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Item 7. Management’s Discussion and Analysis

2023-03-09 compared with 2022-03-01 · 332 added, 279 removed, 25 unchanged (96% of the section changed)

1 unchanged sentence

This discussion should be read in conjunction with the other sections of this Form 10-K, including “Risk Factors,” and the Financial Statements and notes thereto.

This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons of 2021 to 2020.

Discussions of 2019 items and year-to-year comparisons of 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 on our Annual Report on Form 10-K for the year ended December 31, 2020.

The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K.

3 unchanged sentences

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

Executive Overview of Full Year 2021 Results

Key Business and Financial Highlights

Executive Overview

● Executive overview

● Recent business acquisitions

● Tobacco business highlights

● Hemp/cannabis business highlights

● Corporate business highlights

● Financial overview

Our Financial Results

● Fiscal 2022 compared with fiscal 2021

● Liquidity and capital resources

● Impact of recently issued accounting standards

Critical Accounting Estimates

● Inventories

● Valuation of long-lived assets

● Business combinations

Executive Overview

● 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.

● Commenced pilot market sales in Chicago during the first quarter of 2022 of VLN ® King and VLN ® Menthol King 95% reduced nicotine content cigarettes, the first and only FDA authorized MRTP designated combustible cigarettes.

● Based on strong pilot outcomes, announced plans for the expansion of VLN ® into additional Illinois locations and the Colorado market as of September 2022.

The Company also announced that it will launch VLN ® in three additional states – Arizona, New Mexico, and Utah – covering the Four Corners region.

● Contracted the largest VLN ® tobacco planting in 2022 to support expansion in both the U.S.

and international markets.

● Announced an industry-first breakthrough in hemp/cannabis plant transformation with our partner KeyGene, expanding the Company’s capabilities in modifying the principal genes controlling cannabinoid biosynthesis in the plant.

Recent Business Acquisitions and Other Events

● On May 13, 2022, we completed the acquisition of GVB Biopharma ("GVB"), a privately held contract development and manufacturing organization (CDMO).

We believe GVB is one of the largest providers of hemp-derived active ingredients for the pharmaceutical and consumer goods industries worldwide based on total tonnage.

GVB has industry leading market positions and expertise in all facets of the hemp/cannabis industry, including:

research and genetics, proprietary cryogenic hemp extraction;

refining, conversion, and product formulation technology;

lead supplier of Active Pharmaceutical Ingredients (API);

low-cost, scalable manufacturing capabilities;

regulatory and compliance expertise;

industry trusted high-quality products;

and international capabilities

● On November 20, 2022, a fire occurred at the GVB Biopharma distillate and isolate manufacturing facility located in Grass Valley, OR.

There were no reported life-threatening injuries, but the fire damaged the refinement facility requiring all hemp refining operations on site to be curtailed.

Additional equipment and inventory stored in adjacent buildings was not damaged and was relocated to nearby facilities as part of the Company's business continuity plans.

The Company subsequently commenced the insurance claims process and believes that losses resulting from the fire will be covered by its property and business interruption policies.

Subsequent to the fire, the Company implemented backup sourcing and production plans to continue fulfilling customer orders and to resume production of distillate and isolate ingredients.

● On January 19, 2023, we acquired RX Pharmatech Ltd (“RXP”), a privately held leading United Kingdom 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.

is not accepting new novel food applications for cannabinoid products at this time and denied tens of thousands of product applications earlier in 2022 during the FSA’s first round of screening.

Accordingly, we believe this market dynamic could allow us to open new opportunities to land highly accretive contracts with multinationals for quality CBD and hemp-derived consumer products dependent on the novel food licenses.

Refer to Note 2 “Business Acquisitions” and Note 21 “Subsequent Events” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about the acquisition of GVB and RXP.

Tobacco Business Highlights

● Leveraged the exceptional Chicago pilot results to expand VLN ® sales in Illinois and launch in Colorado, where the state employs a favorable MRTP excise tax program.

