UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From ________ to ________
Commission File Number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction | (IRS Employer | |
of incorporation) | Identification No.) |
(Address of principal executive offices)
(
(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 |
|
| 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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |
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
As of November 5, 2020, there were
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 | |
|
| |
4 | ||
|
| |
5 | ||
|
| |
7 | ||
|
| |
8 | ||
|
| |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
|
|
|
33 | ||
|
|
|
35 | ||
|
|
|
35 | ||
|
|
|
35 | ||
|
|
|
35 | ||
|
|
|
35 | ||
|
|
|
35 | ||
|
|
|
35 | ||
|
|
|
36 | ||
|
|
|
37 |
2
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 | $ | | $ | | ||
Short-term investment securities |
| |
| | ||
Accounts receivable, net |
| |
| | ||
Inventory, net |
| |
| | ||
Prepaid expenses and other assets |
| |
| | ||
Total current assets |
| |
| | ||
Property, plant and equipment: |
|
|
|
| ||
Machinery and equipment, net |
| |
| | ||
Operating leases right-of-use assets, net |
| |
| | ||
Total property, plant and equipment |
| |
| | ||
Other assets: |
|
|
| |||
Intangible assets, net |
| |
| | ||
Investments |
| |
| | ||
Convertible note | | | ||||
Total other assets |
| |
| | ||
Total assets | $ | | $ | | ||
|
|
|
| |||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Notes payable | $ | | $ | | ||
Operating lease obligations |
| |
| | ||
Accounts payable |
| |
| | ||
Accrued expenses |
| |
| | ||
Accrued severance |
| |
| | ||
Deferred income |
| |
| | ||
Total current liabilities |
| |
| | ||
Long-term liabilities: |
|
|
|
| ||
Notes payable |
| |
| | ||
Operating lease obligations |
| |
| | ||
Severance Obligations | | | ||||
Total long-term liabilities |
| |
| | ||
Commitments and contingencies (Note 11) |
|
| ||||
Shareholders' equity |
|
|
|
| ||
|
|
|
| |||
|
|
|
| |||
Capital stock and |
|
|
|
| ||
|
| |||||
Common stock value | | | ||||
Capital in excess of par value |
| |
| | ||
Accumulated other comprehensive (loss) income |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Total shareholders' equity |
| |
| | ||
Total liabilities and shareholders’ equity | $ | | $ | |
See accompanying notes to consolidated financial statements.
3
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 | $ | | $ | | $ | | $ | | |||||
Cost of goods sold (exclusive of depreciation shown separately below): |
|
|
|
|
|
| |||||||
Products |
| |
| |
| |
| | |||||
Gross profit (loss) |
| |
| ( |
| |
| ( | |||||
Operating expenses: |
|
|
|
|
|
| |||||||
Research and development |
| |
| |
| |
| | |||||
Research and development - MRTP | | | | | |||||||||
Sales, general and administrative |
| |
| |
| |
| | |||||
Impairment of intangible assets | — |
| |
| |
| | ||||||
Depreciation |
| |
| |
| |
| | |||||
Amortization |
| |
| |
| |
| | |||||
Total operating expenses |
| |
| |
| |
| | |||||
Operating loss |
| ( |
| ( |
| ( |
| ( | |||||
Other income (expense): |
|
|
|
|
|
| |||||||
Unrealized gain (loss) on investments |
| ( |
| ( |
| ( |
| ( | |||||
Impairment of stock warrant | — | — | ( | — | |||||||||
Realized gain (loss) on short-term investment securities |
| — |
| |
| — |
| | |||||
Litigation settlement | — | — | — | ( | |||||||||
Gain on the sale of machinery and equipment |
| |
| — |
| |
| | |||||
Interest income, net |
| |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Total other income (expense) |
| ( |
| ( |
| ( |
| ( | |||||
Loss before income taxes |
| ( | ( |
| ( | ( | |||||||
Income taxes |
| — | — |
| |
| — | ||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive income (loss): |
|
|
|
|
|
| |||||||
Unrealized gain (loss) on short-term investment securities |
| |
| |
| |
| | |||||
Reclassification of gain to net loss |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive income (loss) | | ( | | | |||||||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per common share - basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Weighted average common shares outstanding - basic and diluted (in thousands) |
| |
| |
| |
| |
See accompanying notes to consolidated financial statements.
