|
|
(1,666) |
|
|
(65) |
|
|
2,434 |
Total amortizing intangible assets |
|
$ |
7,078 |
|
$ |
(3,288) |
|
$ |
(552) |
|
$ |
3,238 |
Indefinite-lived: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
|
|
|
|
$ |
134 |
MSA signatory costs |
|
|
|
|
|
|
|
|
|
|
|
2,202 |
License fee for predicate cigarette brand |
|
|
|
|
|
|
|
|
|
|
|
350 |
Total indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
$ |
2,686 |
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
|
$ |
5,924 |
14
Aggregate intangible asset amortization expense comprises of the following:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
Cost of goods sold |
|
$ |
3 |
|
$ |
3 |
|
$ |
8 |
|
$ |
9 |
Research and development |
|
|
103 |
|
|
165 |
|
|
305 |
|
|
485 |
Total amortization expense |
|
$ |
106 |
|
$ |
168 |
|
$ |
313 |
|
$ |
494 |
Estimated future intangible asset amortization expense based on the carrying value as of September 30, 2024 is as follows:
|
|
Remainder of 2024 |
|
2025 |
|
2026 |
|
2027 |
|
2028 |
|
Thereafter |
||||||
Amortization expense |
|
$ |
108 |
|
$ |
427 |
|
$ |
388 |
|
$ |
375 |
|
$ |
291 |
|
$ |
1,447 |
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.
The following table presents information about our liabilities measured at fair value as of September 30, 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 |
||||||||||
|
|
September 30, 2024 |
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Omnia 2024 warrants |
|
$ |
— |
|
$ |
— |
|
$ |
1,091 |
|
$ |
1,091 |
Derivative liability |
|
|
— |
|
|
— |
|
|
75 |
|
|
75 |
Total liabilities |
|
$ |
— |
|
$ |
— |
|
$ |
1,166 |
|
$ |
1,166 |
|
|
Fair Value |
||||||||||
|
|
December 31, 2023 |
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Detachable warrants |
|
$ |
— |
|
$ |
— |
|
$ |
1,350 |
|
$ |
1,350 |
Derivative liability |
|
|
— |
|
|
— |
|
|
557 |
|
|
557 |
Total liabilities |
|
$ |
— |
|
$ |
— |
|
$ |
1,907 |
|
$ |
1,907 |
15
Warrants
The following table sets forth a summary of the changes in fair value of the Company’s common stock warrants accounted for as liabilities (Level 3) for the period ended September 30, 2024:
Fair value measurement at January 1, 2024 |
|
$ |
1,350 |
Fair value measurement adjustment |
|
|
— |
Fair value measurement at March 31, 2024 |
|
$ |
1,350 |
Settlement and release (See Note 6) |
|
|
(1,350) |
Initial measurement (See Note 6) |
|
|
1,515 |
Fair value measurement adjustment |
|
|
(324) |
Fair value measurement at June 30, 2024 |
|
$ |
1,191 |
Fair value measurement adjustment |
|
|
(100) |
Fair value measurement at September 30, 2024 |
|
$ |
1,091 |
The Omnia warrants were measured at September 30, 2024 and December 31, 2023 using a Monte Carlo valuation model with the following assumptions:
|
September 30, |
|
December 31, |
||||
|
2024 |
|
2023 |
||||
|
Omnia 2024 warrants |
|
Omnia 2023 warrants |
||||
Risk-free interest rate per year |
|
3.6 |
% |
|
|
4.6 |
% |
Expected volatility per year |
|
113.1 |
% |
|
|
90.9 |
% |
Expected dividend yield |
|
— |
% |
|
|
— |
% |
Contractual expiration |
|
4.6 |
years |
|
|
6.6 |
years |
Exercise price |
$ |
2.14 |
|
|
$ |
205.248 |
|
Stock price |
$ |
0.215 |
|
|
$ |
3.04 |
|
The 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 Omnia 2023 warrants were extinguished and the Omnia 2024 warrants were issued in April 2024. See Note 6 for further details.
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) as of September 30, 2024:
Fair value measurement at January 1, 2024 |
|
$ |
557 |
Fair value measurement adjustment |
|
|
82 |
Fair value measurement at March 31, 2024 |
|
$ |
639 |
Fair value measurement adjustment |
|
|
(541) |
Fair value measurement at June 30, 2024 |
|
$ |
98 |
Fair value measurement adjustment |
|
|
(23) |
Fair value measurement at September 30, 2024 |
|
$ |
75 |
16
The derivative liability related to the debentures and embedded conversion option was measured at September 30, 2024 and December 31, 2023 using a binomial lattice valuation model and contained the following assumptions:
|
September 30, |
|
December 31, |
||||
|
2024 |
|
2023 |
||||
Stock price volatility |
|
150.1 |
% |
|
|
104.1 |
% |
Expected term |
|
1.4 |
years |
|
|
2.2 |
years |
Stock price |
$ |
0.22 |
|
|
$ |
3.04 |
|
Risk-free rate |
|
3.8 |
% |
|
|
4.3 |
% |
Credit rating |
|
CCC |
|
|
|
CCC |
|
Market yield (credit risk) |
|
12.4 |
% |
|
|
13.8 |
% |
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 and nine months ended September 30, 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 previously, a subordinated promissory note (the “Subordinated Note). The Debentures were issued at a 5% original issuance discount and are subject to a 5% exit payment. The Subordinated Note was extinguished in April 2024, as described below.
Debt related to the Senior Secured Credit Facility and Subordinate Note as of September 30, 2024 and December 31, 2023 consists of the following:
|
|
September 30, |
|
December 31, |
||
|
|
2024 |
|
2023 |
||
Senior Secured Credit Facility |
|
$ |
8,321 |
|
$ |
11,805 |
Subordinated Note |
|
|
— |
|
|
3,554 |
Unamortized discount on loan and deferred debt issuance costs |
|
|
(1,292) |
|
|
(1,453) |
Total debt |
|
$ |
7,029 |
|
$ |
13,906 |
Current portion of long-term debt |
|
|
(1,500) |
|
|
(5,848) |
Total long-term debt |
|
$ |
5,529 |
|
$ |
8,058 |
17
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 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. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.
The 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 $7,500 on its balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets.
In connection with the sale of the Debentures, the Company issued warrants to purchase up to 20,835 shares of common stock for an exercise price of $306.00 per share (the “JGB Warrants”), which had an initial fair value of $4,475 net of issuance costs of $139. On June 22, 2023, as a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 20,835 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 31,060 shares of common stock. There are no further anti-dilution adjustments on such warrants.
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 $18,500 for the quarter ended September 30, 2023 (the “waiver”), (b) the parties agreed to amend Schedule E of the Debentures to reduce the Revenue Target (as such term is defined in the Debentures), for the quarter ended December 31, 2023, to $15,500, and (c) the Company agreed to release to the Purchasers the $7,500 that the Company was required to maintain in a separate account (the “Escrow Funds”) which Escrow Funds were applied to, and reduce, the outstanding principal amount of the Debentures on a dollar-for-dollar basis.
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 $3,800 and (ii) the Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated June 30, 2021, between J&N, as borrower, for the benefit of the Company, as lender (collectively, the “Pledged Indebtedness”). Upon assignment of the Pledged Indebtedness, the Company recognized the $2,600 of consideration in exchange to be applied as a $2,000 reduction of the Put Price (as defined below), $600 reduction of the outstanding principal amount of Debentures and $895 loss on sale of financial asset.
18
In connection with the waiver, 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 (the “Put Price”), which was concurrently reduced by $2,000, as described above, with the remaining $500 payable by the Company on the Maturity Date recorded as Other long-term liabilities on the Condensed Consolidated Balance Sheets. No cash was exchanged as a result of executing the October 2023 Amendment.
Subsequently, on December 22, 2023, the Company, the Holders and the Agent entered into an Amendment Agreement (the “December 2023 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 $2,200 to reduce the outstanding principal of the Debentures (which includes the cash portion of the New Purchase Price paid directly to Agent by Buyer which consists of a cash payment of $1,100 and an additional $1,100 paid by the Company), (ii) a 12% secured promissory note issued to the Company’s senior lender, on behalf of and at the direction of the Company, in an aggregate principal amount of $2,000 (the “GVB Promissory Note”), (iii) assign the GVB Insurance Proceeds to the Agent until the outstanding aggregate principal amount of the Debentures, plus accrued and unpaid interest, has been repaid in full; provided that the first $1,000 of Insurance Proceeds in excess of $5,000 shall be applied as stated in the agreement, and (iv) post-closing enter into a deed in lieu of foreclosure agreement with respect to 224 acres of real property in Delta County, Colorado commonly known as Needle Rock Farms, resulting in a non-monetary exchange yielding additional debt reduction of $1,000.
Effective June 24, 2024, GVB Biopharma (“GVB”), the Company’s former subsidiary, made a scheduled principal and interest payment against the Company’s outstanding indebtedness to JGB, reducing the Company’s total outstanding principal indebtedness with JGB by $1,500. The remaining $500 payable by GVB under the GVB Promissory Note has been extended to December 31, 2024.
As of September 30, 2024, the $500 remaining GVB Promissory Note and $1,000 real estate farm asset are pledged to the senior lender for principal reduction and accordingly $1,500 of the Senior Secured Credit Facility is recorded as Current portion of long-term debt on the Condensed Consolidated Balance Sheets.