Announced additional launch plans in Arizona, New Mexico and Utah.

● Commenced an aggressive multi-state VLN ® rollout strategy, targeting up 18 states by year-end 2023, aimed at penetrating geographies and markets with large adult smoker populations, including those with favorable MRTP state excise tax savings, which can be used toward consumer incentives, distribution support, and additional programming to raise awareness of VLN ® products.

● Initiated agreements with national-scale C-store distribution partners, including Core-Mark/Eby-Brown and others pending, to facilitate state-wide or multi-state launches of VLN ® at hundreds of stores within our target markets in an accelerated timeline.

● Announced expansion into Texas, California and Florida, expected in conjunction with the largest multi-state U.S.

C-store chain leveraging these new national scale distribution capabilities.

● Secured additional retail point of sale placements with regional C-stores, such as Texas based CEFCO, and new regional distribution agreements with Hub, Inc., serving regional Midwestern and tribal accounts, and Chambers & Owen, Inc., serving the upper Midwest.

● Gained authorization to test VLN ® sales at four United States military bases located in California, Arizona and North Carolina, beginning in the second quarter.

● Poised to benefit from federal, state and international regulatory appetite for banning menthol and mandating reduced nicotine content.

The Company has the only FDA-authorized combustible cigarette able to meet the stringent reduced nicotine content product standard under the FDA’s Comprehensive Plan requiring that all cigarettes be made “minimally or non-addictive.”

o Proposed FDA menthol cigarette ban , in final rules status, could leave VLN ® Menthol King as the only combustible menthol cigarette on the market , providing a critical off-ramp to help current menthol smokers to smoke less , a final decision expected in August 2023.

o In December 2022, New Zealand became the first country to pass a nationwide mandate permitting only reduced nicotine content cigarettes to be sold starting in early 2025.

● Planted the largest ever VLN ® tobacco crop in 2022, including the second-generation VLN ® 2.0 reduced nicotine tobacco plants, which have demonstrated approximately 30% higher yields, enhanced quality leaf, improved disease resistance, reduction in nutrient requirements and increased stability across various environments and geographies.

o Announced a dedicated seed cultivation program designed to generate enough tobacco to support the entire New Zealand cigarette marketplace with reduced nicotine content tobacco, more than 2 billion sticks annually.

● Completed expansion of existing manufacturing operations and increased capacity by 25%, including installation of a new production line and initiation of a second shift.

Hemp/Cannabis Business Highlights

● Fundamentally shifted hemp/cannabis business, moving from primarily research and development efforts to a fully commercialized company with the acquisition of GVB Biopharma, a global scale provider of hemp-derived cannabinoid ingredients and API to the pharmaceutical and consumer goods industries with world-class CDMO capabilities.

● Positioned for global leadership as the largest provider of cannabinoid extracts and isolates in North America, focused on cannabidiol (CBD) and cannabigerol (CBG) extracted and refined at industrial scale into distillates.

● Completed vertical integration of novel cannabinoid value chain from receptor science to finished goods and now CDMO+D capabilities for complete category management to retail points of sale.

● Advancing multiple verticalized license agreements with major consumer CBD and alternative cannabinoid brands to manufacture and distribute key cannabinoid product offerings to retailers throughout the U.S.

as a new turnkey solution for consumer facing cannabis product brands.

● Continued expanding CBD crude production capabilities with new Prineville, Oregon facility, one of the largest hemp extraction plants in the world, with expected capacity exceeding 15,000 kg/month at full operation, further improving gross margin on all GVB cannabinoid products.

● Responded to a fire at the Company’s Grass Valley manufacturing facility, immediately shifting to alternate supply sources to fulfill all customer deliveries planned in the fourth quarter.

New facilities are being established, replacing the prior capacity, as the Company plans for construction of a new, larger and more efficient distillate and isolate manufacturing campus.

