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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, 2022

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.)

500 Seneca Street, Suite 507, Buffalo, New York 14204

(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 5, 2022, there were 215,301,603 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, 2022 and December 31, 2021 (unaudited)

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months ended September 30, 2022 and 2021 (unaudited)

4

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months ended September 30, 2022 and 2021 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2022 and 2021 (unaudited)

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 4.

Controls and Procedures

38

 

 

 

PART II.

OTHER INFORMATION

40

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

Item 1A.

Risk Factors

40

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3.

Default Upon Senior Securities

40

 

 

 

Item 4.

Mine Safety Disclosures

40

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

41

 

 

 

SIGNATURES

42

2

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands, except share and per-share data)

September 30, 

December 31, 

    

2022

    

2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,364

$

1,336

Short-term investment securities

 

41,357

 

47,400

Accounts receivable, net

 

4,953

 

585

Inventory

 

12,264

 

2,881

Prepaid expenses and other current assets

 

3,463

 

2,183

Total current assets

 

64,401

 

54,385

Property, plant and equipment, net

 

18,279

 

5,841

Operating lease right-of-use assets, net

 

2,429

 

1,723

Goodwill

 

33,748

 

Intangible assets, net

 

18,336

 

7,919

Investments

 

981

 

2,345

Other assets

4,002

3,741

Total assets

$

142,176

$

75,954

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes and loan payable

$

5,825

$

596

Operating and finance lease obligations

 

927

 

308

Accounts payable

 

5,787

 

2,173

Accrued expenses

 

2,468

 

1,489

Accrued payroll

 

1,043

 

2,255

Accrued excise taxes and fees

 

1,525

 

1,270

Deferred income

693

119

Other current liabilities

 

397

 

217

Total current liabilities

 

18,665

 

8,427

Long-term liabilities:

 

  

 

  

Notes payable

 

220

 

Operating and finance lease obligations

 

1,592

 

1,432

Other long-term liabilities

611

21

Total liabilities

21,088

9,880

Commitments and contingencies (Note 9)

 

 

Shareholders' equity

 

  

 

  

Preferred stock, $.00001 par value, 10,000,000 shares authorized

 

  

 

  

Common stock, $.00001 par value, 300,000,000 shares authorized

 

  

 

  

Capital stock issued and outstanding:

 

  

 

  

215,301,603 common shares (162,872,875 at December 31, 2021)

 

 

Common stock, par value

2

2

Capital in excess of par value

 

333,124

 

244,247

Accumulated other comprehensive loss

 

(507)

 

(162)

Accumulated deficit

 

(211,531)

 

(178,013)

Total shareholders' equity

 

121,088

 

66,074

Total liabilities and shareholders’ equity

$

142,176

$

75,954

See accompanying notes to unaudited interim condensed consolidated financial statements.

3

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(amounts in thousands, except per-share data)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Revenue, net

$

19,383

$

7,811

$

42,905

$

22,988

Cost of goods sold

 

18,764

 

7,519

 

41,086

 

21,733

Gross profit

 

619

 

292

 

1,819

 

1,255

Operating expenses:

 

  

 

  

 

 

Sales, general and administrative

 

14,569

 

6,830

 

31,355

 

17,846

Research and development

 

1,318

 

1,031

 

4,355

 

2,789

Total operating expenses

 

15,887

 

7,861

 

35,710

 

20,635

Operating loss

 

(15,268)

 

(7,569)

 

(33,891)

 

(19,380)

Other income (expense):

 

  

 

  

 

 

Unrealized loss on investments

 

(345)

 

(1,900)

 

(2,046)

 

(2,040)

Gain on Panacea investment conversion

2,548

Realized loss on short-term investment securities

 

(35)

 

 

(143)

 

Interest income, net

 

113

 

52

 

211

 

272

Interest expense

 

(148)

 

(23)

 

(230)

 

(44)

Total other income (expense)

 

(415)

 

(1,871)

 

(2,208)

 

736

Loss before income taxes

 

(15,683)

(9,440)

 

(36,099)

(18,644)

Benefit for income taxes

 

(2,581)

 

(2,581)

 

Net loss

$

(13,102)

$

(9,440)

$

(33,518)

$

(18,644)

Net loss per common share - basic and diluted

$

(0.06)

$

(0.06)

$

(0.18)

$

(0.12)

Weighted average common shares outstanding - basic and diluted (in thousands)

 

210,131

$

162,721

$

185,269

$

153,998

Other comprehensive loss:

 

  

 

  

 

 

Unrealized loss on short-term investment securities

 

(19)

 

(28)

 

(488)

 

(101)

Reclassification of losses to net loss

 

35

 

 

143

 

Other comprehensive income (loss)

16

(28)

(345)

(101)

Comprehensive loss

$

(13,086)

$

(9,468)

$

(33,863)

$

(18,745)

See accompanying notes to unaudited interim condensed consolidated financial statements.

