22nd Century (XXII) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes, for the periods ended June 30, 2021, and December 31, 2020 Consolidated Balance Sheets This table presents the company's financial position, including assets, liabilities, and equity, as of June 30, 2021, and December 31, 2020 | Metric | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | Change ($ thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | :------------------- | | Total assets | 97,159 | 51,694 | 45,465 | | Total liabilities | 9,796 | 7,584 | 2,212 | | Total shareholders' equity | 87,363 | 44,110 | 43,253 | | Cash and cash equivalents | 2,037 | 1,029 | 1,008 | | Short-term investment securities | 60,284 | 21,313 | 38,971 | | Capital in excess of par value | 241,968 | 189,439 | 52,529 | Consolidated Statements of Operations and Comprehensive Loss This table details the company's revenue, gross profit, operating loss, and net loss for the three and six months ended June 30, 2021, and 2020 | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Revenue: Sale of products, net | 8,371 | 6,435 | 15,177 | 13,493 | | Gross profit (loss) | 586 | 201 | 1,233 | 488 | | Operating loss | (6,640) | (4,753) | (11,811) | (8,896) | | Gain on Panacea investment conversion | 2,548 | — | 2,548 | — | | Net loss | (4,174) | (5,057) | (9,204) | (9,086) | | Net loss per common share - basic and diluted | (0.03) | (0.04) | (0.06) | (0.07) | Consolidated Statements of Changes in Shareholders' Equity This section outlines changes in total shareholders' equity, capital in excess of par value, and accumulated deficit between December 31, 2020, and June 30, 2021 | Metric | December 31, 2020 ($ thousands) | June 30, 2021 ($ thousands) | Change ($ thousands) | | :-------------------------------- | :----------------------------- | :-------------------------- | :------------------- | | Total Shareholders' Equity | 44,110 | 87,363 | 43,253 | | Capital in Excess of Par Value | 189,439 | 241,968 | 52,529 | | Accumulated Deficit | (145,404) | (154,608) | (9,204) | - Key drivers for the increase in capital in excess of par value include $11,781 thousand from warrant exercises and $38,206 thousand from a capital raise through common stock issuance[13] Consolidated Statements of Cash Flows This table summarizes cash flows from operating, investing, and financing activities for the six months ended June 30, 2021, and 2020 | Metric | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | Change ($ thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :------------------- | | Net cash provided by (used in) operating activities | (12,270) | (11,473) | (797) | | Net cash provided by (used in) investing activities | (39,667) | 10,179 | (49,846) | | Net cash provided by (used in) financing activities | 52,945 | 1,653 | 51,292 | | Net increase (decrease) in cash and cash equivalents | 1,008 | 359 | 649 | | Cash and cash equivalents - end of period | 2,037 | 844 | 1,193 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the financial statements, covering significant accounting policies and specific account breakdowns NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the company's biotechnology business, consolidation principles, significant accounting policies, and the minimal impact of the COVID-19 pandemic - 22nd Century Group is a biotechnology company focused on genetically engineering and modern plant breeding techniques to alter nicotine levels in tobacco plants and cannabinoid/terpene levels in hemp/cannabis plants[23] - The company's consolidated financial statements include 22nd Century Group and its wholly-owned subsidiaries, with all intercompany accounts and transactions eliminated[22] - The COVID-19 pandemic has had a minimal impact on the Company's operations in 2020 and thus far in 2021, but future disruptions are possible[25] - Intangible assets, primarily patent and trademark costs, license fees, MSA signatory costs, and predicate cigarette brand license fees, are amortized using the straight-line method over their statutory lives, with indefinite-lived assets reviewed annually for impairment[29][30][31] NOTE 2. - INVENTORY This note details inventory valuation methods and presents a breakdown of inventory types, showing an increase from December 2020 to June 2021 | Inventory Type | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Inventory - tobacco leaf | 863 | 821 | | Inventory - hemp/cannabis | 68 | — | | Inventory - finished goods | 193 | 171 | | Inventory - raw materials | 1,289 | 1,142 | | Less: inventory reserve | (100) | (100) | | Total Inventory, net | 2,313 | 2,034 | NOTE 3. – PROPERTY, PLANT, AND EQUIPMENT, NET This note details the significant increase in net property, plant, and equipment, driven by land acquisition and manufacturing equipment, from December 2020 to June 2021 | Asset Category | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :----------------------------- | :----------------------------- | :----------------------------- | | Land | 1,665 | — | | Building and leasehold improvements | 309 | 123 | | Manufacturing equipment | 5,518 | 4,893 | | Office furniture, fixtures and equipment | 119 | 20 | | Laboratory equipment | 192 | 117 | | Less: accumulated depreciation | (2,956) | (2,670) | | Property, plant and equipment, net | 4,847 | 2,483 | - Depreciation expense for the three and six months ended June 30, 2021, was $150 thousand and $288 thousand, respectively, a slight decrease from the prior year[44] NOTE 4. - RIGHT-OF-USE ASSETS, LEASE OBLIGATIONS, AND OTHER LEASES This note details the company's lease agreements, including its new Buffalo headquarters, with a 5.5-year weighted average term and $663 thousand in future minimum payments - The Company relocated its corporate headquarters to downtown Buffalo, NY, during Q2 2021, with an initial lease term of 36 months and two 24-month renewal options[45] Weighted Average Lease Metrics | Metric | Value | | :----------------------------- | :------ | | Weighted average remaining lease term | 5.5 years | | Weighted average discount rate | 3.8 % | Future Minimum Lease Payments | Year | Future Minimum Lease Payments ($ thousands) | | :--------- | :---------------------------------------- | | 2021 | 146 | | 2022 | 85 | | 2023 | 78 | | 2024 | 80 | | 2025 | 82 | | Thereafter | 192 | | Total lease payments | 663 | NOTE 5. – INVESTMENTS & OTHER ASSETS This note details the company's investment portfolio, including the conversion of Panacea investment into Exactus common stock and a new promissory note receivable | Investment Type | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :-------------------------- | :----------------------------- | :----------------------------- | | Aurora stock warrants | 98 | 239 | | Panacea preferred stock | — | 5,173 | | Panacea stock warrant | — | 1,124 | | Exactus common stock | 9,102 | — | | Total Investments | 9,200 | 6,536 | | Convertible note receivable | — | 5,876 | | Promissory note receivable | 3,684 | — | - On June 30, 2021, the Panacea investment was converted: Series B Preferred Stock into 91,016,026 shares of Exactus common stock ($9,102 thousand), and the convertible note receivable into ownership of Needle Rock Farms and equipment ($2,248 thousand), $500 thousand in Panacea Series B Preferred Stock (converted to Exactus common stock), and a new $4,300 thousand promissory note ($3,684 thousand after discount)[54] - The Panacea investment conversion resulted in a gain of $2,548 thousand, recorded in the Consolidated Statements of Operations and Comprehensive Loss[54] NOTE 6. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS This note outlines the fair value hierarchy for financial instruments, detailing significant increases in short-term investments and the classification of Aurora warrants and Exactus shares | Asset Category | Fair Value June 30, 2021 ($ thousands) | Fair Value December 31, 2020 ($ thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | | Money market funds (Level 1) | 43,892 | 8,636 | | Corporate bonds (Level 2) | 16,392 | 12,677 | | Investment - Aurora stock warrants (Level 3) | 98 | 239 | | Investment - Exactus common shares (Level 1) | 9,102 | — | | Investment - Panacea preferred stock (Level 3) | — | 5,173 | | Convertible note receivable (Level 3) | — | 5,876 | - The Aurora stock warrants are measured at fair value using the Black-Scholes pricing model (Level 3), with an estimated volatility factor of 88% as of June 30, 2021[61] - The fair value of Level 3 investments decreased from $11,288 thousand at December 31, 2020, to $98 thousand at June 30, 2021, primarily due to the Panacea investment conversion[64] NOTE 7. - INTANGIBLE ASSETS This note details the slight decrease in net intangible assets from December 2020 to June 2021, with changes in patent, trademark, and license fees | Intangible Asset Type | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Patent and trademark costs, net | 2,764 | 2,731 | | License fees, net | 2,803 | 2,928 | | MSA signatory costs | 2,202 | 2,202 | | License fee for predicate cigarette brand | 350 | 350 | | Total Intangible assets, net | 8,119 | 8,211 | - Amortization expense for intangible assets was $153 thousand and $303 thousand for the three and six months ended June 30, 2021, respectively, a decrease from the prior year due to impairments taken in 2020[65] NOTE 8. – NOTES PAYABLE This note details the significant increase in current notes payable, primarily driven by D&O insurance financing, from December 2020 to June 2021 | Notes Payable Type | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :----------------- | :----------------------------- | :----------------------------- | | License Fees | 297 | 293 | | D&O Insurance | 2,362 | 246 | | Total current notes payable | 2,659 | 539 | - The company renewed its D&O insurance for $3,315 thousand in Q2 2021, financing $2,653 thousand over nine months at a 3.49% annual percentage rate[68] NOTE 9. – SEVERANCE LIABILITY This note details the decrease in current and long-term accrued severance liabilities from December 2020 to June 2021 due to ongoing payments | Severance Liability | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :------------------ | :----------------------------- | :----------------------------- | | Current accrued severance | 212 | 339 | | Long-term severance obligations | 130 | 241 | NOTE 10. – WARRANT EXERCISE AND CAPITAL RAISE This note details the June 2021 registered direct offering, raising $38,206 thousand net, and the Q1 2021 warrant exercises, generating $11,782 thousand net - On June 7, 2021, the company completed a registered direct offering, selling 10,000,000 shares of common stock at $4.00 per share, generating net proceeds of $38,206 thousand[73] - All 11,293,211 outstanding warrants were exercised for cash in Q1 2021, resulting in net proceeds of $11,782 thousand, with no warrants remaining outstanding as of June 30, 2021[74] NOTE 11. - COMMITMENTS AND CONTINGENCIES This note details $9,128 thousand in future commitments, ongoing MRTP application expenses, and active defense against class action and shareholder derivative lawsuits Total Future Commitments | Commitment Type | Total Future Commitments ($ thousands) | | :-------------------------------- | :------------------------------------- | | Research Agreement (KeyGene) | 6,970 | | License Agreement (NCSU) - Annual royalty | 360 | | License Agreement (NCSU) - Minimum annual royalty | 763 | | License Agreement (NCSU) - Minimum annual royalty | 676 | | Research Agreement (NCSU) | 30 | | Sublicense Agreement (Anandia) | 150 | | Research Agreement (Cannametrix) | 101 | | Growing Agreement (Various) | 78 | | Total | 9,128 | - The company continues to incur consulting and legal expenses for its Modified Risk Tobacco Product (MRTP) application with the FDA, with expenses of $2 thousand and $14 thousand for the three and six months ended June 30, 2021, respectively[77] - The company is involved in a class action lawsuit (Bull case) alleging false statements in SEC filings and public documents, which was dismissed by the District Court but is currently under appeal to the Second Circuit Court of Appeals[84][85] - Multiple shareholder derivative claims have been filed, alleging breaches of fiduciary duties, corporate waste, and false statements, which the company believes are frivolous and intends to vigorously defend against[87][90][94] NOTE 12 – EQUITY- BASED COMPENSATION This note details the 2021 Omnibus Incentive Plan, changes in unvested RSUs and stock options, and $1,752 thousand in total equity-based compensation expense for H1 2021 - The 2021 Omnibus Incentive Plan was approved on May 20, 2021, authorizing up to 5,000,000 shares for equity awards, with 7,089,486 shares remaining available as of June 30, 2021[95][97] Equity Award Activity | Metric | Unvested RSUs (thousands) | Outstanding Stock Options (thousands) | | :-------------------------- | :------------------------ | :---------------------------------- | | December 31, 2020 | 2,938 | 6,581 | | Granted (6 months) | 2,010 | 235 | | Vested/Exercised (6 months) | (1,522) | (934) | | Forfeited/Expired (6 months) | (241) | (6) | | June 30, 2021 | 3,185 | 5,776 | Equity-Based Compensation Expense | Compensation Type | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Sales, general, and