● Submitted DMF to the FDA to produce and supply APIs for the medical and pharmaceutical industries while also pursuing The International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use (ICH) Q7 international pharma-grade audit standard certification in order to supply naturally derived hemp/cannabis APIs.

● Announced a global sales, marketing and distribution agreement with Cannabinoid API Solutions (CAS) and Transo-Pharm for APIs to accelerate opportunities to supply to the largest and most innovative pharmaceutical and consumer goods manufacturers.

● Acquired RX Pharmatech Ltd.

in an accretive transaction securing a portfolio of 1,276 CBD product and ingredient based Novel Food Applications with the U.K.

Food Standards Agency, accelerating CBD product growth in the U.K.

and EU food and nutraceuticals markets.

● Announced the Company’s central distribution facility in the Netherlands, opened in November 2022, will support growing demand for hemp/cannabis products in Europe, the Middle East, and Africa (EMEA).

Corporate Business Highlights

● 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 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

● We believe that our proprietary, reduced nicotine content cigarettes, VLN ® , have massive global market opportunity.

In 2018, the global tobacco market was worth $817 billion and of that, $714 billion, or approximately 90% of the global tobacco market is comprised of combustible cigarettes.

There are more than 1 billion global and 34 million U.S.

adult smokers.

More than two-thirds of adult smokers want to quit, yet less than ten percent of them are able to quit successfully.

We believe that smokers are actively seeking alternatives to addictive combustible cigarettes.

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 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 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.

The studies, using our reduced nicotine content tobacco cigarettes, show that smokers who use our products:

(i) reduce their nicotine exposure and dependence, (ii) smoke fewer cigarettes per day, (iii) increase their number of smoke-free days, and (iv) double their quit attempts – all with minimal or no evidence of nicotine withdrawal or compensatory smoking.

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

● 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 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 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.

● 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.

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 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.

● 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.

We have already characterized millions of high-value single nucleotide polymorphisms (SNPs).

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, 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.

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.

● 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 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 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.

Results of Operations

Year Ended December 31, 2021 compared to Year Ended December 31, 2020.

Amounts in thousands, except for share and per-share data

Revenue - Sale of products, net

Sale of products, net

Dollar Change from Prior Year

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

Calvin Treat joined the Company as our Chief Scientific Officer on May 23, 2022, further enhancing our deep expertise in plant-based biotechnology across all three of our plant franchises.

Treat has led global plant biotechnology programs at Bayer and Monsanto, including corn, soybean, and cotton crop improvement technologies.

Hugh Kinsman was appointed Chief Financial Officer on June 16, 2022, expanding his role at GVB Biopharma to include corporate financial leadership functions.

● The Company announced that the position of President and Chief Operating Officer was eliminated effective September 30, 2022.

Mish, assumed the responsibilities of Corporate President, and operations have been integrated into the tobacco and hemp/cannabis business teams.

Salhany was appointed to the Company’s Board of Directors in September 2022, extending her experience in positioning unique products for successful launch, corporate strategy, and entrepreneurial ventures to help raise 22nd Century’s profile in tobacco harm reduction and the hemp/cannabis industry.

● The Company announced that John Miller was appointed as an executive officer and President of Tobacco effective November 11, 2022.

Miller initially joined our tobacco business in May 2022, to help achieve the full potential of our tobacco franchise.

Miller was the President and CEO of Swisher International, Inc., the largest manufacturer and exporter of cigars and smokeless tobacco products in America.

Financial Overview – Fourth Quarter and Full Year 2022 Results

● Net revenues for the fourth quarter of 2022 were $19,206, an increase of 141.3% from $7,960 in 2021.

o Revenue from tobacco-related products was $9,951, an increase of 25.7% from 2021, primarily driven by volume increases in contract manufacturing and initial VLN ® sales as part of the early rollout in Illinois and Colorado.

● Fourth quarter 2022 cartons sold of 1,354 compared to 1,144 in the comparable prior year period.

o Revenue from hemp/cannabis-related products was $9,255, compared to $43 in the prior year fourth quarter, reflecting the acquisition of GVB.

● Net revenues for the full year 2022 were $62,111, an increase of 100.7% from $30,948 in 2021.

● Gross profit for the fourth quarter of 2022 was a loss of $646 compared to profit of $231 in the prior year period.

o Gross profit from tobacco-related products was $(44), a decrease of $400 compared to the prior year period, reflecting lower margin sales mix in contract manufacturing products.

o Gross profit from hemp/cannabis-related products was a loss of $(601) compared to $(125) in the prior year.

Margin declines in the fourth quarter were primarily due to impact of the Grass Valley fire.

On a proforma basis, as if the GVB acquisition had occurred effective January 1, 2021, gross profit would have been $1,594 in the fourth quarter 2021.

● Gross profit for the full year 2022 was $1,174, a decrease of 21.0% from 2021.

● Total operating expenses for the fourth quarter 2022 increased to $22,512 compared to $9,262 in the prior year quarter driven by:

o Sales, general and administrative expenses increased to $14,097 driven primarily by the acquisition of GVB, higher strategic consulting and marketing, legal, and personnel costs to expand the launch of VLN ®

o Research and development expenses increased to $2,093, driven by personnel expenses and costs associated with the Company’s hemp/cannabis and hops research programs.

o Other operating expenses, net was $6,322 reflecting the unusual and infrequent charges recorded in connection with the Grass Valley fire in November 2022.

● Operating loss for the fourth quarter 2022 was $23,158, compared to a loss of $9,031 in the prior year period.

Operating loss for the full year 2022 was $57,106, compared to a loss of $28,412 in the prior year.

● Net loss in the fourth quarter of 2022 was $26,283, representing a net loss per share of $0.12 compared with net loss in the fourth quarter of 2021 of $13,964, representing a net loss per share of $.09.

Net loss for the full year 2022 was $59,801, representing a net loss per share of $0.31 compared with net loss for the full year 2021 of $32,609, representing a net loss per share of $.21.

● As of December 31, 2022, we had $21,213 in cash, cash equivalents and short-term investments securities.

o During the first quarter of 2023, the Company received $5,000 of casualty loss insurance recoveries from the Grass Valley fire with business interruption insurance claims proceeds expected thereafter.

o On March 3, 2023, the Company announced a $21,052 senior credit facility to fund increased working capital needs related to the significant consumer demand for its VLN ® product and GVB business lines.

◾ The new three-year credit facility was issued at 5% original issuance discount (OID), will bear cash interest at a rate of 7% per annum, and commence principal amortization in the

second year at a rate of 2% of the original balance per month.

The Company has the option to redeem the facility early starting in the second year.

● The Company’s strengthened balance sheet supports growing working capital needs driven by increased VLN ® product shipments to multiple national-scale distribution partners as well as strong customer demand for hemp/cannabis bulk ingredients.

● 22nd Century’s operating cash requirements are anticipated to decrease through fiscal 2023, reflecting higher sales volume of higher margin contract manufacturing operations (CMO) cigarettes and VLN ® products, as well as continued organic growth of GVB’s operations.

Our Financial Results

The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 8 of this report, for the periods presented (dollars in thousands, except per share amounts):

Tobacco revenues, net

Hemp/cannabis revenues, net

Total revenues, net

Cost of goods sold

Percent of Product Sales

Dollar Change from Prior Year

Percent of Product Sales

Dollar Change from Prior Year

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

Research and Development

Percent of Product Sales

Dollar Change from Prior Year

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.

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.

Sales, general and administrative expense

Sales, general and administrative

Percent of Product Sales

Dollar Change from 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

Percent of Product Sales

Dollar Change from Prior Year

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.

Depreciation expense

Percent of Product Sales

Dollar Change from Prior Year

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

Percent of Product Sales

Dollar Change from Prior Year

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

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

Unrealized (loss) gain on investments

Unrealized gain (loss) on investments

Percent of Product Sales

Dollar Change from Prior Year

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

Percent of Product Sales

Dollar Change from Prior Year

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 and the conversion related thereto.

Gain on Panacea investment conversion

Percent of Product Sales

Dollar Change from Prior Year

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

Gross profit as a % of revenues, net

Operating expenses:

Sales, general and administrative ("SG&A")

SG&A as a % of revenues, net

Research and development ("R&D")

R&D as a % of revenues, net

Other operating expenses, net ("OOE")

Total operating expenses

Operating loss

Operating loss as a % of revenues, net

Other income (expense):

Unrealized loss on investment

Realized (loss) gain on Panacea investment

Realized loss on short-term investment securities

Other income, net

Interest income, net

Percent of Product Sales

Dollar Change from Prior Year

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

Interest Expense

Percent of Product Sales

Dollar Change from Prior Year

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 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

Dollar Change from Prior Year

We maintain an account for short-term investment securities that are classified as available-for-sale securities and consist of money market funds and corporate bonds with maturities greater than three months at the time of acquisition.

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 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.

Total other expense

Loss before income taxes

(Benefit) provision for income taxes

Net loss as a % of revenues, net

Net loss per common share (basic and diluted)

NM - calculated change not meaningful

Refer to Note 17, “Segment and Geographic Information,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding operating results for our two operating and reportable segments:

(1) Tobacco, (2) Hemp/cannabis.

Fiscal 2022 Compared with Fiscal 2021

Revenue - Sale of products, net

Hemp/cannabis

Total revenues, net

The increase in revenue for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily the result of an increase in tobacco revenue of $9,596 or 31.0% from 2021 primarily driven by volume increases in the number of cartons sold.

Full year 2022 cartons sold were of 5,782 compared to 4,331 in the comparable prior year period.

H emp/cannabis revenue was $21,567 in the current year compared to negligible revenues in 2021, primarily as a result of the GVB acquisition .

Percent of Revenues, net

The decrease in gross profit and gross profit as a percent of revenues, net for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily driven by an increase of $218 from favorable tobacco volume offset by losses from hemp/cannabis of $530.

Hemp/cannabis gross profit was unfavorable mainly due to non-recurring charges of $1,259, primarily attributable to amortization of inventory step-up resulting from the acquisition of GVB.

Additionally, hemp/cannabis gross profits in the fourth quarter were negatively impacted from the Grass Valley fire.

We anticipate subsequent recoveries in 2023 of gross profit negatively impacted by the fire through our business interruption insurance claims.

Sales, general and administrative expense

Change 2022 vs 2021

Compensation and benefits (a)

Strategic consulting (c)

Sales and marketing (d)

Net increase in SG&A expenses

(a) Increases in compensation and benefits primarily due to $716 increased headcount mainly due to the increase in selling and marketing personnel driven by the ongoing expansion and accelerated launch of VLN ® , $1,486 increase in equity comp ($1,237 related to accelerated vesting of an employee’s outstanding equity awards as part of the termination severance agreement), and an increase of $615 in severance.

(b) Increased legal expenses due to regulatory compliance for VLN ® launch, and enforcement of our patent portfolios.

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

(d) Increases due to the ongoing expansion and accelerated launch of VLN ® .

(e) Other expenses increased due to $529 of travel and entertainment, $239 of technology expenses, $215 in public accounting fees, and other $335 offset by a decrease in insurance expenses of $219.

(f) 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 expense

Change 2022 vs 2021

Compensation and benefits (a)

Contract costs (b)

Consulting and professional services (c)

Net increase in R&D expenses

(a) Increased compensation and benefits related to the additional executive and R&D personnel in the current year.

(b) Increased expenses due to our contracts related to field trials, hemp/cannabis programs, new hops R&D and royalty fees.

(d) Other increases include facilities expenses from our new Maryland lab, amortization expenses of new patents, increased patent maintenance costs and testing costs.

(e) Increased R&D as a result of the acquisition of GVB on May 13, 2022.

Other operating expenses, net

Grass Valley fire:

Fixed asset write-offs

Inventory charges

Compensation & benefits

Professional services

Lease obligations

Insurance recoveries

Total Grass Valley fire (a)

Acquisition costs (b)

Impairment of intangible assets (c)

Impairment of inventory (c)

(Gain) loss on sale or disposal of property, plant and equipment (d)

Total other operating expenses, net

(a) 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 total charges of $9,799 were offset by $5,000 of insurance proceeds.

(b) Acquisition costs attributable to the acquisition of GVB on May 13, 2022.

(c) Other general charges include impairment of intangible assets that no longer meet the Company’s strategic objectives and inventory impairment as a result of unavoidable casualty from a weather event.

(d) Reflects gain on sale resulting from sale of older tobacco manufacturing equipment.

Refer to Note 19, “Other operating expenses, net,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding these charges.

Other income (expense)

Other income (expense):

Unrealized loss on investment (a)

Realized (loss) gain on Panacea investment (b)

Realized loss on short-term investment securities

Other income, net

Interest income, net

Interest expense (c)

Total other expense

NM - calculated change not meaningful

(a) Unrealized loss on investment includes fair value adjustments for our investment in Panacea Life Sciences Holdings, Inc.

(“PLSH”) during the year ended December 31, 2021 and Aurora Cannabis Inc (“Aurora”) stock warrants during the years ended December 31, 2022 and 2021, respectively.

(b) Realized (loss) gain on PLSH investment reflects the change in fair value and write-off of our investment in PLSH common stock during the year ended December 31, 2022 of $2,340 and extinguishment of note receivable of $500 less adjusted discount of $51.

(c) Interest expense increased in 2022, as compared to the prior year period, primarily due to the interest recognized from the GVB bridge notes resulting from the GVB acquisition.

Liquidity and Capital Resources

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents - beginning of period

Cash and cash equivalents - end of period

Cash and cash equivalents

Short-term investment securities

Working capital

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.

Cash, cash equivalents and short-term investment securities decreased by $27,523 primarily as a result of cash used in operating activities, offset by net proceeds from issuance of common stock in July 2022 described below.

Working Capital

As of December 31, 2022, we had working capital of approximately $31,587 compared to working capital of approximately $45,958 as of December 31, 2021, a decrease of $14,371.

This decrease in working capital was primarily due to increases from normal fluctuations of current assets such as inventory (i.e.

tobacco leaf grow) and an increase of $11,897 attributable to GVB, offset by a decrease of $27,523 in cash, cash equivalents and short-term investment securities.

Summary of Cash Flow

Cash provided by (used in):

Operating activities

Investing activities

Financing activities

Net change in cash and cash equivalents

Net cash used in operating activities

Cash used in operations increased $28,875 from $22,839 in 2021 to $51,714 in 2022.

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.

The primary driver for this increase was higher net loss of $27,192, driven by increased spending in SG&A and R&D both from the acquisition of GVB and acceleration of the launch of VLN ® , an increase of $9,154 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 $10,837 for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Net cash provided by (used in) investing activities

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, 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 provided by investing activities amounted to $22,578 in 2022 as compared to cash used in investing activities of $27,729 in 2021.

The decrease in cash used in investing activities of $50,307 was primarily the result of a net increase in the net cash provided by our short-term investments in the amount of $55,235 offset by an increase in the cash used for acquisition of property, plant and equipment, the acquisition of patents, trademarks and licenses, acquisition of GVB and investment in Change Agronomy Ltd.

in the amount of $3,358 for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Net cash provided by financing activities

During the year ended December 31, 2022, cash provided by financing activities decreased by $20,055 resulting from (i) the net proceeds of $11,782 resulting from cash exercises of all outstanding warrants in 2021 that did not occur in 2022;

(ii) the change in net proceeds of issuance of common stock of $5,722;

(iii) the change in net proceeds pertaining to notes payable issuances and payments of $1,709;

(iv) change in net proceeds from stock option exercises of $1,133.

These decreases were partially offset by the change in cash paid for taxes related to settlement of restricted stock units of $320.

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, 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 additional capital as needed.

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

Our principal sources of liquidity are our cash and cash equivalents, short-term investment securities, cash generated from our tobacco contract manufacturing business and hemp/cannabis business and proceeds from debt and equity financing activities.

As of December 31, 2022, we had approximately $21,213 of cash and cash equivalents and short-term investments, and $5,000 insurance recovery receivable related to the Grass Valley fire, which we anticipate collecting in the first half of 2023.

We have additional business interruption coverage with policy limits of up to $15,000, which we continue pursuing in connection with such incident.

As described below, on July 25, 2022, we completed a $35,000 above-market registered direct offering with institutional investors generating net proceeds of $32,484, and on March 3, 2023 we entered into a $21,052 senior secured credit facility generating net proceeds to us of approximately $20,000.

Proceeds from these financing activities are intended to be used to continue with the launch of our VLN ® products and to meet increased GVB customer demands and volume.

Our cash, cash equivalents, short-term investment securities, insurance recovery proceeds, and credit facility financing, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, will 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 well beyond the next twelve months.

We are selectively deploying capital to accelerate the launch of VLN ® , expand tobacco manufacturing operations, invest in GVB’s production capacity and increase inventory levels to meet growing demand for both hemp/cannabis and tobacco products and for research and development.

Our cash requirements in future periods are anticipated to decrease, reflecting higher sales volume for VLN ® products through fiscal 2023 and continued organic growth of hemp/cannabis operations, providing adequate liquidity from the current balance sheet to complete our planned strategic initiatives.

New 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 $21,052,632 and (ii) warrants to purchase up to 5,000,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), subject to adjustments as set forth in the JGB Warrants, for a total purchase price of $20,000,000.

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 $1,052,632, 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 JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 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, as more fully described in the JGB Warrant.

GVB Bridge Loan

On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,864,767 in favor of Omnia Ventures, LP (“Omnia”).

The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500,000 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.

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.

July 2022 Equity Raise

On July 25, 2022, we completed a capital raise through a registered direct offering and issued 17,073 shares of common stock for net cash proceeds of $32,484.

This excludes the proceeds, if any, from the exercise of the 17,073 warrants sold in the private placement that occurred concurrently with this offering.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements.

Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

Critical Accounting Estimates

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

GAAP”) which requires management to make estimates, judgements, and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.

For a discussion of our significant accounting policies, refer to Note 1 to our consolidated financial statements.

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

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.

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 MSA.

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

If it is determined that the asset no longer supports the Company’s strategic objectives and/or will not be commercially viable prior to expiration, the asset is impaired.

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 ongoing developments following the recent approval of our MRTP application.

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’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities.

We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances.

Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.

We have identified several critical accounting estimates.

An accounting estimate is considered critical if both:

(a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions have had or are reasonably likely to have a material effect on the consolidated financial statements.

This listing is not a comprehensive list of all of our accounting policies.

For further information regarding the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value.

Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.

Historically, our adjustments or write-off charges recorded against inventory have been adequate to cover our losses.

However, variations in methods or assumptions or volatility in spot pricing for hemp/cannabis could have a material impact on our results.

Additionally, if our demand forecasts for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our gross profit and net income.

Valuation of Long-Lived Assets

We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our intangible and other long-lived assets.

Goodwill and intangible assets determined to have an indefinite useful life are not amortized.

Instead, these assets are evaluated for impairment on an annual basis on December 1, the measurement date, and whenever events or business conditions change that could indicate that the asset is impaired.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.

Evaluation of goodwill for impairment

We test each reporting unit’s goodwill for impairment on the measurement date 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 value.

In conducting this annual impairment testing, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value.

