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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, 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 August 5, 2022, there were 214,784,741 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

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited)

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months ended June 30, 2022 and 2021 (unaudited)

4

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months ended June 30, 2022 and 2021 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2022 and 2021 (unaudited)

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

Item 2.

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

26

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

PART II.

OTHER INFORMATION

37

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3.

Default Upon Senior Securities

39

 

 

 

Item 4.

Mine Safety Disclosures

39

 

 

 

Item 5.

Other Information

39

 

 

 

Item 6.

Exhibits

40

 

 

 

SIGNATURES

41

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands, except per-share data)

June 30, 

December 31, 

    

2022

    

2021

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

2,668

$

1,336

Short-term investment securities

 

23,574

 

47,400

Accounts receivable, net

 

4,655

 

585

Inventory

 

10,018

 

2,881

Prepaid expenses and other current assets

 

3,765

 

2,183

Total current assets

 

44,680

 

54,385

Property, plant and equipment, net

 

14,434

 

5,841

Operating leases right-of-use assets, net

 

2,348

 

1,723

Goodwill

 

44,200

 

Intangible assets, net

 

7,890

 

7,919

Investments

 

1,326

 

2,345

Other assets

4,583

3,741

Total assets

$

119,461

$

75,954

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes and loan payable

$

6,328

$

596

Operating and finance lease obligations

 

788

 

308

Accounts payable

 

4,523

 

2,173

Accrued expenses

 

2,616

 

1,489

Accrued payroll

 

930

 

2,255

Accrued excise taxes and fees

 

1,656

 

1,270

Deferred income

1,083

119

Other current liabilities

 

189

 

217

Total current liabilities

 

18,113

 

8,427

Long-term liabilities:

 

  

 

  

Notes payable

 

253

 

Operating and finance lease obligations

 

1,652

 

1,432

Other long-term liabilities

21

Total liabilities

20,018

9,880

Commitments and contingencies (Note 9)

 

 

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:

 

  

 

  

197,661,566 common shares (162,872,875 at December 31, 2021)

 

 

Common stock, par value

2

2

Capital in excess of par value

 

298,393

 

244,247

Accumulated other comprehensive loss

 

(523)

 

(162)

Accumulated deficit

 

(198,429)

 

(178,013)

Total shareholders' equity

 

99,443

 

66,074

Total liabilities and shareholders’ equity

$

119,461

$

75,954

See accompanying notes to unaudited interim condensed consolidated financial statements.

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

($ in thousands, except per-share data)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Revenue, net

$

14,477

$

8,371

$

23,521

$

15,177

Cost of goods sold

 

13,585

 

7,923

 

22,321

 

14,214

Gross profit

 

892

 

448

 

1,200

 

963

Operating expenses:

 

  

 

  

 

 

Research and development

 

1,897

 

903

 

3,036

 

1,759

Sales, general and administrative

 

9,471

 

6,185

 

16,785

 

11,015

Total operating expenses

 

11,368

 

7,088

 

19,821

 

12,774

Operating loss

 

(10,476)

 

(6,640)

 

(18,621)

 

(11,811)

Other income (expense):

 

  

 

  

 

 

Unrealized gain (loss) on investments

 

(885)

 

(176)

 

(1,702)

 

(140)

Gain on Panacea investment conversion

2,548

2,548

Realized gain (loss) on short-term investment securities

 

(108)

 

 

(108)

 

Interest income, net

 

48

 

108

 

98

 

220

Interest expense

 

(77)

 

(14)

 

(82)

 

(21)

Total other income (expense)

 

(1,022)

 

2,466

 

(1,794)

 

2,607

Loss before income taxes

 

(11,498)

(4,174)

 

(20,415)

(9,204)

Income taxes

 

 

 

Net loss

$

(11,498)

$

(4,174)

$

(20,415)

$

(9,204)

Other comprehensive loss:

 

  

 

  

 

 

Unrealized loss on short-term investment securities

 

(69)

 

(41)

 

(469)

 

(73)

Reclassification of (gain) loss to net loss

 

108

 

 

108

 

Other comprehensive loss

39

(41)

(361)

(73)

Comprehensive loss

$

(11,459)

$

(4,215)

$

(20,776)

$

(9,277)

Net loss per common share - basic and diluted

$

(0.06)

$

(0.03)

$

(0.12)

$

(0.06)

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

 

182,004

$

154,811

$

172,632

$

149,564

See accompanying notes to unaudited interim condensed consolidated financial statements.