As part of the December amendment, the Company, the Holders and the Agent also 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) $1.00 per share and (y) the closing sale price of the Company’s common stock on June 29, 2024 (the “Conversion Price”), and (ii) include a mandatory prepayment of the outstanding principal of the Debentures in an amount equal to 20% of the net cash proceeds of any issuance by the Company of any of its stock, or other Equity Interests (as defined in the Debentures) or the incurrence or issuance of any indebtedness. The Voluntary Conversion Option was approved by the Company’s shareholders on June 28, 2024 and the conversion option price in effect is $0.7458.
Additional terms of the December 2023 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. As of September 30, 2024, the Company was in compliance with these financial covenants.
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 (“April 2024 Amendment”).
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 through the conversion option reset date on June 28, 2024. 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 quarter-ended June 30, 2024.
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 (“May 2024 Amendment”).
19
Under the terms of the May 2024 Amendment, 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). All pre-funded warrants were subsequently exercised during the quarter-ended June 30, 2024.
On August 27, 2024, the Company, the Holders and the Agent entered into that certain August 2024 Letter Agreement to modify the terms of the Amendment Agreement, the JGB SPA, and the Debentures, as amended (“August 2024 Amendment”).
Under the terms of the August 2024 Agreement, each Holder agreed that it shall not exercise its Holder Redemption Right (as defined in the Debentures) for more than 50% of its Monthly Allowance (as defined in the Debentures) through and including July 2025. Further, the provisions in Section 3(c)(i) of the Debentures requiring 20% of any equity issuances to be paid to the Holders shall be suspended through December 31, 2024. In consideration for the amendments set forth in the August 2024 Amendment, the Company paid an amendment fee of $746,000, which was added to the aggregate principal amount of the Debentures. JGB subsequently issued a conversion notice for 440,000 shares of common stock equal to principal reduction of $328,152.
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.
The October 2023 Amendment, April 2024 Amendment, May 2024 Amendment, and August 2024 Amendment were 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 2023 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 $5,158 and recorded in Interest expense on the Consolidated Statements of Operations and Comprehensive Loss for the quarter ended December 31, 2023.
The Company analyzed the conversion feature of the December 2023 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 $75 as of September 30, 2024 and $557 as of December 31, 2023 as a component of Other Long-Term Liabilities on the Condensed Consolidated Balance Sheets. See Note 5 “Fair Value Measurement” for additional information related to measurement of the debentures and derivative liability.
See Note 13 “Subsequent Events” for additional information related to the Debentures.
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 monthly at a compounding 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. The Subordinated Note was terminated and extinguished in April 2024.
20
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 “2023 Omnia Warrants”). The 2023 Omnia Warrants were 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 in the 2023 Omnia Warrants, 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 “2024 Omnia Warrants”). The 2024 Omnia Warrants contain a put provision that permits the holder to require the Company to redeem the 2024 Omnia Warrants, no earlier than May 1, 2025, for a purchase price equal to $2.675 per warrant, and had an initial fair value of $1,515 (see Note 5). Subject to limited exceptions, a holder of pre-funded warrants and 2024 Omnia 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 2023 Omnia Warrants and released all debts, claims or other obligations against each other occurring prior to the date of the Omnia Agreement. The total cash and non-cash consideration amounted to $5,628, resulting in extinguishment charges of $400 for the three months ended June 30, 2024, recorded in Interest expense in the Statement of Operations and Comprehensive Loss.
Contractual Maturities
The Company has $1,500 pledged against outstanding indebtedness under the Senior Secured Credit Facility comprised of (i) $500 GVB promissory note and (ii) $1,000 assignment of Needle Rock Farms to be applied as principal reduction in 2024. As of September 30, 2024, contractual maturities under the Senior Secured Credit Facility for the remainder of 2024 and through maturity, excluding any discounts or premiums, were to be paid in 2024 of $1,500 and 2026 of $6,821.
Additionally, commencing August 2024, at its option, JGB may require the Company to redeem 2% of the original principal amount of the Debentures, as amended to be no more than 50% or $210 per calendar month through July 2025 and $421 per calendar month thereafter which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. JGB elected the monthly redemption feature and the Company repaid $421 in cash during the three month period ended September 30, 2024. If the redemption feature is elected, as of September 30, 2024, contractual maturities under the senior secured credit Facility for the remainder of 2024 are $632, for 2025 are $3,579, and for 2026 are $4,110.
21
Debt Issuance Costs
The fair values of the warrants at issuance of $5,791, together with the Debentures original issuance discount of $1,053, Debentures exit payment of $1,053, and third-party debt issuance costs of $801, are being amortized using the effective interest method over the term of the respective debt instrument, recorded as Interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The components and activity of unamortized discount and deferred debt issuance costs related to the Senior Secured Credit Facility and Subordinated Note is as follows:
|
|
Total |
|
January 1, 2023 |
|
$ |
- |
Issuance |
|
|
8,698 |
Amortization during the year |
|
|
(2,087) |
Debt extinguishment charges |
|
|
(5,158) |
December 31, 2023 |
|
|
1,453 |
Amortization during the period |
|
|
(567) |
March 31, 2024 |
|
$ |
886 |
Amortization during the period |
|
|
(107) |
June 30, 2024 |
|
$ |
779 |
Amortization during the period |
|
|
(233) |
Amendment fee |
|
|
746 |
September 30, 2024 |
|
|
1,292 |
NOTE 7. – NOTES & LOANS PAYABLE
The table below outlines our notes and loans payable balances as of September 30, 2024 and December 31, 2023:
|
|
September 30, |
|
December 31, |
||
|
|
2024 |
|
2023 |
||
Insurance loans payable |
|
$ |
569 |
|
$ |
543 |
Total current notes and loans payable |
|
$ |
569 |
|
$ |
543 |
Insurance loans payable
During the second quarter of 2024, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $866. The Company paid $147 as a premium down payment and financed the remaining $719 of policy premiums over ten months at a 8.3% annual percentage rate.
During the second quarter of 2023, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $1,626. The Company paid $285 as a premium down payment and financed the remaining $1,341 of policy premiums over ten months at a 7.88% annual percentage rate. Additionally, during the third quarter of 2023, the Company expanded its D&O coverage, resulting in additional financing of $143, at 9.38% annual percentage rate over six months.
The Company also has other insurance loans payable related to property and general liability across the Company.
22
Estimated future principal payments to be made under the above notes and loans payable as of September 30, 2024 are as follows:
2024 |
|
$ |
314 |
2025 |
|
|
255 |
Total |
|
$ |
569 |
NOTE 8. – 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 to customers and is recognized net of cash discounts, sales returns and allowances. There was no allowance for discounts or returns at September 30, 2024 and December 31, 2023.
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 44% and 58%, respectively, of total Tobacco revenue for the three and nine months ended September 30, 2024, compared to 57% and 63%, respectively, for the three and nine months ended September 30, 2023.
The following table presents net revenue by product line:
|
|
Three Months Ended |
|
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
|
September 30, |
||||||||
|
|
2024 |
|
2023 |
|
|
2024 |
|
2023 |
||||
Contract Manufacturing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cigarettes |
|
$ |
4,078 |
|
$ |
3,463 |
|
|
$ |
10,942 |
|
$ |
11,735 |
Filtered Cigars |
|
|
1,664 |
|
|
4,088 |
|
|
|
8,593 |
|
|
12,414 |
Cigarillos |
|
|
204 |
|
|
- |
|
|
|
756 |
|
|
- |
Total Contract Manufacturing |
|
|
5,946 |
|
|
7,551 |
|
|
|
20,291 |
|
|
24,149 |
VLN® |
|
|
- |
|
|
320 |
|
|
|
70 |
|
|
699 |
Total Product Line Revenues |
|
$ |
5,946 |
|
$ |
7,871 |
|
|
$ |
20,361 |
|
$ |
24,848 |
23
The following tables present 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 |
||||
|
|
September 30, |
||||
|
|
2024 |
|
2023 |
||
Customer A |
|
55.75 |
% |
|
38.52 |
% |
Customer B |
|
17.63 |
% |
|
3.96 |
% |
Customer C |
|
16.08 |
% |
|
4.58 |
% |
All other customers |
|
10.54 |
% |
|
52.94 |
% |
|
|
Nine Months Ended |
||||
|
|
September 30, |
||||
|
|
2024 |
|
2023 |
||
Customer A |
|
41.94 |
% |
|
31.11 |
% |
Customer B |
|
16.74 |
% |
|
19.05 |
% |
Customer C |
|
11.33 |
% |
|
25.21 |
% |
Customer D |
|
14.63 |
% |
|
11.53 |
% |
All other customers |
|
15.36 |
% |
|
13.10 |
% |
Contract Assets and Liabilities
Unbilled receivables (contract assets) represent revenues recognized for performance obligations that have been satisfied but have not been billed. These receivables are included as Accounts receivable, net on the Condensed Consolidated Balance Sheets. Customer payment terms vary depending on the terms of each customer contract, but payment is generally due prior to product shipment or within credit terms up to 30 days after shipment. Deferred income (contract liabilities) relates to down payments received from customers in advance of satisfying a performance obligation and is included as Deferred income on the Condensed Consolidated Balance Sheets.
