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Item 7. Management’s Discussion and Analysis

2024-03-28 compared with 2023-03-09 · 212 added, 243 removed, 114 unchanged (80% of the section changed)

7 unchanged sentences

Executive Overview

● Executive overview

● Recent business acquisitions

● Tobacco business highlights

● Hemp/cannabis business highlights

● Corporate business highlights

● Financial overview

Our Financial Results

● Fiscal 2022 compared with fiscal 2021

● Liquidity and capital resources

● Impact of recently issued accounting standards

Critical Accounting Estimates

● Inventories

● Valuation of long-lived assets

● Business combinations

Executive Overview

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

In addition to authorizing the Company to market VLN ® cigarettes with the claim, “95% less nicotine”, to clarify the purpose of the brand, the FDA also authorized the claim, “Helps You Smoke Less.”

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

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

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

and international markets.

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

Recent Business Acquisitions and Other Events

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

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

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

research and genetics, proprietary cryogenic hemp extraction;

refining, conversion, and product formulation technology;

lead supplier of Active Pharmaceutical Ingredients (API);

low-cost, scalable manufacturing capabilities;

regulatory and compliance expertise;

industry trusted high-quality products;

and international capabilities

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

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

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

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

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

● On January 19, 2023, we acquired RX Pharmatech Ltd (“RXP”), a privately held leading United Kingdom distributor of cannabinoids with 1,276 novel food applications with the U.K.

Food Standards Agency (“FSA”).

RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others.

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

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

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

● On December 23, 2021, the FDA issued modified risk granted orders for our reduced nicotine cigarettes, VLN ® King and VLN ® Menthol King.

In addition to authorizing the Company to market VLN ® cigarettes with the claim, “95% less nicotine”, to clarify the purpose of the brand, the FDA also required the use of the claim, “Helps You Smoke Less.”

● Commenced pilot market sales in Chicago during the first quarter of 2022 of VLN® King and VLN® Menthol King 95% reduced nicotine content cigarettes, the first and only FDA authorized MRTP designated combustible cigarettes, and subsequently expanded sales and distribution channels throughout 2022 and 2023 to more than 5,000 stores across 26 states.

● In December 2023, the Company completed the sale of substantially all of the GVB hemp/cannabis business (referred to as the “GVB Divestiture”) to Specialty Acquisition Corporation, exiting the hemp/cannabis market and focusing fully on the Company’s tobacco operations.

● Appointed Larry Firestone as Chairman and Chief Executive Officer in November 2023, and announced plans for a turnaround in the business, including cost reductions and efforts to reposition the company’s business to focus on its VLN assets and CMO business.

Tobacco Business Highlights

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

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

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

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

● Continued a multi-state VLN ® rollout strategy, having launched sales in more than 5,000 locations across 26 states at year-end 2023, aimed at penetrating geographies and markets with large adult smoker populations, including those with favorable MRTP state excise tax savings, which can be used toward consumer incentives, distribution support, and additional programming to raise awareness of VLN ® products.

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

● Launched a private label premium cigarette brand, Pinnacle, for sale at one of the nation’s top 10 gas station convenience store chains, comprising almost 1,700 stores in 27 states.

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

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

● Launched sales at a top U.S.

drugstore chain at approximately 1,200 locations across five states in the third quarter.

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

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

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

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

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

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

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

Hemp/Cannabis Business Highlights

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

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

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

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

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

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

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

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

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

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

● Acquired RX Pharmatech Ltd.

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

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

and EU food and nutraceuticals markets.

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

Corporate Business Highlights

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

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

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

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

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

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

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

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

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

Recent Business Divestiture

On December 22, 2023, we completed the sale of substantially all of the assets of the GVB hemp/cannabis business to Specialty Acquisition Corporation.

As a result, we classified the results of operations of the hemp/cannabis segment and disposal group as discontinued operations in the Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations as held for sale in the Consolidated Balance Sheets as of December 31, 2023 and 2022, respectively.

