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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 March 31, 2021

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)

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

(Registrant’s former office)

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 May 4, 2021, there were 152,444,163 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 March 31, 2021 (unaudited) and December 31, 2020

3

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2021 and 2020 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months ended March 31, 2021 and 2020 (unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2021 and 2020 (unaudited)

6

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

Item 2.

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

21

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION

32

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Default Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

33

 

 

 

SIGNATURES

34

2

Table of Contents

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands)

March 31, 

December 31, 

    

2021

    

2020

ASSETS

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

1,272

$

1,029

Short-term investment securities

 

29,671

 

21,313

Accounts receivable, net

 

2,023

 

2,159

Inventory, net

 

2,137

 

2,034

Prepaid expenses and other assets

 

1,280

 

1,806

Total current assets

 

36,383

 

28,341

Property, plant and equipment:

 

  

 

  

Machinery and equipment, net

 

2,487

 

2,483

Operating leases right-of-use assets, net

 

182

 

247

Total property, plant and equipment

 

2,669

 

2,730

Other assets:

 

 

  

Intangible assets, net

 

8,110

 

8,211

Investments

 

6,643

 

6,536

Convertible note

5,876

5,876

Total other assets

 

20,629

 

20,623

Total assets

$

59,681

$

51,694

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes payable

$

295

$

539

Operating lease obligations

 

182

 

247

Accounts payable

 

1,572

 

1,116

Accrued expenses

 

4,681

 

4,830

Accrued severance

 

274

 

339

Deferred income

 

 

272

Total current liabilities

 

7,004

 

7,343

Long-term liabilities:

 

  

 

  

Severance obligations

187

241

Total liabilities

7,191

7,584

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:

 

  

 

  

152,397,501 common shares (139,061,690 at December 31, 2020)

 

 

Common stock value

2

1

Capital in excess of par value

 

202,880

 

189,439

Accumulated other comprehensive (loss) income

 

42

 

74

Accumulated deficit

 

(150,434)

 

(145,404)

Total shareholders' equity

 

52,490

 

44,110

Total liabilities and shareholders’ equity

$

59,681

$

51,694

See accompanying notes to consolidated financial statements.

3

Table of Contents

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

($ in thousands except per-share data)

Three Months Ended

March 31, 

    

2021

    

2020

Revenue:

  

 

  

Sale of products, net

$

6,806

$

7,058

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

 

  

 

  

Products

 

6,159

 

6,771

Gross profit (loss)

 

647

 

287

Operating expenses:

 

  

 

  

Research and development

 

689

 

811

Research and development - MRTP

12

149

Sales, general and administrative

 

4,829

 

3,141

Depreciation

 

138

 

156

Amortization

 

150

 

172

Total operating expenses

 

5,818

 

4,429

Operating loss

 

(5,171)

 

(4,142)

Other income (expense):

 

  

 

  

Unrealized gain (loss) on investments

 

36

 

(445)

Realized gain (loss) on short-term investment securities

 

 

(3)

Interest income, net

 

112

 

612

Interest expense

 

(7)

 

(12)

Total other income (expense)

 

141

 

152

Loss before income taxes

 

(5,030)

(3,990)

Income taxes

 

38

Net loss

$

(5,030)

$

(4,028)

Other comprehensive income (loss):

 

  

 

  

Unrealized gain (loss) on short-term investment securities

 

(32)

 

(196)

Reclassification of (gain) loss to net loss

 

 

3

Other comprehensive income (loss)

(32)

(193)

Comprehensive loss

$

(5,062)

$

(4,221)

Net loss per common share - basic and diluted

$

(0.03)

$

(0.03)

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

 

144,258

 

138,610

See accompanying notes to consolidated financial statements.

