UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2023
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From ________ to ________
Commission File Number: 001-36338
22nd Century Group, Inc.
(Exact name of registrant as specified in its charter)
Nevada |
| 98-0468420 |
(State or other jurisdiction | (IRS Employer | |
of incorporation) | Identification No.) |
500 Seneca Street, Suite 507, Buffalo, New York 14204
(Address of principal executive offices)
(716) 270-1523
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of each class |
| Ticker symbol |
| Name of Exchange on Which Registered |
Common Stock, $0.00001 par value |
| XXII |
| NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of May 2, 2023, there were 222,504,346 shares of common stock issued and outstanding.
22nd CENTURY GROUP, INC.
INDEX
|
| Page Number |
PART I. | FINANCIAL INFORMATION |
|
|
|
|
Item 1. | Financial Statements |
|
|
|
|
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 (unaudited) | 3 | |
|
| |
4 | ||
|
| |
5 | ||
|
| |
6 | ||
|
| |
Notes to Condensed Consolidated Financial Statements (unaudited) | 7 | |
|
| |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 | |
44 | ||
|
|
|
44 | ||
|
|
|
45 | ||
|
|
|
45 | ||
|
|
|
45 | ||
|
|
|
46 | ||
|
|
|
47 | ||
|
|
|
47 | ||
|
|
|
47 | ||
|
|
|
48 | ||
|
|
|
49 |
2
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands, except share and per-share data)
March 31, | December 31, | |||||
|
| 2023 |
| 2022 | ||
ASSETS |
|
|
|
| ||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | 10,952 | $ | 3,020 | ||
Short-term investment securities |
| 5,275 |
| 18,193 | ||
Accounts receivable, net |
| 9,131 |
| 5,641 | ||
Inventories |
| 10,528 |
| 10,008 | ||
Insurance recoveries |
| 3,000 |
| 5,000 | ||
Prepaid expenses and other current assets |
| 2,252 |
| 2,743 | ||
Total current assets |
| 41,138 |
| 44,605 | ||
Property, plant and equipment, net |
| 14,322 |
| 13,093 | ||
Operating lease right-of-use assets, net |
| 5,309 |
| 2,675 | ||
Goodwill |
| 33,160 |
| 33,160 | ||
Intangible assets, net |
| 18,385 |
| 16,853 | ||
Investments |
| 682 |
| 682 | ||
Restricted cash |
| 7,500 |
| — | ||
Other assets | 3,642 | 3,583 | ||||
Total assets | $ | 124,138 | $ | 114,651 | ||
|
|
|
| |||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Notes and loans payable - current | $ | 314 | $ | 908 | ||
Operating lease obligations |
| 862 |
| 681 | ||
Accounts payable |
| 4,602 |
| 4,168 | ||
Accrued expenses |
| 6,306 |
| 1,428 | ||
Accrued payroll |
| 1,276 |
| 3,199 | ||
Accrued excise taxes and fees |
| 2,330 |
| 1,423 | ||
Deferred income | 257 | 831 | ||||
Other current liabilities |
| 923 |
| 380 | ||
Total current liabilities |
| 16,870 |
| 13,018 | ||
Long-term liabilities: |
|
|
|
| ||
Notes and loans payable |
| 154 |
| 3,001 | ||
Operating lease obligations |
| 4,602 |
| 2,141 | ||
Long-term debt |
| 16,417 |
| — | ||
Other long-term liabilities | 4,736 | 516 | ||||
Total liabilities | 42,779 | 18,676 | ||||
Commitments and contingencies (Note 11) |
|
| ||||
Shareholders' equity |
|
|
|
| ||
Preferred stock, $.00001 par value, 10,000,000 shares authorized |
|
|
|
| ||
Common stock, $.00001 par value, 300,000,000 shares authorized |
|
|
|
| ||
Capital stock and : |
|
|
|
| ||
217,057,927 common shares (215,238,198 at December 31, 2022) |
|
| ||||
Common stock, par value | 2 | 2 | ||||
Capital in excess of par value |
| 337,512 |
| 333,898 | ||
Accumulated other comprehensive loss |
| (41) |
| (111) | ||
Accumulated deficit |
| (256,114) |
| (237,814) | ||
Total shareholders' equity |
| 81,359 |
| 95,975 | ||
Total liabilities and shareholders’ equity | $ | 124,138 | $ | 114,651 | ||
See accompanying notes to condensed consolidated financial statements.
3
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(amounts in thousands, except per-share data)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Revenues, net | $ | 21,962 | $ | 9,045 | ||
Cost of goods sold |
| 23,139 |
| 8,736 | ||
Gross (loss) profit |
| (1,177) |
| 309 | ||
Operating expenses: |
|
| ||||
Sales, general and administrative |
| 14,231 |
| 7,262 | ||
Research and development |
| 1,517 |
| 1,141 | ||
Other operating expense, net |
| 898 |
| 52 | ||
Total operating expenses |
| 16,646 |
| 8,455 | ||
Operating loss |
| (17,823) |
| (8,146) | ||
Other income (expense): |
|
| ||||
Unrealized loss on investments |
| — |
| (817) | ||
Other income, net |
| 5 |
| — | ||
Interest income, net |
| 57 |
| 50 | ||
Interest expense |
| (421) |
| (5) | ||
Total other expense |
| (359) |
| (772) | ||
Loss before income taxes |
| (18,182) | (8,918) | |||
(Benefit) provision for income taxes |
| — |
| — | ||
Net loss | $ | (18,182) | $ | (8,918) | ||
Net loss per common share - basic and diluted | (0.08) | (0.05) | ||||
Weighted average common shares outstanding - basic and diluted | 215,784 | 163,157 | ||||
Net loss | $ | (18,182) | $ | (8,918) | ||
Other comprehensive loss: |
|
| ||||
Unrealized gain (loss) on short-term investment securities |
| 61 |
| (400) | ||
Foreign currency translation |
| (4) |
| — | ||
Reclassification of realized losses to net loss |
| 13 |
| — | ||
Other comprehensive income (loss) | 70 | (400) | ||||
Comprehensive loss | $ | (18,112) | $ | (9,318) | ||
See accompanying notes to condensed consolidated financial statements.
4
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(amounts in thousands, except share data)
Three Months Ended March 31, 2023 | |||||||||||||||||
Accumulated | |||||||||||||||||
Common | Par Value | Capital in | Other | Total | |||||||||||||
Shares | of Common | Excess of | Comprehensive | Accumulated | Shareholders’ | ||||||||||||
| Outstanding |
| Shares |
| Par Value |
| Income (Loss) |
| Deficit |
| Equity | ||||||
Balance at January 1, 2023 |
| 215,238,198 | $ | 2 |
| $ | 333,898 |
| $ | (111) |
| $ | (237,814) | $ | 95,975 | ||
Stock issued in connection with RSU vesting, net of 474,091 shares withheld for taxes |
| 1,353,891 |
| — |
| (414) |
| — |
| — |
| (414) | |||||
Stock issued in connection with acquisition | 465,838 | — | 503 | — | — | 503 | |||||||||||
Equity-based compensation |
| — |
| — |
| 1,175 |
| — |
| — |
| 1,175 | |||||
Adoption of ASU 2016-13 |
| — |
| — |
| — |
| — |
| (118) |
| (118) | |||||
Equity detachable warrants |
| — |
| — |
| 2,350 |
| — |
| — |
| 2,350 | |||||
Other comprehensive income |
| — |
| — |
| — |
| 70 |
| — |
| 70 | |||||
Net loss |
| — |
| — |
| — |
| — |
| (18,182) |
| (18,182) | |||||
Balance at March 31, 2023 | 217,057,927 |
| 2 |
| 337,512 |
| (41) |
| (256,114) |
| 81,359 | ||||||
Three Months Ended March 31, 2022 | |||||||||||||||||
Accumulated | |||||||||||||||||
Common | Par Value | Capital in | Other | Total | |||||||||||||
Shares | of Common | Excess of | Comprehensive | Accumulated | Shareholders’ | ||||||||||||
| Outstanding |
| Shares |
| Par Value |
| Income (Loss) |
| Deficit |
| Equity | ||||||
Balance at January 1, 2022 |
| 162,872,875 | $ | 2 |
| $ | 244,247 |
| $ | (162) |
| $ | (178,013) | $ | 66,074 | ||
Stock issued in connection with RSU vesting |
| 1,663,691 |
| — |
| — |
| — |
| — |
| — | |||||
Equity-based compensation |
| — |
| — |
| 1,213 |
| — |
| — |
| 1,213 | |||||
Other comprehensive income |
| — |
| — |
| — |
| (400) |
| — |
| (400) | |||||
Net loss |
| — |
| — |
| — |
| — |
| (8,918) |
| (8,918) | |||||
Balance at March 31, 2022 | 164,536,566 |
| 2 |
| 245,460 |
| (562) |
| (186,931) |
| 57,969 | ||||||
See accompanying notes to condensed consolidated financial statements.
5
22nd CENTURY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts in thousands)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Cash flows from operating activities: |
|
|
|
| ||
Net loss | $ | (18,182) | $ | (8,918) | ||
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
| ||
Amortization and depreciation |
| 881 |
| 329 | ||
Amortization of right-of-use asset |
| 294 |
| 92 | ||
Unrealized loss on investment |
| — |
| 817 | ||
Realized loss on short-term investment securities | 13 | — | ||||
Provision for credit losses | 61 | — | ||||
Loss on the sale of machinery and equipment |
| 103 |
| — | ||
Accretion of non-cash interest expense (income), net | (7) | 119 | ||||
Debt related charges included in interest expense | 231 | — | ||||
Equity-based employee compensation expense |
| 1,175 |
| 1,213 | ||
Loss on change of contingent consideration |
| 22 |
| — | ||
Loss on change of warrant liabilities | 139 | — | ||||
Changes in operating assets and liabilities, net of acquisition: |
|
|
|
| ||
Accounts receivable |
| (3,624) |
| (635) | ||
Inventory |
| (495) |
| (872) | ||
Prepaid expenses and other assets |
| 1,971 |
| 794 | ||
Accounts payable |
| 312 |
| (661) | ||
Accrued expenses |
| 1,544 |
| 647 | ||
Accrued payroll |
| (1,923) |
| (1,850) | ||
Accrued excise taxes and fees |
| 906 |
| 739 | ||
Other liabilities | (921) |
| 258 | |||
Net cash used in operating activities |
| (17,500) |
| (7,928) | ||
Cash flows from investing activities: |
|
|
| |||
Acquisition of patents, trademarks, and licenses |
| (116) |
| (105) | ||
Acquisition of property, plant and equipment |
| (1,910) |
| (258) | ||
Proceeds from the sale of property, plant and equipment |
| 200 |
| — | ||
Acquisition, net of cash acquired | 90 | — | ||||
Investment in Change Agronomy Ltd. | — | (682) | ||||
Property, plant and equipment insurance proceeds | 3,500 | — | ||||
Sales and maturities of short-term investment securities |
| 15,726 |
| 13,595 | ||
Purchase of short-term investment securities |
| (2,767) |
| (3,778) | ||
Net cash provided by investing activities |
| 14,723 |
| 8,772 | ||
Cash flows from financing activities: |
|
|
| |||
Payments on note payables | (3,512) | (596) | ||||
Proceeds from issuance of notes payable | 71 | — | ||||
Proceeds from issuance of long-term debt | 16,849 | — | ||||
Payment of debt issuance costs | (801) | — | ||||
Proceeds from issuance of detachable warrants | 6,016 | — | ||||
Taxes paid related to net share settlement of RSUs | (414) | — | ||||
Net cash provided by (used in) financing activities |
| 18,209 |
| (596) | ||
Net increase in cash, cash equivalents and restricted cash |
| 15,432 |
| 248 | ||
Cash, cash equivalents and restricted cash - beginning of period |
| 3,020 |
| 1,336 | ||
Cash, cash equivalents and restricted cash - end of period | $ | 18,452 | $ | 1,584 | ||
Reconciliation of cash and cash equivalents and restricted cash | ||||||
Cash and cash equivalents at beginning of period | $ | 3,020 | $ | 1,336 | ||
Restricted cash at beginning of period | — | — | ||||
Cash, cash equivalents and restricted cash at beginning of period | $ | 3,020 | $ | 1,336 | ||
Cash and cash equivalents at end of period | $ | 10,952 | $ | 1,584 | ||
Restricted cash at end of period | 7,500 | — | ||||
Cash, cash equivalents and restricted cash at end of period | $ | 18,452 | $ | 1,584 | ||
Supplemental disclosures of cash flow information: |
|
|
|
| ||
Non-cash transactions: |
|
|
|
| ||
Capital expenditures incurred but not yet paid | $ | 142 | $ | 91 | ||
Right-of-use assets and corresponding operating lease obligations | $ | 2,928 | $ | — | ||
Non-cash consideration RXP acquisition | $ | 1,926 | $ | — | ||
See accompanying notes to condensed consolidated financial statements.
