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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 June 30, 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)

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 August 4, 2021, there were 162,735,483 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 June 30, 2021 (unaudited) and December 31, 2020

3

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2021 and 2020 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months ended June 30, 2021 and 2020 (unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 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

23

 

 

 

Item 4.

Controls and Procedures

34

 

 

 

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)

June 30, 

December 31, 

    

2021

    

2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,037

$

1,029

Short-term investment securities

 

60,284

 

21,313

Accounts receivable, net

 

2,137

 

2,159

Inventory, net

 

2,313

 

2,034

Prepaid expenses and other assets

 

3,943

 

1,806

Total current assets

 

70,714

 

28,341

Property, plant and equipment, net

 

4,847

 

2,483

Operating leases right-of-use assets, net

 

595

 

247

Intangible assets, net

 

8,119

 

8,211

Investments

 

9,200

 

6,536

Other assets

3,684

5,876

Total assets

$

97,159

$

51,694

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes payable

$

2,659

$

539

Operating lease obligations

 

174

 

247

Accounts payable

 

981

 

1,116

Accrued expenses

 

5,072

 

4,830

Accrued severance

 

212

 

339

Deferred income

 

145

 

272

Total current liabilities

 

9,243

 

7,343

Long-term liabilities:

 

  

 

  

Operating lease obligations

 

423

 

Severance obligations

130

241

Total liabilities

9,796

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:

 

  

 

  

162,685,483 common shares (139,061,690 at December 31, 2020)

 

 

Common stock value

2

1

Capital in excess of par value

 

241,968

 

189,439

Accumulated other comprehensive (loss) income

 

1

 

74

Accumulated deficit

 

(154,608)

 

(145,404)

Total shareholders' equity

 

87,363

 

44,110

Total liabilities and shareholders’ equity

$

97,159

$

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

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

    

Revenue:

  

 

  

Sale of products, net

$

8,371

$

6,435

$

15,177

$

13,493

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

 

  

 

  

 

 

Products

 

7,785

 

6,234

 

13,944

 

13,005

Gross profit (loss)

 

586

 

201

 

1,233

 

488

Operating expenses:

 

  

 

  

 

 

Research and development

 

744

 

957

 

1,433

 

1,770

Research and development - MRTP

2

4

14

154

Sales, general and administrative

 

6,177

 

3,501

 

11,006

 

6,640

Impairment of intangible assets

 

146

 

 

146

Depreciation

 

150

 

157

 

288

 

313

Amortization

 

153

 

189

 

303

 

361

Total operating expenses

 

7,226

 

4,954

 

13,044

 

9,384

Operating loss

 

(6,640)

 

(4,753)

 

(11,811)

 

(8,896)

Other income (expense):

 

  

 

  

 

 

Unrealized gain (loss) on investments

 

(176)

 

312

 

(140)

 

(133)

Impairment of Panacea investment

(1,062)

(1,062)

Gain on Panacea investment conversion

2,548

2,548

Realized gain (loss) on short-term investment securities

 

 

3

 

 

Interest income, net

 

108

 

462

 

220

 

1,074

Interest expense

 

(14)

 

(19)

 

(21)

 

(31)

Total other income (expense)

 

2,466

 

(304)

 

2,607

 

(152)

Loss before income taxes

 

(4,174)

(5,057)

 

(9,204)

(9,048)

Income taxes

 

 

 

38

Net loss

$

(4,174)

$

(5,057)

$

(9,204)

$

(9,086)

Other comprehensive income (loss):

 

  

 

  

 

 

Unrealized gain (loss) on short-term investment securities

 

(41)

 

241

 

(73)

 

45

Reclassification of (gain) loss to net loss

 

 

(3)

 

 

Other comprehensive income (loss)

(41)

238

(73)

45

Comprehensive loss

$

(4,215)

$

(4,819)

$

(9,277)

$

(9,041)

Net loss per common share - basic and diluted

$

(0.03)

$

(0.04)

$

(0.06)

$

(0.07)

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

 

154,811

 

138,854

 

149,564

 

138,732

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 Months and Six Months Ended June 30, 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