4

Table of Contents

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands except share data)

Three Months Ended March 31, 2021

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, 2020

 

139,061,690

$

1

 

$

189,439

 

$

74

 

$

(145,404)

$

44,110

Stock issued in connection with RSU vesting

 

1,196,258

 

 

 

 

 

Stock issued in connection with option exercises

846,342

1,153

1,153

Stock issued in connection with warrant exercises

11,293,211

1

11,781

11,782

Equity-based compensation

 

 

 

507

 

 

 

507

Unrealized gain (loss) on short-term investment securities

 

 

 

 

(32)

 

 

(32)

Net loss

 

 

 

 

 

(5,030)

 

(5,030)

Balance at March 31, 2021

152,397,501

$

2

$

202,880

$

42

$

(150,434)

$

52,490

Three Months Ended March 31, 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

 

 

 

481

 

 

 

481

Unrealized gain (loss) on short-term investment securities

(196)

(196)

Reclassification of losses (gains) to net loss

3

3

Net loss

(4,028)

(4,028)

Balance at March 31, 2020

138,854,193

$

1

$

188,216

$

(186)

$

(129,721)

$

58,310

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)

Three Months Ended

March 31, 

    

2021

    

2020

    

Cash flows from operating activities:

 

  

 

  

Net loss

$

(5,030)

$

(4,028)

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

 

  

 

  

Amortization and depreciation

 

226

 

266

Amortization of license fees

 

62

 

62

Amortization of ROU Asset

 

65

 

71

Unrealized (gain) loss on investment

 

(36)

 

445

Realized (gain) loss on short-term investment securities

3

Accretion of non cash interest expense

6

12

Accretion of non cash interest income

 

(45)

 

(209)

Equity-based employee compensation expense

 

507

 

481

(Increase) decrease in assets:

 

  

 

  

Accounts receivable

 

135

 

(266)

Inventory

 

(103)

 

(182)

Prepaid expenses and other assets

 

526

 

(273)

Increase (decrease) in liabilities:

 

 

  

Operating lease obligations

 

(66)

 

(70)

Accounts payable

 

381

 

(639)

Accrued expenses

 

(148)

 

(188)

Accrued severance

(119)

(213)

Deferred income

 

(272)

 

66

Net cash provided by (used in) operating activities

 

(3,911)

 

(4,662)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

(20)

 

(103)

Acquisition of machinery and equipment

 

(100)

 

(8)

Sales and maturities of short-term investment securities

 

4,950

 

11,613

Purchase of short-term investment securities

 

(13,365)

 

(6,606)

Net cash provided by (used in) investing activities

 

(8,535)

 

4,896

Cash flows from financing activities:

 

  

 

Payment on note payable

(246)

Net proceeds from option exercise

1,153

Net proceeds from warrant exercise

11,782

Net cash provided by (used in) financing activities

 

12,689

 

Net increase (decrease) in cash and cash equivalents

 

243

 

234

Cash and cash equivalents - beginning of period

 

1,029

 

485

Cash and cash equivalents - end of period

$

1,272

$

719

Supplemental disclosures of cash flow information:

 

  

 

  

Net cash paid for:

 

  

 

  

Cash paid during the period for interest

$

1

$

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

29

$

88

Machinery and equipment additions included in accounts payable

$

43

$

Right-of-use assets and corresponding operating lease obligations

$

$

198

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2021

(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 three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The balance sheet as of December 31, 2020 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, 2020 audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 11, 2021.

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/cannabis business.

COVID-19 Pandemic – The COVID-19 pandemic has adversely impacted the U.S. economy and supply chains and created volatility in U.S. financial markets. The COVID-19 pandemic has had a minimal impact on the Company’s operations in 2020 and thus far in 2021, but there is a risk that state and federal authorities’ responses to the COVID-19 pandemic or another pandemic may disrupt our business in the future. Our executive leadership team and staff are monitoring this evolving situation and its impacts on our business. We will continue to monitor the local, state and federal guidance regarding our business practices.

During April 2021, the Company relocated its corporate headquarters into downtown Buffalo, NY. The new office, as well as all of our facilities, continue to operate under state and federal protocols which include physical distancing, mandatory face coverings, and disinfection of surfaces. We also continue to encourage remote work arrangements by our employees where job duties permit.

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

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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.