Total contract assets and contract liabilities are as follows:
|
|
September 30, |
|
December 31, |
||
|
|
2024 |
|
2023 |
||
Unbilled receivables |
|
$ |
1,494 |
|
$ |
1,053 |
Deferred income |
|
|
(54) |
|
|
(726) |
Net contract assets |
|
$ |
1,440 |
|
$ |
327 |
During the nine months ended September 30, 2024, the Company recognized $726 of revenue that was included in the contract liability balance as of December 31, 2023. During the nine months ended September 30, 2023, the Company recognized $688 of revenue that was included in the contract liability balance as of December 31, 2022.
24
NOTE 9 – 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 28, 2024, increasing the authorized shares by an additional 5,000,000. As of September 30, 2024, the Company had available 5,191,421 shares remaining for future awards under its Omnibus Incentive Plans.
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 |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
|
||||
Sales, general, and administrative |
|
$ |
17 |
|
$ |
518 |
|
$ |
193 |
|
$ |
2,953 |
|
Research and development |
|
|
(21) |
|
|
21 |
|
|
40 |
|
|
138 |
|
Total equity based compensation - continuing operations |
|
|
(4) |
|
|
539 |
|
|
233 |
|
|
3,091 |
|
Total equity based compensation - discontinued operations |
|
|
— |
|
|
37 |
|
|
— |
|
|
146 |
|
Total equity based compensation |
|
$ |
(4) |
|
$ |
576 |
|
$ |
233 |
|
$ |
3,237 |
|
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 September 30, 2024.
|
|
Unvested RSUs |
|||
|
|
|
|
Weighted |
|
|
|
|
|
Average |
|
|
|
Number of |
|
Grant-date |
|
|
|
Shares |
|
Fair Value |
|
|
|
|
|
$ per share |
|
Unvested at January 1, 2024 |
|
9,681 |
|
$ |
251.12 |
Vested |
|
(4,234) |
|
|
233.09 |
Forfeited |
|
(354) |
|
|
274.16 |
Unvested at March 31, 2024 |
|
5,093 |
|
|
264.45 |
Forfeited |
|
(3,269) |
|
|
287.31 |
Unvested at June 30, 2024 |
|
1,824 |
|
|
221.93 |
Granted |
|
516,163 |
|
|
0.29 |
Vested |
|
(370,912) |
|
|
0.24 |
Forfeited |
|
(823) |
|
|
232.42 |
Unvested at September 30, 2024 |
|
146,252 |
|
$ |
1.87 |
The fair value of RSUs related to employee grants that vested during the nine months ended September 30, 2024 was approximately $9 based on the stock price at the time. During the nine months ended September 30, 2024, there were 516,163 shares granted during the period for settled indebtedness for consulting and other services provided; in which the fair value at the time of vesting amounted to $89. As of September 30, 2024, there are 145,250 unvested shares that require the achievement of certain milestones to be met which have not yet been achieved and compensation expense for all other unvested shares amounted to $148 which is expected to be recognized over a weighted average period of approximately 1.4 years.
25
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 nine months ended September 30, 2024. A summary of the status of stock options activity since January 1, 2024 and at September 30, 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 |
|
13,729 |
|
$ |
421.51 |
|
|
|
|
|
|
Expired |
|
(2,778) |
|
|
330.74 |
|
|
|
|
|
|
Forfeited |
|
(417) |
|
|
621.60 |
|
|
|
|
|
|
Outstanding at March 31, 2024 |
|
10,534 |
|
|
437.52 |
|
1.4 |
years |
|
$ |
— |
Expired |
|
(3,929) |
|
|
570.27 |
|
|
|
|
|
|
Outstanding at June 30, 2024 |
|
6,605 |
|
|
358.81 |
|
0.4 |
years |
|
$ |
— |
Expired |
|
(6,073) |
|
|
344.99 |
|
|
|
|
|
|
Outstanding at September 30, 2024 |
|
532 |
|
$ |
516.64 |
|
0.9 |
years |
|
$ |
— |
Exercisable at September 30, 2024 |
|
532 |
|
$ |
516.64 |
|
0.9 |
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.
NOTE 10. – CAPITAL RAISES AND WARRANTS FOR COMMON STOCK
The following tables summarize the Company’s warrant activity:
Warrants outstanding at January 1, 2024 |
|
2,984,847 |
Issued |
|
1,641,535 |
Exercised |
|
(820,769) |
Warrants outstanding at March 31, 2024 |
|
3,805,613 |
Issued |
|
4,813,800 |
Abandoned |
|
(2,813) |
Exercised |
|
(1,105,000) |
Warrants outstanding at June 30, 2024 |
|
7,511,600 |
Issued |
|
35,875,471 |
Exercised |
|
(5,079,245) |
Warrants outstanding at September 30, 2024 |
|
38,307,826 |
26
The following tables summarizes the Company’s outstanding warrants as of September 30, 2024:
|
|
# of warrants outstanding |
|
Issue date exercise price |
|
Current exercise price (1) |
|
Expiration date |
||
July 2022 RDO warrants |
|
4,067 |
|
$ |
492.00 |
|
$ |
492.00 |
|
July 25, 2027 |
Senior Secured Credit Facility - JGB |
|
20,645 |
|
$ |
306.000 |
|
$ |
205.248 |
|
September 3, 2028 |
July 19, 2023 RDO warrants |
|
28,125 |
|
$ |
38.7200 |
|
$ |
0.0600 |
|
July 20, 2028 |
October 2023 CMPO warrants |
|
168,750 |
|
$ |
8.4000 |
|
$ |
0.0600 |
|
October 19, 2028 |
2023 Inducement warrants |
|
335,468 |
|
$ |
3.4400 |
|
$ |
0.0600 |
|
February 15, 2029 |
April 2024 RDO |
|
265,300 |
|
$ |
2.1400 |
|
$ |
0.0600 |
|
June 28, 2029 |
August 2024 Reg A+ warrants (3) |
|
2,596,000 |
|
$ |
1.0000 |
|
$ |
0.0600 (4) |
|
(2) |
September 2024 Reg A+ warrants (3) |
|
12,200,000 |
|
$ |
1.0000 |
|
$ |
0.0600 (4) |
|
(2) |
September 2024 RDO warrants (3) |
|
10,307,016 |
|
$ |
1.0000 |
|
$ |
0.0600 (4) |
|
(2) |
September 2024 RDO PA warrants (3) |
|
309,211 |
|
$ |
1.2500 |
|
$ |
0.0600 (4) |
|
(2) |
September 2024 Inducement warrants (3) |
|
10,158,490 |
|
$ |
1.0000 |
|
$ |
0.0600 (4) |
|
(2) |
September 2024 Inducement PA warrants (3) |
|
304,754 |
|
$ |
1.2500 |
|
$ |
0.0600 (4) |
|
(2) |
Omnia Pre-Funded Warrants |
|
1,150,000 |
|
$ |
0.00001 |
|
$ |
0.00001 |
|
Not applicable |
Omnia warrants |
|
460,000 |
|
$ |
2.14 |
|
$ |
2.14 |
|
May 1, 2029 |
|
|
38,307,826 |
|
|
|
|
|
|
|
|
(1) Warrant price adjusted as a result of anti-dilution or ratchet provisions. | ||||||||||
(2 Expiration date is 5-years following shareholder approval date. | ||||||||||
(3) The exercise prices of the warrants are subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s common stock. In addition, subject to stockholder approval, the warrants will contain anti-dilution protection provisions relating to subsequent equity sales of shares of the Company’s common stock or common stock equivalents at an effective price per share lower than the then effective exercise price of such warrants. | ||||||||||
(4) Reflects the exercise price assuming stockholder approval is obtained. | ||||||||||
2023 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 “2023 Existing Warrants”), which Existing Warrants were 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 “2023 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 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 2023 Existing Warrants to purchase an aggregate of 820,769 shares of common stock at a reduced weighted average exercise price of approximately $2.9504. Pursuant to the warrant inducement agreements, the exercising holders of the 2023 Existing Warrants received 1,641,535 of the 2023 Inducement Warrants and the Company received aggregate gross proceeds of approximately $2,421 from the exercise of the 2023 Existing Warrants. As a result of the inducement and subsequent exercise, the Company determined the incremental fair value provided to the holders using Black Scholes and Monte Carlo models as (i) $148 increase in fair value due to the adjustment in exercise price of 2023 Existing Warrants attributable to down round pricing protection (ii) $3,441 fair value of Inducement Warrants issued to the holders that exercised 2023 Existing Warrants.
27
The incremental fair value is recorded as non-cash deemed dividend. The proceeds of the warrant inducement and issuance of common stock are recorded as Capital in excess of par value.
As a result of subsequent offerings, the exercise price on 3,581,213 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.
In connection with the September 2024 Warrant Inducement Offering, 3,245,744 were subsequently exercised under the terms described below. As of September 30, 2024, 335,468 of 2023 Inducement Warrants remained outstanding with an exercise price of $0.06 of which 332,968 warrants were subsequently cash exercised in October 2024.