4

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands)

Nine Months Ended September 30, 2022

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding

    

Shares

    

Par Value

    

Income (Loss)

    

Deficit

    

Equity

Balance at January 1, 2022

 

162,872,875

$

2

 

$

244,247

 

$

(162)

 

$

(178,013)

$

66,074

Stock issued in connection with RSU vesting

 

1,663,691

 

 

 

 

 

Equity-based compensation

 

 

 

1,213

 

 

 

1,213

Unrealized loss on short-term investment securities

 

 

 

 

(400)

 

 

(400)

Net loss

 

 

 

 

 

(8,918)

 

(8,918)

Balance at March 31, 2022

164,536,566

 

2

 

245,460

 

(562)

 

(186,931)

 

57,969

Stock issued in connection with RSU vesting

75,000

Stock issued in connection with option exercises

150,000

174

174

Stock issued in connection with acquisition

32,900,000

51,653

51,653

Equity-based compensation

1,106

1,106

Unrealized loss on short-term investment securities

(69)

(69)

Reclassification of losses to net loss

108

108

Net loss

(11,498)

(11,498)

Balance at June 30, 2022

 

197,661,566

$

2

$

298,393

$

(523)

$

(198,429)

$

99,443

Stock issued in connection with RSU vesting

566,862

Stock issued in connection with capital raise, net of issuance costs of 2,516

17,073,175

32,484

32,484

Equity-based compensation

2,247

2,247

Unrealized loss on short-term investment securities

(19)

(19)

Reclassification of losses to net loss

35

35

Net loss

(13,102)

(13,102)

Balance at September 30, 2022

 

215,301,603

$

2

$

333,124

$

(507)

$

(211,531)

$

121,088

Nine Months Ended September 30, 2021

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, 2021

 

139,061,690

$

1

 

$

189,439

 

$

74

 

$

(145,404)

$

44,110

Stock issued in connection with RSU vesting

 

1,196,258

 

 

 

 

 

Stock issued in connection with option exercises

846,342

1,153

1,153

Stock issued in connection with warrant exercises

11,293,211

1

11,781

11,782

Equity-based compensation

 

 

 

507

 

 

 

507

Unrealized loss on short-term investment securities

 

 

 

 

(32)

 

 

(32)

Net loss

 

 

 

 

 

(5,030)

 

(5,030)

Balance at March 31, 2021

152,397,501

$

2

$

202,880

$

42

$

(150,434)

$

52,490

Stock issued in connection with RSU vesting, net of shares withheld for taxes

200,103

(469)

(469)

Stock issued in connection with option exercises

87,879

106

106

Stock issued in connection with capital raise, net of issuance costs of 1,794

10,000,000

38,206

38,206

Equity-based compensation

1,245

1,245

Unrealized loss on short-term investment securities

(41)

(41)

Net loss

(4,174)

(4,174)

Balance at June 30, 2021

162,685,483

$

2

$

241,968

$

1

$

(154,608)

$

87,363

Stock issued in connection with RSU vesting

50,000

Equity-based compensation

1,119

1,119

Unrealized loss on short-term investment securities

(28)

(28)

Net loss

(9,440)

(9,440)

Balance at September 30, 2021

 

162,735,483

$

2

$

243,087

$

(27)

$

(164,048)

$

79,014

See accompanying notes to unaudited interim condensed consolidated financial statements.