6
22nd CENTURY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
Amounts in thousands, except for share and per-share data
NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – 22nd Century Group, Inc. (together with its consolidated subsidiaries, “22nd Century Group” or the “Company”) is a publicly traded Nevada corporation on the NASDAQ Capital Market under the symbol “XXII.” 22nd Century Group is a leading agricultural biotechnology and intellectual property company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science.
The accompanying condensed consolidated financial statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. The results for interim periods are not necessarily indicative of results or trends that may be expected for the fiscal year as a whole. The condensed consolidated financial statements were prepared using U.S. GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates.
Reclassifications –As a result of the acquisition of GVB Biopharma (see Note 2), the Company has revised the presentation and classification of depreciation and amortization in the Condensed Consolidated Statement of Operations and Comprehensive Loss to conform with the acquiree, as follows:
Restricted Cash - Restricted cash includes minimum escrow funds the Company maintains in a money market account pursuant to the terms of the Senior Secured Credit Facility.
7
Credit Losses - The Company estimates and records a provision for its expected credit losses related to its financial instruments, including its trade receivables and contract assets. The Company considers historical collection rates, current financial status of its customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable and contract assets, the Company believes that the carrying value, net of excepted losses, approximates fair value and therefore, relies more on historical and current analysis of such financial instruments.
To determine the provision for credit losses for accounts receivable, including consideration of contract assets or unbilled receivables, the Company has disaggregated its accounts receivable by nature and type of product being sold, as the Company determined that risk profile of its customers is consistent based on the type of product and industry in which they operate. These customer classes include tobacco distributors/wholesalers for its CMO cigarette and filtered cigar tobacco product sales, hemp/cannabis bulk ingredient product sales, and hemp/cannabis white label product sales. Each class of customer is analyzed for estimated credit losses individually. In doing so, the Company establishes a historical loss matrix, based on the previous collections of accounts receivable by the age of such receivables, and evaluates the current and forecasted financial position of its customers, as available. Further, the Company considers macroeconomic factors and the status of the related industry, including unemployment rates, industry indices, and other factors, to estimate if there are current expected credit losses within its trade receivables based on the trends and the Company’s expectation of the future status of such economic and industry-specific factors. The Company believes that its customers, the majority of which are in industries with sound financial condition, and therefore, the Company’s evaluation of macroeconomic and industry-specific factors did not have a material impact on the provision for credit losses. As of March 31, 2023 and December 31, 2022, the Company recorded a provision for credit losses of $551 and $372 respectively.
Acquisitions - The Company accounts for acquisitions under the acquisition method of accounting for business combinations. Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill.
All direct acquisition-related costs are expensed as incurred and are recognized in operating expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The allocation of purchase price in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date.
Contingent Consideration - Contingent consideration arising from a business acquisition is included as part of the purchase price and is recorded at fair value as of the acquisition date. Subsequent to the acquisition date, the Company remeasures contingent consideration arrangements at fair value at each reporting period until the contingency is resolved. The changes in fair value are recognized within Other Operating Expenses, Net in the Company’s Condensed Consolidated Statement of Operations and Comprehensive Loss. Changes in fair values reflect new information about the likelihood of the payment of the contingent consideration and the passage of time. See Note 2 for the contingent consideration arising from the acquisition of RX Pharmatech Ltd.
Warrants - The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815) depending on the specific terms of the warrant agreement. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding.
Warrants that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities pursuant to ASC 480 and are initially and subsequently measured at their estimated fair values. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For additional discussion on warrants, see Note 6 and Note 10.
8
Debt Issued with Detachable Warrants - The Company considers guidance within ASC 470-20, Debt (ASC 470), ASC 480, and ASC 815 when accounting for the issuance of debt with detachable warrants. As described above under the caption “Warrants”, the Company classifies stock warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with detachable warrants, the proceeds from the issuance of the debt are first allocated to the warrants at their full estimated fair value with a corresponding debt discount. The remaining proceeds, as further reduced by discounts (including those created by the bifurcation of embedded derivatives), is allocated to the debt. The Company accounts for debt as liabilities measured at amortized cost and amortizes the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument pursuant to ASC 835, Interest (ASC 835).
Embedded Derivatives - The Company considers whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to ASC 815. Embedded derivatives are initially and subsequently measured at fair value. The embedded derivatives associated with the Company’s Senior Secured Credit Facility and Subordinated Note are not material.
Debt Issuance Costs and Discounts - Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the term of the related debt. Debt issuance costs and discounts related to the Company’s Senior Secured Credit Facility and Subordinated Note are recorded as a reduction of the carrying value of the related debt and are amortized to Interest expense using the effective interest method over the period from the date of issuance to the maturity date, whichever is earlier. The amortization of debt issuance costs and discounts are included in Debt related charges included in interest expense in the Condensed Consolidated Statements of Cash Flows. Note 7 “Debt” contains additional information on the Company’s debt issuance costs and discounts.
Goodwill - Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one or more reporting units. The Company’s reporting units are the same as its two reportable segments, which is (1) Tobacco, and (2) Hemp/Cannabis. The Company tests its reporting unit’s goodwill for impairment at least annually as of the measurement date year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.
During the three-month period ended March 31, 2023, there were no indicators of impairment and accordingly a goodwill impairment test was not performed.
Gain and Loss Contingencies – The Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
In accordance with ASC 450-30, Gain Contingencies, gain contingencies are recognized when earned and realized, which typically will occur at the time of final settlement or when cash is received. Insurance recoveries may be realized earlier than cash receipt if a claim and amount of reimbursement is acknowledged by the insurance company that payment is due and collection is probable.
9
The Company maintains general liability insurance policies for its facilities. Under the terms of our insurance policies, in the case of loss to a property, the Company follows the guidance in ASC 610-30, Other Income —Gains and Losses on Involuntary Conversions, for the conversion of nonmonetary assets (the properties) to monetary assets (insurance recoveries). Under ASC 610-30, once the recovery is deemed probable the Company recognizes an asset for the insurance recovery receivable in the Condensed Consolidated Balance Sheets, with corresponding income that is offsetting to the casualty losses recorded in the Condensed Consolidated Statements of Operations and Comprehensive Loss. If the insurance recovery is less than the amount of the casualty charges recognized, the Company will recognize a loss whereas if the insurance recovery is greater than the amount of casualty loss recognized, the Company will only recognize a recovery up to the amount of the casualty loss and will account for the excess as a gain contingency. Business interruption insurance is treated as a gain contingency.
Refer to further discussion of all commitments and contingencies in Note 11.
Income Taxes - For interim income tax reporting, due to a full valuation allowance on net deferred tax assets, no income tax expense or benefit is recorded unless it is an unusual or infrequently occurring item. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.
Recent Accounting Pronouncements – Adoption of Accounting Standards Codification Topic 326
The Company adopted ASU 2016-13, or ASC 326 Financial Instruments-Credit Losses, effective January 1, 2023 under a modified retrospective approach. Under the current expected credit losses (“CECL”) model, the Company immediately recognizes an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are recognized each period. The new guidance applies to the Company’s trade receivables and contract asset balances. Due to the nature of business operations and contracts with customers, the Company has historically not experienced significant bad debt expense or write-offs and as a result, the adoption of ASC 326 did not have a material impact to the Company’s Condensed Consolidated Financial Statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $118 with an offsetting cumulative-effect adjustment to the opening balance of retained earnings as of January 1, 2023.
We consider the applicability and impact of all ASUs. If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our financial statements and related disclosures.
NOTE 2. – BUSINESS ACQUISITIONS
RX Pharmaceutical, Ltd.
On January 19, 2023, the Company acquired RX Pharmatech Ltd (“RXP”) a privately held distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. RXP is included in the Company’s Hemp/cannabis reportable segment.
10
The initial consideration paid to acquire RXP included $200 in cash and $503 in common stock (consisting of 465,838 unregistered shares of common stock), and an initial estimate of target working capital true-up of $286. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. Additionally, the contingent consideration in the transaction represents the estimated fair value of the Company’s obligation, under the share purchase agreement, to make additional payments of up to $1,550 over the next three years based on specified conditions being met, which has an initial fair value of contingent consideration of $1,138. The fair value of the aggregate consideration in the transaction is $2,127.
Based on the preliminary purchase price allocation, the assets acquired and liabilities assumed principally comprise $1,744 of intangible assets, and other immaterial working capital items representing a net asset of $93 (net of cash acquired of $290). There was no excess purchase price and therefore no goodwill recorded as part of the business combination. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Condensed Consolidated Financial Statements were prepared.
Intangible assets include the intellectual property associated with the 1,276 novel food applications with the FSA., which is determined to be indefinite lived. The preliminary fair value was determined by utilizing the cost approach, and considered market data to evaluate the replacement cost per application.
The Company utilizes third-party valuation experts to assist in estimating the fair value of the contingent consideration and develops estimates by considering weighted-average probabilities of likely outcomes and discounted cash flow analysis. These estimates require the Company to make various assumptions about forecasted revenues and discount rates, which are unobservable and considered Level 3 inputs in the fair value hierarchy. A change in these inputs to a different amount might result in a significantly higher or lower fair value measurement at the reporting date.
The following table provides quantitative information associated with the initial fair value measurement of the Company’s liabilities for contingent consideration as of January 19, 2023:
Maximum Payout | Weighted Average | |||||||||
Contingency Type | (undiscounted) | Fair Value | Unobservable Inputs | or Range | ||||||
Revenue-based payments | $ | 1,550 | $ | 1,138 | 16 | % | ||||
Projected year(s) of payment | 2024-2026 | |||||||||
The amounts reported are considered provisional as the Company is finalizing the valuations that are required to allocate the purchase price through the measurement period, which remains open as of March 31, 2023. As a result, the allocation of the provisional purchase price may change in the future, which could be material.
GVB Biopharma
On May 13, 2022, the Company entered into and closed the transactions contemplated by the Reorganization and Acquisition Agreement (the “Reorganization Agreement”) with GVB Biopharma (“GVB”). Under the terms of the Reorganization Agreement, the Company acquired substantially all of the assets of GVB’s business dedicated to hemp-based cannabinoid extraction, refinement, contract manufacturing and product development (the “Transaction”). The acquisition of GVB allows the Company to leverage its expertise in receptor and plant science to develop its hemp/cannabis franchise and add significant scale. GVB is included in the Company’s Hemp/cannabis reportable segment.
11
The aggregate consideration for the Transaction consisted of (i) the assumption of approximately $4,637 of debt, (ii) the assumption and direct payment of certain third-party transaction costs incurred by GVB in connection with the Transaction totaling approximately $1,753 and (iii) the issuance to GVB of 32,900,000 unregistered shares of common stock of the Company (the “Shares”) with a fair value of $51,653. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date. The Shares were subject to a lock-up and restrictions on transfer for at least six months following closing and thereafter, -third of the Shares will be released from the lock-up after six months, -third will be released from the lock-up after nine months and the remainder will be released after one year.
The Transaction was structured as a tax-free re-organization pursuant to Internal Revenue Code Section 368(a)(1)(c). Accordingly, the tax basis of net assets acquired retain their carry over tax basis and holding period in purchase accounting.
The Company recorded provisional estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition during the second quarter of 2022, resulting in goodwill of $44,200. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the Consolidated Financial Statements were prepared.
During the measurement period, the preliminary fair values of the assets acquired and liabilities assumed as of May 13, 2022 were adjusted to reflect the ongoing acquisition valuation analysis procedures of property and equipment, intangible assets, deferred taxes, and working capital adjustments. These adjustments resulted in a combined reduction to goodwill of $11,040. The impact of depreciation and amortization to Operating loss recorded in the third quarter of 2022 as a result of completing valuation procedures for property and equipment and intangible assets, that would have been recorded in the prior period since the date of acquisition was $70.
The amounts reported are considered provisional as the Company is finalizing the valuations that are required to allocate the purchase price through the measurement period, which remains open as of March 31, 2023, as the final stub period income tax returns have not yet been completed. As a result, the allocation of the provisional purchase price may change in the future, which could be material.
The following table presents management’s purchase price allocation:
The fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset.
12
The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, tradename life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Current Assets and Liabilities
The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the income approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance for these remaining efforts. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $978, which was fully amortized in the three month period ended June 30, 2022 in the Consolidated Statement of Operations and Comprehensive Loss.