April 2024 Registered Direct Offering
On April 8, 2024, the Company and certain investors entered into a securities purchase agreement (the “April SPA”) 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 “April Offering”). The investors purchased approximately $4,237 of shares and warrants, consisting of an aggregate of 1,855,000 shares of common stock, pre-funded warrants to purchase 125,000 shares of common stock and warrants to purchase 1,980,000 shares of common stock, at a purchase price of $2.14 per share and accompanying warrant. The warrants are exercisable at an exercise price of $2.14 per share of common stock, expire on June 28, 2029 and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered. The pre-funded warrants are exercisable immediately upon issuance at an exercise price of $0.00001.
The Company also issued an aggregate of 118,800 placement agent warrants to the Placement Agent and its designees with substantially the same terms as the warrants to the Investors, except that the placement agent warrants will terminate five years following the commencement of sales of the Offering and have an exercise price of $2.675.
The net proceeds to the Company from the Offering, after deducting placement agent fees and the Company’s estimated offering expenses, were approximately $3,913.
As a result of subsequent offerings, the exercise price on 2,098,800 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.
In connection with the September 2024 Warrant Inducement Offering, 1,833,500 were subsequently exercised under the terms described below. As of September 30, 2024, 265,300 of the April 2024 warrants remained outstanding with an exercise price of $0.06 of which 250,000 warrants were subsequently cash exercised in October 2024.
September 2024 Registered Direct Offering
On September 27, 2024, the Company and certain investors entered into a securities purchase agreement (the “September SPA”) relating to the issuance and sale of shares of common stock of the Company pursuant to a registered direct offering and a private placement of warrants to purchase shares of common stock. The Investors purchased approximately $1,175 of shares and warrants, consisting of an aggregate of 5,153,508 shares of Common Stock and warrants to purchase 10,307,016 shares of common stock, at a purchase price of $0.228 per share and accompanying warrant. The Warrants are exercisable after the Shareholder Approval Date (as defined in the Securities Purchase Agreement) at an exercise price of $1.00 per share of common stock, expire on the date that is five (5) years after the Shareholder Approval Date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such Warrants, then such exercise price shall be lowered to such price at which the shares were offered.
The net proceeds to the Company from the Offering, after deducting placement agent fees and the Company’s offering expenses were $1,054.
28
In addition, the Company issued an placement agent warrants to purchase an aggregate of 309,211 shares of common stock with substantially the same terms as the warrants, except that the placement agent warrants will terminate five years following the commencement of sales of the offering and have an exercise price of $1.25.
As a result of subsequent offerings, the exercise price on 10,616,227 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.
2024 Warrant Inducement
On September 29, 2024, the Company commenced a warrant inducement offering (the “2024 Warrant Inducement”) with the holders of outstanding warrants to purchase 5,079,244 shares of common stock, consisting of: (i) common stock purchase warrants to purchase 3,245,744 shares of common stock issued on or about November 29, 2023, and (ii) common stock purchase warrants to purchase 1,833,500 shares of common stock issued on or about April 9, 2024 ((i) and (ii) collectively, the “2024 Existing Warrants”), which are exercisable for an equal number of shares of common stock at an exercise price of $0.228. The net proceeds to the Company from the 2024 Warrant Inducement, after deducting placement agent fees and the Company’s offering expenses were $1,073.
In connection with the 2024 Warrant Inducement, the Company issued 10,158,488 new warrants (the “2024 Inducement Warrants”). The 2024 Inducement Warrants will be issued on substantially the same terms as the 2024 Existing Warrants, except that the Inducement Warrants will be exercisable at any time on or after the Shareholder Approval Date, have an expiration date of five years from the Shareholder Approval Date, and have an exercise price equal to $1.00.
In addition, the Company agreed to issue placement agent warrants to purchase an aggregate of 304,754 shares of common stock with substantially the same terms as the 2024 Inducement Warrants, except that the placement agent 2024 Inducement Warrants will terminate five years following the commencement of sales of the 2024 Warrant Inducement and have an exercise price of $1.25.
The incremental fair value, determined using a Black Scholes valuation model, of the 2024 Inducement Warrants issued to the holders that exercised the 2024 Existing Warrants was $1,530 and is recorded as non-cash deemed dividend. The proceeds of the warrant inducement and issuance of common stock are recorded as Capital in excess of par value.
As a result of a subsequent offerings in October 2024, the exercise price on 10,463,242 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.
Other Equity Financings
Pursuant to a Regulation A offering of Form 1-A, the Company entered into subscription agreements with certain accredited investors and high net worth individuals, pursuant to which the Company issued and sold to the investors 9,720,000 shares of its Common Stock, par value $0.0001 per share of the Company at a price of $0.57 per share for net proceeds to the Company of $5,208, net of offering costs of $332.
The shares that were offered and sold above or at-the-market under Nasdaq rules and pursuant to the Company’s Form 1-A, initially filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on August 2, 2024 and qualified on August 13, 2024.
29
Private Placement of Warrants
During the third quarter of 2024, the Company and certain investors entered into warrant purchase agreements related to the private placement of 14,796,000 warrants to purchase an equal number of shares of common stock at a purchase price of $0.00001 per warrant. The warrants are immediately exercisable at an exercise price of $1.00 per share of common stock, expire five years following the issuance date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered; provided however, that such lower exercise price shall not be effected unless and until the Company has obtained shareholder approval for such adjustment.
As a result of subsequent offerings, the exercise price on 14,796,000 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.
Other Agreements
During the second quarter of 2024, the Company settled an aggregate of $1,192 of outstanding indebtedness under various commercial agreements for an aggregate of 700,958 shares of common stock at an effective average price per share of $2.14.
During the third quarter of 2024, the Company settled an aggregate of $525 of outstanding indebtedness under various commercial and licensing agreements for an aggregate of 1,770,688 shares of common stock at an effective average price per share of $0.2965.
30
NOTE 11. – LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss per common share for the three and nine months ended September 30, 2024 and 2023, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive to consolidated net loss. 1,150,000 pre-funded warrants are included in weighted average common shares outstanding – basic and diluted for purposes of calculating loss per common share for the three and nine month periods ended September 30, 2024.
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
September 30, |
|
September 30, |
||||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||
|
|
(in thousands, except for per-share data) |
||||||||||
Net loss from continuing operations |
|
$ |
(3,585) |
|
$ |
(8,081) |
|
$ |
(11,248) |
|
$ |
(32,618) |
Net loss from discontinued operations |
|
|
(172) |
|
|
(64,639) |
|
|
640 |
|
|
(78,823) |
Net loss |
|
|
(3,757) |
|
|
(72,720) |
|
|
(10,608) |
|
|
(111,441) |
Deemed dividends |
|
|
(3,677) |
|
|
(564) |
|
|
(7,711) |
|
|
(931) |
Net loss available to common shareholders |
|
$ |
(7,434) |
|
$ |
(73,284) |
|
$ |
(18,319) |
|
$ |
(112,372) |
Weighted average common shares outstanding - basic and diluted |
|
|
13,507,441 |
|
|
1,206,368 |
|
|
8,316,768 |
|
|
978,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share from continuing operations |
|
$ |
(0.27) |
|
$ |
(6.70) |
|
$ |
(1.35) |
|
$ |
(33.35) |
Basic and diluted loss per common share from discontinued operations |
|
|
(0.01) |
|
|
(53.58) |
|
|
0.08 |
|
|
(80.58) |
Basic and diluted loss per common share from deemed dividends |
|
|
(0.27) |
|
|
(0.47) |
|
|
(0.93) |
|
|
(0.95) |
Basic and diluted loss per common share |
|
$ |
(0.55) |
|
$ |
(60.75) |
|
$ |
(2.20) |
|
$ |
(114.88) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares are as follows as of September 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Warrants (excluding pre-funded) |
|
|
37,157,826 |
|
|
795,760 |
|
|
37,157,826 |
|
|
795,760 |
Options |
|
|
532 |
|
|
14,241 |
|
|
532 |
|
|
14,241 |
Restricted stock units |
|
|
146,252 |
|
|
19,726 |
|
|
146,252 |
|
|
19,726 |
|
|
|
37,304,610 |
|
|
829,727 |
|
|
37,304,610 |
|
|
829,727 |
NOTE 12. - 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 |
|
$ |
100 |
|
$ |
50 |
|
$ |
50 |
|
$ |
100 |
|
$ |
3,575 |
|
$ |
3,875 |
(1) |
License Agreement |
|
NCSU |
|
Contract fee |
|
|
150 |
|
|
500 |
|
|
— |
|
|
— |
|
|
— |
|
|
650 |
(2) |
Consulting Agreements |
|
Various |
|
Contract fee |
|
|
708 |
|
|
373 |
|
|
146 |
|
|
— |
|
|
— |
|
|
1,227 |
(3) |
Growing Agreements |
|
Various |
|
Contract fee |
|
|
149 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
149 |
(4) |
|
|
|
|
|
|
$ |
1,107 |
|
$ |
923 |
|
$ |
196 |
|
$ |
100 |
|
$ |
3,575 |
|
$ |
5,901 |
|
31
| (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. |
| (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 $1,314 on the Condensed Consolidated Balance Sheets. The Company is vigorously defending its position against these claims.
Shareholder Derivative Cases
On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement. Numerous other shareholder derivative cases were subsequently filed and consolidated into the main action.
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 $768 related to plaintiffs attorney and legal fees and is fully covered by the Company’s insurance. The Company expects the settlement to be approved and funded in the fourth quarter of 2024. Accordingly, the Company has recorded an accrual for litigation settlement and corresponding indemnification receivable on the Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023.
