What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-11 · 179 added, 180 removed, 125 unchanged (74% of the section changed)

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and its direct and indirect subsidiaries for the periods described herein.

($ in thousands, except per share data or unless otherwise specified)

Executive Overview of Full Year 2021 Results

Key Business and Financial Highlights

● Securing MRTP authorization for VLN ® remains our number one priority and we are confident that the FDA is in the final stages of the review process related to our application.

We are working to ensure that the launch of VLN ® King and VLN ® Menthol King cigarettes occurs within 90 days of receiving MRTP designation.

● Since reporting third quarter 2020 earnings, we have refocused our hemp/cannabis strategy to target the upstream segment of the cannabinoid value chain:

a shift away from the already saturated U.S.

consumer market of cannabidiol (CBD) and hemp-based products.

● We have now secured four out of the five key partnerships needed to maximize each component in the upstream segment of the hemp/cannabis value chain.

These partnerships will enable us to accelerate the new development of valuable, commercial hemp/cannabis lines and intellectual property to market.

● Net sales revenue of $7.3 million for the fourth quarter of 2020 was consistent with the prior year period and improved by 8.8% to $28.1 million for the full year, compared to the full year of 2019.

● Gross profit for the fourth quarter of 2020 improved by $364 thousand and by $1.4 million for the full year, compared to each respective prior year period.

● Net loss improved by $207 thousand and $6.8 million for the fourth quarter of 2020 and full year, respectively.

● On December 23, 2021, the FDA granted MRTP authorization for our reduced nicotine cigarettes, VLN ® King and VLN ® Menthol King.

In addition to authorizing the Company to market VLN ® cigarettes with the claim, “95% less nicotine”, to clarify the purpose of the brand, the FDA also authorized the claim, “ Helps You Smoke Less .” Pending state regulatory approval, we plan to launch VLN ® King and VLN ® Menthol King in our first U.S.

market on or before March 23, 2022.

● Since reporting third quarter 2021 earnings, we have signed our first IP licensing agreement in hemp/cannabis, as well as recognized our first revenue from the sale of biomass grown at our Needle Rock farms location.

● We believe that we have secured the key partnerships needed to maximize each component in the upstream segment of the hemp/cannabis value chain and expect to continue to expand this network of resources to support our business growth.

We believe these partnerships will enable us to accelerate the new development of valuable, commercial hemp/cannabis lines and intellectual property to market.

● Revenue increased 8.9% year-over-year to $7,960 for the fourth quarter of 2021 and improved by 10.1% to $30,948 for the full year versus 2020.

● Gross profit for the fourth quarter of 2021 was $387 compared to $588 in the prior year fourth quarter and increased to $2,069 for the full year compared to $1,438 in 2020.

● Net loss in the fourth quarter of 2021 was $13,965 and included a $4,954 non-cash unrealized loss related to the fair value of investments, compared to the fourth quarter of 2020 net loss of $6,405.

Net loss for the full year of 2021 was $32,609 and included a $6,994 non-cash unrealized loss related to the fair value of investments, an increase of $12,898 compared to a net loss of $19,711 for the full year of 2020.

Corporate Business Highlights

● On January 13, 2020, we appointed Roger O’Brien as a new member of our Board of Directors and appointed Nora Sullivan, an existing director of the Board, as the new Board Chair.

Since 2000, Mr.

O’Brien has served as President of O’Brien Associates, LLC, a general management consulting firm providing advisory and implementation services to companies in a variety of competitive industries, with a special focus on general management, technology commercialization, marketing, and strategy development.

Sullivan has served as a director of 22nd Century Group since May 18, 2015.

Sullivan is also currently President of Sullivan Capital Partners, LLC, a financial services company providing investment banking and consulting services to businesses seeking growth through acquisitions, strategic partnerships, and joint venture relationships.

Her experience includes the development and advancement of strategic initiatives and the implementation of best practice governance policies.

● On June 3, 2020, we appointed James A.

Mish as our Chief Executive Officer and John Franzino as our Chief Financial Officer.

Mish brings extensive global executive leadership experience in science-driven organizations with a recent focus on the development, manufacturing, and commercialization of active pharmaceutical ingredients (“API”), including cannabinoids, and related consumer products.

He has an outstanding track record of delivering profitable growth at both privately held and publicly traded companies.

Prior to joining 22nd Century Group, Mr.

Franzino served as Chief Financial Officer of the West Point Association of Graduates.

Additionally, he has extensive strategic financial leadership experience serving as Vice President of Finance and Controller at Bard College;

as Chief Financial Officer of Santa Fe Natural Tobacco Company, a subsidiary of Reynolds American, Inc.;

and as Chief Financial Officer of Labatt USA.

Franzino is a Certified Public Accountant (CPA) and holds a Master of Business Administration degree from Fairleigh Dickinson University.

● On September 17, 2020, we appointed Michael Koganov Sc.D., Ph.D., to our Board of Directors.

Koganov is recognized as a leading expert in the development of natural products using plant biotechnology and has achieved considerable accomplishments in physico-chemistry, biochemistry, bioelectrochemistry, and biotechnology.

He is credited with developing Electro-Membrane technology for the comprehensive processing of plants to produce protein concentrates and secondary metabolites.

● On January 19, 2021, we announced the dismissal with prejudice of the federal securities class action lawsuit captioned Noto.

22nd Century Group, Inc., 19-CV-1285 by a federal district court in the Western District of New York on January 14, 2021.

The case was initially filed in the Eastern District of New York, where it was captioned Bull v.

22nd Century Group, Inc.

1:19-CV-00409.

In denying the Plaintiffs’ request for an opportunity to file another amended Complaint, the Court held that “further amendment would be futile.”

● On January 28, 2021, we announced that we are moving our corporate headquarters to the up-and-coming Larkinville District in downtown Buffalo in March of 2021.

● During February and March of 2021, our warrant holders exercised all 11,293,211 outstanding warrants for cash in exchange for common stock.

In connection with these exercises, we received net proceeds of $11,782.

● On April 1, 2021, we moved our corporate headquarters to the up-and-coming Larkinville District in downtown Buffalo, New York.

Our new Buffalo office space is in a state-of-the-art, restored manufacturing facility located at 500 Seneca Street, joining other multinational technology and professional services companies.

our new headquarters will accommodate all of our staff from our current office location in nearby Williamsville and has significant room for expansion.

