Item 9A. Controls and Procedures
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. These
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disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013) , our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
On May 13, 2022, we completed a purchase of substantially all of the assets of GVB’s business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development (the “Transaction”). As the Transaction occurred in the middle of 2022, the scope of our evaluation of the effectiveness of internal control over financial reporting does not include GVB. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our scope for a period not to exceed one year from the date of the acquisition.
The financial results of GVB are included in our consolidated financial statements from the date of acquisition. The financial results of GVB constituted 19% of total assets, 35% of revenues, net and 25% of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2022. The Company is in the process of evaluating the existing controls and procedures of the acquired business and integrating the acquired business into its system of internal control over financial reporting. As a result, management was unable, without incurring unreasonable effort or expense, to conduct an assessment of internal control over financial reporting for the acquired business.
Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to a permanent exemption for smaller reporting companies.
Changes in Internal Controls over Financial Reporting
During the fourth quarter of 2022, we continued the process of evaluating the existing controls and procedures of GVB and integrating into its system of internal control over financial reporting.
Other than with respect to the integration of GVB, there was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection
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Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Officers and Directors
Set forth below is information regarding our directors, executive officers, and key personnel as of March 1, 2023:
Name
Age
Position
James A. Mish
59
Chief Executive Officer and Director
John Franzino
66
Chief Administrative Officer
John J. Miller
58
President, Tobacco Division
R. Hugh Kinsman
56
Chief Financial Officer
Peter Ferola
54
Chief Legal Officer
Dr. Michael Koganov
72
Director
Richard M. Sanders
69
Director
Nora B. Sullivan
65
Director
Clifford B. Fleet
52
Director
Roger D. O’Brien
74
Director
Anthony Johnson
47
Director
Lucille S. Salhany
76
Director
Directors:
James A. Mish, Chief Executive Officer. Mr. Mish has served as our Chief Executive Officer since June 22, 2020 and as a director since January 2022. He has an outstanding track record of delivering profitable growth at both privately-held and publicly-traded science-driven companies with a focus on pharmaceutical and consumer products commercialization. Prior to joining 22nd Century, he served as President and Chief Executive Officer of Purisys, a synthetic cannabinoid API, ingredients and solutions provider to pharmaceutical and consumer products companies, from 2019 to 2020 and Noramco, a global leader in the production of controlled substances for the pharmaceutical industry, from 2016 to 2019. There, Mr. Mish led the private equity carve out of Noramco from Johnson & Johnson/Janssen Pharmaceuticals and spearheaded the subsequent creation and spinoff of Purisys from Noramco. Mr. Mish began his career at Pfizer in research and development before holding positions of increasing responsibility at several companies including as President of Ashland Specialty Ingredients - Consumer Specialties, a major division of Ashland Corporation, a premier, global specialty materials company serving customers in a wide range of consumer and industrial markets from 2008 to 2016. Mr. Mish has a M.B.A. from The Wharton School of the University of Pennsylvania and a Bachelor of Science in Physics and Chemistry from Pennsylvania State University. Mr. Mish’s strong leadership skills and pharmaceutical and consumer products experience led to our conclusion that he should serve as a director.
Clifford B. Fleet. Mr. Fleet has served as a director since his appointment on August 3, 2019 by the Board to fill a vacancy in the Class I director position resulting from the resignation of Henry Sicignano, III as of July 26, 2019. Mr. Fleet also served as the President and Chief Executive Officer of the Company from August 3, 2019 until December 13, 2019, at which time he resigned, effective on December 31, 2019. Mr. Fleet also served as a strategic advisor consultant to the Company from December 2018 to August 3, 2019. Mr. Fleet currently serves as the President and CEO of the Colonial Williamsburg Foundation, the world’s largest living history museum and a national leader in American education. Prior to the Colonial Williamsburg Foundation, Mr. Fleet served as the President and CEO of 22nd Century Group. From 1995 to 2017 Mr. Fleet worked at Altria Group (NYSE: MO), serving in a variety of senior-level management positions in
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Finance, Operations, Marketing, and Business Strategy and Development. From 2013 to 2017, Mr. Fleet served as the President and CEO of Philip Morris USA, Altria’s largest subsidiary, when he ran Philip Morris USA, the nation’s largest tobacco company, and John Middleton, a leading machine-made cigar manufacturer. During his tenure he led both organizations to business success in highly regulated environments. In addition, Mr. Fleet is an adjunct professor at the College of William & Mary teaching in the business school. Mr. Fleet holds a Bachelor of Arts, Master of Arts, Master of Business Administration and Juris Doctor from the College of William & Mary. Mr. Fleet’s extensive experience in the tobacco industry led to our conclusion that he should serve as a director.
Anthony Johnson . Mr. Johnson has served as a director since August 2021 and is co-founder, President, and CEO of Kodikaz Therapeutic Solutions, a world-class next-generation non-viral gene therapy company since 2019. He is also a founding partner of Buffalo Biosciences in 2006, a life science strategic business management firm that supports the evaluation and commercialization of bioscience technologies from concept to market. Previously he was president and CEO of Empire Genomics, where he transformed a concept formed at a university lab into a preeminent oncology molecular testing enterprise, from 2006 - 2019. He also served as the business leader of the stem cell and regenerative medicine franchise for Thermo Fisher (Invitrogen Corporation). Mr. Johnson is an Aspen Institute Health Innovation Fellow and a member of the Aspen Global Leadership Network. He currently serves on the boards of several organizations including the WNED/PBS broadcasting service of Western New York. He has leveraged his business experience and board positions to mentor numerous technology startups and entrepreneurs, spur state and local job creation, and introduce STEM curriculum into early childhood education. Mr. Johnson is also a founding board member of the Communities of Giving Legacy Initiative, which works to create positive change in the lives of low-income youth of color via access to people, places, and experiences that help them achieve their life goals. Additionally, he serves as Michigan Street African-American Heritage Corridor Commissioner and was an Opportunities Council member for University of Buffalo. Formerly, he was a 15-year volunteer with the Big Brother Big Sister Foundation. Mr. Johnson holds an MBA from Manchester Business School, Manchester, UK, with an emphasis in international strategy, and a BA in biology from Fisk University, Nashville, TN. Mr. Johnson’s experience commercializing bioscience technologies and life sciences experience led to our conclusion that he should serve as a director.
Michael Koganov. Dr. Koganov has served as a director since September 11, 2020. Dr. 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. Dr. Koganov co-founded Intellebio LLC, which developed the proprietary and sustainable Zeta Fraction™ technology that selectively isolates efficacious components from living plants and marine sources to produce a wide range of biofunctional ingredients. After the award-winning technology was acquired by AkzoNobel and then Ashland Global Holdings Inc., Dr. Koganov directed the research, product development, and commercialization of patented multifunctional bioactive Zeta Fractions that are used as key, signature ingredients in numerous products of global companies in the OTC and personal care spaces; and various synergistic compositions of Zeta Fractions obtained from living plants from twelve major plant families. He is the President and Co-Founder of Intellebio LLC, a consulting and testing firm focused on the development of novel technologies, advanced test methods, and breakthrough products in the life science field. Dr. Koganov received his Master of Science degree in Biochemistry from the State University, Dnipropetrovsk, USSR; his Ph.D. in Bioelectrochemistry from Institute of Chemical Technology, Dnipropetrovsk, USSR; and Full Doctor of Sciences (Sc.D.) degree in biotechnology from the Higher Attestation Commission of the USSR’s Council of Ministers. He has written more than 70 publications, secured over 100 granted patents, and is the author of two books. Dr. Koganov’s expertise in the area of plant biotechnology and experience developing novel technologies led to our conclusion that he should serve as a director.
Roger D. O’Brien. Mr. O’Brien has served as a director since his appointment on January 10, 2020 by the Board to fill a vacancy in the Class II director position resulting from the death of Dr. Joseph A. Dunn on November 30, 2019. Mr. O’Brien has served since 2000 as the 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 special focus on general management, technology commercialization, marketing and strategy development. From 1998 to 1999, Mr. O’Brien served as the Chief Operating Officer of Ultralife Batteries, Inc. (NASDAQ: ULBI) and from 1991 to 1996, he was the Chief Executive Officer and a major shareholder of Holotek Ltd., a high-technology company with a proprietary position in the design, development, manufacture and sales of laser imaging systems worldwide. Previously, Mr. O’Brien
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served as a senior executive for Exxon Venture Capital, Tenneco Automotive and as an early officer of Sun Microsystems (NASDAQ: SUN) prior to the company’s acquisition by Oracle Corporation. Mr. O’Brien is currently a member of the Board of Directors of Innovative Technology Solutions and Bristol-ID Technologies, Inc. In addition, Mr. O’Brien is an adjunct professor at the Rochester Institute of Technology, where he is a graduate instructor in Rochester, New York and in Croatia. Mr. O’Brien holds a Bachelor of Science degree in Nuclear Engineering from New York University and an MBA degree from The Wharton School of the University of Pennsylvania. Mr. O’Brien’s experience with strategic advisory consulting and his prior public company experience led to our conclusion that he should serve as a director.
Lucille Salhany . Ms. Salhany became a director in September 2022 pursuant to the terms of the Reorganization and Acquisition Agreement with GVB Biopharma. Ms. Salhany has served as President and Chief Executive Officer of JHMedia, a consulting company she founded, since 1997. She was also one of the founding partners of Echo Bridge Entertainment and CEO & President of LifeFX Networks, Inc. After serving as Chairperson of the Twentieth Television division of Fox, Ms. Salhany was appointed as the Chairmanship of Fox Broadcasting. After chairing Fox, Ms. Salhany accepted the post of Chief Executive Officer and President of United Paramount Network (UPN), launching and growing UPN to become the fifth major broadcast network. She also previously served on the Board of Directors for Echo Bridge Entertainment, Compaq / Hewlett-Packard, Fox, Inc., Avid Technologies, and American Media, Inc. Ms. Salhany was also a trustee of Emerson College and Lasell College, where she received Honorary Doctorates. Ms. Salhany’s well-established track record of success in business and strong background in and knowledge of the media industry led to our conclusion that she should serve as a director.
Richard M. Sanders . Mr. Sanders has served as a director since December 9, 2013. Since August 2009, Mr. Sanders has served as a General Partner of Phase One Ventures, LLC, a venture capital firm which focuses on nanotechnology and biotechnology start-up opportunities in New Mexico and surrounding states. From January 2002 until June 2009, Mr. Sanders served as President and CEO of Santa Fe Natural Tobacco Company (“SFNTC”), a division of Reynolds American, Inc., which manufactures and markets the Natural American Spirit cigarette brand. During his 7-year tenure as head of SFNTC, Mr. Sanders tripled Natural American Spirit’s market share and SFNTC’s operating earnings and directed the successful expansion of Natural American Spirit into international markets in Western Europe and Asia. Prior to directing SFNTC’s robust growth, Mr. Sanders worked for R.J. Reynolds Tobacco Company where he began his career as a marketing assistant in 1977. From 1987 to 2002, he served in a wide spectrum of executive positions including,
among others, Senior Vice President of Marketing and Vice President of Sales. A native of Minneapolis, Mr. Sanders earned a Bachelor’s Degree in political science from Hamline University in St. Paul and an M.B.A. Degree in Marketing from Washington University in St. Louis, Missouri. Mr. Sanders’ deep experience in the tobacco industry and expertise in management and marketing led to our conclusion that he should serve as a director.
Nora B. Sullivan. Ms. Sullivan has served as a director since May 18, 2015. Ms. Sullivan is also currently President of Sullivan Capital Partners, LLC, a financial services company providing investment banking and mergers and acquisitions services to companies seeking acquisitive growth, strategic partnerships and joint venture relationships. Her experience includes the development and advancement of strategic initiatives and the implementation of best practice governance policies. Prior to founding Sullivan Capital Partners in 2004, Ms. Sullivan worked for Citigroup Private Bank from 2000 to 2004, providing capital markets and wealth management services to high net worth individuals and institutional clients. From 1995 to 1999, Ms. Sullivan was Executive Vice President of Rand Capital Corporation (NASDAQ: RAND), a publicly traded closed-end investment management company providing capital and managerial expertise to small and mid-size businesses. Ms. Sullivan is also a member of the Boards of Directors of Evans Bancorp, Inc. (NYSE American: EVBN), Robinson Home Products, and Rosina Food Products. She is also a member of the Investment Committee of the Patrick P Lee Foundation, Chairman of the Technology Transfer Committee of the Roswell Park Comprehensive Cancer Center, and a member of the Board of Directors of the Cortland College Foundation. Ms. Sullivan holds an M.B.A. Degree in Finance and International Business from Columbia University Graduate School of Business and a Juris Doctor degree from the University of Buffalo School of Law. Ms. Sullivan’s expertise in finance and corporate governance, experience with mergers and acquisitions and status as an audit committee financial expert led to our conclusion that she should serve as a director.
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Executive Officers :
For information with respect to Mr. Mish, please refer to the Directors section above.
R. Hugh Kinsman , Chief Financial Officer . Mr. Kinsman has served as our Chief Financial Officer since June 2022. Prior to that time, he was serving as Chief Financial Officer of GVB Biopharma and served in this role since March, 2020 Since 2017, Mr. Kinsman has served as a Director at TerraNova Capital Partners, a boutique investment banking firm, where he has served as CFO of several portfolio companies including iQ International, a leading manufacturer and distributor of highly efficient lead acid batteries for the global automotive and storage markets from 2017 to 2020. Previously, Mr. Kinsman served as a member of the Structured Finance group at GE Capital (NYSE: GE). Mr. Kinsman was also a senior accountant at Asher & Company, CPAs (now BDO). Mr. Kinsman received his B.S. in Finance from Pennsylvania State University and his Master’s in Business Administration from Cornell University.
John J. Miller , President of Tobacco . Mr. Miller has served as our President of Tobacco since November 2022. Prior to that time, he was the President and CEO of Swisher International, Inc., a manufacturer and exporter of cigars and smokeless tobacco products in America. Mr. Miller joined Swisher in November of 2012 as Senior Vice President of Sales & Marketing, was promoted to President in 2017 and named CEO in March 2021 until his retirement in September 2021. Mr. Miller’s experience also includes more than 20 years in various management positions at US Smokeless Tobacco Co. Mr. Miller holds a Bachelor of Science Degree in Finance from UNLV and earned an MBA from Pepperdine University, The George L. Graziadio School of Business Management.
John Franzino, Chief Administrative Officer . Mr. Franzino served as our Chief Financial Officer from June 3, 2020 until November 2021 when he transitioned to Chief Administrative Officer. He has a successful track record of strategic financial leadership in high-growth, highly regulated, consumer-facing industries as well as not-for-profit higher education organizations. Most recently, Mr. Franzino served as Chief Financial Officer of the West Point Association of Graduates, which supports the U.S. Military Academy at West Point. Prior to his experience in higher education, Mr. Franzino served as Chief Financial Officer of Santa Fe Natural Tobacco Company, a subsidiary of Reynolds American, Inc., and as Chief Financial Officer of Labatt USA, a subsidiary of Anheuser-Busch. In both roles, he was responsible for the financial planning and control function as well as information systems and technology. Mr. Franzino is a certified public accountant and holds a Master of Business Administration from Fairleigh Dickinson University and a Bachelor of Arts degree from the University of Maine at Farmington.
Peter Ferola, Chief Legal Officer . Mr. Ferola was promoted to the position of Chief Legal Officer in February 2023. Mr. Ferola has served as our General Counsel and Secretary since November 2022. Mr. Ferola has over 30 years of progressive leadership experience in business management, legal affairs and corporate governance. Most recently, he served as Project Counsel in Greenberg Traurig LLP’s corporate securities group. From 2011 to 2020 he served as Senior Vice President and General Counsel at BioTelemetry, Inc. (NASDAQ: BEAT). From 2009 to 2011, Mr. Ferola served as Vice President, General Counsel and Secretary of Nipro Diagnostics, Inc. (formerly Home Diagnostics, Inc., NASDAQ: HDIX). Prior to joining Home Diagnostics, Mr. Ferola worked as a corporate and securities attorney with Greenberg Traurig, LLP and with Dilworth Paxson, LLP in Washington, D.C., focusing on mergers, acquisitions, public securities offerings and corporate governance matters. From 1989 to 2002, Mr. Ferola worked in executive management roles for an American Stock Exchange listed company, most recently serving as Vice President—Administration and Corporate Secretary, overseeing the company’s administrative functions, legal matters and investor relations. Mr. Ferola earned a Bachelor of Science and Juris Doctor degree from Nova Southeastern University and a Master of Laws in Securities and Financial Regulation from Georgetown University Law Center. Mr. Ferola has authored numerous articles on corporate and securities laws, with a particular focus on audit committees and regulations implemented in the wake of the Sarbanes-Oxley Act. Mr. Ferola also serves as a FINRA arbitrator and a panelist on the NASDAQ Listing Qualifications Panel.
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Corporate Governance
The Company’s Board of Directors is classified into three classes of directors, with one class of directors being elected at each annual meeting of stockholders of the Company to serve for a term of three years or until the earlier of: (i) expiration of the term of their class of directors; or (ii) until their successors are elected and take office. The Bylaws of the Company provide that the Board will determine the number of directors to serve on the Board. The number of authorized directors of the Company as of March 1, 2023 is eight, with eight persons currently serving as directors (three Class II directors, two Class I directors and two Class III directors). There are no family relationships among our directors.
Our Board held 8 meetings during 2022. All directors attended at least 75% of all meetings of the Board and Board committees on which they served during 2022. We do not have a formal policy requiring directors to attend annual meetings of stockholders. However, all of our directors attended our 2022 annual meeting and we anticipate that all of continuing directors will attend the 2023 annual meeting.
Our Board of Directors currently has three standing committees: (i) an Audit Committee, (ii) a Compensation Committee, and (iii) a Corporate Governance and Nominating Committee. Each of these Board committees are described below. Members of these committees are elected annually by the Board. The charters of each committee are each available on the investor relations section of our website at www.xxiicentury.com. In addition, we have a Scientific Advisory Board which is chaired by Michael Koganov.
Audit Committee
MEMBERS
KEY RESPONSIBILITIES
Nora B. Sullivan*, Chair
Anthony Johnson
Richard M. Sanders
Dr. Michael Koganov
The Board has determined that each member of the audit committee is independent as defined under the applicable listing standards of the Nasdaq Stock Market and Rule 10A-3 under the Securities Exchange Act of 1934, as amended.
◾
Assists the Board in monitoring the integrity of financial statements and our compliance with legal and regulatory requirements;
◾
Reviews the independence and performance of our internal and external auditors;
◾
Has the ultimate authority and responsibility to select, evaluate, terminate and replace our independent registered public accounting firm;
◾
Has oversight of the Company’s policies with respect to risk assessment and risk management; and
◾
Approves the Audit Committee Report. The report further details the Audit Committee’s responsibilities.
*Audit Committee Financial Expert: Our Board has determined that Ms. Sullivan qualifies as an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission. Furthermore, all members of the Audit Committee meet the financial literacy requirements of the Nasdaq Stock Market and no members of the Audit Committee serves on the Audit Committee of more than three public companies.
The Committee met
4 times in 2022
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Compensation Committee
MEMBERS
KEY RESPONSIBILITIES
Richard M. Sanders, Chair
Nora B. Sullivan
Dr. Michael Koganov
Lucille Salhany
The Board has determined that each member of the Compensation Committee is independent within the meaning of the Company’s independence standards and applicable listing standards of the Nasdaq Stock Market.
◾
Establishes and regularly reviews our compensation and benefits philosophy and program in a manner consistent with corporate financial goals and objectives;
◾
Approves compensation arrangements for senior management, including annual incentive and long-term compensation;
◾
Administers grants under our equity incentive plans;
◾
Evaluates our CEO’s performance; and
◾
Reviews leadership development and succession planning.
