22nd Century Group, Inc. - Quarter Report: 2023 June (Form 10-Q)

December 31, 2022

Amortized

Cost Basis

Fair Value

Due in one year or less

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, 2023


☐	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 3, 2023, there were 21,078,656 shares of common stock issued and outstanding.

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22nd CENTURY GROUP, INC.

INDEX


		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (unaudited)	3

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months ended June 30, 2023 and 2022 (unaudited)	4

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months ended June 30, 2023 and 2022 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2023 and 2022 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	51

PART II.	OTHER INFORMATION	52

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Default Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

SIGNATURES		54

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands, except share and per-share data)


	June 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	4,433	$	3,020
Short-term investment securities		—		18,193
Accounts receivable, net		8,736		5,641
Inventories		14,318		10,008
Insurance recoveries		3,000		5,000
Prepaid expenses and other current assets		6,388		2,743
Total current assets		36,875		44,605
Property, plant and equipment, net		14,401		13,093
Operating lease right-of-use assets, net		6,955		2,675
Goodwill		33,360		33,160
Intangible assets, net		21,526		16,853
Investments		682		682
Restricted cash		7,500		—
Other assets		3,681		3,583
Total assets	$	124,980	$	114,651

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and loans payable - current	$	1,988	$	908
Current portion of long-term debt		1,960		—
Operating lease obligations		1,082		681
Accounts payable		6,449		4,168
Accrued expenses		6,842		1,428
Accrued payroll		2,426		3,199
Accrued excise taxes and fees		2,704		1,423
Deferred income		214		831
Other current liabilities		1,438		380
Total current liabilities		25,103		13,018
Long-term liabilities:
Notes and loans payable		185		3,001
Operating lease obligations		6,118		2,141
Long-term debt		15,326		—
Other long-term liabilities		5,656		516
Total liabilities		52,388		18,676
Commitments and contingencies (Note 11)
Shareholders' equity
Preferred stock, $.00001 par value, 10,000,000 shares authorized
Common stock, $.00001 par value, 33,333,334 shares authorized
Capital stock issued and outstanding:
15,926,803 common shares (14,349,275 at December 31, 2022)
Common stock, par value		—		—
Capital in excess of par value		349,206		333,900
Accumulated other comprehensive loss		39		(111)
Accumulated deficit		(276,653)		(237,814)
Total shareholders' equity		72,592		95,975
Total liabilities and shareholders’ equity	$	124,980	$	114,651

See accompanying notes to Condensed Consolidated Financial Statements.

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(amounts in thousands, except per-share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Revenues, net	$	23,427	$	14,477	$	45,389	$	23,521
Cost of goods sold		25,772		13,585		48,911		22,321
Gross (loss) profit		(2,345)		892		(3,522)		1,200
Operating expenses:
Sales, general and administrative		14,540		8,684		28,771		15,946
Research and development		1,793		1,897		3,310		3,036
Other operating expense, net		675		787		1,573		839
Total operating expenses		17,008		11,368		33,654		19,821
Operating loss		(19,353)		(10,476)		(37,176)		(18,621)
Other income (expense):
Unrealized loss on investments		—		(885)		—		(1,702)
Realized loss on short-term investment securities		(28)		(108)		(41)		(108)
Other income, net		16		—		34		—
Interest income, net		65		48		122		98
Interest expense		(1,193)		(77)		(1,614)		(82)
Total other expense		(1,140)		(1,022)		(1,499)		(1,794)
Loss before income taxes		(20,493)		(11,498)		(38,675)		(20,415)
Provision for income taxes		46		—		46		—
Net loss	$	(20,539)	$	(11,498)	$	(38,721)	$	(20,415)
Deemed dividend from trigger of anti-dilution provision feature		(367)		—		(367)		—
Net loss available to common shareholders	$	(20,906)	$	(11,498)	$	(39,088)	$	(20,415)

Basic and diluted loss per common share	$	(1.40)	$	(0.95)	$	(2.67)	$	(1.77)
Weighted average common shares outstanding - basic and diluted		14,900	$	12,134		14,644		11,509


Net loss		(20,539)		(11,498)	$	(38,721)	$	(20,415)
Other comprehensive loss:
Unrealized gain (loss) on short-term investment securities		10		(69)		71		(469)
Foreign currency translation		42		—		38		—
Reclassification of realized losses to net loss		28		108		41		108
Other comprehensive income (loss)		80		39		150		(361)
Comprehensive loss	$	(20,459)	$	(11,459)	$	(38,571)	$	(20,776)

See accompanying notes to Condensed Consolidated Financial Statements.

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(amounts in thousands, except share data)


	Six Months Ended June 30, 2023
						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, 2023	14,349,275	$	—	$	333,900	$	(111)	$	(237,814)	$	95,975
Stock issued in connection with RSU vesting, net of 31,607 shares withheld for taxes	90,262		—		(414)		—		—		(414)
Stock issued in connection with acquisition	31,056		—		503		—		—		503
Equity-based compensation	—		—		1,175		—		—		1,175
Adoption of ASU 2016-13	—		—		—		—		(118)		(118)
Equity detachable warrants	—		—		1,577		—		—		1,577
Other comprehensive income	—		—		—		70		—		70
Net loss	—		—		—		—		(18,182)		(18,182)
Balance at March 31, 2023	14,470,593		—		336,741		(41)		(256,114)		80,586
Stock issued in connection with RSU vesting, net of shares withheld for taxes	24,524		—		(5)		—		—		(5)
Stock issued in connection with ATM, net of fees of $178	284,343		—		2,563		—		—		2,563
Stock issued in connection with capital raise, net of issuance costs of $422	747,974		—		4,851		—		—		4,851
Stock issued in connection with licensing arrangement	333,334		—		3,570		—		—		3,570
Equity-based compensation	—		—		1,486		—		—		1,486
Other comprehensive loss	—		—		—		80		—		80
Net loss	—		—		—		—		(20,539)		(20,539)
Fractional shares issued for reverse stock split	66,035		—		—		—		—		—
Balance at June 30, 2023	15,926,803	$	—	$	349,206	$	39	$	(276,653)	$	72,592

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023


	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	10,858,237	$	—	$	244,249	$	(162)	$	(178,013)	$	66,074
Stock issued in connection with RSU vesting	110,916		—		—		—		—		—
Equity-based compensation	—		—		1,213		—		—		1,213
Other comprehensive income	—		—		—		(400)		—		(400)
Net loss	—		—		—		—		(8,918)		(8,918)
Balance at March 31, 2022	10,969,153		—		245,462		(562)		(186,931)		57,969
Stock issued in connection with RSU vesting	5,001		—		—		—		—		—
Stock issued in connection with option exercises	10,001		—		174		—		—		174
Stock issued in connection with acquisition	2,193,334		—		51,653		—		—		51,653
Equity-based compensation	—		—		1,106		—		—		1,106
Other comprehensive income	—		—		—		39		—		39
Net loss	—		—		—		—		(11,498)		(11,498)
Balance at June 30, 2022	13,177,489	$	—	$	298,395	$	(523)	$	(198,429)	$	99,443

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

See accompanying notes to Condensed Consolidated Financial Statements.

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22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)


	Six Months Ended
	June 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(38,721)	$	(20,415)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation		2,093		924
Amortization of right-of-use asset		524		240
Amortization of inventory step-up		—		978
Unrealized loss on investment		—		1,702
Other non-cash gains and losses		18		314
Provision for credit losses		154		—
Loss on the sale of machinery and equipment		75		—
Debt related charges included in interest expense		1,100		—
Equity-based employee compensation expense		2,661		2,319
Gain on change of contingent consideration		(195)		—
Loss on change of warrant liabilities		723		—
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(3,322)		(1,126)
Inventory		(4,285)		(2,822)
Prepaid expenses and other assets		(2,178)		(1,212)
Accounts payable		2,257		693
Accrued expenses		2,066		59
Accrued payroll		(774)		(1,521)
Accrued excise taxes and fees		1,280		386
Other liabilities		(808)		(271)
Net cash used in operating activities		(37,332)		(19,752)
Cash flows from investing activities:
Acquisition of patents, trademarks, and licenses		(398)		(250)
Acquisition of property, plant and equipment		(2,759)		(1,182)
Proceeds from the sale of property, plant and equipment		251		—
Acquisition, net of cash acquired		90		(1,253)
Investment in Change Agronomy Ltd.		—		(682)
Property, plant and equipment insurance proceeds		3,500		—
Sales and maturities of short-term investment securities		21,714		38,880
Purchase of short-term investment securities		(3,475)		(15,787)
Net cash provided by investing activities		18,923		19,726
Cash flows from financing activities:
Payments on note payables		(3,954)		(810)
Proceeds from issuance of notes payable		2,218		1,994
Proceeds from issuance of long-term debt		16,849		—
Payment of debt issuance costs		(801)		—
Proceeds from issuance of detachable warrants		6,016		—
Net proceeds from option exercise		—		174
Proceeds from issuance of common stock related to the ATM		2,741		—
Payment of common stock issuance costs related to the ATM		(178)		—
Proceeds from issuance of common stock		5,273		—
Payment of common stock issuance costs		(422)		—
Taxes paid related to net share settlement of RSUs		(420)		—
Net cash provided by financing activities		27,322		1,358
Net increase in cash, cash equivalents and restricted cash		8,913		1,332
Cash, cash equivalents and restricted cash - beginning of period		3,020		1,336
Cash, cash equivalents and restricted cash - end of period	$	11,933	$	2,668

Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period	$	3,020	$	1,336
Restricted cash at beginning of period		—		—
Cash, cash equivalents and restricted cash at beginning of period	$	3,020	$	1,336

Cash and cash equivalents at end of period	$	4,433	$	2,668
Restricted cash at end of period		7,500		—
Cash, cash equivalents and restricted cash at end of period	$	11,933	$	2,668

Supplemental disclosures of cash flow information:
Non-cash transactions:
Capital expenditures incurred but not yet paid	$	64	$	122
Right-of-use assets and corresponding operating lease obligations	$	4,803	$	—
Non-cash consideration RXP acquisition	$	1,926	$	—
Non-cash licensing arrangement	$	3,500	$	—
Deemed dividend from trigger of anti-dilution provision feature	$	367	$	—

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See accompanying notes to Condensed Consolidated Financial Statements.

22nd CENTURY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(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 – 22nd Century Group, Inc. (together with its consolidated subsidiaries, “22^nd Century Group” or the “Company”) is a publicly traded Nevada corporation on the NASDAQ Capital Market under the symbol “XXII.” 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.

The accompanying Condensed Consolidated Financial Statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. The results for interim periods are not necessarily indicative of results or trends that may be expected for the fiscal year as a whole. The Condensed Consolidated Financial Statements were prepared using U.S. GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates.

Liquidity and Capital Resources – These Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company has incurred significant losses and negative cash flows from operations since inception and expects to incur additional losses until such time that it can generate significant revenue and profit in its tobacco and hemp/cannabis businesses. The Company had negative cash flow from operations of $37,332 and $19,752 for the six months ended June 30, 2023 and 2022, respectively, and an accumulated deficit of $276,653 and $237,814 as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, the Company had cash and cash equivalents of $4,433 and restricted cash of $7,500. Given the Company’s projected operating requirements and its existing cash and cash equivalents, there is substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which may include, but are not limited to, the public or private sale of equity, debt financings or funds from other capital sources, such as collaborations, strategic alliances, divestment of non-core assets, or licensing arrangements with third parties. However, there can be no assurance that the Company will be able to secure additional financing, or if available, that it will be sufficient to meet its needs or on favorable terms, which may result in the Company being required to delay, reduce the scope of, or eliminate one or more of its product launch and commercialization programs, or reducing or curtailing operations over a longer term.