Property, Plant and Equipment
The fair value of PP&E acquired was estimated by applying the cost approach for personal property and leasehold improvements. The cost approach was applied by developing a replacement cost and adjusting for economic depreciation and obsolescence.
Leases
The Company recognized operating lease liabilities and operating lease right-of-use assets for office and manufacturing facilities in (i) Las Vegas, Nevada (ii) Grass Valley, Oregon (iii) Prineville, Oregon, and (iv) Tygh Valley, Oregon, accordance with ASC 842, Leases.
The following table summarizes the Company’s discount rate and remaining lease terms as of the acquisition date:
Weighted average remaining lease term in years | 3.8 | ||
Weighted average discount rate | 8.3 | % |
The Company concluded there were no off-market lease intangibles on the date of acquisition based on an evaluation of market rents per square foot, geographic location and nature of use of the underlying asset, among other considerations.
Intangible assets
The purchase price was allocated to intangible assets as follows:
Weighted Average | ||||||||
Fair Value | Amortization Period | Weighted Average | ||||||
Definite-lived Intangible Assets | Assigned |
| (Years) | Discount Rate | ||||
Customer relationships | $ | 5,800 | 23.50% | |||||
Tradename | $ | 4,600 | Indefinite | 23.50% | ||||
13
Customer Relationships
Customer relationships represent the estimated fair value of contractual and non-contractual customer relationships GVB had as of the acquisition date. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer relationships was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 20%, as well as management’s understanding of the industry and product life cycles.
Tradename
Tradename represents the estimated fair value of GVB’s corporate and product names. The acquired tradename was valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the tradename was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate of 1.0%. The GVB tradename was assumed to have an indefinite useful life based upon long-term management expectations and future operating plans.
Deferred Taxes
The Company determined the deferred tax position to be recorded at the time of the GVB acquisition in accordance with ASC Topic 740, Income Taxes, resulting in recognition of deferred tax liabilities for future reversing of taxable temporary differences primarily for intangible assets and property, plant and equipment. This resulted in a preliminary net deferred tax liability of $627, which includes the carryover basis of historical recognized deferred tax assets, liabilities and valuation allowance.
The net deferred tax liabilities recorded as a result of the acquisition of GVB was determined by the Company to also provide future taxable temporary differences that allow for the Company to utilize certain previously fully reserved deferred tax assets. Accordingly, the Company recognized a reduction to its valuation allowance resulting in a net tax benefit of approximately $434 for the year ended December 31, 2022.
Goodwill
The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. A variety of factors contributed to the goodwill recognized, including the value of GVB’s assembled work force, the incremental value resulting from GVB’s capabilities in hemp/cannabis, operational synergies across the plant science platform, and the expected revenue growth over time that is attributable to increased market share from future products and customers. Goodwill recorded in the transaction will be non-deductible.
Actual and Pro Forma (unaudited) disclosures
For segment reporting purposes, the results of operations and net assets from the RXP and GVB acquisitions have been included in the Company’s Hemp/cannabis reportable segment since the respective acquisition dates. For the three-month period ended March 31, 2023, net revenues related to GVB were $12,874, and net loss was $4,791. The operating results of RXP for the three-month period ended March 31, 2023 were immaterial.
14
The following unaudited pro forma information presents the consolidated results of operations of the Company and assumes the acquisition occurred on January 1, 2021:
The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These unaudited pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future. These unaudited pro forma results include certain adjustments, primarily due to amortization expense due to the fair value adjustment of inventory, acquisition related costs and the impact of income taxes on the pro forma adjustments.
Acquisition costs
During the three-month period ended March 31, 2023, direct costs incurred as a result of the acquisition of RXP were $68 as compared to direct costs incurred as a result of the acquisition of GVB were $52 during the three-month period ended March 31, 2022. Acquisition costs are expensed as incurred and included in Other operating expenses, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.
NOTE 3. – INVENTORIES
Inventories at March 31, 2023 and December 31, 2022 consisted of the following:
| March 31, |
| December 31, | |||
| 2023 |
| 2022 | |||
Raw materials | $ | 8,133 | $ | 8,743 | ||
Work in process | 1,238 | 441 | ||||
Finished goods |
| 1,157 | 824 | |||
$ | 10,528 | $ | 10,008 | |||
NOTE 4. – GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The change in the carrying amount of goodwill during the three month period ended March 31, 2023 is as follows:
Balance at January 1, 2023 | $ | 33,160 | |
Balance at March 31, 2023 | $ | 33,160 |
15
Other Intangible Assets, Net
Our other intangible assets, net at March 31, 2023 and December 31, 2022 consisted of the following:
Gross | Accumulated |
| Net Carrying | ||||||
March 31, 2023 |
| Carrying Amount |
| Amortization |
| Amount | |||
Definite-lived: | |||||||||
Patent | $ | 6,690 | $ | (3,821) | $ | 2,869 | |||
License Fees |
| 3,876 | (1,510) | 2,366 | |||||
Customer relationships | 5,800 | (259) | 5,541 | ||||||
Total amortizing intangible assets | $ | 16,366 | $ | (5,590) | $ | 10,776 | |||
Indefinite-lived: |
| ||||||||
Tradename and trademarks |
| $ | 3,313 | ||||||
U.K. FSA portfolio |
| 1,744 | |||||||
MSA signatory costs | 2,202 | ||||||||
License fee for predicate cigarette brand |
| 350 | |||||||
Total indefinite-lived intangible assets | $ | 7,609 | |||||||
Total intangible assets, net | $ | 18,385 | |||||||
Gross | Accumulated |
| Net Carrying | ||||||
December 31, 2022 |
| Carrying Amount |
| Amortization |
| Amount | |||
Definite-lived: | |||||||||
Patent | $ | 6,513 | $ | (3,711) | $ | 2,802 | |||
License Fees |
| 3,876 | (1,446) | 2,430 | |||||
Customer relationships | 5,800 | (20) | 5,780 | ||||||
Total amortizing intangible assets | $ | 16,189 | $ | (5,177) | $ | 11,012 | |||
Indefinite-lived: |
| ||||||||
Tradename and trademarks |
| $ | 3,289 | ||||||
MSA signatory costs | 2,202 | ||||||||
License fee for predicate cigarette brand |
| 350 | |||||||
Total indefinite-lived intangible assets | $ | 5,841 | |||||||
Total intangible assets, net | $ | 16,853 | |||||||
See Note 2 “Business Acquisitions” for additional details regarding goodwill and intangible assets acquired as a result of the acquisitions of RXP and GVB, including any measurement period adjustments.
Aggregate intangible asset amortization expense comprises of the following:
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Cost of goods sold | $ | 4 | $ | 3 | ||
Sales, general, and administrative | 239 | — | ||||
Research and development |
| 170 |
| 158 | ||
Total amortization expense | $ | 413 | $ | 161 | ||
Estimated future intangible asset amortization expense based on the carrying value as of March 31, 2023 is as follows:
| Remainder of 2023 |
| 2024 |
| 2025 |
| 2026 | 2027 | Thereafter | |||||||||
Amortization expense | $ | 1,240 | $ | 1,644 | $ | 1,502 | $ | 1,268 | $ | 1,128 | $ | 3,994 | ||||||
16
NOTE 5. – INVESTMENTS & OTHER ASSETS
The total carrying value of the Company’s investments and other assets at March 31, 2023 and December 31, 2022 consisted of the following:
March 31, | December 31, | |||||
2023 | 2022 | |||||
Change Agronomy Ltd. ordinary shares |
| $ | 682 |
| $ | 682 |
Total investments | $ | 682 | $ | 682 | ||
Investment in Change Agronomy Ltd.
On December 10, 2021, the Company entered into a subscription agreement to invest £500 (pounds sterling, in thousands), in exchange for 592,888 ordinary shares of Change Agronomy Ltd. (“CAL”), a private company existing under the laws of England, at a price per share of £0.84333. CAL is a vertically integrated sustainable industrial hemp business that combines world-class genetics with leading agronomic techniques and infrastructure to provide full-service industrial hemp products to multiple global end markets. CAL presently has operations in Manitoba, Canada, and Italy. This equity investment was part of an Offer for Subscription by CAL for a minimum total of £3,000 at the same price per ordinary share. Approximately U.S. $682 in funds were wired to CAL on January 26, 2022, and our investment of £500 equates to approximately 1.8% of CAL’s total equity.
In accordance with ASU 2019-04, a foreign currency-denominated equity investments that are measured using the measurement alternative are nonmonetary items that should be remeasured using their historical exchange rates. Accordingly, for the three-month periods ended March 31, 2023 and 2022 there is no foreign currency exchange gain or loss recorded in the Condensed Consolidated Statement of Operations and Comprehensive Loss related to the investment in Change Agronomy Ltd.
During the three months ended March 31, 2023 and 2022, respectively, there were no impairment triggering events identified for investments.
Panacea Investment – Promissory Note:
On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc. (“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders. The promissory note was issued in the amount of $4,300 (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0% interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado.
The Promissory note receivable was originally valued at $3,684 ($4,300 face value less $616 discount) and is included within the Condensed Consolidated Balance Sheets as “Other Assets.” Subsequently, on December 31, 2022 the Company and Panacea Life Sciences Holdings, Inc. entered into a settlement agreement in which the Company agreed to a reduction to the face value of the Promissory note receivable of $500, in exchange for resolution to all contractual requirements from the June 30, 2021 Promissory Note Exchange Agreement and Securities Exchange Agreement surrounding the investment and business relationship. Accordingly, the Company recognized extinguishment charge of note receivable of $500 less adjusted discount of $51 during the year-ended December 31, 2022. The Company intends to hold the remaining outstanding Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note.
The following table provides the promissory note receivable balance:
March 31, | December 31, | |||||
2023 | 2022 | |||||
Promissory note receivable | $ | 3,437 | $ | 3,410 | ||
17
NOTE 6. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its short-term investment securities and equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
The following table presents information about our assets and liabilities measured at fair value as of March 31, 2023 and December 31, 2022, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
Fair Value | ||||||||||||
December 31, 2022 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total | |||||
Assets |
|
|
|
|
|
|
|
| ||||
Money market funds | $ | 10,163 | $ | — | $ | — | $ | 10,163 | ||||
Corporate bonds |
| — |
| 7,031 |
| — |
| 7,031 | ||||
U.S. treasury securities |
| — |
| 999 |
| — |
| 999 | ||||
Change Agronomy Ltd. ordinary shares | — | — | 682 | 682 | ||||||||
Total assets | $ | 10,163 | $ | 8,030 | $ | 682 | $ | 18,875 | ||||
Money market funds
Money market mutual funds are valued at their daily closing price as reported by the fund. Money market mutual funds held by the Company are open-end mutual funds that are registered with the SEC that generally transact at a stable $1.00 Net Asset Value (“NAV”) representing its estimated fair value. On a daily basis the fund’s NAV is determined by the fund based on the amortized cost of the funds underlying investments.
Corporate bonds
Corporate bonds are valued using pricing models maximizing the use of observable inputs for similar securities.
18
The following tables set forth a summary of the Company’s available-for-sale debt securities from amortized cost basis to fair value as of March 31, 2023 and December 31, 2022:
Available for Sale Debt Securities | ||||||||||||
March 31, 2023 | ||||||||||||
Amortized | Gross | Gross | ||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||
| Basis |
| Gains |
| Losses |
| Value | |||||
Corporate bonds | $ | 4,391 | $ | — | $ | (38) | $ | 4,353 | ||||
Available for Sale Debt Securities | ||||||||||||
December 31, 2022 | ||||||||||||
Amortized | Gross | Gross | ||||||||||
Cost | Unrealized | Unrealized | Fair | |||||||||
| Basis |
| Gains |
| Losses |
| Value | |||||
Corporate bonds | $ | 7,143 | $ | — | $ | (112) | $ | 7,031 | ||||
The following table sets forth a summary of the Company’s available-for-sale securities at amortized cost basis and fair value by contractual maturity as of March 31, 2023 and December 31, 2022:
Available for Sale Debt Securities | ||||||||||||
March 31, 2023 | December 31, 2022 | |||||||||||
Amortized | Amortized | |||||||||||
| Cost Basis |
| Fair Value |
| Cost Basis |
| Fair Value | |||||
Due in one year or less | $ | 4,391 | $ | 4,353 | $ | 7,143 | $ | 7,031 | ||||
Investment in Change Agronomy
The investment in Change Agronomy Ltd. is in a privately held company and its stock does not have a readily determinable fair value; therefore, the investment is carried at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer.