32
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 $5,000 of casualty loss insurance but has failed to issue any payments in connection with the Company’s business interruption claim.
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 $9,000 under the policy plus direct and indirect damages resulting from Dorchester’s continued delay in issuing coverage payments. Discovery is ongoing. The Company filed a Motion for Partial Summary Judgment which is scheduled for hearing on December 18, 2024. The trial date is November 4, 2025.
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 three years in the field related to the hops plant. On January 8, 2024, the Company formally terminated both Framework Collaborative Research Agreements, as amended, related to hemp/cannabis and hops. KeyGene is seeking payment in the amount of $1,885 for current and future services under the Framework Collaborative Research Agreements and has invoiced the Company $881 for services performed. The matter is being arbitrated under the administration of the International Court of Arbitration.
The Company filed its Answer to Request for Arbitration with Defenses and Counterclaims on June 4, 2024. On July 25, 2024, an arbitrator was formally appointed. Discovery commenced in September 2024. The arbitration date has been set for March 24, 2025. The Company believes it has substantial defenses to KeyGene’s claims and intends to defend itself vigorously.
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 parties have mutually agreed on settlement terms which are expected to be finalized in November 2024.
Cookies Retail Products Dispute
On October 23, 2024, Cookies Retail Products, LLC (“CRP”) filed a complaint against the Company, a subsidiary of the Company (“PTB”), Cookies Creative Consulting, Inc. (“CCC”), Cookies SF, LLC (“CSF”), GMLC WLNS, LLC (“GMLC”) and other defendants, Case No. 24STCV27828, Superior Court of California, County of Los Angeles.
The complaint alleges three counts against all defendants: Count I for Breach of Contract related to a Settlement Agreement entered into between CRP, Paul Rock, CSF, GMLC, CCC and PTB (the “Settlement Agreement”), and a Purchase Agreement entered into between PTB and CRP (the “Purchase Agreement”); Count II for Fraud – False Promise related to the Settlement Agreement and Purchase Agreement; and Count III for Violation of Penal Code Section 496 related to a Licensing and Distribution Agreement between GMLC, CCC and PTB. CRP is seeking monetary damages.
The Company has not been served with the Complaint. The Company believes it has substantial defenses to CRP’s claims, and counterclaims, and intends to defend itself vigorously.
33
NOTE 13. SUBSEQUENT EVENTS
Senior Secured Credit Facility
On October 10, 2024, the Company entered into that certain Letter Agreement to modify the terms of the Securities Purchase Agreement dated March 3, 2023 (the “JGB SPA”) and debentures (the “Debentures”), as amended, 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”).
Under the terms of the Letter Agreement, subject to obtaining shareholder approval as described below, Company will be able to reset the Conversion Price (as defined in the Debentures) currently in effect, at the discretion of the Board of Directors and on a one time basis, to an amount equal to the average of the daily VWAPs for each of the five (5) consecutive Nasdaq trading days immediately preceding the date on which the Conversion Price shall be reset. The reset Conversion Price shall in no event be greater than the Conversion Price in effect on the date of the Letter Agreement, which is $0.7458.
The reduction in the Conversion Price will be subject to shareholder approval. The Company has agreed to seek shareholder approval for the Conversion Price reset pursuant to applicable Nasdaq rules no later than December 31, 2024, and to seek shareholder approval at each shareholder meeting thereafter if approval is not obtained by then.
October 2024 Registered Direct Offering
On October 11, 2024, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of shares of common stock of the Company pursuant to a registered direct offering and a private placement of warrants to purchase shares of common stock. The investors purchased approximately $2,140 of shares and warrants, consisting of an aggregate of 14,266,666 shares of common stock and warrants to purchase 28,533,332 shares of common stock, at a purchase price of $0.15 per share and accompanying warrant. The Warrants are exercisable after the Shareholder Approval Date (as defined in the Securities Purchase Agreement) at an exercise price of $1.00 per share of common stock, expire on the date that is five (5) years after the Shareholder Approval Date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such Warrants, then such exercise price shall be lowered to such price at which the shares were offered.
The net proceeds to the Company from the Offering, after deducting the placement agent fees and the Company’s offering expenses were $2,002.
In addition, the Company agreed to issue placement agent warrants to purchase an aggregate of 856,000 shares of common stock with substantially the same terms as the warrants, except that the placement agent warrants will terminate five years following the commencement of sales of the offering and have an exercise price of $1.25.
The October 2024 registered direct equity offering resulted in down-round adjustments whereby the exercise price on 36,673,113 warrants was automatically adjusted to $0.06 triggering non-cash deemed dividends.
October 2024 PIPE Offering
On October 23, 2024, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of prefunded warrants to purchase shares of common stock of the Company and warrants to purchase shares of Common Stock pursuant to a private placement. The investors purchased approximately $3,039 of prefunded warrants and warrants, consisting of prefunded warrants to purchase an aggregate of 28,354,914 shares of common stock and warrants to purchase an aggregate of 42,532,372 shares of Common Stock, at a purchase price of $0.10719 per prefunded warrant and accompanying warrant. The prefunded warrants are immediately exercisable upon issuance. The warrants are exercisable after the stockholder approval date (as defined in the securities purchase agreement) at an exercise price of $1.00 per share of common stock, expire on the date that is five (5) years after the stockholder approval date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered.
34
The net proceeds to the Company from the offering, after deducting placement agent fees and the Company’s offering expenses, are approximately $2,909.
The shares issuable upon exercise of the warrants are subject to stockholder approval. The Company has agreed to hold an annual or special meeting on or before May 30, 2025, to have stockholders approve the issuance of the shares of common stock underlying the warrants pursuant to applicable Nasdaq rules.
In addition, the Company agreed to issue placement agent warrants to purchase an aggregate of 2,268,393 shares of common stock with substantially the same terms as the Warrants, except that the placement agent warrants have an exercise price of $1.25.
The October 2024 PIPE offering resulted in down-round adjustments whereby the exercise price on 65,323,227 warrants was automatically adjusted to $0.0504 triggering non-cash deemed dividends.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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.
The following 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.
On March 28, 2024, we implemented a 1-for-16 reverse stock split (the “Reverse Stock Split”) of our common stock. As a result of the Reverse Stock Split, every sixteen (16) shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our Common Stock. The number of shares of common stock subject to outstanding options, warrants, and convertible securities were also reduced by a factor of sixteen and the exercise price of such securities increased by a factor of sixteen, as of March 28, 2024. All historical share and per-share amounts reflected throughout this section have been adjusted to reflect the Reverse Stock Split. The par value per share of our common stock was not affected by the Reverse Stock Split.
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 ability to remain listed on NASDAQ (iv) our financial and operating performance, (v) our strategic alternatives, including our cost savings initiatives, (vi) our expectations regarding regulatory enforcement (vii) our products, and (viii) 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 and within Part II Item 1A of our Form 10-Q for the three months ended March 31, 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.
35
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. (NASDAQ: XXII) is an agricultural biotechnology company focused on tobacco harm reduction by offering tobacco products with 95% less nicotine, designed to improve health and wellness by giving smokers a choice to control their nicotine consumption. Backed by comprehensive and extensively patented technologies that regulate nicotine biosynthesis activities in the tobacco plant, the Company has pioneered development of high-yield, proprietary reduced nicotine content (RNC) tobacco plants and clinically validated RNC cigarette products. The Company received the first and only FDA Modified Risk Tobacco Product (MRTP) authorization for a combustible cigarette in December 2021. The Company is a subsequent participating manufacturer under the Master Settlement Agreement ("MSA") and vertically integrated for the production of its both own products and contract manufacturing operations ("CMO"), which consist primarily of branded filtered cigars and conventional cigarettes.
