22nd Century (XXII) - 2019 Q4 - Annual Report

Cautionary Note Regarding Forward-Looking Statements This section outlines forward-looking statements in the 10-K, identifying predictive terms and key risks, with no obligation to update - The report contains forward-looking statements identifiable by words such as 'aim,' 'anticipate,' 'believe,' 'expect,' 'intend,' 'may,' 'plan,' 'will,' and similar expressions, which are subject to risks and uncertainties[15] - Key risks include the ability to achieve profitability and positive cash flows, timing of FDA nicotine regulations, obtaining FDA authorization for VLNC cigarettes, revenue from technology licensing, managing growth, retaining key personnel, market acceptance, impacts from the hemp/cannabis space, compliance with regulations, competition, product liability claims, litigation outcomes, and intellectual property protection[18] Item 1. Business 22nd Century Group is a plant biotechnology company altering nicotine in tobacco and cannabinoids in hemp/cannabis, focused on harm reduction and proprietary strain development Background The company, incorporated in 2005, became 22nd Century Group in 2011 after a reverse merger, continuing its biotechnology focus on tobacco nicotine regulation - 22nd Century Group, Inc. was incorporated on September 12, 2005, and entered a reverse merger with 22nd Century Limited, LLC on January 25, 2011, adopting its biotechnology business[20] - Since its inception in 1998, 22nd Century Limited, LLC has focused on using biotechnology to regulate nicotine content in tobacco plants[21] Overview The company specializes in genetically engineering VLNC tobacco and specific cannabinoid hemp, providing research cigarettes and investing in hemp-derived products - The company is a plant biotechnology company focused on altering nicotine levels in tobacco and cannabinoid levels in hemp/cannabis through genetic engineering and modern plant breeding[22] - Over 28 million VLNC research cigarettes have been provided for independent clinical studies, with U.S. federal government agencies investing more than $125 million in these studies, which support the FDA's plan for minimally or non-addictive nicotine levels in cigarettes[23][24] - The FDA authorized the marketing of Moonlight and Moonlight Menthol VLNC tobacco cigarettes in the U.S. on December 17, 2019, citing their potential to reduce nicotine dependence and exposure[26] - In hemp/cannabis, the company develops proprietary strains for medicines and agricultural crops, operating strictly within legal hemp regulations, and made an initial investment of approximately $24 million in Panacea Life Sciences, Inc. in December 2019[29][31] Current Activities & Future Prospects Future growth depends on FDA approvals for VLNC tobacco, technology licensing, contract manufacturing, and expanding legal hemp activities - Future prospects depend on generating revenue from licensing/sale of proprietary tobacco/technology, FDA approval of MRTPA for VLN cigarettes, contract manufacturing for third-party brands, and expanding legal hemp activities[33] - Current activities include working with the FDA on MRTPA for VLN, facilitating FDA's nicotine reduction mandate, seeking licensing agreements, producing SPECTRUM research cigarettes for NIDA, expanding legal hemp activities, exploring strategic partnerships in hemp/cannabis, and increasing contract manufacturing for third-party tobacco products[34] Very Low Nicotine Content Tobacco The company's tobacco mission is to reduce smoking harm with proprietary VLNC tobacco, containing at least 95% less nicotine, aligning with FDA public health initiatives - The mission in tobacco is to reduce harm by introducing adult smokers to proprietary VLNC tobacco and cigarettes, which contain at least 95% less nicotine than conventional cigarettes[34][35] - Published independent clinical studies have shown VLNC tobaccos are associated with reductions in smoking, nicotine exposure, and dependence, with minimal withdrawal or compensatory smoking[35] - The FDA's public announcement on July 28, 2017, to enact a new rule requiring minimally or non-addictive nicotine levels in combustible cigarettes provides a scientific foundation for the company's strategy[34][35] Very Low Nicotine Content Cigarettes VLNC cigarettes, including FDA-authorized Moonlight, contain 95% less nicotine, with the VLN MRTPA seeking a '95% Less Nicotine' claim under FDA evaluation - Proprietary VLNC cigarettes contain at least 95% less nicotine than conventional brands, aiming to reduce smokers' nicotine exposure[36] - On December 17, 2019, the FDA authorized the marketing of Moonlight and Moonlight Menthol VLNC tobacco cigarettes in the U.S. under a Premarket Tobacco Product Application (PMTA), citing public health benefits[39] - The company's Modified Risk Tobacco Product Application (MRTPA) for VLN cigarettes, requesting a '95% Less Nicotine' claim, was subject to a public hearing by the FDA's TPSAC on February 14, 2020, and is undergoing comprehensive evaluation[38][40][41] SPECTRUM Government Research Cigarettes Since 2011, the company has supplied over 28 million SPECTRUM research cigarettes to NIDA for independent clinical studies on reduced-nicotine content - The company, as a subcontractor to RTI International, supplies SPECTRUM research cigarettes with different nicotine contents to NIDA for independent clinical studies, a contract renewed in 2019[42] - Since 2011, federal government agencies have invested over $125 million in independent clinical studies utilizing the company's proprietary tobaccos, with more than 28 million SPECTRUM research cigarettes provided[43] FDA's Proposed Mandate to Require Minimally or Non-Addictive Levels of Nicotine in all Cigarettes in the United States The FDA plans to mandate minimally or non-addictive nicotine levels in all U.S. combustible cigarettes, a goal the company's VLNC technology supports as technically achievable - The FDA announced on July 28, 2017, its plan to require all combustible cigarettes sold in the U.S. to contain only minimally