22nd Century (XXII) - 2023 Q3 - Quarterly Report

Filing Information Form 10-Q Details This Form 10-Q details 22nd Century Group, Inc.'s Q3 2023 quarterly report, filed as a non-accelerated and smaller reporting company on NASDAQ - Company name: 22nd Century Group, Inc., incorporated in Nevada[1] Filing Information | Indicator | Details | | :--- | :--- | | Stock Symbol | XXII | | Registered Exchange | NASDAQ Capital Market | | Filer Classification | Non-accelerated filer | | Filer Classification | Smaller reporting company | | Common Shares Outstanding (as of Nov 1, 2023) | 30,878,168 shares | PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Q3 2023, including balance sheets, income statements, equity changes, cash flows, and detailed notes on accounting policies and key events Condensed Consolidated Balance Sheets The company's financial position as of September 30, 2023, shows a significant decline in total assets and shareholders' equity, driven by increased liabilities and accumulated deficit Condensed Consolidated Balance Sheets | Indicator | September 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change ($ thousands) | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $64,196 | $114,651 | $(50,455) | | Total Liabilities | $50,401 | $18,676 | $31,725 | | Total Shareholders' Equity | $13,795 | $95,975 | $(82,180) | | Cash and Cash Equivalents | $2,850 | $3,020 | $(170) | | Restricted Cash | $7,500 | $0 | $7,500 | | Goodwill | $0 | $33,160 | $(33,160) | | Inventories | $15,955 | $10,008 | $5,947 | | Current Portion of Long-Term Debt | $18,165 | $0 | $18,165 | | Accumulated Deficit | $(349,373) | $(237,814) | $(111,559) | Condensed Consolidated Statements of Operations and Comprehensive Loss The company's net loss significantly increased for the three and nine months ended September 30, 2023, driven by goodwill impairment and higher operating expenses, despite nine-month net revenue growth Condensed Consolidated Statements of Operations and Comprehensive Loss | Indicator ($ thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Year-over-Year Change | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Year-over-Year Change | | :-------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Net Revenue | $17,811 | $19,383 | (8.1%) | $63,200 | $42,905 | 47.3% | | Gross (Loss) Profit | $(1,966) | $619 | (417.6%) | $(5,488) | $1,819 | (401.7%) | | Total Operating Expenses | $69,516 | $15,887 | 337.6% | $103,171 | $35,710 | 188.9% | | Operating Loss | $(71,482) | $(15,268) | 368.2% | $(108,659) | $(33,891) | 220.6% | | Net Loss | $(72,720) | $(13,102) | 455.0% | $(111,441) | $(33,518) | 232.5% | | Basic and Diluted Loss Per Share | $(3.68) | $(0.94) | 291.5% | $(6.85) | $(2.71) | 152.8% | Condensed Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity significantly decreased from $95,975 thousand on January 1, 2023, to $13,795 thousand by September 30, 2023, primarily due to substantial net losses and new accounting standard adoption, partially offset by capital raises and equity compensation Condensed Consolidated Statements of Changes in Shareholders' Equity | Indicator ($ thousands) | January 1, 2023 | September 30, 2023 | Change | | :-------------------- | :---------- | :----------- | :----- | | Total Shareholders' Equity | $95,975 | $13,795 | $(82,180) | | Accumulated Deficit | $(237,814) | $(349,373) | $(111,559) | | Capital in Excess of Par Value | $333,900 | $363,198 | $29,298 | - During the nine months ended September 30, 2023, the company issued 5,151,853 common shares for $13,416 thousand from capital raises, 747,974 shares for $4,851 thousand from other capital raises, and 333,334 shares for $3,570 thousand through a licensing agreement[11] - The company effected a 1-for-15 reverse stock split on July 5, 2023, with all share and per-share amounts retroactively adjusted[11] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, the company experienced increased cash usage in operating activities, a significant increase in cash inflows from investing activities due to short-term investment sales and insurance proceeds, and higher cash inflows from financing activities through debt and equity issuances Condensed Consolidated Statements of Cash Flows | Indicator ($ thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Year-over-Year Change | | :-------------------- | :-------------------------- | :-------------------------- | :----------- | | Net Cash Used in Operating Activities | $(50,184) | $(32,648) | $(17,536) | | Net Cash Provided by Investing Activities | $17,352 | $380 | $16,972 | | Net Cash Provided by Financing Activities | $40,162 | $33,296 | $6,866 | | Net Increase in Cash, Cash Equivalents, and Restricted Cash | $7,330 | $1,028 | $6,302 | | Cash, Cash Equivalents, and Restricted Cash, End of Period | $10,350 | $2,364 | $7,986 | - Significant increase in cash inflows from investing activities in 2023 was primarily due to $21,714 thousand from sales and maturities of short-term investment securities and $3,500 thousand in insurance proceeds for property, plant, and equipment[14] - Cash inflows from financing activities in 2023 included $16,849 thousand from long-term debt issuance, $6,016 thousand from detachable warrant issuance, and $19,908 thousand from common stock issuance[14] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's financial statements, covering key areas such as accounting policies, business acquisitions, inventories, goodwill and intangible asset impairment, investments, fair value measurements, debt, equity financing, commitments and contingencies, equity compensation, earnings per share, comprehensive income, and segment information NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company, an agricultural biotechnology and intellectual property firm, faces significant going concern doubts due to continuous losses, negative operating cash flow, and debt covenant non-compliance, prompting evaluation of cost-cutting and financing strategies - The company is a leading agricultural biotechnology and intellectual property company focused on improving health through advanced plant technologies in low nicotine tobacco, cannabis/hemp, and hops[15] - Due to continuous losses (net loss of $111,441 thousand for the nine months ended September 30, 2023), negative operating cash flow (operating cash outflow of $50,184 thousand for the nine months ended September 30, 2023), and an accumulated deficit of $349,373 thousand, there are substantial doubts about the company's ability to continue as a going concern[19][21] - The company did not comply with the consolidated net revenue financial covenant in its Senior Secured Credit Facility for Q3 2023 but obtained a waiver from the lender[20] - Management is evaluating financing strategies including expense reductions, securities issuance, asset sales, and strategic collaborations, but these plans do not eliminate the substantial doubt about the company's ability to continue as a going concern[22] NOTE 2. – BUSINESS ACQUISITIONS In 2023, the company acquired RX Pharmatech Ltd. for $2,127 thousand, primarily for its intangible assets (1,276 novel food applications), and completed measurement period adjustments for the 2022 GVB Biopharma acquisition, which significantly increased cannabis/hemp revenue but also contributed to net losses - On January 19, 2023, the company acquired RX Pharmatech Ltd. (RXP) for $2,127 thousand, including cash, common stock, and contingent consideration, primarily for its intangible assets related to 1,276 novel food applications with the UK Food Standards Agency[52][53][54] - The 2022 acquisition of GVB Biopharma, focused on cannabis-based cannabinoid extraction, refining, contract manufacturing, and product development, contributed $9,736 thousand and $37,815 thousand in net revenue for the three and nine months ended September 30, 2023, respectively, but also resulted in net losses of $56,318 thousand and $66,212 thousand during the same periods[76] - Final measurement period adjustments for the GVB acquisition resulted in a $10,840 thousand reduction in goodwill and fair value allocations to property, plant, and equipment ($11,189 thousand) and intangible assets (trade names $4,600 thousand, customer relationships $5,800 thousand)[63][64] NOTE 3. – INVENTORIES As of September 30, 2023, the company's total inventories increased to $15,955 thousand from $10,008 thousand on December 31, 2022, driven by growth in raw materials, work-in-process, and finished goods Inventories | Inventory Type ($ thousands) | September 30, 2023 | December 31, 2022 | Change | | :---------------------------- | :----------- | :----------- | :----- | | Raw Materials | $9,849 | $8,743 | $1,106 | | Work-in-Process | $1,750 | $441 | $1,309 | | Finished Goods | $4,356 | $824 | $3,532 | | Total Inventories | $15,955 | $10,008 | $5,947 | - In Q3 2023, the company increased its cannabis/hemp inventory excess, obsolete, or expired reserve by $1,687 thousand due to evaluating strategic alternatives and cost reduction measures[39] NOTE 4. – GOODWILL AND OTHER INTANGIBLE ASSETS, NET The company fully impaired goodwill by $33,360 thousand for its cannabis/hemp reporting unit in Q3 2023, reducing it to zero, and recognized additional impairment charges of $9,980 thousand on other cannabis/hemp intangible assets and $9,910 thousand on long-lived assets due to strategic review and cost reductions - In Q3 2023, the company fully impaired goodwill by $33,360 thousand for its cannabis/hemp reporting unit, reducing the balance to zero, primarily due to decreased expected future