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Table of Contents

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, 2020

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.)

8560 Main Street, Suite 4, Williamsville, New York 14221

(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 

 

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No  

As of November 5, 2020, there were 138,859,193 shares of common stock issued and outstanding.

Table of Contents

22nd CENTURY GROUP, INC.

INDEX

 

 

Page

Number

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months ended September 30, 2020 and 2019 (unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019 (unaudited)

7

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

Item 2.

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

24

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

PART II.

OTHER INFORMATION

35

 

 

 

Item 1.

Legal Proceedings

35

 

 

 

Item 1A.

Risk Factors

35

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3.

Default Upon Senior Securities

35

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

Item 5.

Other Information

35

 

 

 

Item 6.

Exhibits

36

 

 

 

SIGNATURES

37

2

Table of Contents

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands)

September 30, 

December 31, 

    

2020

    

2019

ASSETS

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

1,542

$

485

Short-term investment securities

 

25,276

 

38,477

Accounts receivable, net

 

1,559

 

867

Inventory, net

 

2,311

 

2,266

Prepaid expenses and other assets

 

2,401

 

648

Total current assets

 

33,089

 

42,743

Property, plant and equipment:

 

  

 

  

Machinery and equipment, net

 

2,689

 

3,120

Operating leases right-of-use assets, net

 

572

 

602

Total property, plant and equipment

 

3,261

 

3,722

Other assets:

 

 

  

Intangible assets, net

 

8,231

 

8,494

Investments

 

7,015

 

8,403

Convertible note

5,804

5,589

Total other assets

 

21,050

 

22,486

Total assets

$

57,400

$

68,951

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes payable

$

1,523

$

581

Operating lease obligations

 

339

 

220

Accounts payable

 

1,114

 

1,997

Accrued expenses

 

3,145

 

2,619

Accrued severance

 

423

 

359

Deferred income

 

 

5

Total current liabilities

 

6,544

 

5,781

Long-term liabilities:

 

  

 

  

Notes payable

 

292

 

292

Operating lease obligations

 

233

 

382

Severance Obligations

294

446

Total long-term liabilities

 

819

 

1,120

Commitments and contingencies (Note 11)

 

 

Shareholders' equity

 

  

 

  

10,000,000 preferred shares, $.00001 par value

 

  

 

  

300,000,000 common shares, $.00001 par value

 

  

 

  

Capital stock issued and outstanding:

 

  

 

  

138,859,193 common shares (138,362,809 at December 31, 2019)

 

 

Common stock value

1

1

Capital in excess of par value

 

188,897

 

187,735

Accumulated other comprehensive (loss) income

 

139

 

7

Accumulated deficit

 

(139,000)

 

(125,693)

Total shareholders' equity

 

50,037

 

62,050

Total liabilities and shareholders’ equity

$

57,400

$

68,951

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

($ in thousands except per-share data)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2020

    

2019

    

2020

    

2019

    

Revenue:

  

 

  

Sale of products, net

$

7,310

$

6,462

$

20,803

$

18,571

Cost of goods sold (exclusive of depreciation shown separately below):

 

  

 

  

 

 

Products

 

6,948

 

6,483

 

19,953

 

18,781

Gross profit (loss)

 

362

 

(21)

 

850

 

(210)

Operating expenses:

 

  

 

  

 

 

Research and development

 

906

 

1,924

 

2,676

 

4,838

Research and development - MRTP

4

69

158

1,593

Sales, general and administrative

 

3,169

 

4,059

 

9,809

 

9,119

Impairment of intangible assets

 

1,142

 

146

 

1,142

Depreciation

 

160

 

158

 

473

 

440

Amortization

 

163

 

233

 

524

 

671

Total operating expenses

 

4,402

 

7,585

 

13,786

 

17,803

Operating loss

 

(4,040)

 

(7,606)

 

(12,936)

 

(18,013)

Other income (expense):

 

  

 

  

 

 

Unrealized gain (loss) on investments

 

(429)

 

(2,959)

 

(562)

 

(1,410)

Impairment of stock warrant

(1,062)

Realized gain (loss) on short-term investment securities

 

 

90

 

 

146

Litigation settlement

(1,891)