Financial Overview
| ● | Net revenues for the third quarter of 2024 were $5,946, a decrease of 24.5% from $7,871 in the prior year period. |
| o | Third quarter 2024 cartons sold of 439 compared to 827 in the comparable prior year period. |
| ● | Gross profit for the third quarter of 2024 was a loss of $588 compared to a profit of $77 in the prior year period. |
| ● | Total operating expenses for the third quarter of 2024 decreased to $2,789 compared to $8,330 in the prior year quarter driven by: |
| o | Sales, general and administrative expenses decreased to $2,547 compared to $6,939 in the prior year period, primarily driven by lower headcount (compensation and benefits), strategic consulting, sales and marketing costs and public company expenses due to our cost savings initiatives implemented in the second half of 2023. |
| o | Research development expenses decreased to $240, compared to $623 in the prior year period, driven by lower headcount (compensation and benefits costs), and contract and IP costs due to our continued cost saving initiatives with a focus on specific tobacco research. |
| o | Other operating expenses (income), net decreased to $2, compared to $768 in the prior year period, primarily attributable to prior year restructuring costs. |
| ● | Operating loss from continuing operations for the third quarter 2024 was $3,377, compared to a loss of $8,253 in the prior year period for the reasons described above. |
| ● | Net loss from continuing operations in the third quarter of 2024 was $3,585 and basic and diluted loss from continuing operations per common share was $0.27 compared with net loss from continuing operations in the third quarter of 2023 of $8,081, and basic and diluted net loss from continuing operations per common share of $6.70. |
| ● | As of September 30, 2024, we had $5,341 in cash and cash equivalents. |
36
Our Financial Results
|
|
Three Months Ended |
|
|
|
|
|
|||||
|
|
September 30 |
|
|
September 30 |
|
|
Change |
||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
% |
||
Revenues, net |
|
$ |
5,946 |
|
|
$ |
7,871 |
|
|
(1,925) |
|
(24.5) |
Cost of goods sold |
|
|
3,102 |
|
|
|
3,921 |
|
|
(819) |
|
(20.9) |
Excise taxes and fees on products |
|
|
3,432 |
|
|
|
3,873 |
|
|
(441) |
|
(11.4) |
Gross (loss) profit |
|
|
(588) |
|
|
|
77 |
|
|
(665) |
|
(863.6) |
Gross (loss) profit as a % of revenues, net |
|
|
(9.9) |
% |
|
|
1.0 |
% |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative ("SG&A") |
|
|
2,547 |
|
|
|
6,939 |
|
|
(4,392) |
|
(63.3) |
SG&A as a % of revenues, net |
|
|
42.8 |
% |
|
|
88.2 |
% |
|
|
|
|
Research and development ("R&D") |
|
|
240 |
|
|
|
623 |
|
|
(383) |
|
(61.5) |
R&D as a % of revenues, net |
|
|
4.0 |
% |
|
|
7.9 |
% |
|
|
|
|
Other operating expenses, net ("OOE") |
|
|
2 |
|
|
|
768 |
|
|
(766) |
|
(99.7) |
Total operating expenses |
|
|
2,789 |
|
|
|
8,330 |
|
|
(5,541) |
|
(66.5) |
Operating loss from continuing operations |
|
|
(3,377) |
|
|
|
(8,253) |
|
|
4,876 |
|
(59.1) |
Operating loss as a % of revenues, net |
|
|
(56.8) |
% |
|
|
(104.9) |
% |
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
100 |
|
|
|
1,272 |
|
|
(1,172) |
|
(92.1) |
Interest income, net |
|
|
3 |
|
|
|
79 |
|
|
(76) |
|
(96.2) |
Interest expense |
|
|
(311) |
|
|
|
(1,179) |
|
|
868 |
|
(73.6) |
Total other income (expense) |
|
|
(208) |
|
|
|
172 |
|
|
(380) |
|
(220.9) |
Loss before income taxes |
|
|
(3,585) |
|
|
|
(8,081) |
|
|
4,496 |
|
(55.6) |
Provision for income taxes |
|
|
- |
|
|
|
- |
|
|
- |
|
- |
Net loss from continuing operations |
|
$ |
(3,585) |
|
|
$ |
(8,081) |
|
|
4,496 |
|
(55.6) |
Net loss as a % of revenues, net |
|
|
(60.3) |
% |
|
|
(102.7) |
% |
|
|
|
|
Net loss per common share from continuing operations (basic and diluted)* |
|
$ |
(0.27) |
|
|
$ |
(6.70) |
|
|
6.43 |
|
(95.97) |
|
|
|
|
|
|
|
|
|
|
|
|
|
*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.
37
|
|
Nine Months Ended |
|
|
|
|
|
|||||
|
|
September 30 |
|
|
September 30 |
|
|
Change |
||||
|
|
2024 |
|
|
2023 |
|
|
$ |
|
% |
||
Revenues, net |
|
$ |
20,361 |
|
|
$ |
24,848 |
|
|
(4,487) |
|
(18.1) |
Cost of goods sold |
|
|
11,184 |
|
|
|
13,327 |
|
|
(2,143) |
|
(16.1) |
Excise taxes and fees on products |
|
|
10,324 |
|
|
|
12,388 |
|
|
(2,064) |
|
(16.7) |
Gross (loss) profit |
|
|
(1,147) |
|
|
|
(867) |
|
|
(280) |
|
32.3 |
Gross (loss) profit as a % of revenues, net |
|
|
(5.6) |
% |
|
|
(3.5) |
% |
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative ("SG&A") |
|
|
7,814 |
|
|
|
27,058 |
|
|
(19,244) |
|
(71.1) |
SG&A as a % of revenues, net |
|
|
38.4 |
% |
|
|
108.9 |
% |
|
|
|
|
Research and development ("R&D") |
|
|
915 |
|
|
|
2,152 |
|
|
(1,237) |
|
(57.5) |
R&D as a % of revenues, net |
|
|
4.5 |
% |
|
|
8.7 |
% |
|
|
|
|
Other operating expenses (income), net ("OOE") |
|
|
(18) |
|
|
|
622 |
|
|
(640) |
|
(102.9) |
Total operating expenses |
|
|
8,711 |
|
|
|
29,832 |
|
|
(21,121) |
|
(70.8) |
Operating loss from continuing operations |
|
|
(9,858) |
|
|
|
(30,699) |
|
|
20,841 |
|
(67.9) |
Operating loss as a % of revenues, net |
|
|
(48.4) |
% |
|
|
(123.5) |
% |
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
439 |
|
|
|
504 |
|
|
(65) |
|
(12.9) |
Interest income, net |
|
|
26 |
|
|
|
201 |
|
|
(175) |
|
(87.1) |
Interest expense |
|
|
(1,828) |
|
|
|
(2,578) |
|
|
750 |
|
(29.1) |
Total other expense |
|
|
(1,363) |
|
|
|
(1,873) |
|
|
510 |
|
(27.2) |
Loss before income taxes |
|
|
(11,221) |
|
|
|
(32,572) |
|
|
21,351 |
|
(65.6) |
Provision for income taxes |
|
|
27 |
|
|
|
46 |
|
|
(19) |
|
(41.3) |
Net loss from continuing operations |
|
|
(11,248) |
|
|
|
(32,618) |
|
|
21,370 |
|
(65.5) |
Net loss as a % of revenues, net |
|
|
(55.2) |
% |
|
|
(131.3) |
% |
|
|
|
|
Net loss per common share from continuing operations (basic and diluted)* |
|
$ |
(1.35) |
|
|
$ |
(33.35) |
|
|
32.00 |
|
(95.95) |
|
|
|
|
|
|
|
|
|
|
|
|
|
*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.
Three and Nine Months Ended September 30, 2024 Compared to Three and Nine Months Ended September 30, 2023
Product line revenue, net
|
|
Three Months Ended |
|||||||
|
|
September 30, |
|
|
|
||||
|
|
2024 |
|
2023 |
|
Change |
|||
|
|
$ |
Cartons |
|
$ |
Cartons |
|
$ |
Cartons |
Contract Manufacturing |
|
|
|
|
|
|
|
|
|
Cigarettes |
|
4,078 |
156 |
|
3,463 |
200 |
|
615 |
(44) |
Filtered Cigars |
|
1,664 |
253 |
|
4,088 |
621 |
|
(2,424) |
(368) |
Cigarillos |
|
204 |
30 |
|
- |
- |
|
204 |
30 |
Total Contract Manufacturing |
|
5,946 |
439 |
|
7,551 |
821 |
|
(1,605) |
(382) |
VLN® |
|
- |
- |
|
320 |
6 |
|
(320) |
(6) |
Total Product Line Revenues |
|
5,946 |
439 |
|
7,871 |
827 |
|
(1,925) |
(388) |
|
|
|
|
|
|
|
|
|
|
38
|
|
Nine Months Ended |
|||||||
|
|
September 30, |
|
|
|
||||
|
|
2024 |
|
2023 |
|
Change |
|||
|
|
$ |
Cartons |
|
$ |
Cartons |
|
$ |
Cartons |
Contract Manufacturing |
|
|
|
|
|
|
|
|
|
Cigarettes |
|
10,942 |
416 |
|
11,735 |
640 |
|
(793) |
(224) |
Filtered Cigars |
|
8,593 |
1,249 |
|
12,414 |
1,937 |
|
(3,821) |
(688) |
Cigarillos |
|
756 |
120 |
|
- |
- |
|
756 |
120 |
Total Contract Manufacturing |
|
20,291 |
1,785 |
|
24,149 |
2,577 |
|
(3,858) |
(792) |
VLN® |
|
70 |
1 |
|
699 |
14 |
|
(629) |
(13) |
Total Product Line Revenues |
|
20,361 |
1,786 |
|
24,848 |
2,591 |
|
(4,487) |
(806) |
For the third quarter and first nine months of 2024, contract manufacturing net revenues decreased to $5,946 and $20,361, respectively, compared to the prior year periods.
For the third quarter 2024, cigarette sales benefitted from strong summer seasonal demand with key customers and price increases that took effect in April 2024. For the first nine months of 2024, volume decreases were result of prior year comparable period stocking orders of Pinnacle cigarettes launched in a top-five convenience store chain and a large one-time order of export product.
For the third quarter and first nine months of 2024, filtered cigars net revenues decreased to $1,664 and $8,592, respectively, compared to the prior year periods, reflecting lower volumes as the Company continues to transition away from low or negative margin manufacturing agreements- in favor of higher margin cigarette manufacturing agreements.
Cigarillo distribution net revenues for the third quarter and first nine months of 2024 amounted to $204 and $756, respectively, reflective of the expanded Pinnacle branded product offerings launched in April 2024 with a top-five national convenience store chain.
VLN® cigarette net revenues were negligible in the third quarter 2024 and $70 for the first nine months of 2024, a decrease from the comparable prior year periods which benefited from stocking orders with major c-stores. While the Company has secured broad distribution of its VLN® products, the sell-through has not yet materialized. The Company is currently making changes to rebrand and relaunch its VLN® products.