A qualitative assessment requires that the Company consider events or circumstances including, but not limited to, macro-economic conditions, market and industry conditions, cost factors, competitive environment, changes in strategy, changes in customers, changes in the Company’s stock price, results of the last impairment test, and the operational stability and the overall financial performance of the reporting units.

If not, no further goodwill impairment testing is required.

If it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its carrying value.

To determine the fair values, the Company uses a weighted combination of the market approach based on comparable publicly traded companies and the income approach based on estimated discounted future cash flows.

cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors.

If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

We completed our annual goodwill impairment test as of December 1, 2022, and determined, after performing a quantitative assessment of the Hemp/cannabis reporting unit, the fair value of the Hemp/cannabis reporting unit exceeded its carrying amount.

Resulting from the quantitative analysis, the fair value exceeded the carrying value of the Hemp/cannabis reporting unit by approximately 25%.

We do not believe that any of our reporting units are at risk for impairment.

However, changes to the factors considered above could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.

We may be unaware of one or more significant factors that, if we had been aware of, would cause our conclusion to change, which could result in a goodwill impairment charge in a future period.

Evaluation of indefinite-lived intangible assets for impairment

Our indefinite-lived intangible assets include the certain trademarks and tradename and licenses.

Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets on the last day of our fiscal year, unless events occur that trigger the need for an interim impairment review.

We have the option to first assess qualitative factors in determining whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired.

If we elect not to use this option, or we determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value.

Fair value is estimated using the relief-from-royalty method.

Significant assumptions inherent in this methodology include estimates of royalty rates and discount rates.

The discount rate applied is based on the risk inherent in the respective intangible assets and royalty rates are based on the rates at which comparable tradenames are being licensed in the marketplace.

Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.

For our indefinite-lived intangible assets—MSA, cigarette brand predicate and trademarks—we performed a qualitative evaluation and considered factors such as current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations.

We determined it is more likely than not that that the assets are not impaired.

For our indefinite-lived intangible asset relate to the GVB tradename, we performed a quantitative assessment to test the asset for impairment as of December 1, 2022.

The fair value was determined by utilizing the relief from royalty method with valuation assumptions consisting of royalty rate of 1.0% and discount rate of 24.5%.

The estimated fair value was concluded to be below carrying value and as a result an impairment charge of $1,453 was recorded.

We do not believe that our indefinite-lived intangible assets are at risk for further impairment.

However, a significant increase in the discount rate, decrease in the terminal growth rate, increase in tax rates, decrease in the royalty rate or substantial reductions in our revenue assumptions could have a negative impact on the estimated fair value of our tradename and require us to recognize additional impairment in a future period.

Evaluation of long-lived assets for impairment

When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) or definite-lived intangible asset(s) including, but not limited to, PP&E and right-of-use lease assets, exceeds the related undiscounted future cash flows.

In cases where the carrying value exceeds the undiscounted future cash flows, the carrying value is written down to fair value.

Fair value is generally determined using a discounted cash flow analysis.

When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life.

Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment.

Events could occur that would materially affect our estimates and assumptions.

Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives.

Business Combinations

The Company accounts for business combinations in accordance with ASC Topic 805, Business Combinations .

The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on the respective fair values of identifiable assets acquired and liabilities assumed on the date of acquisition.

Any excess purchase price over the fair value of net assets acquired is recorded to goodwill.

Determining the fair value of these items requires management’s judgment and often also requires the use of independent valuation specialists.

Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future cash flows from revenues of the intangible assets acquired, estimates of appropriate discount rates used to present value expected future cash flows, estimated useful lives of the intangible assets acquired and other factors.

The judgments made in the determination of the estimated fair values assigned to the assets acquired and the liabilities assumed, as well as the estimated useful life of certain assets and liabilities, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense.

For more information see Note 2 “Business Combinations” of the Notes to Consolidated Financial Statements.

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

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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.

Not required for smaller reporting companies.

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What changed 10-K

Item 7. Management’s Discussion and Analysis