cash flows and increased discount rates for that unit[80][82] - The company recorded $9,980 thousand in impairment charges for specific trade names, patents, and license intangible assets related to its cannabis/hemp business[88] - Additionally, the company recorded $5,876 thousand in impairment charges for cannabis/hemp manufacturing equipment (property, plant, and equipment) and $4,034 thousand for operating lease right-of-use assets associated with manufacturing facilities[88] Intangible Assets, Net | Intangible Asset Type ($ thousands) | Net Carrying Value Sep 30, 2023 | Net Carrying Value Dec 31, 2022 | Impairment (9 Months 2023) | | :----------------------------------- | :------------------------------- | :------------------------------- | :-------------------- | | Total Amortizable Intangible Assets | $4,155 | $11,012 | $(8,100) | | Total Indefinite-Lived Intangible Assets | $2,745 | $5,841 | $(4,917) | | Total Intangible Assets, Net | $6,900 | $16,853 | $(13,017) | NOTE 5. – INVESTMENTS & OTHER ASSETS The company's total investments remained at $682 thousand, primarily comprising an equity investment in Change Agronomy Ltd., while the Panacea promissory note receivable was fully assigned in October 2023 Investments | Investment Type ($ thousands) | September 30, 2023 | December 31, 2022 | | :----------------------------- | :----------- | :----------- | | Change Agronomy Ltd. Common Stock | $682 | $682 | | Total Investments | $682 | $682 | - The Panacea promissory note receivable, valued at $3,490 thousand as of September 30, 2023, was fully assigned in October 2023[96] NOTE 6. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS As of September 30, 2023, the company's fair value measurements for liabilities included detachable warrants ($3,675 thousand) and contingent consideration ($952 thousand), both classified as Level 3 inputs due to significant unobservable inputs Fair Value Measurements | Fair Value Item ($ thousands) | September 30, 2023 | December 31, 2022 | | :----------------------------- | :----------- | :----------- | | Restricted Cash (Level 1) | $7,500 | $0 | | Change Agronomy Ltd. Common Stock (Level 3) | $682 | $682 | | Detachable Warrants (Level 3) | $3,675 | $0 | | Contingent Consideration (Level 3) | $952 | $0 | - Detachable warrants are measured using a Monte Carlo valuation model, assuming a risk-free rate of 4.6%, expected volatility of 90.9%-97.9%, and contractual maturities of 4.9-6.9 years[107] - Contingent consideration for the RXP acquisition (maximum payment of $1,550 thousand) was valued at $952 thousand as of September 30, 2023, using a 15% discount rate and expected payment period of 2024-2026[105] NOTE 7. DEBT The company's debt primarily consists of a Senior Secured Credit Facility ($22,105 thousand) and Subordinated Notes ($3,315 thousand), both classified as current liabilities due to covenant uncertainties; the company received a waiver for a Q3 2023 revenue covenant default and reduced the Senior Secured Credit Facility principal by $8,100 thousand in October 2023 Debt | Debt Type ($ thousands) | September 30, 2023 | December 31, 2022 | | :----------------------- | :----------- | :----------- | | Senior Secured Credit Facility | $22,105 | $0 | | Subordinated Notes | $3,315 | $0 | | Unamortized Discount | $(7,255) | $0 | | Total Current Portion of Long-Term Debt | $18,165 | $0 | - The Senior Secured Credit Facility (Notes) has a total principal of $21,053 thousand, bears 7% annual interest, matures on March 3, 2026, and includes a 5% original issue discount and a 5% exit payment[110] - The company did not comply with the revenue covenant of the Senior Secured Credit Facility for Q3 2023 but received a waiver from the lender on October 16, 2023[114] - In October 2023, the Senior Secured Credit Facility principal was reduced by $8,100 thousand, with $7,500 thousand from restricted cash and $600 thousand from the assignment of a promissory note[197][198] - Subordinated Notes have a principal of $2,865 thousand, accrue payment-in-kind interest at 26.5% annually, and mature on May 1, 2024[117] NOTE 8. – NOTES & LOANS PAYABLE As of September 30, 2023, the company's total notes and loans payable amounted to $1,597 thousand, primarily comprising insurance and vehicle loans, with the GVB bridge loan balance significantly reduced due to refinancing Notes & Loans Payable | Loan Type ($ thousands) | September 30, 2023 | December 31, 2022 | | :----------------------- | :----------- | :----------- | | Insurance Loans | $1,314 | $780 | | Vehicle Loans | $283 | $315 | | Bridge Loan | $0 | $2,814 | | Total Notes and Loans Payable | $1,597 | $3,909 | - The GVB bridge loan, with an outstanding principal of $2,500 thousand, was refinanced on March 3, 2023, and matures on May 1, 2024[124] NOTE 9. – OTHER