The Committee met
7 times in 2022
Corporate Governance and Nominating Committee
MEMBERS
KEY RESPONSIBILITIES
Anthony Johnson, Chair
Nora B. Sullivan
Lucille Salhany
The Board has determined that each member of the Corporate Governance and Nominating Committee is independent within the meaning of the Company’s independence standards and applicable listing standards of the Nasdaq Stock Market.
◾
Assists our Board in establishing criteria and qualifications for potential Board members;
◾
Identifies high quality individuals who have the core competencies, characteristics and experience to become members of our Board;
◾
Establishes corporate governance practices in compliance with applicable regulatory requirements and consistent with the highest standards, and recommends to the Board the corporate governance guidelines applicable to us;
◾
Leads the Board in its annual review of the Board’s performance;
◾
Recommends nominees for each committee of the Board; and
◾
Oversees the Company’s Environmental Social and Governance (“ESG”) policies and practices.
The Committee met
6 times in 2022
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Scientific Advisory Board
MEMBERS
KEY RESPONSIBILITIES
Dr. Michael Koganov, Chair
James A. Mish
Anthony Johnson
Provides advice and recommendations to the Board regarding :
◾
Company scientific research, technology and innovation strategies;
◾
opportunities including potential partnerships and M&A; and
◾
emerging science and technology issues and trends.
The Scientific Advisory Board met 1 time in 2022
Director Nominee Selection Process
Our Corporate Governance and Nominating Committee evaluates the specific personal and professional attributes of each director candidate versus those of existing Board members to ensure diversity of competencies, experience, personal history and background, thought, skills and expertise across the full Board. In the evaluation of director candidates, our Corporate Governance and Nominating Committee gives consideration to diversity in terms of gender, ethnic background, age and other similar attributes that could contribute to Board perspective and effectiveness. The Corporate Governance and Nominating Committee also assesses diversity through its annual assessment of Board structure and composition and annual Board and committee performance self-assessment process. We believe that fostering Board diversity best serves the needs of the Company and the interests of its stockholders, and it is one of the many factors considered when identifying individuals for Board membership. We believe that diversity with respect to gender, ethnicity, tenure, experience and expertise is important to provide both fresh perspectives and deep experience and knowledge of the Company.
When vacancies develop, the Corporate Governance and Nominating Committee solicits input regarding potential new candidates from a variety of sources, including existing directors and senior management. From time to time, we have used an executive search firm in search of candidates that have diversity in experience, skills and perspective. Through these and other means, the Board has continued to refresh the Board by adding directors who bring a sufficient range of different perspectives, generate appropriate challenge and discussion, and fulfill its oversight responsibilities to foster significant value creation for our stockholders. The Committee evaluates potential candidates based on their background, experiences and qualifications and also arranges personal interviews of qualified candidates by one or more committee members, other Board members and senior management.
Stockholder Recommendations for Potential Director Nominees
Nominations of persons for election to the Board at the annual meeting may also be made by any stockholder entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in our bylaws. Such nominations by any stockholder shall be made pursuant to timely notice in writing to the Secretary. To be timely, a stockholder’s notice shall be delivered to the Secretary at our principal executive offices not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made.
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Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act, requires our executive officers, directors, and “beneficial owners” of more than 10% of our common stock to file stock ownership reports and reports of changes in ownership with the SEC. Based on a review of those reports and written representations from the reporting persons, we believe that during 2022, all transactions were reported on a timely basis except for a late Form 3 by R. Hugh Kinsman reporting his initial ownership and a late Form 4 (filed on Form 5) by James A. Mish reporting the withholding of shares to satisfy tax liability upon the vesting of restricted stock.
Code of Ethics
We adopted a Code of Ethics that applies to all our employees. A copy of our Code of Ethics is available on our website at http://www.xxiicentury.com and will be provided to any person requesting same without charge. To request a copy of our Code of Ethics, please make a written request to our General Counsel, c/o 22nd Century Group, Inc., 500 Seneca Street, Suite 507, Buffalo, New York 14204. Future material amendments or waivers relating to the Code of Ethics will be disclosed on our website within four business days following the date of such amendment or waiver.
Item 11. Executive Compensation.
Executive Compensation
Compensation Discussion and Analysis
This compensation discussion and analysis describes the material elements of compensation awarded to, earned by, or paid to each of our named executive officers, whom we refer to as our “NEOs,” during 2022 and describes our policies and decisions made with respect to the information contained in the following tables, related footnotes and narrative for 2022. The NEOs are identified below under “Our Named Executive Officers.” In this compensation discussion and analysis, we also describe various actions regarding NEO compensation taken before or after 2022 when we believe it enhances the understanding of our executive compensation program.
Our Named Executive Officers
James A. Mish
Chief Executive Officer
R. Hugh Kinsman
Chief Financial Officer
John J. Miller
President of Tobacco Division
John Franzino
Chief Administrative Officer
2022 Financial Highlights
2022 was a strong year for us, as we shifted our business to commercial activity, positioned ourselves to meet and out-perform our long-term strategic financial metrics, and accomplished acquisitions intended to strengthen our position in key markets. In April, we commenced a successful Chicago-area pilot program for our VLN ® reduced nicotine content tobacco cigarettes with our partner, Circle K, after which we leveraged the pilot results into additional consumer market testing, allowing us to expand distribution to both Illinois and Colorado. In addition to this, our success in those markets has led to the announcement of plans for our launch in Arizona, New Mexico and Utah. We acquired GVB Biopharma in May 2022, which we believe to be the North American leader in cannabinoid supply by volume, commencing revenue
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operations in our hemp/cannabis business unit and adding a comprehensive CDMO capability. This acquisition expanded our vertically integrated supply chain capabilities from receptor science to finished white label goods.
We remain confident in the prospect of a robust financial performance in 2023, and intend to achieve such goals, in part, by accelerating the VLN ® launch with key national distribution agreements, such that we anticipate selling VLN ® in up to eighteen (18) states, representing in excess of 50% of the addressable combustible tobacco cigarette market in the U.S. prior to year-end 2023. We also anticipate scaling GVB revenue and gross margin to achieve cash-positive operating results in 2023, as well as the ability to expand capital to fuel growth through our new $21.1M lending facility.
Our Executive Compensation Philosophy and Design
Our executive compensation programs are driven by a pay-for-performance philosophy that is directly linked to our business strategies and company-wide goals. Prior to the FDA’s authorization of the marketing of our VLN ® King and VLN ® Menthol King reduced nicotine content cigarettes as modified risk tobacco products (MRTPs) in December 2021 and our May 2022 acquisition of GVB Biopharma, our business had historically been focused on developing products through research and development and securing regulatory approval to market and sell such products. While we had limited revenues through the sale of SPECTRUM ® research cigarettes and contract manufacturing of cigarettes and filtered cigars, we believe the primary driver of stockholder value was derived from the success of our rollout of our new our VLN ® King and VLN ® Menthol King reduced nicotine content cigarettes as well as the development of disruptive, plant-based solutions for the life science, consumer product, and pharmaceutical markets that we license to third parties and/or manufacture and sell. Accordingly, our compensation program has historically focused less on objective financial metrics typically applicable to other companies. As our Company transitions from a research and development based platform to a revenue generating business model, the Compensation Committee, after thoughtful deliberations, intends to update the compensation program for 2023 for further alignment with long-term interests of stockholders. Specifically, metrics to assess performance of the named executive officers will be based on more objective quantitative metrics including but not limited to revenue and other financial metrics.
Our Pay for Performance Philosophy
Our Compensation Committee seeks to attract and retain executive officers who have the experience, temperament, talents and convictions to drive our future success. Our compensation programs are designed to:
● motivate our executives by providing compensation that is directly linked to both our short- and long-term performance;
● tightly align their incentives and economic interests with our stockholders to build long-term stockholder value by delivering a substantial portion of our executive officer’s compensation through equity awards; and
● ensure that our executive compensation program is designed and administered in a manner that appropriately manages risk to safeguard the interests of our stockholders’, as well as our employees’.
We have designed our executive compensation program with specific features to help achieve these goals and to promote related objectives that are important to our long-term success.
Roles and Responsibilities
Our Compensation Committee has primary responsibility for, among other things, determining our compensation philosophy, evaluating the performance of our executive officers, setting the compensation and other benefits of our executive officers, overseeing the Company’s response to the outcome of the advisory votes of stockholders on executive compensation (as discussed below), assessing the relative enterprise risk of our compensation program and administering our incentive compensation plans.
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Our Board, our Compensation Committee and our CEO each play a role in setting the compensation of our NEOs. Our Board appoints the members of our Compensation Committee and delegates to the Compensation Committee the direct responsibility for overseeing the design and administration of our executive compensation program. Our Board and our Compensation Committee value the opinions of our stockholders and are committed to ongoing engagement with our stockholders on executive compensation practices. As discussed below, the Compensation Committee specifically considers the results from the annual stockholder advisory vote on executive compensation in making compensation decisions.
In February 2022, our Compensation Committee engaged the governance consulting firm of Morrow Sodali to assist with Say-on-Pay and the election of new directors.
In August 2022, our Compensation Committee engaged the compensation consulting firm of Pay Governance to assist the Committee in developing a peer group to benchmark executive compensation against other biotechnology, pharmaceutical and life science companies with similar revenues and market capitalizations. Pay Governance then reviewed our current executive compensation program and made recommendations with respect to future compensation decisions.
To assure independence, the Compensation Committee pre-approves all other work unrelated to executive compensation proposed to be provided by any compensation consultant it engages and considers all factors relevant to their independence from management, including but not limited to the following factors:
● The provision of other services that the consultant provides to us;
● The amount of fees received from us as a percentage of the consultant’s total revenue;
● The consultant’s policies and procedures designed to prevent conflicts of interest;
● Business or personal relationships of the consultant with our Compensation Committee members;
● The amount of our stock owned by the consultant; and
● Business or personal relationships of the consultant with our executive officers.
Our Say-on-Pay Vote; Stockholder Outreach
The Board and Compensation Committee are committed to soliciting feedback to inform the Board’s decisions and guide our compensation program. Our stockholder outreach in 2021, 2022 and into 2023 provided the Board with valuable insights into our stockholders’ perspectives on our executive compensation. We are committed to sound compensation practices and will continue to enhance our compensation program as a result of stockholder input.
We have followed a consistent approach to the design of our executive compensation program for many years. The history of our Say-on-Pay results before 2020 generally demonstrated stockholder support for our program over several years. At our 2022 Annual Meeting of Stockholders, approximately 10.5% of our outstanding shares voted against our 2022 executive compensation resolution. As noted below, we conducted a Board-driven stockholder outreach and engaged with our top holders to better understand their concerns.
Following the 2022 Annual Meeting of Stockholders, the Compensation Committee commenced a stockholder outreach program. This outreach focused on better understanding the perspectives of our stockholders with regard to our executive compensation program structures and best practices in aligning executive compensation to the interests of our stockholders.
The executive compensation outreach initiative is in addition to our regular ongoing stockholder engagement. As part of our ongoing outreach efforts to inform our corporate policies, the Company proactively reached out to filing institutional stockholders to discuss the Company’s executive compensation philosophy, goals and plans and to obtain an understanding of our stockholders’ concerns in advance of this filing. Approximately 19.4% of the Company’s outstanding shares of common stock were owned by filing institutional stockholders.
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By The Numbers: Stockholder Engagement
We contacted 15 of our top institutional stockholders, representing approximately 10% of our total shares outstanding and approximately 53% of our shares held by institutional stockholders, with invitations to meet with our management and directors. These institutional stockholders represent the majority of our institutional investors at this time.
Our Independent Board Chair and Chair of our Compensation Committee participated in all of the stockholder engagement meetings.
Feedback from Stockholder Engagement
We heard a range of perspectives on our executive compensation program from stockholders during our outreach, all of which were considered by our Compensation Committee and the Board.
Our stockholders expressed a continuing desire to understand the specifics behind our executive compensation plan design including, rationale, key performance indicators, and qualitative metrics that align to both the short, mid and long-term strategy of the Company.
What We Heard
How We Are Responding
Desire to see expanded disclosure of our compensation philosophy, design and rationale.
à
We have greatly expanded our Compensation Discussion and Analysis to provide more specific details into our compensation programs and philosophy and the rationale behind our compensation decisions.
Our work to solicit stockholder feedback into our executive compensation program continues into the future.
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Following each annual meeting of stockholders, our Compensation Committee will review the Say-on-Pay results and engage with our stockholders to solicit feedback on our compensation program. Our Compensation Committee will use the stockholder feedback to inform and guide its compensation decisions for the following year. Our annual compensation cycle is generally as follows:
Elements of Executive Compensation
Our compensation program consists of the following three primary elements:
(1) Base Salary. We provide a base salary for each NEO based on their job description and scope of responsibilities of that position. We target the base salary for each NEO at the 50 th percentile range of our peer group (discussed below) for each position. Our philosophy is to have a significant portion of each NEO’s total cash compensation “at-risk.”
(2) Annual Cash Bonus Opportunity . The annual cash bonus is our primary short-term performance incentive. Our NEO target bonus awards range from 75% to 150% of their base pay, representing the “at risk” portion of the NEO’s total cash compensation. The Compensation Committee aims to set performance goals for cash bonuses that align pay with performance. During 2022 and in prior years, our Compensation Committee prioritized the accomplishment of critical strategic and operational milestones. With the Company entering into its revenue phase with the roll-out of its VLN cigarettes and acquisition of GVB Biopharma, the Compensation Committee expects to focus performance measures in 2023 and in the future on more objective quantitative metrics including but not limited to revenue and other financial metrics.
(3) Long-Term Incentive Awards . Long-term incentive awards are our primary retention tool and serve to provide for the continuity of key executives with incentives that align our executives’ interests with those of our stockholders’. For 2021 and 2022, these long-term incentive awards were generally comprised of restricted stock units with multi-year vesting, subject to continued service with us. Beginning in 2023, we expect to enhance our Long-Term Incentive Program by introducing performance-based equity awards to the award mix.
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Peer Group
We endeavor to set total compensation, which consists of base salary, annual cash bonuses and the expected value of long-term incentives, for target performance levels in range of the expected median of peer companies, depending on various factors including the experience level of the individual executive and competitive market conditions. We use our peer group median compensation values to help determine the optimal compensation mix and as a general guide to determine salary recommendations, target annual cash bonus opportunity, and target annual long-term incentive value for each executive position. Compensation for top executives can be highly variable due to heavy weighting toward incentive compensation rather than fixed components.
With the assistance of Pay Governance, during late 2022, our Compensation Committee established a peer group consisting primarily of similarly situated biotechnology, pharmaceutical and life science companies with revenues and a market capitalization similar to ours. The peer group established consists of the following companies:
Achieve Life Sciences
AquaBounty Technologies
Avid Bioservices
Benson Hill
Charlotte’s Web Holdings
ChromaDex Corporation
Cronos Group
GreenLight Biosciences
Hawkins
Jushi Holdings
Laird Superfood
Landec Corporation
Pear Therapeutics
PRECIGEN
Societal CDMO
The Valens Company
TILT Holdings
Village Farms International
Zynerba Pharmaceuticals
Base Salary
We pay our NEOs a base salary to compensate them for services rendered and to provide them with a steady source of income for living expenses throughout the year. We have historically determined the base salary of each NEO based on the job description and scope of responsibilities of that position and assign each position a target annual salary equal to the base salary in the 50 th percentile range of the Survey Group. After a base salary is set initially, we have historically provided a base salary increase of 0% - 5% annually depending on the performance of the NEO during the prior year and taking into account any other factors, such as recent salary increases, bonuses or other compensation. Every two to three years, we generally reviewed each NEO’s salary against a peer group of similarly situated companies and made salary increases to the extent necessary to maintain a base salary in the 50 th percentile range of such group. In 2023 and into the future, we expect to target annual salary equal to the base salary in the 50th percentile range of the peer group described above.
For 2022, we took the following actions with respect to the base salaries of our NEOs:
● James Mish’s base salary increased from $450,000 to $472,500, a 4% increase.
● John Franzino’s base salary increased from $315,000 to $330,750, a 5% increase.
● John Miller joined the Company in 2022 with a base salary of $425,000.
● R. Hugh Kinsman joined the Company in 2022 with a base salary of $290,000.
In February 2023, our Compensation Committee reviewed the 2022 base salaries our NEOs in connection with the establishment of the new peer group. Other than Mr. Kinsman, no other NEO received a base salary increase because our NEOs base salaries were generally within the 50th percentile range of the peer group described above for their respective positions. Hugh Kinsman’s salary was increased based on his individual performance and in order to bring his salary closer to the 50 th percentile range for CFO’s in the established peer group. The base salaries of each of our NEOs for 2023 is as follows:
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Name
2023 Base Salary
Percentage Increase Over
2022 Base Salary
James A. Mish
$486,675
3%
John Franzino
$330,750
0%
John Miller
$425,000
0%
R. Hugh Kinsman
$370,000
28%
2022 Annual Cash Bonus Opportunity
In general, our NEO target bonus awards range from 75% - 150% of an NEOs base salary depending on their position. The Compensation Committee aims to set performance goals for cash bonuses that align pay with performance. A number of factors are considered when calibrating goals, including the Company’s business strategies and company-wide goals. Prior to entering into its revenue phase, our Compensation Committee believed that the primary driver of stockholder value was derived from the development of disruptive, plant-based solutions for the life science, consumer product, and pharmaceutical markets that we license to third parties and/or manufacture and sell. Accordingly, our compensation program has historically focused less on objective metrics typically applicable to other companies. In 2023, with the Company entering into its revenue phase with the roll-out of its VLN ® cigarettes and acquisition of GVB Biopharma, the Compensation Committee intends to introduce quantitative performance measures such as revenue and other financial metrics for a direct link to executive pay.
For 2022, we did not weight individual goals or achievements in setting our potential cash bonus awards because our Compensation Committee desired to maintain flexibility in awarding cash bonuses to our NEOs for their performance during the year and to provide flexibility to our NEOs to advance our strategic position or goals as a company in one or more areas opportunistically. In addition, our cash bonus awards included an element of discretion as relegated to the Compensation Committee in order to compensate NEOs that performed extraordinarily well and incentivize and motivate our NEOs.
For 2022, our Compensation Committee challenged our NEOs with a number of strategic goals and objectives for 2022, including but not limited to:
● Launch of VLN ® reduced nicotine content cigarettes internationally;
● Launch of VLN ® reduced nicotine content cigarettes nationally following the successful pilot launch;
● Increase gross profit for cigar and cigarette contract manufacturing operations by $1,000,000;
● Advance VLN ® through securing strategic partnerships;
● Increase regulatory and legislative advocacy for VLN ® , as well as within the hemp and cannabis business units;
● Develop intellectual property for next generation VLN ® blends;
● Develop merger & acquisition strategy and business plan for hemp cannabis division;
● Develop innovative intellectual property for hemp cannabis, tobacco and hops products;
● Increase cash position though capital markets activities;
● Enhance operational finance process/reports;
● Improve human resources and IT functions and processes; and
● Establish compensation benchmarking.
At the end of the year, the Compensation Committee reviews each NEO’s individual performance objectives and goals against their performance during the year, which performance is rated by both the individual NEO through a self-assessment as well as a review of performance by the CEO (for NEOs other than himself) and the Compensation Committee. The target cash bonus amounts (and percentage of base salary) and the actual cash bonuses earned by our NEOs for 2022 are as follows:
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Name
Target Cash Bonus (and percentage of Base Salary)
Actual Cash Bonus Earned
Bonus Earned as a % of Target
James A. Mish
$708,750 (150%)
$481,950
68%
John Franzino
$248,062 (75%)
$238,140
96%
R. Hugh Kinsman
$217,500 (75%)
$90,575
50%
John Miller
$318,750 (75%)
$160,000
50%
2022 Long-Term Incentive Program Awards
Our Compensation Committee strongly believes that using equity awards with multi-year vesting periods reinforces the alignment of the interests of executives with those of stockholders and assists us to retain our executives. We maintain our omnibus incentive plan for the purpose of granting various types of equity awards, including restricted stock units, to provide incentives for management to increase stockholder value. In addition, the multi-year nature of the vesting periods encourages executives to stay with the Company, which is important to us in light of the competitive labor market for talented executives.