The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

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Reclassifications – The Company has revised the presentation and classification of Other operating expenses, net in the Condensed Consolidated Statement of Operations and Comprehensive Loss, as follows:


	Three Months Ended						Six Months Ended
	June 30, 2022						June 30, 2022
	As originally						As originally
	reported		Reclass		Revised		reported		Reclass		Revised
Revenues, net	$	14,477	$	—	$	14,477	$	23,521	$	—	$	23,521
Cost of goods sold		13,585		—		13,585		22,321		—		22,321
Gross profit		892		—		892		1,200		—		1,200
Operating expenses:		—		—		—		—		—		—
Sales, general and administrative		9,471		(787)		8,684		16,785		(839)		15,946
Research and development		1,897		—		1,897		3,036		—		3,036
Other operating expense, net		—		787		787		—		839		839
Total operating expenses		11,368		—		11,368		19,821		—		19,821
Operating loss	$	(10,476)	$	—	$	(10,476)	$	(18,621)	$	—	$	(18,621)

Prior Quarter Adjustment – Included in the results for the six-months ended June 30, 2023, is an adjustment to the valuation of detachable warrants of which related to the three-month period ended March 31, 2023. The adjustment resulted in a decrease to the total fair value measurement at issuance and corresponding debt discount of $86 and an adjustment related to the allocation of the estimated fair values of the Company’s detachable warrants between those accounted for as liabilities and those classified as equity. These adjustments did not impact the statement of operations or cash flows previously issued. The Company has concluded that the impact of the adjustment to first quarter of 2023 is not material to the trends of the Condensed Consolidated Financial Statements for the periods affected, and to a fair presentation of the Company's financial position, results of operations, and cash flows previously issued. The adjustment is as follows:


	As reported
	March 31, 2023		Adjustment		Revised
Long-term debt	$	16,417	$	86	$	16,503
Other long-term liabilities	$	4,736	$	687	$	5,423
Capital in excess of par value	$	337,514	$	(773)	$	336,741

Reverse Stock Split – On July 5, 2023, the Company effected a 1-for-15 reverse stock split of its common stock in order to regain compliance with Nasdaq's continued listing requirements. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share, which resulted in the issuance of a total of 66,035 shares of common stock to implement the reverse stock split. All share and per share amounts, and exercise prices of stock options, and warrants in the Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split. Refer to Note 17 “Subsequent Events” for additional information.

Restricted Cash - Restricted cash includes minimum escrow funds the Company maintains in a money market account pursuant to the terms of the Senior Secured Credit Facility.

Credit Losses - The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables and contract assets. The Company considers historical collection rates, current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable and contract assets, the Company believes that the carrying value, net of excepted losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments.

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To determine the provision for credit losses for accounts receivable, including consideration of contract assets or unbilled receivables, the Company has disaggregated its accounts receivable by nature and type of product being sold, as the Company determined that risk profile of its customers is consistent based on the type of product and industry in which they operate. These customer classes include tobacco distributors/wholesalers for its CMO cigarette and filtered cigar tobacco product sales, hemp/cannabis bulk ingredient product sales, and hemp/cannabis white label product sales. Each class of customer is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the related industry, including unemployment rates, industry indices, and other factors, to estimate if there are current expected credit losses within its trade receivables based on the trends and the Company’s expectation of the future status of such economic and industry-specific factors. The Company believes that its customers, the majority of which are in industries with sound financial condition, and therefore, the Company’s evaluation of macroeconomic and industry-specific factors did not have a material impact on the provision for credit losses. As of June 30, 2023 and December 31, 2022, the Company recorded a provision for credit losses of $643 and $372 respectively.

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.

Contingent Consideration - Contingent consideration arising from a business acquisition is included as part of the purchase price and is recorded at fair value as of the acquisition date. Subsequent to the acquisition date, the Company remeasures contingent consideration arrangements at fair value at each reporting period until the contingency is resolved. The changes in fair value are recognized within Other Operating Expenses, Net in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. See Note 2 for the contingent consideration arising from the acquisition of RX Pharmatech Ltd.

Warrants - The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815) depending on the specific terms of the warrant agreement. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.

Warrants that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities pursuant to ASC 480 and are initially and subsequently measured at their estimated fair values. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For additional discussion on warrants, see Note 6 and Note 10.

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Debt Issued with Detachable Warrants - The Company considers guidance within ASC 470-20, Debt (ASC 470), ASC 480, and ASC 815 when accounting for the issuance of debt with detachable warrants. As described above under the caption “Warrants”, the Company classifies stock warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with detachable warrants, the proceeds from the issuance of the debt are first allocated to the warrants at their full estimated fair value with a corresponding debt discount. The remaining proceeds, as further reduced by discounts (including those created by the bifurcation of embedded derivatives), is allocated to the debt. The Company accounts for debt as liabilities measured at amortized cost and amortizes the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument pursuant to ASC 835, Interest (ASC 835).

Embedded Derivatives - The Company considers whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to ASC 815. Embedded derivatives are initially and subsequently measured at fair value. The embedded derivatives associated with the Company’s Senior Secured Credit Facility and Subordinated Note are not material.

Debt Issuance Costs and Discounts - Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the term of the related debt. Debt issuance costs and discounts related to the Company’s Senior Secured Credit Facility and Subordinated Note are recorded as a reduction of the carrying value of the related debt and are amortized to Interest expense using the effective interest method over the period from the date of issuance to the maturity date, whichever is earlier. The amortization of debt issuance costs and discounts are included in Debt related charges included in interest expense in the Condensed Consolidated Statements of Cash Flows. Note 7 “Debt” contains additional information on the Company’s debt issuance costs and discounts.

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 units are the same as its two reportable segments, which is (1) Tobacco, and (2) Hemp/Cannabis. 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 three and six month periods ended June 30, 2023 and 2022, there were no indicators of impairment and accordingly a goodwill impairment test was not performed.

Gain and Loss Contingencies – The Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.

In accordance with ASC 450-30, Gain Contingencies, gain contingencies are recognized when earned and realized, which typically will occur at the time of final settlement or when cash is received. Insurance recoveries may be realized earlier than cash receipt if a claim and amount of reimbursement is acknowledged by the insurance company that payment is due and collection is probable.

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The Company maintains general liability insurance policies for its facilities. Under the terms of our insurance policies, in the case of loss to a property, the Company follows the guidance in ASC 610-30, Other Income —Gains and Losses on Involuntary Conversions, for the conversion of nonmonetary assets (the properties) to monetary assets (insurance recoveries). Under ASC 610-30, once the recovery is deemed probable the Company recognizes an asset for the insurance recovery receivable in the Condensed Consolidated Balance Sheets, with corresponding income that is offsetting to the casualty losses recorded in the Condensed Consolidated Statements of Operations and Comprehensive Loss. If the insurance recovery is less than the amount of the casualty charges recognized, the Company will recognize a loss whereas if the insurance recovery is greater than the amount of casualty loss recognized, the Company will only recognize a recovery up to the amount of the casualty loss and will account for the excess as a gain contingency. Business interruption insurance is treated as a gain contingency.

Refer to further discussion of all commitments and contingencies in Note 11.

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 related to certain state, local, or franchise taxes, or 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 – Adoption of Accounting Standards Codification Topic 326

The Company adopted ASU 2016-13, or ASC 326 Financial Instruments-Credit Losses, effective January 1, 2023 under a modified retrospective approach. Under the current expected credit losses (“CECL”) model, the Company immediately recognizes an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are recognized each period. The new guidance applies to the Company’s trade receivables and contract asset balances. Due to the nature of business operations and contracts with customers, the Company has historically not experienced significant bad debt expense or write-offs and as a result, the adoption of ASC 326 did not have a material impact to the Company’s Condensed Consolidated Financial Statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $118 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2023.

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

RX Pharmatech, Ltd.

On January 19, 2023, the Company acquired RX Pharmatech Ltd (“RXP”) a privately held distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. RXP is included in the Company’s Hemp/cannabis reportable segment.

The initial consideration paid to acquire RXP included $200 in cash and $503 in common stock (consisting of 31,056 unregistered shares of common stock), and an initial estimate of target working capital true-up of $286. 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. Additionally, the contingent consideration in the transaction represents the estimated fair value of the Company’s obligation, under the share purchase agreement, to make additional payments of up to $1,550 over the next three years based on specified conditions being met, which has an initial fair value of contingent consideration of $1,138. The fair value of the aggregate consideration in the transaction is $2,127.

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Based on the preliminary purchase price allocation, the assets acquired and liabilities assumed principally comprise $1,744 of intangible assets, and other immaterial working capital items representing a net asset of $93 (net of cash acquired of $290). There was no excess purchase price and therefore no goodwill recorded as part of the business combination. 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.

Intangible assets include the intellectual property associated with the 1,276 novel food applications with the FSA, which is determined to be indefinite lived. The preliminary fair value was determined by utilizing the cost approach, and considered market data to evaluate the replacement cost per application.

The Company utilizes third-party valuation experts to assist in estimating the fair value of the contingent consideration and develops estimates by considering weighted-average probabilities of likely outcomes and discounted cash flow analysis. These estimates require the Company to make various assumptions about forecasted revenues and discount rates, which are unobservable and considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date.

The following table provides quantitative information associated with the initial fair value measurement of the Company’s liabilities for contingent consideration as of January 19, 2023:


	Maximum Payout					Weighted Average
Contingency Type	(undiscounted)		Fair Value		Unobservable Inputs	or Range
Revenue-based payments	$	1,550	$	1,138	Discount rate	16	%
					Projected year(s) of payment	2024-2026

The amounts reported are considered provisional as the Company is finalizing the valuations that are required to allocate the purchase price through the measurement period, which remains open as of June 30, 2023. As a result, the allocation of the provisional purchase price may change in the future, which could be material.

GVB Biopharma

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. GVB is included in the Company’s Hemp/cannabis 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 2,193,334 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 were 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.

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 retain their carry over tax basis and holding period in purchase accounting.

The Company recorded provisional estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition during the second quarter of 2022, resulting in goodwill of $44,200. 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.

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Following the initial acquisition accounting, the Company recorded final measurement period adjustments, in which the preliminary fair values of the assets acquired and liabilities assumed as of May 13, 2022 were adjusted to reflect the ongoing acquisition valuation analysis procedures of property and equipment, intangible assets, deferred taxes, and working capital adjustments. These adjustments resulted in a combined reduction to goodwill of $10,840. The impact of depreciation and amortization to Operating loss recorded in the third quarter of 2022 as a result of completing valuation procedures for property and equipment and intangible assets, that would have been recorded in the prior period since the date of acquisition was $70.

The following table presents management’s purchase price allocation:


Cash	$	456
Accounts receivable		2,944
Inventory		3,551
Other assets		519
Property, plant & equipment		11,189
Operating leases right-of-use assets, net		1,231
Goodwill		33,360
Tradename		4,600
Customer relationships		5,800
Accounts payable and accrued expenses		(2,777)
Other current liabilities		(944)
Lease liabilities		(1,259)
Auto loans		(387)
Deferred tax liability		(627)
Bridge loan		(4,250)
Fair value of net assets acquired	$	53,406

The 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.

The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, tradename life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.

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 Consolidated Statement of Operations and Comprehensive Loss.

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Property, Plant and Equipment

The fair value of PP&E acquired was estimated by applying the cost approach for personal property and leasehold improvements. The cost approach was applied by developing a replacement cost and adjusting for economic depreciation and obsolescence.

Leases

The Company recognized operating lease liabilities and operating lease right-of-use assets for office and manufacturing facilities in (i) Las Vegas, Nevada (ii) Grass Valley, Oregon (iii) Prineville, Oregon, and (iv) Tygh Valley, Oregon, accordance with ASC 842, Leases.

The following table summarizes the Company’s discount rate and remaining lease terms as of the acquisition date:


Weighted average remaining lease term in years	3.8
Weighted average discount rate	8.3	%

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 purchase price was allocated to intangible assets as follows:


			Weighted Average
	Fair Value		Amortization Period		Weighted Average
Definite-lived Intangible Assets	Assigned		(Years)		Discount Rate
Customer relationships	$	5,800		10		23.50%
Tradename	$	4,600		Indefinite		23.50%

Customer Relationships

Customer relationships represent the estimated fair value of contractual and non-contractual customer relationships GVB had as of the acquisition date. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer relationships was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 20%, as well as management’s understanding of the industry and product life cycles.