OPERATING EXPENSES, NET Other operating expenses, net, significantly increased to $23,344 thousand and $24,917 thousand for the three and nine months ended September 30, 2023, respectively, primarily due to $24,317 thousand in restructuring costs, including substantial impairment charges on intangible assets, fixed assets, and right-of-use assets Other Operating Expenses, Net | Expense Type ($ thousands) | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :-------------------------- | :-------------------------- | :-------------------------- | | Total Restructuring Costs | $24,317 | $24,317 | | Intangible Asset Impairment | $13,986 | $13,986 | | Fixed Asset Impairment | $5,931 | $5,931 | | Right-of-Use Asset Impairment | $4,034 | $4,034 | | Change in Fair Value of Warrant Liability | $(1,262) | $(540) | | Total Other Operating Expenses, Net | $23,344 | $24,917 | - Restructuring costs were incurred to adjust internal organizational structure, reduce costs, and maintain liquidity, including evaluating strategic alternatives for assets[128] - The company incurred $377 thousand in professional service fees related to the November 2022 Grass Valley manufacturing facility fire[127] NOTE 10. – CAPITAL RAISE AND WARRANT ACTIVITY The company conducted multiple capital raises in 2023, including registered direct offerings in June and July and an ATM program, issuing a significant number of common shares and warrants, which triggered anti-dilution adjustments, warrant repricing, and non-cash deemed dividends Warrant Activity | Warrant Activity (thousands) | January 1, 2023 | September 30, 2023 | Change | | :------------------------------ | :---------- | :----------- | :----- | | Warrants Outstanding | 1,138 | 12,732 | 11,594 | - June 19, 2023, Registered Direct Offering: Issued 747,974 shares and 747,974 warrants at $7.05 per unit, generating net proceeds of $4,800 thousand; this offering also repriced 747,974 previously issued warrants from $30.75 to $7.05 per share[135][133] - July 6, 2023, Registered Direct Offering: Issued 778,634 shares and 1,557,268 warrants at $3.80 per unit, generating net proceeds of $2,722 thousand[137] - July 19, 2023, Registered Direct Offering: Issued 4,373,219 shares and 8,746,438 warrants at $2.67 per unit, generating net proceeds of $10,742 thousand[138] - Subsequent offerings triggered anti-dilution provisions, adjusting warrant exercise prices (e.g., some July 2022 warrants from $30.75 to $0.525, June 2023 warrants from $7.05 to $0.525) and resulting in non-cash deemed dividends[134][137][139] NOTE 11. - COMMITMENTS AND CONTINGENCIES The company has total future commitments of $8,879 thousand related to licensing, sponsored research, and cultivation agreements, is involved in ongoing litigation including a preliminarily settled class action ($3,000 thousand covered by insurance) and a shareholder derivative suit, and has filed an insurance claim for the Grass Valley fire Future Commitments | Commitment Type | Remaining 2023 ($ thousands) | 2024 ($ thousands) | 2025 ($ thousands) | 2026 ($ thousands) | 2027 & Beyond ($ thousands) | Total ($ thousands) | | :-------------- | :--------------- | :--- | :--- | :--- | :----------- | :---- | | Research Agreements (KeyGene) | $1,824 | $2,081 | $1,589 | $1,302 | $328 | $7,124 | | License Agreements (NCSU) | $0 | $100 | $100 | $100 | $1,000 | $1,300 | | Research Agreements (NCSU) | $95 | $114 | $0 | $0 | $0 | $209 | | Cultivation Agreements (Various) | $119 | $127 | $0 | $0 | $0 | $246 | | Total Future Commitments | $2,038 | $2,422 | $1,689 | $1,402 | $1,328 | $8,879 | - A class action lawsuit was preliminarily settled for $3,000 thousand, fully covered by the company's insurance, with final judgment entered in October 2023[157] - The company filed a lawsuit against Dorchester Insurance Company, Ltd. in July 2023, alleging breach of contract and bad faith regarding its business interruption claim following the November 2022 Grass Valley fire[167] - The company reached a settlement agreement for a water rights dispute with Needle Rock Farms, incurring total expenses of $747 thousand[168] NOTE 12 – EQUITY- BASED COMPENSATION The company recognized $576 thousand and $3,237 thousand in equity-based compensation expense for the three and nine months ended September 30, 2023, respectively, with unrecognized compensation costs of $3,280 thousand for restricted stock units (RSUs) and $190 thousand for stock options, both contingent on specific milestones Equity-Based Compensation Expense | Compensation Type ($ thousands) | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :------------------------------- | :-------------------------- | :-------------------------- | | Selling, General and Administrative | $555 | $3,099 | | Research and Development | $21 | $138 | | Total RSU