Gain on the sale of machinery and equipment

 

1

 

 

1

 

87

Interest income, net

 

270

 

242

 

1,344

 

757

Interest expense

 

(23)

 

(12)

 

(54)

 

(36)

Total other income (expense)

 

(181)

 

(2,639)

 

(333)

 

(2,347)

Loss before income taxes

 

(4,221)

(10,245)

 

(13,269)

(20,360)

Income taxes

 

 

38

 

Net loss

$

(4,221)

$

(10,245)

$

(13,307)

$

(20,360)

Other comprehensive income (loss):

 

  

 

  

 

 

Unrealized gain (loss) on short-term investment securities

 

87

 

3

 

132

 

239

Reclassification of gain to net loss

 

 

(90)

 

 

(146)

Other comprehensive income (loss)

87

(87)

132

93

Comprehensive loss

$

(4,134)

$

(10,332)

$

(13,175)

$

(20,267)

Net loss per common share - basic and diluted

$

(0.03)

$

(0.08)

$

(0.10)

$

(0.16)

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

 

138,857

 

125,420

 

138,774

 

124,912

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands except share data)

Three and Nine Months Ended September 30, 2020

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding

    

Shares

    

Par Value

    

Income

    

Deficit

    

Equity

Balance at December 31, 2019

 

138,362,809

$

1

 

$

187,735

 

$

7

 

$

(125,693)

$

62,050

Stock issued in connection with RSU vesting

 

491,384

 

 

 

 

 

Equity-based compensation

 

 

 

480

 

 

 

480

Unrealized gain (loss) on short-term investment securities

 

 

 

 

(196)

 

 

(196)

Reclassification of losses (gains) to net loss

 

 

 

 

3

 

 

3

Net loss

 

 

 

 

 

(4,029)

 

(4,029)

Balance at March 31, 2020

138,854,193

$

1

$

188,215

$

(186)

$

(129,722)

$

58,308

Stock issued in connection with RSU vesting

Equity-based compensation

376

376

Unrealized gain (loss) on short-term investment securities

241

241

Reclassification of losses (gains) to net loss

(3)

(3)

Net loss

(5,057)

(5,057)

Balance at June 30, 2020

 

138,854,193

$

1

$

188,591

$

52

$

(134,779)

$

53,865

Stock issued in connection with RSU vesting

5,000

Equity-based compensation

306

306

Unrealized gain (loss) on short-term investment securities

87

87

Reclassification of losses (gains) to net loss

Net loss

(4,221)

(4,221)

Balance at September 30, 2020

 

138,859,193

$

1

$

188,897

$

139

$

(139,000)

$

50,037

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Three and Nine Months Ended September 30, 2019

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding

    

Shares

    

Par Value

    

Income

    

Deficit

    

Equity

Balance at December 31, 2018

 

124,642,593

$

1

$

170,392

$

21

$

(99,134)

$

71,280

Stock issued in connection with option exercises

 

17,407

 

 

 

 

 

Equity-based compensation

 

 

 

449

 

 

 

449

Unrealized gain (loss) on short-term investment securities

147

147

Reclassification of losses (gains) to net loss

16

16

Net loss

(2,073)

(2,073)

Balance at March 31, 2019

124,660,000

$

1

$

170,841

$

184

$

(101,207)

$

69,819

Stock issued in connection with option exercises

 

13,936

Equity-based compensation

 

517

517

Unrealized gain (loss) on short-term investment securities

89

89

Reclassification of losses (gains) to net loss

(72)

(72)

Net loss

(8,042)

(8,042)

Balance at June 30, 2019

124,673,936

$

1

$

171,358

$

201

$

(109,249)

$

62,311

Stock issued in connection with option exercises

8,645

Stock issued in connection with RSU vesting

100,000

Stock issued in connection with litigation settlement

990,000

1,891

1,891

Equity-based compensation

1,440

1,440

Unrealized gain (loss) on short-term investment securities

3

3

Reclassification of losses (gains) to net loss

(90)

(90)

Net loss

(10,245)

(10,245)

Balance at September 30, 2019

 

125,772,581

$

1

$

174,689

$

114

$

(119,494)

$

55,310

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)

Nine Months Ended

September 30, 

    