● During February and March of 2021, our warrant holders exercised 9,577,612 warrants for cash in exchange for common stock.

In connection with these exercises, we received net proceeds of $10.0 million.

On March 10, 2021, our warrant holders exercised for cash the remaining 1,715,599 outstanding warrants and no outstanding warrants remain.

Our new headquarters accommodates all of our staff from our previous office location in nearby Williamsville and has significant room for expansion.

● On June 7, 2021, we completed a registered direct common stock offering generating net proceeds of $38,206.

● On August 16, 2021, we transferred from the NYSE American market and commenced trading on the Nasdaq Capital Market.

● On August 18, 2021, we appointed Anthony Johnson as a new member of our Board of Directors.

Johnson is co-founder, President, and CEO of Kodikaz Therapeutic Solutions, a next-generation, non-viral gene therapy company, and a founding partner of Buffalo Biosciences, a life science strategic business management firm that supports the evaluation and commercialization of bioscience technologies from concept to market.

● On November 15, 2021, we appointed Richard F.

Fitzgerald as our Chief Financial Officer.

Fitzgerald’s other roles include serving as Chief Financial Officer and Secretary of CleanTech Acquisition Corp, (Nasdaq:

CLAQU), a SPAC focused on the CleanTech sector.

Previously, he was a consulting CFO for Atrin Pharmaceuticals, Co-Founder and CFO of SIRPant Immunotherapeutics and CFO of Immunome (Nasdaq:

He holds a B.S., Business Administration, Accounting from Bucknell University.

John Franzino, the Company’s previous Chief Financial Officer, transitioned to Chief Administrative Officer, where he is responsible for further developing the Company’s business processes and leading the Company’s financial planning and analysis, operational finance, human resources, and information technology functions.

● On January 17, 2022, we appointed James A.

Mish, our Chief Executive Officer, as a new member of our Board of Directors, enhancing the Board’s depth of experience in the commercialization of science-driven consumer products.

Tobacco Franchise Highlights and Notable Accomplishments

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Based on our consumer perception studies, 60% of adult smokers indicate a likelihood to use VLN ® .

● Our VLN ® cigarettes contain 95% less nicotine than conventional cigarettes and are a familiar combustible product format that replicates the conventional cigarette experience, including the sensory and experiential elements of taste, scent, smell, and “hand-to-mouth” behavior.

● Our VLN ® cigarettes contain 95% less nicotine than conventional cigarettes and feature a familiar combustible product format that replicates the conventional cigarette experience, including the sensory and experiential elements of taste, scent, smell, and “hand-to-mouth” behavior.

VLN ® contains 0.5 milligrams of nicotine per gram of tobacco, an amount cited by the FDA, based on clinical studies, to be “minimally or non-addictive”.

The lack of reward from nicotine creates a dissociation between the act of smoking and nicotine which helps adult smokers reduced the harm caused by smoking.

The lack of reward from nicotine creates a dissociation between the act of smoking and the introduction of nicotine to the bloodstream, which helps adult smokers to smoke less and reduce the harm caused by smoking.

● Since 2011, our reduced nicotine content cigarettes have been used in more than 50 independent scientific clinical studies by universities and institutions.

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● In December 2019, the FDA granted a PMTA authorization for our reduced nicotine content cigarettes, giving us the ability to sell the product.

In order to market our reduced nicotine content cigarettes under the brand name VLN ® , with pack and advertising claims stating that the product contains 95% less nicotine than conventional tobacco cigarettes, as well as related claims regarding nicotine exposure, we will need to secure an MRTP authorization from the FDA.

● As a part of the MRTP application process, on February 14, 2020, we presented our MRTP application for our reduced nicotine content cigarettes, VLN ® to the FDA’s Tobacco Products Scientific Advisory Committee (TPSAC) and passed one of the final regulatory milestones.

On April 17, 2020, the FDA set May 18, 2020, as the deadline for the submission of public comments on our MRTP application.

The public comment period is now closed and we believe that we are in the final stages of the review and decision making process.

● Throughout 2020, we were and remain focused on our primary mission and highest, near-term priority of securing MRTP authorization for our proprietary, reduced nicotine content tobacco cigarettes, VLN ® .

We are maintaining our dialogue with the FDA and are confident that the Agency is in the final stages of the review process related to our application.

In addition to our ongoing contact with the FDA, we have been and are working with various legal advisors, regulatory consultants, and government affairs specialists to highlight the public health importance of our MRTP application to encourage a near-term authorization of our application.

● We are prepared to launch VLN ® within 90 days of receiving MRTP authorization from the FDA and are in advanced discussions with potential partners in the independent, regional, and national retail trade.

● On December 23, 2021, the FDA authorized the marketing of the Company’s VLN ® King and VLN ® Menthol King reduced nicotine content cigarettes as modified risk tobacco products with a modified exposure classification (MRTPs).

In doing so, the FDA stated that VLN ® - which smokes, tastes, and smells like a conventional cigarette but contains 95% less nicotine than conventional, highly addictive cigarettes – “help reduce exposure to, and consumption of, nicotine for smokers who use them.” In its marketing order granting the MRTPs, the FDA authorized an additional fourth claim:

“ Helps You Smoke Less ” that we must use on the packaging of all VLN ® products where other approved claims are also used.

● Following FDA authorization, we commenced activities to launch VLN ® within 90 days, including discussions with potential partners in the independent, regional, and national retail trade.

We anticipate a phased rollout of VLN ® in select geographies and plan to position VLN ® in the premium pricing segment of the cigarette market.

On January 11, 2021, we announced that we will expand our growing program and increase planting in the 2021 crop year for VLN ® reduced nicotine content tobacco.

This new planting for VLN ® tobacco is in addition to our current VLN ® inventory, which we plan to use for initial sales of VLN ® .

● On January 11, 2021, we announced that we expanded our growing program and increased planting in the 2021 crop year for VLN ® reduced nicotine content tobacco, leading to a record harvest.

This new planting for VLN ® tobacco was in addition to our existing VLN ® inventory, which we plan to use for initial sales of VLN ® .

● We believe that recent political changes will likely be favorable to our business prospects from a policy priority and regulatory standpoint.

