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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, 2022

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

For the Transition Period From ________ to ________

Commission File Number: 001-36338

22nd Century Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada

    

98-0468420

(State or other jurisdiction

(IRS Employer

of incorporation)

Identification No.)

500 Seneca Street, Suite 507, Buffalo, New York 14204

(Address of principal executive offices)

(716) 270-1523

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

Title of each class

    

Ticker symbol

    

Name of Exchange on Which Registered

Common Stock, $0.00001 par value

 

XXII 

 

NASDAQ Capital Market

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

Yes    No  

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

Yes    No  

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

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

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

Yes   No  

As of April 29, 2022, there were 164,536,566 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, 2022 (unaudited) and December 31, 2021

3

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three Months ended March 31, 2022 and 2021 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months ended March 31, 2022 and 2021 (unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2022 and 2021 (unaudited)

6

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

33

 

 

 

Item 1.

Legal Proceedings

33

 

 

 

Item 1A.

Risk Factors

33

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

Item 3.

Default Upon Senior Securities

33

 

 

 

Item 4.

Mine Safety Disclosures

33

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

34

 

 

 

SIGNATURES

35

2

Table of Contents

22nd CENTURY GROUP, INC.

CONSOLIDATED BALANCE SHEETS

($ in thousands, except per-share data)

March 31, 

December 31, 

    

2022

    

2021

(Unaudited)

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

1,584

$

1,336

Short-term investment securities

 

37,036

 

47,400

Accounts receivable, net

 

1,220

 

585

Inventory, net

 

3,753

 

2,881

Prepaid expenses and other assets

 

1,389

 

2,183

Total current assets

 

44,982

 

54,385

Property, plant and equipment, net

 

5,949

 

5,841

Operating leases right-of-use assets, net

 

1,631

 

1,723

Intangible assets, net

 

7,934

 

7,919

Investments

 

2,211

 

2,345

Other assets

3,770

3,741

Total assets

$

66,477

$

75,954

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes payable

$

$

596

Operating lease obligations

 

359

 

308

Accounts payable

 

1,512

 

2,173

Accrued expenses

 

2,227

 

1,489

Accrued payroll

 

405

 

2,255

Accrued excise taxes and fees

 

2,009

 

1,270

Accrued severance

 

187

 

217

Deferred income

 

483

 

119

Total current liabilities

 

7,182

 

8,427

Long-term liabilities:

 

  

 

  

Operating lease obligations

 

1,326

 

1,432

Severance obligations

21

Total liabilities

8,508

9,880

Commitments and contingencies (Note 11)

 

 

Shareholders' equity

 

  

 

  

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

 

  

 

  

Common stock, $.00001 par value, 300,000,000 shares authorized

 

  

 

  

Capital stock issued and outstanding:

 

  

 

  

164,536,566 common shares (162,872,875 at December 31, 2021)

 

 

Common stock, par value

2

2

Capital in excess of par value

 

245,460

 

244,247

Accumulated other comprehensive loss

 

(562)

 

(162)

Accumulated deficit

 

(186,931)

 

(178,013)

Total shareholders' equity

 

57,969

 

66,074

Total liabilities and shareholders’ equity

$

66,477

$

75,954

See accompanying notes to consolidated financial statements.

3

Table of Contents

22nd CENTURY GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

($ in thousands, except per-share data)

Three Months Ended

March 31, 

    

2022

    

2021

Revenue:

  

 

  

Sale of products, net

$

9,045

$

6,806

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

 

  

 

  

Products

 

8,585

 

6,159

Gross profit

 

460

 

647

Operating expenses:

 

  

 

  

Research and development

 

972

 

701

Sales, general and administrative

 

7,305

 

4,829

Depreciation

 

168

 

138

Amortization

 

161

 

150

Total operating expenses

 

8,606

 

5,818

Operating loss

 

(8,146)

 

(5,171)

Other income (expense):

 

  

 

  

Unrealized gain (loss) on investments

 

(817)

 

36

Interest income, net

 

50

 

112

Interest expense

 

(5)

 

(7)

Total other income (expense)

 

(772)

 

141

Loss before income taxes

 

(8,918)

(5,030)

Net loss

$

(8,918)

$

(5,030)

Other comprehensive loss:

 

  

 

  

Unrealized loss on short-term investment securities

 

(400)

 

(32)

Other comprehensive loss

(400)

(32)

Comprehensive loss

$

(9,318)

$

(5,062)

Net loss per common share - basic and diluted

$

(0.05)

$

(0.03)

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

 

163,157

 

144,258

See accompanying notes to consolidated financial statements.