administrative | 1,197 | 334 | 1,677 | 772 | | Research and Development | 48 | 42 | 75 | 84 | | Total RSUs and stock option compensation | 1,245 | 376 | 1,752 | 856 | NOTE 13. – REVENUE RECOGNITION This note details revenue recognition from contract manufacturing, disaggregated by timing, and notes an increase in net contract assets from December 2020 to June 2021 - Revenue is recognized from contract manufacturing of filtered cigars and cigarettes, with performance obligations satisfied either over time or at a point in time[103][106] Revenue by Recognition Timing | Revenue Recognition Timing | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net sales-over time | 5,915 | 3,718 | 10,347 | 8,526 | | Net sales-point in time | 2,456 | 2,717 | 4,830 | 4,967 | | Total Revenue | 8,371 | 6,435 | 15,177 | 13,493 | Net Contract Assets | Contract Asset/Liability | June 30, 2021 ($ thousands) | December 31, 2020 ($ thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Unbilled receivables | 300 | 349 | | Deferred Revenue | (145) | (272) | | Net contract assets | 155 | 77 | NOTE 14. – EARNINGS PER SHARE This note reports basic and diluted net loss per common share of $(0.03) for Q2 and $(0.06) for H1 2021, with anti-dilutive securities excluded Earnings Per Share | Metric | 3 Months Ended June 30, 2021 | 3 Months Ended June 30, 2020 | 6 Months Ended June 30, 2021 | 6 Months Ended June 30, 2020 | | :--------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss per common share - basic and diluted | $(0.03) | $(0.04) | $(0.06) | $(0.07) | | Weighted average common shares outstanding (thousands) | 154,811 | 138,854 | 149,564 | 138,732 | - Anti-dilutive shares, including warrants, options, and restricted stock units, totaled 8,961 thousand for the six months ended June 30, 2021, and were excluded from diluted EPS calculations[109] NOTE 15. – SUBSEQUENT EVENTS This note discloses a new 51-month R&D laboratory lease in Rockville, MD, commencing late Q3/early Q4 2021, and the conversion of the New York lab lease to month-to-month - On July 28, 2021, the company signed a lease for a new 4,000+ sq ft R&D laboratory in Rockville, MD, with a 51-month term and expected commencement in late Q3/early Q4 2021[110] - The current New York laboratory lease has converted to a month-to-month agreement[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and results for Q2 and H1 2021, covering business overview, franchise performance, accomplishments, and liquidity Corporate Business Overview The company is a biotechnology firm focused on genetically engineering plants to modulate nicotine in tobacco and cannabinoids/terpenes in hemp/cannabis - The company is a biotechnology firm developing plant-based solutions by modulating nicotine in tobacco and cannabinoids/terpenes in hemp/cannabis using genetic engineering and modern plant breeding[114] - Tobacco mission: reduce smoking harm with proprietary Very Low Nicotine Content (VLNC) tobacco and cigarettes (95% less nicotine); Hemp/cannabis mission: develop proprietary varieties with valuable cannabinoid/terpene profiles for life sciences and consumer products[114] Tobacco Franchise Overview This section details the company's Very Low Nicotine Content (VLNC) tobacco products, their clinical validation, and the status of FDA regulatory applications - The company's VLNC tobaccos contain 95% less nicotine than conventional cigarettes and have been used in over 50 independent clinical studies, showing reductions in smoking, nicotine exposure, and dependence[115][117][118] - VLN® cigarettes received Premarket Tobacco Application (PMTA) authorization in December 2019 and are in the final stages of review for Modified Risk Tobacco Product (MRTP) authorization from the FDA[119][120] - The company is developing non-GMO VLN® 2.0 for international markets, having achieved up to 99% nicotine reduction in tobacco plants using new non-GMO methodologies validated in field trials[123] Hemp/Cannabis Franchise Overview This section outlines the company's development of proprietary hemp/cannabis varieties with enhanced cannabinoid levels and agronomic traits for various markets - The company develops proprietary hemp/cannabis varieties with increased cannabinoid levels and superior agronomic traits, operating strictly with legal hemp in compliance with U.S. federal and state laws[124][125] - The objective is to supply leading