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

200,103

(469)

(469)

Stock issued in connection with option exercises

87,879

106

106

Stock issued in connection with capital raise

10,000,000

38,206

38,206

Equity-based compensation

1,245

1,245

Unrealized gain (loss) on short-term investment securities

(41)

(41)

Net loss

(4,174)

(4,174)

Balance at June 30, 2021

 

162,685,483

$

2

$

241,968

$

1

$

(154,608)

$

87,363

Three Months and Six Months Ended June 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

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

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)

Six Months Ended

June 30, 

    

2021

    

2020

    

Cash flows from operating activities:

 

  

 

  

Net loss

$

(9,204)

$

(9,086)

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

 

  

 

  

Impairment of intangible assets

146

Impairment of Panacea investment

1,062

Amortization and depreciation

 

466

 

549

Amortization of license fees

 

124

 

125

Amortization of ROU Asset

 

149

 

151

Unrealized (gain) loss on investment

 

140

 

133

Gain on Panacea investment conversion

 

(2,548)

Accretion of non cash interest expense

4

12

Accretion of non cash interest income

 

(85)

 

(306)

Equity-based employee compensation expense

 

1,752

 

856

(Increase) decrease in assets:

 

  

 

  

Accounts receivable

 

21

 

(132)

Inventory

 

(280)

 

(503)

Prepaid expenses and other assets

 

(2,307)

 

(2,934)

Increase (decrease) in liabilities:

 

 

  

Operating lease obligations

 

(148)

 

(149)

Accounts payable

 

(140)

 

(1,032)

Accrued expenses

 

151

 

(384)

Accrued severance

(238)

24

Deferred income

 

(127)

 

(5)

Net cash provided by (used in) operating activities

 

(12,270)

 

(11,473)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

(179)

 

(198)

Acquisition of property, plant and equipment

 

(388)

 

(42)

Sales and maturities of short-term investment securities

 

19,037

 

19,272

Purchase of short-term investment securities

 

(58,137)

 

(8,853)

Net cash provided by (used in) investing activities

 

(39,667)

 

10,179

Cash flows from financing activities:

 

  

 

Payment on note payable

(538)

(542)

Proceeds from note payable issuance

2,653

2,195

Net proceeds from option exercise

1,259

Net proceeds from warrant exercise

11,782

Net proceeds from issuance of common stock

38,258

Taxes paid related to net share settlement of RSUs

(469)

Proceeds from SBA loan

1,183

Repayment of SBA loan

(1,183)

Net cash provided by (used in) financing activities

 

52,945

 

1,653

Net increase (decrease) in cash and cash equivalents

 

1,008

 

359

Cash and cash equivalents - beginning of period

 

1,029

 

485

Cash and cash equivalents - end of period

$

2,037

$

844

Supplemental disclosures of cash flow information:

 

  

 

  

Net cash paid for:

 

  

 

  

Cash paid during the period for interest

$

8

$

6

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

$

54

Property, plant and equipment additions included in accounts payable

$

9

$

Property, plant and equipment additions included in accrued expenses

$

7

$

Right-of-use assets and corresponding operating lease obligations

$

497

$

198

Patent and trademark additions included in accrued expenses

$

32

$

Capital raise issuance fees included in accrued expenses

$

52

$

Panacea investment conversion

$

12,485

$

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 six months ended June 30, 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 (i) 22nd Century Group, Inc. (“22nd Century Group”); (ii) its four wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), Botanical Genetics, LLC (“Botanical Genetics”), and 22nd Century Group Canada, Inc. (“22nd Century Group Canada”); (iii) two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”); and (iv) one wholly-owned subsidiary of Botanical Genetics, 22nd Century Holdings, LLC. This group of subsidiaries is referred to as 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. 22nd Century Ltd performs research and development related to the level of nicotine and other nicotinic alkaloids in tobacco plants and Botanical Genetics performs research and development related to hemp/cannabis plants. Goodrich Tobacco and Heracles Pharma are business units for the Company’s potential modified 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. 22nd Century Holdings and 22nd Century Group Canada are two newly formed subsidiaries where 22nd Century Holdings will own and operate the newly acquired Needle Rock Farm assets and 22nd Century Group Canada will allow for future international business opportunities in Canada.

Reclassifications Certain prior period amounts have been reclassified to conform to the current period’s classification. None of these reclassifications had a material impact on our consolidated financial statements.

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.

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 in compliance with New York and North Carolina guidance (as applicable) related to the

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prevention of COVID-19 transmission and employee safety. We also continue to allow 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 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 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 that costs associated with becoming a signatory to the MSA and costs related to the acquisition of a predicate cigarette brand have an indefinite life. 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, a promissory note receivable, accounts payable, accrued expenses, and notes payable. The carrying values of these financial instruments approximate fair value. The Company carries cash equivalents, short-term investment securities, certain investments, and certain other assets at fair value which is described further in Note 6.

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

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

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.

Recent Accounting Pronouncement(s) – In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires companies to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The provisions of the ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years—excluding small reporting companies (SRCs) which have an effective date beginning after December 15, 2022 and interim periods within those fiscal years. The Company plans to adopt ASU 2016-13 on January 1, 2022 and is evaluating the expected impacts.

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

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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, hemp/cannabis 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 June 30, 2021 and December 31, 2020 consisted of the following:

    

June 30, 

    

December 31, 

    

2021

    

2020

Inventory - tobacco leaf

$

863

$

821

Inventory - hemp/cannabis

68

Inventory - finished goods

 

Cigarettes and filtered cigars

 

193

 

171

Inventory - raw materials

 

 

Cigarette and filtered cigar components

1,289

1,142

Less: inventory reserve

 

(100)

 

(100)

$

2,313

$

2,034

NOTE 3. – PROPERTY, PLANT, AND EQUIPMENT, NET

Property, plant, and equipment, net at June 30, 2021 and December 31, 2020 consisted of the following:

June 30, 

December 31, 

    

Useful Life

    

2021

    

2020

Land

$

1,665

$

Building and leasehold improvements

7 to 40 years

309

123

Manufacturing equipment

3 to 10 years

5,518

4,893

Office furniture, fixtures and equipment

5 years

 

119

 

20

Laboratory equipment

5 years

 

192

 

117

 

 

Less: accumulated depreciation

  

 

(2,956)

 

(2,670)

Property, plant and equipment, net

  

$

4,847

$

2,483

Depreciation expense was $150 and $288 for the three and six months ended June 30, 2021 ($157 and $313 for the three and six months ended June 30, 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. During the second quarter of 2021, the Company moved into a new corporate headquarters in downtown Buffalo, NY. The lease has an initial term of 36 months and two 24-month renewal options which are at the Company’s discretion. The Company assumed all renewal options in determination of the lease term.

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

Weighted average remaining lease term in years

5.5

Weighted average discount rate

 

3.8

%

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Future minimum lease payments as of June 30, 2021 are as follows:

2021

$

146

2022

 

85

2023

78

2024

 

80

2025

82

Thereafter

192

Total lease payments

 

663

Less: imputed interest

 

(66)

Total

$

597

NOTE 5. – INVESTMENTS & OTHER ASSETS

The total carrying value of the Company’s investments and other assets at June 30, 2021 and December 31, 2020 consisted of the following:

June 30, 

December 31, 

2021

2020

Aurora stock warrants

    

$

98

    

$

239

Panacea preferred stock

5,173

Panacea stock warrant

1,124

Exactus common stock

9,102

Total Investments

$

9,200

$

6,536

Convertible note receivable

$

$

5,876

Promissory note receivable

$

3,684

$

Investment in Panacea Life Sciences, Inc.