4

Table of Contents

22nd CENTURY GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands)

Three Months Ended March 31, 2022

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding

    

Shares

    

Par Value

    

Income (Loss)

    

Deficit

    

Equity

Balance at December 31, 2021

 

162,872,875

$

2

 

$

244,247

 

$

(162)

 

$

(178,013)

$

66,074

Stock issued in connection with RSU vesting

 

1,663,691

 

 

 

 

 

Equity-based compensation

 

 

 

1,213

 

 

 

1,213

Unrealized gain (loss) on short-term investment securities

 

 

 

 

(400)

 

 

(400)

Net loss

 

 

 

 

 

(8,918)

 

(8,918)

Balance at March 31, 2022

164,536,566

 

2

 

245,460

 

(562)

 

(186,931)

 

57,969

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 (Loss)

    

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

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(8,918)

$

(5,030)

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

 

  

 

  

Amortization and depreciation

 

267

 

226

Amortization of license fees

 

62

 

62

Amortization of ROU Asset

 

92

 

65

Unrealized (gain) loss on investment

 

817

 

(36)

Accretion of non-cash interest expense (income)

119

(39)

Equity-based employee compensation expense

 

1,213

 

507

(Increase) decrease in assets:

 

  

 

  

Accounts receivable

 

(635)

 

135

Inventory

 

(872)

 

(103)

Prepaid expenses and other assets

 

794

 

526

Increase (decrease) in liabilities:

 

 

  

Operating lease obligations

 

(55)

 

(66)

Accounts payable

 

(661)

 

381

Accrued expenses

 

647

 

(196)

Accrued payroll

 

(1,850)

 

214

Accrued excise taxes and fees

 

739

 

(166)

Accrued severance

(51)

(119)

Deferred income

 

364

 

(272)

Net cash used in operating activities

 

(7,928)

 

(3,911)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

(105)

 

(20)

Acquisition of property, plant and equipment

 

(258)

 

(100)

Investment in Change Agronomy Ltd.

(682)

Sales and maturities of short-term investment securities

 

13,595

 

4,950

Purchase of short-term investment securities

 

(3,778)

 

(13,365)

Net cash provided by (used in) investing activities

 

8,772

 

(8,535)

Cash flows from financing activities:

 

  

 

Payment on note payable

(596)

(246)

Net proceeds from option exercise

1,153

Net proceeds from warrant exercise

11,782

Net cash provided by (used in) financing activities

 

(596)

 

12,689

Net increase in cash and cash equivalents

 

248

 

243

Cash and cash equivalents - beginning of period

 

1,336

 

1,029

Cash and cash equivalents - end of period

$

1,584

$

1,272

Supplemental disclosures of cash flow information:

 

  

 

  

Net cash paid for:

 

  

 

  

Cash paid during the period for interest

$

3

$

1

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

$

29

Property, plant and equipment additions included in accounts payable

$

$

43

Property, plant and equipment additions included in accrued expenses

$

18

$

Patent and trademark additions included in accrued expenses

$

73

$

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet as of December 31, 2021 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, 2021 audited consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on March 1, 2022.

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of (i) 22nd Century Group, Inc. (“22nd Century Group”); (ii) its five wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), Botanical Genetics, LLC (“Botanical Genetics”), 22nd Century Group Canada, Inc. (“22nd Century Group Canada”) and 22nd Century Group Europe B.V. (“22nd Century Group Europe”); (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 (“22nd Century Holdings”). This group of subsidiaries is referred to as collectively with 22nd Century Group as the “Company”. All intercompany accounts and transactions have been eliminated.