companies in life science, consumer product, and pharmaceutical markets with new, differentiated plant lines or ingredients, addressing the current industry's lack of stable genetics and predictable yields[126] Notable Accomplishments and Recent Announcements This section highlights recent achievements and announcements across the company's tobacco, hemp/cannabis, and corporate business segments Tobacco Franchise The company anticipates final FDA MRTP authorization for VLN®, has expanded its global growing program, and supported New Zealand's nicotine reduction plan - The MRTP application for VLN® is in the final stages of FDA review, with U.S. pilot program and manufacturing capabilities in place for launch within 90 days of designation[129] - Expanded VLN® tobacco growing program globally, including partnerships in the southern hemisphere for year-round cultivation, and increased in-house testing capabilities for rapid analysis[129] - Submitted formal support to New Zealand's Smokefree Aotearoa 2025 Action Plan, which considers reducing nicotine in smoked tobacco products to "minimally or non-addictive" levels, a standard already met by VLN®[129] Hemp/Cannabis Franchise The company expects H2 2021 monetization of hemp/cannabis IP, expanded its KeyGene partnership, secured new breeding partners, and established a comprehensive cannabinoid value chain - Monetization of hemp/cannabis plant lines and IP is expected to begin in the second half of 2021, including upfront license fees and revenue from the current crop[133] - Extended and expanded plant research partnership with KeyGene to develop new hemp/cannabis plants and IP, and included research for non-combustible tobacco applications and a third plant franchise[133] - Secured partnerships with three additional commercial-scale plant breeders (Extractas Bioscience, Sawatch Agriculture, Folium Botanical) for year-round growing capabilities, augmenting existing Aurora Cannabis partnership[133] - Established a comprehensive upstream cannabinoid value chain, integrating plant profiling (CannaMetrix), genetics (KeyGene), commercial-scale breeding/cultivation (partners, Needle Rock Farms, Panacea), and ingredient extraction/purification[133] Third Plant-Based Franchise The company plans to launch a third plant-based franchise on August 30, 2021, targeting a $500 billion global market with a less regulated commercialization strategy - A third plant-based franchise will be introduced on August 30, 2021, targeting a global market estimated at over $500 billion annually, with a focus on competitive advantages and a global commercialization plan in a less regulated environment[131] Corporate Business The company completed a June 2021 direct offering, raising $40 million gross proceeds, and was added to the Russell 2000®, 3000®, and Global Indexes - On June 9, 2021, the company completed a registered direct offering, raising $40 million in gross proceeds from the sale of 10 million common shares to an institutional investor, with net proceeds of $38,206 thousand for R&D, capital expenditures, IP, commercialization, and working capital[134] - The company was added to the Russell 2000®, Russell 3000®, and Russell Global Indexes, effective June 28, 2021[134] Second Quarter 2021 Financial Highlights This section provides a summary of key financial metrics for Q2 and H1 2021, including net sales, gross profit margin, net loss, and cash position | Metric | Q2 2021 ($ millions) | Q2 2020 ($ millions) | H1 2021 ($ millions) | H1 2020 ($ millions) | | :--------------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Net sales | 8.4 | 6.4 | 15.2 | 13.5 | | Gross profit margin increase (YoY) | 0.385 | N/A | N/A | N/A | | Net loss | (4.2) | (5.1) | N/A | N/A | | Net loss per share | (0.03) | (0.04) | N/A | N/A | | Cash, cash equivalents, and short-term investment securities (as of period end) | 62.3 (June 30) | N/A | N/A | 30.9 (March 31) | Results of Operations This section provides a detailed analysis of the company's revenue, cost of goods sold, operating expenses, and net loss for the periods presented Revenue - Sale of products, net Net sales revenue increased for Q2 and H1 2021, driven by higher volume and pricing of contract manufactured filtered cigars and cigarettes, and a SPECTRUM® order | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :----------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Sale of products, net | 