2020

    

2019

    

Cash flows from operating activities:

 

  

 

  

Net loss

$

(13,307)

$

(20,360)

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

 

  

 

  

Impairment of intangible assets

146

1,142

Impairment of stock warrant

1,062

Amortization and depreciation

 

810

 

932

Amortization of license fees

 

187

 

179

Amortization of ROU Asset

 

232

 

159

Unrealized (gain) loss on investment

 

562

 

1,410

Realized (gain) loss on short-term investment securities

(146)

Litigation settlement

 

 

1,891

Gain on the sale of machinery and equipment

 

(1)

 

(87)

Accretion of non cash interest expense

34

33

Accretion of non cash interest income

 

(256)

 

Equity-based employee compensation expense

 

1,162

 

2,406

Inventory write-off

219

882

(Increase) decrease in assets:

 

  

 

  

Accounts receivable

 

(692)

 

97

Inventory

 

(264)

 

(222)

Prepaid expenses and other assets

 

(1,754)

 

55

Increase (decrease) in liabilities:

 

 

  

Operating lease obligations

 

(228)

 

(159)

Accounts payable

 

(924)

 

(1,082)

Accrued expenses

 

481

 

(30)

Accrued severance

(88)

691

Deferred income

 

(5)

 

511

Net cash provided by (used in) operating activities

 

(12,624)

 

(11,698)

Cash flows from investing activities:

 

  

 

Acquisition of patents and trademarks

 

(342)

 

(444)

Acquisition of machinery and equipment

 

(33)

 

(499)

Proceeds from the sale of machinery and equipment

 

 

166

Sales and maturities of short-term investment securities

 

28,960

 

15,966

Purchase of short-term investment securities

 

(15,830)

 

(3,079)

Net cash provided by (used in) investing activities

 

12,755

 

12,110

Cash flows from financing activities:

 

  

 

Payment on note payable

(1,269)

(400)

Proceeds from note payable issuance

2,195

Proceeds from SBA loan

1,183

Repayment of SBA loan

(1,183)

Net cash provided by (used in) financing activities

 

926

 

(400)

Net increase (decrease) in cash and cash equivalents

 

1,057

 

12

Cash and cash equivalents - beginning of period

 

485

 

605

Cash and cash equivalents - end of period

$

1,542

$

617

Supplemental disclosures of cash flow information:

 

  

 

  

Net cash paid for:

 

  

 

  

Cash paid during the period for interest

$

19

$

3

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

19

$

154

Machinery and equipment additions included in accounts payable

$

9

$

Right-of-use assets and corresponding operating lease obligations

$

198

$

814

Patent and trademark additions included in accrued expenses

$

46

$

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Amounts in thousands, except for share and per-share data

NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Operating results for the nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the December 31, 2019 audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 11, 2020.

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of 22nd Century Group, Inc. (“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”) (collectively, “the Company”). All intercompany accounts and transactions have been eliminated.

Nature of Business - 22nd Century Group is a leading biotechnology company developing disruptive plant-based solutions for the life science, consumer product, and pharmaceutical markets. The Company is focused on technology that allows it to alter the level of nicotine and other nicotinic alkaloids in tobacco plants and the levels of cannabinoids and terpenes in hemp/cannabis plants through genetic engineering and modern plant breeding techniques. Goodrich Tobacco and Heracles Pharma are business units for the Company’s potential modified risk tobacco products. NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA and operates the Company’s tobacco products manufacturing business in North Carolina. Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group that performs research and development related to the Company’s hemp business.

Reclassifications - Certain items in the 2019 financial statements have been reclassified to conform to the 2020 classification. During 2020, the Company expanded its research and development expense line item into two line items in the operating expense section of the Company’s Consolidated Statements of Operations and Comprehensive Loss: (i) Research and development and (ii) Research and development—MRTP. The comparative classifications for 2019 have been reclassified to conform to the new presentation.

COVID-19 Pandemic – The COVID-19 pandemic has caused some disruption to our business and poses a risk to our future business, including delays by third party providers of goods or services to our business, interruptions to our sales, research and development, and administrative activities, and disruptions to our manufacturing operations. Similarly, state or federal authorities may also be affected in their capacity or capability to operate as normal and may impact the timeline of product authorizations which may disrupt our business plans.