Nature of Business – 22nd Century Group is a leading agricultural biotechnology and intellectual property company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science. 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 exposure 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 owns and operates Needle Rock Farms. 22nd Century Group Canada and 22nd Century Group Europe were formed for future international business opportunities.

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 2021 and thus far in 2022, 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.

All our facilities continue to operate in compliance with state and local guidance (as applicable) related to the prevention of COVID-19 transmission and employee safety. We also continue to allow remote work arrangements by our employees where job duties permit.

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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 2043. 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 from 2028 through 2036. The Company believes that costs associated with becoming a signatory to the MSA, costs related to the acquisition of a predicate cigarette brand and trademarks have indefinite lives. 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 – On at least an annual basis, 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. 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 and record the difference as an impairment.

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 and record the difference as an impairment.

Fair Value of Financial Instruments - The Company’s financial instruments include cash and cash equivalents, short-term investment securities, accounts receivable, investments, 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, 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 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.

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Right-of-use assets (“ROU”) and Lease Obligations – The Company reviews any lease arrangements in accordance with ASU 2016-02, Subtopic ASC 842, Leases. Any lease having a lease term greater than twelve months will be recognized on the Consolidated Balance Sheets as a ROU asset with an associated lease obligation—all other leases are considered short-term in nature and will be expensed as payments are made over the lease term. The ROU assets and lease obligations are recognized as of the commencement date at the net present value of the fixed minimum lease payments for the lease term. The lease term is determined based on the contractual conditions, including whether renewal options are reasonably certain to be exercised. 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.

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 Pronouncements – 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 have an effective date for the Company beginning after December 15, 2022 and interim periods within those fiscal years. The Company is evaluating the expected impacts of the ASU.

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 March 31, 2022 and December 31, 2021 consisted of the following:

    

March 31, 

    

December 31, 

    

2022

    

2021

Inventory - tobacco leaf

$

2,003

$

1,352

Inventory - hemp/cannabis

113

10

Inventory - finished goods

 

Cigarettes and filtered cigars

 

267

 

256

Inventory - raw materials

 

 

Cigarette and filtered cigar components

1,470

1,363

Less: inventory reserve

 

(100)

 

(100)

$

3,753

$

2,881

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

Property, plant, and equipment, net at March 31, 2022 and December 31, 2021 consisted of the following:

March 31, 

December 31, 

    

Useful Life

    

2022

    

2021

Land

$

1,665

$

1,665

Building

12 to 30 years

130

130

Leasehold Improvements

shorter of 15 years or lease term

198

179

Manufacturing equipment

3 to 10 years

5,580

5,541

Office furniture, fixtures and equipment

3 to 5 years

 

150

 

139

Laboratory equipment

5 years

 

198

 

198

Construction in progress

1,496

1,289

 

 

Less: accumulated depreciation

  

 

(3,468)

 

(3,300)

Property, plant and equipment, net

  

$

5,949

$

5,841

Depreciation expense was $168 for the three months ended March 31, 2022 ($138 for the three months ended March 31, 2021).

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 Rockville, Maryland. The corporate headquarters has an initial term of 36 months with two 24-month renewal options. The manufacturing facility and warehouse has an initial term of 24 months with one 24-month renewal option and the laboratory space has a term of 51 months. The Company assumed all renewal options in determination of each lease term.

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

Weighted average remaining lease term in years

4.3

Weighted average discount rate

 

3.3

%

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Future minimum lease payments as of March 31, 2022 are as follows:

2022

$

304

2023

429

2024

 

448

2025

418

2026

111

Thereafter

108

Total lease payments

 

1,818

Less: imputed interest

 

(133)

Total

$

1,685

NOTE 5. – INVESTMENTS & OTHER ASSETS

The total carrying value of the Company’s investments and other assets at March 31, 2022 and December 31, 2021 consisted of the following:

March 31, 

December 31, 

2022

2021

Panacea Life Sciences Holdings, Inc. common stock

    

$

1,528

    

$

2,340

Aurora stock warrants

1

5

Change Agronomy Ltd. ordinary shares

682

Total investments

$

2,211

$

2,345

Promissory note receivable

$

3,770

$

3,741

Investment in Panacea Life Sciences Holdings, Inc.