Under the new administration, we believe that the FDA will refocus on implementing its ground-breaking Comprehensive Plan for Tobacco and Nicotine Regulation, in particular the agency’s plan to cap the amount of nicotine in combustible cigarettes to a “minimally or non-addictive” level.

We believe that the MRTP authorization and the launch of VLN ® will serve as a starting point for the FDA’s proposed mandate.

Under the new administration and new leadership at the FDA and Center for Tobacco Products (CTP), we believe that the FDA will refocus on implementing a menthol ban on combustible high nicotine cigarettes and its ground-breaking Comprehensive Plan for Tobacco and Nicotine Regulation, in particular the agency’s plan to cap the amount of nicotine in combustible cigarettes to a “minimally or non-addictive” level.

We believe that the MRTP authorization and the launch of VLN ® serves as a starting point for the FDA’s proposed policies.

● Our research cigarettes, SPECTRUM ® , continue to fuel numerous independent, scientific studies to validate the enormous public health benefit identified by the FDA and others of implementing a national standard requiring all cigarettes to contain “minimally or non-addictive” levels of nicotine.

In December 2020, the FDA in coordination with the National Institute on Drug Abuse (NIDA) and others, submitted an order to us for 3.6 million variable nicotine research cigarettes.

● We believe that our next generation, non-GMO, plant research is the key to commercializing our reduced nicotine content tobacco and technology in international markets where non-GMO products are preferred, or GMO products are banned.

We continue to make progress in our non-GMO tobacco research.

In partnership with North Carolina State University, have completed successful research field trials that have validated new non-GMO methodologies for reducing nicotine in tobacco plants and have consistently achieved reductions in nicotine levels by as much as 99%.

During the fourth quarter of 2020, we announced that we were granted a new U.S.

10,669,552, entitled “Up-regulation of auxin response factor NbTF7”, related to the reduction of nicotine in the tobacco plant.

The new technology provides us with a rapid pathway to introduce very low nicotine traits into virtually any variety of tobacco, including bright, burley, and oriental tobacco varieties.

In partnership with North Carolina State University, we completed successful research field trials.

During the first quarter of 2021, we published a new U.S.

patent, entitled “A Genetic Approach for Achieving Ultra Low Nicotine Content in Tobacco” (PCT/US2021/012742).

The new technology provides us with methods and a new approach to introduce very low nicotine traits into virtually any variety of tobacco, including bright, burley, and oriental tobacco varieties.

We have successfully applied our non-GMO technology to bright and burley varieties of tobacco and have developed a VLN ® 2.0 prototype cigarette.

We are also using our non-GMO technology to introduce reduced nicotine traits into oriental varieties of tobacco.

We have also run our first field trial of non-GMO reduced nicotine varieties in the southern hemisphere.

● In the spring of 2022, we plan to plant our first commercial crops of non-GMO flue cured and burley reduced nicotine tobacco varieties.

The reduced tobacco leaves harvested from these crops will support future VLNC cigarette products.

Hemp/Cannabis Franchise Highlights and Notable Accomplishments

● We continue to place an emphasis on our hemp/cannabis strategy to target the upstream segments of the cannabinoid value chain in the areas of plant biotechnology research, gene modification and engineering, modern plant breeding and development, and extraction.

We believe that we can differentiate ourselves in the hemp/cannabis industry by building upon our core strength and expertise in plant science and the ingredient value chain and through our strategic, operational partnerships, including the addition of our new partner, CannaMetrix.

We continue to shift our focus away from the already saturated U.S.

consumer market of cannabidiol (CBD) and hemp-based products and expect to gain ingredient cultivation capabilities and extraction and purification services through a non-binding agreement with Panacea, which is expected to provide us with operational assets, including a farm and various extraction and distillation equipment.

● We developed and launched a new, cutting-edge technology platform that will enable us and our strategic partners to quickly identify and incorporate commercially valuable traits of hemp/cannabis plants to create new, stable hemp/cannabis lines.

● We have launched a new, cutting-edge technology platform that we expect to enable us and our strategic partners to quickly identify and incorporate commercially valuable traits of hemp/cannabis plants to create new, stable hemp/cannabis lines.

The platform, developed in collaboration with researchers at KeyGene, incorporates a suite of proprietary molecular tools and a large library of genomic markers and gene-trait correlations.

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By targeting these newly identified SNPs, we have been able to locate and isolate specific sections of genetic code from genome assemblies present in our state-of-the-art hemp/cannabis bioinformatics database.

This breakthrough enables us to quickly and easily identify the genes responsible for specific traits in a plant and is a powerful tool for us and the hemp/cannabis industry.

This breakthrough enables us to quickly and easily identify the genes responsible for specific traits in a plant, which we expect to be a powerful tool for us and the hemp/cannabis industry.

We have already begun discussions to license this platform to strategic partners to help them improve their plant breeding techniques and optimize their hemp/cannabis lines.

● We continue to secure commercially, valuable patents and intellectual property through our internal research capabilities and external research partnerships.

We were recently granted a new U.S.

10,787,674 B2 entitled “Trichome specific promoters for the manipulation of cannabinoids and other compounds in glandular trichomes”.

This new intellectual property enables us to develop and deliver new hemp/cannabis plants that are designed to produce cannabinoids more efficiently by activating the molecular promoters, “on/off switches,” specifically and only in the plant’s trichomes where the majority of cannabinoids are produced.

The patent application describes eight promoters, which are essentially molecular on/off switches, covering all of the major steps in the cannabinoid biosynthesis pathway and is related to the control of cannabinoid and terpene production.

● We have secured an exclusive agreement with CannaMetrix, LLC for the use of their proprietary, human cell-based testing CannaMetrix EC50Array™ technology that will enable us to accelerate the commercialization of new, disruptive hemp/cannabis plant lines and intellectual property.

Citing one of the leading achievements in 2021, we are the first Company to show the introduction of genetic material via transformation techniques directly leading to functional protein expression in hemp/cannabis.

This new transformation methodology enhances our ability to directly modify specific target genes in hemp/cannabis with potential commercial value, as compared to the broad-based approaches we currently deploy such as molecular breeding and mutagenesis.

These modifications can be tailored to differentiate the content of specific major and minor cannabinoids, terpenoids or eliminate unwanted metabolites.