Our Compensation Committee has authority to determine eligible participants, the types of awards and the terms and conditions of awards. As part of their total compensation package, each NEO is assigned an annual dollar value target for these long-term incentive plan awards that is adjusted up or down depending on the individual’s and the Company’s actual performance during the prior year. For 2021 and 2022, NEOs were generally awarded restricted stock units with a three-year vesting period, subject to continued service with us. The number of restricted stock units for each award is determined by converting the dollar value into a number of shares based on our average closing stock price during the six months preceding the award date. The Compensation Committee expects to continue this practice in 2023.
During 2022, Mr. Miller received an award of 750,000 performance shares, with one-third of such shares vesting annually in 2023, 2024 and 2025 provided that our tobacco business plan revenue objectives and other performance requirements are satisfied. The performance shares were issued to incentivize Mr. Miller to successfully roll-out our VLN ® pilot program. For 2022, our Compensation Committee determined that Mr. Miller earned 150,000 of the initial one-third tranche of such shares in light of his performance in consulting and then ultimately leading our VLN ® roll-out strategy and business plan. In addition, during 2022, Mr. Mish received a special equity award of 950,000 restricted stock units vesting annually over a two-year period plus his normal three-year vesting award. The special equity award was issued to Mr. Mish as a catch-up issuance from 2020 and 2021.
The long-term incentive plan awards are used to motivate and retain employees as well as promote employee stock ownership. We do not issue the shares until the vesting conditions have been satisfied. We currently do not use stock options as part of our compensation package. Since we grant fewer shares with these types of awards than we would have granted in the form of options, stock grants help us manage dilution that we would otherwise experience in granting options.
As we continue to grow, our Compensation Committee is committed to exploring ways to further and more directly tie future long-term incentive plan award vesting to performance and the achievement of future company and individual goals.
For 2022, we awarded our NEOs the following RSUs:
Name
RSU Grant Value
Number of Shares
James A. Mish (1)
$3,025,989
1,381,730
John Franzino
$264,736
120,884
John Miller (2)
$982,500
750,000 (2)
R. Hugh Kinsman (3)
N/A
N/A
(1) Comprises a one-time RSU grant of 950,000 vesting 50% over two (2) years and an annual grant of 431,730 vesting over three (3) years.
(2) Represents performance shares, as discussed above.
(3) Due to the timing of his appointment, Mr. Kinsman was not awarded a long-term equity incentive award during 2022.
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S UMMARY COMPENSATION TABLE FOR 2022
The following table summarizes the compensation of our NEOs for 2022. The amounts reported for stock awards may not represent the amounts that the NEOs will actually realize from the awards. Whether, and to what extent, a named executive officer realizes value will depend on our performance, stock price and continued employment.
Option
Stock
All Other
Awards
Awards
Compensation
Name and Principal Position
Year
Salary
Bonus
(1)
(2)
(3)
Total
James A. Mish
2022
$
470,976
$
481,950
$
—
$
3,025,989
$
32,179
$
4,011,094
Chief Executive Officer
2021
$
452,763
$
608,000
$
—
$
1,440,000
$
33,721
$
2,534,484
2020
$
241,093
$
675,000
$
—
$
118,230
$
8,760
$
1,043,083
R. Hugh Kinsman (4)
2022
$
160,033
$
90,575
$
—
$
—
$
4,646
$
255,254
Chief Financial Officer
John J. Miller (5)
2022
$
277,836
$
160000
$
—
$
982,500
$
19,625
$
1,439,961
President of Tobacco
John Franzino
2022
$
294,606
$
238,140
$
—
$
264,736
$
30,323
$
824,805
Chief Administrative Officer
2021
$
308,849
$
200,813
$
—
$
576,000
$
26,179
$
1,111,841
2020
$
158,213
$
125,000
$
—
$
142,005
$
10,030
$
435,248
Michael J. Zercher
2022
$
291,923
$
—
$
—
$
416,525
$
726,962
$
1,479,909
Former President and Chief Operating Officer
2021
$
368,060
$
638,100
$
192,950
$
1,440,000
$
33,721
$
2,672,831
2020
$
366,431
$
366,100
$
—
$
447,831
$
31,970
$
1,212,332
Richard Fitzgerald
2022
$
159,892
$
—
$
—
$
273,141
$
4,473
$
437,505
Former Chief Financial Officer
2021
$
43,860
$
75,000
$
—
$
—
$
807
$
119,667
(1) Represents the grant date fair value computed in accordance with FASB ASC 718. The assumptions used for the option awards are set forth in Note 15 “Equity Based Compensation” of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
(2) The fair value of each restricted stock unit is based on the stock price of the Company’s common stock on the grant date of the award.
(3) All Other Compensation consists of the following:
Employer
Contributions
to Company
All Other
Fringe
401(k)
Compensation
Name
Year
Benefits *
Severance
Plan
Total
James A. Mish
2022
$
23,029
$
—
$
9,150
$
32,179
R. Hugh Kinsman
2022
$
3,977
$
—
$
669
$
4,646
John J. Miller
2022
$
19,625
$
—
$
—
$
19,625
John Franzino
2022
$
21,173
$
—
$
9,150
$
30,323
Michael J. Zercher
2022
$
21,150
$
691,662
$
9,150
$
726,962
Richard Fitzgerald
2022
$
4,473
$
—
$
—
$
4,473
* Includes Company paid premiums for health insurance, dental insurance, group-term life insurance, and long-term disability insurance.
(4) Mr. Kinsman joined the Company in May 2022.
(5) Mr. Miller joined the Company in May 2022.
CEO Pay Ratio
We have estimated the ratio between our 2022 Chief Executive Officer’s total compensation and the median annual total compensation of all employees (except the Chief Executive Officer). In searching for the median employee we considered taxable compensation totals in 2022. We identified the “Median Employee” based on the taxable compensation of all active full-time and part-time employees employed by us on December 31, 2022 (annualizing salaries for hires made mid-year), then we calculated the Median Employee’s compensation under the Summary Compensation Table rules. Our Chief Executive Officer had annual total compensation in 2022 of $4,011,094 and our Median Employee had annual total compensation of $55,150. Therefore, we estimate that our Chief Executive Officer’s annual total compensation in 2022 is 73 times that of the median of the annual total compensation of all of our employees.
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Grants of Plan-Based Awards
GRANTS OF PLAN BASED AWARDS DURING 2022
As described above in the Compensation Discussion and Analysis, we granted restricted stock units to our NEOs in 2022. The following table sets forth information regarding all such awards:
Grant Date
Restricted
Stock
Fair Value
Stock Unit
Option
Exercise
Restricted
Awards:
Awards:
Price of
Stock Units,
Number of
Number
Option
Stock Awards
Date of Board
Shares of
of Shares
Awards
and Option
Name
Grant Date
Action
Stock (#)
(#)
($)
Awards ($) (2)
James A. Mish
3/21/2021
3/19/2022
431,730
(1)
—
—
$
945,489
3/21/2022
3/21/2022
950,000
(2)
—
—
$
2,080,500
R. Hugh Kinsman
—
—
—
—
—
$
—
John J. Miller
10/31/2022
10/31/2022
750,000
(3)
—
—
$
982,500
John Franzino
3/21/2022
3/21/2022
120,884
(1)
—
—
$
264,736
Richard Fitzgerald
3/21/2022
3/21/2022
124,722
(1)
—
—
$
273,141
Michael J. Zercher
3/21/2022
3/21/2022
210,742
(1)
—
—
$
461,525
(1) Represents RSUs which vest in equal increments over three years on March 21, 2023, 2024 and 2025, subject to continued service.
(2) Represents RSUs which vest in equal increments over two years on March 21, 2023 and 2024, subject to continued service.
(3) Represent an award of 750,000 performance shares, with one-third of such shares vesting on each of May 1, 2023, 2024 and 2025 provided that our tobacco business plan revenue objectives and other performance requirements are satisfied at such times
Outstanding Equity Awards
The following table sets forth information about outstanding equity awards held on December 31, 2022 by our NEOs.
Equity Incentive
Plan Awards:
Market or
Payout Value of
Number of
Number of
Unearned
Securities
Securities
Equity Incentive Plan
Shares,
Underlying
Underlying
Awards: Number of
Restricted Stock
Unexercised
Unexercised
Unearned Shares,
Units or Other
Options
Options
Option
Option
Restricted Stock Units or
Rights That
Exercisable
Unexercisable
Exercise
Expiration
Other Rights That Have
Have Not Vested
Name
(#)
(#)
Price
Date
Not Vested (#)
($) (5)
James A. Mish
—
—
—
—
431,730
(1)
$
397,623
—
—
—
—
950,000
(2)
$
874,950
—
—
—
—
300,000
(3)
$
276,300
R. Hugh Kinsman
—
—
—
—
—
$
—
John J. Miller
—
—
—
—
750,000
(4)
$
690,750
John Franzino
—
—
—
—
120,884
(1)
$
111,334
—
—
—
—
120,000
(3)
$
110,520
Richard Fitzgerald
—
—
—
—
—
$
—
Michael J. Zercher
650,000
—
$
1.07
9/30/2024
—
$
—
68,000
—
$
1.39
9/30/2024
—
$
—
77,875
—
$
2.76
9/30/2024
—
$
—
85,000
—
$
3.2
9/30/2024
—
$
—
(1) Represents RSUs which vest in equal increments over three years on March 21, 2023, 2024 and 2025.
(2) Represents RSUs which vest in equal increments over two years on March 21, 2023 and 2024.
(3) Represents RSUs which vest in equal increments over two years on March 19, 2023 and 2024.
(4) Represents performance shares, with one-third of such shares vesting on each of May 1, 2023, 2024 and 2025 provided that our tobacco business plan revenue objectives and other performance requirements are satisfied at such times.
(5) The amounts in this column are based on the closing stock price of the Company’s common stock on December 31, 2022. These amounts do not reflect the actual amounts that may be realized.
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Option Exercises and Stock Vested in 2022
Option Awards
Stock Awards
Number of
Number of
Shares
Value
Shares
Value
Acquired on
Realized on
Acquired on
Realized on
Exercise
Exercise
Vesting
Vesting
Name
(#)
($)
(#)
($) (1)
James A. Mish
—
$
—
150,000
$
352,500
R. Hugh Kinsman
—
$
—
—
$
—
John J. Miller
—
$
—
—
$
—
John Franzino
—
$
—
135,000
$
281,750
Richard Fitzgerald
—
$
—
—
$
—
Michael J. Zercher
—
$
—
906,802
$
1,342,044
(1) The value realized on vesting is based on the closing stock price of the Company’s common stock on the date of vesting or date of exercise. The amount does not reflect the actual amount that may be realized.
Pay for Performance
Value of Initial
Average
Fixed $100
Summary
Average
Investment
Summary
Compensation
Compensation
Based on
Compensation
Compensation
Table Total
Actually Paid
Total
Table Total for
Actually Paid to
for Non-PEO-
to Non-PEO-
Shareholder
Net Income
Year
PEO (1)
PEO (2)
NEOs (3)
NEOs (2)
Return
(Loss)
2022
$
4,011,094
$
1,495,978
$
888,087
$
411,232
$
84
$
(59,801)
2021
$
2,534,464
$
2,829,984
$
1,301,446
$
895,493
$
281
$
(32,609)
(1) Consists of compensation payable to our CEO, James A. Mish.
(2) Total summary compensation amount is adjusted as (i) less total equity compensation, (ii) plus the fair value of unvested shares as of December 31, 2022 of current year equity awards, (iii) plus or minus the change in fair value of unvested shares as of December 31, 2022 of prior year equity awards, (iv) plus or minus the change in fair value of vested shares during 2022 of prior year equity awards as of the vesting date, (v) plus the fair value of equity awards granted and vested in the current year, as of the vesting date.
(3) For 2022, consists of compensation payable to John Franzino, Michael J. Zercher, R. Hugh Kinsman, John J. Miller and Richard Fitzgerald. For 2021, consists of compensation payable to Richard Fitzgerald, John Franzino and Michael J. Zercher.
Employment Agreements with Named Executive Officers
We have entered into employment agreements with each of our NEOs as follows:
James A. Mish. Pursuant to the employment agreement entered into between James A. Mish and the Company on May 22, 2020, Mr. Mish will earn an initial base salary of $450,000 (which has been increased to $491,400) and shall be eligible for future cash bonuses and awards of performance units as a percentage of base salary based on the achievement of performance targets to be established by the Company. As a one-time inducement, the Company agreed to an award of 150,000 RSUs, vesting on the one-year anniversary of the date of grant, subject to continued service.
If Mr. Mish’s employment is terminated by the Company without Cause or by such executive for Good Reason (as such terms are defined in the employment agreement), then he will be entitled to a severance benefit in the form of (i) a continuation of his then-base salary for a period ending on the earlier of 12 months or the remaining term of the employment agreement (plus continuing health care coverage during such period) and (ii) the payment of a pro-rated bonus award.
R. Hugh Kinsman. Pursuant to the employment agreement entered into between R. High Kinsman and the Company on June 15, 2022, Mr. Kinsman will earn an initial base salary of $290,000 (which has been increased to $301,600) and he shall be eligible for future cash bonuses and awards of performance units as a percentage of base salary based on the achievement of performance targets to be established by the Company. If Mr. Kinsman’s employment is terminated by the Company without Cause (as defined in the employment agreement), then he will be entitled to a severance benefit in the
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form of a continuation of his then-base salary for a period of 12 months (plus continuing health care coverage during such period).
John Franzino. Pursuant to the employment agreement entered into between John Franzino and the Company dated April 8, 2020, Mr. Franzino earned an initial base salary of $250,000 (which has been increased to $343,980) and shall be eligible for future cash bonuses and equity awards. As a one-time inducement, the Company agreed to an award of 100,000 RSUs, with 50,000 RSUs vesting on the one-year anniversary of the date of grant and 50,000 RSUs vesting on the two-year anniversary of the grant date, subject to continued service.
If Mr. Franzino’s employment is terminated by the Company without Cause or by such executive for Good Reason (as such terms are defined in the employment agreement), then he will be entitled to a severance benefit in the form of (i) a continuation of his then-base salary for a period of 12 months and (ii) the payment of any earned but unpaid bonus award.
The employment agreement of Mr. Franzino also provides that in the event of a change in control (as defined in his employment agreement) of our Company, then during the three (3)-year period following such change in control if certain triggering events occur, such as if he is terminated other than for Cause (as defined in his employment agreement), death or disability, or if his responsibilities are diminished after the change in control as compared to his responsibilities prior to the change in control, or if his base salary or benefits are reduced, or he is required to relocate more than twenty-five (25) miles from his then current place of employment, then in any such events he will have the option, exercisable within ninety (90) days of the occurrence of such an event, to resign his employment with us, in which case he will be entitled to receive: (a) his base salary for twelve (12) months thereafter; and (b) the immediate vesting of all options and/or restricted stock grants previously granted or to be granted to him.
John Miller . We entered into an employment agreement with Mr. Miller for an initial term until May 2025 pursuant to which he earns an annual base salary of approximately $425,000 and previously received an award of 750,000 performance shares, with one-third of such shares vesting on each of May 1, 2023, 2024 and 2025 provided that the Company’s tobacco business plan revenue objectives and other performance requirements are satisfied at such times. The performance shares shall automatically vest upon the occurrence of change in control of the Company or similar event or in the event Mr. Miller terminates his employment for “Good Cause”; which means either an involuntary reduction in pay, change in reporting structure or a requirement to relocate.
Compensation on Termination of Employment
The following table illustrates the additional compensation that we estimate would be payable to each of our NEOs on termination of employment under each of the circumstances described above, assuming the termination occurred on December 31, 2022. The amounts shown are estimates and do not necessarily reflect the actual amounts that these individuals would receive on termination of employment.
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Estimated Additional Compensation Triggered by Termination of
Employment If Termination on the Last Business Day of 2022
Early
Vesting
of
Early
Fringe
Restricted
Vesting
Salary
Benefits
Stock
of Stock
Name
Multiple
Salary
(1)
Units (2)
Options
Total
Termination by the Company Without Cause or by the Executive for Good Reason
James A. Mish
1x
$
486,675
$
21,488
$
1,548,873
$
—
$
2,057,037
R. Hugh Kinsman
1x
$
370,000
$
21,367
$
—
$
—
$
391,367
John J. Miller
1x
$
425,000
$
21,488
$
690,750
$
—
$
1,137,238
John Franzino
1x
$
330,750
$
—
$
221,854
$
—
$
552,604
Death or Disability
James A. Mish
n/a
$
—
$
—
$
1,548,873
$
—
$
1,548,873
R. Hugh Kinsman
n/a
$
—
$
—
$
—
$
—
$
—
John J. Miller
n/a
$
—
$
—
$
690,750
$
—
$
690,750
John Franzino
n/a
$
—
$
—
$
221,854
$
—
$
221,854
Change of Control with Triggering Event
James A. Mish
1x
$
486,675
$
21,488
$
1,548,873
$
—
$
2,057,037
R. Hugh Kinsman
1x
$
370,000
$
21,367
$
—
$
—
$
391,367
John J. Miller
1x
$
425,000
$
21,488
$
690,750
$
—
$
1,137,238
John Franzino
1x
$
330,750
$
—
$
221,854
$
—
$
552,604
(1) Health and dental insurance payments and group-term life insurance and long-term disability insurance payments have been estimated based on current rates for a period of 12 months.
(2) The dollar amount is calculated based on the closing price of our common stock on December 31, 2022.
Compensation Committee Report
For the year ended December 31, 2022, the Compensation Committee reviewed and discussed the CD&A with our management. Based on this review and discussion, the Compensation Committee recommended to our Board of directors that the CD&A be included in this Annual Report on Form 10-K.
Richard M. Sanders, Chair
Anthony Johnson
Roger O’Brien
Nora B. Sullivan
Compensation Committee Interlocks and Insider Participation
During the last fiscal year, no member of the Compensation Committee had a relationship with us that required disclosure under Item 404 of Regulation S-K. During the past fiscal year, none of our executive officers served as a member of the Board of Directors or Compensation Committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who served as members of our Board of Directors or our Compensation Committee. None of the members of our Compensation Committee is an officer or employee of our Company, nor have they ever been an officer or employee of our Company.
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Director Compensation
Non-employee directors are compensated for their service on our Board as shown below. Directors who are employees of the Company receive no additional compensation for serving as directors. The Compensation Committee periodically reviews the compensation of our non-employee directors and considers market practices. In February 2021, the Compensation Committee retained Korn Ferry (“KF”) to conduct an independent assessment of our director compensation versus the competitive market and the “fit” of our compensation program to our pay philosophy. To establish the competitive market for directors, KF identified a comparator group of 17 publicly traded companies in the United States and Canada within the biotechnology and pharmaceuticals industries with median revenues of $95 million and median market capitalizations of $1.2 billion. Based on the KF review, the Compensation Committee recommended, and the Board approved, the following director compensation for 2022:
Annual cash retainer:
$ 75,000
Additional annual cash retainer for:
Chair of the Board
$ 50,000
Chair of a Board Committee
$ 20,000
Member of a Board Committee
$ 10,000
Annual RSU award value:
$ 135,000
During 2022, the Compensation Committee retained Pay Governance LLC (“Pay Governance”) to conduct an independent assessment of our director compensation versus a peer group that was developed (see “Compensation Discussion and Analysis – Peer Group” for a discussion of our peer group). Based on the Pay Governance review, the Compensation Committee approved maintaining the 2022 level of non-employee director compensation for 2023.