and Stock Option Compensation | $576 | $3,237 | - As of September 30, 2023, there were 316 thousand unvested restricted stock units with $3,280 thousand in unrecognized compensation cost, expected to be recognized over a weighted-average period of approximately 1.7 years[171] - As of September 30, 2023, there were 228 thousand unexercised stock options with a weighted-average exercise price of $26.12 and $190 thousand in unrecognized compensation cost[172][173] NOTE 13. – EARNINGS PER SHARE Basic and diluted loss per share significantly increased to $(3.68) for Q3 and $(6.85) for the nine months ended September 30, 2023, primarily due to higher net losses and deemed dividends from anti-dilution and down-round provisions Earnings Per Share | Indicator ($ thousands, except per share data) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Loss Attributable to Common Stockholders | $(73,284) | $(13,102) | $(112,372) | $(33,518) | | Basic and Diluted Loss Per Share | $(3.68) | $(0.94) | $(6.85) | $(2.71) | | Weighted-Average Common Shares Outstanding | 19,887 | 14,009 | 16,411 | 12,351 | - Deemed dividends from anti-dilution and down-round provisions increased net loss attributable to common stockholders by $(564) thousand for both the three and nine months ended September 30, 2023[175] - As of September 30, 2023, 13,276 thousand anti-dilutive shares (warrants, options, restricted stock units) were excluded from diluted EPS calculations[175] NOTE 14. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) shifted from a $(111) thousand loss on January 1, 2023, to a $(30) thousand loss on September 30, 2023, primarily influenced by unrealized gains on short-term investment securities and foreign currency translation adjustments Accumulated Other Comprehensive Income (Loss) | Indicator ($ thousands) | January 1, 2023 | September 30, 2023 | | :-------------------- | :---------- | :----------- | | Balance of Accumulated Other Comprehensive Income (Loss) | $(111) | $(30) | - For the nine months ended September 30, 2023, accumulated other comprehensive income (loss) included $61 thousand in unrealized gains on short-term investment securities and $(31) thousand in foreign currency translation adjustments[177] NOTE 15. – REVENUE RECOGNITION For the nine months ended September 30, 2023, total net revenue grew 47.3% to $63,200 thousand, driven by a 210.4% increase in cannabis/hemp revenue, partially offset by an 18.7% decline in tobacco revenue due to product portfolio strategic adjustments Revenue Recognition | Revenue Type ($ thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Year-over-Year Change | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Year-over-Year Change | | :-------------------------- | :-------------------------- | :-------------------------- | :----------- | :-------------------------- | :-------------------------- | :----------- | | Tobacco | $7,871 | $11,535 | (31.8%) | $24,848 | $30,551 | (18.7%) | | Cannabis/Hemp | $9,940 | $7,848 | 26.7% | $38,352 | $12,354 | 210.4% | | Total Net Revenue | $17,811 | $19,383 | (8.1%) | $63,200 | $42,905 | 47.3% | - The decline in tobacco revenue is due to the company's plan to reallocate production resources from lower-margin filtered cigars to higher-margin VLN® and conventional cigarette products[223] - Cannabis/hemp revenue growth benefited from a full sales period following the GVB acquisition and continued strong growth in bulk ingredient sales (195,876 kilograms year-to-date 2023 vs. 70,977 kilograms year-to-date 2022)[223] - Unbilled receivables (contract assets) increased to $1,745 thousand as of September 30, 2023, from $354 thousand as of December 31, 2022[192] NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION The company operates in two reportable segments: Tobacco and Cannabis/Hemp; for the nine months ended September 30, 2023, the Cannabis/Hemp segment saw significant revenue growth but also incurred substantial operating losses and impairment charges, leading to a large increase in overall segment operating loss Segment Performance | Segment ($ thousands) | 9 Months Ended Sep 30, 2023 Revenue | 9 Months Ended Sep 30, 2022 Revenue | Year-over-Year Change | 9 Months Ended Sep 30, 2023 Operating Loss | 9 Months Ended Sep 30, 2022 Operating Loss | Year-over-Year Change | | :--------------------- | :---------------------------------- | :---------------------------------- | :----------- | :----------------------------------- | :----------------------------------- | :----------- | | Tobacco | $24,848 | $30,551 | (18.7%) | $10,072 | $3,337 | 201.8% | | Cannabis/Hemp | $38,352 | $12,354 | 210.4% | $74,604 | $7,316 | 920.9% | | Total Segment Operating Loss | $84,676 | $10,653 | 694.9% | | | | - The Cannabis/Hemp segment incurred $58,808 thousand in impairment charges