39
Gross (loss) profit
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||||
|
|
September 30 |
|
September 30 |
|
September 30 |
|
September 30 |
||||||
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||||
Gross (loss) profit |
|
$ |
(588) |
|
$ |
77 |
|
$ |
(1,147) |
|
|
$ |
(867) |
|
Percent of Revenues, net |
|
|
(9.9) |
% |
|
1.0 |
% |
|
(5.6) |
% |
|
|
(3.5) |
% |
Gross profit (loss) for the third quarter and first nine months of 2024 decreased compared to the prior year periods, primarily driven by lower sales volume, offset by implementation of cost cut initiatives, efficiency, and the shift in product mix.
Sales, general and administrative (“SG&A”) expense
|
|
Changes From Prior Year |
||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Compensation and benefits (a) |
|
$ |
(1,594) |
|
$ |
(7,976) |
Sales and marketing (b) |
|
|
(1,130) |
|
|
(2,389) |
Strategic consulting (b) |
|
|
(619) |
|
|
(6,045) |
Public company expenses (c) |
|
|
(463) |
|
|
(1,113) |
Insurance expenses (d) |
|
|
(381) |
|
|
(1,076) |
Travel and entertainment (b) |
|
|
(112) |
|
|
(602) |
Other (e) |
|
|
(93) |
|
|
(43) |
Net decrease in SG&A expenses |
|
$ |
(4,392) |
|
$ |
(19,244) |
(a) Compensation and benefits and equity compensation expense decreased for the three and nine months ended September 30, 2024 compared to the prior year periods 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 and nine months ended September 30, 2024 compared to the prior year periods were due to reduced spending as part of our cost cut initiatives.
(c) Decreases in public company expenses for the three- and nine-month periods ended September 30, 2024 compared to the prior year periods were mainly due to waived board of director compensation fees in the current year periods and a decrease in professional services fees due to the restructuring of our business.
(d) Insurance expenses decreased for the three and nine months ended September 30, 2024 compared to the prior year periods due to lower D&O and other insurance premiums.
(e) Other expenses decreased for the three and nine months ended September 30, 2024 compared to the three and nine month periods ended September 30, 2023 were mainly due to decreases in insurance, technology and legal expenses.
40
Research and development (“R&D”) expense
|
|
Changes From Prior Year |
||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Compensation and benefits (a) |
|
$ |
(106) |
|
$ |
(460) |
License, Royalty, and Contract costs (b) |
|
|
(168) |
|
|
(348) |
IP costs (c) |
|
|
(116) |
|
|
(337) |
Other (d) |
|
|
7 |
|
|
(92) |
Net decrease in R&D expenses |
|
$ |
(383) |
|
$ |
(1,237) |
| (a) | Decreased compensation and benefits for the three and nine months ended September 30, 2024 are mainly related to the decrease in headcount in the current year periods compared to the prior year periods. |
| (b) | Decreases in licenses, royalty and contract costs for the three- and nine-month periods ended September 30, 2024 relate to growing and contract arrangements that occurred in the prior year periods. |
| (c) | Decreases in IP costs for the three- and nine-month periods ended September 30, 2024 compared to the prior year periods relate to a decrease in patent expenses and amortization from restructuring of our tobacco IP portfolio to align to our current strategy. |
| (d) | Other expenses decreased for the nine months ended September 30, 2024 compared to the prior year period, were attributable to a decrease in consulting and testing costs due to our cost cut initiatives. |
Other income (expense)
|
|
Changes From Prior Year |
||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
Other income (expense), net (a) |
|
$ |
(1,172) |
|
$ |
(65) |
Interest income, net |
|
|
(76) |
|
|
(175) |
Interest expense (b) |
|
|
868 |
|
|
750 |
Net (increase) decrease in other expense |
|
$ |
(380) |
|
$ |
510 |
| (a) | Other income (expense), net increased for the three months ended September 30, 2024 compared to the same prior year period, mainly due to an increase of $1,162 loss resulting from change in fair value of warrant liabilities. |
Other income (expense), net increased for the nine months ended September 30, 2024 compared to the same prior year period, due to a decrease of $51 of realized losses on short term investments and $116 loss resulting from change in fair value of warrant liabilities.
| (b) | For the three months ended September 30, 2024 compared to the prior year period, interest expense primarily decreased as a result of ongoing repayment and elimination of debt obligations on our balance sheet. Cash interest decreased $250 and non-cash interest amortization decreased $252 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $52), and additional decreases of $23 as a result of change in fair value of conversion option derivative liability. Additionally, interest expense decreased $394 from the Subordinated Note, which was extinguished prior to maturity in April 2024. |
For the nine months ended September 30, 2024 compared to the prior year period, interest expense decreased as a result of ongoing repayment and elimination of debt obligations on our balance sheet. Cash interest decreased $352 and non-cash interest amortization decreased $601 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $71), and additional decreases of $482 as a result of change in fair value of conversion option derivative liability. Additionally, interest expense decreased $215 from the Subordinated Note, which was extinguished prior to maturity in April 2024 and resulted in a loss on extinguishment of $400.
41
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 $9,947 for the nine months ended September 30, 2024 and an accumulated deficit of $389,315 as of September 30, 2024. As of September 30, 2024, we had cash and cash equivalents of $5,341 and working capital from continuing operations of $1,568 (compared to working capital deficit 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.
Our cash, and cash equivalents and working capital from continuing operations as of September 30, 2024 and December 31, 2023 are set forth below:
|
|
September 30 |
|
December 31 |
||
|
|
2024 |
|
2023 |
||
Cash and cash equivalents |
|
$ |
5,341 |
|
$ |
2,058 |
Working capital |
|
$ |
1,568 |
|
$ |
(6,826) |
Working Capital
As of September 30, 2024, we had working capital from continuing operations, excluding assets and liabilities held for sale, of approximately $1,568 compared to working capital deficit of approximately ($6,826) at December 31, 2023 an increase of $8,394. This increase in working capital was primarily due to a decrease in net current liabilities of $8,705 offset by a decrease of $311 in net current assets. Cash and cash equivalents increased by $3,283 and the remaining net current assets decreased by $3,594. 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.”
42
Summary of Cash Flows
|
|
Nine Months Ended |
|
|
||||
|
|
September 30, |
|
Change |
||||
|
|
2024 |
|
2023 |
|
$ |
||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(9,947) |
|
$ |
(50,184) |
|
40,237 |
Investing activities |
|
|
(119) |
|
|
17,352 |
|
(17,471) |
Financing activities |
|
|
13,349 |
|
|
40,162 |
|
(26,813) |
Net change in cash, cash equivalents and restricted cash |
|
$ |
3,283 |
|
$ |
7,330 |
|
|
Net cash used in operating activities
Cash used in operating activities decreased $40,237 from $50,184 in 2023 to $9,947 in 2024. The primary driver for this decrease was lower net loss of $100,833, a decrease of $66,249 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 $5,653 for the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.
Net cash (used in) provided by investing activities
Cash used in investing activities amounted to $119 the nine months ended September 30, 2024, as compared to cash provided by investing activities of $17,352 for the nine months ended September 30, 2023. The decrease in cash provided by investing activities of $17,471 was primarily the result of (i) a decrease in net proceeds from short-term investments of $18,239; (ii) decrease of $3,500 in property, plant and equipment casualty loss insurance proceeds collected in the prior year period and (iii) a decrease of $229 of proceeds from the sale of property, plant and equipment. These decreased cash inflows were partially offset by a decrease in cash outflows of (i) $4,243 related to the acquisitions of patents, trademarks and property, plant and equipment and (ii) $254 from the acquisition of RXP in the prior year period
Net cash provided by financing activities
During the nine months ended September 30, 2024, cash provided by financing activities decreased by $26,813, from $40,162 in the prior year period, to $13,349, resulting from decreases in (i) net proceeds of $16,048 from issuance of long-term debt, (ii) proceeds of $6,016 from issuance of detachable warrants, (iii) net proceeds of $10,238 from the issuance of common stock (iv) proceeds from issuance of notes payable of $1,104 offset by an increase in net proceeds from warrant exercise of $3,403. These cash inflows were offset by decreases in cash outflows of note payable payments of $3,441 and taxes paid related to net share settlement of RSUs of $419 and increases in payments of long-term debt of $670.
Cash demands on operations
We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants to purchase common stock and sale of debt instruments with various institutions, accredited investors, high net worth individuals and creditors.
43
In January and February 2024, we received net proceeds of $2,245 from the inducement and exercise of 820,769 warrants for shares of common stock and issuance of 1,641,535 warrants to purchase common stock. In April 2024, we received net proceeds of $3,913 from the issuance of 1,855,000 shares of common stock, 125,000 pre-funded warrants and 1,980,000 warrants to purchase common stock in a registered direct offering. In August and September 2024, we received net proceeds of $5,208 from the issuance of 9,720,000 shares of common stock pursuant to a Regulation A offering, and in separate private placements, issued 14,796,000 warrant to purchase common stock. In September 2024 we received net proceeds of $1,054 from the issuance of 5,153,508 shares of common stock and 10,307,016 warrants to purchase common stock in a registered direct offering. Also, in September 2024 we received net proceeds of $1,073 from the inducement and exercise of 5,079,244 warrants for shares of common stock and issuance of 10,158,488 warrants to purchase common stock. In October 2024 we received net proceeds of $2,002 from the issuance of 14,266,666 shares of common stock and 28,533,332 warrants to purchase common stock in a registered direct offering. Also, in October 2024 we received net proceeds of $2,909 from the issuance of 28,354,914 prefunded warrants to purchase shares of common stock and 42,532,372 warrants to purchase common stock in a private placement offering.