Initial Investment:

On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc. (“Panacea”) whereby the Company acquired shares of Panacea Series B preferred stock; a convertible note receivable with a $7,000 face value; and a warrant to purchase additional shares of Series B preferred stock.

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”) 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; this balance is reflected in final shares as stated above), 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 was included within the Consolidated Statements of Operations and Comprehensive Loss as “Gain on Panacea investment conversion” during 2021.

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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.” As of March 31, 2022, the Promissory note receivable balance was $3,770. 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.

On October 25, 2021, Exactus announced the completion of a 1 for 28 reverse stock split as well as an entity name change to Panacea Life Sciences Holdings, Inc. (OTCQB: PLSH). As a result of the reverse stock split, our 91,016,026 shares were adjusted to 3,250,573 shares.

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.

Investment in Change Agronomy Ltd.

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

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.

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The following table presents information about our assets and liabilities measured at fair value as of March 31, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Fair Value

March 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Short-term investment securities:

 

  

 

  

 

  

 

  

Money market funds

$

2,058

$

$

$

2,058

Corporate bonds

 

 

34,978

 

 

34,978

Total short-term investment securities

$

2,058

$

34,978

$

$

37,036

Investments:

Panacea Life Sciences Holdings, Inc. common shares

$

1,528

$

$

$

1,528

Aurora stock warrants

1

1

Change Agronomy Ltd. ordinary shares

682

682

Total investments

$

1,528

$

$

683

$

2,211

Fair Value

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Short-term investment securities:

 

  

 

  

 

  

 

  

Money market funds

$

8,919

$

$

$

8,919

Corporate bonds

 

 

38,481

 

 

38,481

Total short-term investment securities

$

8,919

$

38,481

$

$

47,400

Investments:

Panacea Life Sciences Holdings, Inc. common shares

$

2,340

$

$

$

2,340

Aurora stock warrants

5

5

Total investments

$

2,340

$

$

5

$

2,345

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 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 97% and 92% as of March 31, 2022 and December 31, 2021, respectively. Therefore, changes in market volatility will impact the fair value measurement of our Aurora investment.

A 20% increase or decrease in the volatility factor used as of March 31, 2022 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by an average of approximately $2. A 20% increase or decrease in the volatility factor used at December 31, 2021 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by an average of approximately $6.

The investment in Panacea Life Sciences Holdings Inc. common shares is considered an equity security with a readily determinable fair value. The fair value is determined using the quotable market price as of the last trading day of the fiscal quarter.

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

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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, 2022:

Fair Value at December 31, 2021

$

5

Unrealized loss on Aurora stock warrants

(4)

Investment in Change Agronomy Ltd. ordinary shares

682

Fair Value at March 31, 2022

$

683

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, 2022 and December 31, 2021:

Available for Sale Debt Securities

March 31, 2022

Amortized

Gross

Gross

Cost

Unrealized

Unrealized

Fair

    

Basis

    

Gains

    

Losses

    

Value

Corporate bonds

$

35,541

$

$

(563)

$

34,978

Available for Sale Debt Securities

December 31, 2021

Amortized

Gross

Gross

Cost

Unrealized 

Unrealized 

Fair

    

Basis

    

Gains

    

Losses

    

Value

Corporate bonds

$

38,643

$

1

$

(163)

$

38,481

The following table sets forth a summary of the Company’s available-for-sale securities at amortized cost basis and fair value by contractual maturity as of March 31, 2022 and December 31, 2021:

Available for Sale Debt Securities

March 31, 2022

December 31, 2021

Amortized

Amortized

    

Cost Basis

    

Fair Value

    

Cost Basis

    

Fair Value

Due in one year or less

$

15,508

$

15,339

$

8,286

$

8,280

Due after one year through five years

 

20,033

 

19,639

 

30,357

 

30,201

$

35,541

$

34,978

$

38,643

$

38,481

NOTE 7. - INTANGIBLE ASSETS 

Total intangible assets at March 31, 2022 and December 31, 2021 consisted of the following:

March 31, 

December 31, 

    

2022

    

2021

Intangible assets, net

 

  

 

  

Patent and trademark costs

$

6,167

$

5,991

Less: accumulated amortization

 

(3,402)

 

(3,303)

Patent and trademark costs, net

 

2,765

 

2,688

License fees

 

3,876

 

3,876

Less: accumulated amortization

 

(1,259)

 

(1,197)

License fees, net

 

2,617

 

2,679

MSA signatory costs

 

2,202

 

2,202

  

License fee for predicate cigarette brand

 

350

 

350

$

7,934

$

7,919

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Amortization expense relating to the above intangible assets for the three months ended March 31, 2022 amounted to $161 ($150 for the three months ended March 31, 2021).