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Our Williamsville, NY corporate office and our R&D laboratory in Buffalo, NY remain open and are currently operating under strict safety protocols in accordance with New York State’s reopening guidelines. These protocols include physical distancing, mandatory face coverings, disinfection of surfaces, and other health and safety measures. We continue to encourage remote work arrangements by our employees where job duties permit. Our laboratory in Buffalo is working to almost full capacity while some of our external research and development partners are operating on a modified or limited schedule during this period of the pandemic. The temporary closure of our laboratory and the interruption to our workflow related to COVID-19 has had a minimum impact on our research operations.

Our NASCO production facility in North Carolina remains open and, despite the pandemic, we have been able to fulfill sales orders in a timely manner. The safety and well-being of our employees remains a top priority and we to continue monitor and operate in line with local, state, and federal safety guidelines. An outbreak at our production facility, or disruption in our supply chain, could cause us to slow or temporarily cease our manufacturing operations.

Our executive leadership team and staff are monitoring this evolving situation and its impacts on our business. We will continue to monitor the local, state and federal guidance regarding our business practices.

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

Fair Value of Financial Instruments - The Company’s financial instruments include cash and cash equivalents, short-term investment securities, accounts receivable, investments, a convertible note receivable, accounts payable, accrued expenses, and notes payable. Other than for cash equivalents, short-term investment securities, certain investments, and convertible note receivable, fair value is assumed to approximate carrying values for these financial instruments, since they are short term in nature, they are receivable or payable on demand, or had stated interest rates that approximate the interest rates available to the Company as of the reporting date. The determination of the fair value of cash equivalents, short-term investment securities, investments, and convertible note receivable are discussed in Note 6.

Investments - Under ASU 2016-01, equity securities are recorded at fair value, with changes in fair value recorded through the statement of operations. Equity securities without a readily determinable market value are carried at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer. The Company considers debt instruments as available-for-sale securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

Stock Based Compensation - The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and others receive shares, restricted stock units or options to purchase common shares of the Company. Stock based compensation expense is recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For accounting purposes, the shares will be considered issued and outstanding upon vesting or risks of forfeiture expiring.

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

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NOTE 2. - INVENTORY

Inventories are valued at the lower of historical cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory and standard cost is primarily used for finished goods inventory. Inventories are evaluated to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved as appropriate. During the three and nine months ended September 30, 2020, the Company wrote off inventory totaling $219 on the Company’s Consolidated Statement of Operations and Comprehensive Loss ($58 included within research and development expenses and $161 included within cost of goods sold). During the three and nine months ended September 30, 2019, the Company wrote off inventory totaling $882 which is included within research and development expenses on the Company’s Consolidated Statement of Operations and Comprehensive Loss.

Inventories at September 30, 2020 and December 31, 2019 consisted of the following:

    

September 30, 

    

December 31, 

    

2020

    

2019

Inventory - tobacco leaf

$

1,105

$

1,178

Inventory - finished goods

 

Cigarettes and filtered cigars

 

201

 

106

Inventory - raw materials

 

 

Cigarette and filtered cigar components

1,105

1,082

Less: inventory reserve

 

(100)

 

(100)

$

2,311

$

2,266

NOTE 3. - MACHINERY AND EQUIPMENT

Machinery and equipment at September 30, 2020 and December 31, 2019 consisted of the following:

September 30, 

December 31, 

    

Useful Life

    

2020

    

2019

Cigarette manufacturing equipment

3 or 10 years

$

4,892

$

4,870

Office furniture, fixtures and equipment

5 Years

 

162

 

152

Laboratory equipment

5 Years

 

117

 

125

Leasehold improvements

6 Years

 

273

 

257

 

 

Less: accumulated depreciation

  

 

(2,755)

 

(2,284)

Machinery and equipment, net

  

$

2,689

$

3,120

Depreciation expense was $160 and $473 for the three and nine months ended September 30, 2020, respectively ($158 and $440 for the three and nine months ended September 30, 2019, respectively).