All results and information presented exclude the hemp/cannabis segment and disposal group unless otherwise noted.

Refer to Note 2 “Discontinued Operations and Divestitures” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information about the divestiture of the GVB and hemp/cannabis disposal group.

Financial Overview – Fourth Quarter and Full Year 2023 Results

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

● Net revenues for the fourth quarter of 2023 were $7,357, a decrease of 26.1% from $9,951 in 2022, primarily driven by a decrease in volumes of filtered cigars.

o Fourth quarter 2023 cartons sold of 823 compared to 1,354 in the comparable prior year period.

● Net revenues for the full year 2023 were $32,204, a decrease of 20.5% from $40,501 in 2022.

● Gross profit for the fourth quarter of 2023 was a loss of $7,829 compared to gross loss of $44 in the prior year period.

● Gross profit for the full year 2023 was a loss of $8,696, compared to a gross profit of $1,847 in 2022.

● Total operating expenses for the fourth quarter 2023 decreased to $6,403 compared to $10,172 in the prior year quarter driven by:

o Sales, general and administrative expenses decreased to $4,005 driven primarily by a decrease in personnel costs, strategic consulting, and sales and marketing due to our cost savings initiatives.

o Research and development expenses decreased to $493, driven by a decrease in personnel expenses and costs associated with the Company’s research programs.

o Other operating expenses, net was $1,905, primarily reflecting restructuring costs of $1,871, including impairment and legal charges.

● Operating loss for the fourth quarter 2023 was $14,232, compared to a loss of $10,216 in the prior year period.

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Net loss for the full year 2023 was $54,686, representing a net loss per share of $2.64 compared with net loss for the full year 2022 of $36,553, representing a net loss per share of $2.84.

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

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

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

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

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

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

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

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

● As of December 31, 2023, we had $2,058 in cash and cash equivalents.

Our Financial Results

The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 15 of this report, for the periods presented (dollars in thousands, except per share amounts):

Tobacco revenues, net

Hemp/cannabis revenues, net

Total revenues, net

Revenues, net

Cost of goods sold

Gross profit as a % of revenues, net

Gross (loss) profit

Gross (loss) profit as a % of revenues, net

Operating expenses:

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

SG&A as a % of revenues, net

Research and development ("R&D")

R&D as a % of revenues, net

Other operating expenses, net ("OOE")

Other operating expenses (income), net ("OOE")

Total operating expenses

Operating loss

Operating loss from continuing operations

Operating loss as a % of revenues, net

Other income (expense):

Unrealized loss on investment

Realized (loss) gain on Panacea investment

Realized loss on short-term investment securities

Other income, net

Other income (expense), net

Realized loss on Panacea investment

Loss on transfer of promissory note

Interest income, net

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Loss before income taxes

(Benefit) provision for income taxes

Provision for income taxes

Net loss from continuing operations

Net loss as a % of revenues, net

Net loss per common share (basic and diluted)

Net loss per common share from continuing operations (basic and diluted)*

NM - calculated change not meaningful

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

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

Fiscal 2023 Compared with Fiscal 2022

Revenue - Sale of products, net

Hemp/cannabis

Total revenues, net

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

Revenues, net

Tobacco revenue was $32,204, a decrease of 20.5% from $40,501 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources during 2023 at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products.

Full year 2023 cartons sold were of 3,459 compared to 5,782 in the comparable prior year period.

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

Gross (loss) profit

Percent of Revenues, net

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

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

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

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

The decrease in gross profit and gross profit as a percent of revenues, net for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily driven by lower volume due to an intentional shift during 2023 in product mix.

In connection with evaluation of strategic alternatives and tobacco focused restructuring efforts, during the fourth quarter of 2023, the Company increased the reserve for excess, obsolete or expired leaf inventory by $7,720.