and write-offs during Q3 2023[196] Segment Assets | Segment Assets ($ thousands) | September 30, 2023 | December 31, 2022 | Change | | :---------------------------- | :----------- | :----------- | :----- | | Tobacco | $21,271 | $15,748 | $5,523 | | Cannabis/Hemp | $18,747 | $65,965 | $(47,218) | | Total Reportable Segments | $40,018 | $81,713 | $(41,695) | NOTE 17. – SUBSEQUENT EVENTS Subsequent to September 30, 2023, the company amended its Senior Secured Credit Facility, reducing principal by $8,100 thousand, increased authorized common stock, completed a public equity offering raising $5,250 thousand in gross proceeds, and secured an additional low nicotine content tobacco technology license from NCSU - On October 16, 2023, the company received a waiver for its Q3 2023 revenue covenant default and reduced the Senior Secured Credit Facility principal by $8,100 thousand using $7,500 thousand of restricted cash and assigning a $600 thousand promissory note[197][198] - Shareholders approved an increase in authorized common stock from 33,333,334 shares to 66,666,667 shares on October 16, 2023[201] - On October 19, 2023, a public equity offering was completed, generating approximately $5,250 thousand in gross proceeds for the company and automatically adjusting the exercise price of 11,799,654 outstanding warrants to $0.525 per share[204] - On November 1, 2023, the company entered into an additional low nicotine content technology license agreement with North Carolina State University (NCSU), including a $250 thousand non-refundable license fee and a $100 thousand common stock award[206] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results for the period ended September 30, 2023, focusing on its business strategy, recent financial performance, liquidity, and capital resources, highlighting significant going concern doubts and mitigation efforts Our Business 22nd Century Group is a biotechnology company focused on low nicotine tobacco, cannabis/hemp, and hops, actively exploring strategic alternatives for assets and implementing cost-cutting measures to maximize shareholder value and improve liquidity, despite significant going concern doubts - The company is a leading biotechnology company focused on improving health and wellness through advanced plant technologies involving low nicotine tobacco, cannabis/hemp, and hops[211] - On September 5, 2023, the company announced it would explore strategic alternatives to maximize shareholder value, including business combinations, asset sales, and financing strategies, and has engaged a financial advisor to assist[212] - Significant doubt exists about the company's ability to continue as a going concern, and failure to obtain necessary capital could force liquidation of inventory, cessation or reduction of operations, or bankruptcy protection[212] Recent Highlights and Other Events Recent highlights include successful capital raises in July and October 2023, a significant reduction in the Senior Secured Credit Facility principal, and the implementation of a cost reduction plan expected to save $15,000 thousand annually - The company completed registered direct offerings in July 2023, generating approximately $14,635 thousand in gross proceeds, and a public offering in October 2023, generating approximately $5,250 thousand in gross proceeds[215] - In October 2023, the company reduced the outstanding principal of its Senior Secured Credit Facility by $8,100 thousand[215] - In July 2023, the company implemented a cost reduction plan expected to save $15,000 thousand annually once fully implemented[215] Financial Overview In Q3 2023, the company's net revenue decreased 8.1% year-over-year to $17,811 thousand, primarily due to lower tobacco sales, partially offset by strong cannabis/hemp business growth; the company reported a gross loss of $1,966 thousand and a net loss of $72,720 thousand, significantly impacted by $33,360 thousand in goodwill impairment and $24,317 thousand in restructuring costs Financial Overview | Indicator ($ thousands) | Q3 2023 | Q3 2022 | Year-over-Year Change | | :-------------------- | :------ | :------ | :----------- | | Net Revenue | $17,811 | $19,383 | (8.1%) | | Tobacco Revenue | $7,871 | $11,535 | (31.8%) | | Cannabis/Hemp Revenue | $9,940 | $7,848 | 26.7% | | Gross (Loss) Profit | $(1,966) | $619 | (417.6%) | | Total Operating Expenses | $69,516 | $15,887 | 337.6% | | Goodwill Impairment | $33,360 | $0 | Not Applicable | | Net Loss | $(72,720) | $(13,102) | 455.0% | | Basic and Diluted Loss Per Share | $(3.68) | $(0.94) | 291.5% | - The cannabis/hemp business reported a gross loss of $2,043 thousand, including an additional $1,687 thousand reserve for excess, obsolete, or expired inventory[215] - Other operating expenses, net, amounted to $23,344 