With the addition of this highly targeted plant transformation capability to 22nd Century’s existing molecular breeding and gene editing capabilities we are now able to increase our bandwidth for the production of highly tailored new plant strains at accelerated rates, lower cost and lower risk to our customers.

● We have secured an exclusive agreement with CannaMetrix, LLC for the use of their proprietary, human cell-based testing CannaMetrix EC50Array™ technology that we believe will enable us to accelerate the commercialization of new, disruptive hemp/cannabis plant lines and intellectual property.

CannaMetrix’s proprietary CannaMetrix EC50Array™ technology serves as a high-throughput roadmap for developing new hemp/cannabis plant lines with tailor-made cannabinoid and terpenoid profiles for use in the life science, consumer product, and pharmaceutical markets.

The human cell-based assay has the ability to measure and validate the potency and efficacy of cannabinoids and/or terpenoids through defined biomarkers and receptor activity and can rapidly identify optimum plant profiles by measuring the potency and effect on the human cell system.

● We believe that we can accelerate the development of commercially, valuable hemp/cannabis lines and related intellectual property through selective partnerships and have now secured four out of the five key partnerships needed to maximize each component in the upstream segment of the cannabinoid value chain.

● In May 2021, we announced an extended and expanded plant research partnership agreement with our partner KeyGene, a global leader in plant research involving high-value genetic traits and increased crop yields.

The new partnership agreement extends the length of the exclusive worldwide collaboration 22nd Century has with KeyGene to develop new, disruptive hemp/cannabis plants and intellectual property for the life science, medicinal, and pharmaceutical end-use markets.

It also expands the partnership to include research and development activity for non-combustible, alternative tobacco plant applications, such as protein production, and 22nd Century’s third plant franchise, specialty hops.

● We believe that we can accelerate the development of commercially, valuable hemp/cannabis lines and related intellectual property through selective partnerships and have the key partnerships needed to maximize each component in the upstream segment of the cannabinoid value chain.

● On December 14, 2021, we announced a three-way non-exclusive agreement to license biosynthesis intellectual property with Aurora Cannabis Inc.

ACB) to Cronos Group Inc.

CRON), intended to assist in the advancement of research and development on the biosynthesis of cannabinoids.

Specialty Franchise Highlights and Notable Accomplishments

● In August 2021, we announced entry into the global specialty hops market, our third and newest plant franchise.

We will leverage our existing know-how with the tobacco and hemp/cannabis plants along with the proprietary tools and technologies possessed by our upstream partnerships with CannaMetrix and KeyGene to bring hop breeding into the 21 st century.

Our relationships with the world’s leading alkaloid plant producer-breeders, including Extractas Bioscience, Sawatch Agriculture, and Folium Botanical, will facilitate year-round growing capabilities at locations in both the southern and northern hemispheres.

2022 Priorities and Areas of Focus

We remain focused on securing FDA authorization for VLN ® .

Starting within 90-days of authorization of our MRTPA by the FDA, we are prepared to launch VLN ® cigarettes in select markets.

We believe that an equally important first priority initiative is for us to support and advance the FDA’s plan to require that all cigarettes sold in the U.S.

be made “minimally or non-addictive” by limiting their nicotine content to just 0.5 milligrams of nicotine per gram of tobacco.

We remain focused on launching commercial sales of our VLN ® products following our MRTP authorization by the FDA.

We have also initiated international sales launch in select markets.

We continue to support and advance the FDA’s plan to require that all cigarettes sold in the U.S.

be made “minimally or non-addictive” by limiting their nicotine content to just 0.5 milligrams of nicotine per gram of tobacco and the proposed ban on menthol high nicotine combustible cigarettes.

We continue to target the upstream segment of the cannabinoid value chain;

creating proprietary, commercially valuable new plant lines and related intellectual property with stabilized genetics to harness and optimize hemp/cannabis plant potential.

We will seek to monetize a portion of our existing hemp/cannabis IP in 2021 and will continue to bring disruptive technology forward.

We will turn attention to the development of a third, plant-based franchise after securing MRTP authorization for VLN ® .

We will leverage our plant science expertise to develop and secure valuable intellectual property and sign lucrative strategic partnerships to support the development of this franchise.

creating proprietary, commercially valuable new plant lines and related intellectual property with stabilized genetics to harness and optimize

hemp/cannabis plant potential.

We intend to continue to work to monetize our existing hemp/cannabis IP and will continue to bring disruptive technology forward with new plant lines.

We will develop our third, plant-based franchise in specialty hops leveraging our plant science expertise to develop and secure valuable intellectual property and sign strategic partnerships to support the development of this franchise.

We will maintain diligent financial execution, efficient operating structure, and balance sheet strength to support our growth initiatives.

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Dollar Change from Prior Year

The increase in sales revenue for the year ended December 31, 2020, compared to the year ended December 31, 2019, was primarily the result of an increase in sales revenue of contract manufactured cigarettes.

Filtered cigar sales revenue increased by $3 compared to the prior year, while cigarette sales revenue increased $2,275 compared to the prior year.

The increase in filtered cigar sales was primarily driven by a volume decrease offset by price increases, compared to the prior period.

The increase in cigarette sales revenue was driven by both volume and price increases compared to the prior period.

Costs of goods sold – Products / Gross profit (loss)

The increase in revenue for the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily the result of an increase in sales of filtered cigars of $4,629, primarily driven by increased volume, fulfillment of our SPECTRUM ® research cigarettes of $680, which did not occur in the prior period, and revenue pertaining to our hemp/cannabis business of $44 which did not occur in the prior period.

This was partially offset by decreased sales of contract manufactured cigarettes of $2,484 during 2021, which was primarily due to a lower volume of orders received.

Costs of goods sold – Products / Gross profit

Cost of goods sold

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Dollar Change from Prior Year

Gross profit (loss)

Percent of Product Sales

Dollar Change from Prior Year

For the year ended December 31, 2020, the increase in gross profit was primarily driven by increased cigarette sales volume, increased cigarette pricing, and lower labor and overhead costs per unit driven by factory efficiencies implemented during 2020.

In addition, gross margin was impacted favorably due to a CARES Act employee retention credit which reduced payroll taxes by $112.