As with many small cap companies, our stock price has been volatile historically. For example, between January 1, 2019 and December 31, 2022, our stock price ranged from a low of $0.55 per share to a high of $6.07 per share. In order to eliminate some of the volatility from our stock price when making equity awards, in 2020 our Compensation Committee decided to implement a policy to determine the number of RSUs to issue for annual awards by dividing the annual RSU award value approved by the Compensation Committee ($135,000) with the average closing stock price over the six months prior to the date of the award. As a result of this policy, the grant date fair value of our RSU awards reported in our Director Compensation table below will vary (up or down) from the annual RSU award value approved by the Compensation Committee depending on the closing market price on the date of the award and the average market price over the prior six months. Our Compensation Committee expects to adhere to this policy for director RSU awards made during 2023 and will evaluate the policy annually.
NON-EMPLOYEE DIRECTOR COMPENSATION FOR 2022
Fees
earned
Restricted
or paid in
Option
Stock Unit
All Other
Name
cash
Awards
Awards (1)
Compensation
Total
Clifford B. Fleet
$
105,000
$
—
$
113,460
$
—
$
218,460
Anthony Johnson
$
105,000
$
—
$
113,460
$
—
$
218,460
Michael Koganov
$
105,000
$
—
$
113,460
$
—
$
218,460
Roger D. O’Brien
$
127,500
$
—
$
113,460
$
—
$
240,960
Richard M. Sanders
$
135,000
$
—
$
113,460
$
—
$
248,460
Lucille S. Salhany (2)
$
30,014
$
—
$
28,440
$
—
$
58,454
Nora B. Sullivan
$
195,000
$
—
$
113,460
$
—
$
308,460
(1) The fair value of each restricted stock unit is based on the stock price of the Company’s common stock on the grant date of the award.
(2) Ms. Salhany was appointed as a director on September 7, 2022 and received pro rata compensation for service during 2022.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the beneficial ownership of our common stock as of March 1, 2023, by (i) each of our current directors and executive officers, and (ii) all our current directors and executive officers as a group. To our knowledge, no person owns more than 5% of our common stock, Derivative securities exercisable or convertible into shares of our common stock within sixty (60) days of March 1, 2023 are deemed to be beneficially owned and outstanding for computing the share ownership and percentage of the person holding securities but are not deemed outstanding for computing the percentage of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*). The address of named beneficial owners that are officers and/or directors of the Company is: c/o 22nd Century Group, Inc., 500 Seneca Street, Suite 507, Buffalo, New York 14204. The following table is based upon information supplied by officers and directors, and with respect to 5% or greater stockholders who are not officers or directors, information filed with the SEC.
Number of
Shares
Percentage
Beneficially
Beneficially
Name of Beneficial Owner
Owned
Owned (1)
Officers and Directors:
James A. Mish (2)
305,070
*
R. Hugh Kinsman
52,327
*
John Franzino (3)
139,690
*
John Miller (4)
75,000
*
Nora B. Sullivan (5) (7)
950,431
*
Richard M. Sanders (6) (7)
596,068
*
Clifford B. Fleet (7)
256,195
*
Roger D. O'Brien (7)
308,595
*
Michael Koganov (7)
179,372
*
Anthony Johnson (7)
91,808
*
Lucille Salhany(8)
27,612
*
All directors, director nominees and executive officers as a group (11 persons) (2) - (8)
2,982,168
1.40%
(1) Based on 215,704,036 shares of common stock issued and outstanding as of March 1, 2023.
(2) 1,681,730 restricted stock units are not included in the number of beneficially owned shares because they do not vest within 60 days of March 1, 2023.
(3) 265,884 restricted stock units are not included in the number of beneficially owned shares because they do not vest within 60 days of March 1, 2023.
(4) Excludes 750,000 performance shares, with one-third of such shares vesting on each of May 1, 2023, 2024 and 2025 provided that the Company’s tobacco business plan revenue objectives and other performance requirements are satisfied at such times.
(5) Consists of (a) 748,707 shares of common stock held directly and (b) 201,724 shares of common stock issuable upon exercise of stock options.
(6) Consists of (a) 444,344 shares of common stock held directly and (b) 151,724 shares of common stock issuable upon exercise of stock options.
(7) Includes 51,808 restricted stock units vesting on March 21, 2023, subject to continued service.
(8) Consists of restricted stock units vesting on March 21, 2023, subject to continued service.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Related Party Transactions
Our policy is to enter into transactions with related persons on terms that, on the whole, are no less favorable to us than those available from unaffiliated third parties. Our Board of Directors has adopted written policies and procedures regarding related person transactions. For purposes of these policies and procedures:
● A “related person” means any of our directors, executive officers, nominees for director, holder of 5% or more of our common stock or any of their immediate family members; and
● A “related person transaction” generally is a transaction (including any indebtedness or a guarantee of indebtedness) in which we were or are to be a participant and the amount involved exceeds $120,000 and in which a related person had or will have a direct or indirect material interest.
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Each of our executive officers, directors or nominees for director is required to disclose to our Audit Committee certain information relating to related person transactions for review, approval or ratification by our Audit Committee. In making a determination about approval or ratification of a related person transaction, our Audit Committee will consider the information provided regarding the related person transaction and whether consummation of the transaction is believed by the Audit Committee to be in our best interests. Our Audit Committee may take into account the effect of a director’s related person transaction on the director’s status as in independent member of our Board of Directors and eligibility to serve on committees of our Board under SEC rules and the listing standards of the Nasdaq Stock Market. Any related person transaction must be disclosed to our full Board of Directors. There were no related party transactions in 2022 and 2021.
Independent Directors
Our Board of Directors has determined that Anthony Johnson, Dr. Michael Koganov, Roger D. O’Brien, Lucille S. Salhany, Richard M. Sanders and Nora B. Sullivan are “independent” as defined by applicable Nasdaq Stock Market listing standards. The Board annually reviews all business and other relationships of directors and determines whether directors meet these categorical independence tests. In addition, each member of our Audit Committee, Compensation Committee, and Corporate Governance and Nominating Committee is “independent” as defined by applicable Nasdaq Stock Market listing standards and applicable SEC rules for service on such committee.
Item 14. Principal Accounting Fees and Services.
The following table shows the fees billed to us for the audits and other services provided by Freed Maxick CPAs, P.C. (“Freed”), our independent registered certified public accounting firm, for the fiscal years ended December 31, 2022 and 2021, respectively.
2022
2021
Audit fees
$
430,100
$
312,275
Audit-related fees
—
—
Tax fees
—
—
All other fees
—
—
$
430,100
$
312,275
Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our consolidated annual financial statements and the quarterly reviews of financial statements and for any other services that are normally provided by our independent registered public accountants in connection with our statutory and regulatory filings or engagements.
Audit Committee Policies and Procedures For Pre-Approval of Independent Auditor Services
The Audit Committee, in accordance with its charter, must pre-approve all non-audit services provided by our independent registered public accountants. The Audit Committee generally pre-approves specified series in the defined categories of audit services, audit related services and tax services up to specified amounts. Pre-approval may also be given as part of our Audit Committee’s approval of the scope of the engagement of the independent registered public accountants or on an individual, explicit case-by-case basis before the independent auditor is engaged to provide each service.
The Audit Committee has considered whether the provision of the services not related to the audit of the financial statements acknowledged in the table above was compatible with maintaining the independence of Freed and is of the opinion that the provision of these services was compatible with maintaining Freed’s independence.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 0 317 )
F-1
Consolidated Financial Statements:
Consolidated Balance Sheets
F-3
Consolidated Statements of Operations and Comprehensive Loss
F-4
Consolidated Statements of Changes in Shareholders’ Equity
F-5
Consolidated Statements of Cash Flows
F-6
Notes to Consolidated Financial Statements
F-7 –F-42
(a) (2) Financial Statement Schedules
Financial statement schedules have been omitted because they are not required.
(b) Exhibits
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index below following the Financial Statements, which are incorporated herein by this reference.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of 22nd Century Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of 22nd Century Group, Inc. and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business acquisition
Critical Audit Matter Description
As discussed in Note 2 of the consolidated financial statements, during the year ended December 31, 2022, the Company completed a business acquisition of GVB Biopharma (GVB) for an aggregate purchase price of approximately $53 million. As discussed in Note 1 of the consolidated financial statements, the Company applies the acquisition method of accounting for business combinations. Under this method, identifiable assets acquired, liabilities assumed, and consideration transferred are measured at their acquisition-date fair value. Any purchase price in excess of the net assets is recorded as goodwill. As discussed in Note 2 to the consolidated financial statements, various assumptions that require management’s judgement were used to determine the fair value of the assets acquired.
F-1
Table of Contents
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 the current period, as well as periods after acquisition. Due to the subjectivity involved we identified the fair value estimate of assets acquired as a critical audit matter, which required a higher degree of auditor judgement as well as the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter Was Addressed in the Audit
Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed include: obtaining an understanding of the process and implemented controls as it relates to the determination of the fair value of assets acquired; identifying key inputs and assumptions used by management to estimate the fair values of the assets purchased; and testing the completeness and accuracy of source information used, mathematical accuracy of management’s calculations, and reviewing assumptions for reasonableness.
Impairment tests for indefinite-lived intangible assets and goodwill
Critical Audit Matter Description
As discussed in Note 1 of the consolidated financial statements, indefinite-lived intangible assets and goodwill are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. As discussed in Notes 6 and 19, the GVB fire, as well as shifts in strategy and changes in expected cash flows resulted in changes in circumstances captured in the annual impairment tests of the tradename and goodwill. As discussed in Notes 1 and 8 to the consolidated financial statements, various assumptions that require management’s judgement were used to determine the fair value of the tradename and goodwill.
The judgments made in the determination of the estimated fair values assigned to the asset and reporting unit can materially impact the financial statements. Due to the subjectivity involved we identified the fair value estimate of the assets and reporting unit tested for impairment as a critical audit matter, which required a higher degree of auditor judgement as well as the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter Was Addressed in the Audit
Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed include: obtaining an understanding of the process and implemented controls as it relates to management’s impairment analysis; identifying key inputs and assumptions used by management to estimate the fair values; and testing the completeness and accuracy of source information used, mathematical accuracy of management’s calculations, and reviewing assumptions for reasonableness.
/s/ Freed Maxick, CPAs, P.C.
We have served as the Company’s auditor since 2011.
Buffalo, New York
March 9, 2023
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Table of Contents
22nd CENTURY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per-share data)
December 31,
December 31,
2022
2021
ASSETS
Current assets:
Cash and cash equivalents
$
3,020
$
1,336
Short-term investment securities
18,193
47,400
Accounts receivable, net
5,641
585
Inventories
10,008
2,881
Insurance recoveries
5,000
—
Prepaid expenses and other current assets
2,743
2,183
Total current assets
44,605
54,385
Property, plant and equipment, net
13,093
5,841
Operating lease right-of-use assets, net
2,675
1,723
Goodwill
33,160
—
Intangible assets, net
16,853
7,919
Investments
682
2,345
Other assets
3,583
3,741
Total assets
$
114,651
$
75,954
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes and loans payable - current
$
908
$
596
Operating lease obligations
681
308
Accounts payable
4,168
2,173
Accrued expenses
1,428
1,489
Accrued payroll
3,199
2,255
Accrued excise taxes and fees
1,423
1,270
Deferred income
831
119
Other current liabilities
380
217
Total current liabilities
13,018
8,427
Long-term liabilities:
Notes and loans payable
3,001
—
Operating lease obligations
2,141
1,432
Other long-term liabilities
516
21
Total liabilities
18,676
9,880
Commitments and contingencies (Note 12)
Shareholders' equity
Preferred stock, $ .00001 par value, 10,000,000 shares authorized
Common stock, $ .00001 par value, 300,000,000 shares authorized
Capital stock issued and outstanding :
215,238,198 common shares ( 162,872,875 at December 31, 2021)
Common stock, par value
2
2
Capital in excess of par value
333,898
244,247
Accumulated other comprehensive loss
( 111 )
( 162 )
Accumulated deficit
( 237,814 )
( 178,013 )
Total shareholders' equity
95,975
66,074
Total liabilities and shareholders’ equity
$
114,651
$
75,954
See accompanying notes to consolidated financial statements.
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22nd CENTURY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(amounts in thousands, except per-share data)
Year Ended
December 31,
2022
2021
Revenues, net
$
62,111
$
30,948
Cost of goods sold
60,937
29,462
Gross profit
1,174
1,486
Operating expenses:
Sales, general and administrative
44,517
25,908
Research and development
6,561
3,912
Other operating expense, net
7,202
78
Total operating expenses
58,280
29,898
Operating loss
( 57,106 )
( 28,412 )
Other income (expense):
Unrealized loss on investments
( 5 )
( 6,994 )
Realized (loss) gain on Panacea investment
( 2,789 )
2,548
Realized loss on short-term investment securities
( 366 )
—
Other income, net
71
—
Interest income, net
313
321
Interest expense
( 353 )
( 58 )
Total other expense
( 3,129 )
( 4,183 )
Loss before income taxes
( 60,235 )
( 32,595 )
(Benefit) provision for income taxes
( 434 )
14
Net loss
$
( 59,801 )
$
( 32,609 )
Net loss per common share - basic and diluted
$
( 0.31 )
$
( 0.21 )
Weighted average common shares outstanding - basic and diluted (in thousands)
$
192,837
$
156,208
Net loss
$
( 59,801 )
$
( 32,609 )
Other comprehensive loss:
Unrealized loss on short-term investment securities
( 316 )
( 236 )
Foreign currency translation
1
—
Reclassification of realized losses to net loss
366
—
Other comprehensive income (loss)
51
( 236 )
Comprehensive loss
$
( 59,750 )
$
( 32,845 )
See accompanying notes to consolidated financial statements.
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Table of Contents
22nd CENTURY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
Years Ended December 31, 2022 and 2021
Common
Par Value
Capital in
Other
Shares
of Common
Excess of
Comprehensive
Accumulated
Shareholders'
Outstanding
Shares
Par Value
Income (Loss)
Deficit
Equity
Balance at January 1, 2021
139,061,690
$
1
$
189,439
$
74
$
( 145,404 )
$
44,110
Stock issued in connection with warrant exercises
11,293,211
1
11,781
—
—
11,782
Stock issued in connection with option exercises
983,613
—
1,307
—
—
1,307
Stock issued in connection with RSU vesting, net of shares withheld for taxes
1,534,361
—
( 469 )
—
—
( 469 )
Stock issued in connection with capital raise
10,000,000
—
38,206
—
—
38,206
Equity-based compensation
—
—
3,983
—
—
3,983
Other comprehensive loss
—
—
—
( 236 )
—
( 236 )
Net loss
—
—
—
—
( 32,609 )
( 32,609 )
Balance at December 31, 2021
162,872,875
$
2
$
244,247
$
( 162 )
$
( 178,013 )
$
66,074
Stock issued in connection with option exercises
150,000
—
174
—
—
174
Stock issued in connection with RSU vesting, net of shares withheld for taxes
2,242,148
—
( 149 )
—
—
( 149 )
Stock issued in connection with acquisition
32,900,000
—
51,653
—
—
51,653
Stock issued in connection with capital raise, net of issuance costs of 2,516
17,073,175
—
32,484
—
—
32,484
Equity-based compensation
—
—
5,489
—
—
5,489
Other comprehensive income
—
—
—
51
—
51
Net loss
—
—
—
—
( 59,801 )
( 59,801 )
Balance at December 31, 2022
215,238,198
$
2
$
333,898
$
( 111 )
$
( 237,814 )
$
95,975
See accompanying notes to consolidated financial statements.
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Table of Contents
22nd CENTURY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended
December 31,
2022
2021
Cash flows from operating activities:
Net loss
$
( 59,801 )
$
( 32,609 )
Adjustments to reconcile net loss to cash used in operating activities:
Impairment of intangible assets
1,488
78
Amortization and depreciation
2,858
1,248
Amortization of right-of-use asset
733
288
Amortization of inventory step-up
978
—
Unrealized loss on investment
5
6,994
GVB fire write-offs
4,549
—
Realized loss on short-term investment securities
366
—
Change in allowance for doubtful accounts
770
—
Gain on the sale of machinery and equipment
( 368 )
—
Realized loss (gain) on Panacea investment
2,789
( 2,548 )
Accretion of non-cash interest expense (income), net
197
143
Equity-based employee compensation expense
5,489
3,983
Deferred income taxes
( 434 )
—
Inventory write-off
237
317
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable
( 2,881 )
1,574
Inventory
( 8,789 )
( 1,164 )
Prepaid expenses and other assets
( 920 )
( 547 )
Accounts payable
416
11
Accrued expenses
( 582 )
533
Accrued payroll
748
47
Accrued excise taxes and fees
153
( 421 )
Other liabilities
285
( 766 )
Net cash used in operating activities
( 51,714 )
( 22,839 )
Cash flows from investing activities:
Acquisition of patents, trademarks, and licenses
( 772 )
( 326 )
Acquisition of property, plant and equipment
( 3,657 )
( 745 )
Proceeds from the sale of machinery and equipment
409
—
Acquisition, net of cash acquired and debt assumed
( 1,297 )
—
Investment in Change Agronomy Ltd.
( 682 )
—
Sales and maturities of short-term investment securities
101,990
63,749
Purchase of short-term investment securities
( 73,413 )
( 90,407 )
Net cash provided by (used in) investing activities
22,578
( 27,729 )
Cash flows from financing activities:
Payment on note payable
( 3,822 )
( 2,604 )
Proceeds from note payable issuance
2,162
2,653
Other financing activities
( 29 )
—
Net proceeds from option exercise
174
1,307
Net proceeds from warrant exercise
—
11,782
Proceeds from issuance of common stock
35,000
40,000
Payment of common stock issuance costs
( 2,516 )
( 1,794 )
Taxes paid related to net share settlement of RSUs
( 149 )
( 469 )
Net cash provided by financing activities
30,820
50,875
Net increase in cash and cash equivalents
1,684
307
Cash and cash equivalents - beginning of period
1,336
1,029
Cash and cash equivalents - end of period
$
3,020
$
1,336
Supplemental disclosures of cash flow information:
Net cash paid for:
Cash paid during the period for interest
$
34
$
37
Cash paid during the period for income taxes
$
14
$
—
Non-cash transactions:
Capital expenditures incurred but not yet paid
$
94
$
1,074
Right-of-use assets and corresponding operating lease obligations
$
—
$
1,816
Panacea investment conversion
$
—
$
12,485
Stock issued in connection with acquisition
$
51,653
$
—
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
22nd CENTURY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Amounts in thousands, except for share and per share data
NOTE 1. – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
22nd Century Group, Inc. (together with its consolidated subsidiaries, “22 nd Century Group” or the “Company”) is a publicly traded Nevada corporation on the NASDAQ Capital Market under the symbol “XXII.” 22nd Century Group is a leading agricultural biotechnology and intellectual property company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science.
Basis of Presentation and Principles of Consolidation – The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of 22 nd Century Group and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
As described in Note 2, on May 13, 2022, the Company acquired substantially all of the assets of GVB Biopharma’s (“GVB”) business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development, which allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise.