Tradename

Tradename represents the estimated fair value of GVB’s corporate and product names. The acquired tradename was valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the tradename was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate of 1.0%. The GVB tradename was assumed to have an indefinite useful life based upon long-term management expectations and future operating plans.

Deferred Taxes

The Company determined the deferred tax position to be recorded at the time of the GVB acquisition in accordance with ASC Topic 740, Income Taxes, resulting in recognition of deferred tax liabilities for future reversing of taxable temporary differences primarily for intangible assets and property, plant and equipment. This resulted in a preliminary net deferred tax liability of $627, which includes the carryover basis of historical recognized deferred tax assets, liabilities and valuation allowance.

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The net deferred tax liabilities recorded as a result of the acquisition of GVB was determined by the Company to also provide future taxable temporary differences that allow for the Company to utilize certain previously fully reserved deferred tax assets. Accordingly, the Company recognized a reduction to its valuation allowance resulting in a net tax benefit of approximately $434 for the year ended December 31, 2022.

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

For segment reporting purposes, the results of operations and net assets from the RXP and GVB acquisitions have been included in the Company’s Hemp/cannabis reportable segment since the respective acquisition dates. For the three- and six-month periods ended June 30, 2023, net revenues related to GVB were $15,206 and $28,079, respectively. For the three- and six-month periods ended June 30, 2023, net loss related to GVB was $5,102 and $9,894, respectively. For the three- and six-month periods ended June 30, 2022 net revenues related to GVB were $4,506 and net loss was $1,474. The operating results of RXP for the three and six month period ended June 30, 2023 were immaterial.

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,
	2023		2022		2023		2022

	(in thousands, except for per-share data)
Revenues, net	$	23,427	$	18,122	$	45,389	$	34,180
Net loss	$	(20,539)	$	(11,831)	$	(38,721)	$	(19,578)
Basic and diluted loss per common share	$	(1.38)	$	(0.90)	$	(2.64)	$	(1.49)
Weighted average common shares outstanding - basic and diluted		14,900		13,170		14,644		13,121

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 three and six-month periods ended June 30, 2023, direct costs incurred as a result of the acquisition of RXP were $62 and $130, respectively, compared to direct costs incurred as a result of the acquisition of GVB of $839 during the six-month period ended June 30, 2022. Acquisition costs are expensed as incurred and included in Other operating expenses, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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NOTE 3. – INVENTORIES

Inventories at June 30, 2023 and December 31, 2022 consisted of the following:


	June 30,		December 31,
	2023		2022
Raw materials	$	9,504	$	8,743
Work in process		1,760		441
Finished goods		3,054		824
	$	14,318	$	10,008

NOTE 4. – GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The change in the carrying amount of goodwill during the six-month period ended June 30, 2023 is as follows:


Balance at January 1, 2023	$	33,160
Measurement period adjustments		200
Balance at June 30, 2023	$	33,360

Other Intangible Assets, Net

Our other intangible assets, net at June 30, 2023 and December 31, 2022 consisted of the following:


	Gross		Accumulated		Net Carrying
June 30, 2023	Carrying Amount		Amortization		Amount
Definite-lived:
Patent	$	6,845	$	(3,937)	$	2,908
License fees		7,521		(1,876)		5,645
Customer relationships		5,800		(498)		5,302
Total amortizing intangible assets	$	20,166	$	(6,311)	$	13,855
Indefinite-lived:
Tradename and trademarks					$	3,343
U.K. FSA portfolio¹						1,776
MSA signatory costs						2,202
License fee for predicate cigarette brand						350
Total indefinite-lived intangible assets					$	7,671
Total intangible assets, net					$	21,526
¹includes foreign exchange fluctuation, which for the three and six month period ended June 30, 2023 was not material

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	Gross		Accumulated		Net Carrying
December 31, 2022	Carrying Amount		Amortization		Amount
Definite-lived:
Patent	$	6,513	$	(3,711)	$	2,802
License fees		3,876		(1,446)		2,430
Customer relationships		5,800		(20)		5,780
Total amortizing intangible assets	$	16,189	$	(5,177)	$	11,012
Indefinite-lived:
Tradename and trademarks					$	3,289
MSA signatory costs						2,202
License fee for predicate cigarette brand						350
Total indefinite-lived intangible assets					$	5,841
Total intangible assets, net					$	16,853

See Note 2 “Business Acquisitions” for additional details regarding goodwill and intangible assets acquired as a result of the acquisitions of RXP and GVB, including any measurement period adjustments.

When acquiring certain assets, the Company assesses whether the acquired assets are a result of a business combination or a purchase of an asset. During the three- and six-month periods ended June 30, 2023, the Company acquired a set of similar identifiable intangible assets relating to a license to manufacture and distribute Cookies branded hemp-derived hemp/cannabis products to retailers within the United States. The Company purchased the license for 333,334 shares of common stock and capitalized $75 of costs associated with acquiring the license as an intangible asset. The resulting intangible asset of $3,645 is being amortized over 3 years.

Aggregate intangible asset amortization expense comprises of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Cost of goods sold	$	3	$	3	$	6	$	5
Sales, general, and administrative		542		—		782		—
Research and development		176		160		346		319
Total amortization expense	$	721	$	163	$	1,134	$	324

Estimated future intangible asset amortization expense based on the carrying value as of June 30, 2023 is as follows:


	Remainder of 2023		2024		2025		2026		2027		Thereafter
Amortization expense	$	1,445	$	2,879	$	2,738	$	1,592	$	1,146	$	4,055

NOTE 5. – INVESTMENTS & OTHER ASSETS

The total carrying value of the Company’s investments at June 30, 2023 and December 31, 2022 consisted of the following:


	June 30,		December 31,
	2023		2022
Change Agronomy Ltd. ordinary shares	$	682	$	682
Total investments	$	682	$	682

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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.

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, 2023 and 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, 2023 and 2022, respectively, there were no impairment triggering events identified for investments.

Panacea Investment – Promissory Note:

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. The promissory note was issued in the amount of $4,300 (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.

The Promissory note receivable was originally valued at $3,684 ($4,300 face value less $616 discount) and is included within the Condensed Consolidated Balance Sheets as “Other Assets.” Subsequently, on December 31, 2022 the Company and Panacea Life Sciences Holdings, Inc. entered into a settlement agreement in which the Company agreed to a reduction to the face value of the Promissory note receivable of $500, in exchange for resolution to all contractual requirements from the June 30, 2021 Promissory Note Exchange Agreement and Securities Exchange Agreement surrounding the investment and business relationship. Accordingly, the Company recognized extinguishment charge of note receivable of $500 less adjusted discount of $51 during the year-ended December 31, 2022. The Company intends to hold the remaining outstanding Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note.

The following table provides the promissory note receivable balance:


	June 30,		December 31,
	2023		2022
Promissory note receivable	$	3,463	$	3,410

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its short-term investment securities and equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.

The following table presents information about our assets and liabilities measured at fair value as of June 30, 2023 and December 31, 2022, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

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	Fair Value
	June 30, 2023
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	2,622	$	—	$	—	$	2,622
Restricted cash		7,500		—		—		7,500
Change Agronomy Ltd. ordinary shares		—		—		682		682
Total assets	$	10,122	$	—	$	682	$	10,804
Liabilities
Detachable warrants	$	—	$	—	$	4,937	$	4,937
Contingent consideration		—		—		943		943
Total liabilities	$	—	$	—	$	5,880	$	5,880


	Fair Value
	December 31, 2022
	Level 1		Level 2		Level 3		Total
Assets
Money market funds	$	10,163	$	—	$	—	$	10,163
Corporate bonds		—		7,031		—		7,031
U.S. treasury securities		—		999		—		999
Change Agronomy Ltd. ordinary shares		—		—		682		682
Total assets	$	10,163	$	8,030	$	682	$	18,875

Money market funds

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

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

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 December 31, 2022:

Available for Sale Debt Securities

December 31, 2022

Amortized

Gross

Cost

Unrealized

Fair

Basis

Gains

Losses

Value

Corporate bonds

7,143

—

(112)

7,031

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 December 31, 2022:

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Investment in Change Agronomy

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.

Contingent Consideration

On January 19, 2023, the Company acquired the assets and liabilities of RXP, a privately-held company based in the U.K. The contingent consideration at June 30, 2023 is the estimated fair value of the Company’s obligations, under the sale and purchase agreement for RXP, to make additional payments if certain revenue goals are met.

The following table presents the changes in the estimated fair values of the Company’s liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the six months ended June 30, 2023:


Fair value measurement at January 1, 2023	$	—
Initial measurement (see Note 2)		1,138
Fair value measurement adjustment		22
Fair value measurement at March 31, 2023	$	1,160
Fair value measurement adjustment		(217)
Fair value measurement at June 30, 2023	$	943

As of June 30, 2023, the current portion of contingent consideration liabilities included in Other current liabilities was $604, and the non-current portion included in Other long-term liabilities on the Condensed Consolidated Balance Sheets was $339.

The following table provides quantitative information associated with the fair value measurement of the Company’s liabilities for contingent consideration as of June 30, 2023:


	Maximum Payout					Weighted Average
Contingency Type	(undiscounted)		Fair Value		Unobservable Inputs	or Range
Revenue-based payments	$	1,550	$	943	Discount rate	14	%
					Projected year(s) of payment	2024-2026

Detachable Warrants

The following table sets forth a summary of the changes in fair value of the Company’s stock warrants accounted for as liabilities (Level 3 asset) for the period ended June 30, 2023:


Fair value measurement at January 1, 2023	$	—
Initial measurement (see Note 1 and 10)		4,214
Fair value measurement adjustment		139
Fair value measurement at March 31, 2023	$	4,353
Fair value measurement adjustment		584
Fair value measurement at June 30, 2023	$	4,937

The detachable warrants are measured at fair value using certain estimated factors which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs that are used in the fair value measurement of the Company’s detachable warrants include the volatility factor, anti-dilution provisions, and contingent put option. Significant increases or decreases in the volatility factor would have resulted in a significantly higher or lower fair value measurement. Additionally, a change in probability regarding the anti-dilution provision or put option would have resulted in a significantly higher or lower fair value measurement.

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The JGB detachable warrants were measured at June 30, 2023 using a Monte Carlo valuation model with the following assumptions:


Risk-free interest rate per year		4.1	%
Expected volatility per year		88.3	%
Expected dividend yield		—	%
Contractual expiration		5.2	years
Exercise price	$	12.828
Stock price	$	5.74

The Omnia detachable warrants were measured at June 30, 2023 using a Monte Carlo valuation model with the following assumptions:


Risk-free interest rate per year		4.0	%
Expected volatility per year		83.7	%
Expected dividend yield		—	%
Contractual expiration		7.2	years
Exercise price	$	12.828
Stock price	$	5.74

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three and six month periods ended June 30, 2023 and 2022 respectively, the Company did not have any financial assets or liabilities measured at fair value on a nonrecurring basis.

NOTE 7. DEBT

The Company has a senior secured credit facility (the “Senior Secured Credit Facility”), which consists of three-year $21,053 debentures (the “Debentures”) and $2,865 subordinated promissory note (the “Subordinated Note). The Debentures were issued at a 5% original issuance discount and are subject to a 5% exit payment.

Long-term debt related to the Senior Secured Credit Facility and Subordinate Note as of June 30, 2023, consists of the following:


	June 30,
	2023
Senior Secured Credit Facility	$	22,105
Subordinated Note		3,114
Unamortized discount on loan and deferred debt issuance costs		(7,933)
Total debt		17,286
Current portion of long-term debt		(1,960)
Total long-term debt	$	15,326

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Debentures

On March 3, 2023, the Company entered into a Securities Purchase Agreement, which pursuant to the agreement, the Company sold 5% original issuance discount senior secured debentures with an aggregate principal amount of $21,053. The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. In connection with the sale of the Debentures, the Company issued warrants to purchase up to 333,334 shares of common stock for an exercise price of $19.125 per share (the “JGB Warrants”), which had an initial fair value of $4,475 net of issuance costs of $139 (see Note 6 and Note 10). On June 22, 2023, as a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 shares of common stock. There are no further anti-dilution adjustments on such warrants.