Sales, general and administrative expense

Change 2022 vs 2021

Changes From Prior Year

Compensation and benefits (a)

Strategic consulting (c)

Sales and marketing (d)

Net increase in SG&A expenses

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

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

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

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

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

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

Strategic consulting (b)

Sales and marketing (c)

Administrative, public company and other expenses (d)

Net decrease in SG&A expenses

(a) Decreases in compensation and benefits primarily resulted from $3,200 benefit of lower equity based compensation expense due to current year headcount reduction and forfeitures, and compared with prior year accelerated vesting of an employee’s outstanding equity awards as part of a termination severance agreement;

$218 decrease in severance expenses offset by an increase of $1,179 in personnel costs due to increased headcount during the year compared to the prior year period.

(b) Decrease of strategic consulting due to restructuring efforts and implementation of cost savings initiatives.

(d) Other expenses increased due to $291 of technology expenses, $579 in public company fees, $270 of facilities expense offset by a decrease in insurance expenses of $469 and other of $397.

(e) Increased legal expenses due to regulatory compliance, business development, and contract matters.

Research and development expense

Change 2022 vs 2021

Changes From Prior Year

Compensation and benefits (a)

Contract costs (b)

Royalty, license and contract costs (b)

Consulting and professional services (c)

Net increase in R&D expenses

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

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

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

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

Other operating expenses, net

Grass Valley fire:

Fixed asset write-offs

Inventory charges

Compensation & benefits

Net decrease in R&D expenses

(a) Decreased compensation and benefits primarily related to personnel bonus expense of $255 in the prior year period as compared to $0 in the current year.

(b) Decreased expenses primarily due to a decrease in royalty fees due in the current year period.

(c) Decreased consulting due to an evaluation of strategic opportunities related to our tobacco patent portfolio that occurred in the period year period.

Other operating expenses (income), net

Restructuring costs:

Impairment of intangible assets

Impairment of fixed assets

Professional services

Lease obligations

Insurance recoveries

Total Grass Valley fire (a)

Acquisition costs (b)

Impairment of intangible assets (c)

Impairment of inventory (c)

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

Total other operating expenses, net

(a) In November 2022, there was a fire at our Grass Valley manufacturing facility in Oregon, which manufactures bulk ingredients, primarily CBD isolate and distillate.

The total charges of $9,799 were offset by $5,000 of insurance proceeds.

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

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

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

Total Restructuring costs (a)

Acquisition and transaction costs (b)

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

Total other operating expenses (income), net

NM - calculated change not meaningful

(a) During the second half of 2023, the Company undertook various restructuring activities in an effort to better align its internal organizational structure and costs with its strategy, as well as preserve liquidity.

As a result, the Company incurred $2,415 in restructuring costs for the year ended December 31, 2023, which included costs related to employee termination, professional services and consulting, and long-lived asset impairment.

(b) Acquisition and transaction costs primarily relate to professional fees incurred in connection with potential capital markets transactions.

Refer to Note 18, “Other operating expenses, net,” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information regarding these charges.

Other income (expense)

Changes From Prior Year

Other income (expense):

Unrealized loss on investment (a)

Realized (loss) gain on Panacea investment (b)

Realized loss on short-term investment securities

Other income, net

Realized loss on Panacea investment (a)

Other income (expense), net (b)

Loss on transfer of promissory note (c)

Interest income, net

Interest expense (c)

Total other expense

NM - calculated change not meaningful

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

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

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

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

Interest expense (d)

Net increase in other expense

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

(b) Other income (expense), net includes a decrease of $336 of realized losses on short-terms investments and $364 gain on change in fair value of warrant liability.

(c) In connection with the Senior Secured Credit Facility October Amendment, the Company assigned $3,800 PLSH promissory note less unamortized discount of $305, and corresponding pay down of indebtedness on outstanding principal of $600 and redemption of the related warrant liability of $2,000 resulting in loss on sale of financial asset of $895.

