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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, 2023

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________

Commission File Number: 001-36338

22nd Century Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada

    

98-0468420

(State or other jurisdiction

(IRS Employer

of incorporation)

Identification No.)

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 1, 2023, there were 30,878,168 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, 2023 and December 31, 2022 (unaudited)

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months ended September 30, 2023 and 2022 (unaudited)

4

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months ended September 30, 2023 and 2022 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2023 and 2022 (unaudited)

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

Item 2.

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

44

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

58

 

 

 

Item 4.

Controls and Procedures

58

 

 

 

PART II.

OTHER INFORMATION

59

 

 

 

Item 1.

Legal Proceedings

59

 

 

 

Item 1A.

Risk Factors

59

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 3.

Default Upon Senior Securities

62

 

 

 

Item 4.

Mine Safety Disclosures

62

 

 

 

Item 5.

Other Information

62

 

 

 

Item 6.

Exhibits

63

 

 

 

SIGNATURES

64

2

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

September 30, 

December 31, 

    

2023

    

2022

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,850

$

3,020

Short-term investment securities

 

 

18,193

Restricted cash

7,500

Accounts receivable, net

 

6,493

 

5,641

Inventories

 

15,955

 

10,008

Insurance recoveries

 

3,000

 

5,000

Prepaid expenses and other current assets

 

4,818

 

2,743

Total current assets

 

40,616

 

44,605

Property, plant and equipment, net

 

9,309

 

13,093

Operating lease right-of-use assets, net

 

2,984

 

2,675

Goodwill

 

 

33,160

Intangible assets, net

 

6,900

 

16,853

Investments

 

682

 

682

Other assets

3,705

3,583

Total assets

$

64,196

$

114,651

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes and loans payable - current

$

1,441

$

908

Current portion of long-term debt

18,165

Operating lease obligations

 

1,097

 

681

Accounts payable

 

7,005

 

4,168

Accrued expenses

 

6,649

 

1,428

Accrued payroll

 

743

 

3,199

Accrued excise taxes and fees

 

2,693

 

1,423

Deferred income

704

831

Other current liabilities

 

1,263

 

380

Total current liabilities

 

39,760

 

13,018

Long-term liabilities:

 

  

 

  

Notes and loans payable

 

156

 

3,001

Operating lease obligations

 

6,219

 

2,141

Other long-term liabilities

4,266

516

Total liabilities

50,401

18,676

Commitments and contingencies (Note 11)

 

 

Shareholders' equity

 

  

 

  

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

 

  

 

  

Common stock, $.00001 par value, 33,333,334 shares authorized

 

  

 

  

Capital stock issued and outstanding:

 

  

 

  

21,078,656 common shares (14,349,275 at December 31, 2022)

 

 

Common stock, par value

Capital in excess of par value

 

363,198

 

333,900

Accumulated other comprehensive loss

 

(30)

 

(111)

Accumulated deficit

 

(349,373)

 

(237,814)

Total shareholders' equity

 

13,795

 

95,975

Total liabilities and shareholders’ equity

$

64,196

$

114,651

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 per-share data)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Revenues, net

$

17,811

$

19,383

$

63,200

$

42,905

Cost of goods sold

 

19,777

 

18,764

 

68,688

 

41,086

Gross (loss) profit

 

(1,966)

 

619

 

(5,488)

 

1,819

Operating expenses:

 

  

 

  

 

 

Sales, general and administrative

 

11,199

 

14,528

 

39,971

 

30,475

Research and development

 

1,613

 

1,318

 

4,923

 

4,355

Other operating expense, net

23,344

 

41

 

24,917

 

880

Goodwill impairment

33,360

 

 

33,360

 

Total operating expenses

 

69,516

 

15,887

 

103,171

 

35,710

Operating loss

 

(71,482)

 

(15,268)

 

(108,659)

 

(33,891)

Other income (expense):

 

  

 

  

 

 

Unrealized loss on investments

 

 

(345)

 

 

(2,046)

Realized loss on short-term investment securities

 

 

(35)

 

(41)

 

(143)

Other income, net

 

(12)

 

 

23

 

Interest income, net

 

79

 

113

 

201

 

211

Interest expense

 

(1,305)

 

(148)

 

(2,919)

 

(230)

Total other expense

 

(1,238)

 

(415)

 

(2,736)

 

(2,208)

Loss before income taxes

 

(72,720)

(15,683)

 

(111,395)

(36,099)

Provision for income taxes

 

(2,581)

 

46

 

(2,581)

Net loss

$

(72,720)

$

(13,102)

$

(111,441)

$

(33,518)

Deemed dividend from trigger of anti-dilution provision feature

(367)

Deemed dividend related to down-round features

(564)

(564)

Net loss available to common shareholders

$

(73,284)

$

(13,102)

$

(112,372)

$

(33,518)

Basic and diluted loss per common share

$

(3.68)

$

(0.94)

$

(6.85)

$

(2.71)

Weighted average common shares outstanding - basic and diluted

 

19,887

$

14,009

16,411

12,351

Net loss

(72,720)

(13,102)

$

(111,441)

$

(33,518)

Other comprehensive income (loss):

 

  

 

  

 

 

Unrealized gain (loss) on short-term investment securities

 

 

(19)

 

71

 

(488)

Foreign currency translation

 

(69)

 

 

(31)

 

Reclassification of realized losses to net loss

 

 

35

 

41

 

143

Other comprehensive income (loss)

(69)

16

81

(345)

Comprehensive loss

$

(72,789)

$

(13,086)

$

(111,360)

$

(33,863)

See accompanying notes to Condensed Consolidated Financial Statements.

4

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands, except share data)

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

 

14,349,275

$

 

$

333,900

 

$

(111)

 

$

(237,814)

$

95,975

Stock issued in connection with RSU vesting, net of 31,607 shares withheld for taxes

 

90,262

 

 

(414)

 

 

 

(414)

Stock issued in connection with acquisition

31,056

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

14,470,593

 

 

336,741

 

(41)

 

(256,114)

 

80,586

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

24,524

(5)

(5)

Stock issued in connection with ATM, net of fees of $178

284,343

2,563

2,563

Stock issued in connection with capital raise, net of issuance costs of $422

747,974

4,851

4,851

Stock issued in connection with licensing arrangement

333,334

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

66,035

Balance at June 30, 2023

 

15,926,803

$

$

349,206

$

39

$

(276,653)

$

72,592

Stock issued in connection with capital raises, net of issuance costs of $1,219

5,151,853

13,416

13,416

Equity-based compensation

576

576

Other comprehensive loss

(69)

(69)

Net loss

(72,720)

(72,720)

Balance at September 30, 2023

 

21,078,656

$

$

363,198

$

(30)

$

(349,373)

$

13,795

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

5

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

 

10,858,237

$

 

$

244,249

 

$

(162)

 

$

(178,013)

$

66,074

Stock issued in connection with RSU vesting

 

110,916

 

 

 

 

 

Equity-based compensation

 

 

 

1,213

 

 

 

1,213

Other comprehensive income

 

 

 

 

(400)

 

 

(400)

Net loss

 

 

 

 

 

(8,918)

 

(8,918)

Balance at March 31, 2022

10,969,153

 

 

245,462

 

(562)

 

(186,931)

 

57,969

Stock issued in connection with RSU vesting

5,001

Stock issued in connection with option exercises

10,001

174

174

Stock issued in connection with acquisition

2,193,334

51,653

51,653

Equity-based compensation

1,106

1,106

Other comprehensive income

39

39

Net loss

(11,498)

(11,498)

Balance at June 30, 2022

13,177,489

$

$

298,395

$

(523)

$

(198,429)

$

99,443

Stock issued in connection with RSU vesting

37,792

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

1,138,221

32,484

32,484

Equity-based compensation

2,247

2,247

Other comprehensive income

16

16

Net loss

(13,102)

(13,102)

Balance at September 31, 2022

 

14,353,502

$

$

333,126

$

(507)

$

(211,531)

$

121,088

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

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, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net loss

$

(111,441)

$

(33,518)

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

 

  

 

  

Impairment of goodwill and long-lived assets

57,311

Amortization and depreciation

 

3,427

 

1,992

Amortization of right-of-use asset

 

823

 

525

Amortization of inventory step-up

978

Unrealized loss on investment

 

 

2,046

Other non-cash gains and losses

(72)

356

Provision for credit losses

246

Loss on the sale of machinery and equipment

 

75

 

Debt related charges included in interest expense

1,978

Equity-based employee compensation expense

 

3,237

 

4,566

Gain on change of contingent consideration

 

(186)

 

Gain on change of warrant liabilities

(540)

Deferred income taxes

(2,581)

Increase in inventory reserves

1,687

Changes in operating assets and liabilities, net of acquisition:

 

  

 

  

Accounts receivable

 

(1,171)

 

(1,425)

Inventory

 

(7,609)

 

(5,068)

Prepaid expenses and other assets

 

(605)

 

(934)

Accounts payable

 

2,669

 

1,933

Accrued expenses

 

2,051

 

(56)

Accrued payroll

 

(2,457)

 

(1,408)

Accrued excise taxes and fees

 

1,270

 

255

Other liabilities

(877)

 

(309)

Net cash used in operating activities

 

(50,184)

 

(32,648)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

(433)

 

(394)

Acquisition of property, plant and equipment

 

(3,951)

 

(2,501)

Proceeds from the sale of property, plant and equipment

 

251

 

Acquisition, net of cash acquired

(254)

(1,297)

Investment in Change Agronomy Ltd.

(682)

Property, plant and equipment insurance proceeds

3,500

Sales and maturities of short-term investment securities

 

21,714

 

67,315

Purchase of short-term investment securities

 

(3,475)

 

(62,061)

Net cash provided by investing activities

 

17,352

 

380

Cash flows from financing activities:

 

  

 

Payments on note payables

(4,672)

(1,508)

Proceeds from issuance of notes payable

2,360

2,162

Other financing activities

(16)

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 option exercise

174

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

19,908

35,000

Payment of common stock issuance costs

(1,641)

(2,516)

Taxes paid related to net share settlement of RSUs

(420)

Net cash provided by financing activities

 

40,162

 

33,296

Net increase in cash, cash equivalents and restricted cash

 

7,330

 

1,028

Cash, cash equivalents and restricted cash - beginning of period

 

3,020

 

1,336

Cash, cash equivalents and restricted cash - end of period

$

10,350

$

2,364

Reconciliation of cash and cash equivalents and restricted cash

Cash and cash equivalents at beginning of period

$

3,020

$

1,336

Restricted cash at beginning of period

Cash, cash equivalents and restricted cash at beginning of period

$

3,020

$

1,336

Cash and cash equivalents at end of period

$

2,850

$

2,364

Restricted cash at end of period

7,500

Cash, cash equivalents and restricted cash at end of period

$

10,350

$

2,364

Supplemental disclosures of cash flow information:

 

  

 

  

Non-cash transactions:

 

  

 

  

Capital expenditures incurred but not yet paid

$

324

$

164

Right-of-use assets and corresponding operating lease obligations

$

5,166

$

Non-cash consideration RXP acquisition

$

1,641

$

Stock issued in connection with acquisition

$

$

51,653

Non-cash licensing arrangement

$

3,500

$

Deemed dividend from trigger of anti-dilution provision feature

$

367

$

Deemed dividend related to down-round features

$

564

$

See accompanying notes to Condensed Consolidated Financial Statements.

7

22nd CENTURY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 leading agricultural biotechnology and intellectual property company dedicated to improving health with reduced nicotine tobacco, hemp/cannabis and hops advanced plant technologies.

The accompanying Condensed Consolidated Financial Statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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 and hemp/cannabis businesses. The Company had negative cash flow from operations of $50,184 and $32,648 for the nine months ended September 30, 2023 and 2022, respectively, and an accumulated deficit of $349,373 and $237,814 as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the Company had cash and cash equivalents of $2,850 and restricted cash of $7,500. Subsequent to September 30, 2023, the Company completed an offering of its securities with gross proceeds to the Company of approximately $5,250, before deducting the placement agent fees of $367 and other offering expenses payable by the Company of approximately $288 (see Note 17 “Subsequent Events”).

Additionally, for the quarter ended September 30, 2023, the Company was not in compliance with the financial covenant related to consolidated Revenues, net pursuant to the Senior Secured Credit Facility debentures. The lenders have granted a waiver for the covenant violation (see Note 17 “Subsequent Events”). Without a waiver or other relief under the Senior Secured Credit Facility debenture agreements, one of the remedies the lenders have available to it, amongst others, is the ability to accelerate repayment of the debt, which the Company would not be able to immediately repay. 

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.

8

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. The Company has engaged a financial advisor to assist it in identifying strategic partners and financing to fund operations and to take actions to maximize the Company’s liquidity. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.

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; inability to identify or consummate any strategic initiatives and transactions; 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 Other operating expenses, net in the Condensed Consolidated Statement of Operations and Comprehensive Loss, as follows:

Three Months Ended

Nine Months Ended

September 30, 2022

September 30, 2022

As originally

As originally

    

reported

    

Reclass

    

Revised

    

reported

    

Reclass

    

Revised

Revenues, net

$

19,383

$

$

19,383

$

42,905

$

$

42,905

Cost of goods sold

 

18,764

 

 

18,764

 

41,086

 

 

41,086

Gross profit

619

619

1,819

1,819

Operating expenses:

Sales, general and administrative

14,569

(41)

14,528

31,355

(880)

30,475

Research and development

1,318

1,318

4,355

4,355

Other operating expense, net

41

41

880

880

Total operating expenses

15,887

15,887

35,710

35,710

Operating loss

$

(15,268)

$

$

(15,268)

$

(33,891)

$

$

(33,891)

Reverse Stock SplitOn July 5, 2023, the Company effected a 1-for-15 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 66,035 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.

Restricted Cash - Restricted cash includes minimum escrow funds the Company maintains in a money market account pursuant to the terms of the Senior Secured Credit Facility. See Note 17 “Subsequent Events” for additional information.

Credit Losses - The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables and contract assets. The Company considers historical collection rates, current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable and contract assets, the Company believes that the carrying value, net of expected losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments.

9

To determine the provision for credit losses for accounts receivable, including consideration of contract assets or unbilled receivables, the Company has disaggregated its accounts receivable by nature and type of product being sold, as the Company determined that risk profile of its customers is consistent based on the type of product and industry in which they operate. These customer classes include tobacco distributors/wholesalers for its CMO cigarette and filtered cigar tobacco product sales, hemp/cannabis bulk ingredient product sales, and hemp/cannabis white label product sales. Each class of customer is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the related industry, including unemployment rates, industry indices, and other factors, to estimate if there are current expected credit losses within its trade receivables based on the trends and the Company’s expectation of the future status of such economic and industry-specific factors. The Company believes that its customers, the majority of which are in industries with sound financial condition, and therefore, the Company’s evaluation of macroeconomic and industry-specific factors did not have a material impact on the provision for credit losses. As of September 30, 2023 and December 31, 2022, the Company recorded a provision for credit losses of $736 and $372 respectively.

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

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

Contingent Consideration - Contingent consideration arising from a business acquisition is included as part of the purchase price and is recorded at fair value as of the acquisition date. Subsequent to the acquisition date, the Company remeasures contingent consideration arrangements at fair value at each reporting period until the contingency is resolved. The changes in fair value are recognized within Other Operating Expenses, Net in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. See Note 2 for the contingent consideration arising from the acquisition of RX Pharmatech Ltd.