5

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Nine Months Ended

September 30, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(33,518)

$

(18,644)

Adjustments to reconcile net loss to cash used in operating activities:

 

  

 

  

Amortization and depreciation

 

1,992

 

932

Amortization of right-of-use asset

 

525

 

214

Amortization of inventory step-up

978

Unrealized loss on investment

 

2,046

 

2,040

Realized loss on short-term investment securities

143

Gain on Panacea investment conversion

 

(2,548)

Accretion of non-cash interest expense (income), net

213

13

Equity-based employee compensation expense

 

4,566

 

2,871

Deferred income taxes

(2,581)

Changes in operating assets and liabilities, net of acquisition:

 

  

 

  

Accounts receivable

 

(1,425)

 

980

Inventory

 

(5,068)

 

(669)

Prepaid expenses and other assets

 

(934)

 

(1,494)

Accounts payable

 

1,933

 

289

Accrued expenses

 

(56)

 

880

Accrued payroll

 

(1,408)

 

(1,884)

Accrued excise taxes and fees

 

255

 

(418)

Other liabilities

(309)

 

(769)

Net cash used in operating activities

 

(32,648)

 

(18,207)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

(394)

 

(239)

Acquisition of property, plant and equipment

 

(2,501)

 

(470)

Acquisition, net of cash acquired and debt assumed

(1,297)

Investment in Change Agronomy Ltd.

(682)

Sales and maturities of short-term investment securities

 

67,315

 

52,203

Purchase of short-term investment securities

 

(62,061)

 

(84,701)

Net cash provided by (used in) investing activities

 

380

 

(33,207)

Cash flows from financing activities:

 

  

 

Payment on note payable

(1,508)

(1,417)

Proceeds from note payable issuance

2,162

2,653

Other financing activities

(16)

Net proceeds from option exercise

174

1,259

Net proceeds from warrant exercise

11,782

Proceeds from issuance of common stock

35,000

40,000

Payment of common stock issuance costs

(2,516)

(1,794)

Taxes paid related to net share settlement of RSUs

(469)

Net cash provided by financing activities

 

33,296

 

52,014

Net increase in cash and cash equivalents

 

1,028

 

600

Cash and cash equivalents - beginning of period

 

1,336

 

1,029

Cash and cash equivalents - end of period

$

2,364

$

1,629

Supplemental disclosures of cash flow information:

 

  

 

  

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

64

$

35

Property, plant and equipment additions included in accounts payable

$

38

$

4

Property, plant and equipment additions included in accrued expenses

$

$

10

Right-of-use assets and corresponding operating lease obligations

$

$

497

Patent and trademark additions included in accrued expenses

$

62

$

22

Panacea investment conversion

$

$

12,485

Stock issued in connection with acquisition

$

51,653

$

See accompanying notes to unaudited interim condensed consolidated financial statements.

6

22nd CENTURY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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 - The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair and non-misleading presentation of the financial statements have been included.

Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

These interim condensed consolidated financial statements should be read in conjunction with the December 31, 2021 audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 1, 2022.

Principles of Consolidation - The accompanying Condensed Consolidated Financial Statements include the accounts of (i) 22nd Century Group, Inc. (“22nd Century Group”); (ii) its five wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), Botanical Genetics, LLC (“Botanical Genetics”), 22nd Century Group Canada, Inc. (“22nd Century Group Canada”) and 22nd Century Group Europe B.V. (“22nd Century Group Europe”); (iii) two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”); and (iv) two wholly-owned subsidiaries of Botanical Genetics, 22nd Century Holdings, LLC (“22nd Century Holdings”) and Golden Acquisition Sub, LLC. This group of subsidiaries is referred to as collectively with 22nd Century Group as the “Company”. All intercompany accounts and transactions have been eliminated.

Nature of Business – 22nd Century Group is a leading agricultural biotechnology and intellectual property company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science. 22nd Century Ltd performs research and development related to the level of nicotine and other nicotinic alkaloids in tobacco plants and Botanical Genetics performs research and development related to hemp/cannabis plants. Goodrich Tobacco and Heracles Pharma are business units for the Company’s potential modified exposure tobacco products. NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA and operates the Company’s tobacco products manufacturing business in North Carolina. 22nd Century Holdings owns and operates Needle Rock Farms. 22nd Century Group Canada and 22nd Century Group Europe were formed for future international business opportunities. As described in Note 2, on May 13, 2022, the Company acquired through Golden Acquisition Sub, LLC substantially all of the assets of GVB Biopharma’s (“GVB”) business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development, which allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise and add significant scale in the immediate term.