(d) Interest expense increased in 2023, as compared to the prior year period, primarily due to the cash interest of $1,104 and non-cash interest of $2,087 recognized from the Senior Secured Credit Facility (of these totals, $366 of interest was allocated to discontinued operations), and additional charges of $5,158 for extinguishment of debt and $557 of derivative liability in connection with the December Amendment.

Additionally, interest expense increased as a result of PIK interest of $695 recognized from the Subordinated Note.

Liquidity and Capital Resources

We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in our tobacco business.

We had negative cash flow from operations of $54,987 for the year ended December 31, 2023 and an accumulated deficit of $378,707 as of December 31, 2023.

As of December 31, 2023, we had cash and cash equivalents of $2,058, and working capital of ($6,826) (compared to working capital of $22,079 at December 31, 2022).

Given our projected operating requirements and existing cash and cash equivalents, there is substantial doubt about our ability to continue as a going concern through one year following the date that the Consolidated Financial Statements herein are issued.

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners.

If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory or assets, cease or curtail operations, seek to negotiate new business deals with our business partners or seek protection under applicable bankruptcy laws or similar state proceedings.

There can be no assurance that the Company will be able to raise the capital it needs to continue operations.

Accordingly, there is substantial doubt regarding our ability to continue in operations.

Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Consolidated Financial Statements are issued.

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

Cash and cash equivalents

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Working capital

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

Working Capital

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

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

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

As of December 31, 2023, we had working capital, excluding assets and liabilities held for sale, of approximately ($6,826) compared to working capital of approximately $22,079 as of December 31, 2022, a decrease of $28,905.

This decrease in working capital is primarily driven by the decrease in short-term investment securities resulting from cash burn, increase in current portion of long-term debt, and other normal fluctuations from operations in accounts receivable, inventory, accounts payable and accrued expenses.

Summary of Cash Flow

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The primary driver for this increase was higher net loss of $80,974, driven by increased spending in SG&A and R&D both from the acquisition of GVB and acceleration of the launch of VLN ® , an increase of $67,866 related to net adjustments to reconcile net loss to cash, and an increase in cash used for working capital components related to operations in the amount of $9,835 for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Net cash provided by (used in) investing activities

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

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

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

Net cash provided by investing activities

Cash provided by investing activities amounted to $16,816 in 2023 as compared to cash provided by investing activities of $22,578 in 2022.

The decrease in cash provided by investing activities of $5,762 was primarily the result of (i) a decrease in net proceeds from short-term investments of $10,338;

(ii) $1,188 related to the acquisition of patents, trademarks and property, plant and equipment;

and (iii) $126 of proceeds from the sale of property, plant and equipment.

These decreased cash outflows were partially offset by an increase in cash inflows of (i) $3,500 of property, plant, and equipment casualty loss insurance proceeds collected in the current year;

(ii) $1,043 from the acquisition of RXP in the current year and GVB in the prior year period;

(iii) $682 from the investment in Change Agronomy Ltd.

in the prior year and (iv) $665 from proceeds from the sale of discontinued operations.

Net cash provided by financing activities

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

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

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

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

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

During the year ended December 31, 2023, cash provided by financing activities increased by $6,389 resulting from the net proceeds of $16,048 from issuance of long-term debt, proceeds of $6,016 from issuance of detachable warrants, net proceeds of $3,044 from warrant exercises, net proceeds of $2,563 from issuance of common stock related to the prior ATM facility, increased proceeds of $198 from the issuance of notes payable, and a decrease in other financing of $29.

These cash inflows were offset by a decrease in net proceeds of issuance of common stock of $9,605, payments of long-term debt of $9,700, increased note payable payments of $1,759, taxes paid related to net share settlement of RSUs of $271 and $174 of option exercises that occurred in 2022.