4
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 |
| | $ | |
| $ | |
| $ | |
| $ | ( | $ | | ||
Stock issued in connection with RSU vesting |
| |
| |
| |
| |
| |
| | |||||
Equity-based compensation |
| |
| |
| |
| |
| |
| | |||||
Unrealized gain (loss) on short-term investment securities |
| |
| |
| |
| ( |
| |
| ( | |||||
Reclassification of losses (gains) to net loss |
| |
| |
| |
| |
| |
| | |||||
Net loss |
| |
| |
| |
| |
| ( |
| ( | |||||
Balance at March 31, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Stock issued in connection with RSU vesting | — | — | — | — | — | — | |||||||||||
Equity-based compensation | — | — | | — | — | | |||||||||||
Unrealized gain (loss) on short-term investment securities | — | — | — | | — | | |||||||||||
Reclassification of losses (gains) to net loss | — | — | — | ( | — | ( | |||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||
Balance at June 30, 2020 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Stock issued in connection with RSU vesting | | — | — | — | — | — | |||||||||||
Equity-based compensation | — | — | | — | — | | |||||||||||
Unrealized gain (loss) on short-term investment securities | — | — | — | | — | | |||||||||||
Reclassification of losses (gains) to net loss | — | — | — | — | — | — | |||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||
Balance at September 30, 2020 |
| | $ | | $ | | $ | | $ | ( | $ | |
5
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 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Stock issued in connection with option exercises |
| |
| |
| |
| |
| |
| | |||||
Equity-based compensation |
| |
| |
| |
| |
| |
| | |||||
Unrealized gain (loss) on short-term investment securities | | | | | | | |||||||||||
Reclassification of losses (gains) to net loss | | | | | | | |||||||||||
Net loss | | | | | ( | ( | |||||||||||
Balance at March 31, 2019 | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Stock issued in connection with option exercises |
| | — | — | — | — | — | ||||||||||
Equity-based compensation |
| — | — | | — | — | | ||||||||||
Unrealized gain (loss) on short-term investment securities | — | — | — | | — | | |||||||||||
Reclassification of losses (gains) to net loss | — | — | — | ( | — | ( | |||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||
Balance at June 30, 2019 | | $ | | $ | | $ | | $ | ( | $ | | ||||||
Stock issued in connection with option exercises | | — | — | — | — | — | |||||||||||
Stock issued in connection with RSU vesting | | — | — | — | — | — | |||||||||||
Stock issued in connection with litigation settlement | | — | | — | — | | |||||||||||
Equity-based compensation | — | — | | — | — | | |||||||||||
Unrealized gain (loss) on short-term investment securities | — | — | — | | — | | |||||||||||
Reclassification of losses (gains) to net loss | — | — | — | ( | — | ( | |||||||||||
Net loss | — | — | — | — | ( | ( | |||||||||||
Balance at September 30, 2019 |
| | $ | | $ | | $ | | $ | ( | $ | |
See accompanying notes to consolidated financial statements.