thousand, primarily due to $24,317 thousand in restructuring costs[217] Our Financial Results For the nine months ended September 30, 2023, the company's total net revenue increased 47.3% to $63,200 thousand, driven by a 210.4% surge in cannabis/hemp revenue; however, gross profit turned into a loss, and operating and net losses significantly expanded due to increased cost of sales, rising operating expenses, and substantial goodwill impairment Financial Results | Indicator ($ thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Year-over-Year Change | | :-------------------- | :-------------------------- | :-------------------------- | :----------- | | Total Net Revenue | $63,200 | $42,905 | 47.3% | | Tobacco Net Revenue | $24,848 | $30,551 | (18.7%) | | Cannabis/Hemp Net Revenue | $38,352 | $12,354 | 210.4% | | Gross (Loss) Profit | $(5,488) | $1,819 | (401.7%) | | Total Operating Expenses | $103,171 | $35,710 | 188.9% | | Goodwill Impairment | $33,360 | $0 | Not Applicable | | Operating Loss | $(108,659) | $(33,891) | 220.6% | | Net Loss | $(111,441) | $(33,518) | 232.5% | | Basic and Diluted Loss Per Share | $(6.85) | $(2.71) | 152.8% | - The decline in tobacco revenue is due to the company's plan to reallocate production resources from lower-margin filtered cigars to higher-margin VLN® and conventional cigarette products[223] - Cannabis/hemp revenue surged due to a full sales period following the GVB acquisition and continued growth in bulk ingredient sales[223] - Selling, General and Administrative (SG&A) expenses increased by $9,496 thousand (31.2%) for the nine-month period, driven by inflation, headcount, sales and marketing, and IT/facilities costs, partially offset by reduced strategic consulting fees[224][225][226] - Research and Development (R&D) expenses increased by $568 thousand (13.0%) for the nine-month period, primarily due to increased R&D personnel and higher Keygene research contract costs[228] - Other operating expenses, net, significantly increased to $24,917 thousand for the nine-month period, primarily due to $24,317 thousand in restructuring costs (including impairment of intangible assets, fixed assets, right-of-use assets, professional services, and severance)[229][231] - Interest expense increased by $2,689 thousand (1,169.1%) for the nine months of 2023, primarily due to interest on the Senior Secured Credit Facility and Subordinated Notes[232] Liquidity and Capital Resources The company faces significant going concern doubts due to continuous losses, negative operating cash flow ($50,184 thousand for nine months), and working capital of only $856 thousand as of September 30, 2023; despite recent capital raises and debt reduction, existing resources are insufficient for the remainder of fiscal year 2023, necessitating ongoing strategic evaluation and financing efforts - As of September 30, 2023, the company had $50,184 thousand in cash outflow from operating activities and an accumulated deficit of $349,373 thousand[233] Liquidity and Capital Resources | Indicator ($ thousands) | September 30, 2023 | December 31, 2022 | Change | | :-------------------- | :----------- | :----------- | :----- | | Cash and Cash Equivalents | $2,850 | $3,020 | $(170) | | Restricted Cash | $7,500 | $0 | $7,500 | | Working Capital | $856 | $31,587 | $(30,731) | - The company did not comply with its Q3 2023 revenue covenant but received a waiver; future non-compliance could lead to accelerated debt repayment, which the company may be unable to meet immediately[234] - Management is evaluating plans for expense reductions, asset sales, and strategic collaborations, but these plans do not eliminate the substantial doubt about the company's ability to continue as a going concern[235] - In 2023, the company received $37,173 thousand in net proceeds from debt and equity financing activities and $5,000 thousand in casualty insurance proceeds from the Grass Valley fire[242] - In October 2023, the company reduced its primary debt balance by $8,100 thousand, saving approximately $500 thousand in annual cash interest[243] - Current cash resources are not expected to be sufficient to support liquidity needs for the remainder of fiscal year 2023[243] Critical Accounting Policies and Estimates The company's financial statements rely on significant estimates and judgments, particularly for contingent consideration and detachable warrants, which are fair valued using unobservable inputs and can be materially impacted by future events and changes in assumptions - Contingent consideration is a financial liability recorded at fair value, with its amount based on judgments regarding the probability and timing of future events (e.g., achievement of revenue milestones) and the discount rate used, where changes in these estimates could materially impact