Cash demands on operations

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

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

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

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

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

Our cash, cash equivalents, short-term investment securities, insurance recovery proceeds, and credit facility financing, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, will provide sufficient resources for estimated contractual commitments, described further in Note 12 to our Consolidated Financial Statements included herein, and normal cash requirements for operations well beyond the next twelve months.

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

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

New Senior Secured Credit Facility

On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”).

Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,052,632 and (ii) warrants to purchase up to 5,000,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), subject to adjustments as set forth in the JGB Warrants, for a total purchase price of $20,000,000.

As of December 31, 2023, we had approximately $2,058 of cash and cash equivalents.

Our principal sources of liquidity are our cash and cash equivalents and cash generated from our tobacco contract manufacturing business and proceeds from debt and equity financing activities, which cash flows provided by financing activities for the year ended December 31, 2023 were $37,209.

As discussed above, in response to the cash demands on operations, management has implemented programs to evaluate strategic alternatives for the Company’s assets and cost cut initiatives intended to reduce our operating costs to provide additional cash runway.

However, our cash, cash equivalents, potential business interruption insurance proceeds, and debt/equity financings, as well as the sustained tobacco contract manufacturing, currently are not forecasted to provide sufficient cash resources or liquidity for a period of twelve months from issuance of these consolidated financial statements.

Senior Secured Credit Facility

On March 3, 2023, the Company entered into that certain Securities Purchase Agreement (the “SPA”) with JGB Partners, LP (“JGB Partners”), JGB Capital, LP (“JGB Capital”) and JGB Capital Offshore Ltd.

(“JGB Offshore” and collectively with JGB Partners and JGB Capital, the “Holders”) and JGB Collateral, LLC, as collateral agent for the Holders (the “Agent”) which pursuant to the agreement, the Company sold 5% original issuance discount senior secured debentures with an aggregate principal amount of $21,053.

The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date.

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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

Commencing on May 1, 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 $19.125 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

As a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 shares of common stock.

There are no further anti-dilution adjustments on such warrants.

In connection with the JGB October Amendment, the Company and Holders agreed to exercise the outstanding put provision to redeem 166,667 Warrants for an aggregate put price equal to $2,500.

Following the JGB October and December Amendments (as further described in Note 13 “Debt” of the Notes to Consolidated Financial Statements contained in Item 15 of this report) , as of December 31, 2023 the remaining principal loan balance is approximately $10,752, exit fee of $1,052 and remaining $500 of the put price will be due at maturity in March 2026 in accordance with the original terms of the debenture agreements.

As of December 31, 2023, the Company has pledged to JGB the $2,000 GVB promissory note and $1,000 assignment of Needle Rock Farms to be applied as principal reduction in 2024.

Omnia Subordinated Note

On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”).

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The maturity date of the Subordinated Note is May 1, 2024.

July 2022 Equity Raise

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

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

In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 45,000 shares of the Company’s common stock.

The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company was previously able issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”).

The Company paid 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold.

Total net proceeds during the second quarter of 2023 were $2,563.

On June 19, 2023, the Company terminated the ATM Program in connection with the June 2023 offering described below.

June 19, 2023 Registered Direct Offering

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

The net proceeds to the Company from the offering were approximately $4,800.

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

As part of the offering, the Company entered into a warrant reprice letter and agreed to reduce the exercise price on the previously issued 747,974 warrants owned by the investors participating in the Offering from $30.75 to $7.05 and to add a provision in the warrants that upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, such exercise price shall be lowered to such price at which the shares were offered.

As a result of the offerings completed in July 2023, the exercise price on the 1,495,948 warrants was automatically adjusted to $2.42 per share and subsequently adjusted to $0.525 per share in October.

All of the outstanding warrants were subsequently exercised in connection with the Warrant Inducement Offering.

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

On December 7, 2023, the Company was provided notice of irrevocable abandonment of 325,205 warrants.

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

$12.828 exercise price for up to 496,960 shares of common stock, of which 166,667 were redeemed in October 2023 (see above discussion of amendment and waiver under Senior Secured Credit Facility).