The Company’s obligations under the Debentures can be accelerated upon the occurrence of certain customary events of default. In the event of a default and acceleration of the Company’s obligations, the Company would be required to pay the Prepayment Amount, liquidated damages and other amounts owing in respect thereof through the date of acceleration.

The Debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict the Company from incurring additional indebtedness, creating or permitting liens on assets, making or holding any investments, repaying outstanding indebtedness, paying dividends or distributions and entering into transactions with affiliates. Substantially all of the company’s assets, including intellectual property, are collateralized and at risk if Debenture obligation is not satisfied. In addition, the Company is required to maintain at least $7,500 on its balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets. As of June 30, 2023, the Company was in compliance with these financial covenants.

Subordinated Note

On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma (see Note 8). The accrued PIK interest refinanced from the Original Notes was $365.

Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK interest accrues monthly at a compounding rate of 26.5% per annum. For the three and six months ended June 30, 2023 the PIK interest accrual amounts were $189 and $249, respectively. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024. The Subordinated Note includes customary event of default provisions. The Subordinated Note is subordinated to the Debenture pursuant to a Subordination Agreement between the Company, the Agent and Omnia.

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In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 45,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions, as more fully described in the Omnia Warrants. The Omnia warrants initial fair value was $1,316 (see Note 6 and 10).

Contractual maturities under the Senior Secured Credit Facility and Subordinate Note for the remainder of 2023 and through maturity, excluding any discounts or premiums, as of June 30, 2023 is as follows:


	Remainder of
	2023		2024		2025		2026		2027		Thereafter
Future minimum principal payments	$	—	$	1,960	$	—	$	15,326	$	—	$	—

The fair values of the warrants at issuance of $5,791, together with the Debentures original issuance discount of $1,053, Debentures exit payment of $1,053, and third-party debt issuance costs of $801, are being amortized using the effective interest method over the term of the respective debt instrument, recorded as Interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The components and activity of unamortized discount and deferred debt issuance costs related to the Senior Secured Credit Facility and Subordinated Note is as follows:


	Total
Issuance	$	(8,698)
Amortization during the period		171
March 31, 2023	$	(8,527)
Amortization during the period		594
June 30, 2023	$	(7,933)

NOTE 8. – NOTES & LOANS PAYABLE

The table below outlines our notes payable balances as of June 30, 2023 and December 31, 2022:


	June 30,		December 31,
	2023		2022
Insurance loans payable	$	1,857	$	780
Vehicle loans		131		128
Total current notes and loans payable	$	1,988	$	908

Bridge loan	$	—	$	2,814
Vehicle loans		185		187
Total long-term notes and loans payable	$	185	$	3,001

Insurance loans payable

During the second quarter of 2023, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $1,626. The Company paid $285 as a premium down payment and financed the remaining $1,341 of policy premiums over ten months at a 7.88% annual percentage rate.

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During the second quarter of 2022, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $2,394. The Company paid $400 as a premium down payment and financed the remaining $1,994 of policy premiums over ten months at a 3.25% annual percentage rate. Additionally, during the third quarter of 2022, the Company expanded its D&O coverage as a result of the acquisition of GVB, resulting in an additional premium down payment of $90 and financing of $168, under the same terms as the original one-year policy.

The Company also has other insurance loans payables related to pollution, property, and general liability across the Company.

GVB Bridge Note

In connection with the acquisition of GVB in May 2022 (see Note 2), the Company assumed the outstanding principal balance of 12% secured promissory note in the principal amount of $4,250 (“GVB Bridge Note”). On October 31, 2022, the Company repaid $1,899 (outstanding principal of $1,750 and accrued interest of $149). The remaining outstanding principal of $2,500 and accrued interest of $314 was refinanced on March 3, 2023 and has a maturity date of May 1, 2024 (see Note 7).

Vehicle Loans

The Company has various vehicle loans with monthly payments ranging from $0.8 to $2.1, interest rates ranging from 0% to 11%, and maturity dates ranging from May 2024 to September 2026.

Estimated future principal payments to be made under the above notes and loans payable as of June 30, 2023 are as follows:


Remainder of 2023	$	1,403
2024		644
2025		68
2026		20
2027		15
Thereafter		23
Total	$	2,173

NOTE 9. – OTHER OPERATING EXPENSES, NET

The components of “Other operating expenses, net” were as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Grass Valley fire:
Professional services	$	256	$	-	$	324	$	-
Total Grass Valley fire		256		-		324		-
Acquisition and transaction costs	$	70	$	787	$	139	$	839
Needlerock Farms settlement (See Note 11)		10		—		756		—
Loss on change in warrant liability (See Note 6)		584		—		723		—
Gain on change in contingent consideration (See Note 6)		(217)		—		(195)		—
Gain on sale or disposal of property, plant and equipment		(28)		—		(174)		—
Total other operating expenses, net	$	675	$	787	$	1,573	$	839

In November 2022, there was a fire at our Grass Valley manufacturing facility in Oregon, which manufactures bulk ingredients, primarily CBD isolate and distillate. The Company has continuous expenses related to consulting, legal and demolition at this facility.

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NOTE 10. – CAPITAL RAISE AND WARRANT ACTIVITY

2022 Registered Direct Offering & Warrant Repricing

On July 21, 2022, the Company and certain institutional investors (the “July 2022 Investors”) entered into a securities purchase agreement (the “July 2022 Securities Purchase Agreement”) relating to the issuance and sale of shares of common stock pursuant to a registered direct offering (the “July 2022 Registered Offering” and, together with the July 2022 Private Placement (as defined below), the “July 2022 Offerings”). The July 2022 Investors purchased approximately $35,000 of shares, consisting of an aggregate of 1,138,221 shares of common stock at a purchase price of $30.75 per share, subject to certain restrictions. The net proceeds to the Company from the July 2022 Offerings, after deducting the fees and the Company’s offering expenses, were $32,484.

Pursuant to the July 2022 Securities Purchase Agreement, in a concurrent private placement, the Company issued and sold to the July 2022 Investors warrants (the “July 2022 Warrants”) to purchase up to 1,138,221 shares of common stock (the “July 2022 Private Placement”). The July 2022 Warrants are exercisable immediately upon issuance at an exercise price of $30.75 per share of common stock, subject to adjustment in certain circumstances, and expire on July 25, 2027.

As a result of the June 19, 2023 offering described below, the July 2022 Investors and the Company entered a warrant reprice letter (the “Warrant Repricing”) and agreed to reduce the exercise price on the previously issued 747,974 warrants owned by the investors participating in the June 19, 2023 offering from $30.75 to $7.05 and to add a provision in the warrants that upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, such exercise price shall be lowered to such price at which the shares were offered. The Warrant Repricing is accounted for as a modification of a freestanding equity-classified written call option, and therefore resulted in an immediate and incremental increase of approximately $2,025 in the estimated fair value of the related 747,974 warrants, recorded as a component of Capital in excess of par value, with an offsetting equal amount recorded as equity issuance costs .

As a result of subsequent offerings, the exercise price on 747,974 warrants was automatically adjusted to $2.42 per share. See “Subsequent Events.”

The remaining 390,247 previously issued warrants were not repriced and remain at an exercise price of $30.75 on their original terms.

June 19, 2023 Registered Direct Offering

On June 19, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of shares of approximately $5,300 of shares and warrants, consisting of an aggregate of 747,974 shares of common stock and 747,974 warrants to purchase an equal number of shares, at a purchase price of $7.05 per unit. The net proceeds to the Company from the offering were approximately $4,800.

The warrants were exercisable immediately upon issuance at an exercise price of $7.05 per share of common stock, expire on June 22, 2028 and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered.

As a result of the offerings completed in July 2023, the exercise price on the 747,974 warrants was automatically adjusted to $2.42 per share. See “Subsequent Events.”

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March 2023 JGB Warrants

In connection with the sale of the Debentures, the Company issued the JGB Warrants to purchase up to 333,334 shares of common stock for an exercise price of $19.125 per share. The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $19.125 per share, determined as a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The JGB warrants initial fair value of $4,475 net of issuance costs of $139 (see Note 6), of which half of the warrants meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $15.00 upon certain conditional events such as change in control or event of default. Accordingly, half of the warrants are classified as Other long-term liabilities on the Condensed Consolidated Balance Sheets. The remainder of the JGB warrants are equity classified and recorded as a component of Capital in excess of par value.

As a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 shares of common stock. As a result of the anti-dilution provision being triggered, the Company recognized a non-cash deemed dividend of $367 in connection with these adjustments, recorded on the Condensed Consolidated Statement of Operations and Comprehensive Loss and within Capital in excess of par value (as the Company has an accumulated deficit and therefore the deemed dividend is treated as paid out of Capital in excess of par value). There are no further anti-dilution adjustments on such warrants.

The JGB detachable warrants were valued at the closing dates of the Senior Secured Credit Facility using a Monte Carlo valuation model with the following assumptions:


Risk-free interest rate per year		4.2	%
Expected volatility per year		88.1	%
Expected dividend yield		—	%
Contractual expiration		5.5	years
Exercise price	$	19.125
Stock price	$	13.65

March 2023 Omnia Warrants

In connection with the Subordinated Note, the Company issued to Omnia, the Omnia Warrants to purchase up to 45,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The Omnia warrants initial fair value was $1,316 (see Note 6), and meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $30.00 upon certain conditional events such as change in control or event of default. The Omnia warrants are classified as Other long-term liabilities on the Condensed Consolidated Balance Sheets.

The Omnia detachable warrants were valued at the closing dates of the Subordinated Note using a Monte Carlo valuation model with the following assumptions:


Risk-free interest rate per year		4.1	%
Expected volatility per year		83.8	%
Expected dividend yield		—	%
Contractual expiration		7.5	years
Exercise price	$	12.828
Stock price	$	13.65

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ATM Offering

On March 31, 2023, the Company established an at-the-market common equity offering program (“ATM Program”), through which it may, through which it had the ability to offer and sell shares of common stock having an aggregate gross sales price of up to $50,000. The Company paid a 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold. On June 19, 2023, the Company terminated the ATM Program in connection with the June 2023 Capital Raise. The following table shows the number of shares sold under the ATM Program prior to its termination:


	Three Months Ended
	June 30,
(in thousands, except for per-share data)	2023
Number of common shares issued		284
Weighted average sale price per share	$	9.65
Gross proceeds	$	2,741
Net proceeds	$	2,563

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 counterparties 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 Condensed Consolidated Statements of Operations and Comprehensive Loss.


				Future Commitments
Commitment	Counter Party	Product Relationship	Commitment Type	2023		2024		2025		2026		2027 & After		Total
Research Agreement	KeyGene	Hemp / Cannabis	Contract fee	$	1,824	$	2,081	$	1,589	$	1,302	$	328	$	7,124	(1)
License Agreement	NCSU	Tobacco	Minimum annual royalty		—		100		100		100		1,000		1,300	(2)
Research Agreement	NCSU	Tobacco	Contract fee		15		—		—		—		—		15	(3)
Sublicense Agreement	Anandia Laboratories, Inc.	Hemp / Cannabis	Annual license fee		10		10		10		10		90		130	(4)
Research Agreement	Cannametrix	Hemp / Cannabis	Contract fee		—		666		—		—		—		666	(5)
License Agreement	Cannametrix	Hemp / Cannabis	Minimum annual royalty		—		—		75		100		1,900		2,075	(6)
Growing Agreements	Various	Tobacco	Contract fee		187		68		—		—		—		255	(7)
Consulting Agreements	Various	Various	Contract fee		661		186		—		—		—		847	(8)
				$	2,697	$	3,111	$	1,774	$	1,512	$	3,318	$	12,412

(1)

Exclusive agreement with the Company in the field of the Cannabis Sativa L. plant. The initial term of the agreement was five years with an option for an additional two years. On April 30, 2021, the Company and KeyGene entered into a First Amended and Restated Framework Collaborative Research Agreement which extended the agreement term, from first-quarter 2024 to first-quarter 2027, and preserves the Company’s option for an additional 2-year extension, now through first quarter of 2029. On March 30, 2022, the Company and KeyGene entered into a new Framework Collaborative Research Agreement for a term of three years at an aggregate cost of $1,830 in the field related to the hops plant.