Contingent Consideration
The following table presents the changes in the estimated fair values of the Company’s liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the three months ended March 31, 2023:
Fair value measurement at January 1, 2023 | $ | — | |
Initial measurement (see Note 2) | 1,138 | ||
Fair value measurement adjustment | 22 | ||
Fair value measurement at March 31, 2023 | $ | 1,160 |
On January 19, 2023, the Company acquired the assets and liabilities of RXP, a privately-held company based in the U.K. The contingent consideration at March 31, 2023 is the estimated fair value of the Company’s obligations, under the sale and purchase agreement for RXP, to make additional payments if certain revenue goals are met.
As of March 31, 2023, the current portion of contingent consideration liabilities included in Other current liabilities was $566, and the non-current portion included in Other long-term liabilities on the Condensed Consolidated Balance Sheets was $594.
19
The following table provides quantitative information associated with the fair value measurement of the Company’s liabilities for contingent consideration as of March 31, 2023:
Maximum Payout | Weighted Average | |||||||||
Contingency Type | (undiscounted) | Fair Value | Unobservable Inputs | or Range | ||||||
Revenue-based payments | $ | 1,550 | $ | 1,160 | 16 | % | ||||
Projected year(s) of payment | 2024-2026 | |||||||||
Detachable Warrants
The following table sets forth a summary of the changes in fair value of the Company’s stock warrants (Level 3 asset) for the three-month period ended March 31, 2023:
Fair value measurement at January 1, 2023 | $ | — | |
Initial measurement | 3,527 | ||
Fair value measurement adjustment | 139 | ||
Fair value measurement at March 31, 2023 | $ | 3,666 |
The JGB detachable warrants were valued at the closing dates of the Senior Secured Credit Facility using a Monte Carlo valuation model with the following assumptions:
Risk-free interest rate per year |
| 4.2 | % |
Expected volatility per year |
| 88.1 | % |
Expected dividend yield |
| — | % |
Contractual expiration |
| 5.5 | years |
Exercise price | $ | 1.275 | |
Stock price | $ | 0.91 |
The Omnia detachable warrants were valued at the closing dates of the Subordinated Note using a Monte Carlo valuation model with the following assumptions:
Risk-free interest rate per year |
| 4.1 | % |
Expected volatility per year |
| 83.8 | % |
Expected dividend yield |
| — | % |
Contractual expiration |
| 7.5 | years |
Exercise price | $ | 0.855 | |
Stock price | $ | 0.91 |
There were no material changes in assumptions for valuation of the detachable warrants as of March 31, 2023 given the short period of time from issuance. The detachable warrants are measured at fair value using certain estimated factors which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs that are used in the fair value measurement of the Company’s detachable warrants include the volatility factor. Significant increases or decreases in the volatility factor would have resulted in a significantly higher or lower fair value measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three month periods ended March 31, 2023 and 2022 respectively, the Company did not have any financial assets or liabilities measured at fair value on a nonrecurring basis.
20
NOTE 7. DEBT
The Company has a senior secured credit facility (the “Senior Secured Credit Facility”), which consists of three-year $21,053 debentures (the “Debentures”) and $2,865 subordinated promissory note (the “Subordinated Note). The Debentures were issued at a 5% original issuance discount and are subject to a 5% exit payment.
Long-term debt related to the Senior Secured Credit Facility and Subordinate Note as of March 31, 2023, consists of the following:
Debentures
On March 3, 2023, the Company entered into a Securities Purchase Agreement, which pursuant to the agreement, the Company sold 5% original issuance discount senior secured debentures with an aggregate principal amount of $21,053. The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. In connection with the sale of the Debentures, the Company issued warrants to purchase up to 5,000,000 shares of common stock for an exercise price of $1.275 per share (the “JGB Warrants”), which had an initial fair value of $4,561 net of issuance costs of $139 (see Note 6 and Note 10).
The Company’s obligations under the Debentures can be accelerated upon the occurrence of certain customary events of default. In the event of a default and acceleration of the Company’s obligations, the Company would be required to pay the Prepayment Amount, liquidated damages and other amounts owing in respect thereof through the date of acceleration.
The Debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict the Company from incurring additional indebtedness, creating or permitting liens on assets, making or holding any investments, repaying outstanding indebtedness, paying dividends or distributions and entering into transactions with affiliates. Substantially all of the company’s assets, including intellectual property, are collateralized and at risk if Debenture obligation is not satisfied. In addition, the Company is required to maintain at least $7,500 on its balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets. As of March 31, 2023, the Company was in compliance with these financial covenants.
21
Subordinated Note
On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma (see Note 8). The accrued PIK interest refinanced from the Original Notes was $365.
Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of 26.5% per annum, payable monthly. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The Subordinated Note includes customary event of default provisions. The Subordinated Note is subordinated to the Debenture pursuant to a Subordination Agreement between the Company, the Agent and Omnia.
In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 675,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for from September 3, 2023, at an exercise price of $0.855 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions, as more fully described in the Omnia Warrants. The Omnia warrants initial fair value was $1,316 (see Note 6 and 10).
Contractual maturities under the Senior Secured Credit Facility and Subordinate Note for the remainder of 2023 and through maturity, excluding any discounts or premiums, as of March 31, 2023 is as follows:
Remainder of | ||||||||||||||||||
| 2023 |
| 2024 |
| 2025 |
| 2026 | 2027 | Thereafter | |||||||||
Future minimum principal payments | $ | — | $ | 2,925 | $ | — | $ | 22,105 | $ | — | $ | — | ||||||
The fair values of the warrants at issuance of $5,877, together with the Debentures original issuance discount of $1,053, Debentures exit payment of $1,053, and third-party debt issuance costs of $801, are being amortized using the effective interest method over the term of the respective debt instrument, recorded as Interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The components and activity of unamortized discount and deferred debt issuance costs related to the Senior Secured Credit Facility and Subordinated Note is as follows:
Total | ||
Issuance | $ | (8,784) |
Amortization during the period | 171 | |
March 31, 2023 | $ | (8,613) |
22
NOTE 8. – NOTES & LOANS PAYABLE
The table below outlines our notes payable balances as of March 31, 2023 and December 31, 2022:
March 31, | December 31, | |||||
|
| 2023 |
| 2022 | ||
Insurance loans payable | $ | 184 | $ | 780 | ||
Vehicle loans | 130 | 128 | ||||
Total current notes and loans payable | $ | 314 | $ | 908 | ||
Bridge loan | $ | — | $ | 2,814 | ||
Vehicle loans | 154 | 187 | ||||
Total long-term notes and loans payable | $ | 154 | $ | 3,001 | ||
Insurance loans payable
During the second quarter of 2022, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $2,394. The Company paid $400 as a premium down payment and financed the remaining $1,994 of policy premiums over ten months at a 3.25% annual percentage rate. Additionally, during the third quarter of 2022, the Company expanded its D&O coverage as a result of the acquisition of GVB, resulting in an additional premium down payment of $90 and financing of $168, under the same terms as the original one-year policy.
The Company also has other insurance loans payables related to pollution, and general liability for GVB.
Vehicle Loans
The Company has various vehicle loans with monthly payments ranging from $0.8 to $2.1, interest rates ranging from 0% to 11%, and maturity dates ranging from May 2024 to September 2026.
Estimated future principal payments to be made under the above notes and loans payable as of March 31, 2023 are as follows:
Remainder of 2023 | $ | 271 | |
2024 | 131 | ||
2025 | 59 | ||
2026 | 7 | ||
Total | $ | 468 |
23
NOTE 9. – OTHER OPERATING EXPENSES, NET
The components of “Other operating expenses, net” were as follows:
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Grass Valley fire: | ||||||
Professional services and supplies | $ | 68 | $ | — | ||
Total Grass Valley fire | 68 | — | ||||
Acquisition costs | $ | 68 | $ | 52 | ||
Needlerock Farms settlement | 747 | — | ||||
Loss on change in warrant liability | 139 | — | ||||
Loss on change in contingent consideration | 22 | — | ||||
Gain on sale or disposal of property, plant and equipment | (146) | — | ||||
Total other operating expenses, net | $ | 898 | $ | 52 | ||
NOTE 10. – CAPITAL RAISE AND WARRANT ACTIVITY
2022 Capital Raise
On July 21, 2022, the Company and certain institutional investors (the “Investors”) entered into a securities purchase agreement (the “Securities Purchase Agreement”) relating to the issuance and sale of shares of common stock pursuant to a registered direct offering (the “Registered Offering” and, together with the Private Placement (as defined below), the “Offerings”). The Investors purchased approximately $35,000 of shares, consisting of an aggregate of 17,073,175 shares of common stock at a purchase price of $2.05 per share, subject to certain restrictions. The net proceeds to the Company from the Offerings, after deducting the fees and the Company’s offering expenses, were $32,484. The Offerings closed on July 25, 2022.
Pursuant to the Securities Purchase Agreement, in a concurrent private placement, the Company issued and sold to the Investors warrants (the “Warrants”) to purchase up to 17,073,175 shares of common stock (the “Private Placement”). The Warrants are exercisable immediately upon issuance at an exercise price of $2.05 per share of common stock, subject to adjustment in certain circumstances, and expire on July 25, 2027.
JGB Warrants
In connection with the sale of the Debentures, the Company issued the JGB Warrants to purchase up to 5,000,000 shares of common stock for an exercise price of $1.275 per share. The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The JGB warrants initial fair value of $4,561 net of issuance costs of $139 (see Note 6), of which half of the warrants meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $1.00 upon certain conditional events such as change in control or event of default. Accordingly, half of the warrants are recorded as Other long-term liabilities on the Condensed Consolidated Balance Sheets. The remainder of the JGB warrants are equity classified and recorded as a component of Capital in excess of par value.
24
Omnia Warrants
In connection with the Subordinated Note, the Company issued to Omnia, the Omnia Warrants to purchase up to 675,000 shares of the Company’s common stock (the “Omnia Warrants”). The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $0.855 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions. The Omnia warrants initial fair value was $1,316 (see Note 6), and meet the criteria for liability classification due to contingent put option which allows the holder to require that the Company redeem the warrants in cash for a purchase price equal to $2.00 upon certain conditional events such as change in control or event of default. The Omnia warrants are recorded as Other long-term liabilities on the Condensed Consolidated Balance Sheets.
ATM Offering
During the first quarter of 2023, the Company established an at-the-market common equity offering program (“ATM Program”), through which it may, from time to time, publicly offer and sell shares of common stock having an aggregate gross sales price of up to $50,000. The Company will pay 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold. As of March 31, 2023, the Company has $50,000 of available capacity under the ATM Program.
NOTE 11. - COMMITMENTS AND CONTINGENCIES
License agreements and sponsored research – The Company has entered into various license, sponsored research, collaboration, and other agreements (the “Agreements”) with various counterparties in connection with the Company’s plant biotechnology business relating to tobacco, hemp/cannabis and hops. The schedule below summarizes the Company’s commitments, both financial and other, associated with each Agreement. Costs incurred under the Agreements are generally recorded as research and development expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.
| (1) | Exclusive agreement with the Company in the field of the Cannabis Sativa L. plant. The initial term of the agreement was five years with an option for an additional two years. On April 30, 2021, the Company and KeyGene entered into a First Amended and Restated Framework Collaborative Research Agreement which extended the agreement term, from first-quarter 2024 to first-quarter 2027, and preserves the Company’s option for an additional 2-year extension, now through first quarter of 2029. On March 30, 2022, the Company and KeyGene entered into a new Framework Collaborative Research Agreement for a term of three years at an aggregate cost of $1,830 in the field related to the hops plant. |
The Company will exclusively own all results and all intellectual property relating to the results of the collaboration with KeyGene (the "Results”). The Company will pay royalties in varying amounts to KeyGene relating to the Company's commercialization in the stated fields of each agreement. The Company has also granted KeyGene a license to commercialize the Results outside of each field and KeyGene will pay royalties in varying amounts to the Company relating to KeyGene's commercialization of the Results outside of each field.
| (2) | The minimum annual royalty fee is credited against running royalties on sales of licensed products. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred, including capitalized patent costs and patent maintenance costs. These costs vary from year to year and the Company has certain rights to direct the activities that result in these costs. |
25
| (3) | On August 19, 2022, the Company entered into a one-year Sponsored Project Agreement with NCSU for continued research of tobacco alkaloid formation. |
| (4) | The Company is also responsible for the payment of certain costs, including, capitalized patent costs and patent maintenance costs, a running royalty on future net sales of products made from the sublicensed intellectual property, and a sharing of future sublicensing consideration received from sublicensing to third parties in all countries except for Canada. Anandia retains all patent rights, and is responsible for all patent maintenance, in Canada. |
| (5) | On March 11, 2022, the Company expanded its research agreement with Cannametrix for hemp/cannabis product development, formulation, and validation for a three-year period at an aggregate cost of $2,000. |
| (6) | The minimum annual royalty fee is credited against running royalties from the sales of goods or services based on Project IP and/or Background IP. |
| (7) | Various R&D growing agreements for hemp/cannabis and tobacco. |
| (8) | General corporate consulting agreements. |
Litigation - In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
Class Action
On January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Matthew Bull, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 1:19 cv 00409.
On January 29, 2019, Ian M. Fitch, a resident of Essex County Massachusetts, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T. Brodfuehrer, in the United States District Court for the Eastern District of New York entitled: Ian Fitch, Individually and on behalf of all others similarly situated, v. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer, Case No. 2:19 cv 00553.
On May 28, 2019, the plaintiff in the Fitch case voluntarily dismissed that action. On August 1, 2019, the Court in the Bull case issued an order designating Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.
On September 16, 2019, pursuant to a joint motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western District of New York, where it remains pending as Case No. 1:19-cv-01285.
Plaintiffs in the Bull case filed an Amended Complaint on November 19, 2019 that alleges three counts: Count I sues the Company and Messrs. Sicignano and Brodfuehrer and alleges that the Company's quarterly and annual reports, SEC filings, press releases and other public statements and documents contained false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5; Count II sues Messrs. Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c); and Count III sues Messrs. Sicignano and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act. The Amended Complaint seeks to certify a class, and unspecified compensatory and punitive damages, and attorney's fees and costs.
26
On January 29, 2020, the Company and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On January 14, 2021, the Court granted the motion, dismissing all claims with prejudice. The Plaintiffs filed a notice of appeal on February 12, 2021 to the Second Circuit Court of Appeals. On May 24, 2022, after briefing and oral argument, the Second Circuit issued an order affirming in part, and reversing in part, the District Court’s dismissal order. The Second Circuit affirmed the District Court’s dismissal of the claims relating to the non-disclosure of stock promotion articles, but reversed the District Court’s dismissal order of the claims alleging the non-disclosure of an SEC investigation. The Second Circuit noted in its opinion, however, that the District Court had not addressed certain arguments raised by the Company and Messrs. Sicignano and Brodfuehrer in the Motion to Dismiss the Amended Complaint as to these remaining claims, and remanded the case to the District Court to address these arguments for the dismissal of the remaining claims. On August 8, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a renewed motion to dismiss the remaining claims in the Amended Complaint to address the arguments not previously addressed by the District Court. On September 22, 2022, Plaintiffs filed a brief in opposition to the motion. On October 12, 2022, the Company and Messrs. Sicignano and Brodfuehrer filed a reply brief in further support of the motion. On January 6, 2023, the District Court denied the motion to dismiss, and the case will proceed forward on the remaining claims. No trial date has been set.
The parties participated in a mediation on March 21, 2023 and reached an initial memorandum of understanding for settlement in principle to resolve the litigation and release all claims against the Company. On April 25, 2023, the parties filed with the Court the Motion for Preliminary Approval of the Settlement, which includes the final terms of the proposed settlement. This motion remains pending, and if preliminarily approved, the Court will then schedule a later hearing to consider the final approval of the settlement to conclude the litigation. The settlement amount that the defendants are expected to pay is $3,000 and is fully covered by the Company’s insurance. Accordingly, the Company has recorded an accrual for litigation settlement and corresponding indemnification receivable on the Condensed Consolidated Balance Sheets as of March 31, 2023.
We believe that the claims are frivolous, meritless and that the Company and Messrs. Sicignano and Brodfuehrer have substantial legal and factual defenses to the remaining claims. We intend to vigorously defend the Company and Messrs. Sicignano and Brodfuehrer against such claims.
Shareholder Derivative Cases
On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement.
On February 11, 2019, Stephen Mathew filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Stephen Mathew, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, John T. Brodfuehrer, Richard M. Sanders, Joseph Alexander Dunn, James W. Cornell, Nora B. Sullivan and 22nd Century Group, Inc., Index No. 801786/2019. Mr. Mathew brings this action derivatively generally alleging the same allegations as in the Klein case. The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.
On August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation by the parties (Western District of New York, Case No. 1-19-cv-0513). On May 3, 2019, the Court ordered the Mathew case stayed. This stay was applied to the Consolidated Action pursuant to the Court’s August 15, 2019 Order Consolidated Related Shareholder Derivative Actions and Establishing a Leadership Structure. As a result of the Court’s denial of the renewed Motion to Dismiss the Amended Complaint, the May 3, 2019 stay will be lifted. No trial date has been set. We believe that the claims are frivolous, meritless and that the Company
27
and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.
On June 10, 2019, Judy Rowley filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the Supreme Court of the State of New York, County of Erie, entitled: Judy Rowley, derivatively on behalf of 22nd Century Group, Inc. v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer, and 22nd Century Group, Inc., Index No. 807214/2019. Ms. Rowley brought the action derivatively alleging that the director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements. The Complaint sought declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs. We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims. On September 13, 2019, the Court ordered the litigation stayed pursuant to a joint stipulation by the parties. On August 3, 2022, Plaintiff dismissed the case with prejudice by filing a stipulation of discontinuance with the Court. This dismissal was not pursuant to a settlement.
On January 15, 2020, Kevin Broccuto filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Kevin Broccuto, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Broccuto brings this action derivatively alleging three counts: Count I alleges that the defendants breached their fiduciary duties; Count II alleges they committed corporate waste; and Count III that they were unjustly enriched, by allegedly allowing the Company to make false statements.
On February 11, 2020, Jerry Wayne filed a shareholder derivative claim against the Company, the Company's then Chief Executive Officer, Henry Sicignano III, the Company's Chief Financial Officer, John T. Brodfuehrer, and certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled: Jerry Wayne, derivatively on behalf of 22nd Century Group, Inc. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Wayne brings this action derivatively alleging generally the same allegations as the Broccuto case. The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement of alleged profits and imposition of constructive trusts, and attorney's fees and costs. The Complaint also seeks to declare as unenforceable the Company's Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company is headquartered.
On March 25, 2020, the Court ordered the Broccuto and Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties. On June 27, 2022, the Court ordered that the stay continue until thirty (30) days after the District Court rules on the renewed Motion to Dismiss the Amended Complaint in the Noto Class Action case. As a result of the Court’s denial of the Motion to Dismiss the Amended Complaint, the June 27, 2022 stay will be lifted. No trial date has been set. The parties participated in a mediation on March 21, 2023, which process is continuing.
We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims. We intend to vigorously defend the Company and the individual defendants against such claims.
Needle Rock Farms – Settlement Agreement
During March 2023, the Company negotiated and entered into a settlement agreement related to water rights dispute with the adjacent property owner for Needle Rock Farms in which the Company agreed to pay $250 in cash upon execution of the settlement, transferred certain farm equipment with net book value of $272, and accrued an additional payment of $225 that is contingent on either the sale of the farm or will be paid within one year. The total charges of $747 recorded in connection with the settlement agreement is included within Other operating expenses, net on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
28
NOTE 12 – EQUITY- BASED COMPENSATION
On May 20, 2021, the shareholders of 22nd Century Group, Inc. (the “Company”) approved the 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (the “2021 Plan”). The 2021 Plan allows for the granting of equity awards to eligible individuals over the life of the 2021 Plan, including the issuance of up to 5,000,000 shares of the Company’s common stock, in addition to any remaining shares under the Company’s 2014 Omnibus Incentive Plan pursuant to awards under the 2021 Plan. The 2021 Plan has a term of ten years and is administered by the Compensation Committee of the Company’s Board of Directors to determine the various types of incentive awards that may be granted to recipients under the 2021 Plan and the number of shares of common stock to underlie each such award under the 2021 Plan. As of March 31, 2023, the Company had available 203,691 shares remaining for future awards under the 2021 Plan.
Compensation Expense – The Company recognized the following compensation costs, net of actual forfeitures, related to restricted stock units (“RSUs”) and stock options:
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Sales, general, and administrative | $ | 1,124 | $ | 1,171 | ||
Research and development |
| 51 |
| 42 | ||
Total RSUs and stock option compensation | $ | 1,175 | $ | 1,213 | ||
Restricted Stock Units – We typically grant RSUs to employees and non-employee directors. The following table summarizes the changes in unvested RSUs from January 1, 2023 through March 31, 2023.
29
The fair value of RSUs that vested during the three months ended March 31, 2023 was approximately $1,590 based on the stock price at the time of vesting. As of March 31, 2023, unrecognized compensation expense for RSUs amounted to $6,975 which is expected to be recognized over a weighted average period of approximately 1.7 years. In addition, there is approximately $1,114 of unrecognized compensation expense that requires the achievement of certain milestones which are not yet probable.
Stock Options – Our outstanding stock options were valued using the Black-Scholes option-pricing model on the date of the award. There was no stock option grant activity during the three months ended March 31, 2023. A summary of the status of stock options activity since January 1, 2023 and at March 31, 2023 is as follows:
The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.
As of March 31, 2023, there is approximately $190 of unrecognized compensation expense for stock options that requires the achievement of certain milestones which are not yet probable.
NOTE 13. – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per common share for the three months ended March 31, 2023 and 2022, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive.
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
(in thousands, except for per-share data) | ||||||
Net loss | $ | (18,182) | $ | (8,918) | ||
Weighted average common shares outstanding - basic and diluted |
| 215,784 | 163,157 | |||
Net loss per common share - basic and diluted | (0.08) | (0.05) | ||||
Anti-dilutive shares are as follows as of March 31: | ||||||
Warrants | 22,748 | — | ||||
Options | 4,806 | 5,171 | ||||
Restricted stock units | 6,569 | 4,037 | ||||
34,123 | 9,208 | |||||
30
NOTE 14. – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table is a summary of the components and activity of Accumulated Other Comprehensive Income (Loss) (“AOCI”) as of and for the three months ended March 31, 2023 and 2022, respectively:
Three Months Ended March 31, 2023 | |||||||||||||||
Corporate | Foreign | ||||||||||||||
securities/ | Translation | Pre-tax | Net of | ||||||||||||
| investments |
| Adjustment |
| Amount |
| Tax |
| Tax Amount | ||||||
Balance at January 1, 2023 |
| $ | (112) | $ | 1 | $ | (111) | $ | — | $ | (111) | ||||
Unrealized gain on short-term investment securities |
| 61 | — | 61 | — | 61 | |||||||||
Foreign currency translation | — | (4) | (4) | — | (4) | ||||||||||
Reclassification of realized losses to net loss | 13 | — | 13 | — | 13 | ||||||||||
Balance at March 31, 2023 | $ | (38) | $ | (3) | $ | (41) | $ | — | $ | (41) | |||||
Three Months Ended March 31, 2022 | |||||||||||||||
Corporate | Foreign | ||||||||||||||
securities/ | Translation | Pre-tax | Net of | ||||||||||||
| investments |
| Adjustment |
| Amount |
| Tax |
| Tax Amount | ||||||
Balance at January 1, 2022 |
| $ | (162) | $ | — | $ | (162) | $ | — | $ | (162) | ||||
Unrealized loss on short-term investment securities |
| (400) | — | (400) | — | (400) | |||||||||
Balance at March 31, 2022 | $ | (562) | $ | — | $ | (562) | $ | — | $ | (562) | |||||
NOTE 15. – REVENUE RECOGNITION
Tobacco
The Company’s tobacco reportable segment revenues are derived primarily from contract manufacturing organization (“CMO”) customer contracts that consist of obligations to manufacture the customers’ branded filtered cigars and cigarettes. Additional revenues are generated from sale of the Company’s proprietary low nicotine content cigarettes, sold under the brand name VLN®, or research cigarettes sold under the brand name SPECTRUM®.
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For certain CMO contracts, the performance obligation is satisfied over time as the Company determines, due to contract restrictions, it does not have an alternative use of the product and it has an enforceable right to payment as the product is manufactured. The Company recognizes revenue under those contracts at the unit price stated in the contract based on the units manufactured. Tobacco revenue from the sale of the Company’s products, which include excise taxes and shipping and handling charges billed to customers, is recognized net of cash discounts, sales returns and allowances. There was no allowance for discounts or returns and allowances at March 31, 2023 and December 31, 2022. Excise taxes recorded in Cost of Goods Sold on the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 were $2,695 and $2,719, respectively.
Hemp/Cannabis
The Company’s hemp/cannabis reportable segment revenues are derived primarily from a CBD wholesale extracts and bulk ingredient distillate or isolate. Additional revenues are generated from private/white label contract manufacturing.
31
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled. For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.
When applicable, the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.
There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.
Disaggregation of Revenue
The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by major product line because the Company believes it best depicts the nature, amount, and timing of revenue and cash flows. Revenue recognized from Tobacco products transferred to customers over time represented 66% and 74%, for the three months ended March 31, 2023 and 2022, respectively. There was no revenue recognized from Hemp/cannabis products that were transferred to customers over time for the three months ended March 31, 2023 and 2022.
Three Months Ended | |||||
March 31, | |||||
2023 |
| 2022 | |||
Tobacco | $ | 8,927 | $ | 9,045 | |
Hemp/cannabis |
| 13,035 |
| — | |
Total revenues, net | $ | 21,962 | $ | 9,045 | |
The following table presents net revenues by significant customers, which are defined as any customer who individually represents 10% or more of disaggregated product line net revenues:
32
Contract Assets and Liabilities
Unbilled receivables (contract assets) represent revenues recognized for performance obligations that have been satisfied but have not been billed. These receivables are included as Accounts receivable, net on the Condensed Consolidated Balance Sheets. Customer payment terms vary depending on the terms of each customer contract, but payment is generally due prior to product shipment or within credit terms up to 30 days after shipment. Deferred income (contract liabilities) relates to down payments received from customers in advance of satisfying a performance obligation and is included as Deferred income on the Condensed Consolidated Balance Sheets.
Total contract assets and contract liabilities are as follows:
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
Unbilled receivables |
| $ | 1,549 |
| $ | 354 |
Deferred income | (257) | (831) | ||||
Net contract assets (liabilities) | $ | 1,292 | $ | (477) | ||
During the three months ended March 31, 2023 and 2022, the Company recognized $802 and $119 of revenue that was included in the contract liability balance as of December 31, 2022 and 2021 respectively.
N
NOTE 16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company organizes its business into two reportable segments: (1) Tobacco and (2) Hemp/Cannabis. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting.
The Company defines segment income from operations as revenues, net less cost of goods sold and expenses attributable to segment-specific selling, general, administrative, research, development, and other operating activities. The remaining unallocated operating and other income and expenses are primarily administrative corporate overhead expenses such as corporate personnel costs, equity compensation, investor relations, strategic consulting, research and development costs that apply broadly to the overall plant science platform, and that are not allocated to reportable segments. Unallocated corporate assets consist of cash and cash equivalents, short-term investment securities, prepaid and other assets, property and equipment, and intangible assets. Transactions between the two segments are not significant.
The following table presents revenues, net by segment for the three months ended March 31, 2023 and 2022:
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Tobacco | $ | 8,927 | $ | 9,045 | ||
Hemp/cannabis |
| 13,035 |
| — | ||
Total revenues, net | $ | 21,962 | $ | 9,045 | ||
33
The following table presents income from continuing operations for the Company’s reportable segments for the three months ended March 31, 2023 and 2022:
The following table presents total assets for the Company’s reportable segments as of March 31, 2023 and December 31, 2022:
March 31, | December 31, | |||||
| 2023 |
| 2022 | |||
Tobacco | $ | 20,459 | $ | 15,748 | ||
Hemp/cannabis |
| 66,610 |
| 65,965 | ||
Total reportable segments | 87,069 | 81,713 | ||||
Unallocated assets | 37,069 | 32,938 | ||||
Total assets | $ | 124,138 | $ | 114,651 | ||
The following table presents capital expenditures for the Company’s reportable segments for the three months ended March 31, 2023 and 2022:
NOTE 17. – SUBSEQUENT EVENTS
On April 4, 2023, a subsidiary of 22nd Century Group, Inc. (the “Company”) entered into a License and Distribution Agreement (the “Agreement”) with Cookies Creative Consulting & Promotions, Inc. (“Cookies”). Pursuant to the Agreement, Cookies granted the Company an exclusive license to manufacture and distribute certain Cookie’s branded hemp-derived hemp/cannabis products to retailers within the United States for a period of three years, with the Company having an option to extend the Agreement for an additional three-year period if certain retailer milestones are met during the initial term.
During the term of the Agreement, the Company will pay Cookies a monthly license fee equal to a percentage of the net profits generated by the Company under the Agreement. In consideration for the exclusivity under the Agreement, the Company agreed to issue Cookies 5,000,000 shares of unregistered common stock of the Company, subject to a lock-up during the first year after the issuance.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as our condensed consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1 of this Form 10-Q.
For purposes of this MD&A, references to the “Company,” “we,” “us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein. In addition, dollars are in thousands, except per share data or unless otherwise specified.
Forward Looking Statements
Except for historical information, all of the statements, expectations, and assumptions contained in this section are forward-looking statements. Forward-looking statements typically contain terms such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “explore,” “foresee,” “goal,” “guidance,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “preliminary,” “probable,” “project,” “promising,” “seek,” “should,” “will,” “would,” and similar expressions. Actual results might differ materially from those explicit or implicit in forward-looking statements. Important factors that could cause actual results to differ materially are set forth in “Risk Factors” in our Annual Report on Form 10-K filed on March 9, 2023. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law. All information provided in this quarterly report is as of the date hereof, and we assume no obligation to and do not intend to update these forward-looking statements, except as required by law.
Our Business
22nd Century Group, Inc. is a leading biotechnology company focused on utilizing advanced plant technologies to improve health and wellness with reduced nicotine tobacco, hemp/cannabis and hops. We use modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the consumer goods and pharmaceutical industries by creating new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits. Our mission in tobacco products is dedicated to reduce the harms of smoking by commercializing our proprietary, very low nicotine content “VLNC” tobacco plants and cigarette products. We received the first and only Food and Drug Administration (“FDA”) Modified Risk Tobacco Product (“MRTP”) authorization of a combustible cigarette in December 2021. Beginning in April 2022, we launched our proprietary VLN® reduced nicotine cigarettes, first through a pilot program conducted in select Circle K stores in and around Chicago, Illinois. Following our successful pilot program, we initiated an ongoing state-by-state, region-by-region rollout strategy.
Our mission in hemp/cannabis is to develop and monetize proprietary varieties of hemp with valuable cannabinoid and terpene profiles and other superior agronomic traits. We are a global scale provider of cannabinoid ingredients and Active Pharmaceutical Ingredients (“API”), as well as a contract development and manufacturing organization (CDMO) provider of hemp-derived consumer products.
In hops, our mission is to leverage our experience with tobacco and hemp/cannabis, a close hop plant relative, to accelerate the development of proprietary specialty hop varieties with valuable traits, for potential applications in life sciences and consumer products.
We have a significant intellectual property portfolio of issued patents and patent applications relating to both tobacco and hemp/cannabis plants and have further resources directed towards creating and securing additional intellectual property pertaining to all three franchises. We continue to prioritize research and development activities to achieve our strategic and investment priorities.
35
Recent Business Acquisitions and Other Events
| ● | On January 19, 2023, we acquired RX Pharmatech Ltd (“RXP”), a privately held leading United Kingdom distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. |
| ● | On March 3, 2023, the Company announced a $21,053 senior credit facility to fund increased working capital needs related to the significant consumer demand for its VLN® product and GVB business lines. |
| o | The new three-year credit facility was issued at 5% original issuance discount (OID) and will bear cash interest at a rate of 7% per annum. |
| ● | In Q1 2023, the company launched a new single source, turnkey contract development, manufacturing and distribution service offering (CDMO+D) for the largest consumer brand companies in the hemp/cannabis sector. This new CDMO+D service offering includes ingredient supply, white label manufacturing and retail category management and distribution . |
| o | On April 4, 2023, we entered into a License and Distribution Agreement (the “Agreement”) with Cookies Creative Consulting & Promotions, Inc. (“Cookies”). Pursuant to the Agreement, Cookies granted the Company an exclusive license to manufacture and distribute certain Cookie’s branded hemp-derived hemp/cannabis products to retailers within the United States for a period of three years, with the Company having an option to extend the Agreement for an additional three-year period if certain retailer milestones are met during the initial term. Refer to Note 2 “Business Acquisitions,” Note 7 “Debt,” and Note 17 “Subsequent Events” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information. |
Financial Overview
| ● | Net revenues for the first quarter of 2023 were $21,962, an increase of 142.8% from $9,045 in 2022. |
| o | Revenue from tobacco-related products for the first quarter was $8,927 compared to $9,045 in the prior year first quarter reflecting a decrease in unit sales of filtered cigars. |
| o | Revenue from hemp/cannabis-related products was $13,035, compared to $0 in the prior year first quarter, reflecting the acquisition of GVB. Sequential revenues in the first quarter of 2023 increased by $3,780 compared to the fourth quarter of 2022 due to continued strong demand for bulk ingredients. |
| ● | Gross profit for the first quarter of 2023 was a loss of $1,177 compared to profit of $309 in the prior year period. |
| o | Gross profit from tobacco-related products was $19, a decrease of $290 compared to the prior year period, reflecting lower margin sales mix in contract manufacturing products and increased excise taxes. |
| o | Gross profit from hemp/cannabis-related products was a loss of $1,196 compared to $0 in the prior year. Margin declines in the first quarter were primarily due to ongoing impacts of the Grass Valley fire. |
| ● | Total operating expenses for the first quarter of 2023 increased to $16,646 compared to $8,455 in the prior year quarter driven by: |
| o | Sales, general and administrative expenses increased to $14,231 driven primarily by the acquisition of GVB, higher strategic consulting and marketing, legal, and personnel costs to expand the launch of VLN®. |
| o | Research and development expenses increased to $1,517, driven by personnel expenses and costs associated with the Company’s hemp/cannabis and hops research programs. |
| o | Other operating expenses, net was $898, primarily reflecting settlement, acquisition costs and other non-recurring charges. |
| ● | Operating loss for the first quarter 2023 was $17,823, compared to a loss of $8,146 in the prior year period. |
| ● | Net loss in the first quarter of 2023 was $18,182, representing a net loss per share of $0.08 compared with net loss in the first quarter of 2022 of $8,918, representing a net loss per share of $0.05. |
36
| ● | As of March 31, 2023, we had $16,227 in cash, cash equivalents and short-term investments securities and $7,500 in restricted cash pursuant to the Senior Secured Credit Facility. |
| ● | During the first quarter of 2023, the Company received $5,000 of casualty loss insurance recoveries from the Grass Valley fire with initial business interruption insurance claim proceeds expected to be received during the second quarter of 2023. |
Our Financial Results
| Three Months Ended | ||||||||||||
| March 31 | March 31 | Change | ||||||||||
|
| 2023 |
| 2022 | $ | % | |||||||
Tobacco revenues, net | $ | 8,927 | $ | 9,045 | $ | (118) | (1.3) | ||||||
Hemp/cannabis revenues, net | 13,035 | — | 13,035 | NM | |||||||||
Total revenues, net | 21,962 | 9,045 | 12,917 | 142.8 | |||||||||
Cost of goods sold | 23,139 | 8,736 | 14,403 | 164.9 | |||||||||
Gross (loss) profit | (1,177) | 309 | (1,486) | (480.3) | |||||||||
Gross (loss) profit as a % of revenues, net | (5.4) | % | 3.4 | % | |||||||||
Operating expenses: | |||||||||||||
Sales, general and administrative ("SG&A") | 14,231 | 7,262 | 6,969 | 96.0 | |||||||||
SG&A as a % of revenues, net | 64.8 | % | 80.3 | % | |||||||||
Research and development ("R&D") | 1,517 | 1,141 | 376 | 33.0 | |||||||||
R&D as a % of revenues, net | 6.9 | % | 12.6 | % | |||||||||
Other operating expenses, net ("OOE") | 898 | 52 | 846 | NM | |||||||||
Total operating expenses | 16,646 | 8,455 | 8,191 | 96.9 | |||||||||
Operating loss | (17,823) | (8,146) | (9,677) | 118.8 | |||||||||
Operating loss as a % of revenues, net | (81.2) | % | (90.1) | % | |||||||||
Other income (expense): | |||||||||||||
Unrealized loss on investment | - | (817) | 817 | NM | |||||||||
Other income, net | 5 | - | 5 | NM | |||||||||
Interest income, net | 57 | 50 | 7 | 14.0 | |||||||||
Interest expense | (421) | (5) | (416) | NM | |||||||||
Total other expense | (359) | (772) | 413 | (53.5) | |||||||||
Loss before income taxes | (18,182) | (8,918) | (9,264) | 103.9 | |||||||||
(Benefit) provision for income taxes | - | - | - | - | |||||||||
Net loss | $ | (18,182) | $ | (8,918) | (9,264) | 103.9 | |||||||
Net loss as a % of revenues, net | (82.8) | % | (98.6) | % | |||||||||
Net loss per common share (basic and diluted) | $ | (0.08) | $ | (0.05) | (0.03) | 60.0 | |||||||
NM - calculated change not meaningful | |||||||||||||
Refer to Note 16, “Segment and Geographic Information,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding operating results for our two operating and reportable segments: (1) Tobacco, (2) Hemp/cannabis.
First Quarter 2023 Compared with First Quarter 2022
Revenue, net
| Three Months Ended | |||||||||
| March 31 | March 31 | Change | |||||||
| 2023 |
| 2022 | $ | % | |||||
Tobacco | $ | 8,927 | $ | 9,045 | $ | (118) | (1.3) | |||
Hemp/cannabis | 13,035 | — | 13,035 | NM | ||||||
Total revenues, net | $ | 21,962 | $ | 9,045 | 12,917 | 142.8 | ||||
37
The increase in revenue for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was primarily due to the increase in hemp/cannabis revenue of $13,035 due to the acquisition of GVB.
| o | Tobacco revenue was $8,927, a decrease of 1.3% from the first quarter of 2022, reflecting a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products. First quarter 2023 cartons sold of 1,002 compared to 1,382 in the comparable prior year period. |
| o | Hemp/cannabis revenue was $13,035, compared to $0 in the prior year first quarter, reflecting the acquisition of GVB and continued sequential quarterly growth in ingredient supply sales. First quarter 2023 bulk ingredient sales volume in kilograms was 68,195 compared to 16,524 in the comparable prior year period (prior to the GVB acquisition that occurred on May 13, 2022), and compared to 39,605 in the fourth quarter of 2022. |
Gross (loss) profit
| Three Months Ended | |||||||
| March 31 | March 31 | Change | |||||
| 2023 |
| 2022 | $ | ||||
Gross (loss) profit | $ | (1,177) | $ | 309 | (1,486) | |||
Percent of Revenues, net | (5.4) | % | 3.4 | % | ||||
The decrease in gross profit and gross profit as a percent of revenues, net for the three month period-ended March 31, 2023 as compared to March 31, 2022 is driven by ($290) decline in tobacco gross profit driven mainly by lower volume and product mix and ($1,196) in hemp/cannabis gross profit resulting from reflecting costs associated with buying and selling ingredients while the Company rebuilds its distillate and isolate manufacturing capacity following the November 2022 Grass Valley fire.
| o | Initial expected business interruption insurance claims for the first quarter of 2023 to offset margin losses is anticipated to be approximately $2,258, driven by price increases on raw materials as a result of sourcing through third parties as compared to in-house processing. Additional business interruption claim recoveries are expected during the remainder of 2023. |
Sales, general and administrative (“SG&A”) expense
(a) Increases in compensation and benefits is mainly attributable to inflationary increases, as well as increases in corporate headcount as our organization continues scaling.
(b) Increase of strategic consulting due to additional business development, recruitment, and investor relations expenses.
(c) Increases due to the ongoing expansion and accelerated launch of VLN®.
(d) Other expenses increased due to $154 of travel and entertainment, $120 of technology expenses, and other $343, offset by a decrease in insurance expenses of $113.
38
(e) Increased SG&A as a result of the acquisition of GVB on May 13, 2022, including corporate personnel costs and general overhead.
Research and development (“R&D”) expense
Change 2023 vs 2022 | ||||
$ | % | |||
Compensation and benefits (a) | $ | 266 | 227.9 | |
Contract costs | (17) | (2.4) | ||
Consulting and professional services | 3 | 5.5 | ||
Other | 87 | 33.9 | ||
GVB | 37 | 100.0 | ||
Net increase in R&D expenses | $ | 376 | 33.0 | |
(a) Increased compensation and benefits related to the additional executive and R&D personnel in the current year.
Other operating expenses, net (“OOE”)
Three Months Ended | ||||||
March 31, | ||||||
| 2023 |
| 2022 | |||
Grass Valley fire: | ||||||
Professional services and supplies | $ | 68 | $ | — | ||
Total Grass Valley fire | 68 | — | ||||
Acquisition costs | 68 | 52 | ||||
Needlerock Farms settlement (a) | 747 | — | ||||
Loss on change in warrant liability (b) | 139 | — | ||||
Gain on sale or disposal of property, plant and equipment (c) | (146) | — | ||||
Loss on change in contingent consideration | 22 | — | ||||
Total other operating expenses, net | $ | 898 | $ | 52 | ||
| (a) | Expenses associated with non-ordinary course legal matters and corresponding settlement related to water rights dispute for Needle Rock Farms. |
| (b) | Represents change in fair value of warrant liability resulting from remeasurement as of March 31, 2023. |
| (c) | Reflects gain on sale resulting from sale of older tobacco manufacturing equipment. |
Refer to Note 9, “Other operating expenses, net,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these charges.
39
Other income (expense)
| Three Months Ended | ||||||||||||
| March 31 | March 31 | Change | ||||||||||
|
| 2023 |
| 2022 | $ | % | |||||||
Other income (expense): | |||||||||||||
Unrealized loss on investment (a) | $ | - | $ | (817) | $ | 817 | NM | ||||||
Other income, net | 5 | - | 5 | NM | |||||||||
Interest income, net | 57 | 50 | 7 | 14.0 | |||||||||
Interest expense (b) | (421) | (5) | (416) | NM | |||||||||
Total other expense | $ | (359) | $ | (772) | $ | 413 | (53.5) | ||||||
NM - calculated change not meaningful | |||||||||||||
(a) Unrealized loss on investment includes fair value adjustments for our investment in Panacea Life Sciences Holdings, Inc. (“PLSH”) during the three month-period ended March 31, 2022. The investment was subsequently liquidated during 2022.
(b) Interest expense increased in 2023, as compared to the prior year period, primarily due to the interest recognized from the Senior Secured Credit Facility and Subordinated Note, as described below under ‘Liquidity and Capital Resources.’
Liquidity and Capital Resources
| March 31 | December 31, | ||||
|
| 2023 |
| 2022 | ||
Cash and cash equivalents | $ | 10,952 | $ | 3,020 | ||
Short-term investment securities | $ | 5,275 |
| $ | 18,193 | |
Restricted cash | $ | 7,500 |
| $ | — | |
Working capital | $ | 24,268 |
| $ | 31,587 | |
Working Capital
As of March 31, 2023, we had working capital of $24,268 compared to working capital of $31,587 at December 31, 2022 a decrease of $7,319. This decrease in working capital was primarily due to a $3,467 decrease in net current assets and was offset by an increase in net current liabilities of $3,852. Cash, cash equivalents and short-term investment securities decreased by $4,986 and the remaining net current assets increased by $1,519.
40
Summary of Cash Flows
| Three Months Ended | |||||
March 31, | ||||||
|
| 2023 |
| 2022 | ||
Cash provided by (used in): | ||||||
Operating activities | $ | (17,500) | $ | (7,928) | ||
Investing activities |
| 14,723 |
|
| 8,772 | |
Financing activities |
| 18,209 |
|
| (596) | |
Net change in cash, cash equivalents and restricted cash | $ | 15,432 |
| $ | 248 | |
Net cash used in operating activities
Cash used in operating activities increased $9,572 from $7,928 in 2022 to $17,500 in 2023. The primary driver for this increase was higher net loss of $9,264, driven by increased SG&A and R&D both from the acquisition of GVB and acceleration of the launch of VLN®, an increase of $342 related to net adjustments to reconcile net loss to cash, and an increase in cash used for working capital components related to operations in the amount of $650 for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
Net cash provided by investing activities
Cash provided by investing activities amounted to $14,723 for the three months ended March 31, 2023, as compared to cash provided by investing activities of $8,772 for the three months ended March 31, 2022. The increase in cash provided by investing activities of $5,951 was the result of (i) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the current period; (ii) an increase in net proceeds from short-term investments of $3,142; (iii) $682 from the investment in Change Agronomy Ltd. in the prior year period; (iv) $200 of proceeds from the sale of property, plant and equipment; and (v) $90 from the acquisition of RXP. These increased cash inflows were partially offset by increased cash outflow of $1,663 related to the acquisitions of patents, trademarks and property, plant and equipment.
Net cash provided by (used in) financing activities
During the three months ended March 31, 2023, cash provided by financing activities increased by $18,805 resulting from the proceeds of $16,849 from issuance of long-term debt and the proceeds of $6,016 from issuance of detachable warrants. These cash inflows were offset by payments of debt issuance costs of $801, increased note payable payments of $2,916, and taxes paid related to net share settlement of RSUs of $414.
Cash demands on operations
Our principal sources of liquidity are our cash and cash equivalents, short-term investment securities, cash generated from our tobacco contract manufacturing business and hemp/cannabis business and proceeds from debt and equity financing activities. As of March 31, 2023, we had approximately $16,227 of cash and cash equivalents and short-term investments. We also have business interruption coverage, which we continue pursuing in connection with such incident and anticipate initial payments on our claims to commence in the second quarter of 2023.
Our cash, cash equivalents, short-term investment securities, insurance proceeds, and credit facility financing, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, will provide sufficient resources for estimated contractual commitments, described further in Note 11 to our Condensed Consolidated Financial Statements included herein, and normal cash requirements for operations well beyond the next twelve months. We continue evaluating our capital and financing requirements, as compared with the significant anticipated growth with the accelerated launch and expansion of VLN®, rebuild of GVB’s production capabilities following the Grass Valley fire, and our new CDMO+D contracts, to ensure we meet our success based strategic initiatives.
41
New Senior Secured Credit Facility
On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,053 and (ii) warrants to purchase up to 5,000,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000.
The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.
The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
Omnia Subordinated Note
On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma.
Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of 26.5% per annum, payable monthly. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024.
ATM Offering
On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”). The Company currently intends to use any net proceeds from this ATM Offering for general corporate purposes, including potentially expanding existing businesses, acquiring businesses and investing in other business opportunities, for expansion and acceleration of the launch of the Company’s VLN® reduced nicotine content tobacco cigarettes in additional markets, research and development expenses, procurement and development of additional intellectual property rights and working capital.
Subject to the terms and conditions of the Sales Agreement, each time that the Company wishes to issue and sell shares of common stock, it will notify the Sales Agent and the Sales Agent will use its commercially reasonable efforts, consistent with its sales and trading practices, to solicit offers to purchase the common stock shares under the terms and subject to the conditions set forth in the Sales Agreement.
42
The Company will pay the Sales Agent 3.00% of the gross proceeds of the sales price per share of common stock sold through the Sales Agent under the Sales Agreement. In addition, the Company will reimburse the Sales Agent for certain fees and disbursements to its legal counsel incurred in connection with entering into the transactions contemplated by the Sales Agreement in an amount not to exceed $75 in the aggregate.
Sales of the Company’s common stock through or to the Sales Agent, if any, will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company is not obligated to make any sales of its common stock under the Sales Agreement and may at any time suspend offers under the Sales Agreement. The Sales Agreement will terminate upon the earlier of (i) the sale of all of the Company’s common stock subject to the Sales Agreement, or (ii) termination of the Sales Agreement as permitted therein.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.
Except as described below, there have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.
Contingent consideration
Contingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain revenue milestones. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration liability result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material impact on the results from operations. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.
Detachable Warrants
Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
43
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 4. Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures: |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure information required to be disclosed is recorded, processed, summarized and reported within the time period specified by SEC rules, based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
(b) | Changes in Internal Control over Financial Reporting: |
During the three months ended March 31, 2023, the Company's internal controls over financial reporting expanded to include those inherited from the acquisition of GVB and RXP, which are currently under evaluation by management. There were no additional changes in our internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 - Commitments and Contingencies – Litigation - to our consolidated financial statements included in this Quarterly Report for information concerning our on-going litigation. In addition to the lawsuits described in Note 11, from time to time we may be involved in claims arising in the ordinary course of business. To our knowledge other than the cases described in Note 11 to our consolidated financial statements, no material legal proceedings, governmental actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 9, 2023.
Nasdaq may delist our common stock from trading on its exchange which could limit investors’ ability to make transactions in our common stock and subject us to additional trading restrictions.
Our common stock is currently listed on the Nasdaq Capital Market. If Nasdaq delists our common stock from trading on its exchange, we could face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our common stock; |
| ● | reduced liquidity with respect to our securities; |
| ● | a determination that shares of our common stock are “penny stock” which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares; |
| ● | a limited amount of news and analyst coverage; and |
| ● | a decreased ability to issue additional common stock or obtain additional financing in the future. |
On March 31, 2023, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department notifying the Company that, for the last 30 consecutive business days, the closing bid price for the Company’s common stock has been below the minimum $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been given 180 calendar days, or until September 27, 2023, to regain compliance with Rule 5550(a)(2). If the Company does not regain compliance with Rule 5550(a)(2) by September 27, 2023, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, except for the minimum bid price requirement. In addition, the Company would be required to provide written notice to Nasdaq of its intent to cure the deficiency during the second compliance period. The Company intends to monitor the closing bid price of its common stock and may, if appropriate, consider implementing available options to regain compliance with the Minimum Bid Price Requirement under the Nasdaq Listing Rules such as a reverse stock split.