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

The Company’s capitalized intellectual property costs are amortized using the straight-line method over the remaining statutory life of the granted patent assets in each of the Company’s patent families, which have estimated expiration dates ranging from 2026 to 2041. Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which have expected expiration dates ranging from 2028 through 2036. The Company believes costs associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such, no amortization is taken. At each reporting period, the Company evaluates whether events and circumstances continue to support the indefinite-lived classification.

Impairment of Long-Lived Assets – The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be recoverable. On at least an annual basis, the Company assesses whether events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indicators are present, the Company will test for recoverability in accordance with ASC 360-Property, plant, and equipment or ASC 350- Intangibles, Goodwill, and Other.

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

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

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 the 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 its 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. Forfeitures are accounted for when they occur.

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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.

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. 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.

Inventories at March 31, 2021 and December 31, 2020 consisted of the following:

    

March 31, 

    

December 31, 

    

2021

    

2020

Inventory - tobacco leaf

$

703

$

821

Inventory - finished goods

 

Cigarettes and filtered cigars

 

229

 

171

Inventory - raw materials

 

 

Cigarette and filtered cigar components

1,305

1,142

Less: inventory reserve

 

(100)

 

(100)

$

2,137

$

2,034

NOTE 3. - MACHINERY AND EQUIPMENT

Machinery and equipment at March 31, 2021 and December 31, 2020 consisted of the following:

March 31, 

December 31, 

    

Useful Life

    

2021

    

2020

Cigarette manufacturing equipment

3 or 10 years

$

4,924

$

4,893

Office furniture, fixtures and equipment

5 Years

 

26

 

20

Laboratory equipment

5 Years

 

117

 

117

Leasehold improvements

6 Years

 

123

 

123

Construction in progress

105

 

 

Less: accumulated depreciation

  

 

(2,808)

 

(2,670)

Machinery and equipment, net

  

$

2,487

$

2,483

Depreciation expense was $138 for the three months ended March 31, 2021 ($156 for the three months ended March 31, 2020).

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

The Company leases a manufacturing facility and warehouse in North Carolina, a corporate headquarters in Buffalo, New York, and a laboratory space in Buffalo, New York. The tables outlined below represent information regarding the Company’s manufacturing facility lease and laboratory lease which are both classified as operating leases and are currently reflected within the Consolidated Balance Sheets.

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

Weighted average remaining lease term in years

0.8

Weighted average discount rate

 

4.4

%

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Future minimum lease payments as of March 31, 2021 are as follows:

2021

$

176

2022

 

9

Total lease payments

 

185

Less: imputed interest

 

(3)

Total

$

182

On January 15, 2021, the Company signed a lease agreement to relocate its corporate headquarters to the Larkinville District in downtown Buffalo, New York. The Company moved into the new office location in April 2021 and signed an amended lease agreement which revised the original lease commencement date to April 1, 2021. During the second quarter of 2021, the Company will recognize the respective right of use (“ROU”) asset and lease liability for the new corporate headquarters on its Consolidated Balance Sheets. The lease has a monthly base rent of $6, which escalates 2.5% annually after the first year, and an initial term of 36 months—with two twenty-four-month optional renewal options at the Company’s discretion.

NOTE 5. – INVESTMENTS & CONVERTIBLE NOTE RECEIVABLE

Investment in Panacea Life Sciences, Inc.

The Company has an investment in Panacea Life Sciences (“Panacea”) that consists of three instruments: (i) shares of Series B preferred stock (“preferred stock”); (ii) a convertible note receivable with a $7,000 face value; and (iii) 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 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 on the convertible note receivable and preferred stock is being amortized into interest income over the respective term. See Note 6 for additional information on the fair value measurements.

The Company entered into a non-binding agreement with Panacea to potentially restructure the investment and business relationship. The non-binding agreement with Panacea generally provides for (i) the transfer of $7,170 in operational assets, including an agricultural facility and various extraction and distillation equipment, from Panacea to the Company in exchange for the cancellation of the $7,000 convertible note receivable plus accrued interest; (ii) an amendment of transaction documents to remove any future investment rights and obligations of the Company in Panacea, (iii) cancellation of the stock warrant to purchase additional Series B preferred stock; and (iv) various other amendments to Panacea’s charter to amend various investors rights therein. As a result of the expected outcome of this non-binding agreement, the discount on the convertible note receivable is no longer amortized into interest income as the Company’s total carrying value of its stock warrant, convertible note receivable, and accrued interest equals the fair value outlined in the non-binding agreement. However, the agreement to restructure the investment with Panacea is preliminary, non-binding, subject to change, and may not occur.

As of March 31, 2021, the total carrying value of the Company’s investment in Panacea is outlined below:

March 31, 

December 31,

2021

2020

Panacea preferred stock

    

$

5,244

    

$

5,173

Panacea stock warrant

1,124

1,124

Accrued interest on convertible note receivable (included within prepaid expenses and other assets)

170

170

Convertible note receivable

5,876

5,876

Total

$

12,414

$

12,343

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

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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 total carrying value of the Company’s investments at March 31, 2021 and December 31, 2020 consisted of the following:

March 31, 

December 31, 

2021

2020

Aurora stock warrants

    

$

275

    

$

239

Panacea preferred stock

5,244

5,173

Panacea stock warrant

1,124

1,124

Total Investments

$

6,643

$

6,536

Convertible Note Receivable

$

5,876

$

5,876

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

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

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

A financial asset’s or a financial liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table presents information about our assets and liabilities measured at fair value as of March 31, 2021 and December 31, 2020, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Fair Value

March 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Short-term investment securities:

 

  

 

  

 

  

 

  

Money market funds

$

22,001

$

$

$

22,001

Corporate bonds

 

 

7,670

 

 

7,670

Total short-term investment securities

$

22,001

$

7,670

$

$

29,671

Investment - Aurora stock warrants

$

$

$

275

$

275

Investment - Panacea preferred stock

$

$

$

5,244

$

5,244

Convertible note receivable

$

$

$

5,876

$

5,876

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Fair Value

December 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Short-term investment securities:

 

  

 

  

 

  

 

  

Money market funds

$

8,636

$

$

$

8,636

Corporate bonds

 

 

12,677

 

 

12,677

Total short-term investment securities

$

8,636

$

12,677

$

$

21,313

Investment - Aurora stock warrants

$

$

$

239

$

239

Investment - Panacea preferred stock

$

$

$

5,173

$

5,173

Convertible note receivable

$

$

$

5,876

$

5,876

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

The investment in the Aurora stock (ACB) warrants is measured at fair value using the Black-Scholes pricing model and is classified within Level 3 of the valuation hierarchy. The unobservable input is an estimated volatility factor of 143% and 137% as of March 31, 2021 and December 31, 2020, respectively. Therefore, changes in market volatility will impact the fair value measurement of our ACB investment.

A 20% increase or decrease in the volatility factor used as of March 31, 2021 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately $128. A 20% increase or decrease in the volatility factor used at December 31, 2020 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately $115.

The Panacea 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, fair value was estimated based on cost less an appropriate discount upon acquisition.

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 investments for the three months ended March 31, 2021:

Fair Value at December 31, 2020

$

11,288

Unrealized gain as a result of change in fair value

36

Accretion of interest on Panacea preferred stock

71

Fair Value at March 31, 2021

$

11,395

The following tables set forth a summary of the Company’s available-for-sale debt securities from amortized cost basis to fair value as of March 31, 2021 and December 31, 2020:

Available for Sale Debt Securities

March 31, 2021

Amortized

Gross

Gross

Cost

Unrealized

Unrealized

Fair

    

Basis

    

Gains

    

Losses

    

Value

Corporate bonds

$

7,628

$

42

$

$

7,670

Convertible note receivable

 

5,876

 

 

 

5,876

Investment - Panacea preferred stock

 

5,244

 

 

 

5,244

$

18,748

$

42

$

$

18,790

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Available for Sale Debt Securities

December 31, 2020

Amortized

Gross

Gross

Cost

Unrealized 

Unrealized 

Fair

    

Basis

    

Gains

    

Losses

    