The Company will exclusively own all results and all intellectual property relating to the results of the collaboration with KeyGene (the "Results”). The Company will pay royalties in varying amounts to KeyGene relating to the Company's commercialization in the stated fields of each agreement. The Company has also granted KeyGene a license to commercialize the Results outside of each field and KeyGene will pay royalties in varying amounts to the Company relating to KeyGene's commercialization of the Results outside of each field.

(2)

The minimum annual royalty fee is credited against running royalties on sales of licensed products. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred, including capitalized patent costs and patent maintenance costs. These costs vary from year to year and the Company has certain rights to direct the activities that result in these costs.

(3)

On August 19, 2022, the Company entered into a one-year Sponsored Project Agreement with NCSU for continued research of tobacco alkaloid formation.

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(4)

The Company is also responsible for the payment of certain costs, including, capitalized patent costs and patent maintenance costs, a running royalty on future net sales of products made from the sublicensed intellectual property, and a sharing of future sublicensing consideration received from sublicensing to third parties in all countries except for Canada. Anandia retains all patent rights, and is responsible for all patent maintenance, in Canada.

(5)

On March 11, 2022, the Company expanded its research agreement with Cannametrix for hemp/cannabis product development, formulation, and validation for a three-year period at an aggregate cost of $2,000.

(6)

The minimum annual royalty fee is credited against running royalties from the sales of goods or services based on Project IP and/or Background IP.

(7)

Various R&D growing agreements for hemp/cannabis and tobacco.

(8)

General corporate consulting agreements.

Litigation - In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.

Class Action

On January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Matthew Bull, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 1:19 cv 00409.

On January 29, 2019, Ian M. Fitch, a resident of Essex County Massachusetts, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Ian Fitch, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 2:19 cv 00553.

On May 28, 2019, the plaintiff in the Fitch case voluntarily dismissed that action. On August 1, 2019, the Court in the Bull case issued an order designating Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.

On September 16, 2019, pursuant to a joint motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western District of New York, where it remains pending as Case No. 1:19-cv-01285.

Plaintiffs in the Bull case filed an Amended Complaint on November 19, 2019 that alleges three counts: Count I sues the Company and Messrs. Sicignano and Brodfuehrer and alleges that the Company's quarterly and annual reports, SEC filings, press releases and other public statements and documents contained false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5; Count II sues Messrs. Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c); and Count III sues Messrs. Sicignano and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act. The Amended Complaint seeks to certify a class, and unspecified compensatory and punitive damages, and attorney's fees and costs.

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On January 29, 2020, the Company and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On January 14, 2021, the Court granted the motion, dismissing all claims with prejudice. The Plaintiffs filed a notice of appeal on February 12, 2021 to the Second Circuit Court of Appeals. On May 24, 2022, after briefing and oral argument, the Second Circuit issued an order affirming in part, and reversing in part, the District Court’s dismissal order. The Second Circuit affirmed the District Court’s dismissal of the claims relating to the non-disclosure of stock promotion articles, but reversed the District Court’s dismissal order of the claims alleging the non-disclosure of an SEC investigation. The Second Circuit noted in its opinion, however, that the District Court had not addressed certain arguments raised by the Company and Messrs. Sicignano and Brodfuehrer in the Motion to Dismiss the Amended Complaint as to these remaining claims, and remanded the case to the District Court to address these arguments for the dismissal of the remaining claims. On August 8, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a renewed motion to dismiss the remaining claims in the Amended Complaint to address the arguments not previously addressed by the District Court. On September 22, 2022, Plaintiffs filed a brief in opposition to the motion. On October 12, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a reply brief in further support of the motion. On January 6, 2023, the District Court denied the motion to dismiss, and the case will proceed forward on the remaining claims.

The parties participated in a mediation on March 21, 2023 and reached an initial memorandum of understanding for settlement in principle to resolve the litigation and release all claims against the Company. On April 25, 2023, the parties filed with the Court the Motion for Preliminary Approval of the Settlement, which includes the final terms of the proposed settlement. The Court preliminarily approved the settlement on June 30, 2023, and scheduled a further settlement hearing for October 3, 2023. The settlement amount that the defendants are expected to pay is $3,000 and is fully covered by the Company’s insurance. The Company's insurance company funded the settlement payment in late July 2023. Accordingly, the Company has recorded an accrual for litigation settlement and corresponding indemnification receivable on the Condensed Consolidated Balance Sheets as of June 30, 2023.

Shareholder Derivative Cases

On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement.

On February 11, 2019, Stephen Mathew filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Stephen Mathew, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, John T. Brodfuehrer, Richard M. Sanders, Joseph Alexander Dunn, James W. Cornell, Nora B. Sullivan and 22nd Century Group, Inc., Index No. 801786/2019. Mr. Mathew brings this action derivatively generally alleging the same allegations as in the Klein case. The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.

On August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation by the parties (Western District of New York, Case No. 1-19-cv-0513). On May 3, 2019, the Court ordered the Mathew case stayed. This stay was applied to the Consolidated Action pursuant to the Court’s August 15, 2019 Order Consolidated Related Shareholder Derivative Actions and Establishing a Leadership Structure. As a result of the Court’s denial of the renewed Motion to Dismiss the Amended Complaint, the May 3, 2019 stay will be lifted. No trial date has been set. We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.

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On June 10, 2019, Judy Rowley filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Judy Rowley, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer, and 22nd Century Group, Inc., Index No. 807214/2019. Ms. Rowley brought the action derivatively alleging that the director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements. The Complaint sought declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs. We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims. On September 13, 2019, the Court ordered the litigation stayed pursuant to a joint stipulation by the parties. On August 3, 2022, Plaintiff dismissed the case with prejudice by filing a stipulation of discontinuance with the Court. This dismissal was not pursuant to a settlement.

On January 15, 2020, Kevin Broccuto filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Kevin Broccuto, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Broccuto brings this action derivatively alleging three counts: Count I alleges that the defendants breached their fiduciary duties; Count II alleges they committed corporate waste; and Count III that they were unjustly enriched, by allegedly allowing the Company to make false statements.

On February 11, 2020, Jerry Wayne filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Jerry Wayne, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Wayne brings this action derivatively alleging generally the same allegations as the Broccuto case. The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement of alleged profits and imposition of constructive trusts, and attorney's fees and costs. The Complaint also seeks to declare as unenforceable the Company's Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company is headquartered.

On March 25, 2020, the Court ordered the Broccuto and Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties. On June 27, 2022, the Court ordered that the stay continue until thirty (30) days after the District Court rules on the renewed Motion to Dismiss the Amended Complaint in the Noto Class Action case. As a result of the Court’s denial of the Motion to Dismiss the Amended Complaint, the June 27, 2022 stay will be lifted. No trial date has been set. The parties participated in a mediation on March 21, 2023, which process is continuing.

We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.

Needle Rock Farms – Settlement Agreement

During March 2023, the Company negotiated and entered into a settlement agreement related to water rights dispute with the adjacent property owner for Needle Rock Farms in which the Company agreed to pay $250 in cash upon execution of the settlement, transferred certain farm equipment with net book value of $272, and accrued an additional payment of $225 that is contingent on either the sale of the farm or will be paid within one year. The total charges of $747 recorded in connection with the settlement agreement is included within Other operating expenses, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss.

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NOTE 12 – EQUITY- BASED COMPENSATION

The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders and are administered by the Compensation Committee of the Company’s Board of Directors. The stock-based compensation plans provide for the granting of stock options, time and performance based restricted stock units (RSU’s), among other awards to employees, non-employee directors, consultants, and service providers. The 2021 Omnibus Incentive Plan was amended on June 16, 2023, increasing the authorized shares by 233,334. As of June 30, 2023, the Company had available 268,816 shares remaining for future awards under its Omnibus Incentive Plans.

Compensation Expense – The Company recognized the following compensation costs, net of actual forfeitures, related to restricted stock units (“RSUs”) and stock options:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Sales, general, and administrative	$	1,419	$	1,059	$	2,544	$	2,230
Research and development		67		47		117		89
Total RSUs and stock option compensation	$	1,486	$	1,106	$	2,661	$	2,319

Restricted Stock Units – We typically grant RSUs to employees and non-employee directors. The following table summarizes the changes in unvested RSUs from January 1, 2023 through June 30, 2023.


	Unvested RSUs
		Weighted
		Average
	Number of	Grant-date
	Shares	Fair Value
	in thousands	$ per share
Unvested at January 1, 2023	269	$	31.88
Granted	293		12.44
Vested	(122)		31.16
Forfeited	(2)		36.35
Unvested at March 31, 2023	438		19.06
Vested	(25)		22.47
Forfeited	(22)		17.77
Unvested at June 30, 2023	391		18.92

The fair value of RSUs that vested during the six months ended June 30, 2023 was approximately $1,838 based on the stock price at the time of vesting. As of June 30, 2023, unrecognized compensation expense for RSUs amounted to $3,986 which is expected to be recognized over a weighted average period of approximately 1.4 years. In addition, there is approximately $1,114 of unrecognized compensation expense that requires the achievement of certain milestones which are not yet probable.

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Stock Options – Our outstanding stock options were valued using the Black-Scholes option-pricing model on the date of the award. There was no stock option grant activity during the six months ended June 30, 2023. A summary of the status of stock options activity since January 1, 2023 and at June 30, 2023 is as follows:


				Weighted
		Weighted		Average
		Average		Remaining		Aggregate
	Number of	Exercise		Contractual		Intrinsic
	Options	Price		Term		Value
	in thousands	$ per share
Outstanding at January 1, 2023	327	$	24.82
Expired	(7)	$	41.40
Outstanding at March 31, 2023	320	$	24.74	2.1	years	$	—
Outstanding at June 30, 2023	320	$	24.74	1.8	years	$	—
Exercisable at June 30, 2023	314	$	24.44	1.7	years	$	—

The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

As of June 30, 2023, there is approximately $190 of unrecognized compensation expense for stock options that requires the achievement of certain milestones which are not yet probable.

NOTE 13. – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted loss per common share for the three and six months ended June 30, 2023 and 2022, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022

	(in thousands, except for per-share data)
Net loss	$	(20,539)	$	(11,498)	$	(38,721)	$	(20,415)
Deemed dividend from trigger of anti-dilution provision feature		(367)		—		(367)		—
Net loss available to common shareholders	$	(20,906)	$	(11,498)	$	(39,088)	$	(20,415)
Weighted average common shares outstanding - basic and diluted		14,900		12,134		14,644		11,509
Basic and diluted loss per common share	$	(1.40)	$	(0.95)	$	(2.67)	$	(1.77)

Anti-dilutive shares are as follows as of June 30:
Warrants		2,428		—		2,428		—
Options		320		327		320		327
Restricted stock units		391		256		391		256
		3,139		583		3,139		583

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NOTE 14. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table is a summary of the components and activity of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of and for the six months ended June 30, 2023 and 2022, respectively:


	Three Months Ended June 30, 2023

	Corporate		Foreign
	securities/		Translation		Pre-tax				Net of
	investments		Adjustment		Amount		Tax		Tax Amount
Balance at January 1, 2023	$	(112)	$	1	$	(111)	$	—	$	(111)
Unrealized gain on short-term investment securities		61		—		61		—		61
Foreign currency translation		—		(4)		(4)		—		(4)
Reclassification of realized losses to net loss		13		—		13		—		13
Balance at March 31, 2023	$	(38)	$	(3)	$	(41)	$	—	$	(41)
Unrealized loss on short-term investment securities		10		—		10		—		10
Foreign currency translation		—		42		42		—		42
Reclassification of realized losses to net loss		28		—		28		—		28
Balance at June 30, 2023	$	(0)	$	39	$	39	$	—	$	39


	Three Months Ended June 30, 2022

	Corporate		Foreign
	securities/		Translation		Pre-tax				Net of
	investments		Adjustment		Amount		Tax		Tax Amount
Balance at January 1, 2022	$	(162)	$	—	$	(162)	$	—	$	(162)
Unrealized loss on short-term investment securities		(400)		—		(400)		—		(400)
Balance at March 31, 2022	$	(562)	$	—	$	(562)	$	—	$	(562)
Unrealized loss on short-term investment securities		(69)		—		(69)		—		(69)
Foreign currency translation		—		—		—		—		—
Reclassification of realized losses to net loss		108		—		108		—		108
Balance at June 30, 2022	$	(523)	$	—	$	(523)	$	—	$	(523)

NOTE 15. – REVENUE RECOGNITION

Tobacco

The Company’s tobacco reportable segment revenues are derived primarily from contract manufacturing organization (“CMO”) customer contracts that consist of obligations to manufacture the customers’ branded filtered cigars and cigarettes. Additional revenues are generated from sale of the Company’s proprietary low nicotine content cigarettes, sold under the brand name VLN^®, or research cigarettes sold under the brand name SPECTRUM^®.