or non-addictive levels of nicotine, exercising its authority under the Tobacco Control Act[44][48] - The World Health Organization (WHO) Study Group on Tobacco Product Regulation published an advisory note in 2015 recommending a global nicotine reduction strategy, citing 22nd Century's SPECTRUM research cigarettes as meeting low nicotine levels[47] - The company believes its VLNC tobacco technology and the production of over 28 million research cigarettes since 2011 demonstrate the technical achievability of the FDA's nicotine reduction plan[50] Hemp/Cannabis The company develops proprietary hemp varieties with valuable cannabinoid profiles, adhering to legal hemp laws, and has invested in Panacea Life Sciences for CBD products - The company's mission is to develop proprietary hemp strains with valuable cannabinoid profiles and superior agronomic traits, operating in compliance with U.S. federal and state legal hemp laws[53] - The federal Agricultural Improvement Act of 2018 (2018 Farm Bill) legalized hemp and hemp-derived cannabinoids in the U.S., distinguishing it from federally illegal marijuana[53] - The company is in an exclusive, worldwide collaboration with KeyGene NV to develop hemp/cannabis plants with exceptional cannabinoid profiles and agronomic traits, and has invested in Panacea Life Sciences, Inc., a vertically-integrated CBD product developer[55][56] Intellectual Property The company holds extensive IP for altering nicotine and cannabinoids, focusing resources on VLNC tobacco and unique hemp/cannabis plants despite some patent expirations - The company has extensive patent protection and exclusive rights covering tobacco plants with altered nicotine content (e.g., NBB, QPT, A622, MPO genes) and tobacco products, with most patent families expiring between 2021 and 2036[58] - Vector 21-41 VLNC tobacco plants with QPT modification are protected by Plant Variety Protection (PVP) through 2023, restricting third-party use[58][61] - The expiration of a portion of the QPT patent family in 2018 allows third parties to target the gene, but the company believes successful VLNC tobacco development requires targeting other genes and IP for which it retains protection[60] - The company has an exclusive sublicense in the U.S. and co-exclusive sublicense elsewhere (excluding Canada) to Anandia patents and applications related to cannabinoid production in hemp/cannabis, expiring in 2035[62] - In 2019, the company decided to concentrate IP resources on very low nicotine tobacco and unique hemp/cannabis, discontinuing support for non-core IP and narrowing geographic focus for filings[63] Research and Development R&D combines outsourced efforts with in-house labs and university collaborations, with 2019 expenses totaling $8.06 million, including PMTA/MRTPA application costs - R&D efforts are primarily outsourced to qualified groups, with exclusive worldwide licenses obtained from funded research, enabling control over R&D costs and intellectual property rights[64] - The company opened its own laboratory in Buffalo, New York, in August 2016, and obtained a New York State hemp research and grower license in October 2017[65] - Collaborations include a $1 million, three-year agreement with UVA for industrial hemp plants and medical cannabinoids, and license agreements with NCSU and UK for non-GM VLNC tobacco plant lines[66][68][69] Research and Development Expenses | Year Ended December 31, | R&D Expenses | | :---------------------- | :------------- | | 2019 | $8,057,147 | | 2018 | $14,989,746 | | 2017 | $3,366,468 | - R&D expenses for 2019 included approximately $1,675,000 related to PMTA and MRTPA applications[70] MSA Membership The company acquired NASCO in 2013, becoming a participating manufacturer under the Master Settlement Agreement in August 2014 - In September 2013, the company acquired NASCO, a federally licensed tobacco product manufacturer[71] - On August 29, 2014, the company became a subsequent participating manufacturer under the Master Settlement Agreement (MSA)[71][72] Manufacturing The company operates a leased manufacturing facility in Mocksville, NC, enabling vertical integration for research cigarettes, third-party brands, and future VLNC products - The company leases a cigarette manufacturing facility and warehouse in Mocksville, North Carolina, and purchased manufacturing equipment in 2013[73] - Since 2015, the facility has manufactured SPECTRUM government research cigarettes and third-party MSA cigarette and filtered cigar brands[74] - The factory allows for vertical integration, controlling production and quality, and will produce VLNC cigarette brands (Moonlight, VLN) upon FDA authorization[75] Sources of Raw Materials The company sources tobacco leaf and hemp through direct U.S. farmer contracts, planning to increase contract growing for proprietary VLNC tobacco - A large portion of tobacco leaf is obtained from U.S. farmers under direct contracts that prohibit transfer of proprietary tobaccos, seeds, and plant materials[76] - The company also grows hemp itself and under contracts with farmers, with similar prohibitions on transferring proprietary materials[77] - Plans are in place to increase contract growing of proprietary VLNC tobacco in the U.S. and internationally, preparing for anticipated increased demand from FDA authorizations[76] Government Regulation The company operates under significant FDA regulation for tobacco, including proposed nicotine reduction mandates and MRTP processes, alongside evolving legal frameworks for hemp FDA Mandate to Require Minimally or Non-Addictive Levels of Nicotine in all Cigarettes in the United States The FDA plans to mandate minimally or non-addictive nicotine levels in all U.S. combustible cigarettes, a paradigm shift the company actively supports with its VLNC technology - The Tobacco Control Act grants the FDA authority to regulate tobacco products, including requiring nicotine reduction, though not to zero[78] - On July 28, 2017, the FDA announced its plan to mandate minimally or non-addictive nicotine levels in all