Initial Investment:

On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc. (“Panacea”) for consideration valued at $13,297 ($12,000 cash and $1,297 of the Company’s shares of common stock valued at $1 per share) in exchange for a 15.8% ownership interest. The Company’s investment consisted of three instruments: shares of Series B preferred stock (“preferred stock”); a convertible note receivable with a $7,000 face value; 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 had a term of five years, interest of 10% per annum, and could be converted to shares of Series B preferred stock at the Company’s discretion. The embedded conversion option was not considered a derivative instrument for accounting purposes. The preferred stock carried an annual 10% cumulative dividend, compounded annually, and had an implicit put option after the fifth anniversary date so long that the stock warrants had not been exercised. The put option was not considered a derivative instrument for accounting purposes. The stock warrant was exercisable at any time after the fifth anniversary date and would be accelerated if Panacea achieved certain sales targets for two consecutive years. The Series B preferred stock also included first priority equity preferences in the event of a liquidation, sale, or transfer of Panacea assets. These rights entitled the Company to the original Series B issuance price of $7,000 plus any unpaid accrued dividends.

To allocate the cost of the stock warrant, the Company calculated a fair value based on the following assumptions: volatility of 70%, discount of 25% for lack of marketability, and a risk-free rate of 2%. The value of the stock warrant was allocated to the preferred stock and the convertible note receivable, equally, at a discount to the acquisition price. The discount on the preferred stock was determined to be for lack of control and the discount on the convertible note receivable was determined to be for issuing the note at a below market interest rate for similar instruments.

The convertible note receivable and the preferred stock investment were considered available for sale debt securities with a private company that was not traded in active markets. Since observable price quotations were not available at acquisition, fair value

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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 practicability exception under ASU 2016-01.

Impairment of Panacea Investment:

As a result of increased competition and other macroeconomic factors, the Company recognized an impairment of $1,062 on the Panacea stock warrant during the second quarter of 2020. The impairment is recorded within the Consolidated Statements of Operations and Comprehensive Loss as “Impairment of Panacea Investment.” During the fourth quarter of 2020, the Company entered into a non-binding agreement with Panacea to potentially restructure the investment and business relationship—including the transfer of an agricultural facility and other assets. As of December 31, 2020, the Company adjusted certain assets to represent the fair value outlined in the non-binding agreement.

Conversion of Panacea Investment:

On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc. (“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders. Pursuant to the Securities Exchange Agreement, Exactus fully acquired Panacea. These transactions effected the (i) conversion of all of the Company’s Series B Preferred Stock in Panacea into 91,016,026 shares of common stock in Exactus valued at $9,102 as of June 30, 2021 and (ii) the conversion of the Company’s existing debt in Panacea by converting the outstanding $7,000 principal balance convertible note receivable and all accrued but unpaid interest thereon for fee simple ownership of Needle Rock Farms (224 acres in Delta County, Colorado) and equipment valued at $2,248, $500 in Panacea’s Series B Preferred Stock (which was subsequently converted to Exactus common stock under the Securities Exchange Agreement), and a new $4,300 promissory note (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0% interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado. All other rights and obligations of the Company in Panacea and Panacea’s affiliate, Quintel-MC Incorporated, were terminated by this transaction—including all warrant rights and obligations for future investment. The conversion was recorded as a non-monetary transaction, based on the fair value of the assets received, and resulted in a gain of $2,548 which is included within the Consolidated Statements of Operations and Comprehensive Loss as “Gain on Panacea investment conversion.”

The Promissory note receivable was valued at $3,684 ($4,300 face value less $616 discount) and is included within the Consolidated Balance Sheets as “Other Assets.” The Company intends to hold the Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note. The ownership of Needle Rock Farms and related equipment is included within “Property, plant, and equipment, net” on the Consolidated Balance Sheets. The common shares of Exactus, Inc. are considered equity securities in accordance with ASC 321 and are recorded at fair value—changes in fair value will be included within the statement of operations. See Note 6 for additional information on the fair value measurements.

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.

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;

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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 June 30, 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

June 30, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Short-term investment securities:

 

  

 

  

 

  

 

  

Money market funds

$

43,892

$

$

$

43,892

Corporate bonds

 

 

16,392

 

 

16,392

Total short-term investment securities

$

43,892

$

16,392

$

$

60,284

Investment - Aurora stock warrants

$

$

$

98

$

98

Investment - Exactus common shares

$

9,102

$

$

$

9,102

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

$