8,371 | 6,435 | 15,177 | 13,493 | | Dollar Change from Prior Year | 1,936 | N/A | 1,684 | N/A | - The increase in Q2 2021 sales was due to a $1,755 thousand increase in filtered cigar sales and a $181 thousand increase in cigarette sales, driven by volume and pricing[138] - The H1 2021 sales increase was primarily from $1,882 thousand in filtered cigar sales and $680 thousand from the SPECTRUM® cigarette order, partially offset by a $878 thousand decrease in other contract manufactured cigarettes[139] Cost of goods sold - Products / Gross profit (loss) Gross profit significantly increased for Q2 and H1 2021, driven by an improved sales mix of filtered cigars, price increases on cigarettes, and a SPECTRUM® order | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :----------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Cost of goods sold | 7,785 | 6,234 | 13,944 | 13,005 | | Gross profit | 586 | 201 | 1,233 | 488 | | Gross profit % of sales | 7.0 % | 3.1 % | 8.1 % | 3.6 % | | Dollar Change in Gross Profit from Prior Year | 385 | N/A | 745 | N/A | - Gross profit increase was driven by improved contract manufactured filtered cigar sales mix (new customer contracts) and price increases on contract manufactured cigarettes[142] Research and development ("R&D") expense R&D expense decreased for Q2 and H1 2021 due to lower consulting, contract, and personnel costs, partially offset by increased patent expenses, as the company prioritizes R&D | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :----------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Research and Development | 744 | 957 | 1,433 | 1,770 | | Percent of Product Sales | 8.9 % | 14.9 % | 9.4 % | 13.1 % | | Dollar Change from Prior Year | (213) | N/A | (336) | N/A | - Decreases in R&D were due to lower consulting/professional services ($125k for Q2, $98k for H1), R&D contract costs ($64k for Q2, $99k for H1), and personnel expense ($68k for Q2, $173k for H1), partially offset by increased patent expenses ($70k for Q2, $97k for H1)[143][144] Research and development expense - MRTP MRTP-related R&D expenses significantly declined for Q2 and H1 2021, as the application was submitted in 2019, with current costs primarily for consulting | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Research and Development - MRTP | 2 | 4 | 14 | 154 | | Dollar Change from Prior Year | (2) | N/A | (140) | N/A | - The decline in MRTP expenses is due to the application submission in 2019; 2021 expenses are mainly for consulting, while 2020 expenses were related to the TPSAC hearing[146] Sales, general and administrative expense SG&A expense significantly increased for Q2 and H1 2021, driven by higher investor relations, consulting, equity compensation, insurance, and personnel costs, supporting market readiness and growth | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Sales, general and administrative | 6,177 | 3,501 | 11,006 | 6,640 | | Percent of Product Sales | 73.8 % | 54.4 % | 72.5 % | 49.2 % | | Dollar Change from Prior Year | 2,676 | N/A | 4,366 | N/A | - Key drivers for SG&A increase include investor relations/strategic consulting ($1,255k for Q2, $1,732k for H1), equity compensation ($865k for Q2, $905k for H1), insurance ($275k for Q2, $879k for H1), and personnel expenses ($697k for H1)[147][148] - The increased SG&A spending is deployed for corporate investment and market readiness in tobacco and hemp/cannabis, with continued incremental spending expected for growth opportunities[149] Depreciation expense Depreciation expense slightly decreased for Q2 and H1 2021 due to a lower depreciable base for property, plant, and equipment following Q4 2020 impairments | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :----------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Depreciation | 150 | 157 | 288 | 313 | | Dollar Change from Prior Year | (7) | N/A | (25) | N/A | - The decrease in depreciation expense was due to a lower depreciable base for property, plant, and equipment, primarily from impairments taken for the Williamsville corporate office in Q4 2020[150] Amortization expense Amortization expense decreased for Q2 and H1 2021 due to a lower depreciable base for intangible assets following 2020 impairments | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :----------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Amortization | 153 | 189 | 303 | 361 | | Dollar Change from Prior Year | (36) | N/A | (58) | N/A | - The decrease in amortization expense was due to a lower intangible asset depreciable base, primarily from impairments taken during 2020[151] Unrealized gain (loss) on investment The company recorded an unrealized loss on its Aurora Cannabis, Inc. stock warrants for Q2 and H1 2021 due to a decrease in fair value | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Unrealized gain (loss) on investments | (176) | 312 | (140) | (133) | | Dollar Change from Prior Year | (488) | N/A | (7) | N/A | - The company recorded an unrealized loss of $176 thousand for Q2 2021 and $140 thousand for H1 2021 on its Aurora Cannabis, Inc. stock warrants, valued at $98 thousand as of June 30, 2021, using the Black-Scholes pricing model[152] Panacea investment conversion The company converted its Panacea investment on June 30, 2021, resulting in a $2,548 thousand gain through exchanges for Exactus common stock and a new promissory note - On June 30, 2021, the company converted its Panacea investment, resulting in a $2,548 thousand gain recorded in the Consolidated Statements of Operations[154] - The conversion involved exchanging Panacea Series B Preferred Stock for 91,016,026 shares of Exactus common stock ($9,102 thousand) and the convertible note receivable for Needle Rock Farms and equipment ($2,248 thousand), $500 thousand in Panacea Series B Preferred Stock (converted to Exactus common stock), and a new $4,300 thousand promissory note receivable[153][154] Interest income, net Net interest income significantly decreased for Q2 and H1 2021 due to lower bond yields on short-term investments and reduced income from the Panacea investment conversion | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Interest Income, net | 108 | 462 | 220 | 1,074 | | Dollar Change from Prior Year | (354) | N/A | (854) | N/A | - The decrease in interest income was primarily due to lower cash interest income on short-term investment securities ($122k for Q2, $287k for H1) due to lower bond yields, and reduced interest income from the Panacea investment ($200k for Q2, $511k for H1) following its conversion[157][158] Interest expense Interest expense decreased for Q2 and H1 2021, primarily due to the full payoff of a note payable to NCSU in Q2 2020 | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :--------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Interest Expense | (14) | (19) | (21) | (31) | | Dollar Change from Prior Year | 5 | N/A | 10 | N/A | - The decrease in interest expense was primarily due to the full payoff of a note payable to NCSU during the second quarter of 2020[159] Net loss Net loss decreased for Q2 2021 due to increased gross profit and a Panacea conversion gain, but increased for H1 2021 due to higher operating expenses and lower interest income | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :--------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net Loss | (4,174) | (5,057) | (9,204) | (9,086) | | Dollar Change from Prior Year | 883 | N/A | (118) | N/A | - Q2 2021 net loss decrease was driven by a $385k increase in gross profit, a $2,548k gain on Panacea conversion, and the absence of a $1,062k impairment from 2020, partially offset by $2,272k increased operating expenses, $176k unrealized loss on Aurora warrants (vs. $312k gain in 2020), and $354k lower interest income[161] - H1 2021 net loss increase was due to $3,660k increased operating expenses and $854k lower interest income, partially offset by $745k increased gross profit, $2,548k gain on Panacea conversion, and the absence of a $1,062k impairment from 2020[162] Other Comprehensive Income (Loss) The company reported an other comprehensive loss for Q2 and H1 2021, primarily due to unrealized losses on available-for-sale short-term investment securities | Metric | 3 Months Ended June 30, 2021 ($ thousands) | 3 Months Ended June 30, 2020 ($ thousands) | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Other Comprehensive Income (Loss) | (41) | 238 | (73) | 45 | | Dollar Change from Prior Year | (279) | N/A | (118) | N/A | - The other comprehensive loss was due to unrealized losses of $41 thousand (Q2 2021) and $73 thousand (H1 2021) on available-for-sale short-term investment securities[163] Liquidity and Capital Resources This section analyzes the company's cash flows, working capital, and financing activities, highlighting its current liquidity position and resources