Warrants - The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815) depending on the specific terms of the warrant agreement. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. 

Warrants that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities pursuant to ASC 480 and are initially and subsequently measured at their estimated fair values. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For additional discussion on warrants, see Note 6 and Note 10.

Deemed dividends associated with anti-dilution or down round provisions (commonly referred to as “ratchets”) represent the economic transfer of value to holders of equity-classified freestanding financial instruments when these provisions are triggered. These deemed dividends are presented as a reduction in net income or an increase in net loss available to common stockholders and a corresponding increase to additional paid-in-capital resulting in no change to stockholders’ equity/deficit. The incremental value of modifications to warrants as a result of the trigger of down round provisions of $564 were recorded as deemed dividends for the three-month period ended September 30, 2023.  The incremental value of modifications to warrants as a result of the trigger of down round provisions and anti-dilution provisions of $931 were recorded as deemed dividends for the nine-month period ended September 30, 2023.

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).

Embedded DerivativesThe Company considers whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to ASC 815. Embedded derivatives are initially and subsequently measured at fair value. The embedded derivatives associated with the Company’s Senior Secured Credit Facility and Subordinated Note are not material.

Debt Issuance Costs and Discounts - Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the term of the related debt. Debt issuance costs and discounts related to the Company’s Senior Secured Credit Facility and Subordinated Note are recorded as a reduction of the carrying value of the related debt and are amortized to Interest expense using the effective interest method over the period from the date of issuance to the maturity date, whichever is earlier. The amortization of debt issuance costs and discounts are included in Debt related charges included in interest expense in the Condensed Consolidated Statements of Cash Flows. Note 7 “Debt” contains additional information on the Company’s debt issuance costs and discounts.

Inventories - Inventories are stated at the lower of cost, determined using the first-in first-out method, or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Write-downs for excess, obsolete or expired inventory are based primarily on how long the inventory has been held, historical sales volume, and estimates of forecasted net sales of that product. A significant change in the timing or level of demand for products may result in recording additional write-downs for excess, obsolete or expired inventory in the future. Note 3, “Inventories,” contains additional information on the Company’s inventory. In connection with evaluation of strategic alternatives for the Company’s assets and cost cut initiatives, during the third quarter of 2023, the Company increased the reserve for excess, obsolete or expired hemp/cannabis inventory by $1,687.

Goodwill - Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company’s reporting units are the same as its two reportable segments, which is (1) Tobacco, and (2) Hemp/Cannabis. The Company tests its reporting unit’s goodwill for impairment at least annually as of the measurement date year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

The Company concluded an interim impairment trigger event occurred and tested its goodwill for impairment during the quarter ended September 30, 2023 and concluded that goodwill impairment existed. No goodwill remained as of September 30, 2023. See Note 4 “Goodwill and Other Intangible Assets, Net and Note 6 “Fair Value Measurements”, for additional information.

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 impairment indicators occurred during the quarter ended September 30, 2023 and concluded that impairments existed. See Note 4 “Goodwill and Other Intangible Assets, Net” for additional information related to impairment charges of Property, plant and equipment, net, Intangible assets, net and Operating lease right-of-use assets, net and Note 6 “Fair Value Measurements.”

11

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 contingencyBusiness interruption insurance is treated as a gain contingency.

Refer to further discussion of all commitments and contingencies in Note 11.

Severance charges - From time to time, the Company evaluates its resources and optimizes its business plan to align to changing needs of executing on its strategy. These actions may result in voluntary or involuntary employee termination benefits. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination. The following table summarizes the change in accrued liabilities, presented within Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets:

Balance at January 1, 2023

$

634

Accruals

727

Reversal from settlement

(168)

Cash payments

(523)

Balance at September 30, 2023

$

670

    

September 30, 

    

December 31, 

    

2023

    

2022

Current

$

657

$

349

Noncurrent

13

285

Total severance liability

$

670

$

634

12

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Sales, general, and administrative

$

(168)

$

692

$

400

$

692

Other operating expense, net

 

159

 

 

159

 

Total severance charges

$

(9)

$

692

$

559

$

692

In addition, the Company recorded $523 and $1,237 of accelerated equity compensation expense for the nine-month period ending September 30, 2023 and 2022, respectively, in connection with the vesting of employees’ outstanding equity awards as part of their termination severance agreements. Amounts are recorded as Selling, general and administrative in the 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 related to certain state, local, or franchise taxes, or an unusual or infrequently occurring item. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.

Recent Accounting Pronouncements – Adoption of Accounting Standards Codification Topic 326

The Company adopted ASU 2016-13, or ASC 326 Financial Instruments-Credit Losses, effective January 1, 2023 under a modified retrospective approach. Under the current expected credit losses (“CECL”) model, the Company immediately recognizes an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are recognized each period. The new guidance applies to the Company’s trade receivables and contract asset balances. Due to the nature of business operations and contracts with customers, the Company has historically not experienced significant bad debt expense or write-offs and as a result, the adoption of ASC 326 did not have a material impact to the Company’s Condensed Consolidated Financial Statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $118 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2023.

We consider the applicability and impact of all ASUs. If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our financial statements and related disclosures.

NOTE 2. – BUSINESS ACQUISITIONS

RX Pharmatech, Ltd.

On January 19, 2023, the Company acquired RX Pharmatech Ltd (“RXP”) a privately held distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. RXP is included in the Company’s Hemp/cannabis reportable segment.

The initial consideration paid to acquire RXP included $200 in cash and $503 in common stock (consisting of 31,056 unregistered shares of common stock), and an initial estimate of target working capital true-up of $286. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. Additionally, the contingent consideration in the transaction represents the estimated fair value of the Company’s obligation, under the share purchase agreement, to make additional equity based payments of up to $1,550 over the next three years based on specified conditions being met, which has an initial fair value of contingent consideration of $1,138. The fair value of the aggregate consideration in the transaction is $2,127.

13

Based on the preliminary purchase price allocation, the assets acquired and liabilities assumed principally comprise $1,744 of intangible assets, and other immaterial working capital items representing a net asset of $93 (net of cash acquired of $290). There was no excess purchase price and therefore no goodwill recorded as part of the business combination. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Condensed Consolidated Financial Statements were prepared.

Intangible assets include the intellectual property associated with the 1,276 novel food applications with the FSA, which is determined to be indefinite lived. The preliminary fair value was determined by utilizing the cost approach and considered market data to evaluate the replacement cost per application. The intellectual property is included in the hemp/cannabis reporting unit, see Note 4 “Goodwill and Other Intangible Assets, Net,” which includes discussion of subsequent impairment charges recorded in the third quarter of 2023.

The Company utilizes third-party valuation experts to assist in estimating the fair value of the contingent consideration and develops estimates by considering weighted-average probabilities of likely outcomes and discounted cash flow analysis. These estimates require the Company to make various assumptions about forecasted revenues and discount rates, which are unobservable and considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date.

The following table provides quantitative information associated with the initial fair value measurement of the Company’s liabilities for contingent consideration as of January 19, 2023:

Maximum Payout

Weighted Average

Contingency Type

(undiscounted)

Fair Value

Unobservable Inputs

or Range

Revenue-based payments

$

1,550

$

1,138

Discount rate

16

%

Projected year(s) of payment

2024-2026

During the third quarter of 2023, the Company finalized amounts recorded as purchase price allocation and recorded measurement period adjustments of $53, resulting from an increase of the working capital true-up amount based on final payment made to the sellers.

GVB Biopharma

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. GVB is included in the Company’s Hemp/cannabis 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 2,193,334 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 were subject to a lock-up and restrictions on transfer for at least six months following closing and thereafter, one-third of the Shares will be released from the lock-up after six months, one-third will be released from the lock-up after nine months and the remainder will be released after one year.

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

The Company recorded provisional estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition during the second quarter of 2022, resulting in goodwill of $44,200. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Condensed Consolidated Financial Statements were prepared.

14

Following the initial acquisition accounting, the Company recorded final measurement period adjustments, in which 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 $10,840. The impact of depreciation and amortization to Operating loss recorded in the third quarter of 2022 as a result of completing valuation procedures for property and equipment and intangible assets, that would have been recorded in the prior period since the date of acquisition was $70. See Note 4 “Goodwill and Other Intangible Assets, Net,” which includes discussion of subsequent impairment charges recorded in the third quarter of 2023.

The following table presents management’s purchase price allocation:

Cash

$

456

Accounts receivable

2,944

Inventory

3,551

Other assets

519

Property, plant & equipment

11,189

Operating leases right-of-use assets, net

1,231

Goodwill

33,360

Tradename

4,600

Customer relationships

5,800

Accounts payable and accrued expenses

(2,777)

Other current liabilities

(944)

Lease liabilities

(1,259)

Auto loans

(387)

Deferred tax liability

(627)

Bridge loan

(4,250)

Fair value of net assets acquired

$

53,406

The fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.

The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, tradename life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.

Current Assets and Liabilities

The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.

The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the income approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance for these remaining efforts. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $978, which was fully amortized in the three month period ended June 30, 2022 in the Consolidated Statement of Operations and Comprehensive Loss.

15

Property, Plant and Equipment

The fair value of PP&E acquired was estimated by applying the cost approach for personal property and leasehold improvements. The cost approach was applied by developing a replacement cost and adjusting for economic depreciation and obsolescence.

Leases

The Company recognized operating lease liabilities and operating lease right-of-use assets for office and manufacturing facilities in (i) Las Vegas, Nevada (ii) Grass Valley, Oregon (iii) Prineville, Oregon, and (iv) Tygh Valley, Oregon, accordance with ASC 842, Leases.

The following table summarizes the Company’s discount rate and remaining lease terms as of the acquisition date:

Weighted average remaining lease term in years

3.8

Weighted average discount rate

8.3

%

The Company concluded there were no off-market lease intangibles on the date of acquisition based on an evaluation of market rents per square foot, geographic location and nature of use of the underlying asset, among other considerations.

Intangible assets

The purchase price was allocated to intangible assets as follows:

Weighted Average

Fair Value

Amortization Period

Weighted Average

Definite-lived Intangible Assets

Assigned

    

(Years)

Discount Rate

Customer relationships

$

5,800

10

23.50%

Tradename

$

4,600

Indefinite

23.50%

Customer Relationships

Customer relationships represent the estimated fair value of contractual and non-contractual customer relationships GVB had as of the acquisition date. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer relationships was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 20%, as well as management’s understanding of the industry and product life cycles.

Tradename

Tradename represents the estimated fair value of GVB’s corporate and product names. The acquired tradename was valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the tradename was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate of 1.0%. The GVB tradename was assumed to have an indefinite useful life based upon long-term management expectations and future operating plans.

Deferred Taxes

The Company determined the deferred tax position to be recorded at the time of the GVB acquisition in accordance with ASC Topic 740, Income Taxes, resulting in recognition of deferred tax liabilities for future reversing of taxable temporary differences primarily for intangible assets and property, plant and equipment. This resulted in a preliminary net deferred tax liability of $627, which includes the carryover basis of historical recognized deferred tax assets, liabilities and valuation allowance.

16

The net deferred tax liabilities recorded as a result of the acquisition of GVB was determined by the Company to also provide future taxable temporary differences that allow for the Company to utilize certain previously fully reserved deferred tax assets. Accordingly, the Company recognized a reduction to its valuation allowance resulting in a net tax benefit of approximately $434 for the year ended December 31, 2022.

Goodwill

The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. A variety of factors contributed to the goodwill recognized, including the value of GVB’s assembled work force, the incremental value resulting from GVB’s capabilities in hemp/cannabis, operational synergies across the plant science platform, and the expected revenue growth over time that is attributable to increased market share from future products and customers. See Note 4 “Goodwill and Other Intangible Assets, Net” for additional information.

Actual and Pro Forma (unaudited) disclosures

For segment reporting purposes, the results of operations and net assets from the RXP and GVB acquisitions have been included in the Company’s Hemp/cannabis reportable segment since the respective acquisition dates. For the three and nine months ended September 30, 2023, net revenues related to GVB were $9,736 and $37,815, respectively, and net loss was $56,318 and $66,212. For the three and nine months ended September 30, 2022, net revenues related to GVB were $7,848 and $12,354, respectively, and net loss was $2,743 and $4,217, respectively. The operating results of RXP for the three and nine months ended September 30, 2023 were immaterial.

The following unaudited pro forma information presents the consolidated results of operations of the Company and assumes the acquisition occurred on January 1, 2021:

Nine Months Ended

September 30, 

2022

(in thousands, except for per-share data)

Revenues, net

$

53,630

Net loss available to common shareholders

$

(33,438)

Basic and diluted loss per common share

$

(2.49)

Weighted average common shares outstanding - basic and diluted

13,420

The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These unaudited pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future. These unaudited pro forma results include certain adjustments, primarily due to amortization expense due to the fair value adjustment of inventory, acquisition related costs and the impact of income taxes on the pro forma adjustments.

Acquisition costs

During the nine-month period ending September 30, 2023, direct costs incurred as a result of the acquisition of RXP were $130, compared to direct costs incurred as a result of the acquisition of GVB of $839 during the nine-month period ended September 30, 2022. Acquisition costs are expensed as incurred and included in Other operating expenses, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

17

NOTE 3. – INVENTORIES

Inventories at September 30, 2023 and December 31, 2022 consisted of the following:

    

September 30, 

    

December 31, 

    

2023

    

2022

Raw materials

$

9,849

$

8,743

Work in process

1,750

441

Finished goods

 

4,356

824

$

15,955

$

10,008

NOTE 4. – GOODWILL AND OTHER INTANGIBLE ASSETS, NET 

Goodwill

The change in the carrying amount of goodwill during the nine months ended September 30, 2023 is as follows:

Balance at January 1, 2023

$

33,160

Measurement period adjustments

200

Impairment

(33,360)

Balance at September 30, 2023

$

0

During the quarter ended September 30, 2023, the Company identified certain events and circumstances that could potentially be an impairment triggering event for both the tobacco and hemp/cannabis reporting units in connection with (1) the announcement of initiating a process to evaluate strategic alternatives for the Company’s assets, and (2) announcement of cost cut initiatives intended to yield significant cash savings on an annual basis. The initiation of these two processes is in response to the sustained decline in the Company's market capitalization, operating losses and negative cash flows from operations, and current liquidity position, and is intended to monetize the value or more effectively expand the market reach of our products.

These processes have included consideration of a range of strategic, operational and financial transactions and alternatives, such as business combinations, asset sales, licensing agreements, alternative financing strategies and other options. Additionally, the Company undertook various restructuring activities in an effort to better align its internal organizational structure and costs with its strategy, as well as preserve liquidity, as further outlined in Note 9 “Other Operating Expenses, Net.”

Accordingly, the Company evaluated the impact on each of its reporting units to assess whether there was an impairment triggering event requiring it to perform a goodwill impairment test. The Company had no recorded goodwill in its tobacco reporting unit. For the hemp/cannabis reporting unit, as part of this impairment test, the Company considered certain qualitative factors, such as the Company’s performance, business forecasts, and strategic plans. It reviewed key assumptions, including projected cash flows and future revenues. After reviewing the qualitative assessment, the Company determined a quantitative assessment was required to be performed.