July 6, 2023 Registered Direct Offering.

On July 6, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $3,000 of shares and warrants, consisting of an aggregate of 778,634 shares of common stock and 1,557,268 warrants to purchase an equal number of shares, at a purchase price of $3.80 per unit.

The warrants are exercisable six months after issuance at an exercise price of $3.80 per share of common stock and expire on January 10, 2029.

The net proceeds to the Company from the offering were approximately $2,722.

As a result of the subsequent offering completed in July 2023, the exercise price on the 1,557,268 warrants was automatically adjusted to $2.42 per share and subsequently adjusted to $0.525 per share in October.

All of the outstanding warrants were subsequently exercised in connection with the Warrant Inducement Offering.

July 19, 2023 Registered Direct Offering.

On July 19, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $11,700 of shares and warrants, consisting of an aggregate of 4,373,219 shares of common stock and 8,746,438 warrants to purchase an equal number of shares, at a purchase price of $2.67 per unit.

The warrants are exercisable immediately at an exercise price of $2.42 per share of common stock and expire five years after issuance.

The net proceeds to the Company from the offering were approximately $10,742.

As a result of the subsequent offering completed in October 2023, the exercise price on the 8,746,438 warrants was automatically adjusted to $0.525 per share.

8,296,438 of the warrants were subsequently exercised in connection with the Warrant Inducement Offering.

October 2023 Public Offering

On October 17, 2023, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell and issue, in a registered public offering, (i) an aggregate of 7,600,000 shares of the Company’s common stock, par value $0.00001 per share, (ii) warrants to purchase 20,000,000 shares of common stock (the “Common Warrants”) and (iii) pre-funded warrants to purchase 2,400,000 shares of common stock (the “Pre-Funded Warrants”).

The Common Warrants have an exercise price of $0.525, are immediately exercisable and have a term of exercise equal to five years following the original issuance date.

The Pre-Funded Warrants have an exercise price of $0.0001, are immediately exercisable and are exercisable at any time after their original issuance until such Pre-Funded Warrants are exercised in full.

The shares were offered at a combined public offering price of $0.525 per share and two accompanying Common Warrants.

The Pre-Funded Warrants were offered at a combined public offering price of $0.5249 per Pre-Funded Warrant and two accompanying Common Warrants.

In addition, the Company issued the placement agent warrants to purchase up to 1,000,000 shares of common stock (equal to 10% of the aggregate number of shares and Pre-Funded Warrants sold in the offering) at an exercise price of $0.65625, which represents 125% of the public offering price per share and accompanying Common Warrant.

The placement agent agreed not to exercise the such warrants until the Company subsequently increases its authorized shares of common stock.

The offering closed on October 19, 2023 with gross proceeds to the Company of approximately $5,250, before deducting the placement agent fees of $367 and other offering expenses payable by the Company of approximately $288.

As a result of the offering, the exercise price on 11,799,654 previously outstanding warrants were automatically adjusted from $2.42 per share to $0.525 per share.

The Pre-Funded Warrants were subsequently exercised on a cashless basis in October 2023, resulting in issuance of 2,399,512 shares of common stock.

17,300,000 of the October Warrants were subsequently exercised in connection with the Warrant Inducement Offering.

Warrant Inducement Offering

On November 28, 2023, the Company commenced a warrant inducement offering with the holders of the Company’s outstanding 31,779,654 warrants consisting of:

(i) the common stock purchase warrants of the Company issued on or about June 22, 2023;

(ii) the common stock purchase warrants of the Company issued on or about July 10, 2023;

(iii) the common stock purchase warrants of the Company issued on or about July 21, 2023;

and/or (iv) the common stock purchase warrants of the Company issued on or about October 19, 2023 (collectively, the “Existing Warrants”), which Existing Warrants are exercisable for an equal number of shares of common stock at an exercise price of $0.525.