NOTE 8. – NOTES PAYABLE

License Fees

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 was obligated to pay the University of Kentucky milestone payments totaling $1,200, of which $300 was payable upon execution, and $300 was payable annually over three years on the anniversary of the execution of the License Agreement. The Company recorded the present value of the obligations under the License Agreement as a note payable that originally amounted to $1,151. As of November 30, 2021, the Company paid the final milestone payment of $300. The cost of the 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 2021, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $3,315. The Company paid $662 as a premium down payment and financed the remaining $2,653 of policy premiums over nine months at a 3.49% annual percentage rate.

The table below outlines our notes payable balances as of March 31, 2022 and December 31, 2021:

March 31, 

December 31, 

    

2022

    

2021

D&O Insurance

$

$

596

Accretion of non-cash interest expense amounted to $0 for the three months ended March 31, 2022 and $2 for the three months ended March 31, 2021.

NOTE 9. – SEVERANCE LIABILITY

During the second quarter of 2020, the Company recorded severance benefits related to a resignation of $306. The benefits were 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, 2022 was $187 and $0, respectively. The current and long-term accrued severance balance remaining as of December 31, 2021 was $217 and $21, respectively.

NOTE 10. – CAPITAL RAISE AND WARRANT EXERCISE

Capital Raise

On June 7, 2021, the Company entered into a placement agent agreement (the “Placement Agent Agreement”) with Cowen and Company, LLC (the “Placement Agent”) relating to the Company’s registered direct offering (the “Offering”) to a select investor (the “Investor”). In addition, on June 7, 2021, the Company and the Investor entered into a securities purchase agreement relating to the issuance and sale of shares of common stock pursuant to which the Investor purchased 10,000,000 shares of common stock at $4.00 per share. The net proceeds to the Company from the Offering, after deducting Placement Agent fees and offering expenses, was $38,206.

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Table of Contents

Warrant Exercise

During the first quarter of 2021, the Company’s warrant holders exercised all 11,293,211 outstanding warrants for cash in exchange for common stock. In connection with these exercises, the Company received net proceeds of $11,782. No warrants remain outstanding as of March 31, 2022.

NOTE 11. - COMMITMENTS AND CONTINGENCIES

License agreements and sponsored research – The Company has entered into various license, sponsored research, collaboration, and other agreements (the “Agreements”) with various counter parties in connection with the Company’s plant biotechnology business relating to tobacco, hemp/cannabis and hops. The schedule below summarizes the Company’s commitments, both financial and other, associated with each Agreement. Costs incurred under the Agreements are generally recorded as research and development expenses on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

Future Commitments

Commitment

 

Counter Party

 

Product Relationship

 

Commitment Type

 

2022

 

2023

 

2024

 

2025

2026 & After

Total

    

Research Agreement

KeyGene

Hemp / Cannabis

Contract fee

$

1,406

$

1,860

$

1,828

$

1,414

$

1,630

$

8,138

(1)

License Agreement

NCSU

Tobacco

Annual royalty fee

203

203

(2), (3)

License Agreement

NCSU

Tobacco

Minimum annual royalty

38

50

50

50

550

738

(3)

License Agreement

NCSU

Tobacco

Minimum annual royalty

38

50

50

50

450

638

(3)

Research Agreement

NCSU

Tobacco

Contract fee

78

78

(4)

Sublicense Agreement

Anandia Laboratories, Inc.

Hemp / Cannabis

Annual license fee

10

10

10

100

130

(5)

Research Agreement

Cannametrix

Hemp / Cannabis

Contract fee

500

667

666