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For certain CMO contracts, the performance obligation is satisfied over time as the Company determines, due to contract restrictions, it does not have an alternative use of the product and it has an enforceable right to payment as the product is manufactured. The Company recognizes revenue under those contracts at the unit price stated in the contract based on the units manufactured. Tobacco revenue from the sale of the Company’s products, which include excise taxes and shipping and handling charges billed to customers, is recognized net of cash discounts, sales returns and allowances. There was no allowance for discounts or returns and allowances at June 30, 2023 and December 31, 2022. Excise taxes recorded in Cost of Goods Sold on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended June 30, 2023 and 2022 were $2,740 and $2,834, respectively. Excise taxes for the six months ended June 30, 2023 and 2022 were $5,435 and $5,552, respectively.

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Hemp/Cannabis

The Company’s hemp/cannabis reportable segment revenues are derived primarily from a CBD wholesale extracts and bulk ingredient distillate or isolate. Additional revenues are generated from private/white label contract manufacturing.

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled. For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.

When applicable, the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.

There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.

Disaggregation of Revenue

The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by major product line because the Company believes it best depicts the nature, amount, and timing of revenue and cash flows. Revenue recognized from Tobacco products transferred to customers over time represented 67% and 66%, respectively, of total Tobacco revenue for the three and six months ended June 30, 2023, compared to 72% and 73%, respectively, for the three and six months ended June 30, 2022. There was no revenue recognized from hemp/cannabis products that were transferred to customers over time for the three and six months ended June 30, 2023 and 2022.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Tobacco	$	8,050	$	9,971	$	16,977	$	19,015
Hemp/cannabis		15,377		4,506		28,412		4,506
Total revenues, net	$	23,427	$	14,477	$	45,389	$	23,521

The following table presents net revenues by significant customers, which are defined as any customer who individually represents 10% or more of disaggregated product line net revenues:


	Three Months Ended
	June 30,
	2023				2022
	Tobacco		Hemp/cannabis		Tobacco		Hemp/cannabis
Customer A	29.20	%	*		23.44	%	*
Customer B	28.05	%	*		23.12	%	*
Customer C	14.00	%	*		10.80	%	*
Customer D	*		*		18.36	%	*
Customer E	*		*		12.32	%	*
Customer F	*		16.00	%	*		29.15	%
Customer G	*		*		*		11.04	%
All other customers	28.75	%	84.00	%	11.96	%	59.81	%

*Less than 10% of product line’s total revenues for the period.

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	Six Months Ended
	June 30,
	2023				2022
	Tobacco		Hemp/cannabis		Tobacco		Hemp/cannabis
Customer A	29.33	%	*		22.61	%	*
Customer B	27.43	%	*		25.44	%	*
Customer C	*		*		11.17	%	*
Customer D	*		*		19.09	%	*
Customer E	*		*		11.68	%	*
Customer F	*		16.72	%	*		29.15	%
Customer G	*		*		*		11.04	%
All other customers	43.24	%	83.28	%	10.01	%	59.81	%

*Less than 10% of product line’s total revenues for the period.

Contract Assets and Liabilities

Unbilled receivables (contract assets) represent revenues recognized for performance obligations that have been satisfied but have not been billed. These receivables are included as Accounts receivable, net on the Condensed Consolidated Balance Sheets. Customer payment terms vary depending on the terms of each customer contract, but payment is generally due prior to product shipment or within credit terms up to 30 days after shipment. Deferred income (contract liabilities) relates to down payments received from customers in advance of satisfying a performance obligation and is included as Deferred income on the Condensed Consolidated Balance Sheets.

Total contract assets and contract liabilities are as follows:


	June 30,		December 31,
	2023		2022
Unbilled receivables	$	1,797	$	354
Deferred income		(214)		(831)
Net contract assets (liabilities)	$	1,583	$	(477)

During the three and six months ended June 30, 2023, the Company recognized $0 and $802, respectively of revenue that was included in the contract liability balance as of December 31, 2022. During the three and six months ended June 30, 2022, the Company recognized $0 and $119, respectively of revenue that was included in the contract asset balance as of December 31, 2021.

NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION

The Company organizes its business into two reportable segments: (1) Tobacco and (2) Hemp/Cannabis. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting.

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The Company defines segment income from operations as revenues, net less cost of goods sold and expenses attributable to segment-specific selling, general, administrative, research, development, and other operating activities. The remaining unallocated operating and other income and expenses are primarily administrative corporate overhead expenses such as corporate personnel costs, equity compensation, investor relations, strategic consulting, research and development costs that apply broadly to the overall plant science platform, and that are not allocated to reportable segments. Unallocated corporate assets consist of cash and cash equivalents, short-term investment securities, prepaid and other assets, property and equipment, and intangible assets. Transactions between the two segments are not significant.

The following table presents revenues, net by segment for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Tobacco	$	8,050	$	9,971	$	16,977	$	19,015
Hemp/cannabis		15,377		4,506		28,412		4,506
Total revenues, net	$	23,427	$	14,477	$	45,389	$	23,521

The following table presents income from continuing operations for the Company’s reportable segments for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Tobacco	$	4,371	$	722	$	7,275	$	1,662
Hemp/cannabis		5,784		2,018		11,949		2,867
Total segment operating loss		10,155		2,740		19,224		4,529
Unallocated operating expenses		9,198		7,736		17,952		14,092
Operating loss		19,353		10,476		37,176		18,621
Unallocated other expense, net		1,144		952		1,464		1,724
Loss before income taxes	$	20,493	$	11,498	$	38,675	$	20,415

The following table presents total assets for the Company’s reportable segments as of June 30, 2023 and December 31, 2022:



	June 30,		December 31,
	2023		2022
Tobacco	$	20,650	$	15,748
Hemp/cannabis		76,438		65,965
Total reportable segments		97,088		81,713
Unallocated assets		27,892		32,938
Total assets	$	124,980	$	114,651

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The following table presents capital expenditures for the Company’s reportable segments for the six months ended June, 2023 and 2022:


	Six Months Ended
	June 30,
	2023		2022
Tobacco	$	475	$	455
Hemp/cannabis		2,024		424
Total reportable segments		2,499		879
Unallocated expenditures for long-lived tangible assets		260		303
Total expenditures	$	2,759	$	1,182

NOTE 17. – SUBSEQUENT EVENTS

Reverse Stock Split

On July 5, 2023, the Company effected a 15:1 reverse stock split of its common stock in order to regain compliance with Nasdaq's continued listing requirements. All share and per share amounts, and exercise prices of stock options, warrants, and pre-funded warrants, if applicable, in the Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split.

July 6, 2023 Registered Direct Offering.

On July 6, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $3,000 of shares and warrants, consisting of an aggregate of 778,634 shares of common stock and 1,557,268 warrants to purchase an equal number of shares, at a purchase price of $3.80 per unit. The warrants are exercisable six months after issuance at an exercise price of $3.80 per share of common stock and expire on the later of January 10, 2029 and the date Stockholder Approval (as defined below) is obtained. The net proceeds to the Company from the offering were approximately $2,722.

The securities purchase agreement also provides that the Company will use commercially reasonable efforts to hold a special meeting of stockholders to have stockholders approve (i) a proposal allowing for the price adjustment provisions in the warrants to be approved pursuant to applicable Nasdaq rules and (ii) a proposal to amend the Company’s charter to increase the number of shares of common stock authorized for issuance ((i) and (ii) collectively, “Stockholder Approval”). The warrants are subject to adjustment in certain circumstances, including, if the Stockholder Approval is obtained, upon any subsequent equity sales at a price per share lower than the then effective exercise price of such Warrants, then such exercise price shall be lowered to such price at which the shares were offered. As a result of the offering, the exercise price on 1,495,948 previously outstanding warrants was automatically adjusted from $7.05 per share to $3.80 per share.

July 19, 2023 Registered Direct Offering.

On July 19, 2023, the Company and certain investors (entered into a securities purchase agreement relating to the issuance and sale of approximately $11,700 of shares and warrants, consisting of an aggregate of 4,373,219 shares of common stock and 8,746,438 warrants to purchase an equal number of shares, at a purchase price of $2.67 per unit. The warrants are exercisable immediately at an exercise price of $2.42 per share of common stock and expire on the later of five years after issuance and the date Stockholder Approval (as defined below) is obtained. The net proceeds to the Company from the offering were approximately $10,742.

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Insurance Litigation

In November 2022, there was a fire at the Company’s Grass Valley manufacturing facility in Oregon, which resulted in a total loss of the facility. The Company submitted an insurance claim with Dorchester Insurance Company, Ltd. (“Dorchester”) for casualty loss and business interruption coverage which was acknowledged on November 23, 2022. Dorchester funded $5,000 of casualty loss insurance but has failed to issue any payments in connection with the Company’s business interruption claim.

On July 19, 2023, the Company filed a Complaint against Dorchester in the United States District Court for the District of Oregon, Pendleton Division, Case No. 2:23-cv-01057-HL. The Company is alleging breach of contract, breach of duty of good faith and fair dealing and negligence per se. The Company is seeking full recovery of its business interruption claim under the policy plus direct, indirect and consequential damages resulting from Dorchester’s continued delay in issuing coverage payments.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as our Condensed Consolidated Financial Statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1 of this Form 10-Q.

For purposes of this MD&A, references to the “Company,” “we,” “us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein. In addition, dollars are in thousands, except per share data or unless otherwise specified.

Forward Looking Statements

Except for historical information, all of the statements, expectations, and assumptions contained in this section are forward-looking statements. Forward-looking statements typically contain terms such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “explore,” “foresee,” “goal,” “guidance,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “preliminary,” “probable,” “project,” “promising,” “seek,” “should,” “will,” “would,” and similar expressions. Actual results might differ materially from those explicit or implicit in forward-looking statements. Important factors that could cause actual results to differ materially are set forth in “Risk Factors” in our Annual Report on Form 10-K filed on March 9, 2023. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law. All information provided in this quarterly report is as of the date hereof, and we assume no obligation to and do not intend to update these forward-looking statements, except as required by law.

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Our Business

22nd Century Group, Inc. is a leading biotechnology company focused on utilizing advanced plant technologies to improve health and wellness with reduced nicotine tobacco, hemp/cannabis and hops. We use modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the consumer goods and pharmaceutical industries by creating new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits. Our mission in tobacco products is dedicated to reduce the harms of smoking by commercializing our proprietary, very low nicotine content “VLNC” tobacco plants and cigarette products. We received the first and only Food and Drug Administration (“FDA”) Modified Risk Tobacco Product (“MRTP”) authorization of a combustible cigarette in December 2021. Beginning in April 2022, we launched our proprietary VLN^® reduced nicotine cigarettes, first through a pilot program conducted in select Circle K stores in and around Chicago, Illinois. Following our successful pilot program, we initiated an ongoing state-by-state, region-by-region rollout strategy.

Our mission in hemp/cannabis is to develop and monetize proprietary varieties of hemp with valuable cannabinoid and terpene profiles and other superior agronomic traits. We are a global scale provider of cannabinoid ingredients and Active Pharmaceutical Ingredients (“API”), as well as a contract development and manufacturing organization (CDMO) provider of hemp-derived consumer products.

In hops, our mission is to leverage our experience with tobacco and hemp/cannabis, a close hop plant relative, to accelerate the development of proprietary specialty hop varieties with valuable traits, for potential applications in life sciences and consumer products.

We have a significant intellectual property portfolio of issued patents and patent applications relating to both tobacco and hemp/cannabis plants and have further resources directed towards creating and securing additional intellectual property pertaining to all three franchises. We continue to prioritize research and development activities to achieve our strategic and investment priorities.

Recent Highlights and Other Events

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During the first half of 2023, the Company launched a new single source, turnkey contract development, manufacturing and distribution service offering (CDMO+D) for the largest consumer brand companies in the hemp/cannabis sector. This new CDMO+D service offering includes ingredient supply, white label manufacturing and retail category management and distribution .

On April 4, 2023, we entered into a License and Distribution Agreement (the “Agreement”) with Cookies Creative Consulting & Promotions, Inc. (“Cookies”). Pursuant to the Agreement, Cookies granted the Company an exclusive license to manufacture and distribute certain Cookie’s branded hemp-derived hemp/cannabis products to retailers within the United States for a period of three years, with the Company having an option to extend the Agreement for an additional three-year period if certain retailer milestones are met during the initial term.

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The Company completed registered direct offerings through July 2023, for total net proceeds after placement agent fees of approximately $18,315 before expenses to us.

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During July 2023, the Company has implemented a cost savings initiative intended to simplify operations as it continues to tighten its focus on key end markets and operating strategies resulting in an estimated $15,000 in annualized cost reductions across its operations once fully in place.

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NASDAQ Listing Standards

On July 19, 2023, the Company received notice from The Nasdaq Stock Market LLC indicating that the Company had regained compliance with the minimum bid price requirement under Nasdaq Rule 5550(a)(2) issuance.

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Leadership Transition

On July 21, 2023, James A. Mish, the Company’s Chief Executive Officer, provided notice that he was resigning for personal reasons from such position effective August 1, 2023. He will continue to serve as a member of the Board of Directors (the “Board). In connection with Mr. Mish’s resignation, the Board appointed John J. Miller, who has served as President of the Tobacco Business since November 2022, as interim-CEO of the Company effective immediately.

On July 19, 2023, the Board of Directors expanded the Board to seven members and appointed Andrew Arno to be a director on the Board, effective immediately. Mr. Arno was appointed as a Class I director.

Financial Overview

●

Net revenues for the second quarter of 2023 were $23,427, an increase of 61.8% from $14,477 in 2022.

Revenue from tobacco-related products for the second quarter was $8,050 compared to $9,971 in the prior year period reflecting a decrease in unit sales of filtered cigars and export cigarettes, offset by increases in unit sales of cigarettes.

Revenue from hemp/cannabis-related products was $15,377, compared to $4,506 in the prior year second quarter, due to record volumes for bulk ingredient sales and reflecting continued strong demand (the GVB acquisition occurred on May 13, 2022).

◾

Sequential revenue growth quarter over quarter since the fourth quarter of 2022 was an increase of $3,780 in the first quarter of 2023 and an increase of $2,342 in second quarter of 2023.

●

Gross profit for the second quarter of 2023 was a loss of $2,345 compared to profit of $892 in the prior year period.

Gross profit from tobacco-related products was a loss of $961, a decrease of $1,889 compared to the prior year period, reflecting lower unit sales in contract manufacturing products and increases in tobacco excise taxes.

Gross profit from hemp/cannabis-related products was a loss of $1,384 compared to a loss of $36 in the prior year. Margin declines in the second quarter were primarily due to ongoing impacts of the Grass Valley fire.

●

Total operating expenses for the second quarter of 2023 increased to $17,008 compared to $11,368 in the prior year quarter driven by:

Sales, general and administrative expenses increased to $14,540 driven primarily by the acquisition of GVB, higher strategic consulting and marketing, and personnel costs to expand the launch of VLN^®.

Research and development expenses decreased to $1,793, driven by lower strategic consulting expenses.

Other operating expenses, net was $675, primarily reflecting changes in the fair value of warrant liability and RXP contingent consideration upon remeasurement, and other non-recurring charges.

●

Operating loss for the second quarter 2023 was $19,353, compared to a loss of $10,476 in the prior year period.

●

Net loss in the second quarter of 2023 was $20,539 and basic and diluted a net loss per common share was $1.40 compared with net loss in the second quarter of 2022 of $11,498, and basic and diluted net loss per common share of $0.95.

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As of June 30, 2023, we had $4,433 in cash and cash equivalents and $7,500 in restricted cash pursuant to the Senior Secured Credit Facility.

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Our Financial Results


	Three Months Ended
	June 30			June 30			Change
	2023			2022				%
Tobacco revenues, net	$	8,050		$	9,971		(1,921)	(19.3)
Hemp/cannabis revenues, net		15,377			4,506		10,871	241.3
Total revenues, net		23,427			14,477		8,950	61.8
Cost of goods sold		25,772			13,585		12,187	89.7
Gross (loss) profit		(2,345)			892		(3,237)	(362.9)
Gross (loss) profit as a % of revenues, net		(10.0)	%		6.2	%
Operating expenses:
Sales, general and administrative ("SG&A")		14,540			8,684		5,856	67.4
SG&A as a % of revenues, net		62.1	%		60.0	%
Research and development ("R&D")		1,793			1,897		(104)	(5.5)
R&D as a % of revenues, net		7.7	%		13.1	%
Other operating expenses, net ("OOE")		675			787		(112)	(14.2)
Total operating expenses		17,008			11,368		5,640	49.6
Operating loss		(19,353)			(10,476)		(8,877)	84.7
Operating loss as a % of revenues, net		(82.6)	%		(72.4)	%
Other income (expense):
Unrealized loss on investment		-			(885)		885	(100.0)
Realized loss on short-term investment securities		(28)			(108)		80	(74.1)
Other income, net		16			-		16	NM
Interest income, net		65			48		17	35.4
Interest expense		(1,193)			(77)		(1,116)	1,449.4
Total other expense		(1,140)			(1,022)		(118)	11.5
Loss before income taxes		(20,493)			(11,498)		(8,995)	78.2
Provision for income taxes		46			-		46	NM
Net loss		(20,539)			(11,498)		(9,041)	78.6
Net loss as a % of revenues, net		(87.7)	%		(79.4)	%
Deemed dividend from trigger of anti-dilution provision feature		(367)			-		(367)	NM
Net loss available to common shareholders	$	(20,906)		$	(11,498)		(9,408)	81.8
Net loss per common share (basic and diluted)*	$	(1.40)		$	(0.95)		(0.45)	47.4

NM - calculated change not meaningful

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

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	Six Months Ended
	June 30			June 30			Change
	2023			2022				%
Tobacco revenues, net	$	16,977		$	19,015		(2,038)	(10.7)
Hemp/cannabis revenues, net		28,412			4,506		23,906	530.5
Total revenues, net		45,389			23,521		21,868	93.0
Cost of goods sold		48,911			22,321		26,590	119.1
Gross (loss) profit		(3,522)			1,200		(4,722)	(393.5)
Gross (loss) profit as a % of revenues, net		(7.8)	%		5.1	%
Operating expenses:
Sales, general and administrative ("SG&A")		28,771			15,946		12,825	80.4
SG&A as a % of revenues, net		63.4	%		67.8	%
Research and development ("R&D")		3,310			3,036		274	9.0
R&D as a % of revenues, net		7.3	%		12.9	%
Other operating expenses, net ("OOE")		1,573			839		734	87.5
Total operating expenses		33,654			19,821		13,833	69.8
Operating loss		(37,176)			(18,621)		(18,555)	99.6
Operating loss as a % of revenues, net		(81.9)	%		(79.2)	%
Other income (expense):
Unrealized loss on investment		-			(1,702)		1,702	(100.0)
Realized loss on short-term investment securities		(41)			(108)		67	(62.0)
Other income, net		34			-		34	NM
Interest income, net		122			98		24	24.5
Interest expense		(1,614)			(82)		(1,532)	1,868.3
Total other expense		(1,499)			(1,794)		295	(16.4)
Loss before income taxes		(38,675)			(20,415)		(18,260)	89.4
Provision for income taxes		46			-		46	NM
Net loss		(38,721)			(20,415)		(18,306)	89.7
Net loss as a % of revenues, net		(85.3)	%		(86.8)	%
Deemed dividend from trigger of anti-dilution provision feature		(367)			-		(367)	NM
Net loss available to common shareholders	$	(39,088)		$	(20,415)		(18,673)	91.5
Net loss per common share (basic and diluted)*	$	(2.67)		$	(1.77)		(0.90)	50.8

NM - calculated change not meaningful

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

Refer to Note 16, “Segment and Geographic Information,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding operating results for our two operating and reportable segments: (1) Tobacco, (2) Hemp/cannabis.

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Three and Six Months Ended June 30, 2023 Compared to Three and Six Months Ended June 30, 2022

Revenue, net


	Three Months Ended				Six Months Ended
	June 30		June 30		June 30		June 30
	2023		2022		2023		2022
Tobacco	$	8,050	$	9,971	$	16,977	$	19,015
Hemp/cannabis		15,377		4,506		28,412		4,506
Total revenues, net	$	23,427	$	14,477	$	45,389	$	23,521

The increase in revenue for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily due to the increase in hemp/cannabis revenue of $10,871, offset by a decrease in tobacco revenue of $1,921.

Tobacco revenue was $8,050, a decrease of 19.3% from the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN^® and conventional cigarette products. Second quarter 2023 cartons sold of 796 compared to 1,472 in the comparable prior year period.

Hemp/cannabis revenue was $15,377, compared to $4,506 in the prior year second quarter, reflecting the acquisition of GVB and continued sequential quarterly growth in bulk ingredient sales. Second quarter 2023 bulk ingredient sales volume in kilograms was 76,591 compared to 26,546 in the comparable prior year period (the GVB acquisition occurred on May 13, 2022).

The increase in revenue for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was primarily due to the increase in hemp/cannabis revenue of $23,906, offset by a decrease in tobacco revenue of $2,038.

Tobacco revenue was $16,977, a decrease of 10.7% from the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN^® and conventional cigarette products. Second quarter 2023 year-to-date cartons sold of 1,782 compared to 2,855 in the comparable prior year period.

Hemp/cannabis revenue was $28,412, compared to $4,506 in the prior year second quarter, reflecting a full period of sales following the acquisition of GVB and continued growth in bulk ingredient sales. Second quarter 2023 year-to-date bulk ingredient sales volume in kilograms was 144,786 compared to 43,070 in the comparable prior year period (the GVB acquisition occurred on May 13, 2022).

Gross (loss) profit


	Three Months Ended						Six Months Ended
	June 30			June 30			June 30			June 30
	2023			2022			2023			2022
Gross (loss) profit	$	(2,345)		$	892		$	(3,522)		$	1,200
Percent of Revenues, net		(10.0)	%		6.2	%		(7.8)	%		5.1	%

The decrease in gross profit and gross profit as a percent of revenues, net for the three and six month periods-ended June 30, 2023 as compared to June 30, 2022 is driven by declines in tobacco gross profit of ($1,889) and ($2,198), respectively driven mainly by lower volume and product mix and decreases in hemp/cannabis gross profit of ($1,348) and ($2,524), respectively resulting from incremental costs associated with buying and selling ingredients while the Company rebuilds its distillate and isolate manufacturing capacity following the November 2022 Grass Valley fire.

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Sales, general and administrative (“SG&A”) expense


	Changes From Prior Year
	Three Months Ended			Six Months Ended
Compensation and benefits (a)	$	2,303	$	3,403
Strategic consulting (b)		572		2,314
Sales and marketing (c)		426		740
Other (d)		504		987
GVB (e)		2,051		5,381
Net increase in SG&A expenses	$	5,856	$	12,825

(a) Increases in compensation and benefits is mainly attributable to inflationary increases, as well as increases in corporate headcount as our organization continues scaling.

(b) Increase of strategic consulting due to additional business development, recruitment, and investor relations expenses.

(d) Other expenses increased for the three-month ended June 30, 2023 were due to $133 of facilities expense, $123 of travel and entertainment, and $113 of technology expenses. For the six months period ended June 30, 2023, other expenses increased due to $277 of travel and entertainment, $207 of facilities expense, and $232 of technology expenses.