As a result of the acquisition of GVB and ongoing evaluation of the Company’s strategy across our plant science and intellectual property platform, the Company reevaluated its operating and reporting segments, which was finalized during the fourth quarter of 2022. T he Company now organizes its business into two reportable segments: (1) Tobacco and (2) Hemp/cannabis. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker (“CODM”), to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with Accounting Standards Codification (“ASC”) 280, Segment Reporting . As a result of the new segment reporting structure, the Company has reclassified prior year amounts to conform them to the current year presentation. The revised segment structure and the related presentation changes did not impact consolidated net loss, earnings (loss) per share, total current assets, total assets or total stockholders’ equity. Refer to Note 17 “Segment and Geographic Information,” for additional information on the Company’s reportable segments.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
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Table of Contents
Reclassifications – As a result of the acquisition of GVB (see Note 2), the Company has revised the presentation and classification of depreciation and amortization in the Consolidated Statement of Operations and Comprehensive Loss to conform with the acquiree, as follows:
Year Ended
December 31, 2021
As originally
reported
Reclass
Revised
Revenues, net
$
30,948
$
—
$
30,948
Cost of goods sold
28,879
583
29,462
Gross profit
2,069
( 583 )
1,486
Operating expenses:
Sales, general and administrative
25,881
27
25,908
Research and development
3,274
638
3,912
Impairment of intangible assets
78
( 78 )
—
Other operating expenses, net
—
78
78
Depreciation
633
( 633 )
—
Amortization
615
( 615 )
—
Total operating expenses
30,481
( 583 )
29,898
Operating loss
$
( 28,412 )
$
—
$
( 28,412 )
Preferred stock authorized – The Company is authorized to issue “blank check” preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.
Foreign currency translation– The functional currency of our foreign subsidiaries is generally the respective local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using period-end rates of exchange and for revenue and expense accounts using an average rate of exchange during the period. The resulting translation adjustments are recognized as a component of Accumulated other comprehensive loss. Gains or losses resulting from foreign currency denominated transactions are included in Other income (expense) in the Consolidated Statement of Operations and Comprehensive Loss.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in financial institutions. Although the cash accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions. Management reviews the financial viability of these institutions on a periodic basis.
Cash and cash equivalents – The Company considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents. However, the Company has elected to classify money market mutual funds related to its short-term investment portfolio as short-term investment securities. There are no restrictions on the Company’s cash and cash equivalents.
Short-term investment securities – The Company’s short-term investment securities are classified as available-for-sale securities and consist of money market funds, corporate bonds, U.S. government agency bonds, U.S. treasury securities, and commercial paper with maturities that may extend beyond three months at the time of acquisition. The Company’s short-term investment securities are carried at fair value within current assets on the Company’s Consolidated Balance Sheets. The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security. The Company’s investment policy states that all investment securities must have a maximum maturity of twenty-four (24) months or less and the maximum weighted maturity of the investment securities must not exceed twelve (12) months. Some of the Company’s short-term investment securities are fixed-income debt instruments, and accordingly, unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations and Comprehensive Loss. Realized gains and losses on short-term investment securities are recorded in the other income (expense) portion of the Company’s Consolidated Statements of Operations and Comprehensive Loss. Interest income is recorded on the accrual basis and presented net of investment related fees.
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Accounts receivable, net – The Company extends credit to customers in the normal course of business. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. The Company periodically reviews aged account balances for collectability. The Company recorded an allowance for doubtful accounts of $ 372 and $ 0 for years ended December 31, 2022 and December 31, 2021.
Inventories – Inventories are valued at the lower of historical cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory. Standard cost is primarily used for finished goods inventory. Cost of hemp biomass consists of initial third-party acquisition costs plus analytical testing costs. Costs of extracted and hemp oil inventory are comprised of initial acquisition cost of the biomass and all direct and indirect processing costs including labor related costs, consumables, materials, packaging supplies, utilities, facility costs, analytical testing costs, and production related depreciation. Inventories are evaluated to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved as appropriate.
Property, plant and equipment – Plant and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the estimate useful life of the asset, whichever is shorter. Depreciation commences when the asset is placed in service. The following table shows estimated useful lives of property, plant and equipment:
Classification
Estimated Useful Lives
Buildings
25 to 40 years
Laboratory equipment
5 years
Land improvements
15 years
Leasehold improvements
shorter of 20 years or lease term
Manufacturing equipment
5 to 15 years
Office furniture, fixtures and equipment
3 to 10 years
Vehicles
5 years
Acquisitions - The Company accounts for acquisitions under the acquisition method of accounting for business combinations. Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.
All direct acquisition-related costs are expensed as incurred and are recognized in Other operating expenses, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
Goodwill - Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company’s reporting units are the same as its reportable segments, Tobacco and Hemp/cannabis. The Company tests its reporting unit’s goodwill for impairment at least annually as of 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 amount.
In conducting its goodwill test, the Company either performs a qualitative assessment or a quantitative assessment. 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, after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair values of its reporting units are greater than the carrying amounts, then the quantitative goodwill impairment test is not performed. The Company may elect to bypass the qualitative analysis and perform a quantitative analysis.
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If the qualitative assessment indicates that the quantitative analysis should be performed or if management elects to bypass a qualitative analysis to perform a quantitative analysis, the Company then evaluates goodwill for impairment by comparing the fair value of each of its reporting units to its carrying value, including the associated goodwill. 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. The cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors.
The Company completed its annual goodwill impairment test as of December 1, 2022 and determined, after performing a quantitative assessment of its Hemp/cannabis reporting unit, the fair value of the Hemp/cannabis reporting unit exceeded its carrying amount.
Intangible Assets – Intangible assets recorded at fair value as a component of purchase accounting consist of purchased customer relationships and tradename. Definite lived intangible assets related to customer relationship is amortized on an accelerated basis, which approximates the projected cash flows used to determine the fair value of the definite-lived intangible asset at the time of acquisition. The tradename asset is considered indefinite-lived and is not amortized.
Other definite lived intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third-parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third-parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand. The amounts capitalized relate to intellectual property that the Company owns or to which it has rights to use.
The Company’s capitalized intellectual property costs are amortized using the straight-line method over the remaining statutory life of the patent assets in each of the Company’s patent families, which have estimated expiration dates ranging from 2026 to 2043. Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which have expected expiration dates from 2028 through 2036. The Company believes that costs associated with becoming a signatory to the MSA, costs related to the acquisition of a predicate cigarette brand and trademarks have indefinite lives. As such, no amortization is taken. At each reporting period, the Company evaluates whether events and circumstances continue to support the indefinite-lived classification.
Impairment of Long-Lived Assets – The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be recoverable. On at least an annual basis, the Company assesses whether events or changes in circumstances indicate that the carrying amount may not be recoverable. If any such indicators are present, the Company will test for recoverability in accordance with ASC 360- Property, plant, and equipment or ASC 350- Intangibles, Goodwill, and Other .
Intangible assets subject to amortization are reviewed for strategic importance and commercialization opportunity prior to expiration. If it is determined that the asset no longer supports the Company’s strategic objectives and/or will not be commercially viable prior to expiration, the asset is impaired. In addition, the Company will assess the expected future undiscounted cash flows for its intellectual property based on consideration of future market and economic conditions, competition, federal and state regulations, and licensing opportunities. If the carrying value of such assets are not recoverable, the carrying value will be reduced to fair value and record the difference as an impairment.
Indefinite-lived intangible asset carrying values are reviewed at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists. The Company first performs a qualitative assessment and considers its current strategic objectives, future market and economic conditions, competition, and federal and state regulations to determine if an impairment is more likely than not. If it is determined that an impairment is more likely than not, a quantitative assessment is performed to compare the asset carrying value to fair value.
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Table of Contents
The Company completed its annual impairment test as of December 1, 2022 of indefinite lived intangible assets and determined, after performing a quantitative assessment using the relief from royalty method, the fair value was below its carrying amount and accordingly recorded an impairment charge.
Refer to Note 6 “Goodwill and Other Intangible Assets, Net” for further details of the Company’s goodwill and other intangible assets and Note 8 “Fair Value Measurements” for further details of the inputs and assumptions utilized in managements quantitative assessment of indefinite lived intangible assets.
Leases – The Company determines if an arrangement is, or contains, a lease at inception and classifies it as operating or finance. The Company has operating and finance leases for office and manufacturing facilities, machinery and vehicles. Finance lease assets and corresponding liabilities are not material to the consolidated financial statements.
Any operating lease having a lease term greater than twelve months will be recognized on the Consolidated Balance Sheets as a right-of-use (ROU) asset with an associated lease obligation—all other leases are considered short-term in nature and will be expensed on a month-to-month basis. The ROU assets and lease obligations are recognized as of the commencement date at the net present value of the fixed minimum lease payments for the lease term. The lease term is determined based on the contractual conditions, including whether renewal options are reasonably certain to be exercised. The discount rate used is the interest rate implicit in the lease, if available, or the Company’s incremental borrowing rate which is determined using a base line rate plus an applicable spread.
Refer to Note 5 for additional information regarding our ROU assets and liabilities.
Income Taxes – The Company recognizes deferred tax assets and liabilities for any basis differences in its assets and liabilities between tax and U.S. GAAP reporting, and for operating loss and credit carry-forwards.
As a result of the Company’s history of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance to fully offset its net deferred tax assets as of December 31, 2022 and December 31, 2021. Additionally, the Company has elected to present other comprehensive income items relating to net unrealized gains on short-term investment securities gross and not net of taxes.
The Company’s federal and state tax returns for the years ended December 31, 2019 through December 31, 2021 are currently open to audit under the statutes of limitations. There are no pending audits as of December 31, 2022.
Stock Based Compensation – The Company’s Omnibus Incentive Plan allows for various types of equity-based incentive awards. Stock based compensation expense is based on awards that are expected to vest over the requisite service periods and are based on the fair value of the award measured on the grant date. Vesting requirements vary for directors, officers, and employees. In general, time-based awards fully vest after one year for directors and vest in equal annual installments over a three-year period for officers and employees. Performance-based awards vest upon achievement of certain milestones. Forfeitures are accounted for when they occur.
Revenue Recognition – The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For additional discussion on revenue recognition, refer to Note 18.
Fair Value of Financial Instruments – FASB ASC 820 - Fair Value Measurements and Disclosures establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
● Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
● Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
● Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
F-11
Table of Contents
A financial asset’s or a financial liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company estimates that the carrying amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, contract assets, promissory note receivable, accounts payable and accrued expenses, and notes and loans payable approximate their fair value due to the short-term nature of these items. Note 8 contains additional information on assets and liabilities recorded at fair value in the Consolidated Financial Statements.
Investments –The Company’s equity securities are recorded at fair value with changes in fair value included within the statement of operations. Equity securities without a readily determinable market value are carried at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer. The Company considers certain debt instruments as available-for-sale securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
Research and Development – Research and development costs are expensed as incurred.
Loss Per Common Share – Basic loss per common share is computed using the weighted-average number of common shares outstanding. Diluted loss per share is computed assuming conversion of all potentially dilutive securities. Potential common shares outstanding are excluded from the computation if their effect is anti-dilutive. Refer to Note 13 for additional information.
Gain and Loss Contingencies – The Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
The Company maintains general liability insurance policies for its facilities. Under the terms of our insurance policies, in the case of loss to a property, the Company follows the guidance in ASC 610-30, Other Income —Gains and Losses on Involuntary Conversions, for the conversion of nonmonetary assets (the properties) to monetary assets (insurance recoveries). Under ASC 610-30, once the recovery is deemed probable the Company recognizes an asset for the insurance recovery receivable in the Consolidated Balance Sheets, with corresponding income that is offsetting to the casualty losses recorded in the Consolidated Statements of Operations and Comprehensive Loss. If the insurance recovery is less than the amount of the casualty charges recognized, the Company will recognize a loss whereas if the insurance recovery is greater than the amount of casualty loss recognized, the Company will only recognize a recovery up to the amount of the casualty loss and will account for the excess as a gain contingency in accordance with ASC 450-30, Gain Contingencies. Business interruption insurance is treated as a gain contingency. Gain contingencies are recognized when earned and realized, which typically will occur at the time of final settlement or when cash is received.
Refer to further discussion of all commitments and contingencies in Note 12.
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Table of Contents
Severance charges - From time to time, the Company evaluates its resources and optimizes its business plan to align to changing needs of executing on its strategy. These actions may result in voluntary or involuntary employee termination benefits. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination. The following table summarizes the change in accrued liabilities, presented within Other current liabilities and Other long-term liabilities Consolidated Balance Sheets:
Balance at January 1, 2022
$
238
Accruals
692
Cash payments
( 296 )
Balance at December 31, 2022
$
634
December 31,
December 31,
2022
2021
Current
$
349
$
217
Noncurrent
285
21
Total severance liability
$
634
$
238
In addition, during the year ended December 31, 2022, the Company recorded $ 1,237 of accelerated equity compensation expense in connection with the vesting of an employee’s outstanding equity awards as part of the termination severance agreement. Amounts are recorded as Selling, general and administrative in the Consolidated Statements of Operations and Comprehensive Loss.
Recent Accounting Pronouncement(s) – In June 2016, the FASB issued ASU 2016-13, “ Measurement of Credit Losses on Financial Instruments. ” The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The provisions of the ASU have an effective date for the Company beginning after December 15, 2022 and interim periods within those fiscal years.
The standard was effective for the Company on January 1, 2023 and will be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings. The Company does not expect the new credit loss standard to have a material impact to the Consolidated Financial Statements.
We consider the applicability and impact of all ASUs. If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our financial statements and related disclosures.
NOTE 2. – BUSINESS ACQUISITIONS
On May 13, 2022, the Company entered into and closed the transactions contemplated by the Reorganization and Acquisition Agreement (the “Reorganization Agreement”) with GVB. Under the terms of the Reorganization Agreement, the Company acquired substantially all of the assets of GVB’s business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development (the “Transaction”). The acquisition of GVB allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise and add significant scale. GVB is included in the Company’s Hemp/cannabis reportable segment.
F-13
Table of Contents
The aggregate consideration for the Transaction consisted of (i) the assumption of approximately $ 4,637 of debt, (ii) the assumption and direct payment of certain third-party transaction costs incurred by GVB in connection with the Transaction totaling approximately $ 1,753 and (iii) the issuance to GVB of 32,900,000 unregistered shares of common stock of the Company (the “Shares”) with a fair value of $ 51,653 . The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. The Shares are subject to a lock-up and restrictions on transfer for at least six months following closing and thereafter, one -third of the Shares will be released from the lock-up after six months , one -third will be released from the lock-up after nine months and the remainder will be released after one year .
The Transaction was structured as a tax-free re-organization pursuant to Internal Revenue Code Section 368(a)(1)(c). Accordingly, the tax basis of net assets acquired retain their carry over tax basis and holding period in purchase accounting.
The Company recorded provisional estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition during the second quarter of 2022, resulting in goodwill of $ 44,200 . The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Consolidated Financial Statements were prepared.
During the measurement period, the preliminary fair values of the assets acquired and liabilities assumed as of May 13, 2022 were adjusted to reflect the ongoing acquisition valuation analysis procedures of property and equipment, intangible assets, deferred taxes, and working capital adjustments. These adjustments resulted in a combined reduction to goodwill of $ 11,040 . The impact of depreciation and amortization to Operating loss recorded in the third quarter of 2022 as a result of completing valuation procedures for property and equipment and intangible assets, that would have been recorded in the prior period since the date of acquisition was $ 70 .
The amounts reported are considered provisional as the Company is finalizing the valuations that are required to allocate the purchase price through the measurement period, which remains open as of December 31, 2022, as the final stub period income tax returns have not yet been completed. As a result, the allocation of the provisional purchase price may change in the future, which could be material.
The following table presents management’s purchase price allocation:
Cash
$
456
Accounts receivable
2,944
Inventory
3,551
Other assets
519
Property, plant & equipment
11,388
Operating leases right-of-use assets, net
1,231
Goodwill
33,161
Tradename
4,600
Customer relationships
5,800
Accounts payable and accrued expenses
( 2,777 )
Other current liabilities
( 944 )
Lease liabilities
( 1,259 )
Auto loans
( 387 )
Deferred tax liability
( 627 )
Bridge loan
( 4,250 )
Fair value of net assets acquired
$
53,406
The fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.
F-14
Table of Contents
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, tradename life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Current Assets and Liabilities
The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the income approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance for these remaining efforts. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $ 978 , which was fully amortized in the three month period ended June 30, 2022 in the Consolidated Statement of Operations and Comprehensive Loss.
Property, Plant and Equipment
The fair value of PP&E acquired was estimated by applying the cost approach for personal property and leasehold improvements. The cost approach was applied by developing a replacement cost and adjusting for economic depreciation and obsolescence.
Leases
The Company recognized operating lease liabilities and operating lease right-of-use assets for office and manufacturing facilities in (i) Las Vegas, Nevada (ii) Grass Valley, Oregon (iii) Prineville, Oregon, and (iv) Tygh Valley, Oregon, accordance with ASC 842, Leases .
The following table summarizes the Company’s discount rate and remaining lease terms as of the acquisition date:
Weighted average remaining lease term in years
3.8
Weighted average discount rate
8.3
%
The Company concluded there were no off-market lease intangibles on the date of acquisition based on an evaluation of market rents per square foot, geographic location and nature of use of the underlying asset, among other considerations.
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Intangible assets
The purchase price was allocated to intangible assets as follows:
Weighted Average
Fair Value
Amortization Period
Weighted Average
Definite-lived Intangible Assets
Assigned
(Years)
Discount Rate
Customer relationships
$
5,800
10
23.50 %
Tradename
$
4,600
Indefinite
23.50 %
Customer Relationships
Customer relationships represent the estimated fair value of contractual and non-contractual customer relationships GVB had as of the acquisition date. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer relationships was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 20 %, as well as management’s understanding of the industry and product life cycles.
Tradename
Tradename represents the estimated fair value of GVB’s corporate and product names. The acquired tradename was valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the tradename was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate of 1.0 %. The GVB tradename was assumed to have an indefinite useful life based upon long-term management expectations and future operating plans.
Deferred Taxes
The Company determined the deferred tax position to be recorded at the time of the GVB acquisition in accordance with ASC Topic 740, Income Taxes , resulting in recognition of deferred tax liabilities for future reversing of taxable temporary differences primarily for intangible assets and property, plant and equipment. This resulted in a preliminary net deferred tax liability of $ 627 , which includes the carryover basis of historical recognized deferred tax assets, liabilities and valuation allowance.
The net deferred tax liabilities recorded as a result of the acquisition of GVB was determined by the Company to also provide future taxable temporary differences that allow for the Company to utilize certain previously fully reserved deferred tax assets. Accordingly, the Company recognized a reduction to its valuation allowance resulting in a net tax benefit of approximately $ 434 for the year ended December 31, 2022.
Goodwill
The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. A variety of factors contributed to the goodwill recognized, including the value of GVB’s assembled work force, the incremental value resulting from GVB’s capabilities in hemp/cannabis, operational synergies across the plant science platform, and the expected revenue growth over time that is attributable to increased market share from future products and customers. Goodwill recorded in the transaction will be non-deductible.
Actual and Pro Forma (unaudited) disclosures
The results of operations and assets from the GVB acquisition have been included in the Company’s consolidated financial statements since the acquisition date. For the year ended December 31, 2022, net revenues related to GVB were $ 21,610 , and net loss was $ 14,771 .
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The following unaudited pro forma information presents the consolidated results of operations of the Company and assumes the acquisition occurred on January 1, 2021:
Three Months Ended
Year Ended
December 31,
December 31,
2022
2021
2022
2021
(in thousands, except for per-share data)
Revenues, net
$
19,482
$
16,724
$
73,112
$
60,374
Net loss
$
( 25,629 )
$
( 11,259 )
$
( 59,710 )
$
( 31,848 )
Net loss per common share - basic and diluted
$
( 0.12 )
$
( 0.06 )
$
( 0.29 )
$
( 0.17 )
Weighted average common shares outstanding - basic and diluted
215,293
195,668
204,825
189,108
The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These unaudited pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future. These unaudited pro forma results include certain adjustments, primarily due to amortization expense due to the fair value adjustment of inventory, acquisition related costs and the impact of income taxes on the pro forma adjustments.
Acquisition costs
During the year ended December 31, 2022, direct costs incurred as a result of the acquisition of GVB of $ 1,046 were expensed as incurred and included in Other operating expenses, net in the Consolidated Statements of Operations and Comprehensive Loss.