For the year ended December 31, 2021, the increase in gross profit as compared to 2020 was primarily driven by improved contract manufactured sales mix due to new customer contracts, cigarette price increases and sales of our higher margin SPECTRUM ® research cigarettes.

Research and development expense

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Dollar Change from Prior Year

Lower R&D expense in the year ended December 31, 2020, as compared to the prior year, was primarily driven by a decrease in R&D personnel expense and a decrease in tobacco leaf inventory impairment.

R&D expense during the year ended December 31, 2021, decreased $834 as compared to the prior year, primarily driven by lower costs for R&D personnel, consulting and professional services, and licenses and contracts, as well as a 2020 tobacco leaf inventory impairment of $360 that did not recur in 2021.

Personnel expense decreased by $222 year over year, due to more focused R&D headcount to accomplish our strategies.

Tobacco leaf inventory impairment decreased by $625 year over year.

Additionally, license and contract costs decreased $213

compared to prior year.

The lower license and contract spending is primarily a result of 2019 milestone payments for certain research agreements which were not due in the current year.

Consulting and professional services decreased by $65 and license and contract costs decreased $100 compared to the prior year primarily due to fewer milestone payments for certain research agreements which were not required in 2021.

We continue to prioritize our R&D activities to achieve our strategic objectives.

Research and development expense—MRTP

Research and Development - MRTP

Percent of Product Sales

Dollar Change from Prior Year

MRTP expenses for the year ended December 31, 2020 declined significantly, as we submitted our MRTP application to the FDA during 2019.

MRTP-related expenses for 2020 are primarily related to our February 14, 2020 Tobacco Products Scientific Advisory Committee (TPSAC) hearing, offset by the finalization of a 2019 cigarette cessation study which resulted in a reimbursement of $124.

Sales, general and administrative expense

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Dollar Change from Prior Year

The increase in sales, general and administrative (“SG&A”) expense during the year ended December 31, 2020, as compared to the prior year, was driven by a $1,613 increase in insurance expenses, a $1,227 increase in consulting and professional services expenses, a $1,385 increase in personnel expense, and a $131 increase in marketing expenses.

We have deployed this incremental SG&A spending to place new members of the management team, including our CEO, to support our efforts in governmental affairs related to the approval of our MRTP application, as well as to conduct pre-market research in anticipation of the authorization of our MRTP filing for VLN ® .

These increases in SG&A were partially offset by decreased one-time severance expenses of $415, and decreased equity compensation expense of $1,639—both driven primarily by management changes in the third quarter of 2019.

Additionally, legal fees decreased by $435 compared to the prior year.

The increase in sales, general and administrative (“SG&A”) expense during the year ended December 31, 2021, as compared to the prior year, was driven by increased investor relations and corporate communications expense of $3,198, strategic consulting expense of $2,598, higher non-cash equity compensation expense of $2,294, increased insurance expense of $1,188, and higher personnel expense of $996 due mainly to the hiring of the executives during 2020 and 2021.

In addition, during 2021 director fees increased by $322, legal fees rose by $156 and travel and entertainment expense increased $113.

We have invested in this incremental SG&A spending to continue to ramp up our efforts to allow us to move toward market readiness in both tobacco and hemp/cannabis.

We will continue to invest in SG&A spending as growth and opportunities present themselves.

Impairment of intangible assets

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Dollar Change from Prior Year

During the years ended December 31, 2020 and 2019, management conducted a review of intellectual property assets and determined that impairment was required for certain patent and trademark costs.

As such, we recorded impairment charges of approximately $176 and $1,142 for the current year and prior year, respectively.

During the year ended December 31, 2021, management conducted a review of intellectual property assets and determined that an adjustment was necessary for the carrying value of certain trademark costs.

As such, we recorded a charge of approximately $78 in 2021.

This compares to an impairment charge of $176 reflected in 2020 for certain patents and trademarks.

Refer to Note 5 to our consolidated financial statements for additional information.

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Dollar Change from Prior Year

The increase in depreciation expense was primarily due to additional machinery and equipment acquisitions during 2020 and 2019 to for our production facility in North Carolina.

The decrease in depreciation expense during 2021 was primarily due to impairments taken for the former Williamsville corporate office during the fourth quarter of 2020.

Amortization expense

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Amortization expense relates to amortization taken on capitalized patent costs and license fees.

The decrease was primarily due to amortization expense on a lower patent base which resulted from one-time impairment charges as described in the “Impairment expense” section above.

The decrease in 2021 was primarily due to amortization expense on a lower base of amortizable intangible assets.

Unrealized (loss) gain on investments

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Dollar Change from Prior Year

The warrants to purchase 81,164 shares of Aurora Cannabis, Inc (“Aurora”) common stock are considered an equity security and are recorded at fair value.

We recorded the fair value of the stock warrants of $239 at December 31, 2020, using the Black-Scholes pricing model, and recorded an unrealized loss on the warrants in the amount of $434 for the year ended December 31, 2020.

Unrealized loss on investments includes fair value adjustments for our investment in Aurora Cannabis, Inc.

(“Aurora”) stock warrants and our investment in Panacea Holdings common stock.

Both investments are considered equity securities and are adjusted to fair value at each reporting period as discussed within Note 7 to our consolidated financial statements included herein.

The warrants to purchase 81,164 shares of Aurora common stock were valued at $5 as of December 31, 2021, using the Black-Scholes pricing model, which resulted in an unrealized loss of $234 for the year ended December 31, 2021.

Our shares of Panacea Holdings common stock were valued based on the closing share price as of December 31, 2021.

As of December 31, 2021, the shares were valued at $2,340 resulting in the recognition of an unrealized loss of $6,761 for the year.

Our investment in Panacea Holdings is a small microcap stock which can be subject to large market volatility resulting in fluctuations to our net loss and loss per share—due to unrealized gains or losses that are recognized within the Consolidated Statements of Operations.

Our investment is described further within Note 6 to our financial statements included herein.

Impairment of Panacea Investment

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During 2020, we incurred impairment charges on our investment in Panacea.

Refer to Note 6 to our consolidated financial statements for additional information regarding our investment in Panacea.

Realized gain (loss) on short-term investment securities

Percent of Product Sales

Dollar Change from Prior Year

The realized gain on short-term investment securities for the year ended December 31, 2020 was $5, a decrease of $216 from the gain of $221 realized for the year ended December 31, 2019.

The realized gain on short-term investment securities was the result of the maturity of various debt instruments held in the short-term investment account.

Investments in the short-term investment account are managed in accordance with our investment policy.

Litigation settlement expense

We incurred an expense relating to the settlement agreement in the Crede litigation in the amount of $1,891 for the year ended December 31, 2019.

We had no litigation settlement expenses for the year ended December 31, 2020.

Gain on the sale of machinery and equipment

Refer to Note 6 to our consolidated financial statements for additional information regarding our investment in Panacea and the conversion related thereto.

Gain on Panacea investment conversion

Percent of Product Sales

Dollar Change from Prior Year

We recognized a small gain on equipment sold during the year ended December 31, 2020.

During the year ended December 31, 2019, we sold a piece of machinery and equipment no longer required in our factory operations in North Carolina and recorded a gain on the sale in the amount of $87.

On June 30, 2021, we entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc.

(“Exactus”) (OTCQB:EXDI), renamed to Panacea Life Sciences Holdings, Inc.

(OTCQB:PLSH) as of October 25, 2021 (“Panacea Holdings”), and certain other Panacea shareholders.

Pursuant to the Securities Exchange Agreement, Exactus fully acquired Panacea.

These transactions resulted in the (i) conversion of all of our existing Series B Preferred Stock in Panacea into 91,016,026 shares of common stock in Exactus valued at $9,102 as of June 30, 2021 and (ii) the conversion of our existing debt in Panacea by converting the outstanding $7,000 principal balance convertible note receivable and all accrued but unpaid interest thereon for fee simple ownership of Needle Rock Farms (224 acres in Delta County, Colorado) and equipment valued at $2,248, $500 in Panacea’s Series B Preferred Stock (which was subsequently converted to Exactus common stock under the Securities Exchange Agreement;

this balance is reflected in final shares as stated above), and a new $4,300 promissory note (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0% interest rate.

The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado.

The conversion was recorded as a non-monetary transaction, based on the fair value of the assets received, and resulted in a gain of $2,548 which is included within the Consolidated Statements of Operations.

Our shares of Panacea Holdings common stock were initially valued based on a closing share price of $0.10 per share as published on June 30, 2021.

Our investment is described further within Note 6 to our financial statements included herein.

Interest income, net

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Dollar Change from Prior Year

Interest income, net (interest income less investment fees) for the year ended December 31, 2020 is comprised of cash interest on our convertible note receivable and short-term investment securities, and non-cash interest accretion on our convertible note, preferred stock investment in Panacea, and short-term investment securities purchased at a discount or premium.

During 2020, the increase in interest income, net was driven by an increase in non-cash interest income, net of $347 and an increase in cash interest income, net of $338.

Interest income, net (interest income less investment fees) is comprised of cash interest income and non-cash interest accretion.

Cash interest income is primarily derived from interest earned on our short-term investment securities and non-cash interest income is primarily related to accretion of short-term investment securities purchased at a discount or premium and accretion of certain other assets recorded at a discount.

Cash interest income for the year ended December 31, 2021 decreased $925 as compared to the prior year, primarily due to lower bond interest yields on our short-term investment securities.

Non-cash interest accretion for the year ended December 31, 2021, decreased $506, as compared to the prior year, primarily due to our Panacea investment conversion which is further described within Note 6 to our financial statements included herein.

Interest expense

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Dollar Change from Prior Year

Interest expense for 2020 was $16 higher than the prior year.

Interest expense for the year ended December 31, 2020 and 2019 related to interest accretion on notes payable to NCSU and the University of Kentucky, and interest accretion on accrued severance.

2020 also included cash interest expense of $29 on notes payable for D&O insurance.

Interest expense decreased for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to the reduction of our severance liability and lower note payable balances for our licenses.

Percent of Product Sales

Dollar Change from Prior Year

The decrease in net loss for the year ended December 31, 2020 compared to the prior year ended December 31, 2019, was primarily the result of improved gross profit, lower total operating expenses, one-time 2019 litigation settlement costs that did not repeat in 2020, lower unrealized loss on our Aurora warrants, and increased interest income primarily related to the Panacea investment.

These impacts were somewhat offset by 2020 impairment charges on our Panacea investment (see Note 6 to our consolidated financial statements).

Other comprehensive income

The increase in net loss for the year ended December 31, 2021, as compared to the prior year, was primarily the result of higher operating expenses of $9,860, an increase in unrealized loss on investments of $6,560, primarily relating to our Aurora stock warrants and Panacea Holdings common stock investments, and lower interest income in the amount of $1,430.

This was partially offset by a $631 increase in gross profit, a gain on our Panacea investment conversion of $2,548, and a 2020 impairment charge of $1,741 for our investment in Panacea which did not recur in 2021.

Other comprehensive income (loss)

Other Comprehensive Income (Loss)

Percent of Product Sales

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Unrealized gains and losses on short-term investment securities (the adjustment to fair value) are recorded as other comprehensive income or loss.

We recorded an unrealized gain on short-term investment securities in the amount of $72 and a reclassification of gains to net loss of $5, resulting in other comprehensive income of $67 for the year ended December 31, 2020.

For the year ended December 31, 2019, we recorded an unrealized gain on short-term investment securities of $207 and a reclassification of gains to net loss of $221, resulting in other comprehensive loss of $14.

We recorded an unrealized loss on short-term investment securities in the amount of $236 resulting in other comprehensive loss for the year ended December 31, 2021, as compared to an unrealized gain of $67 for the prior year.

Liquidity and Capital Resources

Net cash used in operating activities

Net cash provided by investing activities

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

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Working Capital

As of December 31, 2020, we had working capital of approximately $20,998 compared to working capital of approximately $36,962 as of December 31, 2019, a decrease of $15,964.

This decrease in working capital was primarily due to a decrease in net current assets of approximately $14,402, as well as an increase in net current liabilities of approximately $1,562.

Cash, cash equivalents and short-term investment securities decreased by approximately $16,620

and the remaining net current assets increased by approximately $2,218.

We used approximately $15,621 of cash in operating activities during the year ended December 31, 2020.

Our cash balance as of December 31, 2020 (inclusive of cash and cash equivalents and short-term investments) was $22,342, a decrease of $16,620 from the cash balance of $38,962 as of December 31, 2019.

This equates to an average monthly cash usage of $1,385 for the year ended December 31, 2020.

As of December 31, 2021, we had working capital of approximately $45,958 compared to working capital of approximately $20,998 as of December 31, 2020, an increase of $24,960.

This increase in working capital was primarily due to a $26,394 increase in cash, cash equivalents and short-term investment securities resulting from (i) net proceeds of $11,782 from the cash exercises of all outstanding warrants during the first quarter of 2021;

and (ii) net proceeds of $38,206 from a capital raise in June 2021 described below, offset primarily by cash and cash equivalents consumed in the operating activities of the Company.

On June 7, 2021, we entered into a placement agent agreement (the “Placement Agent Agreement”) with Cowen and Company, LLC (the “Placement Agent”) relating to a registered direct offering (the “Offering”) to a select investor (the “Investor”).

Pursuant to the Placement Agent Agreement, we agreed to pay the Placement Agent a cash fee of 3.0% of the gross proceeds from the Offering.

In addition, on June 7, 2021, we and the Investor entered into a securities purchase agreement relating to the issuance and sale of shares of common stock.

The Investor purchased $40,000 of shares, consisting of an aggregate of 10,000,000 shares of common stock at $4.00 per share, resulting in net proceeds of $38,206.

The common stock was offered and sold pursuant to our Form S-3 shelf registration statement.

Net cash used in operating activities

The increase in cash used in operations in the amount of $1,033 was due to an increase in cash used for working capital components related to operations in the amount of $2,270 which was partially offset by a decrease in the cash used from the portion of the net loss in the amount of $1,237 for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase in cash used for working capital components was primarily due to an increase in pre-paid D&O insurance, which is described further in Note 8 to our consolidated financial statements, and an increase in accounts receivable due to timing of collections.

Cash used in operations increased $7,218 from $15,621 in 2020 to $22,839 in 2021.

The primary driver for this increase was higher SG&A spending, most notably in the areas of investor relations and corporate communication, strategic consulting, insurance and the addition of senior management personnel.

Net cash provided by (used in) investing activities

The increase in cash provided by investing activities, in the amount of $11,917 when compared to the prior year was primarily attributed to the 2019 acquisition of Panacea which totaled $12,000.

In addition, cash flows decreased for the acquisition of patents and trademarks, machinery and equipment in the net amount of $570.

These increased cash inflows were partially offset by a decrease in the net proceeds received from our short term investments in the amount of $493 and decreased proceeds from the sale of machinery and equipment in the amount of $160.

Cash used in investing activities amounted to $27,729 in 2021 as compared to cash provided by investing activities of $16,469 in 2020.

This overall change of $44,198 in cash used in investing activities was primarily related to activity in our short-term investments, which was mainly due to increased funds for investment from the warrant exercises and capital raise described above.

We used $1,071 in 2021 to invest in the acquisition of intangible assets and property, plant and equipment, as compared to $522 in 2020.

The increase in cash used for the acquisition of machinery and equipment and the acquisition of patents, trademarks and licenses was primarily due to new office furnishings and additional intellectual property costs.

Net cash provided by (used in) financing activities

During the year ended December 31, 2020, cash used in by financing activities was $304 primarily due to principal payments on our notes payable of $2,549 which was partially offset by $2,195 of proceeds received from a note payable issuance.

Refer to Note 8 to our consolidated financial statements for additional information.

During the year ended December 31, 2019, we realized $9,916 in proceeds from our financing activities resulting from net proceeds from the exercise of warrants in the amount of $10,616, partially offset by payments on notes payable in the amount of $700 .

During the year ended December 31, 2021, cash provided by financing activities increased by $51,179 resulting from (i) the net proceeds of $11,782 resulting from cash exercises of all outstanding warrants during the first quarter of 2021;

(ii) net proceeds of $38,206 resulting from a capital raise in June 2021;

(iii) net proceeds pertaining to notes payable issuances and payments of $49;

and (iv) net proceeds from stock option exercises of $1,307.

These increases were partially offset by cash paid for taxes related to settlement of restricted stock units of $469.

Cash demands on operations

Our principal sources of liquidity are our cash and cash equivalents, short-term investment securities, and cash generated from our contract manufacturing business.

As of December 31, 2020, we had approximately $22,342 of cash and cash equivalents and short-term investments which is a decline of $16,620 from December 31, 2019.

During 2020, our average monthly cash usage was approximately $1,385, compared to $1,449 in 2019.

Our short-term investment securities along with sustained contract manufacturing sales provide sufficient resources for estimated contractual commitments for 2021, described further in Note 12 to our consolidated financial statements, and normal cash requirements for operations.

In addition to the commitments described in Note 12 to our consolidated financial statements, we are currently in the process of securing contracts with select tobacco farmers to assist with the 2021 growing of our VLNC tobacco.

These contacts, once finalized and executed, will increase the quantity of our current leaf inventory which will help support expected demand of VLN ® , if MTRP authorization is granted by the FDA.

The cost of such growing efforts is dependent on the final agricultural yields and leaf quality, but we expect the cost to range between $1.5 million and $1.9 million.

We also believe that we have appropriate liquidity to successfully manufacture and distribute our VLN ® cigarette within 90 days of MRTP authorization by the FDA, if granted in 2021.

During February and March of 2021, our warrant holders exercised 9,577,612 warrants for cash in exchange for common stock.

In connection with these exercises, we received net proceeds of $9,993.

On March 10, 2021, our warrant holders exercised for cash the remaining 1,715,599 outstanding warrants and no outstanding warrants remain.

As of December 31, 2021, we had approximately $48,736 of cash and cash equivalents and short-term investments which is an increase of $26,394 from December 31, 2020.

This increase was primarily due to the cash exercise of our outstanding warrants in the first quarter of 2021 and a capital raise in the second quarter of 2021.

We believe our short-term investment securities, along with sustained contract manufacturing sales and anticipated growth in our VLN ® product line, provide sufficient resources for estimated contractual commitments, described further in Note 12 to our consolidated financial statements included herein, and normal cash requirements for operations beyond the next twelve months.

In addition to the commitments described in Note 12 to our consolidated financial statements included herein, we have secured contracts with select tobacco farmers to assist with the growing of our VLNC tobacco.

These contracts will increase the quantity of our current leaf inventory which will help support expected demand of VLN ® , particularly now that MRTP authorization was granted by the FDA in December 2021.

The cost of such growing efforts is dependent on the final agricultural yields and leaf quality, but we expect the cost to be approximately $4.6 million for deliveries received and to be received in 2022 and early 2023.

We also believe that we have appropriate liquidity to successfully manufacture and distribute our VLN ® cigarette within 90 days of MRTP authorization by the FDA which was received in December 2021, as well as appropriate liquidity for continued R&D investment in all our plant franchises.

We also have an effective S-3 shelf registration statement on file with the U.S.

Securities and Exchange Commission (SEC),

which provides us flexibility and optionality to raise capital, however there can be no assurance that capital will be available to us on acceptable terms or at all.

Critical Accounting Policies and Estimates

Securities and Exchange Commission (SEC), which provides us flexibility and optionality to raise additional capital as needed.

However, there can be no assurance that capital will be available to us on acceptable terms or at all.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S.

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We believe that our most critical accounting estimates relate to investment valuation and impairment of long-lived intangible assets.

Investment Valuation –We have two investments—our investment in Panacea Life Sciences, Inc.

(“Panacea”) and Aurora Cannabis, Inc.

(“ACB”)—that require us to estimate fair value and assess for impairment indicators as of each period-end.

Our investment in Aurora consists of stock warrants that are exercisable into common stock at a predetermined exercise price.

We estimate the Aurora stock warrant fair value using the Black-Scholes pricing model noting one unobservable input—an estimated volatility factor based on the underlying stock price of ACB.

Therefore, changes in market volatility will impact the fair value measurement for our investment.

Our investment in Panacea includes three instruments:

Series B preferred stock (“preferred stock”), a convertible note receivable, and a stock warrant to purchase additional shares of Series B preferred stock.

The preferred stock and convertible note receivable are recorded as available-for-sale debt securities, while the stock warrant is recorded at its cost basis in accordance with the practicability exception under ASU 2016-01.

We consider the current market conditions of the cannabidiol (“CBD”) consumer product industry, competition, governmental regulation developments, our preferred stock priority equity preferences and rights, and the overall finance performance of Panacea to assess if fair value supports our investment carrying value.

Refer to Note 6 and Note 7 to our consolidated financial statements for additional information regarding our investment valuations.

Impairment of Long-Lived Assets – Our intangible asset portfolio consists of both definite-lived and indefinite-lived intangible assets which include patents, trademarks, licenses, and our inclusion within the tobacco master settlement agreement (“MSA”).

Conversion of Panacea Investment –As described further within Note 6 to our consolidated financial statements included herein, in June 2021 we exchanged certain assets pertaining to our investment in Panacea.

The determination of the carrying value of the assets received required us to use certain estimates.

For instance, we received farmland and equipment for which we relied in part by an independent valuation firm to assess the current market value of these assets.

In addition, we received a secured, non-interest bearing $4,000 note.

Based on the stated term of the note, we used current market interest rates for a comparable security to determine an implied interest rate and adjust the value of the note recorded in our consolidated financial statements.

Our intangible assets subject to amortization are reviewed for strategic importance and commercialization opportunity prior to expiration.

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To determine if an asset’s carrying value is appropriate, we are required to estimate the expected commercialization of our tobacco and cannabis intellectual property—either through future product sales or potential license opportunities.

This estimate process includes expected future cash flow projections, industry market assessments, and assumptions around positive regulatory developments from government agencies—including authorization of our MRTPA.

For our indefinite-lived intangible assets—MSA and cigarette brand predicate—we consider current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations to determine if it is more likely than not that that the asset is impaired.

If it is more likely than note that the asset is impaired, we will compare the asset carrying value to fair value.

For our indefinite-lived intangible assets—MSA, cigarette brand predicate and trademarks—we consider current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations to determine if it is more likely than not that that the asset is impaired.

If it is more likely than not that the asset is impaired, we will compare the asset carrying value to fair value and record the difference as an impairment.

Management has discussed these critical accounting policies and estimates with the Audit Committee of the Company’s Board of Directors.

While our estimates and assumptions are based on our knowledge of current events and future actions, actual results may ultimately differ from these estimates and assumptions.

Inflation did not have a material effect on our operating results for the years ended December 31, 2020 and 2019.

Off-Balance Sheet Arrangement

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

Quantitative and Qu alitative Disclosures About Market Risk

We are exposed to various market risks in the ordinary course of our business, which consist primarily of interest rate risk associated with our cash and cash equivalents and short-term investments and foreign exchange rate risk.

Additionally, the value of our stock in Panacea Holdings is based on the trading price of their common stock, and our stock warrants in Aurora is primarily based on the underlying price of Aurora’s common stock and fluctuations in those values could impact the fair value of our holdings.

Interest Rate Risk

We do not believe we are exposed to material direct interest rate risk associated with changes in interest rates other than with respect to our cash equivalents and short-term investments securities.

We invest excess cash in cash equivalents and short-term investment securities primarily consisting of money market funds, corporate bonds, U.S.

government agency bonds, U.S.

treasury securities, commercial paper, and certificates of deposit that earn interest based on fluctuating interest rates.

We believe changes in these interest rates will not have a material impact on our financial statements.

Additionally, we have no interest rate sensitive debt, and as such, are not exposed to interest rate changes relating to debt instruments.

Foreign Exchange Risk

The majority of our revenues and expenses are transacted in U.S.

A small portion of our vendors are paid in foreign currencies.

Our Canadian subsidiary conducts its business in Canadian dollars, and we have limited exposure to foreign currency translation.

The exercise price on the Aurora stock warrants is stated in Canadian dollars.

Accordingly, we have some foreign currency risk with respect to such exercise price.

We do not believe that fluctuations in foreign currency rates associated with these non-U.S.

dollars transaction will have a material impact on our financial statements.

The stock warrants we received from Aurora are considered equity securities and are carried at fair value using the Black-Scholes pricing model.

These stock warrants are exposed to market volatilities, changes in the underlying stock price of Aurora, and interest rates.

The shares of common stock we have in Panacea Holdings are considered equity securities and are carried at fair value using the observable trading price of Panacea Holdings.

Our investment in this stock is exposed to market volatilities.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis