22nd Century (XXII) - 2019 Q2 - Quarterly Report

FORM 10-Q Filing Information This section provides the filing details for 22nd Century Group, Inc.'s Quarterly Report on Form 10-Q for the period ended June 30, 2019 Registrant Details Details the registrant as 22nd Century Group, Inc., a Nevada corporation, with common stock listed on NYSE American under XXII - Registrant: 22nd Century Group, Inc., Nevada[2] - Filing Period: Quarterly Report for the period ended June 30, 2019[2] Common Stock Listing | Title of each class | Ticker symbol | Name of Exchange on Which Registered | | :------------------ | :------------ | :----------------------------------- | | Common Stock, $0.00001 par value | XXII | NYSE American | - Shares Outstanding (as of August 7, 2019): 125,663,936 shares of common stock[5] Filing Status Confirms the registrant's compliance with filing requirements, classification as an 'Accelerated filer,' and not being a shell company - Compliance: Filed all required reports and Interactive Data Files during the preceding 12 months[3] - Filer Status: Accelerated filer[3] - Shell Company: Not a shell company[3] INDEX This section provides an index to the contents of the Quarterly Report on Form 10-Q PART I. FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Financial Statements Presents the unaudited consolidated financial statements, including balance sheets, statements of operations, equity changes, cash flows, and detailed notes Consolidated Balance Sheets Shows a decrease in total assets and shareholders' equity, with an increase in total liabilities from December 2018 to June 2019 Consolidated Balance Sheet Highlights | Item | June 30, 2019 (unaudited) | December 31, 2018 | | :-------------------------------- | :------------------------ | :------------------ | | ASSETS | | | | Cash and cash equivalents | $874,427 | $604,925 | | Short-term investment securities | $46,095,682 | $55,748,939 | | Total current assets | $52,086,071 | $61,197,526 | | Property, plant and equipment, net | $4,063,204 | $3,260,748 | | Intangible assets, net | $9,754,964 | $9,751,504 | | Total assets | $70,546,185 | $77,302,136 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $7,181,166 | $5,173,544 | | Total liabilities | $8,234,132 | $6,021,761 | | Total shareholders' equity | $62,312,053 | $71,280,375 | | Total liabilities and shareholders' equity | $70,546,185 | $77,302,136 | Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended June 30, 2019 and 2018 Reports a higher net loss for Q2 2019 due to decreased sales, gross loss, and significant litigation expenses, despite lower R&D Consolidated Statements of Operations and Comprehensive Loss (Three Months Ended June 30) | Item | 2019 (unaudited) | 2018 (unaudited) | Change (YoY) | | :------------------------------------------------------------------------------------------------ | :--------------- | :--------------- | :------------- | | Revenue: Sale of products, net | $5,814,979 | $6,914,913 | -15.9% | | Gross (loss) profit | $(86,300) | $161,714 | -153.4% | | Operating expenses: Research and development | $1,986,608 | $4,781,407 | -58.5% | | Operating loss | $(5,028,839) | $(7,040,512) | -28.6% | | Other income (expense): Unrealized (loss) gain on investment | $(1,423,945) | $92,574 | -1639.6% | | Other income (expense): Litigation expense | $(1,890,900) | $- | N/A | | Net loss | $(8,041,682) | $(6,738,652) | 19.3% | | Net loss per common share - basic and diluted | $(0.06) | $(0.05) | 20.0% | | Common shares used in basic and diluted net loss per share calculation | 124,661,991 | 124,311,087 | 0.3% | Consolidated Statements of Operations and Comprehensive Loss - Six Months Ended June 30, 2019 and 2018 Details a substantial increase in net loss for the first half of 2019, driven by reduced sales, gross loss, and significant litigation expenses Consolidated Statements of Operations and Comprehensive Loss (Six Months Ended June 30) | Item | 2019 (unaudited) | 2018 (unaudited) | Change (YoY) | | :------------------------------------------------------------------------------------------------ | :--------------- | :--------------- | :------------- | | Revenue: Sale of products, net | $12,108,627 | $13,030,952 | -7.1% | | Gross (loss) profit | $(189,210) | $233,292 | -181.1% | | Operating expenses: Research and development | $4,438,050 | $7,298,176 | -39.2% | | Operating loss | $(10,407,998) | $(12,009,284) | -13.3% | | Other income (expense): Unrealized gain on investment | $1,549,588 | $6,147,088 | -74.8% | | Other income (expense): Litigation expense | $(1,890,900) | $- | N/A | | Net loss | $(10,114,395) | $(5,352,164) | 89.0% | | Net loss per common share - basic and diluted | $(0.08) | $(0.04) | 100.0% | | Common shares used in basic and diluted net loss per share calculation | 124,653,403 | 124,166,321 | 0.4% | Consolidated Statements of Changes in Shareholders' Equity Illustrates a decrease in shareholders' equity from December 2018 to June 2019, primarily due to net loss Consolidated Statements of Changes in Shareholders' Equity (Six Months Ended June 30, 2019) | Item | Amount | | :------------------------------------ | :------------- | | Balance at December 31, 2018 | $71,280,375 | | Equity-based compensation | $965,657 | | Unrealized gain on short-term investment securities | $236,309 | | Reclassification of gains to net loss | $(55,893) | | Net loss | $(10,114,395) | | Balance at June 30, 2019 | $62,312,053 | Consolidated Statements of Cash Flows Shows increased cash used in operations, higher cash from investing, and a net increase in cash and equivalents for the first half of 2019 Consolidated Statements of Cash Flows (Six Months Ended June 30) | Item | 2019 (unaudited) | 2018 (unaudited) | | :-------------------------------------- | :--------------- | :--------------- | | Net cash used in operating activities | $(8,744,813) | $(8,390,786) | | Net cash provided by investing activities | $9,414,315 | $8,387,140 | | Net cash used in financing activities | $(400,000) | $(282,500) | | Net increase (decrease) in cash and cash equivalents | $269,502 | $(286,146) | | Cash and cash equivalents - end of period | $874,427 | $3,373,388 | Notes to Consolidated Financial Statements Provides detailed accounting policies, asset valuations, liabilities, and equity changes, including new lease accounting standards and investment details NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Outlines the company's plant biotechnology business, focusing on reduced-risk tobacco and hemp/cannabis, and key accounting policy adoptions - Nature of Business: Plant biotechnology company specializing in genetic engineering and plant breeding for (i) reduced nicotine tobacco and smoking cessation products, and (ii) altered cannabinoid levels in hemp plants for potential medicines and agricultural applications[24][129] - Principles of Consolidation: Includes 22nd Century Group, Inc. and its wholly-owned subsidiaries: 22nd Century Limited, LLC, NASCO Products, LLC, Botanical Genetics, LLC, Goodrich Tobacco Company, LLC, and Heracles Pharmaceuticals, LLC[23] - Accounting Standards: Unaudited interim financial statements prepared in accordance with U.S. GAAP for interim financial information and Form 10-Q instructions. Adopted ASU 2016-02 (Leases) on January 1, 2019, and ASU 2016-01 (Financial Instruments) in Q1 2018[20][32][51] Inventory Composition (June 30, 2019 vs. December 31, 2018) | Inventory Type | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Inventory - tobacco leaf | $1,610,499 | $1,556,581 | | Inventory - finished goods (Cigarettes and filtered cigars) | $138,456 | $156,702 | | Inventory - raw materials (Cigarette and filtered cigar components) | $1,282,700 | $1,430,666 | | Total Inventory | $3,031,655 | $3,143,949 | | Less: inventory reserve | $100,000 | $100,000 | | Inventory, net | $2,931,655 | $3,043,949 | Intangible Assets, Net (June 30, 2019 vs. December 31, 2018) | Intangible Asset | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Patent and trademark costs, net | $4,064,763 | $3,942,209 | | License fees, net | $3,188,201 | $3,307,295 | | MSA signatory costs | $2,202,000 | $2,202,000 | | License fee for predicate cigarette brand | $300,000 | $300,000 | | Total Intangible Assets, net | $9,754,964 | $9,751,504 | - Revenue Recognition: Revenue is recognized when control of the product is transferred to the customer. For Q2 2019, net sales revenue from products transferred over time was $3.44 million, and at a point in time was $2.37 million[43][45] NOTE 2. - MACHINERY AND EQUIPMENT Details the net value increase of machinery and equipment and associated depreciation expenses for the reporting periods Machinery and Equipment, Net | Item | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Cigarette manufacturing equipment | $4,825,293 | $4,608,267 | | Office furniture, fixtures and equipment | $150,349 | $135,909 | | Laboratory equipment | $122,780 | $104,709 | | Leasehold improvements | $233,569 | $169,362 | | Total | $5,331,991 | $5,018,247 | | Less: accumulated depreciation | $1,976,516 | $1,757,499 | | Machinery and equipment, net | $3,355,475 | $3,260,748 | Depreciation Expense | Period | 2019 | 2018 | | :-------------------------------- | :----------- | :----------- | | Three months ended June 30 | $147,255 | $131,294 | | Six months ended June 30 | $282,301 | $255,822 | NOTE 3. - RIGHT-OF-USE ASSETS, LEASE OBLIGATIONS, AND OTHER LEASES Explains the recognition of Right-of-Use assets and lease obligations following the adoption of new lease accounting standards - Adoption of ASU 2016-02: On January 1, 2019, the Company adopted new lease guidance, recording Right-of-Use (ROU) assets and corresponding lease obligations for qualifying operating leases[55] - Operating Leases Recognized: Two real estate leases (manufacturing facility and office space) qualified as operating leases. The manufacturing facility lease had a remaining term of 34 months, and the office space lease had 62 months, both including renewal options[56][57] - Initial ROU Asset and Lease Obligation: $446,950 for the manufacturing facility and $367,325 for the office space, totaling $814,275 at January 1, 2019[18] Lease Expense (Three and Six Months Ended June 30, 2019) | Lease Type | Three Months | Six Months | | :-------------------------------- | :----------- | :----------- | | Manufacturing facility | ~$42,000 | ~$84,000 | | Office space | ~$20,000 | ~$40,000 | | Laboratory space | ~$17,000 | ~$34,000 | NOTE 4. - INVESTMENT Describes the company's stock warrant investment in Aurora Cannabis, Inc., including its fair value and recorded unrealized gains or losses - Investment: Stock warrant to purchase 973,971 shares of Aurora Cannabis, Inc. common stock, acquired in August 2018[64] Stock Warrant Fair Value and Unrealized (Loss) Gain | Item | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Fair Value of Stock Warrant | $4,641,946 | $3,092,358 | | Unrealized (Loss) Gain (Three Months Ended June 30, 2019) | $(1,423,945) | N/A | | Unrealized Gain (Six Months Ended June 30, 2019) | $1,549,588 | N/A | NOTE 5. - FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS Discusses the fair value measurement of financial assets, including short-term investments and a stock warrant valued using the Black-Scholes model - Fair Value Hierarchy: Utilizes Level 1 (money market funds), Level 2 (corporate bonds, U.S. treasury/agency bonds), and Level 3 (stock warrant) inputs[67] Short-term Investment Securities at Fair Value | Type | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Money market funds (Level 1) | $18,481,361 | $10,083,972 | | Corporate bonds (Level 2) | $22,975,620 | $38,579,055 | | U.S. treasury securities (Level 2) | $1,991,563 | $2,970,900 | | U.S. government agency bonds (Level 2) | $2,647,138 | $4,115,012 | | Total Short-term investment securities | $46,095,682 | $55,748,939 | | Investment: Stock warrant (Level 3) | $4,641,946 | $3,092,358 | - Stock Warrant Valuation: Valued using the Black-Scholes pricing model with an estimated volatility factor of 79% at June 30, 2019 (down from 92% at December 31, 2018)[70] Changes in Fair Value of Stock Warrant (Level 3 Asset) | Period | Amount | | :-------------------------------- | :------------- | | Fair value at December 31, 2017 | $- | | Fair value of stock warrants acquired on August 8, 2018 | $2,807,958 | | Unrealized gain as a result of change in fair value (2018) | $284,400 | | Fair value at December 31, 2018 | $3,092,358 | | Unrealized gain as a result of change in fair value first quarter 2019 | $2,973,533 | | Fair value at March 31, 2019 | $6,065,891 | | Unrealized loss as a result of change in fair value second quarter 2019 | $(1,423,945) | | Fair value at June 30, 2019 | $4,641,946 | NOTE 6. - NOTES PAYABLE FOR LICENSE FEE Details the company's obligations for license fees with universities, totaling $1.16 million, amortized over patent lives - NCSU License Agreement: Obligation to pay NCSU milestone payments totaling $1.2 million, with $0.5 million paid upon execution (June 2018), $0.4 million due on first anniversary, and $0.3 million on second anniversary. Present value recorded as $1.18 million[73] - University of Kentucky License Agreement: Obligation to pay $1.2 million, with $0.3 million paid upon execution (October 2018) and $0.3 million annually for three years. Present value recorded as $1.15 million[74] Notes Payable for License Fees | Item | June 30, 2019 | December 31, 2018 | | :-------------------------------- | :------------ | :---------------- | | Total notes payable balance | $1,157,886 | $1,537,365 | | Current portion | $598,431 | $689,148 | | Long-term portion | $559,485 | $848,217 | | Accretion of interest (Six Months Ended June 30, 2019) | $20,552 | N/A | NOTE 7. - WARRANTS FOR COMMON STOCK Reports 11.29 million outstanding warrants to purchase common stock at $2.15 per share, with no activity in the first half of 2019 - Outstanding Warrants (June 30, 2019): 11,293,211 shares of common stock[77] - Exercise Price: $2.15 per share[77] - Expiration Date: December 20, 2022[77] - Activity: No warrants issued or exercised in the first half of 2019[78] NOTE 8. - COMMITMENTS AND CONTINGENCIES Outlines various commitments under license agreements and ongoing legal proceedings, including a settled Crede litigation and class action lawsuits - License and Research Agreements: Incurred $0.15 million in expenses for license and sponsored research agreements for the six months ended June 30, 2019[80] - MRTP Application Expenses: Incurred approximately $1.52 million in expenses for the Modified Risk Tobacco Product (MRTP) Application during the six months ended June 30, 2019[99] - Crede Settlement: Settled litigation with Crede CG III, LTD. by issuing 990,000 shares of common stock, valued at $1.89 million, accrued as an expense in Q2 2019. Crede granted a 5-year proxy to the Company and agreed not to purchase/short Company securities[101][102] - Class Action Cases: Two class action lawsuits (Matthew Bull, Ian M. Fitch) filed in early 2019, alleging false statements in 10-K reports (2015-2017) and seeking unspecified damages. The Fitch case was voluntarily dismissed, but the motion for lead plaintiffs remains pending. The company believes these claims are frivolous[103][104][106] - Shareholder Derivative Cases: Three shareholder derivative claims (Melvyn Klein, Stephen Mathew, Judy Rowley) filed in 2019, alleging breach of fiduciary duties, waste of corporate assets, and other violations. These cases are currently stayed or in the process of consolidation. The company believes these claims are frivolous[108][109][110] - Shareholder Derivative Demand: Received demand letters from shareholders (Van McClendon, Jeremy Houck) requesting the Board to pursue causes of action for alleged breaches of fiduciary duties. A Special Committee was appointed to assess these demands[111] NOTE 9. - LOSS PER COMMON SHARE Presents the basic and diluted net loss per common share for the three and six months ended June 30, 2019, with dilutive securities excluded Net Loss Per Common Share (Basic and Diluted) | Period | 2019 | 2018 | | :-------------------------------- | :----------- | :----------- | | Three months ended June 30 | $(0.06) | $(0.05) | | Six months ended June 30 | $(0.08) | $(0.04) | Dilutive Securities Outstanding (Excluded from EPS Calculation) | Security Type | June 30, 2019 | June 30, 2018 | | :-------------------------------- | :------------ | :------------ | | Warrants | 11,293,211 | 11,387,932 | | Options | 7,702,795 | 8,756,560 | | Restricted stock units | 693,000 | - | | Total | 19,689,006 | 20,144,492 | NOTE 10. - EQUITY BASED COMPENSATION Reports equity-based compensation expense for the period and details stock option activity under the Omnibus Incentive Plan - Omnibus Incentive Plan (OIP): Stockholders approved an increase of 5,000,000 shares on May 3, 2019, bringing the total authorized to 15,000,000 shares. As of June 30, 2019, 6,815,115 shares remained available for future awards[115] Equity-Based Compensation Expense | Period | 2019 | 2018 | | :-------------------------------- | :----------- | :----------- | | Three months ended June 30 | $516,752 | $1,682,228 | | Six months ended June 30 | $965,656 | $2,246,104 | - Unrecognized Compensation Expense: Approximately $3.76 million related to non-vested stock options as of June 30, 2019, expected to be recognized through 2022[118] Stock Option Activity Summary (Since December 31, 2017) | Item | Number of Options | Weighted Average Exercise Price | | :-------------------------------- | :---------------- | :------------------------------ | | Outstanding at December 31, 2017 | 8,156,691 | $1.28 | | Granted in 2018 | 1,631,841 | $2.64 | | Exercised in 2018 | (612,259) | $0.87 | | Expired / cancelled in 2018 | (504,191) | $1.71 | | Outstanding at December 31, 2018 | 8,672,082 | $1.54 | | Exercised in 2019 | (59,787) | $0.95 | | Forfeited in 2019 | (909,500) | $2.13 | | Outstanding at June 30, 2019 | 7,702,795 | $1.47 | | Exercisable at June 30, 2019 | 5,126,054 | $1.37 | NOTE 11. - SUBSEQUENT EVENTS Highlights post-quarter events, including the Crede litigation settlement and the appointment of Clifford B. Fleet as the new President and CEO - Crede Litigation Settlement: Effective July 22, 2019, the company settled the Crede litigation, as detailed in Note 8[122] - CEO Resignation: Henry Sicignano III resigned as President and CEO, and Board member, effective July 26, 2019, for personal reasons. He entered a consulting agreement for 42 months at $200,000 per year, with immediate vesting of all unvested stock options[123] - New CEO Appointment: Clifford B. Fleet was appointed President and CEO, and a Class I Director, effective August 3, 2019. Mr. Fleet previously served as President and CEO of Philip Morris USA from 2013 to 2017[124][125] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's analysis of financial performance, strategic direction, and operational highlights for the reporting periods Overview Introduces 22nd Century Group as a plant biotechnology company focused on reduced-risk tobacco and hemp/cannabis research and development - Core Business: Plant biotechnology focused on (i) reduced-risk tobacco cigarettes and smoking cessation products by modifying nicotine content, and (ii) research and development of unique hemp/cannabis plants to alter cannabinoid levels for new medicines and improved agricultural applications[129] - Tobacco Products: Developed proprietary VLNC tobacco (VLN tobacco) with at least 95% less nicotine. Produced over 28 million SPECTRUM research cigarettes for independent clinical studies, which have shown reduced smoking, lower nicotine exposure, increased quit attempts, and lessened nicotine dependence[131] - Hemp/Cannabis Activities: Developing proprietary hemp strains for medicines and agricultural crops, focusing on low-THC hemp and high-CBD/non-THC cannabinoid varieties. Collaborating with the University of Virginia and KeyGene NV for research and development[133] Strategic Objectives Outlines the company's goals, including FDA engagement for nicotine reduction, MRTP authorization, IP monetization, and hemp/cannabis expansion - FDA Engagement: Facilitate FDA's plan to require minimally or non-addictive nicotine levels in cigarettes and obtain reduced exposure marketing authorization for BRAND A VLNC cigarettes (proposed brand name "VLN")[136] - Intellectual Property Monetization: Seek licensing agreements for VLNC tobacco technology and proprietary tobaccos[136] - Research & Development: Continue producing SPECTRUM research cigarettes for NIDA and developing other novel VLNC tobacco plant varieties[136][138] - Hemp/Cannabis Expansion: Expand legal hemp/cannabis activities and develop unique plant varieties with desirable agronomic traits and high levels of CBD/non-THC cannabinoids[138] - Contract Manufacturing: Continue to grow the contract manufacturing business for third-party branded tobacco products[138] Accomplishments and Notable Events Highlights key achievements in Q2 2019 and subsequent events, including R&D collaborations, executive appointments, and FDA application progress - KeyGene NV Collaboration (April 9, 2019): Entered an exclusive worldwide R&D agreement with KeyGene NV to develop hemp/cannabis plants with exceptional cannabinoid profiles and improved agronomic traits. The company will hold exclusive worldwide rights to all resulting plant lines, IP, and research[137] - New VP of Regulatory Science (April 17, 2019): Hired John Pritchard, former Head of Regulatory Science for Imperial Brands, to lead global regulatory and compliance activities, engage with the FDA on the MRTP application, and support nicotine reduction initiatives[140] - FDA Manufacturing Facility Inspection (April 30, 2019): FDA conducted a comprehensive inspection of the North Carolina manufacturing facility as part of the PMT application review for VLN cigarettes, verifying production processes and data[141] - New Chief Operating Officer (June 14, 2019): Appointed Michael Zercher as COO, who previously served as VP of Business Development and had significant international business experience at Santa Fe Natural Tobacco Company[142] - FDA Acceptance of MRTP Application (July 19, 2019): FDA accepted and filed the MRTP application for VLN cigarettes for substantive scientific review[144] - New President and CEO (August 3, 2019): Clifford B. Fleet was appointed President and CEO, and a Class I Director. He previously served as President and CEO of Philip Morris USA[145][146] Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018 Compares Q2 2019 financial results to Q2 2018, noting decreased revenue, gross loss, and increased net loss due to investment and litigation Financial Performance (Three Months Ended June 30) | Item | 2019 | 2018 | Change (YoY) | | :-------------------------------- | :----------- | :----------- | :------------- | | Net Sales Revenue | $5,814,979 | $6,914,913 | -15.9% | | Gross (Loss) Profit | $(86,300) | $161,714 | -153.4% | | Research and Development Expense | $1,986,608 | $4,781,407 | -58.5% | | General and Administrative Expense | $2,373,693 | $1,914,971 | 24.0% | | Sales and Marketing Costs | $212,190 | $203,629 | 4.2% | | Depreciation Expense | $147,255 | $131,294 | 12.2% | | Amortization Expense | $222,793 | $170,925 | 30.3% | | Unrealized (Loss) Gain on Investment | $(1,423,945) | $92,574 | -1639.6% | | Litigation Expense | $(1,890,900) | $- | N/A | | Interest Income, net | $243,183 | $251,670 | -3.4% | | Interest Expense | $13,095 | $- | N/A | | Net Loss | $(8,041,682) | $(6,738,652) | 19.3% | Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018 Compares first-half 2019 financial results to first-half 2018, showing decreased revenue, gross loss, and a significant increase in net loss Financial Performance (Six Months Ended June 30) | Item | 2019 | 2018 | Change (YoY) | | :-------------------------------- | :----------- | :----------- | :------------- | | Net Sales Revenue | $12,108,627 | $13,030,952 | -7.1% | | Gross (Loss) Profit | $(189,210) | $233,292 | -181.1% | | Research and Development Expense | $4,438,050 | $7,298,176 | -39.2% | | General and Administrative Expense | $4,616,195 | $3,947,363 | 16.9% | | Sales and Marketing Costs | $443,890 | $402,738 | 10.2% | | Depreciation Expense | $282,301 | $255,822 | 10.4% | | Amortization Expense | $438,352 | $338,477 | 29.5% | | Unrealized Gain on Investment | $1,549,588 | $6,147,088 | -74.8% | | Realized Gain (Loss) on Short-term Investment Securities | $55,893 | $(42,189) | N/A | | Litigation Expense | $(1,890,900) | $- | N/A | | Gain on the Sale of Machinery and Equipment | $87,351 | $- | N/A | | Warrant Liability Gain - net | $- | $48,711 | -100.0% | | Interest Income, net | $515,426 | $503,510 | 2.4% | | Interest Expense | $23,755 | $- | N/A | | Net (Loss) Income | $(10,114,395) | $(5,352,164) | 89.0% | Liquidity and Capital Resources Discusses working capital, cash flow, and capital raising capacity, affirming sufficient resources for operations despite decreased working capital Working Capital and Cash Flow Summary | Item | June 30, 2019 | December 31, 2018 | Change | | :-------------------------------- | :------------ | :---------------- | :------- | | Working Capital | $44.9 million | $56.0 million | $(11.1) million | | Cash, cash equivalents and short-term investment securities | $46,970,109 | N/A | N/A | | Net cash used in operating activities (Six Months) | $(8,744,813) | $(8,390,786) | $(354,027) | | Net cash provided by investing activities (Six Months) | $9,414,315 | $8,387,140 | $1,027,175 | | Net cash used in financing activities (Six Months) | $(400,000) | $(282,500) | $(117,500) | - Capital