NOTE 3. – INVENTORIES
Inventories at December 31, 2022 and 2021 consisted of the following:
December 31,
December 31,
2022
2021
Raw materials
$
8,743
$
2,634
Work in process
441
—
Finished goods
824
247
$
10,008
$
2,881
During the year ended December 31, 2022, the Company wrote off inventory totaling $ 4,236 ( $ 3,999 related to the GVB fire as discussed in Note 19) which is included within Other operating expenses, net on the Company’s Consolidated Statement of Operations and Comprehensive Loss and $ 281 which is included with Cost of goods sold on the Company’s Consolidated Statement of Operations and Comprehensive Loss.
During the year ended December 31, 2021, the Company wrote off inventory totaling $ 317 which is included within Cost of goods sold on the Company’s Consolidated Statement of Operations and Comprehensive Loss.
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NOTE 4. – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net at December 31, 2022 and 2021 consisted of the following:
December 31,
December 31,
2022
2021
Land
$
1,665
$
1,665
Land improvements
167
—
Buildings
331
130
Laboratory equipment
744
198
Leasehold improvements
358
179
Manufacturing equipment
10,469
5,541
Office furniture, fixtures and equipment
557
139
Vehicles
950
—
Construction in progress
3,774
1,289
19,015
9,141
Less: accumulated depreciation
( 5,922 )
( 3,300 )
Property, plant and equipment, net
$
13,093
$
5,841
As of December 31, 2022, the Construction in progress balance primarily relates to the ongoing development of the Prineville, Oregon crude extraction facility, anticipated to be placed in service in the first quarter of 2023. As of December 31, 2021, Construction in progress primarily related to tobacco machinery and equipment, which was placed in service during 2022.
Depreciation expense was $ 2,178 and $ 633 for the year ended December 31, 2022 and 2021, respectively. Due to the GVB fire in 2022 (see Note 19), total property, plant and equipment write offs amounted to $ 5,499 which is included within Other operating expenses, net on the Company’s Consolidated Statement of Operations and Comprehensive Loss.
NOTE 5. – RIGHT-OF-USE ASSETS, LEASE OBLIGATIONS, AND OTHER LEASES
The Company leases office space, laboratory space and manufacturing facilities in (i) Mocksville, North Carolina, (ii) Buffalo, New York, (iii) Rockville, Maryland, (iv) Las Vegas, Nevada, (v) Prineville, Oregon, and (vi) multiple locations in Madras, Oregon.
The following table summarized the Company’s discount rate and remaining lease terms as of December 31, 2022:
Weighted average remaining lease term in years
6.8
Weighted average discount rate
6.1
%
Future minimum lease payments as of December 31, 2022 are as follows:
2023
$
835
2024
706
2025
676
2026
219
2027
195
Thereafter
1,142
Total lease payments
3,773
Less: imputed interest
( 951 )
Present value of lease liabilities
2,823
Less: current portion of lease liabilities
( 681 )
Total long-term lease liabilities
$
2,141
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Operating lease costs for the year ended December 31, 2022 and 2021, were $ 891 and $ 301 , respectively.
Supplemental cash flow information for leases for fiscal years 2022 and 2021 are comprised of the following:
December 31,
December 31,
2022
2021
Cash paid for operating leases
$
849
$
239
Assets acquired under operating leases
$
729
$
1,816
During the fiscal year ended December 31, 2022, the Company extended the lease terms for one of its manufacturing facilities. As a result of these lease modifications, the Company re-measured the lease liability and adjusted the ROU asset on the modification dates.
NOTE 6. – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The change in the carrying amount of goodwill during fiscal year 2022 was as follows:
Balance at January 1, 2022
$
—
GVB acquisition (see Note 2)
44,200
Measurement period adjustments
( 11,040 )
Balance at December 31, 2022
$
33,160
Intangible Assets
Our intangible assets at December 31, 2022 and 2021 consisted of the following:
Gross
Accumulated
Net Carrying
December 31, 2022
Carrying Amount
Amortization
Amount
Definite-lived:
Patent
$
6,513
$
( 3,711 )
$
2,802
License Fees
3,876
( 1,446 )
2,430
Customer relationships
5,800
( 20 )
5,780
Total amortizing intangible assets
$
16,189
$
( 5,177 )
$
11,012
Indefinite-lived:
Tradename and trademarks
$
3,289
MSA signatory costs
2,202
License fee for predicate cigarette brand
350
Total indefinite-lived intangible assets
$
5,841
Total intangible assets, net
$
16,853
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Gross
Accumulated
Net Carrying
December 31, 2021
Carrying Amount
Amortization
Amount
Definite-lived:
Patent
$
5,902
$
( 3,303 )
$
2,599
License Fees
3,876
( 1,197 )
2,679
Total amortizing intangible assets
$
9,778
$
( 4,500 )
$
5,278
Indefinite-lived:
Tradename and trademarks
$
89
MSA signatory costs
2,202
License fee for predicate cigarette brand
350
Total indefinite-lived intangible assets
$
2,641
Total intangible assets, net
$
7,919
See Note 2 “Business Acquisitions” for additional details regarding goodwill and intangible assets acquired during 2022 as a result of the acquisition of GVB, including measurement period adjustments.
Aggregate intangible asset amortization expense comprises of the following:
Year Ended
December 31,
2022
2021
Cost of goods sold
$
10
$
10
Sales, general, and administrative
20
—
Research and development
650
605
Total amortization expense
$
680
$
615
During the year ended December 31, 2022, the Company incurred impairment charges of $ 1,488 , primarily related to write-down of tradename, as a result of a shift in strategy and changes in expected future cash flows for certain contracts supporting the associated tradename (see Note 19). During the year ended December 31, 2021, the Company incurred a charge of $ 78 related to a write-down of our trademarks, as a result of abandonment of the trademark as it no longer aligned to Company strategic objectives.
The impairment charges are included in Other operating expenses, net on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
Estimated future intangible asset amortization expense based on the carrying value as of December 31, 2022 is as follows:
2023
2024
2025
2026
2027
Thereafter
Amortization expense
$
1,667
$
1,657
$
1,516
$
1,261
$
1,111
$
3,800
NOTE 7. – INVESTMENTS & OTHER ASSETS
The carrying value of the Company’s investments at December 31, 2022 and 2021 consisted of the following:
December 31,
December 31,
2022
2021
Panacea Life Sciences Holdings, Inc. common stock
$
—
$
2,340
Aurora stock warrants
—
5
Change Agronomy Ltd. ordinary shares
682
—
Total investments
$
682
$
2,345
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Investment in Panacea Life Sciences, Inc.
Initial Investment:
On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc. (“Panacea”) for consideration valued at $ 13,297 ( $ 12,000 cash and $ 1,297 of the Company’s shares of common stock valued at $ 1 per share) in exchange for a 15.8 % ownership interest. The Company’s investment consisted of three instruments: shares of Series B preferred stock (“preferred stock”); a convertible note receivable with a $ 7,000 face value; and a warrant (“stock warrant”) to purchase additional shares of Series B preferred stock, to obtain 51 % ownership of Panacea, at an exercise price of $ 2.344 per share. The convertible note receivable had a term of five years , interest of 10 % per annum, and could be converted to shares of Series B preferred stock at the Company’s discretion. The embedded conversion option was not considered a derivative instrument for accounting purposes. The preferred stock carried an annual 10 % cumulative dividend, compounded annually, and had an implicit put option after the fifth anniversary date so long that the stock warrants had not been exercised. The put option was not considered a derivative instrument for accounting purposes. The stock warrant was exercisable at any time after the fifth anniversary date and would be accelerated if Panacea achieved certain sales targets for two consecutive years. The Series B preferred stock also included first priority equity preferences in the event of a liquidation, sale, or transfer of Panacea assets. These rights entitled the Company to the original Series B issuance price of $ 7,000 plus any unpaid accrued dividends.
To allocate the cost of the stock warrant, the Company calculated a fair value based on the following assumptions: volatility of 70 %, discount of 25 % for lack of marketability, and a risk-free rate of 2 %. The value of the stock warrant was allocated to the preferred stock and the convertible note receivable, equally, at a discount to the acquisition price. The discount on the preferred stock was determined to be for lack of control and the discount on the convertible note receivable was determined to be for issuing the note at a below market interest rate for similar instruments.
The convertible note receivable and the preferred stock investment were considered available for sale debt securities with a private company that was not traded in active markets. Since observable price quotations were not available at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition. The discount of each instrument is accreted into interest income over the respective term as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. The stock warrant was recorded at its cost basis in accordance with the practicability exception under ASU 2016-01.
Impairment of Panacea Investment:
As a result of increased competition and other macroeconomic factors, the Company recognized an impairment of $ 1,062 on the Panacea stock warrant during the second quarter of 2020. During the fourth quarter of 2020, the Company entered into a non-binding agreement with Panacea to potentially restructure the investment and business relationship—including the transfer of an agricultural facility and other assets. As of December 31, 2020, the Company adjusted certain assets to represent the fair value outlined in the non-binding agreement.
The Company’s non-binding agreement with Panacea to restructure the investment and business relationship generally provided for (i) the transfer of $ 7,170 in operational assets, including an agricultural facility and various extraction and distillation equipment, from Panacea to the Company in exchange for the cancellation of the $7,000 convertible note receivable plus accrued interest; (ii) an amendment of transaction documents to remove any future investment rights and obligations of the Company in Panacea, (iii) cancellation of the stock warrant to purchase additional Series B preferred stock; and (iv) various other amendments to Panacea’s charter to amend various investors rights therein.
As a result of the expected outcome of this non-binding agreement, the Company determined that the carrying value of the stock warrant and the convertible note receivable plus accrued interest exceeded the fair value outlined in the non-binding agreement. As such, the Company recorded an impairment of $ 679 , which reduced the stock warrant carrying value, so that the carrying value of the stock warrant, and convertible note receivable plus accrued interest amounted to a value of $ 7,170 as of December 31, 2020.
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In accordance with ASC 326- Financial Instruments-Credit Losses , the Company reviewed the fair value of its preferred stock investment and considered the following: (i) increased competition in the cannabinoid industry; (ii) the Company’s preferred stock priority equity preferences; and (iii) other macroeconomic factors. Based on the assessment performed, it was determined that no credit loss existed for the preferred stock available-for-sale debt security.
Conversion of Panacea Investment:
On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc. (“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders. Pursuant to the Securities Exchange Agreement, Exactus fully acquired Panacea. These transactions effected the (i) conversion of all of the Company’s Series B Preferred Stock in Panacea into 91,016,026 shares of common stock in Exactus valued at $ 9,102 as of June 30, 2021 and (ii) the conversion of the Company’s existing debt in Panacea by converting the outstanding $ 7,000 principal balance convertible note receivable and all accrued but unpaid interest thereon for fee simple ownership of Needle Rock Farms ( 224 acres in Delta County, Colorado) and equipment valued at $ 2,248 , $ 500 in Panacea’s Series B Preferred Stock (which was subsequently converted to Exactus common stock under the Securities Exchange Agreement; this balance is reflected in final shares as stated above), and a new $ 4,300 promissory note (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0 % interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado. All other rights and obligations of the Company in Panacea and Panacea’s affiliate, Quintel-MC Incorporated, were terminated by this transaction—including all warrant rights and obligations for future investment. The conversion was recorded as a non-monetary transaction, based on the fair value of the assets received, and resulted in a gain of $ 2,548 which is included within the Consolidated Statements of Operations and Comprehensive Loss as “Gain on Panacea investment conversion.”
The Promissory note receivable was originally valued at $ 3,684 ($ 4,300 face value less $ 616 discount) and is included within the Consolidated Balance Sheets as “Other Assets.” The Company intends to hold the Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note. The ownership of Needle Rock Farms and related equipment is included within “Property, plant, and equipment, net” on the Consolidated Balance Sheets. The common shares of Exactus, Inc. are considered equity securities in accordance with ASC 321 and are recorded at fair value—changes in fair value will be included within the statement of operations. See Note 7 for additional information on the fair value measurements.
On October 25, 2021, Exactus announced the completion of a 1 for 28 reverse stock split as well as an entity name change to Panacea Life Sciences Holdings, Inc (OTCQB: PLSH). Panacea Life Sciences Holdings, Inc. was assigned a temporary stock symbol of “EXDID” which formally changed to “PLSH” after twenty business days. As a result of the reverse stock split, our 91,016,026 shares were adjusted to 3,250,573 shares.
Panacea Investment – Settlement Agreement:
On December 31, 2022, the Company and Panacea Life Sciences Holdings, Inc. entered into a settlement agreement in which the Company agreed to forfeit and return all PLSH common stock outstanding with a fair value of $ 229 and reduction to the face value of the Promissory note receivable of $ 500 , in exchange for resolution to all contractual requirements from the June 30, 2021 Promissory Note Exchange Agreement and Securities Exchange Agreement surrounding the investment and business relationship. The total charge of $ 2,789 recorded in connection with the settlement agreement and change in fair value during the year ended December 31, 2022 is included within Realized (loss) gain on Panacea investment on the Consolidated Statements of Operations and Comprehensive Loss and is comprised of change in fair value and write-off of PLSH common stock of $ 2,340 and extinguishment of note receivable of $ 500 less adjusted discount of $ 51 .
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Table of Contents
As of December 31, 2022, the total carrying value of the Company’s investment in Panacea is outlined below:
December 31,
December 31,
2022
2021
Panacea Holdings common stock
$
—
$
2,340
Promissory note receivable
3,410
3,741
Total
$
3,410
$
6,081
Investment in Aurora Cannabis, Inc.
In 2018, in connection with the sale of its investment in a Canadian plant biotechnology company, the Company acquired stock warrants to purchase 973,971 common stock of Aurora Cannabis, Inc. (“Aurora”), a Canadian company (NYSE: ACB and TSX: ACB). The stock warrants have a five-year contractual term ending August 8, 2023 and had an exercise price of $ 9.37 Canadian Dollars (CAD) per share. During the second quarter of 2020, Aurora announced a 12 -to-1 reverse stock split which adjusted our total warrant to purchase 81,164 shares of Aurora common stock (from 973,971 ) at an exercise price of $ 112.44 CAD per share (from $ 9.37 CAD per share). The warrants are considered equity securities in accordance with ASC 321 – Investments – Equity Securities and a derivative instrument under ASC 815 – Derivatives and Hedging. The stock warrants are not designated as a hedging instrument, and in accordance with ASC 815, the Company’s investment in stock warrants are recorded at fair value with changes in fair value recorded to unrealized gain/loss as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 8 for additional information on the fair value measurements.
Investment in Change Agronomy Ltd.
On December 10, 2021, the Company entered into a subscription agreement to invest £ 500 (pounds sterling, in thousands), in exchange for 592,888 ordinary shares of Change Agronomy Ltd. (“CAL”), a private company existing under the laws of England, at a price per share of £ 0.84333 . CAL is a vertically integrated sustainable industrial hemp business that combines genetics with leading agronomic techniques and infrastructure to provide full-service industrial hemp products to multiple global end markets. CAL presently has operations in Manitoba, Canada, and Italy. This equity investment was part of an Offer for Subscription by CAL for a minimum total of £ 3,000 at the same price per ordinary share. Approximately U.S. $ 682 in funds were wired to CAL on January 26, 2022, and our investment equated to approximately 1.8 % of CAL’s total equity.
In accordance with ASU 2019-04, a foreign currency-denominated equity investments that are measured using the measurement alternative are nonmonetary items that should be remeasured using their historical exchange rates. Accordingly, for the year ended December 31, 2022, there is no foreign currency exchange gain or loss recorded in the Consolidated Statement of Operations and Comprehensive Loss related to the investment in Change Agronomy Ltd.
During the years ended December 31, 2022 and 2021, respectively, there were no impairment triggering events identified for investments.
NOTE 8. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its short-term investment securities and equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
.The following table presents information about our assets and liabilities measured at fair value at December 31, 2022 and 2021, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
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Table of Contents
Fair Value
December 31, 2022
Level 1
Level 2
Level 3
Total
Assets
Short-term investment securities:
Money market funds
$
10,163
$
—
$
—
$
10,163
Corporate bonds
—
7,031
—
7,031
U.S. treasury securities
—
999
—
999
Total short-term investment securities
$
10,163
$
8,030
$
—
$
18,193
Investments:
Change Agronomy Ltd. ordinary shares
$
—
$
—
$
682
$
682
Total investments
$
—
$
—
$
682
$
682
Fair Value
December 31, 2021
Level 1
Level 2
Level 3
Total
Assets
Short-term investment securities:
Money market funds
$
8,919
$
—
$
—
$
8,919
Corporate bonds
—
38,481
—
38,481
Total short-term investment securities
$
8,919
$
38,481
$
—
$
47,400
Investments:
Panacea Life Sciences Holdings, Inc. common shares
$
2,340
$
—
$
—
$
2,340
Aurora stock warrants
—
—
5
5
Total investments
$
2,340
$
—
$
5
$
2,345
Money market mutual funds are valued at their daily closing price as reported by the fund. Money market mutual funds held by the Company are open-end mutual funds that are registered with the SEC that generally transact at a stable $ 1.00 Net Asset Value (“NAV”) representing its estimated fair value. On a daily basis the fund’s NAV is determined by the fund based on the amortized cost of the funds underlying investments. The Company classifies its money market funds within Level 1 because it uses quoted market prices to determine their fair value. The Company classifies its commercial paper, corporate notes, certificates of deposit, and U.S. government bonds within Level 2 because it uses quoted prices for similar assets or liabilities in active markets and each has a specified term and all level 2 inputs are observable for substantially the full term of each instrument.
Corporate bonds are valued using pricing models maximizing the use of observable inputs for similar securities.
The investment in Panacea Holdings common shares is considered an equity security with a readily determinable fair value. The fair value is determined using the quotable market price as of the last trading day of the fiscal quarter. The change in fair value for the years ended December 31, 2022, and 2021 were losses of $ 2,112 and $ 6,761 , respectively.
The following table sets forth a summary of the changes in fair value of the Company’s Level 3 investments for the year ended December 31, 2022.
Fair Value at January 1, 2022
$
5
Unrealized loss on Aurora stock warrants
( 5 )
Investment in Change Agronomy Ltd. ordinary shares
682
Fair Value at December 31, 2022
$
682
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Table of Contents
The following tables set forth a summary of the Company’s available-for-sale debt securities from amortized cost basis to fair value as of December 31, 2022 and 2021:
Available for Sale Debt Securities
December 31, 2022
Amortized
Gross
Gross
Cost
Unrealized
Unrealized
Fair
Basis
Gains
Losses
Value
Corporate bonds
$
7,143
$
—
$
( 112 )
$
7,031
Available for Sale Debt Securities
December 31, 2021
Amortized
Gross
Gross
Cost
Unrealized
Unrealized
Fair
Basis
Gains
Losses
Value
Corporate bonds
$
38,643
$
1
$
( 163 )
$
38,481
The following table sets forth a summary of the Company’s available-for-sale debt securities at amortized cost basis and fair value by contractual maturity as of December 31, 2022 and December 31, 2021:
Available for Sale Debt Securities
December 31, 2022
December 31, 2021
Amortized
Amortized
Cost Basis
Fair Value
Cost Basis
Fair Value
Due in one year or less
$
7,143
$
7,031
$
8,286
$
8,280
Due after one year through five years
—
$
—
$
30,357
$
30,201
$
7,143
$
7,031
$
38,643
$
38,481
The Company recognized interest income on short-term investment securities recorded in Interest income, net on the Consolidated Statement of Operations and Comprehensive Loss during the years ended December 31, 2022 and 2021 of $ 546 and $ 483 , respectively.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The Company’s non-recurring fair value measurement as of December 31, 2022, consisted of the fair value of impaired indefinite-lived intangible asset that was determined by utilizing the relief from royalty method with Level 3 inputs, including royalty rate of 1.0 % and discount rate of 24.5 %.