(e) Increased SG&A as a result of the acquisition of GVB on May 13, 2022, including corporate personnel costs and general overhead.

Research and development (“R&D”) expense


	Changes From Prior Year
	Three Months Ended			Six Months Ended
Compensation and benefits (a)	$	217	$	484
Contract costs		(86)		(103)
Consulting and professional services (b)		(442)		(439)
Other		200		288
GVB		7		44
Net increase in R&D expenses	$	(104)	$	274

(a)

Increased compensation and benefits related to the additional executive and R&D personnel.

(b)

Decreased consulting and professional services due to the evaluation of strategic opportunities related to our tobacco patent portfolio that occurred in the prior year period

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Other operating expenses, net (“OOE”)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
Grass Valley fire:
Professional services and supplies (a)	$	256	$	-	$	324	$	-
Total Grass Valley fire		256		-		324		-
Acquisition and transaction costs		70		787		139		839
Needlerock Farms settlement (b)		10		—		756		—
Loss on change in warrant liability (c)		584		—		723		—
Gain on sale or disposal of property, plant and equipment (d)		(28)		—		(174)		—
Gain on change in contingent consideration (e)		(217)		—		(195)		—
Total other operating expenses, net	$	675	$	787	$	1,573	$	839

(a)

(b)

Expenses associated with non-ordinary course legal matters and corresponding settlement related to water rights dispute for Needle Rock Farms.

(c)

Represents change in fair value of warrant liability resulting from remeasurement.

(d)

Reflects gain on sale primarily from the sale of older tobacco equipment.

(e)

Represents change in fair value of RXP contingent consideration from remeasurement.

Refer to Note 9, “Other operating expenses, net,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these charges.

Other income (expense)


	Changes From Prior Year
	Three Months Ended			Six Months Ended
Other income (expense):
Unrealized loss on investment (a)	$	885	$	1,702
Realized loss on short-term investment securities		80		67
Other income, net		16		34
Interest income, net		17		24
Interest expense (b)		(1,116)		(1,532)
Total other expense	$	(118)	$	295

(a) Unrealized loss on investment includes fair value adjustments for our investment in Panacea Life Sciences Holdings, Inc. (“PLSH”) during the three and six month-period ended June 30, 2022. The investment was subsequently liquidated during 2022.

(b) Interest expense increased in 2023, as compared to the prior year period, primarily due to the interest recognized from the Senior Secured Credit Facility and Subordinated Note, as described below under ‘Liquidity and Capital Resources.’

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Liquidity and Capital Resources

We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in its tobacco and hemp/cannabis businesses. We had negative cash flow from operations of $37,332 for the six months ended June 30, 2023 and an accumulated deficit of $276,653 as of June 30, 2023. As of June 30, 2023, we had cash and cash equivalents of $4,433, restricted cash of $7,500 and working capital of $11,772 (compared to working capital of $31,587 at December 31, 2022). Given our projected operating requirements and existing cash and cash equivalents, there is substantial doubt about our ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements herein are issued.

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which may include, but are not limited to, the public or private sale of equity, debt financings or funds from other capital sources, such as collaborations, strategic alliances, divestment of assets, or licensing arrangements with third parties. However, there can be no assurance that we will be able to secure additional financing, or if available, that it will be sufficient to meet its needs or on favorable terms, which may result in the Company being required to delay, reduce the scope of, or eliminate one or more of its product launch and commercialization programs, or reducing or curtailing operations over a longer term.

Our cash, short term investments, restricted cash and working capital as of June 30, 2023 and December 31, 2022 are set forth below:


	June 30		December 31,
	2023		2022
Cash and cash equivalents	$	4,433	$	3,020
Short-term investment securities	$	—	$	18,193
Restricted cash	$	7,500	$	—
Working capital	$	11,772	$	31,587

Working Capital

As of June 30, 2023, we had working capital of $11,772 compared to working capital of $31,587 at December 31, 2022 a decrease of $19,815. This decrease in working capital was primarily due to a $7,731 decrease in net current assets and was offset by an increase in net current liabilities of $12,084. Cash, cash equivalents and short-term investment securities decreased by $16,780 and the remaining net current assets increased by $9,049.

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Summary of Cash Flows


	Six Months Ended
	June 30,				Change
	2023		2022		$
Cash provided by (used in):
Operating activities	$	(37,332)	$	(19,752)	(17,580)
Investing activities		18,923		19,726	(803)
Financing activities		27,322		1,358	25,964
Net change in cash, cash equivalents and restricted cash	$	8,913	$	1,332

Net cash used in operating activities

Cash used in operating activities increased $17,580 from $19,752 in 2022 to $37,332 in 2023. The primary driver for this increase was higher net loss of $18,306, driven by increased SG&A both from the acquisition of GVB and acceleration of the launch of VLN^®, an increase of $676 related to net adjustments to reconcile net loss to cash, and an increase in cash used for working capital components related to operations in the amount of $50 for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Net cash provided by investing activities

Cash provided by investing activities amounted to $18,923 the six months ended June 30, 2023, as compared to cash provided by investing activities of $19,726 for the six months ended June 30, 2022. The decrease in cash provided by investing activities of $803 was the result of (i) a decrease in net proceeds from short-term investments of $4,854 and (ii) $1,725 related to the acquisitions of patents, trademarks and property, plant and equipment. These decreased cash outflows were partially offset by increased cash inflows of (i) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the current period; (ii) $682 from the investment in Change Agronomy Ltd. in the prior year period; (iii) $1,343 from the acquisitions of RXP in the current period and GVB in the prior year period and (iv) $251 of proceeds from the sale of property, plant and equipment.

Net cash provided by financing activities

During the six months ended June 30, 2023, cash provided by financing activities increased by $25,964 resulting from the proceeds of $16,849 from issuance of long-term debt, proceeds of issuance of common stock of $8,014, proceeds of $6,016 from issuance of detachable warrants and increased proceeds of $224 from the issuance of notes payable. These cash inflows were offset by payments of debt issuance costs of $801, payments of common stock issuance costs of $600, increased note payable payments of $3,144, taxes paid related to net share settlement of RSUs of $422 and $174 of option exercises that occurred in 2022.

Cash demands on operations

As of June 30, 2023, we had approximately $4,433 of cash and cash equivalents. Our principal sources of liquidity are our cash and cash equivalents and cash generated from our tobacco contract manufacturing business and hemp/cannabis business and proceeds from debt and equity financing activities, which such financings have provided total net proceeds in the first half of 2023 of $32,579, including registered direct offerings completed in July 2023 (refer below for details of all debt and equity financing activities). The Company has also received $5,000 of casualty loss insurance recoveries from the Grass Valley fire, has business interruption coverage and has filed litigation to enforce its claim.

We continue evaluating our capital and financing requirements, as compared with the significant anticipated growth with the accelerated launch and expansion of VLN^®, rebuild of GVB’s production capabilities following the Grass Valley fire, and our new CDMO+D contracts, to ensure we meet our success based strategic initiatives. However as of June 30, 2023 and through the date of filing, our cash, cash equivalents, short-term investment securities, insurance proceeds, and debt/equity financings, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, currently are not forecasted to provide sufficient resources for a period of twelve months from issuance of the Condensed Consolidated Financial Statements (see Note 1 “Nature of Business and Summary of Significant Accounting Policies”). Accordingly, management has implemented programs intended to reduce our

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operating costs by at least $15 million on an annualized basis. Much of these operating cost reductions will reflect efficiencies and streamline operations as management focuses on commercial activities, as well as the Company exits a period of substantial investment undertaken in the first half of 2023 to upgrade distribution, marketing, sales and research activities in support of the aforementioned launch and expansion of VLN^®, rebuild of GVB’s production capabilities following the Grass Valley fire, and our new CDMO+D contracts.

Senior Secured Credit Facility

On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,053 and (ii) warrants to purchase up to 333,334 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000.

The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.

The Company is required to maintain at least $7,500 on its balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets. As of June 30, 2023, the Company was in compliance with these financial covenants.

The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

Omnia Subordinated Note

Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of 26.5% per annum, payable monthly. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024.

In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 45,000 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

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ATM Offering

On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”). The Company will pay 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold. Total net proceed during the second quarter of 2023 were $2,639. On June 19, 2023, the Company terminated the ATM Program in connection with the June 2023 Capital Raise.

June 19, 2023 Registered Direct Offering

As part of the offering, the Company entered into a warrant reprice letter and agreed to reduce the exercise price on the previously issued 747,974 warrants owned by the investors participating in the Offering from $30.75 to $7.05 and to add a provision in the warrants that upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, such exercise price shall be lowered to such price at which the shares were offered. As a result of the offerings completed in July 2023, the exercise price on the 1,495,948 warrants was automatically adjusted to $2.42 per share. See “Subsequent Events.” The remaining 390,247 previously issued warrants were not repriced and remain at an exercise price of $30.75 on their original terms.

In addition, as a result of the offering, the Company’s outstanding warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted as follows: $12.828 exercise price for up to 496,960 shares of common stock.

July 6, 2023 Registered Direct Offering.

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July 19, 2023 Registered Direct Offering.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.

Except as described below, there have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

Contingent consideration

Contingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain revenue milestones. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration liability result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material impact on the results from operations. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.

Detachable Warrants

Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.

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Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures:

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s interim chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our interim chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure information required to be disclosed is recorded, processed, summarized and reported within the time period specified by SEC rules, based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b)

Changes in Internal Control over Financial Reporting:

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 11 - Commitments and Contingencies – Litigation - to our consolidated financial statements included in this Quarterly Report for information concerning our on-going litigation. In addition to the lawsuits described in Note 11, from time to time we may be involved in claims arising in the ordinary course of business. To our knowledge other than the cases described in Note 11 to our consolidated financial statements, no material legal proceedings, governmental actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 9, 2023 or Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on May 9, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On April 4, 2023, a subsidiary entered into a License and Distribution Agreement (the “Agreement”) with Cookies Creative Consulting & Promotions, Inc. (“Cookies”). Pursuant to the Agreement, Cookies granted us an exclusive license to manufacture and distribute certain Cookie’s branded hemp-derived hemp/cannabis products to retailers within the United States for a period of three years, with us having an option to extend the Agreement for an additional three-year period if certain retailer milestones are met during the initial term. During the term of the Agreement, we will pay Cookies a monthly license fee equal to a percentage of the net profits generated by us under the Agreement. In consideration for the exclusivity under the Agreement, we issued Cookies 333,334 shares of unregistered common stock, subject to a lock-up during the first year after the issuance. The issuance of the shares was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder.

Item 3. Default Upon Senior Securities.

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

During the three months ended June 30, 2023, there were no modifications, adoptions or terminations by any directors or officers to any contract, instruction or written plan for the purchase or sale of securities of the Company that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or non-Rule 10b5-1 trading agreements.

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Item 6. Exhibits



Exhibit 3.1			Certificate of Amendment to Restated Articles of Incorporation filed June 16, 2023

Exhibit 3.2			Certificate of Change to Restated Articles of Incorporation filed June 30, 2023

Exhibit 4.1			Form of Warrant (Incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K filed with the Commission on June 21, 2023)

Exhibit 4.2			Form of Warrant (Incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K filed with the Commission on July 7, 2023)

Exhibit 4.3			Form of Warrant (Incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K filed with the Commission on July 24, 2023)

Exhibit 31.1			Section 302 Certification - Chief Executive Officer

Exhibit 31.2			Section 302 Certification - Chief Financial Officer

Exhibit 32.1			Certification of Principal Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

101.INS			Inline XBRL Instance Document

101.SCH			Inline XBRL Taxonomy Extension Schema Document

101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104			Cover Page Interactive Data File (formatted as Inline XBRL)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:


	22nd CENTURY GROUP, INC.

Date: August 14, 2023	/s/ John J. Miller
	John J. Miller
	Interim Chief Executive Officer
	(Principal Executive Officer)

Date: August 14, 2023	/s/ R. Hugh Kinsman
	R. Hugh Kinsman
	Chief Financial Officer
	(Principal Accounting and Financial Officer)