Using the income approach, with the discount rate selected considering and capturing the related risk associated with the forecast, the Company compared the fair value of the reporting unit to carrying value. Based on the results, the carrying value of the hemp/cannabis reporting unit exceeded its fair value and the goodwill was determined to be impaired and $33,360, representing the full amount of goodwill recorded to the hemp/cannabis reporting unit, was written off as impaired during the quarter ended September 30, 2023.

The impairment charge is the result of the Company's Step-1 goodwill impairment test for the hemp/cannabis reporting unit, which reflected a decrease in the future expected cash flows related to bulk ingredient and CDMO+D product sales, along with increases in discount rates to reflect the uncertainty of future cash flows. Estimating the fair value of goodwill requires the use of estimates and significant judgments that are based on a number of factors, including unobservable level 3 inputs. These estimates and judgments may not be within the control of the Company and accordingly it is reasonably possible that the judgments and estimates could change in future periods.

18

Other Intangible Assets, Net

Our other intangible assets, net at September 30, 2023 and December 31, 2022 consisted of the following:

Gross

Accumulated

 

Net Carrying

September 30, 2023

    

Carrying Amount

    

Amortization

 

Impairment

Amount

Definite-lived:

Patent

$

5,838

$

(3,883)

$

$

1,955

License fees

 

7,446

(2,209)

(3,037)

2,200

Customer relationships

5,800

(737)

(5,063)

Total amortizing intangible assets

$

19,084

$

(6,829)

$

(8,100)

$

4,155

Indefinite-lived:

 

Tradename and trademarks

$

3,340

NA

$

(3,147)

$

193

U.K. FSA portfolio1

1,770

NA

(1,770)

MSA signatory costs

2,202

NA

-

2,202

License fee for predicate cigarette brand

350

NA

-

350

Total indefinite-lived intangible assets

$

7,662

NA

$

(4,917)

$

2,745

Total intangible assets, net

$

26,746

$

(6,829)

$

(13,017)

$

6,900

1 includes foreign exchange fluctuation, which for the three and nine month period ended September 30, 2023 was not material

Gross

Accumulated

 

Net Carrying

December 31, 2022

    

Carrying Amount

    

Amortization

 

Amount

Definite-lived:

Patent

$

6,513

$

(3,711)

$

2,802

License fees

 

3,876

(1,446)

2,430

Customer relationships

5,800

(20)

5,780

Total amortizing intangible assets

$

16,189

$

(5,177)

$

11,012

Indefinite-lived:

 

Tradename and trademarks

 

$

3,289

MSA signatory costs

2,202

License fee for predicate cigarette brand

 

350

Total indefinite-lived intangible assets

$

5,841

Total intangible assets, net

$

16,853

See Note 2 “Business Acquisitions” for additional details regarding goodwill and intangible assets acquired as a result of the acquisitions of RXP and GVB, including any measurement period adjustments.

When acquiring certain assets, the Company assesses whether the acquired assets are a result of a business combination or a purchase of an asset. During the second quarter of 2023, the Company acquired a set of similar identifiable intangible assets relating to a license to manufacture and distribute Cookies branded hemp-derived hemp/cannabis products to retailers within the United States. The Company purchased the license for 333,334 shares of common stock and capitalized $75 of costs associated with acquiring the license as an intangible asset. The resulting intangible asset of $3,645 was being amortized over 3 years. Subsequently, during the third quarter of 2023, the Cookies license was written-off and fully impaired in the amount of $3,037.

During the three and nine months ended September 30, 2023, the Company abandoned, impaired and recorded a write-off of $135 related to tobacco patents and equipment and $834 of hemp/cannabis patents and licenses that were deemed to have no future use relative to the Company’s ongoing strategy.

In connection with the events and circumstances that led to an impairment triggering event identified for the hemp/cannabis reporting unit during the third quarter of 2023, the Company evaluated the recoverability of its hemp/cannabis other intangible assets, net and long-lived assets to determine whether any assets or asset groups were impaired. The Company determined that the carrying value of certain tradenames, patents and license intangible assets, net were greater than their fair value, as these intangible assets

19

related to hemp/cannabis operations. Therefore, the Company recorded additional provision for impairment in the amount of $9,980. Additionally, through a similar analysis, the Company recorded provision for impairment of $5,876 for hemp/cannabis manufacturing equipment property, plant and equipment and $4,034 for hemp/cannabis operating lease right-of-use assets related to manufacturing facilities. The undiscounted cash flow analysis and fair value determination requires the use of estimates and significant judgments that are based on a number of factors, including unobservable level 3 inputs. These estimates and judgments may not be within the control of the Company and accordingly it is reasonably possible that the judgments or estimates could change in future periods.

During the third quarter of 2023, the Company also reviewed the portfolio of tobacco related patents, licenses, and intellectual property recorded as other intangible assets, net, indefinite lived intangible assets, and long-lived assets and concluded based on the nature and use of the related assets, the events and circumstances identified did not require further recoverability analysis to be performed. The Company record impairment charges of $55 related to certain corporate property, plant and equipment assets.

Aggregate intangible asset amortization expense comprises of the following:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Cost of goods sold

$

3

$

3

$

9

$

8

Sales, general, and administrative

543

12

1,324

12

Research and development

 

180

 

163

 

526

 

482

Total amortization expense

$

726

$

178

$

1,859

$

502

Estimated future intangible asset amortization expense based on the carrying value as of September 30, 2023 is as follows:

 

Remainder of 2023

 

2024

 

2025

 

2026

2027

Thereafter

Amortization expense

$

164

$

655

$

655

$

547

$

520

$

1,614

NOTE 5. – INVESTMENTS & OTHER ASSETS

The total carrying value of the Company’s investments at September 30, 2023 and December 31, 2022 consisted of the following:

September 30, 

December 31, 

2023

2022

Change Agronomy Ltd. ordinary shares

    

$

682

    

$

682

Total investments

$

682

$

682

Investment in Change Agronomy Ltd.

On December 10, 2021, the Company entered into a subscription agreement to invest £500 (pounds sterling, in thousands), in exchange for 592,888 ordinary shares of Change Agronomy Ltd. (“CAL”), a private company existing under the laws of England, at a price per share of £0.84333. CAL is a vertically integrated sustainable industrial hemp business that combines world-class genetics with leading agronomic techniques and infrastructure to provide full-service industrial hemp products to multiple global end markets. CAL presently has operations in Manitoba, Canada, and Italy. This equity investment was part of an Offer for Subscription by CAL for a minimum total of £3,000 at the same price per ordinary share. Approximately U.S. $682 in funds were wired to CAL on January 26, 2022, and our investment of £500 equates to approximately 1.8% of CAL’s total equity.

In accordance with ASU 2019-04, a foreign currency-denominated equity investments that are measured using the measurement alternative are nonmonetary items that should be remeasured using their historical exchange rates. Accordingly, for the three and nine months ended September 30, 2023 and 2022 there is no foreign currency exchange gain or loss recorded in the Condensed Consolidated Statement of Operations and Comprehensive Loss related to the investment in Change Agronomy Ltd.

20

During the three and nine months ended September 30, 2023 and 2022, respectively, there were no impairment triggering events identified for investments.

Panacea Investment – Promissory Note:

On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc. (“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders. The promissory note was issued in the amount of $4,300 (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0% interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado.

The Promissory note receivable was originally valued at $3,684 ($4,300 face value less $616 discount) and is included within the Condensed Consolidated Balance Sheets as “Other Assets.” Subsequently, on December 31, 2022 the Company and Panacea Life Sciences Holdings, Inc. entered into a settlement agreement in which the Company agreed to a reduction to the face value of the Promissory note receivable of $500, in exchange for resolution to all contractual requirements from the June 30, 2021 Promissory Note Exchange Agreement and Securities Exchange Agreement surrounding the investment and business relationship. Accordingly, the Company recognized an extinguishment charge of note receivable of $500 less adjusted discount of $51 during the year-ended December 31, 2022. As of September 30, 2023, the Company intended to hold the remaining outstanding Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note. As of October 16, 2023, the Promissory note was fully assigned; refer to Note 17 “Subsequent events”

The following table provides the promissory note receivable balance:

September 30, 

December 31,

2023

2022

Promissory note receivable

$

3,490

$

3,410

NOTE 6. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its short-term investment securities and equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.

The following table presents information about our assets and liabilities measured at fair value as of September 30, 2023 and December 31, 2022, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Fair Value

September 30, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Restricted cash

7,500

7,500

Change Agronomy Ltd. ordinary shares

682

682

Total assets

$

7,500

$

$

682

$

8,182

Liabilities

Detachable warrants

$

$

$

3,675

$

3,675

Contingent consideration

952

952

Total liabilities

$

$

$

4,627

$

4,627

21

Fair Value

December 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Money market funds

$

10,163

$

$

$

10,163

Corporate bonds

 

 

7,031

 

 

7,031

U.S. treasury securities

 

 

999

 

 

999

Change Agronomy Ltd. ordinary shares

682

682

Total assets

$

10,163

$

8,030

$

682

$

18,875

Money market funds

Money market mutual funds are valued at their daily closing price as reported by the fund. Money market mutual funds held by the Company are open-end mutual funds that are registered with the SEC that generally transact at a stable $1.00 Net Asset Value (“NAV”) representing its estimated fair value. On a daily basis the fund’s NAV is determined by the fund based on the amortized cost of the funds underlying investments.

Corporate bonds

Corporate bonds are valued using pricing models maximizing the use of observable inputs for similar securities.

The following tables sets forth a summary of the Company’s available-for-sale debt securities from amortized cost basis to fair value as of December 31, 2022:

Available for Sale Debt Securities

December 31, 2022

Amortized

Gross

Gross

Cost

Unrealized 

Unrealized 

Fair

    

Basis

    

Gains

    

Losses

    

Value

Corporate bonds

$

7,143

$

$

(112)

$

7,031

The following table sets forth a summary of the Company’s available-for-sale securities at amortized cost basis and fair value by contractual maturity as of December 31, 2022:

December 31, 2022

Amortized

    

Cost Basis

    

Fair Value

Due in one year or less

$

7,143

$

7,031

Investment in Change Agronomy

The investment in Change Agronomy Ltd. is in a privately held company and its stock does not have a readily determinable fair value; therefore, the investment is carried at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer.

Contingent Consideration

On January 19, 2023, the Company acquired the assets and liabilities of RXP, a privately-held company based in the U.K. The contingent consideration at September 30, 2023 is the estimated fair value of the Company’s obligations, under the sale and purchase agreement for RXP, to make additional equity based payments if certain revenue goals are met.

22

The following table presents the changes in the estimated fair values of the Company’s liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2023:

Fair value measurement at January 1, 2023

$

Initial measurement (see Note 2)

1,138

Fair value measurement adjustment

22

Fair value measurement at March 31, 2023

$

1,160

Fair value measurement adjustment

(217)

Fair value measurement at June 30, 2023

$

943

Fair value measurement adjustment

9

Fair value measurement at September 30, 2023

$

952

As of September 30, 2023, the current portion of contingent consideration liabilities included in Other current liabilities was $606, and the non-current portion included in Other long-term liabilities on the Condensed Consolidated Balance Sheets was $346.

The following table provides quantitative information associated with the fair value measurement of the Company’s liabilities for contingent consideration as of September 30, 2023:

Maximum Payout

Weighted Average

Contingency Type

(undiscounted)

Fair Value

Unobservable Inputs

or Range

Revenue-based payments

$

1,550

$

952

Discount rate

15

%

Projected year(s) of payment

2024-2026

Detachable Warrants

The following table sets forth a summary of the changes in fair value of the Company’s stock warrants accounted for as liabilities (Level 3 asset) for the period ended September 30, 2023:

Fair value measurement at January 1, 2023

$

Initial measurement (see Note 1 and 10)

4,214

Fair value measurement adjustment

139

Fair value measurement at March 31, 2023

$

4,353

Fair value measurement adjustment

584

Fair value measurement at June 30, 2023

$

4,937

Fair value measurement adjustment

(1,262)

Fair value measurement at September 30, 2023

$

3,675

The detachable warrants are measured at fair value using certain estimated factors which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs that are used in the fair value measurement of the Company’s detachable warrants include the volatility factor, anti-dilution provisions, and contingent put option. Significant increases or decreases in the volatility factor would have resulted in a significantly higher or lower fair value measurement. Additionally, a change in probability regarding the anti-dilution provision or put option would have resulted in a significantly higher or lower fair value measurement.

23

The JGB detachable warrants were measured at September 30, 2023 using a Monte Carlo valuation model with the following assumptions:

Risk-free interest rate per year

 

4.6

%

Expected volatility per year

 

97.9

%

Expected dividend yield

 

%

Contractual expiration

 

4.9

years

Exercise price

$

12.828

Stock price

$

0.98

The Omnia detachable warrants were measured at September 30, 2023 using a Monte Carlo valuation model with the following assumptions:

Risk-free interest rate per year

 

4.6

%

Expected volatility per year

 

90.9

%

Expected dividend yield

 

%

Contractual expiration

 

6.9

years

Exercise price

$

12.828

Stock price

$

0.98

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three months ended September 30, 2023, the Company’s non-recurring fair value measurements consisted of the fair value of impaired long-lived assets, including goodwill, other intangible assets, net, and property, plant and equipment, net that were determined using Level 3 inputs. See Note 4 “Goodwill and Other Intangible Assets, Net”. During the three months ended September 30, 2022, the Company did not have any financial assets or liabilities measured at fair value on a nonrecurring basis.

NOTE 7. DEBT

The Company has a senior secured credit facility (the “Senior Secured Credit Facility”), which consists of three-year $21,053 Debentures (as defined below) and $2,865 subordinated promissory note (the “Subordinated Note). The Debentures were issued at a 5% original issuance discount and are subject to a 5% exit payment.

Debt related to the Senior Secured Credit Facility and Subordinate Note as of September 30, 2023, consists of the following:

September 30, 

December 31, 

    

2023

    

2022

Senior Secured Credit Facility

 

$

22,105

 

$

Subordinated Note

3,315

Unamortized discount on loan and deferred debt issuance costs

(7,255)

Total current portion of long-term debt

$

18,165

$

24

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 is 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 333,334 shares of common stock for an exercise price of $19.125 per share (the “JGB Warrants”), which had an initial fair value of $4,475 net of issuance costs of $139 (see Note 6 and Note 10). On June 22, 2023, as a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 shares of common stock. There are no further anti-dilution adjustments on such warrants.

The Company was not expected to be in compliance with its financial covenant tied to minimum consolidated Revenues, net of $18,500, for the three months ended September 30, 2023. The Company has obtained a waiver with the lender executed on October 16, 2023; accordingly no event of default has occurred. See Note 17 “Subsequent Events.”

Based on the remaining uncertainty associated with maintaining compliance with the financial covenants through the next four quarters, or one year from the date of issuance of these Condensed Consolidated Financial Statements, the outstanding debt balance under the Senior Secured Credit Facility is presented as Current portion of long term debt on the Condensed Consolidated Balance Sheets.

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 (see Note 8). The accrued PIK interest refinanced from the Original Notes was $365.

 

25

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. For the three and nine months ended September 30, 2023 the PIK Interest accrual amounts were $201 and $450, respectively. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024. The Subordinated Note includes customary event of default provisions. The Subordinated Note is subordinated to the Debenture pursuant to a Subordination Agreement between the Company, the Agent and Omnia.