Value

Corporate bonds

$

12,603

$

74

$

$

12,677

Convertible note receivable

 

5,876

 

 

 

5,876

Investment - Panacea preferred stock

 

5,173

 

 

 

5,173

$

23,652

$

74

$

$

23,726

The following table sets forth a summary of the Company’s available-for-sale securities from amortized cost basis and fair value by contractual maturity as of March 31, 2021 and December 31, 2020:

Available for Sale Debt Securities

March 31, 2021

December 31, 2020

Amortized

Amortized

    

Cost Basis

    

Fair Value

    

Cost Basis

    

Fair Value

Due in one year or less

$

7,628

$

7,670

$

11,692

$

11,753

Due after one year through five years

 

11,120

 

11,120

 

11,960

 

11,973

Due in five years

$

18,748

$

18,790

$

23,652

$

23,726

NOTE 7. - INTANGIBLE ASSETS 

Total intangible assets at March 31, 2021 and December 31, 2020 consisted of the following:

March 31, 

December 31, 

    

2021

    

2020

Intangible assets, net

 

  

 

  

Patent and trademark costs

$

5,717

$

5,667

Less: accumulated amortization

 

(3,025)

 

(2,936)

Patent and trademark costs, net

 

2,692

 

2,731

License fees

 

3,876

 

3,876

Less: accumulated amortization

 

(1,010)

 

(948)

License fees, net

 

2,866

 

2,928

MSA signatory costs

 

2,202

 

2,202

  

License fee for predicate cigarette brand

 

350

 

350

$

8,110

$

8,211

Amortization expense relating to the above intangible assets for the three months ended March 31, 2021 amounted to $150 ($172 for the three months ended March 31, 2020).

NOTE 8. – NOTES PAYABLE

License Fees

On June 22, 2018, the Company entered into the Second Amendment to the License Agreement (the “Second Amendment”) with North Carolina State University (“NCSU”) that amended an original License Agreement between the Company and NCSU, dated December 8, 2015, and the First Amendment, dated February 14, 2018, to the original License Agreement. Under the terms of the Second Amendment, the Company was obligated to pay NCSU milestone payments totaling $1,200, which originally amounted to a present value of $1,175. As of June 30, 2020 the Company paid the final milestone payment of $300. The cost of the of acquired

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license amounted to $1,175 and is included in Intangible assets, net on the Company’s Consolidated Balance Sheets, and is amortized on a straight-line basis over the last-to-expire patent, which is expected to be in 2036.

On October 22, 2018, the Company entered into a License Agreement with the University of Kentucky. Under the terms of the License Agreement, the Company is obligated to pay the University of Kentucky milestone payments totaling $1,200, of which $300 was payable upon execution, and $300 will be payable annually over three years on the anniversary of the execution of the License Agreement. The Company has recorded the present value of the obligations under the License Agreement as a note payable that originally amounted to $1,151. The cost of the of acquired licenses amounted to $1,151 and is included in Intangible assets, net on the Company’s Consolidated Balance Sheets and will be amortized on a straight-line basis over the last-to-expire patent, which is expected to be in 2033.

D&O Insurance

During the second quarter of 2020, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $2,744. The Company paid $549 as a premium down payment and financed the remaining $2,195 of policy premiums over nine months at a 3.19% annual percentage rate.

The table below outlines our notes payable balances as of March 31, 2021 and December 31, 2020:

March 31, 

December 31, 

 

    

2021

    

2020

 

License Fees

$

295

$

293

D&O Insurance

 

 

246

Total current notes payable

$

295

$

539

Accretion of non-cash interest expense amounted to $2 for the three months ended March 31, 2021 and $6 for the three months ended March 31, 2020.

NOTE 9. – SEVERANCE LIABILITY

During the second quarter of 2020, the Company recorded severance benefits of $306 related to a resignation which will be provided over a twelve-month period. During 2019, the Company recorded severance benefits of $881. Consistent with certain contractual obligations, $771 of the related benefit will be provided over a period of forty-two months.

The current and long-term accrued severance balance remaining as of March 31, 2021 was $