6
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 | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
| |||
Impairment of intangible assets | | | |||||
Impairment of stock warrant | | — | |||||
Amortization and depreciation |
| |
| | |||
Amortization of license fees |
| |
| | |||
Amortization of ROU Asset |
| |
| | |||
Unrealized (gain) loss on investment |
| |
| | |||
Realized (gain) loss on short-term investment securities | — | ( | |||||
Litigation settlement |
| |
| | |||
Gain on the sale of machinery and equipment |
| ( |
| ( | |||
Accretion of non cash interest expense | | | |||||
Accretion of non cash interest income |
| ( |
| — | |||
Equity-based employee compensation expense |
| |
| | |||
Inventory write-off | | | |||||
(Increase) decrease in assets: |
|
|
|
| |||
Accounts receivable |
| ( |
| | |||
Inventory |
| ( |
| ( | |||
Prepaid expenses and other assets |
| ( |
| | |||
Increase (decrease) in liabilities: |
|
|
| ||||
Operating lease obligations |
| ( |
| ( | |||
Accounts payable |
| ( |
| ( | |||
Accrued expenses |
| |
| ( | |||
Accrued severance | ( | | |||||
Deferred income |
| ( |
| | |||
Net cash provided by (used in) operating activities |
| ( |
| ( | |||
Cash flows from investing activities: |
|
|
| ||||
Acquisition of patents and trademarks |
| ( |
| ( | |||
Acquisition of machinery and equipment |
| ( |
| ( | |||
Proceeds from the sale of machinery and equipment |
| |
| | |||
Sales and maturities of short-term investment securities |
| |
| | |||
Purchase of short-term investment securities |
| ( |
| ( | |||
Net cash provided by (used in) investing activities |
| |
| | |||
Cash flows from financing activities: |
|
|
| ||||
Payment on note payable | ( | ( | |||||
Proceeds from note payable issuance | | — | |||||
Proceeds from SBA loan | | — | |||||
Repayment of SBA loan | ( | — | |||||
Net cash provided by (used in) financing activities |
| |
| ( | |||
Net increase (decrease) in cash and cash equivalents |
| |
| | |||
Cash and cash equivalents - beginning of period |
| |
| | |||
Cash and cash equivalents - end of period | $ | | $ | | |||
Supplemental disclosures of cash flow information: |
|
|
|
| |||
Net cash paid for: |
|
|
|
| |||
Cash paid during the period for interest | $ | | $ | | |||
Non-cash transactions: |
|
|
|
| |||
Patent and trademark additions included in accounts payable | $ | | $ | | |||
Machinery and equipment additions included in accounts payable | $ | | $ | | |||
Right-of-use assets and corresponding operating lease obligations | $ | | $ | | |||
Patent and trademark additions included in accrued expenses | $ | | $ | — |
See accompanying notes to consolidated financial statements.
7
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
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
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.
8
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.
9
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 $
Inventories at September 30, 2020 and December 31, 2019 consisted of the following:
| September 30, |
| December 31, | |||
| 2020 |
| 2019 | |||
Inventory - tobacco leaf | $ | | $ | | ||
Inventory - finished goods |
| |||||
Cigarettes and filtered cigars |
| |
| | ||
Inventory - raw materials |
|
| ||||
Cigarette and filtered cigar components | | | ||||
Less: inventory reserve |
| ( |
| ( | ||
$ | | $ | |
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 | $ | | $ | | ||||
Office furniture, fixtures and equipment |
| |
| | ||||
Laboratory equipment |
| |
| | ||||
Leasehold improvements |
| |
| | ||||
|
| |||||||
Less: accumulated depreciation |
|
| ( |
| ( | |||
Machinery and equipment, net |
| $ | | $ | |
Depreciation expense was $
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
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.
10
The following table summarizes the Company’s discount rate and remaining lease terms:
Weighted average remaining lease term in years | ||||
Weighted average discount rate |
| | % |
Future minimum lease payments as of September 30, 2020 are as follows:
2020 | $ | | |
2021 |
| | |
2022 |
| | |
2023 | | ||
2024 |
| | |
Total lease payments |
| | |
Less: imputed interest |
| ( | |
Total | $ | |
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 $
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 $
11
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 |
| $ | |
| $ | |
Panacea preferred stock | | | ||||
Panacea stock warrant | |