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands)

Six Months Ended June 30, 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 January 1, 2022

 

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 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

Stock issued in connection with RSU vesting

75,000

Stock issued in connection with option exercises

150,000

174

174

Stock issued in connection with acquisition

32,900,000

51,653

51,653

Equity-based compensation

1,106

1,106

Unrealized loss on short-term investment securities

(69)

(69)

Reclassification of losses to net loss

108

108

Net loss

(11,498)

(11,498)

Balance at June 30, 2022

 

197,661,566

$

2

$

298,393

$

(523)

$

(198,429)

$

99,443

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 (Loss)

    

Deficit

    

Equity

Balance at January 1, 2021

 

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 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 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

See accompanying notes to unaudited interim condensed consolidated financial statements.

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)

Six Months Ended

June 30, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(20,415)

$

(9,204)

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

 

  

 

  

Amortization and depreciation

 

924

 

590

Amortization of ROU Asset

 

240

 

149

Amortization of inventory step-up

978

Unrealized loss on investment

 

1,702

 

140

Realized loss on short-term investment securities

108

Gain on Panacea investment conversion

 

(2,548)

Accretion of non-cash interest expense (income)

206

(81)

Equity-based employee compensation expense

 

2,319

 

1,752

Changes in operating assets and liabilities, net of acquisition:

 

  

 

  

Accounts receivable

 

(1,126)

 

21

Inventory

 

(2,822)

 

(280)

Prepaid expenses and other assets

 

(1,212)

 

(2,307)

Accounts payable

 

693

 

(140)

Accrued expenses

 

59

 

(66)

Accrued payroll

 

(1,521)

 

57

Accrued excise taxes and fees

 

386

 

160

Other liabilities

(271)

 

(513)

Net cash used in operating activities

 

(19,752)

 

(12,270)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

(250)

 

(179)

Acquisition of property, plant and equipment

 

(1,182)

 

(388)

Acquisition, net of cash acquired and debt assumed

(1,253)

Investment in Change Agronomy Ltd.

(682)

Sales and maturities of short-term investment securities

 

38,880

 

19,037

Purchase of short-term investment securities

 

(15,787)

 

(58,137)

Net cash provided by (used in) investing activities

 

19,726

 

(39,667)

Cash flows from financing activities:

 

  

 

Payment on note payable

(804)

(538)

Proceeds from note payable issuance

1,994

2,653

Other financing activities

(6)

Net proceeds from option exercise

174

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)

Net cash provided by financing activities

 

1,358

 

52,945

Net increase in cash and cash equivalents

 

1,332

 

1,008

Cash and cash equivalents - beginning of period

 

1,336

 

1,029

Cash and cash equivalents - end of period

$

2,668

$

2,037

Supplemental disclosures of cash flow information:

 

  

 

  

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

3

$

Property, plant and equipment additions included in accounts payable

$

76

$

9

Property, plant and equipment additions included in accrued expenses

$

$

7

Right-of-use assets and corresponding operating lease obligations

$

$

497

Patent and trademark additions included in accrued expenses

$

43

$

32

Panacea investment conversion

$

$

12,485

Stock issued in connection with acquisition

$

51,653

$

See accompanying notes to unaudited interim condensed consolidated financial statements.

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22nd CENTURY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 Condensed 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, 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 condensed 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 Condensed 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) two wholly-owned subsidiaries of Botanical Genetics, 22nd Century Holdings, LLC (“22nd Century Holdings”) and Golden Acquisition Sub, LLC. 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. As described in Note 2, on May 13, 2022, the Company acquired substantially all of the assets of GVB Biopharma’s (“GVB”) business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development, which allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise and add significant scale in the immediate term.

Reclassifications As a result of the acquisition of GVB (see Note 2), the Company has revised the presentation and classification of depreciation and amortization in the Condensed Consolidated Statement of Operations and Comprehensive Loss to conform with the acquiree, as follows:

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Three Months Ended

Six Months Ended

June 30, 2021

June 30, 2021

As originally

As originally

    

reported

    

Reclass

    

Revised

    

reported

    

Reclass

    

Revised

Revenue, net

$

8,371

$

$

8,371

$

15,177

$

$

15,177

Cost of goods sold

 

7,785

 

138

 

7,923

 

13,944

 

270

 

14,214

Gross profit

586

(138)

448

1,233

(270)

963

Operating expenses:

Research and development

746

157

903

1,447

312

1,759

Sales, general and administrative

6,177

8

6,185

11,006

9

11,015

Depreciation

150

(150)

288

(288)

Amortization

153

(153)

303

(303)

Total operating expenses

7,226

(138)

7,088

13,044

(270)

12,774

Operating loss

$

(6,640)

$

$

(6,640)

$

(11,811)

$

$

(11,811)

COVID-19 Pandemic – 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. 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.