In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 45,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions, as more fully described in the Omnia Warrants.  The Omnia warrants initial fair value was $1,316 (see Note 6 and 10).

Contractual maturities under the Senior Secured Credit Facility and Subordinate Note for the remainder of 2023 and through maturity, excluding any discounts or premiums, as of September 30, 2023 is as follows:

Remainder of

 

2023

 

2024

 

2025

 

2026

2027

Thereafter

Future minimum principal payments

$

$

2,354

$

$

15,811

$

$

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

Issuance

$

(8,698)

Amortization during the period

171

March 31, 2023

$

(8,527)

Amortization during the period

594

June 30, 2023

$

(7,933)

Amortization during the period

678

September 30, 2023

$

(7,255)

26

NOTE 8. – NOTES & LOANS PAYABLE

The table below outlines our notes payable balances as of September 30, 2023 and December 31, 2022:

September 30, 

December 31, 

    

2023

    

2022

Insurance loans payable

$

1,314

$

780

Vehicle loans

127

128

Total current notes and loans payable

$

1,441

$

908

Bridge loan

$

$

2,814

Vehicle loans

156

187

Total long-term notes and loans payable

$

156

$

3,001

Insurance loans payable

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.

During the second quarter of 2022, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $2,394. The Company paid $400 as a premium down payment and financed the remaining $1,994 of policy premiums over ten months at a 3.25% annual percentage rate. Additionally, during the third quarter of 2022, the Company expanded its D&O coverage as a result of the acquisition of GVB, resulting in an additional premium down payment of $90 and financing of $168, under the same terms as the original one-year policy.

The Company also has other insurance loans payables related to pollution, property, and general liability across the Company.

GVB Bridge Note

In connection with the acquisition of GVB in May 2022 (see Note 2), the Company assumed the outstanding principal balance of 12% secured promissory note in the principal amount of $4,250 (“GVB Bridge Note”). On October 31, 2022, the Company repaid $1,899 (outstanding principal of $1,750 and accrued interest of $149). The remaining outstanding principal of $2,500 and accrued interest of $314 was refinanced on March 3, 2023 and has a maturity date of May 1, 2024 (see Note 7).

Vehicle Loans

The Company has various vehicle loans with monthly payments ranging from $0.8 to $2.1, interest rates ranging from 0% to 11%, and maturity dates ranging from May 2024 to September 2026.

Estimated future principal payments to be made under the above notes and loans payable as of September 30, 2023 are as follows:

Remainder of 2023

$

756

2024

715

2025

68

2026

20

2027

15

Thereafter

23

Total

$

1,597

27

NOTE 9. – OTHER OPERATING EXPENSES, NET

The components of “Other operating expenses, net” were as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Grass Valley fire:

Professional services

$

53

$

$

377

$

Total Grass Valley fire

53

377

Restructuring costs:

Impairment of intangible assets (see Note 4)

13,986

13,986

Impairment of fixed assets

5,931

5,931

Impairment of right-of-use assets

4,034

4,034

Professional services

207

207

Severance (see Note 1)

159

159

Total Restructuring costs

24,317

24,317

Acquisition and transaction costs

218

43

357

882

Needlerock Farms settlement (see Note 11)

9

765

Gain on change in warrant liability (see Note 6)

(1,262)

(540)

Loss (gain) on change in contingent consideration (see Note 6)

9

(186)

Gain on sale or disposal of property, plant and equipment

(2)

(173)

(2)

Total other operating expenses, net

$

23,344

$

41

$

24,917

$

880

Grass Valley fire

In November 2022, there was a fire at our Grass Valley manufacturing facility in Oregon, which manufactures bulk ingredients, primarily CBD isolate and distillate. The Company has incurred continuous expenses throughout 2023 related to consulting, legal and demolition at this facility.

Restructuring costs

During the third quarter of 2023, the Company undertook various restructuring activities in an effort to better align its internal organizational structure and costs with its strategy, as well as preserve liquidity. As a component of the restructuring, the Company has initiated a process to evaluate strategic alternatives with respect to the Company’s assets and implemented cost cut initiatives. These processes included consideration of a range of strategic, operational and financial transactions and alternatives, such as business combinations, asset sales, licensing agreements, alternate financing strategies and other options.

As a result, the Company incurred $24,317 in restructuring costs in the three and nine months ended September 30, 2023, which included costs related to employee termination, professional services and consulting, and long-lived asset impairment.  

28

NOTE 10. – CAPITAL RAISE AND WARRANT ACTIVITY

The following table summarizes the Company’s warrant activity:

Warrants outstanding at January 1, 2023

1,138

Issued

378

Warrants outstanding at March 31, 2023

1,516

Issued

912

Warrants outstanding at June 30, 2023

2,428

Issued

10,304

Warrants outstanding at September 30, 2023

12,732

2022 Registered Direct Offering & Warrant Repricing

On July 21, 2022, the Company and certain institutional investors (the “July 2022 Investors”) entered into a securities purchase agreement (the “July 2022 Securities Purchase Agreement”) relating to the issuance and sale of shares of common stock pursuant to a registered direct offering (the “July 2022 Registered Offering” and, together with the July 2022 Private Placement (as defined below), the “July 2022 Offerings”). The July 2022 Investors purchased approximately $35,000 of shares, consisting of an aggregate of 1,138,221 shares of common stock at a purchase price of $30.75 per share, subject to certain restrictions. The net proceeds to the Company from the July 2022 Offerings, after deducting the fees and the Company’s offering expenses, were $32,484.

Pursuant to the July 2022 Securities Purchase Agreement, in a concurrent private placement, the Company issued and sold to the July 2022 Investors warrants (the “July 2022 Warrants”) to purchase up to 1,138,221 shares of common stock (the “July 2022 Private Placement”). The July 2022 Warrants are exercisable immediately upon issuance at an exercise price of $30.75 per share of common stock, subject to adjustment in certain circumstances, and expire on July 25, 2027.

As a result of the June 19, 2023 offering described below, certain of the July 2022 Investors and the Company entered a warrant reprice letter (the “Warrant Repricing”) and agreed to reduce the exercise price on the previously issued 747,974 warrants owned by the investors participating in the June 19, 2023 offering from $30.75 to $7.05 and to add a provision in the warrants that upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, such exercise price shall be lowered to such price at which the shares were offered. The Warrant Repricing is accounted for as a modification of a freestanding equity-classified written call option, and therefore resulted in an immediate and incremental increase of approximately $2,025 in the estimated fair value of the related 747,974 warrants, recorded as a component of Capital in excess of par value, with an offsetting equal amount recorded as equity issuance costs.

As a result of subsequent offerings, the exercise price on 747,974 warrants was automatically adjusted triggering non-cash deemed dividend as a result of the down-round adjustments. In July 2023 the exercise price was adjusted to $3.80 and $2.42, respectively, and further in October 2023 was adjusted to $0.525. See “Subsequent Events.”

The remaining 390,247 previously issued July 2022 Warrants were not repriced and remain at an exercise price of $30.75 on their original terms.

June 19, 2023 Registered Direct Offering  

On June 19, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of shares of approximately $5,300 of shares and warrants, consisting of an aggregate of 747,974 shares of common stock and 747,974 warrants to purchase an equal number of shares, at a purchase price of $7.05 per unit.  The net proceeds to the Company from the offering were approximately $4,800.

The warrants were exercisable immediately upon issuance at an exercise price of $7.05 per share of common stock, expire on June 22, 2028 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.

29

As a result of the offerings, the exercise price on the 747,974 warrants was automatically adjusted triggering non-cash deemed dividend as a result of the down-round adjustments. In July 2023 the exercise price was adjusted to $3.80 and $2.42, respectively, and further in October 2023 was adjusted to $0.525. See “Subsequent Events.”

July 6, 2023 Registered Direct Offering.  

On July 6, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $3,000 of shares and warrants, consisting of an aggregate of 778,634 shares of common stock and 1,557,268 warrants to purchase an equal number of shares, at a purchase price of $3.80 per unit. The warrants are exercisable six months after issuance at an exercise price of $3.80 per share of common stock and expire on January 10, 2029. The net proceeds to the Company from the offering were approximately $2,722.

As a result of subsequent offerings, the exercise price on 1,557,268 warrants was automatically adjusted triggering non-cash deemed dividend as a result of the down-round adjustments. In July 2023 the exercise price was adjusted to $2.42 and further in October 2023 was adjusted to $0.525. See “Subsequent Events.”

July 19, 2023 Registered Direct Offering.  

On July 19, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $11,700 of shares and warrants, consisting of an aggregate of 4,373,219 shares of common stock and 8,746,438 warrants to purchase an equal number of shares, at a purchase price of $2.67 per unit. The warrants are exercisable immediately at an exercise price of $2.42 per share of common stock and expire five years after issuance. The net proceeds to the Company from the offering were approximately $10,742.

As a result of a subsequent offering, the exercise price on 8,746,438 warrants was automatically adjusted triggering non-cash deemed dividend as a result of the down-round adjustment. In October 2023 the exercise price was adjusted to $0.525. See “Subsequent Events.”

March 2023 JGB Warrants

 

In connection with the sale of the Debentures, the Company issued the JGB Warrants to purchase up to 333,334 shares of common stock for an exercise price of $19.125 per share. The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $19.125 per share, determined as a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The JGB warrants initial fair value of $4,475 net of issuance costs of $139 (see Note 6), of which half of the warrants meet the criteria for liability classification due to a contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $15.00 upon certain conditional events such as change in control or event of default. Accordingly, half of the warrants are classified as Other long-term liabilities on the Condensed Consolidated Balance Sheets. The remainder of the JGB warrants are equity classified and recorded as a component of Capital in excess of par value.

As a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 shares of common stock. As a result of the anti-dilution provision being triggered, the Company recognized a non-cash deemed dividend of $367 in connection with these adjustments, recorded on the Condensed Consolidated Statement of Operations and Comprehensive Loss and within Capital in excess of par value (as the Company has an accumulated deficit and therefore the deemed dividend is treated as paid out of Capital in excess of par value). There are no further anti-dilution adjustments on such warrants.

The Company redeemed 166,667 of such warrants for an aggregate put price equal to $2,500.  See Note 17 “Subsequent Events.”  

30

The JGB detachable warrants were valued at the closing dates of the Senior Secured Credit Facility using a Monte Carlo valuation model with the following assumptions:

Risk-free interest rate per year

 

4.2

%

Expected volatility per year

 

88.1

%

Expected dividend yield

 

%

Contractual expiration

 

5.5

years

Exercise price

$

19.125

Stock price

$

13.65

March 2023 Omnia Warrants

 

In connection with the Subordinated Note, the Company issued to Omnia, the Omnia Warrants to purchase up to 45,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The Omnia warrants initial fair value was $1,316 (see Note 6), and meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $30.00 upon certain conditional events such as change in control or event of default. The Omnia warrants are classified as Other long-term liabilities on the Condensed Consolidated Balance Sheets.

The Omnia detachable warrants were valued at the closing dates of the Subordinated Note using a Monte Carlo valuation model with the following assumptions:

Risk-free interest rate per year

 

4.1

%

Expected volatility per year

 

83.8

%

Expected dividend yield

 

%

Contractual expiration

 

7.5

years

Exercise price

$

12.828

Stock price

$

13.65

ATM Offering

On March 31, 2023, the Company established an at-the-market common equity offering program (“ATM Program”), through which it may, through which it had the ability to offer and sell shares of common stock having an aggregate gross sales price of up to $50,000. The Company paid a 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold. On June 19, 2023, the Company terminated the ATM Program in connection with the June 2023 Capital Raise. The following table shows the number of shares sold under the ATM Program prior to its termination:

Nine Months Ended

September 30, 

(in thousands, except for per-share data)

    

2023

Number of common shares issued

284

Weighted average sale price per share

$

9.65

Gross proceeds

$

2,741

Net proceeds

$

2,563

31

NOTE 11. - COMMITMENTS AND CONTINGENCIES

License agreements and sponsored research – The Company has entered into various license, sponsored research, collaboration, and other agreements (the “Agreements”) with various counterparties in connection with the Company’s plant biotechnology business relating to tobacco, hemp/cannabis and hops. 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.

A

Future Commitments

Commitment

 

Counter Party

 

Product Relationship

 

Commitment Type

 

2023

 

2024

 

2025

 

2026

2027 & After

Total

    

Research Agreement

KeyGene

Hemp / Cannabis / Hops

Contract fee

$

1,824

$

2,081

$

1,589

$

1,302

$

328

$

7,124

(1)

License Agreement

NCSU

Tobacco

Minimum annual royalty

100

100

100

1,000

1,300

(2)

Research Agreement

NCSU

Tobacco

Contract fee

95

114

209

(3)

Growing Agreements

Various

Tobacco

Contract fee

119

127

246

(4)

$

2,038

$

2,422

$

1,689

$

1,402

$

1,328

$

8,879

(1)Exclusive agreement with the Company in the field of the Cannabis Sativa L. plant. The initial term of the agreement was five years with an option for an additional two years. 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, and preserves the Company’s option for an additional 2-year extension, now through first quarter of 2029. On March 30, 2022, the Company and KeyGene entered into a new Framework Collaborative Research Agreement for a term of three years at an aggregate cost of $1,830 in the field related to the hops plant.

The Company will exclusively own all results and all intellectual property relating to the results of the collaboration with KeyGene (the "Results”). The Company will pay royalties in varying amounts to KeyGene relating to the Company's commercialization in the stated fields of each agreement. The Company has also granted KeyGene a license to commercialize the Results outside of each field and KeyGene will pay royalties in varying amounts to the Company relating to KeyGene's commercialization of the Results outside of each field.

(2)The minimum annual royalty fee is credited against running royalties on sales of licensed products. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred, including capitalized patent costs and patent maintenance costs. These costs vary from year to year and the Company has certain rights to direct the activities that result in these costs. Additionally, see Note 17 “Subsequent events.”
(3)On August 4, 2023, the Company entered into a one-year Sponsored Project Agreement with NCSU for continued research of tobacco alkaloid formation.
(4)Various R&D growing agreements for tobacco.

32

Litigation - In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability. 

Class Action

On January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Matthew Bull, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 1:19 cv 00409.

On January 29, 2019, Ian M. Fitch, a resident of Essex County Massachusetts, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Ian Fitch, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 2:19 cv 00553.

On May 28, 2019, the plaintiff in the Fitch case voluntarily dismissed that action. On August 1, 2019, the Court in the Bull case issued an order designating Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.

On September 16, 2019, pursuant to a joint motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western District of New York, where it remains pending as Case No. 1:19-cv-01285.

Plaintiffs in the Bull case filed an Amended Complaint on November 19, 2019 that alleges three counts: Count I sues the Company and Messrs. Sicignano and Brodfuehrer and alleges that the Company's quarterly and annual reports, SEC filings, press releases and other public statements and documents contained false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5; Count II sues Messrs. Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c); and Count III sues Messrs. Sicignano and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act. The Amended Complaint seeks to certify a class, and unspecified compensatory and punitive damages, and attorney's fees and costs.

33

On January 29, 2020, the Company and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On January 14, 2021, the Court granted the motion, dismissing all claims with prejudice. The Plaintiffs filed a notice of appeal on February 12, 2021 to the Second Circuit Court of Appeals. On May 24, 2022, after briefing and oral argument, the Second Circuit issued an order affirming in part, and reversing in part, the District Court’s dismissal order. The Second Circuit affirmed the District Court’s dismissal of the claims relating to the non-disclosure of stock promotion articles, but reversed the District Court’s dismissal order of the claims alleging the non-disclosure of an SEC investigation. The Second Circuit noted in its opinion, however, that the District Court had not addressed certain arguments raised by the Company and Messrs. Sicignano and Brodfuehrer in the Motion to Dismiss the Amended Complaint as to these remaining claims, and remanded the case to the District Court to address these arguments for the dismissal of the remaining claims. On August 8, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a renewed motion to dismiss the remaining claims in the Amended Complaint to address the arguments not previously addressed by the District Court. On September 22, 2022, Plaintiffs filed a brief in opposition to the motion. On October 12, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a reply brief in further support of the motion. On January 6, 2023, the District Court denied the motion to dismiss, and the case will proceed forward on the remaining claims.

The parties participated in a mediation on March 21, 2023 and reached an initial memorandum of understanding for settlement in principle to resolve the litigation and release all claims against the Company. On April 25, 2023, the parties filed with the Court the Motion for Preliminary Approval of the Settlement, which includes the final terms of the proposed settlement. The Court preliminarily approved the settlement on June 30, 2023, and scheduled a further settlement hearing for October 3, 2023. The Court entered the Final Judgment and Order of Dismissal with Prejudice of the action on October 23, 2023. The settlement amount that the defendants paid is $3,000 and is fully covered by the Company’s insurance, which has been funded by the Company’s insurance carrier in an escrow account and anticipated to be disbursed in the fourth quarter of 2023. Accordingly, the Company has recorded an accrual for litigation settlement and corresponding indemnification receivable on the Condensed Consolidated Balance Sheets as of September 30, 2023.

Shareholder Derivative Cases

On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement.

On February 11, 2019, Stephen Mathew filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Stephen Mathew, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, John T. Brodfuehrer, Richard M. Sanders, Joseph Alexander Dunn, James W. Cornell, Nora B. Sullivan and 22nd Century Group, Inc., Index No. 801786/2019. Mr. Mathew brings this action derivatively generally alleging the same allegations as in the Klein case. The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.

On August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation by the parties (Western District of New York, Case No. 1-19-cv-0513). On May 3, 2019, the Court ordered the Mathew case stayed. This stay was applied to the Consolidated Action pursuant to the Court’s August 15, 2019 Order Consolidated Related Shareholder Derivative Actions and Establishing a Leadership Structure. As a result of the Court’s denial of the renewed Motion to Dismiss the Amended Complaint, the May 3, 2019 stay will be lifted. No trial date has been set. We intend to vigorously defend the Company and the individual defendants against such claims.

34

On June 10, 2019, Judy Rowley filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Judy Rowley, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer, and 22nd Century Group, Inc., Index No. 807214/2019. Ms. Rowley brought the action derivatively alleging that the director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements. The Complaint sought declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs. We intend to vigorously defend the Company and the individual defendants against such claims. On September 13, 2019, the Court ordered the litigation stayed pursuant to a joint stipulation by the parties. On August 3, 2022, Plaintiff dismissed the case with prejudice by filing a stipulation of discontinuance with the Court. This dismissal was not pursuant to a settlement.

On January 15, 2020, Kevin Broccuto filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Kevin Broccuto, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Broccuto brings this action derivatively alleging three counts: Count I alleges that the defendants breached their fiduciary duties; Count II alleges they committed corporate waste; and Count III that they were unjustly enriched, by allegedly allowing the Company to make false statements.

On February 11, 2020, Jerry Wayne filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Jerry Wayne, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Wayne brings this action derivatively alleging generally the same allegations as the Broccuto case. The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement of alleged profits and imposition of constructive trusts, and attorney's fees and costs. The Complaint also seeks to declare as unenforceable the Company's Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company is headquartered.

On March 25, 2020, the Court ordered the Broccuto and Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties. On June 27, 2022, the Court ordered that the stay continue until thirty (30) days after the District Court rules on the renewed Motion to Dismiss the Amended Complaint in the Noto Class Action case. As a result of the Court’s denial of the Motion to Dismiss the Amended Complaint, the June 27, 2022 stay will be lifted. No trial date has been set. The parties participated in a mediation on March 21, 2023, and a subsequent mediation on October 17, 2023, which process is continuing.

We intend to vigorously defend the Company and the individual defendants against such claims.

Insurance Litigation 

In November 2022, there was a fire at the Company’s Grass Valley manufacturing facility in Oregon, which resulted in a total loss of the facility. The Company submitted an insurance claim with Dorchester Insurance Company, Ltd. (“Dorchester”) for casualty loss and business interruption coverage which was acknowledged on November 23, 2022. Dorchester funded $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, breach of duty of good faith and fair dealing and negligence per se. The Company is seeking full recovery of its business interruption claim under the policy plus direct, indirect and consequential damages resulting from Dorchester’s continued delay in issuing coverage payments. Discovery is ongoing.

Needle Rock Farms – Settlement Agreement

35

During March 2023, the Company negotiated and entered into a settlement agreement related to a water rights dispute with the adjacent property owner for Needle Rock Farms in which the Company agreed to pay $250 in cash upon execution of the settlement, transferred certain farm equipment with net book value of $272, and accrued an additional payment of $225 that is contingent on either the sale of the farm or will be paid within one year. The total charges of $747 recorded in connection with the settlement agreement is included within Other operating expenses, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

NOTE 12 – EQUITY- BASED COMPENSATION

The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders and are administered by the Compensation Committee of the Company’s Board of Directors. The stock-based compensation plans provide for the granting of stock options, time and performance based restricted stock units (RSU’s), among other awards to employees, non-employee directors, consultants, and service providers. The 2021 Omnibus Incentive Plan was amended on June 16, 2023, increasing the authorized shares by 233,334. As of September 30, 2023, the Company had available 436,775 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, 

    

2023

    

2022

    

2023

    

2022

Sales, general, and administrative

$

555

$

2,201

$

3,099

$

4,431

Research and development

 

21

 

46

 

138

 

135

Total RSUs and stock option compensation

$

576

$

2,247

$

3,237

$

4,566

Restricted Stock Units – We typically grant RSUs to employees and non-employee directors. The following table summarizes the changes in unvested RSUs from January 1, 2023 through September 30, 2023.

Unvested RSUs

Weighted

Average

Number of

Grant-date

    

Shares

    

Fair Value

in thousands

$ per share

Unvested at January 1, 2023

 

269

$

31.88

Granted

 

293

12.44

Vested

(122)

31.16

Forfeited

(2)

36.35

Unvested at March 31, 2023

438

19.06

Vested

(25)

22.47

Forfeited

(22)

17.77

Unvested at June 30, 2023

391

18.92

Forfeited

(75)

20.86

Unvested at September 30, 2023

316

$

18.45

The fair value of RSUs that vested during the nine months ended September 30, 2023 was approximately $1,838 based on the stock price at the time of vesting. As of September 30, 2023, unrecognized compensation expense for RSUs amounted to $3,280 which is expected to be recognized over a weighted average period of approximately 1.7 years. In addition, there is approximately $786 of unrecognized compensation expense that requires the achievement of certain milestones which are not yet probable.

36

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, 2023. A summary of the status of stock options activity since January 1, 2023 and at September 30, 2023 is as follows:

Weighted

Weighted

Average

Average

Remaining

Aggregate

Number of

Exercise

Contractual

Intrinsic

    

Options

    

Price

    

Term

    

Value

in thousands

$ per share

Outstanding at January 1, 2023

 

327

$

24.82

 

  

 

 

  

Expired

 

(7)

$

41.40

 

  

 

 

  

Outstanding at March 31, 2023

 

320

$

24.74

 

2.1

years

 

$

Outstanding at June 30, 2023

320

$

24.74

1.8

years

$

Expired

(92)

$

21.34

Outstanding at September 30, 2023

228

$

26.12

2.0

years

$

Exercisable at September 30, 2023

 

221

$

25.74

 

1.9

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.

As of September 30, 2023, there is approximately $190 of unrecognized compensation expense for stock options that requires the achievement of certain milestones which are not yet probable.

NOTE 13. – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted loss per common share for the three and nine months ended September 30, 2023 and 2022, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

(in thousands, except for per-share data)

Net loss

$

(72,720)

$

(13,102)

$

(111,441)

$

(33,518)

Deemed dividend from trigger of anti-dilution provision feature

(367)

Deemed dividend related to down-round features

(564)

(564)

Net loss available to common shareholders

$

(73,284)

$

(13,102)

$

(112,372)

$

(33,518)

Weighted average common shares outstanding - basic and diluted

 

19,887

14,009

16,411

12,351

Basic and diluted loss per common share

$

(3.68)

$

(0.94)

$

(6.85)

$

(2.71)

Anti-dilutive shares are as follows as of September 30:

Warrants

12,732

1,138

12,732

1,138

Options

228

327

228

327

Restricted stock units

316

212

316

212

13,276

1,677

13,276

1,677

37

NOTE 14. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table is a summary of the components and activity of Accumulated Other Comprehensive Income (Loss) (“AOCI”) for the nine months ended September 30, 2023 and 2022, respectively:

Nine Months Ended September 30, 2023

Corporate

Foreign

securities/

Translation

Pre-tax

Net of

    

investments

    

Adjustment

    

Amount

    

Tax

    

Tax Amount

Balance at January 1, 2023

 

$

(112)

$

1

$

(111)

$

$

(111)

Unrealized gain on short-term investment securities

 

61

61

61

Foreign currency translation

(4)

(4)

(4)

Reclassification of realized losses to net loss

13

13

13

Balance at March 31, 2023

$

(38)

$

(3)

$

(41)

$

$

(41)

Unrealized loss on short-term investment securities

 

10

10

10

Foreign currency translation

42

42

42

Reclassification of realized losses to net loss

28

28

28

Balance at June 30, 2023

$

(0)

$

39

$

39

$

$

39

Foreign currency translation

(69)

(69)

(69)

Balance at September 30, 2023

$

(0)

$

(30)

$

(30)

$

$

(30)

Nine Months Ended September 30, 2022

Corporate

Foreign

securities/

Translation

Pre-tax

Net of

    

investments

    

Adjustment

    

Amount

    

Tax

    

Tax Amount

Balance at January 1, 2022

 

$

(162)

$

$

(162)

$

$

(162)

Unrealized loss on short-term investment securities

 

(400)

(400)

(400)

Balance at March 31, 2022

$

(562)

$

$

(562)

$

$

(562)

Unrealized loss on short-term investment securities

 

(69)

(69)

(69)

Reclassification of realized losses to net loss

108

108

108

Balance at June 30, 2022

$

(523)

$

$

(523)

$

$

(523)

Unrealized loss on short-term investment securities

 

(19)

(19)

(19)

Reclassification of realized losses to net loss

35

35

35

Balance at September 30, 2022

$

(507)

$

$

(507)

$

$

(507)

NOTE 15. – REVENUE RECOGNITION

Tobacco

The Company’s tobacco reportable segment revenues are derived primarily from contract manufacturing organization (“CMO”) customer contracts that consist of obligations to manufacture the customers’ branded filtered cigars and cigarettes. Additional revenues are generated from sale of the Company’s proprietary low nicotine content cigarettes, sold under the brand name VLN®, or research cigarettes sold under the brand name SPECTRUM®.

38

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For certain CMO contracts, the performance obligation is satisfied over time as the Company determines, due to contract restrictions, it does not have an alternative use of the product and it has an enforceable right to payment as the product is manufactured. The Company recognizes revenue under those contracts at the unit price stated in the contract based on the units manufactured. Tobacco revenue from the sale of the Company’s products, which include excise taxes and shipping and handling charges billed to customers, is recognized net of cash discounts, sales returns and allowances. There was no allowance for discounts or returns and allowances at September 30, 2023 and December 31, 2022. Excise taxes recorded in Cost of Goods Sold on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended September 30, 2023 and 2022 were $2,554 and $3,747, respectively. Excise taxes for the nine months ended September 30, 2023 and 2022 were $7,990 and $9,299, respectively.

Hemp/Cannabis

The Company’s hemp/cannabis reportable segment revenues are derived primarily from a CBD wholesale extracts and bulk ingredient distillate or isolate. Additional revenues are generated from private/white label contract manufacturing.

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled. For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.

When applicable, the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.

There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.

Disaggregation of Revenue

The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by major product line because the Company believes it best depicts the nature, amount, and timing of revenue and cash flows. Revenue recognized from Tobacco products transferred to customers over time represented 57% and 63%, respectively, of total Tobacco revenue for the three and nine months ended September 30, 2023, compared to 74% and 73%, respectively, for the three and nine months ended September 30, 2022. Revenue recognized from Hemp/cannabis products is all recognized point-in-time.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Tobacco

$

7,871

$

11,535

$

24,848

$

30,551

Hemp/cannabis

 

9,940

 

7,848

 

38,352

 

12,354

Total revenues, net

$

17,811

$

19,383

$

63,200

$

42,905

39

The following table presents net revenues by significant customers, which are defined as any customer who individually represents 10% or more of disaggregated product line net revenues:

Three Months Ended

September 30, 

    

2023

2022

Tobacco

Hemp/cannabis

Tobacco

Hemp/cannabis

Customer A

37.80

%

*

42.14

%

*

Customer B

18.00

%

*

*

*

Customer C

21.97

%

*

7.06

%

*

Customer D

*

*

14.33

%

*

Customer E

*

12.82

%

*

11.25

%

Customer F

*

25.39

%

*

11.22

%

Customer G

*

*

*

17.52

%

All other customers

22.23

%

61.79

%

36.47

%

60.01

%

*Less than 10% of product line’s total revenues for the period.

Nine Months Ended

September 30, 

2023

2022

Tobacco

Hemp/cannabis

Tobacco

Hemp/cannabis

Customer A

34.92

%

*

23.05

%

*

Customer B

24.44

%

*

23.11

%

*

Customer C

13.72

%

*

14.48

%

*

Customer D

*

*

17.17

%

*

Customer E

*

*

*

*

Customer F

*

18.33

%

*

16.48

%

Customer G

*

*

*

13.41

%

All other customers

26.92

%

81.67

%

22.19

%

70.11

%

*Less than 10% of product line’s total revenues for the period.

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, 

    

2023

    

2022

Unbilled receivables

 

$

1,745

 

$

354

Deferred income

(704)

(831)

Net contract assets (liabilities)

$

1,041

$

(477)

During the nine months ended September 30, 2023, the Company recognized $802 of revenue that was included in the contract liability balance as of December 31, 2022. During the nine months ended September 30, 2022, the Company recognized $119 of revenue that was included in the contract asset balance as of December 31, 2021.

40

N

NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION

The Company organizes its business into two reportable segments: (1) Tobacco and (2) Hemp/Cannabis. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting.

The Company defines segment income from operations as revenues, net less cost of goods sold and expenses attributable to segment-specific selling, general, administrative, research, development, and other operating activities. The remaining unallocated operating and other income and expenses are primarily administrative corporate overhead expenses such as corporate personnel costs, equity compensation, investor relations, strategic consulting, research and development costs that apply broadly to the overall plant science platform, and that are not allocated to reportable segments. Unallocated corporate assets consist of cash and cash equivalents, short-term investment securities, prepaid and other assets, property and equipment, and intangible assets. Transactions between the two segments are not significant.

The following table presents revenues, net by segment for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Tobacco

$

7,871

$

11,535

$

24,848

$

30,551

Hemp/cannabis

9,940

 

7,848

 

38,352

 

12,354

Total revenues, net

$

17,811

$

19,383

$

63,200

$

42,905

The following table presents loss from continuing operations for the Company’s reportable segments for the three and nine months ended September 30, 2023 and 2022:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Tobacco

$

2,798

$

1,674

$

10,072

$

3,337

Hemp/cannabis

62,655

 

4,326

 

74,604

 

7,316

Total segment operating loss

65,453

6,000

84,676

10,653

Unallocated operating expenses

6,029

9,268

23,983

23,238

Operating loss

71,482

15,268

108,659

33,891

Tobacco other (income) expense, net

10

Hemp/cannabis other (income) expense, net

25

136

50

203

Unallocated other expense, net

1,213

279

2,676

2,005

Loss before income taxes

$

72,720

$

15,683

$

111,395

$

36,099

41

The hemp/cannabis segment included impairment charges and write-downs in total of $58,808 recorded during the third quarter of 2023. Refer to Note 1, Note 4, and Note 9 for additional information on the nature of such charges.

The following table presents total assets for the Company’s reportable segments as of September 30, 2023 and December 31, 2022:

September 30, 

December 31, 

    

2023

    

2022

Tobacco

$

21,271

$

15,748

Hemp/cannabis

 

18,747

 

65,965

Total reportable segments

40,018

81,713

Unallocated assets

24,178

32,938

Total assets

$

64,196

$

114,651

The following table presents capital expenditures for the Company’s reportable segments for the nine months ended September 30, 2023 and 2022:

Nine Months Ended

September 30, 

    

2023

    

2022

Tobacco

$

717

$

589

Hemp/cannabis

 

2,864

 

1,495

Total reportable segments

3,581

2,084

Unallocated expenditures for long-lived tangible assets

370

417

Total expenditures

$

3,951

$

2,501

42

NOTE 17. – SUBSEQUENT EVENTS

Senior Secured Credit Facility Amendment

On October 16, 2023, the Company entered into a Waiver and Amendment Agreement (the “ Credit Facility Amendment”) with each of the subsidiaries of the Company executing the Debentures, the Purchasers and the Agent, pursuant to which, among other things, (a) the Purchasers 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 be applied to, and reduce, the outstanding principal amount of the Debentures on a dollar-for-dollar basis.

Additionally, 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 will recognize as a non-monetary transaction, $2,600 of consideration in exchange to be applied as a $2,000 reduction of the Put Price (as defined below) and $600 reduction of the outstanding principal amount of Debentures.

In connection with the waiver, the Company and Purchasers agreed to exercise the outstanding put provision to redeem 166,667 Warrants for an aggregate put price equal to $2,500 (the “Put Price”), which is concurrently reduced by $2,000, as described above, with the remaining $500 payable by the Company on the Maturity Date. No cash was exchanged as a result of executing the Credit Facility Amendment.

The Credit Facility Amendment contains customary reaffirmations, reconfirmations of security interests and subsidiary guarantees, and representations and warranties typical for a waiver and amendment of this type.

Increase in Authorized Shares

 

On October 16, 2023, our stockholders approved an amendment (the “Articles Amendment”) to our Articles of Incorporation, as amended, to increase the number of authorized shares of common stock from thirty-three million three hundred thirty-three thousand and three hundred thirty-four (33,333,334) shares to sixty-six million, six hundred sixty-six thousand sixty hundred sixty-seven (66,666,667), which Articles Amendment was filed and effective with the Secretary of the State of Nevada on October 16, 2023.

October 2023- Public Equity Offering

On October 17, 2023, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell and issue, in a registered public offering, (i) an aggregate of 7,600,000 shares of the Company’s common stock, par value $0.00001 per share, (ii) warrants to purchase 20,000,000 shares of common stock (the “Common Warrants”) and (iii) pre-funded warrants to purchase 2,400,000 shares of common stock (the “Pre-Funded Warrants”). The Common Warrants have an exercise price of $0.525, are immediately exercisable and have a term of exercise equal to five years following the original issuance date. The Pre-Funded Warrants have an exercise price of $0.0001, are immediately exercisable and will be able to be exercised at any time after their original issuance until such Pre-Funded Warrants are exercised in full. The shares were offered at a combined public offering price of $0.525 per share and two accompanying Common Warrants. The Pre-Funded Warrants were offered at a combined public offering price of $0.5249 per Pre-Funded Warrant and two accompanying Common Warrants.

 

In addition, the Company issued the placement agent warrants to purchase up to 1,000,000 shares of common stock (equal to 10% of the aggregate number of shares and Pre-Funded Warrants sold in the offering) at an exercise price of $0.65625, which represents 125% of the public offering price per share and accompanying Common Warrant. The placement agent agreed not to exercise the such warrants until the Company subsequently increases its authorized shares of common stock.

43

The offering closed on October 19, 2023 with gross proceeds to the Company of approximately $5,250, before deducting the placement agent fees of $367 and other offering expenses payable by the Company of approximately $288. As a result of the offering, the exercise price on 11,799,654 previously outstanding warrants were automatically adjusted from $2.42 per share to $0.525 per share.

The Pre-Funded Warrants were subsequently exercised on a cashless basis in October 2023, resulting in issuance of 2,399,512 shares of common stock.

Tobacco - NCSU Technology License

The Company signed on November 1, 2023, an additional reduced nicotine content technology license with North Carolina State University. On the date of signing, the Company paid to NCSU a non-refundable license fee of $250 and as partial consideration the Company will grant NCSU an award of common stock equal to $100 within fifteen business days. Additional consideration will be paid at successive intervals of the license following a schedule over two years for a total of up to $650, unless earlier terminated by the Company.

The latest license provides additional modes of efficiently producing reduced nicotine content tobacco plants, extending the Company’s already extensive IP portfolio. The license will provide the Company exclusive rights to the technology, which the term shall continue on a country by-country basis until the date of expiration of the last to expire of the patent rights and/or plant variety rights, including any renewals or extensions thereof, or nineteen (19) years from the effective date of this license agreement if no patents in the patent rights and/or plant variety rights are issued in the applicable country.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as our Condensed Consolidated Financial Statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1 of this Form 10-Q.

For purposes of this MD&A, references to the “Company,” “we,” “us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein. In addition, dollars are in thousands, except per share data or unless otherwise specified.

Forward Looking Statements

Except for historical information, all of the statements, expectations, and assumptions contained in this section are forward-looking statements. Forward-looking statements typically contain terms such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “explore,” “foresee,” “goal,” “guidance,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “preliminary,” “probable,” “project,” “promising,” “seek,” “should,” “will,” “would,” and similar expressions. Forward looking statements include, but are not limited to, statements regarding (i) our ability to continue as a going concern, (ii) our expectations regarding our debt obligations, (iii) our financial and operating performance, (iv) our strategic alternatives, including our cost savings initiatives, (v) our expectations regarding regulatory enforcement (vi) our products, and (vii) the volatility of our common stock and warrants. Actual results might differ materially from those explicit or implicit in forward-looking statements. Important factors that could cause actual results to differ materially are set forth in “Risk Factors” herein and in our Annual Report on Form 10-K filed on March 9, 2023. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law. All information provided in this quarterly report is as of the date hereof, and we assume no obligation to and do not intend to update these forward-looking statements, except as required by law.

44

Our Business

22nd Century Group, Inc. is a leading biotechnology company focused on utilizing advanced plant technologies to improve health and wellness with reduced nicotine tobacco, hemp/cannabis and hops.

On September 5, 2023, the Company announced its intent to explore strategic alternatives, including engaging financial advisors, in an effort to maximize shareholder value. While the initial focus was primarily on 22nd Century Inc.’s tobacco portfolio, the Company subsequently received indications of interest regarding its other assets, in addition to tobacco. The Company continues to be committed to the process of exploring a wide range of strategic, operational, and financial transactions and alternatives. We have also engaged a financial advisor to assist us in this strategic process with respect to identifying strategic partners and financing to fund operations and to take actions to maximize our liquidity.  If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations.

Recent Highlights and Other Events

Capital Markets Transactions
oThe Company completed registered direct offerings in July 2023, for total gross proceeds of approximately $14,635, before expenses and a public offering in October 2023 for total gross proceeds of approximately $5,250, before expenses.
oIn October 2023, the Company reduced the outstanding principle of it Senior Secured Credit Facility by $8,100.
Cost Savings & Reduction of Operating Expenses
oDuring July 2023, the Company implemented a cost savings initiative intended to simplify operations as it continues to tighten its focus on key end markets and operating strategies resulting in an estimated $15,000 in annualized cost reductions across its operations once fully in place.

Financial Overview

Net revenues for the third quarter of 2023 were $17,811, a decrease of 8.1% from $19,383 in 2022.
oRevenue from tobacco-related products for the third quarter was $7,871 compared to $11,535 in the prior year period reflecting a decrease in unit sales of filtered cigars, partially offset by increases in unit sales of cigarettes and export cigarettes.
oRevenue from hemp/cannabis-related products was $9,940, compared to $7,848 in the prior year third quarter, due to continued strong volume for bulk ingredient sales.
Gross profit for the third quarter of 2023 was a loss of $1,966 compared to profit of $619 in the prior year period.
oGross profit from tobacco-related products was a profit of $77, a decrease of $559 compared to the prior year period, reflecting lower unit sales in contract manufacturing products and increases in tobacco excise taxes.
oGross profit from hemp/cannabis-related products was a loss of $2,043 compared to a loss of $17 in the prior year. In connection with evaluation of strategic alternatives for the Company’s assets and cost cut initiatives, during the third quarter of 2023, the Company increased the reserve for excess, obsolete or expired hemp/cannabis inventory by $1,687.
Total operating expenses for the third quarter of 2023 increased to $69,516 compared to $15,887 in the prior year quarter driven by:
oSales, general and administrative expenses decreased to $11,199 compared to $14,528 in the prior year period, primarily driven by lower compensation and benefits and strategic consulting, partially offset by higher sales and marketing expenses and royalty, license and contract costs.

45

oResearch development expenses increased to $1,613, compared to $1,318 in the prior year period, driven by higher contract costs.
oOther operating expenses, net was $23,344, primarily reflecting restructuring costs of $24,317, including impairment charges, partially offset by the change in fair value of warrant liabilities.
oIn connection with initiating a process to review strategic alternatives for the Company’s assets and implementing cost cut initiatives, during the third quarter of 2023, the Company recorded a goodwill impairment charge of $33,360.
Operating loss for the third quarter 2023 was $71,482, compared to a loss of $15,268 in the prior year period for the reasons described above.
Net loss in the third quarter of 2023 was $72,720 and basic and diluted loss per common share was $3.68 compared with net loss in the third quarter of 2022 of $13,102, and basic and diluted net loss per common share of $0.94.
As of September 30, 2023, we had $2,850 in cash and cash equivalents and $7,500 in restricted cash pursuant to the Senior Secured Credit Facility. In October 2023, the restricted cash was subsequently used to pay down a portion of the outstanding principle balance under the Senior Secured Credit Facility.

46

Our Financial Results

Three Months Ended

September 30

September 30

Change

    

2023

    

2022

%

Tobacco revenues, net

$

7,871

$

11,535

(3,664)

(31.8)

Hemp/cannabis revenues, net

9,940

7,848

2,092

26.7

Total revenues, net

17,811

19,383

(1,572)

(8.1)

Cost of goods sold

19,777

18,764

1,013

5.4

Gross (loss) profit

(1,966)

619

(2,585)

(417.6)

Gross (loss) profit as a % of revenues, net

(11.0)

%

3.2

%

Operating expenses:

Sales, general and administrative ("SG&A")

11,199

14,528

(3,329)

(22.9)

SG&A as a % of revenues, net

62.9

%

74.9

%

Research and development ("R&D")

1,613

1,318

295

22.4

R&D as a % of revenues, net

9.1

%

6.8

%

Other operating expenses, net ("OOE")

23,344

41

23,303

NM

Goodwill impairment

33,360

-

33,360

NM

Total operating expenses

69,516

15,887

53,629

337.6

Operating loss

(71,482)

(15,268)

(56,214)

368.2

Operating loss as a % of revenues, net

(401.3)

%

(78.8)

%

Other income (expense):

Unrealized loss on investment

-

(345)

345

(100.0)

Realized loss on short-term investment securities

-

(35)

35

(100.0)

Other income, net

(12)

-

(12)

NM

Interest income, net

79

113

(34)

(30.1)

Interest expense

(1,305)

(148)

(1,157)

781.8

Total other expense

(1,238)

(415)

(823)

198.3

Loss before income taxes

(72,720)

(15,683)

(57,037)

363.7

Provision for income taxes

-

(2,581)

2,581

NM

Net loss

(72,720)

(13,102)

(59,618)

455.0

Net loss as a % of revenues, net

(408.3)

%

(67.6)

%

Deemed dividend from trigger of anti-dilution provision feature

-

-

-

NM

Deemed dividend related to down-round features

(564)

-

(564)

NM

Net loss available to common shareholders

$

(73,284)

$

(13,102)

(59,618)

455.0

Net loss per common share (basic and diluted)*

$

(3.68)

$

(0.94)

(2.74)

291.5

NM - calculated change not meaningful

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

47

Nine Months Ended

September 30

September 30

Change

    

2023

    

2022

%

Tobacco revenues, net

$

24,848

$

30,551

(5,703)

(18.7)

Hemp/cannabis revenues, net

38,352

12,354

25,998

210.4

Total revenues, net

63,200

42,905

20,295

47.3

Cost of goods sold

68,688

41,086

27,602

67.2

Gross (loss) profit

(5,488)

1,819

(7,307)

(401.7)

Gross (loss) profit as a % of revenues, net

(8.7)

%

4.2

%

Operating expenses:

Sales, general and administrative ("SG&A")

39,971

30,475

9,496

31.2

SG&A as a % of revenues, net

63.2

%

71.0

%

Research and development ("R&D")

4,923

4,355

568

13.0

R&D as a % of revenues, net

7.8

%

10.2

%

Other operating expenses, net ("OOE")

24,917

880

24,037

NM

Goodwill impairment

33,360

-

33,360

NM

Total operating expenses

103,171

35,710

67,461

188.9

Operating loss

(108,659)

(33,891)

(74,768)

220.6

Operating loss as a % of revenues, net

(171.9)

%

(79.0)

%

Other income (expense):

Unrealized loss on investment

-

(2,046)

2,046

(100.0)

Realized loss on short-term investment securities

(41)

(143)

102

(71.3)

Other income, net

23

-

23

NM

Interest income, net

201

211

(10)

(4.7)

Interest expense

(2,919)

(230)

(2,689)

1,169.1

Total other expense

(2,736)

(2,208)

(528)

23.9

Loss before income taxes

(111,395)

(36,099)

(75,296)

208.6

Provision for income taxes

46

(2,581)

2,627

NM

Net loss

(111,441)

(33,518)

(77,923)

232.5

Net loss as a % of revenues, net

(176.3)

%

(78.1)

%

Deemed dividend from trigger of anti-dilution provision feature

(367)

-

(367)

NM

Deemed dividend related to down-round features

(564)

-

(564)

NM

Net loss available to common shareholders

$

(112,372)

$

(33,518)

(78,290)

233.6

Net loss per common share (basic and diluted)*

$

(6.85)

$

(2.71)

(4.14)

152.8

NM - calculated change not meaningful

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

Refer to Note 16, “Segment and Geographic Information,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding operating results for our two operating and reportable segments: (1) Tobacco, and (2) Hemp/cannabis.