During the years ended December 31, 2022 and 2021, t he Company did not have any other financial assets or liabilities measured at fair value on a nonrecurring basis.
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Table of Contents
NOTE 9. – NOTES AND LOANS PAYABLE
The table below outlines our notes payable balances as of December 31, 2022 and 2021:
December 31,
December 31,
2022
2021
Insurance loans payable
$
780
$
596
Vehicle loans
128
—
Total current notes and loans payable
$
908
$
596
Bridge loan
$
2,814
$
—
Vehicle loans
187
—
Total long-term notes and loans payable
$
3,001
$
596
Insurance loans payable
During the second quarter of 2022, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $ 2,394 . The Company paid $ 400 as a premium down payment and financed the remaining $ 1,994 of policy premiums over ten months at a 3.25 % annual percentage rate. Additionally, during the third quarter of 2022, the Company expanded its D&O coverage as a result of the acquisition of GVB, resulting in an additional premium down payment of $ 90 and financing of $ 168 , under the same terms as the original one-year policy.
During the second quarter of 2021, the Company renewed its D&O insurance for a one-year policy premium totaling $ 3,315 . The Company paid $ 662 as a premium down payment and financed the remaining $ 2,653 of policy premiums over nine months at a 3.49 % annual percentage rate.
The Company also has other insurance loans payables related to pollution, and general liability for GVB.
Vehicle Loans
The Company has various vehicle loans with monthly payments ranging from $ 0.5 to $ 2.1 , interest rates ranging from 0 % to 11 %, and maturity dates ranging from March 2023 to September 2026.
GVB Bridge Note
In connection with the acquisition of GVB (see Note 2), the Company assumed the outstanding principal balance of 12 % secured promissory note in the principal amount of $ 4,250 (“GVB Bridge Note”). On October 31, 2022, the Company repaid $ 1,899 (outstanding principal of $ 1,750 and accrued interest of $ 149 ). The remaining outstanding principal of $ 2,500 and accrued interest was refinanced and has a maturity date of May 1, 2024 (see Note 21).
Accretion of non-cash interest expense amounted to $ 0 and $ 7 for the years ended December 31, 2022 and 2021, respectively.
Estimated future principal payments to be made under the above notes and loans payable as of December 31, 2022 are as follows:
2023
$
908
2024
2,935
2025
59
2026
7
Total
$
3,909
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NOTE 10. – CAPITAL RAISE AND WARRANTS FOR COMMON STOCK
2022 Capital Raise
On July 21, 2022, the Company and certain institutional investors (the “Investors”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) relating to the issuance and sale of shares of common stock pursuant to a registered direct offering (the “Registered Offering” and, together with the Private Placement (as defined below), the “Offerings”). The Investors purchased approximately $ 35,000 of shares, consisting of an aggregate of 17,073,175 shares of common stock at a purchase price of $ 2.05 per share, subject to certain restrictions. The net proceeds to the Company from the Offerings, after deducting the fees and the Company’s offering expenses, were $ 32,484 . The Offerings closed on July 25, 2022.
Pursuant to the Securities Purchase Agreement, in a concurrent private placement, the Company issued and sold to the Investors warrants (the “Warrants”) to purchase up to 17,073,175 shares of common stock (the “Private Placement”). The Warrants are exercisable immediately upon issuance at an exercise price of $ 2.05 per share of common stock, subject to adjustment in certain circumstances, and expire on July 25, 2027.
2021 Capital Raise
On June 7, 2021, the Company and an investor entered into a securities purchase agreement relating to the issuance and sale of shares of common stock pursuant to which the investor purchased 10,000,000 shares of common stock at $ 4.00 per share. The net proceeds to the Company from the offering, after deducting placement agent fees and offering expenses, was $ 38,206 .
Warrant Exercise
During the first quarter of 2021, the Company’s warrant holders exercised 11,293,211 outstanding warrants for cash in exchange for common stock. In connection with these exercises, the Company received net proceeds of $ 11,782 . The following table summarizes the Company’s warrant activity since January 1, 2021:
Number of
Warrants
Warrants outstanding at January 1, 2021
11,293,211
Exercised
( 11,293,211 )
Issued
—
Warrants outstanding at December 31, 2021
—
Exercised
—
Issued
17,073,175
Warrants outstanding at December 31, 2022
17,073,175
NOTE 11. – RETIREMENT PLAN
The Company sponsors a defined contribution plan under IRC Section 401(k). The plan covers all employees who meet the minimum eligibility requirements. Under the 401(k) plan eligible employees are allowed to make voluntary deferred salary contribution to the plan, subject to statutory limits. The Company has elected to make Safe Harbor Non-Elective Contributions to the plan for eligible employees in the amount of three percent ( 3 %) of the employee’s compensation. Total employer contributions to the plan for the years ended December 31, 2022 and 2021 amounted to $ 200 and $ 171 , respectively.
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NOTE 12. – COMMITMENTS AND CONTINGENCIES
License agreements and sponsored research – The Company has entered into various license, sponsored research, collaboration, and other agreements (the “Agreements”) with various counter parties in connection with the Company’s plant biotechnology business relating to tobacco and hemp/cannabis. The schedule below summarizes the Company’s commitments, both financial and other, associated with each Agreement. Costs incurred under the Agreements are generally recorded as research and development expenses on the Company’s Consolidated Statements of Operations and Comprehensive Loss.
Future Commitments
Commitment
Counter Party
Product Relationship
Commitment Type
2023
2024
2025
2026
2027 & After
Total
Research Agreement
KeyGene
Hemp / Cannabis
Contract fee
$
2,524
$
2,058
$
1,589
$
1,302
$
328
$
7,801
(1)
License Agreement
NCSU
Tobacco
Minimum annual royalty
325
100
100
100
1,000
1,625
(2)
Research Agreement
NCSU
Tobacco
Contract fee
99
—
—
—
—
99
(3)
Sublicense Agreement
Anandia Laboratories, Inc.
Hemp / Cannabis
Annual license fee
10
10
10
100
—
130
(4)
Research Agreement
Cannametrix
Hemp / Cannabis
Contract fee
667
666
—
—
—
1,333
(5)
License Agreement
Cannametrix
Hemp / Cannabis
Minimum annual royalty
—
—
75
100
1,900
2,075
(6)
Growing Agreements
Various
Tobacco
Contract fee
242
—
—
—
—
242
(7)
Consulting Agreements
Various
Various
Contract fee
1,195
746
—
—
—
1,941
(8)
$
5,062
$
3,580
$
1,774
$
1,602
$
3,228
$
15,246
(1) Exclusive agreement with the Company in the field of the Cannabis Sativa L. plant. The initial term of the agreement was five years with an option for an additional two years . On April 30, 2021, the Company and KeyGene entered into a First Amended and Restated Framework Collaborative Research Agreement which extended the agreement term, from first-quarter 2024 to first-quarter 2027, and preserves the Company’s option for an additional 2-year extension, now through first quarter of 2029. On March 30, 2022, the Company and KeyGene entered into a new Framework Collaborative Research Agreement for a term of three years at an aggregate cost of $ 1,830 in the field related to the hops plant.
The Company will exclusively own all results and all intellectual property relating to the results of the collaboration with KeyGene (the "Results”). The Company will pay royalties in varying amounts to KeyGene relating to the Company's commercialization in the stated fields of each agreement. The Company has also granted KeyGene a license to commercialize the Results outside of each field and KeyGene will pay royalties in varying amounts to the Company relating to KeyGene's commercialization of the Results outside of each field.
(2) The minimum annual royalty fee is credited against running royalties on sales of licensed products. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred, including capitalized patent costs and patent maintenance costs. These costs vary from year to year and the Company has certain rights to direct the activities that result in these costs.
(3) On August 19, 2022, the Company entered into a one-year Sponsored Project Agreement with NCSU for continued research of tobacco alkaloid formation.
(4) The Company is also responsible for the payment of certain costs, including, capitalized patent costs and patent maintenance costs, a running royalty on future net sales of products made from the sublicensed intellectual property, and a sharing of future sublicensing consideration received from sublicensing to third parties in all countries except for Canada. Anandia retains all patent rights, and is responsible for all patent maintenance, in Canada.
(5) On March 11, 2022, the Company expanded its research agreement with Cannametrix for hemp/cannabis product development, formulation, and validation for a three-year period at an aggregate cost of $ 2,000 .
(6) The minimum annual royalty fee is credited against running royalties from the sales of goods or services based on Project IP and/or Background IP.
(7) Various R&D growing agreements for hemp / cannabis and tobacco.
(8) General corporate consulting agreements.
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Insurance recoveries – In connection with the Grass Valley fire, the Company has recorded $ 5,000 asset as Insurance recoveries on the Consolidated Balance Sheets and as income offsetting property, plant and equipment and inventory casualty losses in Other operating expenses, net in the Statement of Operations and Comprehensive Loss (see Note 19). The insurance recoveries related to property, plant and equipment of $ 3,500 is a non-cash investing activity. Additional business interruption insurance coverage with limits of $ 15,000 remains pending as of December 31, 2022, and will be recognized as income when all contingencies have been resolved.
Litigation - The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future. In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
Class Action
On January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Matthew Bull, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 1:19 cv 00409.
On January 29, 2019, Ian M. Fitch, a resident of Essex County Massachusetts, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Ian Fitch, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 2:19 cv 00553.
On May 28, 2019, the plaintiff in the Fitch case voluntarily dismissed that action. On August 1, 2019, the Court in the Bull case issued an order designating Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.
On September 16, 2019, pursuant to a joint motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western District of New York, where it remains pending as Case No. 1:19-cv-01285.
Plaintiffs in the Bull case filed an Amended Complaint on November 19, 2019 that alleges three counts: Count I sues the Company and Messrs. Sicignano and Brodfuehrer and alleges that the Company's quarterly and annual reports, SEC filings, press releases and other public statements and documents contained false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5; Count II sues Messrs. Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c); and Count III sues Messrs. Sicignano and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act. The Amended Complaint seeks to certify a class, and unspecified compensatory and punitive damages, and attorney's fees and costs.
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On January 29, 2020, the Company and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On January 14, 2021, the Court granted the motion, dismissing all claims with prejudice. The Plaintiffs filed a notice of appeal on February 12, 2021 to the Second Circuit Court of Appeals. On May 24, 2022, after briefing and oral argument, the Second Circuit issued an order affirming in part, and reversing in part, the District Court’s dismissal order. The Second Circuit affirmed the District Court’s dismissal of the claims relating to the non-disclosure of stock promotion articles, but reversed the District Court’s dismissal order of the claims alleging the non-disclosure of an SEC investigation. The Second Circuit noted in its opinion, however, that the District Court had not addressed certain arguments raised by the Company and Messrs. Sicignano and Brodfuehrer in the Motion to Dismiss the Amended Complaint as to these remaining claims, and remanded the case to the District Court to address these arguments for the dismissal of the remaining claims. On August 8, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a renewed motion to dismiss the remaining claims in the Amended Complaint to address the arguments not previously addressed by the District Court. On September 22, 2022, Plaintiffs filed a brief in opposition to the motion. On October 12, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a reply brief in further support of the motion. On January 6, 2023, the District Court denied the motion to dismiss, and the case will proceed forward on the remaining claims. No trial date has been set. The parties have scheduled a mediation during March 2023.
We believe that the claims are frivolous, meritless and that the Company and Messrs. Sicignano and Brodfuehrer have substantial legal and factual defenses to the remaining claims. We intend to vigorously defend the Company and Messrs. Sicignano and Brodfuehrer against such claims.
Shareholder Derivative Cases
On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement.
On February 11, 2019, Stephen Mathew filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Stephen Mathew, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, John T. Brodfuehrer, Richard M. Sanders, Joseph Alexander Dunn, James W. Cornell, Nora B. Sullivan and 22nd Century Group, Inc., Index No. 801786/2019. Mr. Mathew brings this action derivatively generally alleging the same allegations as in the Klein case. The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.
On August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation by the parties (Western District of New York, Case No. 1-19-cv-0513). On May 3, 2019, the Court ordered the Mathew case stayed. This stay was applied to the Consolidated Action pursuant to the Court’s August 15, 2019 Order Consolidated Related Shareholder Derivative Actions and Establishing a Leadership Structure. As a result of the Court’s denial of the renewed Motion to Dismiss the Amended Complaint, the May 3, 2019 stay will be lifted. No trial date has been set. We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.
On June 10, 2019, Judy Rowley filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each
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member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Judy Rowley, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer, and 22nd Century Group, Inc., Index No. 807214/2019. Ms. Rowley brought the action derivatively alleging that the director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements. The Complaint sought declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs. We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims. On September 13, 2019, the Court ordered the litigation stayed pursuant to a joint stipulation by the parties. On August 3, 2022, Plaintiff dismissed the case with prejudice by filing a stipulation of discontinuance with the Court. This dismissal was not pursuant to a settlement.
On January 15, 2020, Kevin Broccuto filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Kevin Broccuto, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Broccuto brings this action derivatively alleging three counts: Count I alleges that the defendants breached their fiduciary duties; Count II alleges they committed corporate waste; and Count III that they were unjustly enriched, by allegedly allowing the Company to make false statements.
On February 11, 2020, Jerry Wayne filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Jerry Wayne, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Wayne brings this action derivatively alleging generally the same allegations as the Broccuto case. The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement of alleged profits and imposition of constructive trusts, and attorney's fees and costs. The Complaint also seeks to declare as unenforceable the Company's Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company is headquartered.
On March 25, 2020, the Court ordered the Broccuto and Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties. On June 27, 2022, the Court ordered that the stay continue until thirty (30) days after the District Court rules on the renewed Motion to Dismiss the Amended Complaint in the Noto Class Action case. As a result of the Court’s denial of the Motion to Dismiss the Amended Complaint, the June 27, 2022 stay will be lifted. No trial date has been set. The parties have scheduled a mediation during March 2023. We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.
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NOTE 13. – LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted loss per common share for the years ended December 31, 2022 and 2021, respectively. Outstanding warrants, options, and restricted stock units were excluded from the calculation of diluted EPS as the effect was antidilutive.
Year Ended
December 31,
2022
2021
(in thousands, except for per-share data)
Net loss
$
( 59,801 )
$
( 32,609 )
Weighted average common shares outstanding - basic and diluted
192,837
156,208
Net loss per common share - basic and diluted
$
( 0.31 )
$
( 0.21 )
Anti-dilutive shares are as follows as of December 31:
Warrants
17,073
—
Options
4,912
5,171
Restricted stock units
4,033
3,165
26,018
8,336
NOTE 14. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table is a summary of the components and activity of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of and for the year-ended December 31, 2022 and 2021, respectively:
Years Ended December 31, 2022 and 2021
Corporate
Foreign
securities/
Translation
Pre-tax
Net of
investments
Adjustment
Amount
Tax
Tax Amount
Balance at January 1, 2021
$
74
$
—
$
74
$
—
$
74
Unrealized loss on short-term investment securities
( 236 )
—
( 236 )
—
( 236 )
Balance at December 31, 2021
$
( 162 )
$
—
$
( 162 )
$
—
$
( 162 )
Unrealized loss on short-term investment securities
( 316 )
—
( 316 )
—
( 316 )
Foreign currency translation
—
1
1
—
1
Reclassification of realized losses to net loss
366
—
366
—
366
Balance at December 31, 2022
$
( 112 )
$
1
$
( 111 )
$
—
$
( 111 )
NOTE 15. – EQUITY BASED COMPENSATION
Stock Compensation Plan
On May 20, 2021, the stockholders of 22nd Century Group, Inc. (the “Company”) approved the 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (the “2021 Plan”). The 2021 Plan allows for the granting of equity awards to eligible individuals over the life of the 2021 Plan, including the issuance of up to 5,000,000 shares of the Company’s common stock, in addition to any remaining shares under the Company’s 2014 Omnibus Incentive Plan pursuant to awards under the 2021 Plan. The 2021 Plan has a term of ten years and is administered by the Compensation Committee of the Company’s Board of Directors to determine the various types of incentive awards that may be granted to recipients under the 2021 Plan and the number of shares of common stock to underlie each such award under the 2021 Plan. As of December 31, 2022, the Company had available 4,461,984 shares remaining for future awards under the 2021 Plan.
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Compensation Expense
The Company recognized the following compensation costs, net of actual forfeitures, related to RSUs and stock options:
Year Ended
December 31,
2022
2021
Sales, general, and administrative
$
5,307
$
3,821
Research and development
182
163
Total RSUs and stock option compensation
$
5,489
$
3,983
Restricted Stock Units (“RSUs”) . We typically grant RSUs to employees and non-employee directors. The following table summarizes the changes in unvested RSUs from January 1, 2021 through December 31, 2022.
Unvested RSUs
Weighted
Average
Number of
Grant-date
Shares
Fair Value
in thousands
$ per share
Unvested at January 1, 2021
2,938
$
0.85
Granted
2,200
$
3.25
Vested
( 1,660 )
$
0.85
Forfeited
( 313 )
$
1.04
Unvested at December 31, 2021
3,165
$
2.50
Granted
3,535
$
1.96
Vested
( 2,306 )
$
2.11
Forfeited
( 361 )
$
2.39
Unvested at December 31, 2022
4,033
$
2.13
The fair value of RSUs that vested during the years ended December 31, 2022 and 2021 was approximately $ 4,505 and $ 5,262 , respectively, based on the stock price at the time of vesting. As of December 31, 2022, unrecognized compensation expense for RSUs amounted to $ 4,189 which is expected to be recognized over a weighted average period of approximately 0.8 years. In addition, there is approximately $ 1,310 of unrecognized compensation expense that requires the achievement of certain milestones which are not yet probable.
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Stock Options. Our outstanding stock options were valued using the Black-Scholes option-pricing model on the date of the award. A summary of all stock option activity since January 1, 2021 is as follows:
Weighted
Weighted
Average
Average
Remaining
Aggregate
Number of
Exercise
Contractual
Intrinsic
Options
Price
Term
Value
in thousands
$ per share
Outstanding at January 1, 2021
6,581
$
1.50
Granted
235
3.10
Exercised
( 984 )
1.37
Forfeited
( 600 )
1.00
Expired
( 61 )
2.64
Outstanding at December 31, 2021
5,171
1.65
Exercised
( 150 )
1.16
Forfeited
( 100 )
1.39
Expired
( 9 )
2.76
Outstanding at December 31, 2022
4,912
$
1.67
2.3
years
$
—
Exercisable at December 31, 2022
4,812
$
1.65
2.2
years
$
—
The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. No option awards were granted in 2022. The following assumptions were used for the year ended December 31, 2021:
2021
Risk-free interest rate (1)
0.54
%
Expected dividend yield (2)
—
%
Expected volatility (3)
87.92
%
Expected term of stock options (4)
4.09
years
(1) The risk-free interest rate is based on the period matching the expected term of the stock options based on the U.S. Treasury yield curve in effect on the grant date.
(2) The expected dividend yield is assumed as zero. The Company has never paid cash dividends nor does it anticipate paying dividends in the foreseeable future.
(3) The expected volatility is based on historical volatility of the Company’s stock.
(4) The expected term represents the period of time that options granted are expected to be outstanding based on vesting date and contractual term.
As of December 31, 2022, there is approximately $ 190 of unrecognized compensation expense for stock options that requires the achievement of certain milestones which are not yet probable.