Acquisitions - The Company accounts for acquisitions under the acquisition method of accounting for business combinations. Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill.

All direct acquisition-related costs are expensed as incurred and are recognized in operating expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.

Goodwill - Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company’s reporting unit is the same as its reportable segment, which is the consolidated entity. The Company tests its reporting unit’s goodwill for impairment at least annually as of the measurement date year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

During the six months ended June 30, 2022, there were no indicators of impairment and accordingly a goodwill impairment test was not performed.

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.

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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 5.

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 Condensed 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.

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Segments - As a result of the acquisition of GVB (see Note 2) and ongoing evaluation of our strategy across our plant science and intellectual property platform (tobacco, hemp/cannabis, and hops), the Company is reevaluating its operating and reporting segments, which is expected to be finalized by the end of fiscal 2022 once the corporate and management reporting structure realignment is completed. As of June 30, 2022, the Company operates its business in one single operating and reportable segment. The Company’s chief operating decision maker assesses, measures, and reviews the operating and financial results at the consolidated level for the entire platform.

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.

NOTE 2. – BUSINESS ACQUISITIONS

On May 13, 2022, the Company entered into and closed the transactions contemplated by the Reorganization and Acquisition Agreement (the “Reorganization Agreement”) with GVB Biopharma (“GVB”). Under the terms of the Reorganization Agreement, the Company acquired substantially all of the assets of GVB’s business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development (the “Transaction”). The acquisition of GVB allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise and add significant scale in the immediate term. GVB is included in the Company’s consolidated single operating and reportable segment.

The aggregate consideration for the Transaction consisted of (i) the assumption of approximately $4,637 of debt, (ii) the assumption and direct payment of certain third-party transaction costs incurred by GVB in connection with the Transaction totaling approximately $1,753 and (iii) the issuance to GVB of 32,900,000 unregistered shares of common stock of the Company (the “Shares”) with a fair value of $51,653. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. The Shares are subject to a lock-up and restrictions on transfer for at least six months following closing and thereafter, one-third of the Shares will be released from the lock-up after six months, one-third will be released from the lock-up after nine months and the remainder will be released after one year. Certain Shares held by former preferred holders of GVB stock have limited registration rights associated with approximately 8,959,533 total Shares.

The Transaction was structured as a tax-free re-organization pursuant to Internal Revenue Code Section 368(a)(1)(c). Accordingly, the tax basis of net assets acquired will retain their carry over tax basis and holding period in purchase accounting.

The Company has provisionally estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Condensed Consolidated Financial Statements were prepared. The amounts reported are considered provisional as the Company is completing the valuations that are required to allocate the purchase price in areas such as property and equipment, intangible assets, deferred taxes and goodwill. As a result, the allocation of the provisional purchase price may change in the future, which could be material.

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The preliminary purchase price allocation was as follows:

Cash

$

500

Accounts receivable

2,944

Inventory

5,292

Other assets

519

Property, plant & equipment

7,935

Operating leases right-of-use assets, net

864

Deferred income taxes

635

Goodwill and intangibles

44,200

Accounts payable and accrued expenses

(2,952)

Other current liabilities

(1,002)

Lease liabilities

(892)

Auto loans

(387)

Bridge loan

(4,250)

Fair value of net assets acquired

$

53,406

The preliminary fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.

Current Assets and Liabilities

The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.

The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the income approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance for these remaining efforts. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $978, which was fully amortized in the three month period ended June 30, 2022 in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

Property, Plant and Equipment

The Company has not completed its valuation of the property, plant and equipment purchased. As a result, no adjustment has been recorded to property, plant and equipment to step-up the basis to fair value nor has any amortization of any fair value adjustment been made to these Condensed Consolidated Financial Statements.