7

Reclassifications As a result of the acquisition of GVB (see Note 2), the Company has revised the presentation and classification of depreciation and amortization in the Condensed Consolidated Statement of Operations and Comprehensive Loss to conform with the acquiree, as follows:

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2021

As originally

As originally

    

reported

    

Reclass

    

Revised

    

reported

    

Reclass

    

Revised

Revenue, net

$

7,811

$

$

7,811

$

22,988

$

$

22,988

Cost of goods sold

 

7,362

 

157

 

7,519

 

21,306

 

427

 

21,733

Gross profit

449

(157)

292

1,682

(427)

1,255

Operating expenses:

Sales, general and administrative

6,821

9

6,830

17,827

19

17,846

Research and development

856

175

1,031

2,303

486

2,789

Depreciation

173

(173)

461

(461)

Amortization

168

(168)

471

(471)

Total operating expenses

8,018

(157)

7,861

21,062

(427)

20,635

Operating loss

$

(7,569)

$

$

(7,569)

$

(19,380)

$

$

(19,380)

COVID-19 Pandemic – The COVID-19 pandemic has had a minimal impact on the Company’s operations in 2021 and thus far in 2022, but there is a risk that state and federal authorities’ responses to the COVID-19 pandemic or another pandemic may disrupt our business in the future. Our executive leadership team and staff are monitoring this evolving situation and its impacts on our business. We will continue to monitor the local, state, and federal guidance regarding our business practices.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Inventories - Inventories are valued at the lower of historical cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory. Standard cost is primarily used for finished goods inventory. Cost of hemp biomass consists of initial third-party acquisition costs plus analytical testing costs. Costs of extracted and hemp oil inventory are comprised of initial acquisition cost of the biomass and all direct and indirect processing costs including labor related costs, consumables, materials, packaging supplies, utilities, facility costs, analytical testing costs, and production related depreciation. Inventories are evaluated to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved as appropriate.

Acquisitions - The Company accounts for acquisitions under the acquisition method of accounting for business combinations. Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill.

All direct acquisition-related costs are expensed as incurred and are recognized in operating expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

Goodwill - Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company’s reporting unit is the same as its reportable segment, which is the consolidated entity. The Company tests its reporting unit’s goodwill for impairment at least annually as of the measurement date year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

During the nine months ended September 30, 2022, there were no indicators of impairment and accordingly a goodwill impairment test was not performed.

8

Intangible Assets – Intangible assets recorded at fair value as a component of purchase accounting consist of purchased customer relationships and tradename. Definite lived intangible assets related to customer relationship is amortized on an accelerated basis, which approximates the projected cash flows used to determine the fair value of the definite-lived intangible assets at the time of acquisition. The tradename asset is considered indefinite-lived and is not amortized.

Other definite lived intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third-parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third-parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand. The amounts capitalized relate to intellectual property that the Company owns or to which it has rights to use.

The Company’s capitalized intellectual property costs are amortized using the straight-line method over the remaining statutory life of the patent assets in each of the Company’s patent families, which have estimated expiration dates ranging from 2026 to 2043. Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which have expected expiration dates from 2028 through 2036. The Company believes that costs associated with becoming a signatory to the MSA, costs related to the acquisition of a predicate cigarette brand and trademarks have indefinite lives. As such, no amortization is taken. At each reporting period, the Company evaluates whether events and circumstances continue to support the indefinite-lived classification.

Impairment of Long-Lived Assets – On at least an annual basis, the Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be recoverable. If any such indicators are present, the Company will test for recoverability in accordance with ASC 360-Property, plant, and equipment or ASC 350- Intangibles, Goodwill, and Other.

Intangible assets subject to amortization are reviewed for strategic importance and commercialization opportunity prior to expiration. If it is determined that the asset no longer supports the Company’s strategic objectives and/or will not be commercially viable prior to expiration, the asset is impaired. In addition, the Company will assess the expected future undiscounted cash flows for its intellectual property based on consideration of future market and economic conditions, competition, federal and state regulations, and licensing opportunities. If the carrying value of such assets are not recoverable, the carrying value will be reduced to fair value and record the difference as an impairment.

Indefinite-lived intangible asset carrying values are reviewed at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. The Company first performs a qualitative assessment and considers its current strategic objectives, future market and economic conditions, competition, and federal and state regulations to determine if an impairment is more likely than not. If it is determined that an impairment is more likely than not, a quantitative assessment is performed to compare the asset carrying value to fair value and record the difference as an impairment.

Fair Value of Financial Instruments  FASB ASC 820 - Fair Value Measurements and Disclosures establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

A financial asset’s or a financial liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company estimates that the carrying amounts reported on the Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, contract assets, promissory note receivable, accounts payable and accrued expenses, and notes and loans payable approximate their fair value due to the short-term nature of these items. Note 5 contains additional information on assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements.