operating results[268] - Warrants issued in conjunction with debt or equity offerings are classified as liabilities and measured at fair value if the company may be required to redeem them for cash or other assets; the company uses a Monte Carlo valuation model, with key assumptions including the expected future volatility of the company's stock price and the expected life of the warrants[269] Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes to market risk disclosures since the Form 10-K annual report filed on December 31, 2022 - Market risk information has not materially changed since the annual report on Form 10-K filed on December 31, 2022[273] Item 4. Controls and Procedures As of September 30, 2023, the company's disclosure controls and procedures were deemed effective, ensuring timely and accurate reporting, with no significant changes in internal control over financial reporting during the quarter - As of September 30, 2023, the company's disclosure controls and procedures were deemed effective[275] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2023[276] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ongoing legal proceedings, including a preliminarily settled class action and a shareholder derivative suit, as detailed in Note 11; no other material legal proceedings are currently pending that could significantly harm the company's business and financial condition - Information regarding ongoing legal proceedings is detailed in Note 11 – Commitments and Contingencies to the financial statements[279] - No other material legal proceedings are currently pending that could significantly harm the company's business and financial condition, other than those described in Note 11[279] Item 1A. Risk Factors The company faces significant risks including going concern doubts from historical losses and negative cash flow, the need for additional funding, potential debt covenant non-compliance, further restructuring and impairment charges, and regulatory/litigation risks from the evolving CBD market - Due to historical losses and negative operating cash flow, there is substantial doubt about the company's ability to continue as a going concern, which could negatively impact business relationships and employee morale[280][281] - The company requires additional capital to execute its business plan and sustain operations, with no assurance that it can raise the necessary funds[282] - Failure to comply with covenants in the Senior Secured Notes could lead to accelerated debt repayment, which the company may be unable to meet, potentially forcing liquidation or bankruptcy[283][284][286] - The company may continue to incur significant restructuring and impairment charges as it pursues cost reduction initiatives and explores strategic alternatives[287] - The continued success of cannabinoid-containing products is subject to evolving state and federal laws, regulations, and uncertain regulatory enforcement policies, particularly the FDA's stance on CBD in food/dietary supplements[288][289][290] - Non-compliance with FDA requirements or misleading advertising of CBD products could result in penalties, product recalls, fines, and costly class action lawsuits[295][296][297] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during this period - None[301] Item 3. Default Upon Senior Securities No default upon senior securities was reported during this period - None[301] Item 4. Mine Safety Disclosures No mine safety disclosures were reported during this period - None[301] Item 5. Other Information During the three months ended September 30, 2023, no modifications, adoptions, or terminations of any contracts, instructions, or written plans for the purchase or sale of securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) were made by the company's directors or executive officers - No modifications, adoptions, or terminations of Rule 10b5-1(c) trading plans were made by directors or executive officers[301] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to articles of incorporation, waiver and amendment agreements, warrant forms, retention agreements, employment agreements, and certifications - Exhibits include Amended and Restated Articles of Incorporation (Exhibit 3.1), Waiver and Amendment Agreement (Exhibit 4.1), various Warrant Forms (Exhibits 4.2, 4.3, 4.4), Retention Agreements (Exhibits 10.1, 10.2), Amended and Restated Employment Agreement (Exhibit 10.3), and Section 302/906 Certifications (Exhibits 31.1, 31.2, 32.1)[304] SIGNATURES This report was duly signed by Interim Chief Executive Officer John J. Miller and Chief Financial Officer R. Hugh Kinsman on November 6, 2023 - The report was signed by Interim Chief Executive Officer John J. Miller and Chief Financial Officer R. Hugh Kinsman on November 6, 2023[307]