Leases

The Company recognized operating lease liabilities and operating lease right-of-use assets for office and manufacturing facilities in accordance with ASC 842, Leases. The Company concluded there were no off-market lease intangibles on the date of acquisition based on an evaluation of market rents per square foot, geographic location and nature of use of the underlying asset, among other considerations.

Intangible assets

The Company has not completed its valuation of identifiable intangible assets. As a result, no allocation has been recorded in the provisional purchase price allocation, nor has any amortization of any fair value adjustment been made to these Condensed Consolidated Financial Statements. The Company initially has determined identifiable intangible assets acquired include customer lists and tradename.

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Goodwill

The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. A variety of factors contributed to the goodwill recognized, including the value of GVB’s assembled work force, the incremental value resulting from GVB’s capabilities in hemp/cannabis, operational synergies across the plant science platform, and the expected revenue growth over time that is attributable to increased market share from future products and customers. Goodwill recorded in the transaction will be non-deductible. 

Actual and Pro Forma (unaudited) disclosures

The results of operations and assets from the GVB acquisition have been included in the Company’s Condensed Consolidated financial statements since the acquisition date. For the three and six months ended June 30, 2022, net revenues related to GVB were $4,506 and net loss was $1,474.

The following unaudited pro forma information presents the consolidated results of operations of the Company and assumes the acquisition occurred on January 1, 2021:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2022

    

2021

    

2022

    

2021

Revenue, net

$

18,122

$

16,208

$

34,180

$

29,666

Net loss

$

(11,831)

$

(6,545)

$

(19,578)

$

(11,932)

Net loss per common share - basic and diluted

$

(0.06)

$

(0.03)

$

(0.10)

$

(0.07)

Weighted average common shares outstanding - basic and diluted

$

197,550

$

187,711

$

196,808

$

182,464

The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These unaudited pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future. These unaudited pro forma results include certain adjustments, primarily due to amortization expense due to the fair value adjustment of inventory, acquisition related costs and the impact of income taxes on the pro forma adjustments.

Acquisition costs

During the six months ended June 30, 2022, direct costs incurred as a result of the acquisition of $839 were expensed as incurred and included in Sales, General and Administrative in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

NOTE 3. - 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. Cost of hemp biomass consists of initial third-party acquisition costs plus analytical testing costs. Costs of extracted and hemp oil inventory are comprised of initial acquisition cost of the biomass and all direct and indirect processing costs including labor related costs, consumables, materials, packaging supplies, utilities, facility costs, analytical testing costs, and production related depreciation. 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.

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Inventories at June 30, 2022 and December 31, 2021 consisted of the following:

    

June 30, 

    

December 31, 

    

2022

    

2021

Raw materials

$

7,337

$

2,634

Work in process

1,021

Finished goods

 

1,660

247

$

10,018

$

2,881

NOTE 4. – INVESTMENTS & OTHER ASSETS

The total carrying value of the Company’s investments and other assets at June 30, 2022 and December 31, 2021 consisted of the following:

June 30, 

December 31, 

2022

2021

Panacea Life Sciences Holdings, Inc. common stock

    

$

644

    

$

2,340

Aurora stock warrants

5

Change Agronomy Ltd. ordinary shares

682

Total investments

$

1,326

$

2,345

Investment in Panacea Life Sciences Holdings, Inc.

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 Condensed Consolidated Statements of Operations and Comprehensive Loss as “Gain on Panacea investment conversion” during 2021.

The Promissory note receivable was issued at a value of $3,684 ($4,300 face value less $616 discount) and is included within Other assets on the Condensed Consolidated Balance Sheets. As of June 30, 2022 and December 31, 2021, the Promissory note receivable balance was $3,800 and $3,741, respectively. 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 Condensed 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 and comprehensive loss. See Note 5 for additional information on the fair value measurements.

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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 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 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 equated to approximately 1.8% of CAL’s total equity.

In accordance with ASU 2019-04, a foreign currency-denominated equity investments that are measured using the measurement alternative are nonmonetary items that should be remeasured using their historical exchange rates. Accordingly, for the three and six-month periods ended June 30, 2022, there is no foreign currency exchange gain or loss recorded in the Condensed Consolidated Statement of Operations and Comprehensive Loss related to the investment in Change Agronomy Ltd.

During the three and six months ended June 30, 2022 and 2021, respectively, there were no impairment triggering events identified for investments.

NOTE 5. – 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 June 30, 2022 and December 31, 2021, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value: