Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the other sections of this Form 10-K, including “Risk Factors,” and the Financial Statements and notes thereto. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K. See “Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary.” Our actual results may differ materially. For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, references to the “Company,” “we,” us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein.
On December 17, 2024, we implemented a 1-for-135 reverse stock split, on March 28, 2024, we implemented a 1-for-16 reverse stock split, and on July 5, 2023, we implemented a 1-for-15 reverse stock split of our common stock. All historical share and per-share amounts reflected throughout this section have been adjusted to reflect the reverse stock splits. The par value per share of our common stock was not affected.
($ in thousands, except per share data or unless otherwise specified)
Executive Overview
● On December 23, 2021, the FDA issued modified risk orders for our reduced nicotine cigarettes, VLN ® King and VLN ® Menthol King, 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.”
● Subsequently commenced pilot market sales of VLN® King and VLN® Menthol King 95% reduced nicotine content cigarettes in Chicago during the first quarter of 2022, then expanded sales and distribution channels from 2022 - 2024 to more than 5,100 stores across 26 states.
● Executed on restructuring plans that commenced in the fourth quarter of 2023 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, inclusive of:
30
Table of Contents
o 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.
o Decreased consolidated liabilities from December 31, 2023 to December 31,2024 by $18,251 through payment, equity exchange and other means, including $8,124 reduction in long-term debt.
Tobacco Business Highlights
● Poised to benefit from the January 2025 proposed FDA rule mandating reduced nicotine content in all combustible cigarette products, if advanced. The Company has the only FDA-authorized combustible cigarette able to meet the proposed stringent reduced nicotine content product standard.
● Continued agreements with national-scale C-store distribution partners to support state-wide or multi-state availability of VLN ® at hundreds of stores within our target markets.
● Announced plans for new VLN product branding and marketing initiatives designed to drive greater customer engagement, as well as the development of partner VLN brands to be sold alongside proprietary VLN products.
● Announced the first VLN partner brand with Smoker Friendly, to begin shipments in the second quarter 2025.
● Restructured contract manufacturing business operations to deliver improved efficiency and exited or renegotiated underpriced contracts in favor of improved customer agreements.
● Signed a new license and manufacturing agreement with Smoker Friendly, one of the largest independent cigarette retailers in the United States, covering 11 brands currently sold in the Smoker Friendly network of retail stores and dealers in the U.S., plus another eight new premium brands to be launched and establishing a framework for other planned future products to be added.
● Expanded the Pinnacle private label brand to add distribution of cigarillo products to its existing Pinnacle cigarette products currently sold as a private label brand in a top-5 U.S. gas station convenience store chain.
● Executed two significant new export customer contracts to drive additional revenue and improve our margin profile, including an expected substantial increase in our overall CMO production unit volumes. Those contracts and production setup commenced in April 2024, with initial shipments during the fourth quarter.
Financial Overview – Fourth Quarter and Full Year 2024 Results
● Net revenues for the fourth quarter of 2024 were $4,020, a decrease of 45.4% from $7,357 in 2023, primarily driven by a decrease in volumes of filtered cigars.
o Fourth quarter 2024 cartons sold of 338 compared to 823 in the comparable prior year period.
● Net revenues for the full year 2024 were $24,382, a decrease of 24.3% from $32,204 in 2023.
● Gross profit (loss) for the fourth quarter of 2024 was a loss of $1,254 compared to loss of $7,829 in the prior year period.
● Gross profit (loss) for the full year 2024 was a loss of $2,400, compared to a loss of $8,696 in 2023.
● Total operating expenses for the fourth quarter 2024 decreased 56% to $2,837 compared to $6,403 in the prior year quarter driven by:
o Sales, general and administrative expenses decreased to $2,471, driven primarily by a decrease in strategic consulting, insurance expenses, and other public company expenses due to our cost savings initiatives.
o Research and development expenses decreased to $219, driven by a decrease in contract and IP related costs.
o Other operating expense, net was $147 compared to $1,905 in the prior year period, primarily reflecting restructuring costs of $1,871, including impairment and legal charges that occurred in 2023.
● Operating loss for the fourth quarter 2024 was $4,091, compared to a loss of $14,232 in the prior year period. Operating loss for the full year 2024 was $13,950, compared to a loss of $44,931 in the prior year.
● Net loss in the fourth quarter of 2024 was $4,246 representing a net loss per share of $10.59 compared with net loss in the fourth quarter of 2023 of $22,068, representing a net loss per share of $1,413.40. Net loss for the full
31
Table of Contents
year 2024 was $15,495, representing a net loss per share of $105.85 compared with net loss for the full year 2023 of $54,686, representing a net loss per share of $5,776.63.
● As of December 31, 2024, we had $4,422 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):
Year Ended
December 31
December 31
Change
2024
2023
$
%
Revenues, net
$
24,382
$
32,204
(7,822)
(24.3)
Cost of goods sold
14,278
24,891
(10,613)
(42.6)
Excise taxes and fees on products
12,504
16,009
(3,505)
(21.9)
Gross (loss) profit
(2,400)
(8,696)
6,296
(72.4)
Gross (loss) profit as a % of revenues, net
(9.8)
%
(27.0)
%
Operating expenses:
Sales, general and administrative ("SG&A")
10,287
31,064
(20,777)
(66.9)
SG&A as a % of revenues, net
42.2
%
96.5
%
Research and development ("R&D")
1,133
2,644
(1,511)
(57.1)
R&D as a % of revenues, net
4.6
%
8.2
%
Other operating expense, net ("OOE")
130
2,527
(2,397)
(94.9)
Total operating expenses
11,550
36,235
(24,685)
(68.1)
Operating loss from continuing operations
(13,950)
(44,931)
30,981
(69.0)
Operating loss as a % of revenues, net
(57.2)
%
(139.5)
%
Other income (expense):
Loss on transfer of promissory note
-
(895)
895
NM
Other income (expense), net
507
334
173
51.8
Interest income, net
72
219
(147)
(67.1)
Interest expense
(2,094)
(9,366)
7,272
(77.6)
Total other income (expense), net
(1,515)
(9,708)
8,193
(84.4)
Loss before income taxes
(15,465)
(54,639)
39,174
(71.7)
Provision for income taxes
30
47
(17)
(36.2)
Net loss from continuing operations
(15,495)
(54,686)
39,191
(71.7)
Net loss as a % of revenues, net
(63.6)
%
(169.8)
%
Net loss per common share from continuing operations (basic and diluted)
$
(105.85)
$
(5,776.63)
5,670.78
(98.2)
32
Table of Contents
2024 Compared with 2023
Revenue - Sale of products, net
Year Ended
December 31
December 31
2024
2023
Revenues, net
$
24,382
$
32,204
Cartons sold
2,125
3,415
Tobacco revenue was $24,382, a decrease of 24.3% from $32,204 in the prior year, primarily driven by a decrease in volumes of filtered cigars and export cigarettes, offset by increases in cigarettes and new sales in 2024 for cigarillos.
Gross (loss) profit
Year Ended
December 31
December 31
2024
2023
Gross (loss) profit
$
(2,400)
$
(8,696)
Percent of Revenues, net
(9.8)
%
(27.0)
%
The decrease in gross loss and gross loss as a percent of revenues, net for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily driven by implementation of cost cut initiatives, efficiency, and the shift in product mix offset by lower sales volume. Additionally, the improvement in gross loss and gross loss as a percent of revenues, net is due to the prior year period reserve for excess, obsolete or expired leaf inventory of $7,720 recorded during the fourth quarter of 2023.
Sales, general and administrative expense
Changes From Prior Year
Compensation and benefits (a)
$
(8,098)
Sales and marketing (b)
(2,456)
Strategic consulting (b)
(6,569)
Other expenses (c)
(3,654)
Net decrease in SG&A expenses
$
(20,777)
(a) Compensation and benefits and equity compensation expense decreased for the year ended December 31, 2024 compared to the prior year due to a reduction of headcount as part of our cost cut initiatives.
(b) Decreases of strategic consulting, sales and marketing and travel and entertainment for the year ended December 31, 2024 compared to the prior year were due to reduced spending as part of our cost cut initiatives.
(c) Other expenses decreased for the year ended December 31, 2024 compared to the prior year ended December 31, 2023 mainly due to decreases in insurance of $1,483, public company expenses of $1,407, legal expenses of $617, travel and entertainment of $615, technology expenses $329 and depreciation expense of $78 which were partially offset by an allocation to our hemp cannabis business that occurred in the prior year.
33
Table of Contents
Research and development expense
Changes From Prior Year
Compensation and benefits (a)
$
(475)
Contract, IP and other expenses (b)
(1,036)
Net decrease in R&D expenses
$
(1,511)
(a) Decreased compensation and benefits primarily relate to the decrease in headcount in 2024 compared to the prior year.
(b) Contract, IP and other expenses decreased for the year ended December 31, 2024 compared to the prior year primarily due to a decrease in contract costs of $500 and IP related consulting and expenses of $503 due to our cost cutting initiatives.
Other operating expenses (income), net
Year Ended
December 31,
2024
2023
Restructuring costs:
Impairment of intangible assets
$
—
$
1,375
Impairment of fixed assets
—
56
Professional services
—
763
Severance
—
221
Total Restructuring costs (a)
—
2,415
Acquisition and transaction costs (b)
—
223
Impairment of intangible assets
68
—
Loss (gain) on sale or disposal of property, plant and equipment
62
(111)
Total other operating expense, net
$
130
$
2,527
(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 in the prior year.
Refer to Note 18, “Other operating expenses (income), net,” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information regarding these charges.
34
Table of Contents
Other income (expense), net
Year Ended
Loss on transfer of promissory note (a)
$
895
Other income (expense), net (b)
173
Interest income, net
(147)
Interest expense (c)
7,272
Net decrease in other expense
$
8,193
(a) During 2023 and in connection with the Senior Secured Credit Facility October 2023 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.
(b) Other income (expense), net primarily reflects the change in fair value of warrant liability.
(c) Interest expense decreased for 2024, as compared to the prior year 2023 as a result of ongoing repayment and elimination of debt obligations on our balance sheet. Cash interest decreased $454 and non-cash interest amortization decreased $723 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $82), and additional decreases of $1,113 as a result of change in fair value of conversion option derivative liability and other interest charges of $28. Additionally, these amounts are offset by $5,158 for extinguishment of debt in the prior year period. Additionally, interest expense decreased $278 from the Subordinated Note, which was extinguished prior to maturity in April 2024 and resulted in a loss on extinguishment of $400.
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 $14,345 for the year ended December 31, 2024 and an accumulated deficit of $393,871 as of December 31, 2024. As of December 31, 2024, we had cash and cash equivalents of $4,422, indebtedness under the Convertible Senior Secured Credit Facility of $7,690 and working capital from continuing operations of $1,790 (compared to working capital deficit from continuing operations of ($6,826) at December 31, 2023). 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.
35
Table of Contents
Our cash and cash equivalents, and working capital as of December 31, 2024, and 2023, are set forth below:
December 31
December 31
2024
2023
Cash and cash equivalents
$
4,422
$
2,058
Working capital
$
1,790
$
(6,826)
Working Capital
As of December 31, 2024, we had working capital, excluding assets and liabilities held for sale, of approximately $1,790 compared to working capital deficit of approximately ($6,826) as of December 31, 2023, an improvement of $8,616. This increase in working capital was primarily due to a decrease in current liabilities of $13,168 offset by a decrease of $4,552 in current assets. Cash and cash equivalents increased by $2,364 and the remaining net current assets decreased by $6,916. As a result of the working capital balance, management has taken a number of steps to improve liquidity. Refer below to “Cash demands on operations.”
Summary of Cash Flow
Year Ended
December 31,
Change
2024
2023
$
Cash provided by (used in):
Operating activities
$
(14,345)
$
(54,987)
40,642
Investing activities
(139)
16,816
(16,955)
Financing activities
16,848
37,209
(20,361)
Net change in cash and cash equivalents
$
2,364
$
(962)
Net cash used in operating activities
Cash used in operations decreased $40,642 from $54,987 in 2023 to $14,345 in 2024. The primary driver for this decrease was lower consolidated net loss of $125,611 due to our cost savings initiatives implemented in 2024, a decrease of $89,876 related to net adjustments to reconcile net loss to cash primarily due to a loss on disposal of the hemp cannabis business that occurred in the prior year of $58,521, and a decrease in cash used for working capital components related to operations in the amount of $4,907 for the year ended December 31, 2024, as compared to the year ended December 31, 2023.
Net cash (used in) provided by investing activities
Cash used in investing activities amounted to $139 in 2024 as compared to cash provided by investing activities of $16,816 in 2023. The decrease in cash provided by investing activities of $16,955 was primarily the result of (i) a decrease in net proceeds from short-term investments of $18,239; (ii) $3,500 of property, plant, and equipment casualty loss insurance proceeds collected in the prior year; (iii) $665 from proceeds from the sale of discontinued operations in the prior year and (iv) a decrease in the proceeds from the sale of property, plant and equipment of $261. These decreased cash inflows were partially offset by a decrease in cash outflows of $5,456 related to the acquisitions of patents, trademarks and property, plant and equipment and (ii) $254 from the acquisition of RXP in the prior year.
36
Table of Contents
Net cash provided by financing activities
During the year ended December 31, 2024, cash provided by financing activities decreased by $20,361, from $37,209 in the prior year, to $16,848, resulting from decreases in (i) net proceeds of $16,048 from issuance of long-term debt, (ii) proceeds of $6,016 from issuance of detachable warrants, (iii) net proceeds of $10,335 from the issuance of common stock (iv) proceeds from issuance of notes payable of $1,104 offset by an increase in net proceeds from warrant exercise of $309. These cash inflows were offset by decreases in cash outflows of note payable payments of $4,035, payments of long-term debt of $8,398, and taxes paid related to net share settlement of RSUs of $419.
Cash demands on operations
We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants to purchase common stock and sale of debt instruments with various institutions, accredited investors, high net worth individuals and creditors.
In January and February 2024, we received net proceeds of $2,245 from the inducement and exercise of 6,081 warrants for shares of common stock and issuance of 12,160 warrants to purchase common stock. In April 2024, we received net proceeds of $3,913 from the issuance of 13,741 shares of common stock, 926 pre-funded warrants and 14,667 warrants to purchase common stock in a registered direct offering. In August and September 2024, we received net proceeds of $5,208 from the issuance of 72,000 shares of common stock pursuant to a Regulation A offering, and in separate private placements, issued 109,600 warrant to purchase common stock. In September 2024 we received net proceeds of $1,054 from the issuance of 38,041 shares of common stock and 76,348 warrants to purchase common stock in a registered direct offering. Also, in September 2024 we received net proceeds of $1,073 from the inducement and exercise of 37,624 warrants for shares of common stock and issuance of 75,248 warrants to purchase common stock. In October 2024 we received net proceeds of $2,002 from the issuance of 105,679 shares of common stock and 211,358 warrants to purchase common stock in a registered direct offering. Also, in October 2024 we received net proceeds of $2,909 from the issuance of 210,036 prefunded warrants to purchase shares of common stock and 315,055 warrants to purchase common stock in a private placement offering.
Convertible Senior Secured Credit Facility
As of December 31, 2024, the remaining principal balance under our Senior Secured Credit Facility is $7,690 of which $1,500 remains current with corresponding non-operating pledged assets. The Debentures under the Senior Secured Credit Facility allow the Holders to voluntarily convert the Debentures, in whole or in part, into shares of the Company’s common stock and the conversion option price in effect as of January 13, 2025 is $6.04. The Holders exercised conversion notices in the amount of $3,132 in January 2025 and the Company issued 518,600 shares of common stock. The remaining principal balance of the Debentures is $4,558, as of March 17, 2025 following the conversion of which the Company and Holders have $1,500 of non-operating assets pledged for repayment.
37
Table of Contents
Outstanding Warrants
As of March 17, 2025, we had the following warrants outstanding:
# of warrants outstanding
Issue date exercise price
Current exercise price (1)
Expiration date
July 2022 RDO warrants
32
$
66,420.00
$
66,420.00
July 25, 2027
Senior Secured Credit Facility - JGB
154
$
41,310.00
$
27,708.00
September 3, 2028
July 19, 2023 RDO warrants (3)
209
$
5,227.20
$
4.3021
July 20, 2028
October 2023 CMPO warrants (3)
93
$
1,134.00
$
4.3021
October 19, 2028
2023 Inducement warrants (3)
19
$
464.40
$
4.3021
February 15, 2029
April 2024 RDO Placement Agent warrants (3)
7,611
$
361.125
$
4.3021
April 8, 2029
September 2024 Reg A+ warrants (3)
2,497,630
$
135.00
$
4.3021
December 6, 2029
September 2024 RDO warrants (3)
2,341,905
$
135.00
$
4.3021
December 6, 2029
September 2024 RDO Placement Agent warrants (3)
87,216
$
168.75
$
4.3021
December 6, 2029
September 2024 Inducement warrants (3)
2,220,465
$
135.00
$
4.3021
December 6, 2029
September 2024 Inducement Placement Agent warrants (3)
85,960
$
168.75
$
4.3021
December 6, 2029
Omnia Pre-Funded Warrants
8,519
$
0.00001
$
0.00001
Not applicable
Omnia warrants
3,408
$
361.125
$
361.125
May 1, 2029
October 2024 RDO (3)
6,359,501
$
135.00
$
4.3021
December 6, 2029
October 2024 RDO Placement Agent Warrants (3)
241,445
$
168.75
$
4.3021
December 6, 2029
October 2024 PIPE Warrants (3)
9,886,421
(4)
$
135.00
$
4.3021
(4)
(2)
October 2024 PIPE Placement Agent Warrants (3)
659,095
(4)
$
168.75
$
4.3021
(4)
(2)
24,399,683
(1) Warrant price adjusted as a result of anti-dilution or ratchet provisions.
(2) Expiration date is 5-years following shareholder approval date.
(3) The exercise prices of the warrants are subject to appropriate adjustment as a result of anti-dilution or ratchet protection provisions relating to subsequent equity sales of shares of the Company’s common stock or common stock equivalents at an effective price per share lower than the then effective exercise price of such warrants. Additionally, the warrant contains cashless and/or alternative cashless exercise features.
(4) Reflects the number of warrants and exercise price assuming stockholder approval is obtained.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.
38
Table of Contents
We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions have had or are reasonably likely to have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 15 of this report.
Inventories
Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.
Historically, our adjustments or write-off charges recorded against inventory have been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. Additionally, if our demand forecasts for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our gross profit and net income.
Valuation of Long-Lived Assets
We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our intangible and other long-lived assets. 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 indefinite-lived intangible assets for impairment
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. 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, 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, 2024, 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) 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. Fair value is generally determined using a discounted cash flow analysis. When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life.
39
Table of Contents
Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment. Events could occur that would materially affect our estimates and assumptions. Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives.
For our long-lived assets, we determined that no impairment indicators occurred during 2024.
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 8, 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
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Item 7A. Quantitative and Qu alitative Disclosures About Market Risk
Not required for smaller reporting companies.