The Company agreed to issue new warrants (the “Inducement Warrants”) to purchase up to a number of shares of common stock equal to 200% of the number of shares of common stock issued pursuant to the exercise by the holders of the Existing Warrants during the inducement period, for cash, at a reduced exercise price equal to the Nasdaq Minimum Price (as defined in the as defined in Nasdaq Listing Rule 5635(d)).

For the period from November 28, 2023 through February 15, 2024, the date of Stockholder Approval, the Company entered into warrant inducement agreements with certain holders of the Existing Warrants to purchase an aggregate of 28,649,654 shares of common stock at a reduced weighted average exercise price of $0.2010.

Pursuant to the warrant inducement agreements, the exercising holders of the Existing Warrants received 57,299,308 Inducement Warrants at an exercise price of $0.1765 and the Company received aggregate gross proceeds of approximately $5,757 from the exercise of the Existing Warrants.

Outstanding Warrants

As of March 25, 2024, we had the following warrants outstanding:

# of warrants outstanding

Exercise price

Expiration date

July 2022 RDO warrants

July 25, 2027

Senior Secured Credit Facility - JGB

September 3, 2028

Subordinated Note - Omnia

September 3, 2030

July 19, 2023 RDO warrants

July 20, 2028

October 2023 CMPO warrants

October 19, 2028

Inducement warrants

February 15, 2029

Impact of Recently Issued Accounting Standards

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

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

However, variations in methods or assumptions could have a material impact on our results.

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

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

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

Intangible assets determined to have an indefinite useful life are not amortized.

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

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

Evaluation of goodwill for impairment

We test each reporting unit’s goodwill for impairment on the measurement date and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

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

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

If not, no further goodwill impairment testing is required.

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

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

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

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

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

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

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

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

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

Evaluation of indefinite-lived intangible assets for impairment

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

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

Our indefinite-lived intangible assets include the MSA, cigarette brand predicate and trademarks.

We perform an annual impairment review of our indefinite-lived intangible assets on December 1, the measurement date, unless events occur that trigger the need for an interim impairment review.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We determined as of December 1, 2023, it is more likely than not that that the assets are not impaired.

Evaluation of long-lived assets for impairment

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

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

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

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

Business Combinations

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

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

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

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

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

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

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

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

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

For our long-lived assets, we determined that impairment indicators occurred during the fourth quarter of 2023 in connection with ongoing evaluation of our tobacco strategy and restructuring efforts and concluded that certain definite-lived intangible assets, including patents, were impaired due to obsolescence or abandonment in the amount of $1,375.

No other long-lived assets were concluded to be non-recoverable based on undiscounted cash flow analysis performed.

Detachable Warrants

Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value.

The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date.

The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants.

Embedded Derivatives – Conversion Option

Our December Amendment to the Senior Secured Credit Facility contained an embedded derivative conversion option.

The Company evaluates each debt agreement to determine whether any embedded features require bifurcation from the debt host in accordance with ASC 815, Derivatives and Hedging ("ASC 815").

If the embedded feature requires bifurcation from its debt host, the Company will account for it as either a derivative liability or as a derivative in equity.

The Company uses valuation models to estimate the fair value of the embedded derivatives.

For the valuation to record the debt and embedded derivative related to the conversion option at fair value, the Company uses a binomial lattice model at inception and on subsequent valuation dates.

This model incorporates inputs such as the stock price of the Company, risk-free interest rate, the effective debt yield and expected volatility.

Certain inputs involve unobservable inputs and are classified as level 3 of the fair value hierarchy (see Note 9, Fair Value Measurement to our Consolidated Financial Statements included elsewhere in Item 15 of this Annual Report).

The sensitivity of the fair value calculation to these methods, assumptions, and estimates included could create materially different results under different conditions or using different assumptions.

Off-Balance Sheet Arrangement

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

What changed 10-K

Item 7. Management’s Discussion and Analysis