9

Investments  The Company’s equity securities are recorded at fair value with changes in fair value included within the statement of operations. Equity securities without a readily determinable market value are carried at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer. The Company considers certain debt instruments as available-for-sale securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Stock Based Compensation – The Company’s 2021 Omnibus Incentive Plan allows for various types of equity-based incentive awards. Stock based compensation expense is based on awards that are expected to vest over the requisite service periods and are based on the fair value of the award measured on the grant date. Vesting requirements vary for directors, officers, and employees. In general, time-based awards fully vest after one year for directors and vest in equal annual installments over a three-year period for officers and employees. Performance-based awards vest upon achievement of certain milestones. Forfeitures are accounted for when they occur.

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 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. The following table summarizes the change in accrued liabilities, presented within Other current liabilities and Other long-term liabilities Condensed Consolidated Balance Sheets:

Balance at December 31, 2021

$

238

Accruals

692

Cash payments

(167)

Balance at September 30, 2022

$

763

    

September 30, 

    

December 31, 

    

2022

    

2021

Current

$

397

$

217

Noncurrent

$

366

$

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In addition, during the three and nine months ended September 30, 2022, the Company recorded $1,237 of accelerated equity compensation expense in connection with the vesting of an employee’s outstanding equity awards as part of the termination severance agreement. Amounts are recorded as Selling, general and administrative in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

Income Taxes - For interim income tax reporting, due to a full valuation allowance on net deferred tax assets, no income tax expense or benefit is recorded unless it is an unusual or infrequently occurring item. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur. See Note 2 for income tax considerations as a result of the acquisition of GVB.

Segments - As a result of the acquisition of GVB (see Note 2) and ongoing evaluation of the Company’s strategy across our plant science and intellectual property platform (tobacco, hemp/cannabis, and hops), the Company is reevaluating its operating and reporting segments, which is expected to be finalized by the end of fiscal 2022 once the corporate and management reporting structure realignment is completed. As September 30, 2022, the Company continues to operate its business in one single operating and reportable segment. The Company’s chief operating decision maker assesses, measures, and reviews the operating and financial results at the consolidated level for the entire platform.

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Recent Accounting Pronouncements – In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires companies to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The provisions of the ASU have an effective date for the Company beginning after December 15, 2022 and interim periods within those fiscal years. The Company does not expect the new credit loss standard to have a material impact to the Condensed 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. – BUSINESS ACQUISITIONS

On May 13, 2022, the Company entered into and closed the transactions contemplated by the Reorganization and Acquisition Agreement (the “Reorganization Agreement”) with GVB Biopharma (“GVB”). Under the terms of the Reorganization Agreement, the Company acquired substantially all of the assets of GVB’s business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development (the “Transaction”). The acquisition of GVB allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise and add significant scale in the immediate term. GVB is included in the Company’s consolidated single operating and reportable segment.

The aggregate consideration for the Transaction consisted of (i) the assumption of approximately $4,637 of debt, (ii) the assumption and direct payment of certain third-party transaction costs incurred by GVB in connection with the Transaction totaling approximately $1,753 and (iii) the issuance to GVB of 32,900,000 unregistered shares of common stock of the Company (the “Shares”) with a fair value of $51,653. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. The Shares are subject to a lock-up and restrictions on transfer for at least six months following closing and thereafter, one-third of the Shares will be released from the lock-up after six months, one-third will be released from the lock-up after nine months and the remainder will be released after one year. Certain Shares held by former preferred holders of GVB stock have limited registration rights associated with approximately 8,959,533 total Shares.

The Transaction was structured as a tax-free re-organization pursuant to Internal Revenue Code Section 368(a)(1)(c). Accordingly, the tax basis of net assets acquired will retain their carry over tax basis and holding period in purchase accounting.

The Company has provisionally estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Condensed Consolidated Financial Statements were prepared.

During the third quarter of 2022, the preliminary fair values of the assets acquired and liabilities assumed as of May 13, 2022 were adjusted to reflect the ongoing acquisition valuation analysis procedures of property and equipment, intangible assets, deferred taxes, and working capital adjustments. These adjustments resulted in a combined reduction to goodwill of $10,452.

The amounts reported are considered provisional as the Company is finalizing the valuations that are required to allocate the purchase price through the measurement period, which remains open as of September 30, 2022. As a result, the allocation of the provisional purchase price may change in the future, which could be material.

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The following table presents management’s purchase price allocation:

Cash

$

456

Accounts receivable

2,944

Inventory

5,292

Other assets

519