Raising Capacity: Approximately $46 million remaining under a universal shelf registration statement, effective until January 17, 2020[187] - Monthly Cash Expenditures: Approximately $1.1 million, excluding discretionary R&D, patent/trademark costs, contract growing, MRTP, and certain nonrecurring expenses[188] Critical Accounting Policies and Estimates States no material changes to critical accounting policies, except for the adoption of new lease accounting standards - No material changes to critical accounting policies, except for the adoption of ASU 2016-02, Leases, on January 1, 2019[192] Inflation Confirms that inflation did not materially impact the company's operating results for the reported periods - Inflation did not materially affect operating results for the six months ended June 30, 2019 and 2018[193] Off-Balance Sheet Arrangements States that the company does not have any off-balance sheet arrangements as defined by Regulation S-K - No off-balance sheet arrangements[194] Item 3. Quantitative and Qualitative Disclosures About Market Risk Reports no material changes to market risk disclosures from the previous annual report - No material changes to market risk disclosures from the 2018 Annual Report on Form 10-K[195] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and procedures and no material changes in internal control over financial reporting - Disclosure Controls and Procedures: Effective as of June 30, 2019, as evaluated by the CEO and CFO[198] - Internal Control over Financial Reporting: No material changes during the second quarter of 2019[199] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings Details ongoing legal proceedings, including a settled Crede litigation, class action lawsuits, and shareholder derivative cases - Crede Settlement: Settled litigation with Crede CG III, LTD. on July 22, 2019, by issuing 990,000 shares of common stock, valued at $1,890,900, accrued as an expense in Q2 2019[203][204] - Class Action Cases: Two class action lawsuits (Matthew Bull, Ian M. Fitch) filed in early 2019, alleging false statements in 10-K reports (2015-2017). The Fitch case was voluntarily dismissed, but the motion for lead plaintiffs remains pending. The company believes these claims are frivolous[205][207][209] - Shareholder Derivative Cases: Three shareholder derivative claims (Melvyn Klein, Stephen Mathew, Judy Rowley) filed in 2019, alleging breach of fiduciary duties, waste of corporate assets, and other violations. These cases are currently stayed or in the process of consolidation. The company believes these claims are frivolous[211][212][213] - Shareholder Derivative Demand: Received demand letters from shareholders (Van McClendon, Jeremy Houck) requesting the Board to pursue causes of action for alleged breaches of fiduciary duties. A Special Committee was appointed to assess these demands[215] Item 1A. Risk Factors States that there have been no material changes to the company's risk factors since the last annual report - No material changes to risk factors from the 2018 Annual Report on Form 10-K[217] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Reports no unregistered sales of equity securities or use of proceeds for the period - None to report[218] Item 3. Default Upon Senior Securities. Reports no defaults upon senior securities for the period - None to report[218] Item 4. Mine Safety Disclosures Reports no mine safety disclosures for the period - None to report[218] Item 5. Other Information Announces the appointment of Clifford B. Fleet as the new President and CEO, effective August 3, 2019 - New President and CEO: Clifford B. Fleet appointed President and Chief Executive Officer and Class I Director, effective August 3, 2019[218] - Background: Mr. Fleet previously served as President and CEO of Philip Morris USA from 2013 to 2017[219] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including certifications and interactive data files - Exhibits include Section 302 and 906 Certifications by CEO and CFO, and Interactive Data Files (XBRL) for financial statements and notes[221] SIGNATURES Confirms the report's signing by the President, CEO, and CFO on August 7, 2019 - Signed by Clifford B. Fleet (President, CEO, and Director) and John T. Brodfuehrer (CFO) on August 7, 2019[224]