48

Three and Nine Months Ended September 30, 2023 Compared to Three and Nine Months Ended September 30, 2022

Revenue, net

Three Months Ended

 

Nine Months Ended

September 30

September 30

 

September 30

September 30

    

2023

    

2022

    

2023

    

2022

Tobacco

$

7,871

$

11,535

$

24,848

$

30,551

Hemp/cannabis

9,940

 

7,848

 

38,352

 

12,354

Total revenues, net

$

17,811

$

19,383

$

63,200

$

42,905

The decrease in revenue for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to the decrease in tobacco revenue of $3,664, offset by an increase in hemp/cannabis revenue of $2,092.

oTobacco revenue was $7,871, a decrease of 31.8% from $11,535 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products. Third quarter 2023 cartons sold of 827 compared to 1,573 in the comparable prior year period.
oHemp/cannabis revenue was $9,940, compared to $7,848 in the prior year period. Third quarter 2023 bulk ingredient sales volume in kilograms was 49,142 compared to 27,912 in the comparable prior year period.

The increase in revenue for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to the increase in hemp/cannabis revenue of $25,998, offset by a decrease in tobacco revenue of $5,703.

oTobacco revenue was $24,848, a decrease of 18.7% from $30,551 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products. Third quarter 2023 year-to-date cartons sold of 2,591 compared to 4,427 in the comparable prior year period.
oHemp/cannabis revenue was $38,352, compared to $12,354 in the prior year third quarter, reflecting a full period of sales following the acquisition of GVB and continued growth in bulk ingredient sales. Third quarter 2023 year-to-date bulk ingredient sales volume in kilograms was 195,876 compared to 70,977 in the comparable prior year period (the GVB acquisition occurred on May 13, 2022).

Gross (loss) profit

Three Months Ended

 

Nine Months Ended

September 30

September 30

 

September 30

September 30

    

2023

    

2022

    

2023

    

2022

Gross (loss) profit

$

(1,966)

$

619

$

(5,488)

$

1,819

Percent of Revenues, net

 

(11.0)

%  

 

3.2

%

(8.7)

%

4.2

%

The decrease in gross profit and gross profit as a percent of revenues, net for the three and nine month periods-ended September 30, 2023 as compared to September 30, 2022 is driven by declines in tobacco gross profit of ($559) and ($2,757), respectively due to lower volume due to an intentional shift in product mix and decreases in hemp/cannabis gross profit of ($2,026) and ($4,622), respectively resulting from incremental costs associated with buying and selling ingredients while the Company rebuilds its distillate and isolate manufacturing capacity following the November 2022 Grass Valley fire. In connection with evaluation of strategic alternatives for the Company’s assets and cost cut initiatives, during the third quarter of 2023, the Company increased the reserve for excess, obsolete or expired hemp/cannabis inventory by $1,687.

49

Sales, general and administrative (“SG&A”) expense

    

Changes From Prior Year

Three Months Ended

Nine Months Ended

Compensation and benefits (a)

$

(2,236)

$

4,165

Strategic consulting (b)

(2,693)

435

Sales and marketing (c)

621

1,492

Administrative, public company and other expenses (d)

(75)

1,526

Depreciation and amortization (e)

576

1,406

Royalty, license and contract costs (f)

478

472

Net increase in SG&A expenses

$

(3,329)

$

9,496

(a) Compensation and benefits decreased for the three-month period ending September 30, 2023 due to a reduction of headcount as part of our cost cut initiatives and increased severance and equity comp expense in the prior year period due to the termination of our COO. Increases in compensation and benefits for the nine-month period ending September 30, 2023, is mainly attributable to inflationary increases, as well as increases in headcount for a portion of the year prior to our cost cut initiatives as compared to the prior year period.

(b) Decrease of strategic consulting for the three-month period ending September 30, 2023 was due to reduced spending as part of our cost cut initiatives.

(c) Increases due to the ongoing expansion of store count and launch of VLN® compared to the prior year period.

(d) Other expenses decreased for the three-month ended September 30, 2023, due to decreases of $115 of insurance expenses, $104 of travel and entertainment, $32 of legal and other expenses offset by increases of $96 for public company expenses and $79 for facilities expenses. For the nine months period ended September 30, 2023, other expenses increased due to $704 of IT and technology, $303 of travel and entertainment, $332 of facilities expense, $171 of public company expenses, and $134 of bad debt expenses, offset by a decrease of $308 of insurance expenses.

(e) Depreciation and amortization increased due to the buildout of our GVB Prineville facilities and newly acquired intangible assets in the current year period.

(f) Royalty, license and contract costs are mainly related to our contract development, manufacturing and distribution service offering licenses.

Research and development (“R&D”) expense

    

Changes From Prior Year

Three Months Ended

Nine Months Ended

Compensation and benefits (a)

$

(10)

$

530

Royalty, license and contract costs (b)

 

186

82

Other

119

(44)

Net increase in R&D expenses

$

295

$

568

(a)Increased compensation and benefits for the nine-month period ended September 30, 2023 are mainly related to the additional R&D personnel in the current year period compared to the prior year period.
(b)Increased contract costs were due to costs related to our Keygene research offset by a decrease in royalty fees owed.

50

Other operating expenses, net (“OOE”)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Grass Valley fire:

Professional services

$

53

$

-

$

377

$

-

Total Grass Valley fire (a)

53

-

377

-

Restructuring costs:

Impairment of intangible assets

13,986

-

13,986

-

Impairment of fixed assets

5,931

-

5,931

-

Impairment of right-of-use assets

4,034

-

4,034

-

Professional services

207

-

207

-

Severance

159

-

159

-

Total Restructuring costs (b)

24,317

-

24,317

-

Acquisition and transaction costs

218

43

357

882

Needlerock Farms settlement (c)

9

765

Gain on change in warrant liability (d)

(1,262)

(540)

Loss (gain) on change in contingent consideration (e)

9

(186)

Gain on sale or disposal of property, plant and equipment (f)

(2)

(173)

(2)

Total other operating expenses, net

$

23,344

$

41

$

24,917

$

880

(a)In November 2022, there was a fire at our Grass Valley manufacturing facility in Oregon, which manufactures bulk ingredients, primarily CBD isolate and distillate. The Company has continuous expenses related to consulting, legal and demolition at this facility.
(b)During the third quarter of 2023, the Company undertook various restructuring activities in an effort to better align its internal organizational structure and costs with its strategy, as well as preserve liquidity. As a component of the restructuring, the Company has initiated a process to evaluate strategic alternatives with respect to the Company’s tobacco assets. The process will include consideration of a range of strategic, operational and financial transactions and alternatives, such as business combinations, asset sales, licensing agreements, alternate financing strategies and other options.
(c)Expenses associated with non-ordinary course legal matters and corresponding settlement related to water rights dispute for Needle Rock Farms.
(d)Represents change in fair value of warrant liability resulting from remeasurement.
(e)Represents change in fair value of RXP contingent consideration from remeasurement.
(f)Reflects gain on sale primarily from the sale of older tobacco equipment.

Refer to Note 9, “Other operating expenses, net,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these charges.

Goodwill impairment

In connection with our strategic restructuring initiatives, the Company recorded goodwill impairment of $33,360.

51

Other income (expense)

Changes From Prior Year

    

Three Months Ended

Nine Months Ended

Other income (expense):

Unrealized loss on investment (a)

$

345

$

2,046

Realized loss on short-term investment securities

35

102

Other income, net

(12)

23

Interest income, net

(34)

(10)

Interest expense (b)

(1,157)

(2,689)

Total other expense

$

(823)

$

(528)

(a) Unrealized loss on investment includes fair value adjustments for our investment in Panacea Life Sciences Holdings, Inc. (“PLSH”) during the three and nine month-period ended September 30, 2022.  The investment was subsequently liquidated during 2022.

(b) Interest expense increased in 2023, as compared to the prior year period, primarily due to the interest recognized on the Senior Secured Credit Facility and Subordinated Note, as described below under ‘Liquidity and Capital Resources.’

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 and hemp/cannabis businesses. We had negative cash flow from operations of $50,184 for the nine months ended September 30, 2023 and an accumulated deficit of $349,373 as of September 30, 2023. As of September 30, 2023, we had cash and cash equivalents of $2,850, restricted cash of $7,500 and working capital of $856 (compared to working capital of $31,587 at December 31, 2022). 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.

Additionally, for the quarter ended September 30, 2023, the Company was not in compliance with the financial covenant related to consolidated Revenues, net pursuant to the Senior Secured Credit Facility debentures. The lenders have granted a waiver for the covenant violation. Without a waiver or other relief under the Senior Secured Credit Facility debenture agreements, one of the remedies the lenders have available to them, amongst others, is the ability to accelerate repayment of the debt, which the Company would not be able to immediately repay. 

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing strategic alternatives which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. The Company has engaged a financial advisor to assist it in identifying strategic partners and financing to fund operations and to take actions to maximize the Company’s liquidity. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.

Our cash, short term investments, restricted cash and working capital as of September 30, 2023 and December 31, 2022 are set forth below:

September 30

December 31, 

    

2023

    

2022

Cash and cash equivalents

$

2,850

$

3,020

Short-term investment securities

$

 

$

18,193

Restricted cash

$

7,500

 

$

Working capital

$

856

 

$

31,587

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Working Capital

As of September 30, 2023, we had working capital of $856 compared to working capital of $31,587 at December 31, 2022 a decrease of $30,731. This decrease in working capital was primarily due to a $3,989 decrease in net current assets and was offset by an increase in net current liabilities of $26,741, which includes in the third quarter $18,165 of current portion of long-term debt obligations related to our Senior Secured Credit Facility and Subordinate Note, previously classified as Non-current. Cash, cash equivalents, short-term investment securities and restricted cash decreased by $10,863 and the remaining net current assets increased by $6,874. As a result of the insignificant positive working capital balance, management has taken a number of steps to improve liquidity. Refer below to “Cash demands on operations.”

Summary of Cash Flows

Nine Months Ended

September 30, 

Change

    

2023

    

2022

$

Cash provided by (used in):

Operating activities

$

(50,184)

$

(32,648)

(17,536)

Investing activities

 

17,352

 

 

380

16,972

Financing activities

 

40,162

 

 

33,296

6,866

Net change in cash, cash equivalents and restricted cash

$

7,330

 

$

1,028

Net cash used in operating activities

Cash used in operating activities increased $17,536 from $32,648 in 2022 to $50,184 in 2023. The primary driver for this increase was higher net loss of $77,923, as explained above, an increase of $60,104 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 $283 for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Net cash provided by investing activities

Cash provided by investing activities amounted to $17,352 the nine months ended September 30, 2023, as compared to cash provided by investing activities of $380 for the nine months ended September 30, 2022. The increase in cash provided by investing activities of $16,972 was the result of (i) an increase in net proceeds from short-term investments of $12,985; (ii) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the current period (iii) $682 from the investment in Change Agronomy Ltd. in the prior year period; (iv) $1,043 from the acquisitions of RXP in the current period and GVB in the prior year period and (v) $251 of proceeds from the sale of property, plant and equipment. These increased cash inflows were partially offset by an increase in cash outflows of $1,489 related to the acquisitions of patents, trademarks and property, plant and equipment.

Net cash provided by financing activities

During the nine months ended September 30, 2023, cash provided by financing activities increased by $6,866, from $33,296 in the prior year period, to $40,162, resulting from the net proceeds of $16,048 from issuance of long-term debt, proceeds of $6,016 from issuance of detachable warrants, net proceeds of $2,563 from issuance of common stock related to the ATM, increased proceeds of $198 from the issuance of notes payable, and a decrease in other financing of $16. These cash inflows were offset by a decrease in net proceeds of issuance of common stock of $14,217, increased note payable payments of $3,164, taxes paid related to net share settlement of RSUs of $420 and $174 of option exercises that occurred in 2022.

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Cash demands on operations

As of September 30, 2023, we had approximately $2,850 of cash and cash equivalents. Our principal sources of liquidity are our cash and cash equivalents and cash generated from our tobacco contract manufacturing business and hemp/cannabis business and proceeds from debt and equity financing activities, which such financings have provided total net proceeds throughout 2023 of $37,173, including registered direct offerings completed in October 2023 (refer below for details of all debt and equity financing activities). The Company has also received $5,000 of casualty loss insurance recoveries from the Grass Valley fire, has business interruption coverage and has filed litigation to enforce its claim.

As discussed above, in response to the cash demands on operations, management has implemented programs to evaluate strategic alternatives for the Company’s assets and cost cut initiatives intended to reduce our operating costs to provide additional cash runway. In October 2023 the Company decreased its principal debt balances by $8,100, resulting in cash interest savings of approximately $500 annually. However, our cash, cash equivalents, short-term investment securities, insurance proceeds, and debt/equity financings, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, currently are not forecasted to provide sufficient cash resources or liquidity through the remainder of fiscal 2023.

Senior Secured Credit Facility

On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,053 and (ii) warrants to purchase up to 333,334 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000.

The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.

The Company is 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. As of September 30, 2023, the Company was not in compliance with its financial covenant tied to minimum consolidated Revenues, net of $18,500. The Company has obtained a waiver (as described below) with the lender executed on October 16, 2023; accordingly, no event of default has occurred.

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The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

On June 22, 2023, as a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 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 that resulted in a reduction of the outstanding principle of its Senior Secured Credit Facility by $8,100. The reduction reflects a waiver and repayment of the $7,500 restricted cash balance required under terms of the original debenture agreements, which was held in an escrow account. The Company also assigned an existing promissory note pertaining to the Company’s previous holdings in Panacea Life Science Holdings as additional consideration in the debt reduction transaction. In a non-monetary exchange, the assigned value of the promissory note was allocated as $600 to further principal reduction and $2,000 to a reduction in the put price associated with the lenders outstanding warrants, which 166,667 of such the warrants were concurrently cancelled.

The remaining principal loan balance of approximately $14,005 and remaining $500 of the put price will be due at maturity in March 2026 in accordance with the original terms of the debenture agreements. The Company was not required to pay any cash to the lenders in connection with this transaction.

Omnia Subordinated Note

On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma.

Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of 26.5% per annum, payable monthly. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024.

In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 45,000 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

ATM Offering

On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”).   The Company will pay 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold. Total net proceeds during the second quarter of 2023 were $2,639. On June 19, 2023, the Company terminated the ATM Program in connection with the June 2023 Capital Raise.

June 19, 2023 Registered Direct Offering  

On June 19, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of shares of approximately $5,300 of shares and warrants, consisting of an aggregate of 747,974 shares of common stock and 747,974 warrants to purchase an equal number of shares, at a purchase price of $7.05 per unit.  The net proceeds to the Company from the offering were approximately $4,800.

55

The warrants were exercisable immediately upon issuance at an exercise price of $7.05 per share of common stock, expire on June 22, 2028 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.