U.S. combustible cigarettes, initiating a rulemaking process[79] - The company believes this regulatory environment creates opportunities for its VLNC tobacco cigarettes and technology licensing, having formally responded to the FDA's ANPRM to support the proposed rule's scientific basis and feasibility[80] Modified Risk Cigarettes The FDA authorized Moonlight VLNC cigarettes via PMTA, and the VLN MRTPA, seeking a '95% Less Nicotine' claim, is under comprehensive FDA evaluation after a public hearing - The Tobacco Control Act establishes procedures for the FDA to regulate Modified Risk Tobacco Products, including those marketed to reduce harm or exposure to substances[81] - On December 17, 2019, the FDA authorized the marketing of the company's Moonlight and Moonlight Menthol VLNC tobacco cigarettes in the U.S. under a PMTA, recognizing their potential to reduce nicotine dependence[83] - The company's MRTPA for VLN cigarettes, seeking a '95% Less Nicotine' claim, was the subject of a public hearing by TPSAC on February 14, 2020, and is currently under comprehensive FDA evaluation[84] Hemp The 2018 Farm Bill legalized hemp and its derivatives federally, but the FDA regulates hemp-derived products, with the company strictly adhering to legal hemp activities - The 2018 Farm Bill legalized hemp and hemp-derived cannabinoids under U.S. federal law, requiring compliance with state laws and regulation by federal agencies like the FDA and USDA[87] - The FDA has publicly stated that certain hemp-derived products, including CBD, will be regulated by the FDA, requiring compliance with the Federal Food, Drug and Cosmetic Act[87] - The company's current activities are exclusively with legal hemp, in compliance with federal and state laws, to avoid confusion with federally illegal marijuana[88] Competition The company faces no direct competition for VLNC tobaccos but competes with smoking cessation aids, major tobacco firms for conventional cigarettes, and regional CBD marketers in hemp - The company is not aware of any direct competition for its VLNC tobaccos or VLNC tobacco research cigarettes[89][90] - VLNC tobacco cigarettes may compete with FDA-approved smoking cessation aids from major pharmaceutical companies like Pfizer, GlaxoSmithKline, and Novartis[89] - In the conventional cigarette market, competitors include major domestic players (Philip Morris USA, Reynolds American) and international companies (Philip Morris International, British American Tobacco)[91] - Competition in the hemp/cannabis space primarily consists of many small regional marketers/packagers of CBD oil and CBD oil-containing products[92] Employees As of February 15, 2020, the company employed 67 people and maintains good employee relations - As of February 15, 2020, the company employed 67 people and considers employee relations to be good[93] Corporate Information The company is a Nevada corporation headquartered in Williamsville, NY, with SEC filings accessible via its website and the SEC's website - The company is a Nevada corporation with its corporate headquarters at 8560 Main Street, Suite 4, Williamsville, New York 14221[94] - All SEC filings are accessible free of charge through the company's website (www.xxiicentury.com) and the SEC's website (www.sec.gov)[94](index=94&type=chunk) Item 1A. Risk Factors This section details significant risks that could materially affect the company's business, financial condition, operations, and future growth, spanning operational, regulatory, and intellectual property challenges Risks Related to Our Business and Operations The company faces risks from historical losses, FDA regulatory dependence, negative public perception of hemp/cannabis, acquisition integration, global disruptions, and manufacturing compliance - The company has a history of net losses ($26.6 million in 2019) and negative cash flow from operations ($14.6 million in 2019), with no guarantee of future profitability or sustained positive cash flow[96][97] - Demand for VLNC tobacco is highly dependent on the FDA implementing regulations requiring minimally or non-addictive nicotine levels in all U.S. cigarettes; delays or non-implementation would have a material adverse effect[99][100] - Failure to obtain FDA and foreign regulatory approvals for VLNC tobacco as a Modified Risk Cigarette would prevent commercialization[101] - Negative press or incorrect perception of involvement in federally illegal marijuana, despite focusing on legal hemp, could adversely affect business and relationships[105] - Acquisitions or investments, such as in Panacea, may divert management attention, dilute stockholders, consume resources, and present integration challenges or unknown liabilities[111][112][113] - Business interruptions from natural disasters, terrorism, economic downturns, or global pandemics (like coronavirus) could negatively impact operations, supply chain, and employee productivity[119] - The company's manufacturing facility is subject to evolving FDA Current Good Manufacturing Practices (cGMP) regulations, and failure to comply could negatively affect costs or sustainability[126] Risks Related to the Tobacco Industry The tobacco industry faces significant governmental restrictions, including increased regulation, graphic warnings, and taxes, which could reduce demand and expose the company to litigation - The tobacco industry faces significant governmental regulation, including efforts to reduce tobacco use, restrict marketing, impose packaging regulations, and mandate warnings, which have led to reduced industry volume[136] - If the FDA's proposed rule for graphic health warnings on cigarette packaging is finalized, it is likely to negatively impact sales of both third-party and potential company products[138] - The company may become subject to product liability claims or litigation related to cigarette smoking and exposure to environmental tobacco smoke, which could severely impair results of operations and liquidity[139][141] - Significant increases in cigarette-related taxes, which are frequently proposed or enacted, are expected to adversely impact sales, leading to lower consumption and shifts to lower-priced or illicit products[142] Risks Related to Intellectual Property Commercial success relies on IP protection, but patents may expire or be challenged, trade secrets are vulnerable, and infringement risks could lead to costly litigation or commercialization delays - Commercial success depends on obtaining and maintaining intellectual property protection, but patent positions in life sciences are highly uncertain, and patents may not adequately protect technologies or products[144][145] - The expiration of a portion of the QPT patent family in 2018 may allow third parties to target the QPT gene to reduce nicotine levels, potentially increasing competition if they succeed without infringing other protected IP[147] - Reliance on trade secrets carries risks of unintentional or willful disclosure by employees or others, and these agreements may not provide adequate protection[148][149] - The ability to commercialize products depends on avoiding infringement of third-party patent rights, and infringement claims could lead to costly litigation, regulatory delays, substantial damages, or prohibitions on commercialization[150][152] - Patent applications may not result in issued patents, and even issued patents may be infringed upon or designed around by others, or require licensing from competitors[154][155] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - The company has no unresolved staff comments[171] Item 2. Properties The company leases administrative offices, laboratory space, and a manufacturing facility, with future minimum annual lease payments detailed for each property - Principal administrative offices are leased in Williamsville, New York, with an initial three-year term from October 2017 and monthly payments of $6,375[172] - Laboratory space in Buffalo, New York, has a new one-year lease commencing February 1, 2020, with a monthly payment of $8,408[173] - A manufacturing facility and warehouse in North Carolina are leased on a triple net basis, currently in a two-year extension term expiring October 31, 2020[174] Future Minimum Annual Lease Payments (Manufacturing Facility) | Year Ended December 31, | Amount | | :---------------------- | :----- | | 2020 | $169,000 | | 2021 | $141,000 | - Warehouse space in North Carolina is leased month-to-month with a $4,665 monthly payment, for storing tobacco leaf processing equipment and inventory[174] Item 3. Legal Proceedings Information on ongoing legal proceedings is referenced in Note 10 of the financial statements, with no other material legal proceedings expected to significantly impact the business - Information concerning ongoing litigation is detailed in Note 10 - Commitments and Contingencies – Litigation - to the consolidated financial statements[175] - No other material legal proceedings, governmental actions, investigations, or claims are currently pending that are expected to have a material adverse effect on the business and financial condition[175] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant[177] Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE American under 'XXII', with 89 record holders as of December 31, 2019, and no plans for dividends, retaining earnings for growth Market Information and Holders The company's common stock is listed on the NYSE American under 'XXII', with 89 holders of record as of December 31, 2019 - Common stock is listed on the NYSE American under the symbol 'XXII'[179] - As of December 31, 2019, there were 89 holders of record of common stock[179] Dividend Policy The company has not paid and does not plan to pay cash dividends, opting to retain all funds for business operations and expansion - The company has not paid cash dividends and does not plan to declare or pay any in the foreseeable future[180] - The current policy is to retain all funds and earnings for the operation and expansion of the business[180] Recent Sales of Unregistered Securities There were no recent sales of unregistered securities - No recent sales of unregistered securities[181] Issuer Purchases of Equity Securities There were no issuer purchases of equity securities - No issuer purchases of equity securities[182] Shares authorized for issuance under equity compensation plans The 2014 Omnibus Incentive Plan authorizes equity and cash awards, with 6,307,115 shares available for future awards as of December 31, 2019 - The 2014 Omnibus Incentive Plan (OIP) was approved by shareholders, with amendments in 2017 and 2019 increasing authorized shares[183] - As of December 31, 2019, 6,307,115 shares remained available for future awards under the OIP[183] Equity Compensation Plan Information (as of December 31, 2019) | Category | Number of securities to be issued upon exercise of outstanding options, and restricted stock units (a) | Weighted average exercise price of outstanding options (b) | Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | :------------------------------------------- | :------------------------------------------------------------------------------------------------- | :--------------------------------------------------------- | :--------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | 8,088,172 | $1.49 | 6,307,115 | | Equity compensation plans not approved by security holders | - | N/A | - | | Total | 8,088,172 | | 6,307,115 | Stock Performance Graph This section compares the company's stock performance against two indices from 2014-2019, assuming a $100 investment, with a disclaimer on future results - The stock performance graph compares the company's common stock return with the NYSE American Composite Index and the NASDAQ US Small Cap Biotechnology Index from December 31, 2014, to December 31, 2019[186] - The comparison assumes a $100 investment and reinvestment of dividends, and the stock price performance shown is not necessarily indicative of future price performance[186] Item 6. Selected Financial Data This section summarizes five years of consolidated financial data, including statements of operations, balance sheets, and cash flows, to be read with full financial statements Selected Consolidated Financial Data (Years Ended December 31) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------------------------------- | :------------- | :------------- | :------------- | :------------- | :------------ | | Consolidated Statements of Operations and Comprehensive Loss data: | | Revenue | $25,832,530 | $26,426,347 | $16,600,244 | $12,279,979 | $8,521,998 | | Gross profit (loss) | $14,455 | $898,987 | $(707,912) | $(429,699) | $(580,562) | | Operating expenses | $21,013,564 | $23,575,279 | $11,644,955 | $10,115,968 | $10,689,010 | | Equity based compensation included in operating expenses | $3,539,744 | $3,187,331 | $941,650 | $911,382 | $3,585,540 | | Operating loss | $(23,566,461) | $(24,018,627) | $(13,299,864) | $(11,387,847) | $(12,043,883) | | Warrant liability gain (loss) - net | $- | $48,711 | $(157,809) | $29,615 | $144,550 | | Net loss | $(26,558,544) | $(7,966,911) | $(13,029,117) | $(11,581,430) | $(11,031,931) | | Loss per common share - basic and diluted | $(0.21) | $(0.06) | $(0.13) | $(0.15) | $(0.16) | | Common shares used in basic earnings per share calculation | 125,882,717 | 124,298,981 | 101,161,380 | 79,842,773 | 68,143,284 | | Consolidated Balance Sheet data: | | Working capital | $36,963,118 | $56,023,982 | $63,308,249 | $13,548,118 | $3,991,828 | | Total assets | $68,951,365 | $77,302,136 | $79,739,406 | $27,642,357 | $18,370,512 | | Total debt | $1,474,865 | $1,537,365 | $- | $307,938 | $616,520 | | Total shareholders' equity | $62,050,822 | $71,280,735 | $75,426,200 | $24,334,359 | $11,728,500 | | Other data: | | Net cash used in operating activities | $(14,587,364) | $(17,844,266) | $(12,068,383) | $(9,887,580) | $(7,321,811) | | Net cash provided by (used in) investing activities | $4,551,933 | $15,145,044 | $(60,586,245) | $(553,770) | $(450,661) | | Net cash (used in) provided by financing activities | $9,915,617 | $(355,387) | $62,845,974 | $20,149,241 | $5,130,082 | | Acquisition of patents and trademarks | $825,567 | $656,985 | $450,208 | $356,541 | $413,180 | | Depreciation | $589,310 | $522,695 | $353,435 | $326,124 | $319,699 | | Amortization | $835,693 | $819,640 | $593,562 | $516,056 | $454,612 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results for 2019 vs. 2018, covering business, recent developments, revenue, expenses, liquidity, and accounting policies Business Overview The company is a plant biotechnology firm developing reduced-risk tobacco and unique hemp/cannabis plants, aiming to reduce smoking harm and create valuable hemp varieties - The company is a plant biotechnology company focused on developing reduced-risk tobacco cigarettes and unique hemp/cannabis plants through genetic engineering[195] - Its mission in tobacco is to reduce smoking harm with Very Low Nicotine Content (VLNC) products, and in hemp/cannabis, to develop proprietary varieties with valuable cannabinoid profiles and superior agronomic traits[195] Current Activities Current activities focus on FDA regulatory advancement for VLNC tobacco, licensing, research cigarette production, hemp/cannabis development, and contract manufacturing - Key activities include working with the FDA on MRTPA for VLNC cigarettes, facilitating the FDA's nicotine reduction mandate, seeking licensing for VLNC tobacco technology, producing SPECTRUM research cigarettes for NIDA, expanding legal hemp/cannabis activities, exploring strategic partnerships in the hemp/cannabis value chain, and increasing contract manufacturing for third-party tobacco products[197] Recent Developments Recent developments include warrant exercises generating $11.3 million, a $24 million investment in Panacea, FDA authorization for Moonlight VLNC cigarettes, and a public hearing for VLN MRTPA - In November 2019, the company entered warrant exercise agreements, resulting in the exercise of 11,293,211 warrants at a reduced price of $1.00 per share, generating approximately $11.3 million in gross proceeds and issuing new warrants[196][198] - On December 3, 2019, the company made an initial investment in Panacea Life Sciences, Inc., a vertically-integrated developer of legal, hemp-derived CBD products, with expected investments totaling approximately $24 million[199] - On December 17, 2019, the FDA authorized the marketing of the company's Moonlight and Moonlight Menthol VLNC tobacco cigarettes in the U.S. under a Premarket Tobacco Product Application (PMTA)[200] - On February 14, 2020, the FDA's Tobacco Products Scientific Advisory Committee (TPSAC) conducted a public hearing regarding the company's Modified Risk Tobacco Product Application (MRTPA) for its VLN cigarettes, which claim '95% Less Nicotine'[201] Results of Operations The company's net loss significantly increased in 2019 due to the absence of prior-year investment gains, a litigation settlement, and reduced gross profit, despite lower R&D expenses Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 2019 saw a 2% revenue decrease, significant gross profit decline, 46% R&D reduction, 51% SG&A increase, and a 233% net loss widening due to investment gains absence and litigation Revenue - Sale of products, net | Year | Net Revenue | | :--- | :---------- | | 2019 | $25,832,530 | | 2018 | $26,426,347 | | Change | $(593,817) (2%) | - The decrease in net revenue was primarily due to the absence of SPECTRUM research cigarette sales in 2019, which amounted to $607,000 in 2018[204] Gross Profit on Sales of Products | Year | Cost of Goods Sold | % of Net Sales | Gross Profit | | :--- | :----------------- | :------------- | :----------- | | 2019 | $25,818,075 | 100.0% | $14,455 | | 2018 | $25,527,360 | 97% | $898,987 | | Change | | | $(884,532) | - The decline in gross profit was mainly due to an increase in FDA fees on filtered cigars and the absence of SPECTRUM research cigarette sales in 2019, along with a $54,000 write-off of obsolete inventory[205] Research and Development Expense | Year | R&D Expense | | :--- | :---------- | | 2019 | $8,057,147 | | 2018 | $14,989,746 | | Change | $(6,932,599) (46%) | - The decrease in R&D was primarily due to an $8,125,000 decrease in MRTPA-related expenses and a $1,472,000 decrease in equity-based compensation, partially offset by increases in sponsored research, consulting fees, tobacco leaf inventory write-off, severance, and royalty expenses[206] Sales, General and Administrative Expense | Year | SG&A Expense | | :--- | :----------- | | 2019 | $12,956,417 | | 2018 | $8,585,533 | | Change | $4,370,884 (51%) | - The increase in SG&A was mainly driven by higher equity-based compensation ($1,825,000), payroll and benefits ($2,031,000, including $720,000 in severance), legal and professional expenses, and business insurance, partially offset by reduced investor relations expenses[207] - A non-cash impairment charge of $1,142,349 was recorded in 2019 for intellectual property no longer aligned with strategic objectives (e.g., increased nicotine tobacco, older scientific methods); no impairment was recorded in 2018[208] Net Loss | Year | Net Loss | | :--- | :--------- | | 2019 | $(26,558,544) | | 2018 | $(7,966,911) | | Change | $(18,591,633) (233%) | - The significant increase in net loss was primarily due to a $14,493,000 decrease in one-time realized gains on investments (Anandia/Aurora transactions) from 2018, a $2,704,000 decrease in unrealized gain/loss on Aurora stock warrants, a $1,891,000 litigation settlement expense, and an $885,000 reduction in gross profit[223] Other comprehensive income In 2019, the company reported an other comprehensive loss of $14,289, resulting from an unrealized gain on investments offset by reclassification of gains to net loss Other Comprehensive Income (Loss) | Year | Unrealized Gain (Loss) on Short-term Investment Securities | Reclassification of (Gains) Losses to Net Loss | Other Comprehensive Income (Loss) | | :--- | :------------------------------------------------------- | :--------------------------------------------- | :-------------------------------- | | 2019 | $206,583 | $(220,872) | $(14,289) | | 2018 | $(21,653) | $43,016 | $21,363 | Liquidity and Capital Resources Working capital decreased by $19.0 million in 2019, but management deems $38.96 million in cash adequate for several years, with changes in operating, investing, and financing cash flows noted Working Capital Working capital decreased by $19.0 million in 2019 to $37.0 million, primarily due to an $18.5 million reduction in cash and short-term investment securities Working Capital | Year | Working Capital | | :--- | :-------------- | | 2019 | $36,963,118 | | 2018 | $56,023,982 | | Change | $(19,060,864) | - The decrease was primarily due to an $18.5 million decrease in current assets, mainly cash and cash equivalents and short-term investment securities[226] Cash demands on operations As of December 31, 2019, the company held $38.96 million in cash and short-term investments, deemed sufficient for several years despite a $23.57 million operating loss and $14.59 million cash used in operations - Cash and cash equivalents and short-term investment securities totaled $38,962,185 at December 31, 2019[228] - The company believes this amount is adequate to sustain normal operations and meet current obligations for a number of years[228] - In 2019, the company experienced an operating loss of $23,566,461 and used $14,587,364 in operating cash[228] Net cash used in operating activities Net cash used in operating activities decreased by $3.26 million in 2019 to $14.59 million, driven by a lower cash portion of net loss, partially offset by increased working capital usage Net Cash Used in Operating Activities | Year | Net Cash Used in Operating Activities | | :--- | :------------------------------------ | | 2019 | $(14,587,364) | | 2018 | $(17,844,266) | | Change | $(3,256,901) decrease in use | - The decrease in cash usage was primarily due to a $3,947,681 decrease in the cash portion of the net loss, partially offset by a $690,780 increase in cash used from working capital components[229] Net cash provided by (used in) investing activities Net cash provided by investing activities significantly decreased to $4.55 million in 2019, primarily due to lower net cash from short-term investments and a $12.0 million Panacea investment Net Cash Provided by (Used in) Investing Activities | Year | Net Cash Provided by (Used in) Investing Activities | | :--- | :------------------------------------------------ | | 2019 | $4,551,933 | | 2018 | $15,145,044 | | Change | $(10,593,111) decrease in cash provided | - 2019 investing activities included $17,478,448 net cash from short-term investments and $166,150 from asset sales, offset by $1,092,665 for patents/trademarks/equipment and a $12,000,000 investment in Panacea[231] Net cash provided by (used in) financing activities In 2019, financing activities provided $9.92 million, mainly from $10.62 million in warrant exercises, contrasting with cash used in financing in 2018 Net Cash Provided by (Used in) Financing Activities | Year | Net Cash Provided by (Used in) Financing Activities | | :--- | :------------------------------------------------ | | 2019 | $9,915,617 | | 2018 | $(355,387) | | Change | $10,270,994 increase in cash provided | - 2019 financing activities included $10,615,617 from warrant exercises, partially offset by $700,000 in payments on notes payable[232] Contractual Obligations As of December 31, 2019, the company's contractual obligations totaled $9.30 million, including notes payable, operating leases, consulting, license fees, and sponsored research, with $2.85 million due in 2020 Contractual Obligations (as of December 31, 2019) | Category | Total | Year Ended December 31, 2020 | Years Ended December 31, 2021 & 2022 | Years Ended December 31, 2023 & 2024 | More Than Five Years | | :------------------------ | :----------- | :--------------------------- | :----------------------------------- | :----------------------------------- | :------------------- | | Notes payable | $900,000 | $900,000 | $- | $- | $- | | Operating lease obligations | $905,917 | $359,326 | $458,088 | $88,558 | $- | | Consulting agreements | $105,000 | $105,000 | $- | $- | $- | | License fees | $2,290,000 | $290,000 | $620,000 | $220,000 | $1,160,000 | | Sponsored research | $5,095,000 | $1,200,000 | $2,400,000 | $1,495,000 | $- | | Total | $9,295,917 | $2,854,326 | $3,478,033 | $1,803,558 | $1,160,000 | Critical Accounting Policies and Estimates This section outlines critical accounting policies and estimates, including short-term investments, inventory, lease accounting, revenue recognition, asset impairment, fair value, investments, stock compensation, and income taxes - Short-term investment securities are classified as available-for-sale, carried at fair value, with unrealized gains/losses in other comprehensive income and realized gains/losses in net income[237] - Inventories are valued at the lower of cost or net realizable value, using average cost for tobacco leaf/raw materials and standard cost for finished goods, with appropriate write-offs or reserves[238] - The company adopted ASU 2016-02 (ASC 842) on January 1, 2019, recording Right-of-use (ROU) assets and corresponding lease obligations for operating leases[239] - Revenue is recognized under ASC 606 when performance obligations are satisfied by transferring control of products to customers, either over time or at a point in time[240][241] - Long-lived assets are reviewed for impairment when circumstances indicate carrying value may not be recoverable; a non-cash impairment charge of $1,142,349 was recorded in 2019 for non-strategic intellectual property[244] - Investments in equity securities are accounted for under the equity method or at fair value (ASU 2016-01), with specific valuation for Aurora stock warrants and Panacea investments[247][249][250] - Stock-based compensation is determined using a fair-value based method and expensed over the requisite service period based on vesting estimates[251] - Deferred tax assets and liabilities are recognized for basis differences, with a full valuation allowance established due to a history of cumulative net operating losses[252] Item 8. Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements, supplementary data, the independent auditor's report, and selected unaudited quarterly financial data Financial Statements This subsection lists the Consolidated Balance Sheets, Statements of Operations and Comprehensive Loss, Statements of Changes in Shareholders' Equity, Statements of Cash Flows, and Notes to Consolidated Financial Statements - The financial statements include Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Loss, Consolidated Statements of Changes in Shareholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements[290] Report of Independent Registered Public Accounting Firm (Financial Statements) Freed Maxick CPAs, P.C. issued an unqualified opinion on the company's consolidated financial statements for 2019, affirming their fair presentation in conformity with U.S. GAAP - Freed Maxick CPAs, P.C. issued an unqualified opinion on the consolidated financial statements as of December 31, 2019, and for the three years ended December 31, 2019[292] - The financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America[292] Consolidated Balance Sheets The Consolidated Balance Sheets present the company's financial position as of December 31, 2019 and 2018, showing decreases in total assets and shareholders' equity Consolidated Balance Sheet Data (as of December 31) | ASSETS | 2019 | 2018 | | :----------------------------------- | :------------- | :------------- | | Cash and cash equivalents | $485,111 | $604,925 | | Short-term investment securities | $38,477,074 | $55,748,939 | | Accounts receivable | $866,860 | $871,293 | | Inventory, net | $2,266,304 | $3,043,949 | | Prepaid expenses and other assets | $648,149 | $928,420 | | Total current assets | $42,743,498| $61,197,526| | Machinery and equipment, net | $3,119,970 | $3,260,748 | | Operating leases right-of-use assets, net | $601,979 | $- | | Intangible assets, net | $8,493,913 | $9,751,504 | | Investments | $8,402,527 | $3,092,358 | | Convertible note receivable, net | $5,589,478 | $- | | Total assets | $68,951,365| $77,302,136| | LIABILITIES AND SHAREHOLDERS' EQUITY | | Notes payable (current) | $580,709 | $689,148 | | Operating lease obligations (current)| $219,814 | $- | | Accounts payable | $1,997,820 | $2,574,840 | | Accrued expenses | $2,618,577 | $1,826,481 | | Accrued severance (current) | $358,610 | $- | | Deferred income | $4,850 | $83,075 | | Total current liabilities | $5,780,380 | $5,173,544 | | Notes Payable (long-term) | $292,177 | $848,217 | | Operating lease obligations (long-term)| $382,165 | $- | | Accrued severance (long-term) | $445,821 | $- | | Total liabilities | $6,900,543 | $6,021,761 | | Total shareholders' equity | $62,050,822 | $71,280,375 | | Total liabilities and shareholders' equity | $68,951,365| $77,302,136| Consolidated Statements of Operations and Comprehensive Loss The Consolidated Statements of Operations and Comprehensive Loss show a net loss of $26.56 million in 2019, a significant increase from 2018, driven by investment gains and operating expenses Consolidated Statements of Operations and Comprehensive Loss (Years Ended December 31) | Metric | 2019 | 2018 | 2017 | | :------------------------------------------- | :------------- | :------------- | :------------- | | Revenue: Sale of products, net | $25,832,530 | $26,426,347 | $16,600,244 | | Cost of goods sold (Products) | $25,818,075 | $25,527,360 | $17,308,156 | | Gross profit (loss) | $14,455 | $898,987 | $(707,912) | | Operating expenses: Research and development | $8,057,147 | $14,989,746 | $3,366,468 | | Operating expenses: Sales, general and administrative | $12,956,417 | $8,585,533 | $8,278,487 | | Operating expenses: Impairment | $1,142,349 | $- | $- | | Operating expenses: Depreciation | $589,310 | $522,695 | $353,435 | | Operating loss | $(23,566,461) | $(24,018,627) | $(13,299,864) | | Operating income (expense): Unrealized (loss) gain on investments | $(2,419,348) | $284,400 | $342,562 | | Operating income (expense): Realized gain on investments | $- | $14,492,968 | $- | | Operating income (expense): Realized gain (loss) on short-term investment securities | $220,872 | $(54,451) | $- | | Operating income (expense): Litigation expense | $(1,890,900) | $- | $- | | Operating income (expense): Gain on the sale of machinery and equipment | $87,351 | $- | $- | | Operating income (expense): Warrant liability gain (loss), net | $- | $48,711 | $(157,809) | | Operating income (expense): Dividend income | $- | $221,991 | $- | | Operating income (expense): Interest income, net | $1,066,324 | $1,069,036 | $115,098 | | Operating income (expense): Interest expense | $(56,382) | $(10,939) | $(29,104) | | Loss before income taxes | $(26,558,544) | $(7,966,911) | $(13,029,117) |\n| Net loss | $(26,558,544) | $(7,966,911) | $(13,029,117) | | Other comprehensive income (loss) | $(14,289) | $21,363 | $- | | Comprehensive loss | $(26,572,833) | $(7,945,548) | $(13,029,117) | | Amortization | $835,693 | $819,640 | $593,562 | | Net loss per common share - basic and diluted | $(0.21) | $(0.06) | $(0.13) | | Common shares used in basic and diluted earnings per share calculation | 125,882,717 | 124,298,981 | 101,161,380 | Consolidated Statements of Changes in Shareholders' Equity This statement details changes in shareholders' equity for 2017-2019, highlighting significant increases from warrant exercises and equity-based compensation in 2019, offset by a substantial net loss Consolidated Statements of Changes in Shareholders' Equity (Years Ended December 31) | Metric | Common Shares Outstanding | Par Value of Common Shares | Capital in Excess of Par Value | Other Comprehensive Income | Accumulated Deficit | Shareholders' Equity | | :------------------------------------------- | :------------------------ | :------------------------- | :----------------------------- | :------------------------- | :------------------ | :------------------- | | Balance at December 31, 2016 | 90,698,113 | $907 | $102,471,907 | $- | $(78,138,455) | $24,334,359 | | Equity-based compensation (2017) | - | - | $941,650 | - | - | $941,650 | | Stock issued in connection with warrant exercises (2017) | 12,249,327 | $122 | $12,446,986 | - | - | $12,447,108 | | Stock issued in October 2017 registered direct offering, net | 20,570,000 | $206 | $50,731,994 | - | - | $50,732,200 | | Net loss (2017) | - | - | - | - | $(13,029,117) | $(13,029,117) | | Balance at December 31, 2017 | 123,569,367 | $1,236 | $166,592,536 | $- | $(91,167,572) | $75,426,200 | | Equity-based compensation (2018) | - | - | $3,187,331 | - | - | $3,187,331 | | Reclassification of warrant liability to capital in excess of par (2018) | - | - | $167,779 | - | - | $167,779 | | Unrealized loss on short-term investment (2018) | - | - | - | $(21,653) | - | $(21,653) | | Reclassification of losses to net loss (2018) | - | - | - | $43,016 | - | $43,016 | | Net loss (2018) | - | - | - | - | $(7,966,911) | $(7,966,911) | | Balance at December 31, 2018 | 124,642,593 | $1,246 | $170,392,249 | $21,363 | $(99,134,483) | $71,280,375 | | Stock issued in connection with warrant exercises (2019) | 11,293,211 | $113 | $10,615,505 | - | - | $10,615,618 | | Equity-based compensation (2019) | 100,000 | $1 | $3,539,744 | - | - | $3,539,745 | | Stock issued in connection with litigation expense (2019) | 990,000 | $10 | $1,890,890 | - | - | $1,890,900 | | Stock issued in connection with Panacea investment (2019) | 1,297,017 | $13 | $1,297,004 | - | - | $1,297,017 | | Unrealized gain on short-term investment (2019) | - | - | - | $206,583 | - | $206,583 | | Reclassification of gains to net loss (2019) | - | - | - | $(220,872) | - | $(220,872) | | Net loss (2019) | - | - | - | - | $(26,558,544) | $(26,558,544) | | Balance at December 31, 2019 | 138,362,809 | $1,384 | $187,735,391 | $7,074 | $(125,693,027) | $62,050,822 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show decreased cash used in operations, significantly less cash from investing, and substantially more cash from financing activities in 2019 Consolidated Statements of Cash Flows (Years Ended December 31) | Cash Flow Activity | 2019 | 2018 | 2017 | | :----------------------------------------------- | :------------- | :------------- | :------------- | | Net cash used in operating activities | $(14,587,364) | $(17,844,266) | $(12,068,383) | | Net cash provided by (used in) investing activities | $4,551,933 | $15,145,044 | $(60,586,245) | | Net cash provided by (used in) financing activities | $9,915,617 | $(355,387) | $62,845,974 | | Net decrease in cash | $(119,814) | $(3,054,609) | $(9,808,654) | | Cash and cash equivalents - January 1, | $604,925 | $3,659,534 | $13,468,188 | | Cash and cash equivalents - December 31, | $485,111 | $604,925 | $3,659,534 | | Supplemental disclosures of cash flow information: | | Cash paid during the period for interest | $3,338 | $- | $29,104 | | Cash paid during the period for income taxes | $- | $- | $- | | Non-cash transactions: Patent and trademark additions included in accounts payable | $155,116 | $152,322 | $188,818 | | Non-cash transactions: Licenses acquired with notes payable | $- | $2,326,427 | $- | | Non-cash transactions: Stock issued in connection with equity investment | $1,297,017 | $- | $- | Notes to Consolidated Financial Statements These notes provide detailed information supporting the financial statements, covering business nature, accounting policies, assets, liabilities, equity, and various commitments and contingencies NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note describes the company's plant biotechnology business and summarizes key accounting policies, including consolidation, cash, investments, inventory, intangibles, and revenue recognition - The company is a plant biotechnology company specializing in technology to alter nicotine levels in tobacco plants and cannabinoid levels in hemp plants through genetic engineering[309] - Key subsidiaries include 22nd Century Limited, LLC (biotechnology), NASCO Products, LLC (tobacco manufacturer under MSA), and Botanical Genetics, L