As of September 30, 2024, the remaining principal balance under our Senior Secured Credit Facility is $8,321 of which $1,500 remains current with corresponding pledged assets. The Debentures under the Senior Secured Credit Facility allow the Holders to voluntarily convert the Debentures, in whole or in part, into shares of the Company’s common stock and the conversion option price in effect is $0.7458. On October 9, 2024, the Company entered into that certain Letter Agreement to modify the terms of the Debentures with JGB, subject to obtaining shareholder approval, Company will be able to reset the Conversion Price currently in effect, at the discretion of the Board of Directors and on a one time basis, to an amount equal to the average of the daily VWAPs for each of the five (5) consecutive Nasdaq trading days immediately preceding the date on which the Conversion Price shall be reset. The reset Conversion Price shall in no event be greater than the Conversion Price in effect.
Additionally, at its option, JGB may require the Company to redeem 2% of the original principal amount of the Debentures, as amended to be no more than 50% or $210 per calendar month through July 2025 and $421 per calendar month thereafter which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. JGB elected the monthly redemption feature and the Company repaid 421k in cash during the three month period ended September 30, 2024. If the redemption feature is elected, as of September 30, 2024, contractual maturities under the Senior Secured Credit Facility for the remainder of 2024 are $632, for 2025 are $3,579, and for 2026 are $4,110.
44
Outstanding Warrants
As of November 10, 2024, we had the following warrants outstanding:
|
|
# of warrants outstanding |
|
Issue date exercise price |
|
Current exercise price (1) |
|
Expiration date |
||
July 2022 RDO warrants |
|
4,067 |
|
$ |
492.00 |
|
$ |
492.00 |
|
July 25, 2027 |
Senior Secured Credit Facility - JGB |
|
20,645 |
|
$ |
306.000 |
|
$ |
205.248 |
|
September 3, 2028 |
July 19, 2023 RDO warrants |
|
28,125 |
|
$ |
38.7200 |
|
$ |
0.0504 |
|
July 20, 2028 |
October 2023 CMPO warrants |
|
12,500 |
|
$ |
8.4000 |
|
$ |
0.0504 |
|
October 19, 2028 |
2023 Inducement warrants |
|
2,500 |
|
$ |
3.4400 |
|
$ |
0.0504 |
|
February 15, 2029 |
April 2024 RDO |
|
15,300 |
|
$ |
2.1400 |
|
$ |
0.0504 |
|
June 28, 2029 |
August 2024 Reg A+ warrants (3) |
|
2,596,000 |
|
$ |
1.0000 |
|
$ |
0.0504 (4) |
|
(2) |
September 2024 Reg A+ warrants (3) |
|
12,200,000 |
|
$ |
1.0000 |
|
$ |
0.0504 (4) |
|
(2) |
September 2024 RDO warrants (3) |
|
10,307,016 |
|
$ |
1.0000 |
|
$ |
0.0504 (4) |
|
(2) |
September 2024 RDO PA warrants (3) |
|
309,211 |
|
$ |
1.2500 |
|
$ |
0.0504 (4) |
|
(2) |
September 2024 Inducement warrants (3) |
|
10,158,490 |
|
$ |
1.0000 |
|
$ |
0.0504 (4) |
|
(2) |
September 2024 Inducement PA warrants (3) |
|
304,754 |
|
$ |
1.2500 |
|
$ |
0.0504 (4) |
|
(2) |
October 2024 RDO warrants (3) |
|
28,533,332 |
|
$ |
1.0000 |
|
$ |
0.0504 (4) |
|
(2) |
October 2024 RDO PA warrants (3) |
|
856,000 |
|
$ |
1.2500 |
|
$ |
0.0504 (4) |
|
(2) |
Omnia Pre-Funded |
|
1,150,000 |
|
$ |
0.00001 |
|
$ |
0.00001 |
|
Not applicable |
Omnia warrants |
|
460,000 |
|
$ |
2.14 |
|
$ |
2.14 |
|
May 1, 2029 |
October 2024 PIPE Prefunded Warrants (3) |
|
28,354,914 |
|
$ |
0.00001 |
|
$ |
0.00001 |
|
Not applicable |
October 2024 PIPE Warrants (3) |
|
42,532,372 |
|
$ |
1.00 |
|
$ |
1.00 |
|
(2) |
October 2024 PIPE PA Warrants (3) |
|
2,268,393 |
|
$ |
1.25 |
|
$ |
1.25 |
|
(2) |
|
|
140,113,619 |
|
|
|
|
|
|
|
|
(1) Warrant price adjusted as a result of anti-dilution or ratchet provisions. | ||||||||||
(2 Expiration date is 5-years following shareholder approval date. | ||||||||||
(3) The exercise prices of the warrants are subject to appropriate adjustment in the event of recapitalization events, stock dividends, stock splits, stock combinations, reclassifications, reorganizations or similar events affecting the Company’s common stock. In addition, subject to stockholder approval, the warrants will contain anti-dilution protection provisions relating to subsequent equity sales of shares of the Company’s common stock or common stock equivalents at an effective price per share lower than the then effective exercise price of such warrants. | ||||||||||
(4) Reflects the exercise price assuming stockholder approval is obtained. | ||||||||||
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.
45
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.
(b) |
Changes in Internal Control over Financial Reporting: |
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 12 - 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 12, 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 12 to our Condensed 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. |
As previously disclosed, on July 16, 2024, we received a deficiency letter from the Nasdaq Listing Qualifications Department indicating that for the last 30 consecutive business days our common stock did not maintain a minimum closing bid price of $1.00 (“Minimum Bid Price Requirement”) per share for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2). Under Nasdaq Listing Rule 5810(c)(3)(A), if during the 180 calendar days following the date of the notification, or prior to January 13, 2025, the closing bid price of our stock is at or above $1.00 for a minimum of 10 consecutive business days, we will regain compliance with the Minimum Bid Price Requirement. If the Company does not regain compliance with Rule 5550(a)(2) by January 13, 2025, the Company may be afforded a second 180 calendar day period to regain compliance.
If we fail to evidence compliance with Nasdaq listing rules, we will be delisted and we could face significant adverse consequences.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Default Upon Senior Securities.
None
Item 4. Mine Safety Disclosures
None
47
Item 5. Other Information
During the three months ended September 30, 2024, there were no modifications, adoptions or terminations by any directors or officers to any contract, instruction or written plan for the purchase or sale of securities of the Company that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or non-Rule 10b5-1 trading agreements.
Item 6. Exhibits
|
|
||
|
|
||
|
|
||
|
|
||
101.INS |
Inline XBRL Instance Document |
||
|
|
||
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
||
|
|
||
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
||
|
|
||
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
||
|
|
||
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
||
|
|
||
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
||
|
|
||
Exhibit 104 |
Cover Page Interactive Data File (formatted as Inline XBRL) |
||
|
|
||
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
|
22nd CENTURY GROUP, INC. |
|
|
Date: November 12, 2024 |
/s/ Lawrence D. Firestone |
|
Lawrence D. Firestone |
|
Chief Executive Officer |
|
(Principal Executive Officer and Authorized Officer) |
|
|
Date: November 12, 2024 |
/s/ Daniel A. Otto |
|
Daniel A. Otto |
|
Chief Financial Officer |
|
(Principal Accounting and Financial Officer) |
49
Exhibit 31.1
CERTIFICATIONS
I, Lawrence D. Firestone, Chief Executive Officer of 22nd CENTURY GROUP, INC., certify that:
1. I have reviewed this quarterly report on Form 10-Q of 22nd CENTURY GROUP, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15 (f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: |
November 12, 2024 |
|
|
|
|
|
/s/ Lawrence D. Firestone |
|
|
Lawrence D. Firestone |
|
|
Chief Executive Officer and Director |
|
|
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Daniel A. Otto, Chief Financial Officer of 22nd CENTURY GROUP, INC., certify that:
1. I have reviewed this quarterly report on Form 10-Q of 22nd CENTURY GROUP, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15 (f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: |
November 12, 2024 |
|
|
|
|
|
/s/ Daniel A. Otto |
|
|
Daniel A. Otto |
|
|
Chief Financial Officer |
|
|
(Principal Accounting and Financial Officer) |
Exhibit 32.1
Written Statement of the Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350
Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Chief Executive Officer of 22nd CENTURY GROUP, INC. (the “Company”), and I, the undersigned Chief Financial Officer of the Company, hereby certify, to the best of my knowledge, that the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2024 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|
Date: |
November 12, 2024 |
|
|
|
|
|
/s/ Lawrence D. Firestone |
|
|
Lawrence D. Firestone |
|
|
Chief Executive Officer and Director |
|
|
|
|
Date: |
November 12, 2024 |
|
|
|
|
|
/s/ Daniel A. Otto |
|
|
Daniel A. Otto |
|
|
Chief Financial Officer |