As part of the offering, the Company entered into a warrant reprice letter and agreed to reduce the exercise price on the previously issued 747,974 warrants owned by the investors participating in the Offering from $30.75 to $7.05 and to add a provision in the warrants that upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, such exercise price shall be lowered to such price at which the shares were offered. As a result of the offerings completed in July 2023, the exercise price on the 1,495,948 warrants was automatically adjusted to $2.42 per share and subsequently adjusted to $0.525 per share in October.

The remaining 390,247 previously issued warrants were not repriced and remain at an exercise price of $30.75 on their original terms.

In addition, as a result of the offering, the Company’s outstanding warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted as follows: $12.828 exercise price for up to 496,960 shares of common stock, of which 166,667 were canceled in October 2023 (see above discussion of amendment and waiver under Senior Secured Credit Facility).

July 6, 2023 Registered Direct Offering.  

On July 6, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $3,000 of shares and warrants, consisting of an aggregate of 778,634 shares of common stock and 1,557,268 warrants to purchase an equal number of shares, at a purchase price of $3.80 per unit. The warrants are exercisable six months after issuance at an exercise price of $3.80 per share of common stock and expire on the later of January 10, 2029 and the date Stockholder Approval (as defined below) is obtained. The net proceeds to the Company from the offering were approximately $2,600. As a result of the subsequent offering completed in July 2023, the exercise price on the 1,557,268 warrants was automatically adjusted to $2.42 per share and subsequently adjusted to $0.525 per share in October.

July 19, 2023 Registered Direct Offering.  

On July 19, 2023, the Company and certain investors (entered into a securities purchase agreement relating to the issuance and sale of approximately $11,700 of shares and warrants, consisting of an aggregate of 4,373,219 shares of common stock and 8,746,438 warrants to purchase an equal number of shares, at a purchase price of $2.67 per unit. The warrants are exercisable immediately at an exercise price of $2.42 per share of common stock and expire five years after issuance. The net proceeds to the Company from the offering were approximately $10,742. As a result of the subsequent offering completed in October 2023, the exercise price on the 8,746,438 warrants was automatically adjusted to $0.525 per share.

October 2023 Public Offering

On October 17, 2023, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell and issue, in a registered public offering, (i) an aggregate of 7,600,000 shares of the Company’s common stock, par value $0.00001 per share, (ii) warrants to purchase 20,000,000 shares of common stock (the “Common Warrants”) and (iii) pre-funded warrants to purchase 2,400,000 shares of common stock (the “Pre-Funded Warrants”). The Common Warrants have an exercise price of $0.525, are immediately exercisable and have a term of exercise equal to five years following the original issuance date. The Pre-Funded Warrants have an exercise price of $0.0001, are immediately exercisable and are exercisable at any time after their original issuance until such Pre-Funded Warrants are exercised in full. The shares were offered at a combined public offering price of $0.525 per share and two accompanying Common Warrants. The Pre-Funded Warrants were offered at a combined public offering price of $0.5249 per Pre-Funded Warrant and two accompanying Common Warrants.

 

In addition, the Company issued the placement agent warrants to purchase up to 1,000,000 shares of common stock (equal to 10% of the aggregate number of shares and Pre-Funded Warrants sold in the offering) at an exercise price of $0.65625, which represents 125% of the public offering price per share and accompanying Common Warrant. The placement agent agreed not to exercise the such warrants until the Company subsequently increases its authorized shares of common stock.

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The offering closed on October 19, 2023 with gross proceeds to the Company of approximately $5,250, before deducting the placement agent fees of $367 and other offering expenses payable by the Company of approximately $288. As a result of the offering, the exercise price on 11,799,654 previously outstanding warrants were automatically adjusted from $2.42 per share to $0.525 per share.

The Pre-Funded Warrants were subsequently exercised on a cashless basis in October 2023, resulting in issuance of 2,399,512 shares of common stock. 

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.

Except as described below, there have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

Contingent consideration

Contingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain revenue milestones. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration liability result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material impact on the results from operations. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.

Detachable Warrants

Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our 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.

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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, 2022.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures:

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s interim 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 interim 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 11 - Commitments and Contingencies – Litigation - to our consolidated financial statements included in this Quarterly Report for information concerning our on-going litigation. In addition to the lawsuits described in Note 11, from time to time we may be involved in claims arising in the ordinary course of business. To our knowledge other than the cases described in Note 11 to our consolidated financial statements, no material legal proceedings, governmental actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

Item 1A. Risk Factors

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, 2022, as filed with the SEC on March 9, 2023 or Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on May 9, 2023, other than the following:

We have a history of losses, and we expect to incur significant expenses and continuing losses for the foreseeable future and there is substantial doubt regarding our ability to continue as a going concern.

 

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 and hemp/cannabis businesses, which casts substantial doubt regarding our ability to continue as a going concern. As of October 31, 2023, we had cash and cash equivalents of approximately $6,298.

 

Doubts about our ability to continue as a going concern have and could continue to negatively impact our relationships with our commercial partners and our ability, as part of our cost-cutting measures, to obtain, maintain, restructure and/or terminate agreements with them, or negatively impact our negotiating leverage with such parties, which could have a material adverse effect on our business, financial condition and results of operations or result in litigation. Furthermore, any loss of key personnel, employee attrition or material erosion of employee morale arising out of doubts about our ability to operate as a going concern could have a material adverse effect on our ability to effectively conduct our business, and could impair our ability to execute our business plan, thereby having a material adverse effect on our business, financial condition and results of operations.

 

We need additional funding to execute our business plan and to continue operations even with the anticipated proceeds from the October 2023 public equity offering. We continue to seek and evaluate opportunities to raise additional funds through the issuance of our securities, asset sales, and through arrangements with strategic partners. We have engaged a financial advisor to assist us in identifying strategic partners and financing to fund operations and to take actions to maximize our liquidity. If capital is not available to us when, and in the amounts needed, we could be required to liquidate our inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that we will be able to raise the capital we need to continue our operations.

We may be unable to comply with the covenants in our senior secured debentures.

 

Our senior secured debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict us 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. We are also required to maintain certain quarterly revenue targets.

As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial transactions, including to obtain additional financing as needed, may be restricted. Furthermore, our failure to comply with the covenants could result in a default under such agreements, which could permit the debt holders to accelerate our obligation to repay the debt. Although we recently received a waiver with respect to our compliance with such covenants, there is no assurance that we will be able to secure a similar waiver for the failure to comply with any future covenants. If any of our debt is accelerated, we

59

likely would not have sufficient funds available to repay it. Substantially all of our assets, including intellectual property, are collateralized under the debentures. If such debt is accelerated, we could be required to liquidate our inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings.

We could continue to incur restructuring and impairment charges as we continue to pursue a cost cutting initiative and pursue strategic alternatives.

 

We continue to evaluate opportunities to optimize the cost structure of our operations in order to implement a cost savings initiative. These actions could result in significant charges which could adversely affect our financial condition and results of operations. Future actions could result in restructuring and related charges, including but not limited to impairments and employee termination costs that could be significant. We have incurred significant impairment charges for long-lived assets, including goodwill and intangible assets, which are subject to periodic impairment analysis and review, and remain subject to the potential for additional charges. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions, requires significant judgment. Any of the above future actions could result in charges that could have an adverse effect on our financial condition and results of operations.

The continued success of our cannabinoid-containing products, if any, is subject to a number of constantly-evolving state and federal laws, regulations, and uncertain regulatory enforcement policies pertaining to hemp-derived CBD and/or cannabis more generally.

 

The Agriculture Improvement Act of 2018, or the “2018 Farm Bill,” was signed into law on December 20, 2018. This 2018 Farm Bill expressly excluded “hemp” from the federal Controlled Substances Act of 1970 and the Controlled Substances Import and Export Act’s, as amended (the “CSA”)’s definition of marijuana and, accordingly, declassified substances derived from or containing any part(s) of the cannabis plant containing not more than 0.3% THC on a dry-weight basis from Schedule I. In effect, the 2018 Farm Bill legalized the cultivation and commercial sale of hemp in the United States, subject to applicable state laws and regulations and applicable federal Food, Drug & Cosmetic Act (FDCA) provisions, including any implementing regulations, as interpreted and enforced by the FDA.

 

Local, state, federal, and international hemp and CBD laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance requirements. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our current and/or future cannabinoid business(es). It is also possible that the federal government will begin strictly enforcing existing laws, which may limit the legal uses of the hemp plant and its derivatives and extracts, such as cannabinoids. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can it determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on its activities in the cannabis industry.  

 

In addition, the 2018 Farm Bill did not alter the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds, including cannabinoids, under the FDCA. Hemp products, including cannabinoids, that qualify as drugs, food, dietary supplements, veterinary products, and cosmetics, for example, are subject to regulation by the FDA. Following passage of the 2018 Farm Bill, the FDA reaffirmed its enforcement authority and reiterated the requirement that a product containing CBD or other cannabinoid(s) (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit implicitly or explicitly attributed to, or based on, the presence of the cannabinoid as an ingredient, or any other health/medical claim, must be approved by the FDA for its intended use(s) before it may be introduced into interstate commerce. We currently have cannabinoid-containing retail offerings in virtually all forms of consumption (e.g., supplements, topical products, gummies, tinctures, vape products, and others). We are, accordingly, subject to some level of regulatory risk, given the FDA’s current position that CBD is an active drug ingredient that cannot be marketed as a food or dietary supplement under the FDCA. However, we believe our offerings are consistent with others on the market that pose a low risk of regulatory enforcement.

 

Additionally, while the 2018 Farm Bill and analogous state legislation has reduced the amount of DEA oversight of hemp-derived cannabinoids, this is a rapidly evolving area of U.S. law and substantial uncertainty remains as to the future of federal and state regulation of cannabinoid products. Many states have varying requirements, including licensure requirements that must be met prior to engaging in applicable hemp operations. We are in the process of reviewing and complying with applicable state requirements, but we may not have or be aware of all the necessary authorizations needed to engage in the business we conduct in

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each applicable state. Any regulations the FDA issues relating to the sale, marketing, and/or other activities involving cannabinoid or certain cannabinoid-containing products could have a material adverse effect on our business, financial condition and results of operations.

 

Given the uncertainty surrounding future state regulations and the continuing barriers that still exist for cannabinoids in certain product categories due to FDA regulation, it is unknown to what extent FDA’s regulation of the applicable product categories in which we offer cannabinoid-containing products may have on our business.

 

Costs associated with compliance with numerous laws and regulations could impact our financial results. In addition, we have become and could in the future become subject to increased enforcement and/or litigation risks associated with the CBD industry.

 

The manufacture, labeling and distribution of products containing CBD or other cannabinoids is governed by various federal, state and local agencies. Our commercialization of various cannabinoid-containing products at the retail level may give rise to heightened regulatory scrutiny and greater risk of consumer litigation, either of which likely restricts the scope of the permissible marketing claims we can lawfully make about such products or our ability to continue selling them in the United States at all. The shifting compliance environment and the need to build and maintain robust systems to comply with different hemp or CBD-related regulations in jurisdictions may increase costs and/or the risk that we may violate one or more applicable regulatory requirements. If our operations, or any of our activities or products, are found to be in violation of any such laws or any other governmental regulations that apply to the manufacture, distribution, or sale of FDA-regulated products, generally, or to products containing cannabinoids, more specifically, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of its operations, any of which could adversely affect our ability to operate its business or its financial results.

 

Failure to comply with any applicable FDA requirements, relating to CBD or otherwise, may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. Our advertising is also subject to regulation by the FTC under the Federal Trade Commission Act. Additionally, analogous state advertising and labeling laws are often enforced by state attorneys general, and any state or federal enforcement action based on potentially misleading or deceptive advertising is often followed by costly class-action complaints under state consumer-protection laws.

 

The FDA, on its own and in collaboration with the FTC, has issued numerous warning letters to companies offering for sale of topical, oral, and other types of products containing CBD, which were not approved under the FDA’s NDA process, in response to their making unsubstantiated claims on product webpages, online stores, and social media websites about the products’ purported therapeutic or other drug-like benefits in connection with CBD or other cannabinoids. The FDA deemed that companies “used these online platforms to make unfounded, egregious claims about their products’ ability to limit, treat or cure cancer, neurodegenerative conditions, autoimmune diseases, opioid use disorder, and other serious diseases, without sufficient evidence and the legally required FDA approval.”

 

The agency has continuously demonstrated its commitment to taking action against companies making medical claims about products containing CBD (as the active ingredient), as selling unapproved products with unsubstantiated therapeutic claims can put patients and consumers at risk. The FDA does not believe CBD has been shown to be safe and effective for any therapeutic use, except as used in Epidiolex, the only new drug containing natural, hemp-derived CBD that has been approved by FDA under the NDA process, which was approved for the treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome in patients 2 years of age and older. The agency’s principal concern with CBD products on the market that are unlawfully claiming to treat serious medical conditions is that deceptive marketing of unproven treatments may keep some patients from accessing appropriate, recognized therapies to treat serious and even fatal diseases. Additionally, because they are not evaluated by the FDA, there may be other ingredients that are not disclosed, which may be harmful.

 

The FDA has pledged to continue to monitor the marketplace and take enforcement action as-needed to protect the public against companies illegally selling products containing CBD as the active ingredient, claiming to prevent, diagnose, treat, or cure serious diseases, such as cancer, Alzheimer’s disease, psychiatric disorders and diabetes; illegally selling cannabis and cannabis-derived products that can put consumers at risk; and marketing and distributing such products in violation of the FDA’s authorities.

 

We, or those who market the hemp-derived products we manufacture and/or distribute, may inadvertently make claims in the future about the efficacy or safety of such products, which, due to the presence of CBD or other cannabinoids as ingredients or for any other reason, may be deemed to be unsubstantiated claims and/or render the products unapproved new drugs in violation of the FDCA.

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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

Item 5. Other Information

During the three months ended September 30, 2023, 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.

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Item 6. Exhibits

Exhibit 3.1

Certificate of Amendment to Restated Articles of Incorporation filed October 16, 2023

Exhibit 4.1

Waiver and Amendment Agreement (Incorporated by reference from Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on October 16, 2023)

Exhibit 4.2

Form of Common Warrant (Incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K filed with the Commission on October 18, 2023)

Exhibit 4.3

Form of Pre-Funded Warrant (Incorporated by reference from Exhibit 4.2 to the Company’s Form 8-K filed with the Commission on October 18, 2023)

Exhibit 4.4

Form of Placement Agent Warrant (Incorporated by reference from Exhibit 4.3 to the Company’s Form 8-K filed with the Commission on October 18, 2023)

Exhibit 10.1

Retention Agreement between the Company and John Miller dated August 23, 2023

Exhibit 10.2

Retention Agreement between the Company and R. Hugh Kinsman dated August 20, 2023, as amended

Exhibit 10.3

Restated Employment Agreement between the Company and Peter Ferola dated August 20, 2023, as amended

Exhibit 31.1

Section 302 Certification - Chief Executive Officer

 

 

Exhibit 31.2

Section 302 Certification - Chief Financial Officer

 

 

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

 

22nd CENTURY GROUP, INC.

 

 

Date: November 6, 2023

/s/ John J. Miller

 

John J. Miller

 

Interim Chief Executive Officer

 

(Principal Executive Officer and Authorized Officer)

 

 

Date: November 6, 2023

/s/ R. Hugh Kinsman

 

R. Hugh Kinsman

 

Chief Financial Officer

 

(Principal Accounting and Financial Officer)

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