NOTE 4. - RIGHT-OF-USE ASSETS, LEASE OBLIGATIONS, AND OTHER LEASES

On January 1, 2019, the Company adopted ASU 2016-02, Subtopic ASC 842, Leases (the “new guidance”) and elected to use the practical expedient which allowed the Company to carry forward the historical lease classifications of the existing leases as of adoption. Our lessee right of use (ROU) assets represent our right to use an underlying asset and our lease liabilities represent our obligation to make lease payments.

The Company leases a manufacturing facility and warehouse in North Carolina, a corporate office space in Williamsville, New York, and a laboratory space in Buffalo, New York. The ROU assets and lease liabilities for these operating leases are recognized as of the commencement date at the net present value of the fixed minimum lease payments for the lease term. The discount rate used is the interest rate implicit in the lease, if available, or the Company’s incremental borrowing rate which is determined using a base line rate plus an applicable spread.

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The following table summarizes the Company’s discount rate and remaining lease terms:

Weighted average remaining lease term in years

2.3

Weighted average discount rate

 

4.8

%

Future minimum lease payments as of September 30, 2020 are as follows:

2020

$

87

2021

 

324

2022

 

92

2023

88

2024

 

15

Total lease payments

 

606

Less: imputed interest

 

(34)

Total

$

572

NOTE 5. – INVESTMENTS & CONVERTIBLE NOTE RECEIVABLE

Investment in Panacea Life Sciences, Inc.

On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc. (“Panacea”) for $13,297 in exchange for a 15.8% ownership interest. The Company’s investment consists of three instruments: shares of Series B preferred stock (“preferred stock”); a convertible note receivable; and a warrant (“stock warrant”) to purchase additional shares of Series B preferred stock, to obtain 51% ownership of Panacea, at an exercise price of $2.344 per share. The convertible note receivable has a term of five years, bears interest of 10% per annum, and can be converted to shares of Series B preferred stock at the Company’s discretion. The preferred stock carries an annual 10% cumulative dividend, compounded annually, and has an implicit put option after the fifth anniversary date so long that the stock warrants have not been exercised. The stock warrant may be exercised at any time after the fifth anniversary date and would be accelerated if Panacea achieves certain sales targets for two consecutive years. The Series B preferred stock also has equity preferences in the event of a liquidation, sale, or transfer of Panacea assets.

The convertible note receivable and the preferred stock investment are considered available for sale debt securities with a private company that is not traded in active markets. Since observable price quotations were not available at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition. The discount of each instrument is accreted into interest income over the respective term as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 6 for additional information on these fair value measurements. The stock warrant was recorded at its cost basis in accordance with the practical expedient under ASU 2016-01.

In accordance with ASC 326-30-35 and ASC 321-35-3, credit loss risk of available-for-sale securities and impairment risk of investments recorded at cost should be evaluated if negative indicators are present. During 2020, the cannabidiol (CBD) industry has experienced an overall decline due to increased competition, FDA regulation uncertainty, and continued uncertainty from COVID-19—all relevant impairment indicators for the valuation of our Panacea investment. Based on the Company’s assessment, it was determined that no risk of credit loss existed for the available-for-sale debt security instruments as of September 30, 2020. As such, we concluded that the recorded value aligns with the expected cash flows of the instruments.

However, the Company determined that the recorded cost basis of the stock warrant exceeded its fair value due to the negative macroeconomic indicators mentioned above. As such, the Company recognized an impairment charge of $1,062 during the nine months ended September 30, 2020.

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Investment in Aurora Cannabis, Inc.

The Company has an investment in Aurora Cannabis Inc. (“Aurora”) stock warrants that are considered equity securities under ASC 321 – Investments – Equity Securities and a derivative instrument under ASC 815 – Derivatives and Hedging. The stock warrants are not designated as a hedging instrument, and in accordance with ASC 815, the Company’s investment in stock warrants are recorded at fair value with changes in fair value recorded to unrealized gain/loss as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 6 for additional information on the fair value measurements.

The carrying value of the Company’s investments at September 30, 2020 and December 31, 2019 consisted of the following:

September 30, 

December 31, 

2020

2019

Aurora stock warrants

    

$

111

    

$

673

Panacea preferred stock

5,101

4,865

Panacea stock warrant

1,803