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NOTE 16. – INCOME TAXES
The following is a summary of the components giving rise to the income tax (benefit) provision for the years ended December 31, 2022 and 2021:
2022
2021
Current:
Federal
$
—
$
—
State
14
—
Foreign
—
—
Total current provision
$
14
$
—
Deferred:
Federal
( 11,319 )
( 7,566 )
State
( 4,978 )
( 1 )
Foreign
( 24 )
—
Total deferred benefit
( 16,321 )
( 7,567 )
Change in valuation allowance
15,873
7,581
Total income tax (benefit) / provision
$
( 434 )
$
14
The (benefit) provision for income tax varies from that which would be expected based on applying the statutory federal rate to pre-tax book loss, including the effect of the change in the U.S. corporate income tax rates, as follows:
2022
2021
Statutory federal rate
21.0
%
21.0
%
Other items
( 0.6 )
( 0.5 )
Stock based compensation
( 0.8 )
2.7
Research and development credit carryforward
—
0.1
State tax, net of federal benefit
8.3
—
162(m) limitation
( 0.6 )
—
Valuation allowance
( 26.6 )
( 23.3 )
Effective tax rate
0.7
%
—
%
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Table of Contents
Individual components of deferred taxes consist of the following as of December 31:
2022
2021
Deferred tax assets:
Net operating loss carry-forward
$
39,806
$
24,859
Inventory
694
104
Stock-based compensation
1,167
1,326
Investment in Panacea Life Sciences, Inc.
79
1,320
Investment in Aurora Cannabis, Inc.
53
46
Start-up expenditures
175
177
Research and development credit carryforward
1,205
1,192
Accrued bonus
537
411
Severance liability
151
50
Allowance for doubtful accounts
89
—
Research and development costs
1,521
—
Operating lease obligations
672
365
Capital loss on investment
2,209
107
Capitalized legal fees
178
—
Other
106
18
$
48,642
$
29,975
Deferred tax liabilities:
Machinery and equipment
( 757 )
( 254 )
Patents and trademarks
( 356 )
( 373 )
Operating lease right-of-use assets
( 638 )
( 362 )
Other intangible assets
( 2,470 )
( 259 )
( 4,221 )
( 1,248 )
Valuation allowance
( 44,652 )
( 28,779 )
Net deferred taxes
$
( 231 )
$
( 52 )
The Company has net operating loss (“NOL”) carryforwards of approximately $ 120,023 as of December 31, 2022 that do not expire. The Company had accumulated an NOL carryforward of approximately $ 46,920 through December 31, 2017 and this NOL carryforward begins to expire in 2030. As of December 31, 2022, the Company has a research and development credit carryforward of approximately $ 1,205 that begins to expire in 2030. The Company generated a capital loss carryover of approximately $ 9,271 as of December 31, 2022, that begins to expire in 2026. Utilization of these NOL carryforwards may be subject to an annual limitation in the case of equity ownership changes, as defined by law. Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future, the Company has recorded a valuation allowance to reduce the net deferred tax asset to zero. These carryforwards are included in the net deferred tax asset that has been fully offset by the valuation allowance. The valuation allowance increased by $ 15,873 and $ 7,581 for the years ended December 31, 2022, and 2021, respectively.
ASC 740 provides guidance on the financial statement recognition and measurement for uncertain income tax positions that are taken or expected to be taken in a company’s income tax return. The Company has evaluated its tax positions and believes there are no uncertain tax positions as of December 31, 2022.
NOTE 17. – SEGMENT AND GEOGRAPHIC INFORMATION
The Company organizes its business into two reportable segments: (1) Tobacco and (2) Hemp/Cannabis. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting .
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The Company defines segment income from operations as revenues, net less cost of goods sold and expenses attributable to segment-specific selling, general, administrative, research, development, and other operating activities. The remaining unallocated operating and other income and expenses are primarily administrative corporate overhead expenses such as corporate personnel costs, equity compensation, investor relations, strategic consulting, research and development costs that apply broadly to the overall plant science platform, and that are not allocated to reportable segments. Unallocated corporate assets consist of cash and cash equivalents, short-term investment securities, prepaid and other assets, property and equipment, and intangible assets. Transactions between the two segments are not significant.
The following table presents revenues, net by segment for fiscal years ended December 31, 2022 and 2021:
Year Ended
December 31,
2022
2021
Tobacco
$
40,501
$
30,905
Hemp/cannabis
21,610
43
Total revenues, net
$
62,111
$
30,948
The following table presents income from continuing operations for the Company’s reportable segments for fiscal years ended December 31, 2022 and 2021:
Year Ended
December 31,
2022
2021
Tobacco
$
5,753
$
2,527
Hemp/cannabis
15,870
624
Total segment operating loss
21,623
3,151
Unallocated operating expenses
35,483
25,261
Operating loss
57,106
28,412
Hemp/cannabis other (income) expense, net
227
-
Unallocated other (income) expense, net
2,902
4,183
Loss before income taxes
$
60,235
$
32,595
(1) In the fourth quarter of 2022, the Company recorded pre-tax charges and other expenses of $ 4,799 related to the Grass Valley fire. These charges were included in Other operating expenses, net as described in Note 19.
The following table presents depreciation and amortization expense for the Company’s reportable segments for fiscal years ended December 31, 2022 and 2021:
Year Ended
December 31,
2022
2021
Tobacco
$
606
$
546
Hemp/cannabis
1,475
37
Total depreciation and amortization included in segment operating loss
2,081
583
Unallocated depreciation and amortization
777
665
Total depreciation and amortization
$
2,858
$
1,248
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The following table presents total assets for the Company’s reportable segments as of December 31, 2022 and 2021:
Year Ended
December 31,
2022
2021
Tobacco
$
15,748
$
10,746
Hemp/cannabis
65,965
2,266
Total reportable segments
81,713
13,013
Unallocated assets
32,938
62,942
Total assets
$
114,651
$
75,954
The following table presents capital expenditures for the Company’s reportable segments for fiscal years ended December 31, 2022 and 2021:
Year Ended
December 31,
2022
2021
Tobacco
$
650
$
461
Hemp/cannabis
2,549
-
Total reportable segments
3,198
461
Unallocated expenditures for long-lived tangible assets
459
286
Total expenditures
$
3,657
$
745
Geographic Area Information
For the years ended December 31, 2022 and 2021, substantially all third-party sales of product are shipped to customers in the United States. Additionally, as of December 31, 2022, and 2021, substantially all long-lived assets are physically located or domiciled in the United States.
NOTE 18. – REVENUE RECOGNITION
Tobacco
The Company’s tobacco reportable segment revenues are derived primarily from contract manufacturing organization (“CMO”) customer contracts that consist of obligations to manufacture the customers’ branded filtered cigars and cigarettes. Additional revenues are generated from sale of the Company’s proprietary low nicotine content cigarettes, sold under the brand name VLN ® , or research cigarettes sold under the brand name SPECTRUM®.
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For certain CMO contracts, the performance obligation is satisfied over time as the Company determines, due to contract restrictions, it does not have an alternative use of the product and it has an enforceable right to payment as the product is manufactured. The Company recognizes revenue under those contracts at the unit price stated in the contract based on the units manufactured. Tobacco revenue from the sale of the Company’s products, which include excise taxes and shipping and handling charges billed to customers, is recognized net of cash discounts, sales returns and allowances. There was no allowance for discounts or returns and allowances at December 31, 2022 and December 31, 2021. Excise taxes recorded in Cost of Goods Sold on the Consolidated Statement of Operations and Comprehensive Loss for the years ended December 31, 2022 and 2021 was $ 12,619 and $ 10,135 , respectively.
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Hemp/Cannabis
The Company’s hemp/cannabis reportable segment revenues are derived primarily from a CBD wholesale extracts and bulk ingredient distillate or isolate. Additional revenues are generated from private/white label contract manufacturing.
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled. For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.
When applicable, the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.
There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.
Disaggregation of Revenue
The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by major product line because the Company believes it best depicts the nature, amount, and timing of revenue and cash flows. Revenue recognized from Tobacco products transferred to customers over time represented 74 % and 68 %, for the year ended December 31, 2022 and 2021, respectively. Revenue recognized from Hemp/cannabis products transferred to customers over time represented 4 % and 0 %, for the year ended December 31, 2022 and 2021, respectively.
Year Ended
December 31,
2022
2021
Tobacco
$
40,501
$
30,905
Hemp/cannabis
21,610
43
Total revenues, net
$
62,111
$
30,948
The following table presents net revenues by significant customers, which are defined as any customer who individually represents 10% or more of disaggregated product line net revenues:
Year Ended
December 31,
2022
2021
Tobacco
Hemp/cannabis
Tobacco
Hemp/cannabis
Customer A
21.69
%
*
26.00
%
*
Customer B
19.55
%
*
27.04
%
*
Customer C
23.31
%
*
*
*
Customer D
*
*
*
10.81
%
Customer E
*
*
*
81.01
%
Customer F
*
12.03
%
*
*
Customer G
*
11.29
%
*
*
All other customers
35.45
%
76.68
%
46.96
%
8.18
%
_____________
*Less than 10% of product line’s total revenues for the period.
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Contract Assets and Liabilities
Unbilled receivables (contract assets) represent revenues recognized for performance obligations that have been satisfied but have not been billed. These receivables are included as Accounts receivable, net on the Consolidated Balance Sheets. Customer payment terms vary depending on the terms of each customer contract, but payment is generally due prior to product shipment or within extended credit terms up to twenty-one ( 21 ) days after shipment. Deferred Revenue (contract liabilities) relate to down payments received from customers in advance of satisfying a performance obligation. This deferred revenue is included as Deferred income on the Consolidated Balance Sheets.
Total contract assets and contract liabilities are as follows:
December 31,
December 31,
2022
2021
Unbilled receivables
$
354
$
178
Deferred revenue
( 831 )
( 119 )
Net contract assets (liabilities)
$
( 477 )
$
59
During the years ended December 31, 2022 and 2021, the Company recognized $ 59 and $ 77 of revenue that was included in the contract asset balance as of December 31, 2021 and 2020 respectively.
NOTE 19. – OTHER OPERATING EXPENSES, NET
The components of “Other operating expenses, net” were as follows:
Year Ended
December 31,
2022
2021
Grass Valley fire:
Fixed asset write-offs
$
5,550
$
-
Inventory charges
3,998
-
Compensation & benefits
195
-
Professional services
36
-
Lease obligations
20
-
Insurance recoveries
( 5,000 )
-
Total Grass Valley fire
4,799
-
Acquisition costs
1,046
-
Impairment of intangible assets
1,488
78
Impairment of inventory
237
-
(Gain) loss on sale or disposal of property, plant and equipment
( 368 )
-
Total other operating expenses, net
$
7,202
$
78
Grass Valley Fire
In November 2022, there was a fire at our Grass Valley manufacturing facility in Oregon, which manufactures bulk ingredients, primarily CBD isolate and distillate.
We recognized fixed asset write-offs and inventory charges of $ 5,550 , $ 3,998 , respectively, related to property destroyed in the fire in the fourth quarter of 2022. The associated lease ROU asset and lease liability were also written-off, with remaining lease obligation of $ 20 being recorded for December rent. We have incurred certain fees for various professional services in 2022 in connection with the assessment of the fire and the efforts to rebuild and resume operations. Further, we incurred $ 195 of compensation and benefits in 2022 for Grass Valley manufacturing employees, subsequent to the fire. In connection with the Grass Valley fire, we have recognized anticipated insurance recoveries deemed probable
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of collection of $ 5,000 in 2022 related to our ongoing insurance claim for property damage, which the corresponding receivable is recorded as Prepaids and other current assets on the Consolidated Balance Sheet as of December 31, 2022.
Additional business interruption insurance coverage with limits of $ 15,000 remains pending as of December 31, 2022, and will be recognized as income when all contingencies have been resolved.
Acquisition Costs
During 2022, acquisition costs include $ 1,046 primarily related to the acquisition of GVB Biopharma and consist primarily of professional fees and others costs.
Other general charges
During 2022 and 2021, the Company recorded other impairment charges in connection with intangible assets subject to amortization that are periodically reviewed for strategic importance and commercialization opportunity prior to expiration and we recorded an impairment charge for the tradename intangible asset impacted by changes to expect future cash flows of $ 1,453 .
Additionally, the Company recorded an inventory write-down in the fourth quarter in connection with unavoidable casualty from a weather event that resulted in hemp/cannabis crop loss.
NOTE 20. – QUARTERLY REVENUE AND EARNINGS DATA – UNAUDITED
Three Months Ended
December 31,
September 30,
June 30,
March 31,
2022 (1)
2022
2022
2022
Revenues, net
$
19,206
$
19,383
$
14,477
$
9,045
Gross profit (loss)
$
( 646 )
$
619
$
892
$
309
Net loss
$
( 26,283 )
$
( 13,102 )
$
( 11,498 )
$
( 8,918 )
Net loss per common share - basic and diluted (2)
$
( 0.12 )
$
( 0.06 )
$
( 0.06 )
$
( 0.05 )
Three Months Ended
December 31,
September 30,
June 30,
March 31,
2021
2021
2021
2021
Revenues, net
$
7,960
$
7,811
$
8,371
$
6,806
Gross profit
$
231
$
292
$
448
$
515
Net loss
$
( 13,964 )
$
( 9,440 )
$
( 4,174 )
$
( 5,031 )
Net loss per common share - basic and diluted
$
( 0.09 )
$
( 0.06 )
$
( 0.03 )
$
( 0.03 )
(1) In the fourth quarter of 2022, the Company recorded pre-tax charges and other expenses of $ 4,799 related to the Grass Valley fire. These charges were included in Other operating expenses, net as described in Note 19.
(2) The quarterly per share data in this table has been rounded to the nearest $ 0.01 and therefore may not sum to total year-to-date EPS.
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NOTE 21. – SUBSEQUENT EVENTS
Acquisition of RX Pharmatech Ltd
On January 19, 2023, the Company acquired RX Pharmatech Ltd (“RXP”) a privately held distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. The Company paid $ 200 in cash and $ 450 in stock and may pay up to an additional $ 1,550 of contingent earn out over the next three years based on specified conditions being met. The Company expects to determine the preliminary purchase price allocation prior to the end of the first quarter of 2023.
Insurance Recoveries
During the first quarter of 2023, the Company received $ 5,000 of casualty loss insurance recoveries from the Grass Valley fire.
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
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assumed by the Company in connection with the acquisition of GVB Biopharma. The maturity date of the Subordinated Note is May 1, 2024.
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.
In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 675,000 shares of the Company’s Common Stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $ 0.855 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions, as more fully described in the Omnia Warrants.
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Item 15(b). Exhibits
In reviewing the agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
·
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
·
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
·
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
·
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading. Additional information about the Company may be found elsewhere in this report and the Company’s other public files, which are available without charge through the SEC’s website at http://www.sec.gov .
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Exhibit No.
Description
2.1
Reorganization and Acquisition Agreement between the Company and GVB Biopharma (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on May 18, 2022).
3.1
Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010 filed with the Commission on December 1, 2010).
3.1.1
Amendment to Certificate of Incorporation of the Company (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the Commission on March 4, 2014).
3.2
Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Commission on January 30, 2014).
3.2.1
Amendment No. 1 to Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Form 8-K filed with the Commission on April 28, 2015).
4.1
Description of Securities Registered Pursuant to Section 12 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-K filed on March 1, 2022)
4.2
.
Form of Warrant (incorporated by reference from Exhibit 4.1 to the Company’s Form 8-K filed with the Commission on July 25, 2022).
4.3*
Form of Original Issue Discount Senior Secured Debentures dated March 3, 2023
4.4*
Form of JGB Warrant
4.5*
Form of Omnia Warrant
10.1††
License Agreement dated March 6, 2009 between North Carolina State University and 22nd Century Limited, LLC (incorporated by reference to Exhibit 10.21 to the Company’s Form S-1 registration statement filed with the Commission on August 26, 2011).
10.1.1
Amendment dated August 9, 2012 to License Agreement dated March 6, 2009 between North Carolina State University and 22nd Century Limited, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 20, 2012).
10.2
Letter Agreement between the Company and North Carolina State University dated November 22, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on November 23, 2011).
10.3†
Form of Executive Restricted Stock Unit Award under 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).
10.4†
Form of Director Restricted Stock Unit Award under 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).
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10.5†††
Framework Collaborative Research Agreement, dated as of April 3, 2019, between KeyGene N.V. and 22nd Century Group, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 7, 2019).
10.6†
Employment Agreement between the Company and James Mish (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on June 3, 2020).
10.7†
Employment Agreement between the Company and John Franzino (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on June 3, 2020).
10.8†
22nd Century Group, Inc. 2021 Omnibus Incentive Plan (incorporated by reference from Appendix A to the Company’s definitive proxy statement filed April 5, 2021)
10.9†
Form of Option Award Agreement under 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on May 21, 2021).
10.10†
Form of Executive RSU Award Agreement under 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on May 21, 2021).
10.11†
Form of Director RSU Award Agreement under 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on May 21, 2021).
10.12†††
First Amended and Restated Framework Collaborative Research Agreement between 22nd Century Group, Inc. and Keygene N.V. dated April 16, 2021 (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on August 5, 2021).
10.13
Securities Exchange Agreement between 22nd Century Group, Inc. and PLS, Exactus, Inc. dated June 30, 2021 (incorporated by reference to exhibit 10.3 of the Company’s Form 10-Q filed with the Commission on August 5, 2021).
10.14†
Employment Agreement between the Company and R. Hugh Kinsman (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on June 15, 2022).
10.15†*
Employment Agreement between the Company and John J. Miller dated November 11, 2022
10.16†
22nd Century Group, Inc. 2014 Omnibus Incentive Plan, as amended and restated (incorporated by reference from Appendix A to the Company’s definitive proxy statement filed on March 22, 2019)
10.17†*
Employment Agreement between the Company and Peter Ferola dated September 20, 2022
10.18*
Securities Purchase Agreement dated March 3, 2023 with each of the purchasers party thereto and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers
10.19*
Subordinated Promissory Noted dated March 3, 2023
21.1*
Subsidiaries
23.1*
Consent of Freed Maxick CPAs, P.C.
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31.1*
Section 302 Certification.
31.2*
Section 302 Certification.
32.1*
Written Statement of Principal Executive Officer and Chief Financial Officer pursuant to 18.U.S.C §1350.
101*
Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to the Consolidated Financial Statements.
101.INS XBRL
Instance Document*
101.SCH XBRL
Taxonomy Extension Schema Document*
101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document*
101.DEF XBRL
Taxonomy Extension Definition Linkbase Document*
101.LAB XBRL
Taxonomy Extension Label Linkbase Document*
101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document*
Exhibit 104
Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*
* Filed herewith.
† Management contract or compensatory plan, contract or arrangement.
†† Certain portions of the exhibit have been omitted pursuant to a confidential treatment order. An unredacted copy of the exhibit has been filed separately with the United States Securities and Exchange Commission pursuant to the request for confidential treatment.
†††Certain portions of the exhibit have been omitted pursuant Regulation S-K Item 601(b) because it is both (i) not material to investors and (ii) likely to cause competitive harm to the Company is publicly disclosed.
Item 16. Form 10-K Summary.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
22nd CENTURY GROUP, INC.
Date:
March 9, 2023
By:
/s/ James A. Mish
James A. Mish
Chief Executive Officer and Director
(Principal Executive Officer)
Date:
March 9, 2023
By:
/s/ R. Hugh Kinsman
R. Hugh Kinsman
Chief Financial Officer
(Principal Accounting and Financial Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
March 9, 2023
By:
/s/ Nora B. Sullivan
Nora B. Sullivan
Director
Date:
March 9, 2023
By:
/s/ Richard M. Sanders
Richard M. Sanders
Director
Date:
March 9, 2023
By:
/s/ Clifford B. Fleet
Clifford B. Fleet
Director
Date:
March 9, 2023
By:
/s/ Roger D. O’Brien
Roger D. O’Brien
Director
Date:
March 9, 2023
By:
/s/ Dr. Michael Koganov
Dr. Michael Koganov
Director
nthony
Date:
March 9, 2023
By:
/s/ Anthony Johnson
Anthony Johnson
Director
Date:
March 9, 2023
By:
/s/ Lucille S. Salhany
Lucille S. Salhany
Director
87