for future commitments | Metric | 6 Months Ended June 30, 2021 ($ thousands) | 6 Months Ended June 30, 2020 ($ thousands) | | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by (used in) operating activities | (12,270) | (11,473) | | Net cash provided by (used in) investing activities | (39,667) | 10,179 | | Net cash provided by (used in) financing activities | 52,945 | 1,653 | | Net increase (decrease) in cash and cash equivalents | 1,008 | 359 | | Cash and cash equivalents - end of period | 2,037 | 844 | | Short-term investment securities | 60,284 | 28,103 | - Working capital increased by $40,473 thousand to $61,471 thousand as of June 30, 2021, driven by a $39,979 thousand increase in cash, cash equivalents, and short-term investment securities[165] - Key financing activities included $11,782 thousand from warrant exercises (Q1 2021) and $38,258 thousand net proceeds from a capital raise (June 2021)[165][169] - The company has approximately $62,321 thousand in cash and short-term investments, providing sufficient resources for contractual commitments, VLNC tobacco growing ($1.5M-$1.9M), and VLN® launch within 90 days of MRTP authorization[170][171] Critical Accounting Policies and Estimates This section confirms no material changes to critical accounting policies and estimates since the December 31, 2020 Annual Report on Form 10-K - No material changes to critical accounting policies and estimates since the December 31, 2020 Annual Report on Form 10-K[173] Inflation This section states that inflation had no material effect on operating results for the six months ended June 30, 2021, and 2020 - Inflation had no material effect on operating results for the six months ended June 30, 2021, and 2020[174] Off-Balance Sheet Arrangements This section confirms the company has no off-balance sheet arrangements as defined by Regulation S-K - The company has no off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K[175] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as of June 30, 2021, with no material changes in internal controls during Q2 Evaluation of Disclosure Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021, for timely and accurate reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021, for timely and accurate reporting in Exchange Act reports[177] Changes in Internal Control over Financial Reporting No material changes in internal controls over financial reporting occurred during the second quarter of 2021 - No material changes in internal controls over financial reporting occurred during the second quarter of 2021[178] PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings This section refers to Note 11 for details on ongoing litigation and confirms no other material legal proceedings are pending - Information on ongoing litigation, including class action and shareholder derivative lawsuits, is detailed in Note 11 to the consolidated financial statements[180] - Management believes no other material legal proceedings, governmental actions, investigations, or claims are pending that could reasonably be expected to have a material adverse effect on the company's business and financial condition[180] Item 1A. Risk Factors No material changes to risk factors have occurred since the December 31, 2020 Annual Report on Form 10-K - No material changes to risk factors since the December 31, 2020 Annual Report on Form 10-K[181] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds are reported in this period - None to report[182] Item 3. Default Upon Senior Securities No defaults upon senior securities are reported in this period - None to report[182] Item 4. Mine Safety Disclosures No mine safety disclosures are reported in this period - None to report[182] Item 5. Other Information No other information is reported in this period - None to report[182] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including key agreements, incentive plans, and certifications - The exhibits include the First Amended and Restated Framework Collaborative Research Agreement with Keygene N.V., Promissory Note Exchange Agreement and Securities Exchange Agreement with Panacea and Exactus, Inc., the 2021 Omnibus Incentive Plan, and Section 302 and 906 certifications[183] SIGNATURES The report was signed by the Chief Executive Officer and Chief Financial Officer on August 5, 2021 - The report was signed by James A. Mish (CEO) and John Franzino (CFO) on August 5, 2021[185]