45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
RX Pharmaceutical, Ltd.
On January 19, 2023, the Company acquired RX Pharmatech Ltd (“RXP”). The initial consideration paid to acquire RXP included $200 in cash and $503 in common stock (consisting of 465,838 unregistered shares of common stock), and an initial estimate of target working capital true-up of $286. The fair value of the Company’s common stock issued as part of the consideration was determined based upon the opening stock price of the Company’s shares as of the acquisition date.
The issuance of the shares was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder.
JGB Warrants
On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,052,632 and (ii) warrants to purchase up to 5,000,000 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000,000.
The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
The issuance of the warrants was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder.
Omnia Warrants
On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,864,767 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500,000 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma.
In connection with the Subordinated Note, the Company issued to Omnia, the Omnia Warrants to purchase up to 675,000 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $0.855 per share, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
The issuance of the warrants was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Rule 506(b) of Regulation D promulgated thereunder.
46
ATM Offering
On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”). The Company currently intends to use any net proceeds from this ATM Offering for general corporate purposes, including potentially expanding existing businesses, acquiring businesses and investing in other business opportunities, for expansion and acceleration of the launch of the Company’s VLN® reduced nicotine content tobacco cigarettes in additional markets, research and development expenses, procurement and development of additional intellectual property rights and working capital.
Subject to the terms and conditions of the Sales Agreement, each time that the Company wishes to issue and sell shares of common stock, it will notify the Sales Agent and the Sales Agent will use its commercially reasonable efforts, consistent with its sales and trading practices, to solicit offers to purchase the common stock shares under the terms and subject to the conditions set forth in the Sales Agreement.
The Company will pay the Sales Agent 3.00% of the gross proceeds of the sales price per share of common stock sold through the Sales Agent under the Sales Agreement. In addition, the Company will reimburse the Sales Agent for certain fees and disbursements to its legal counsel incurred in connection with entering into the transactions contemplated by the Sales Agreement in an amount not to exceed $75,000 in the aggregate.
Sales of the Company’s common stock through or to the Sales Agent, if any, will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company is not obligated to make any sales of its common stock under the Sales Agreement and may at any time suspend offers under the Sales Agreement. The Sales Agreement will terminate upon the earlier of (i) the sale of all of the Company’s common stock subject to the Sales Agreement, or (ii) termination of the Sales Agreement as permitted therein.
The issuance and sale of common stock, if any, by the Company under the Sales Agreement will be made pursuant to the Company’s registration statement on Form S-3(No. 333-270473) which was declared effective by the Securities and Exchange Commission on March 31, 2023 (the “Registration Statement”), and the Company’s prospectus supplement relating to the offering filed therewith that forms part of the Registration Statement.
Item 3. Default Upon Senior Securities.
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
47
Item 6. Exhibits
Exhibit 10.1 | ||||
Exhibit 10.2† | ||||
Exhibit 31.1 | ||||
|
| |||
Exhibit 31.2 | ||||
|
| |||
Exhibit 32.1 | ||||
|
| |||
101.INS | Inline XBRL Instance Document | |||
|
| |||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||
|
| |||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||
|
| |||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||
|
| |||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||
|
| |||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||
Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL) | |||
†Certain portions of the exhibit have been omitted pursuant Regulation S-K Item 601(b) because it is both (i) not material to investors and (ii) likely to cause competitive harm to the Company is publicly disclosed.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
| 22nd CENTURY GROUP, INC. |
|
|
Date: May 9, 2023 | /s/ James A. Mish |
| James A. Mish |
| Chief Executive Officer |
| (Principal Executive Officer) |
|
|
Date: May 9, 2023 | /s/ R. Hugh Kinsman |
| R. Hugh Kinsman |
| Chief Financial Officer |
| (Principal Accounting and Financial Officer) |
49
Exhibit 10.2
[REDACTED] = Pursuant to Item 601(b)(10) of Regulation S-K, portions of this exhibit have been omitted as the registrant has determined certain confidential information contained in this document, marked by brackets, is (i) not material and (ii) would be competitively harmful if publicly disclosed.
LICENSE AND DISTRIBUTION AGREEMENT
This License and Distribution Agreement (the “Agreement”) is entered into effective as of April 4, 2023 (the “Effective Date”), by and between GMLC WLNS, LLC, a California limited liability company, and Cookies Creative Consulting & Promotions, Inc., a California corporation (collectively for all purposes the “Licensor”), on the one hand, and PTB Investment Holdings, LLC, a Nevada limited liability company doing business as GVB Nevada, or its approved assignee (“Licensee”) on the other hand. Licensor and Licensee are sometimes each individually referred to herein as a “Party” and collectively as the “Parties.”
WHEREAS, Licensor owns and/or is the exclusive licensee of: (a)(i) the trademarks, services marks, trade names, design marks and commercial symbols identified on Exhibit B; and (ii) such other common law trademarks, service marks, trade names, design marks and commercial symbols owned or licensed by Licensor relate to the property identified in this clause (a)(i) (collectively, the “Marks”); (b) all copyright-protected documents, designs, and marketing materials related to the Marks and certain cannabis strain names and packaging associated with Licensor’s business (the “Copyrights”); and (c) all applications and common-law rights related the foregoing (Marks, Copyrights and all other all applications and common-law rights related the foregoing, collectively, the “Licensed Property”);
WHEREAS, Licensee manages: (a) the production of certain cannabis-based products that do not contain federally regulated-or-higher levels of THC, including, without limitation those containing CBD, CBG, CBN, Delta-8 and Delta-10, and other similar variations of each (the “Non-Regulated Products”); and (b) the distribution of Non-Regulated Products to retail locations in the United States (collectively, the “Retailers”);
WHEREAS, Licensee owns and/or is the exclusive licensee of: (a)(i) the trademarks, services marks, trade names, design marks and commercial symbols identified on Exhibit C; and (ii) such other common-law trademarks, service marks, trade names, design marks and commercial symbols owned or licensed by Licensee relate to the property identified in this clause (a)(i) (collectively, the “Licensee Marks”); (b) all copyright-protected documents, designs, and marketing materials related to the Licensee Marks (the “Licensee Copyrights”); and (c) all applications and common-law rights related the foregoing (Licensee Marks, Licensee Copyrights and all other all applications and common-law rights related the foregoing, collectively, the “Licensee IP”).
WHEREAS, subject to the terms and conditions of this Agreement, Licensor desires to grant to Licensee, and Licensee desires to accept from Licensor, a license to distribute and sell certain SKUs of Non-Regulated Products bearing the Licensed Property (the “Licensor Non-Regulated Products”) that have been approved in writing by Licensor and set forth on Exhibit A (such approved SKUs, the “Approved Licensor Products”).
NOW, THEREFORE, in consideration of the foregoing and the premises and covenants herein contained, as well as other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledge, the Parties hereto agree as follows:
1.TERM AND TERRITORY.
(a)Term.
(i) The initial term of this Agreement is for three (3) years (the “Initial Term”) commencing on the Effective Date, except as terminated as provided in this Agreement.
(ii) If [REDACTED] is achieved during the Initial Term, the Licensee shall have the option to renew the Agreement for an additional three (3) year term (the “Renewal Term” and, together with the Initial Term, the “Term”).
(b)Territory. The term “Territory” means the United States.
2.LICENSE.
(a)Grant of License. In consideration of promises, representations, warranties, obligations, payments and agreements made or assumed by Licensee hereunder and subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee, solely within the Territory and during the Term, an exclusive (subject to Section 1(d)), non-transferable, non-sublicensable (except as set forth in Section 3(a)) license (such License, the “License”) to:
(i)manufacture Approved Licensor Products and package them in Branded Packaging (the “Manufacturing License”);
(ii)distribute, sell and/or offer to sell Approved Licensor Products to Retailers in the Territory;
and
(iii)warehouse and distribute Approved Licensor Products direct to consumers who have purchased such Approved Licensor Products from the Cookies CBD Site (as defined in Section 2(d)).
(b)License Acceptance. Licensee accepts the foregoing License and agrees to perform the obligations established herein in compliance with the terms and conditions of this Agreement and Applicable Law. On a commercially reasonable basis, Licensee agrees to manufacture, distribute, promote and sell Approved Licensed Products in the Territory.
(c)Reservation of Rights. Licensor or the applicable IP Owner (as defined in Section 4(a)) retains all rights not expressly licensed to Licensee under Section 2(a), such retained rights including, without limitation, the right to grant licenses to use the Licensed Property to other third parties which do not violate the terms of this Agreement.
(d)Exclusivity. The License is exclusive to Licensee during the Term. During the Term, Licensor agrees that it shall not, and shall not grant any third party the right to, distribute any Approved Licensor Products to any retailer, reseller, distributor, wholesaler, Retailers or through any other channel of distribution in the United States; provided, however, that Licensor may sell Approved Licensor Products direct to consumers through Licensor’s online website (www.shop.cookies.com, or such other internet address(es) that may be updated by Licensor from time-to-time).
3.RESTRICTIONS ON LICENSE.
(a)Sublicensing and Subcontractors. Licensee shall not assign or sublicense the rights granted to it under this Agreement except with the prior written consent of Licensor, which consent shall be given on a commercially reasonable basis; provided, that Licensee may sub-contract or assign to third parties the distribution, sales and manufacturing functions that have been approved by Licensor in order to fulfill its obligations regarding this Agreement. Notwithstanding anything to the contrary, all of Licensee’s warranties, representations and covenants hereunder shall apply to the acts and omissions of any such subcontractors and/or assignees and Licensee shall remain primarily liable hereunder for any acts and omissions of all subcontractors and assignees as if committed by Licensee.
Page 2 of 22
(b)Compliance with Law. As a condition of this Agreement, Licensee shall use the Licensed Property only in compliance with Applicable Law and in connection with the operation of the Licensee Business (as defined in Section 4(g)) in the Territory and as set forth herein, and shall not knowingly use, or knowingly allow to be used, the Licensed Property in any manner which materially adversely affects the quality, value, brand, goodwill, or reputation of the Licensed Property, any IP Owner, or Licensor in any way.
(c)Nothing contained in this Agreement shall be construed to create a franchise or make either Party the franchisee of the other. Licensee acknowledges and agrees that the marketing system it intends to use with regards to the Approved Licensor Products has not been, nor shall it be, prescribed in substantial part by Licensor. Licensee hereby releases any and all claims that Licensor or IP Owner has violated any franchise disclosure or other franchisor obligation in connection herewith.
4.INTELLECTUAL PROPERTY; PERMITS.
(a)Ownership.
(i)Licensee acknowledges and agrees that the Licensed Property is owned solely and exclusively by Licensor or, in the event that Licensor is a licensee of any of the Licensed Property, the owner of such Licensed Property (any such owner, including Licensor, an “IP Owner”). Licensee shall not, during or after the Term of this Agreement, engage in any conduct directly or indirectly that would infringe upon, harm or contest any IP Owner’s rights in any of the Licensed Property or the goodwill associated therewith, including any use of the Licensed Property in a derogatory, negative, or other inappropriate manner in any media, including but not limited to print or electronic media. Licensee shall not at any time do or cause to be done any act or thing which may in any way impair or contest any part of Licensor’s or any IP Owner’s right, title, or interest in and to the Licensed Property or assist any third party in doing so. In connection with the use of the Licensed Property, Licensee shall not represent that it has any ownership or other rights in or to the Licensed Property outside the scope of those granted by this Agreement.
(ii)Licensor acknowledges and agrees that the Licensee IP is owned solely and exclusively by Licensee. Licensor shall not, during or after the Term of this Agreement, engage in any conduct directly or indirectly that would infringe upon, harm or contest Licensee’s rights in any of the Licensee IP or the goodwill associated therewith, including any use of the Licensee IP in a derogatory, negative, or other inappropriate manner in any media, including but not limited to print or electronic media. Licensor shall not at any time do or cause to be done any act or thing which may in any way impair or contest any part of Licensee’s right, title, or interest in and to the Licensee IP or assist any third party in doing so.
(b)Promotional Value & Goodwill. Licensee acknowledges that Licensor is entering into this Agreement not only in consideration of the License Profits to be paid, but also for the promotional value to be secured by Licensor and any other IP Owner as a result of the manufacture, distribution and/or sale of Approved Licensor Products under this Agreement. Further, Licensee recognizes the great value of the goodwill associated with the Licensed Property and acknowledges that such goodwill belongs exclusively to Licensor and/or the applicable IP Owner and that the Licensed Property has acquired a secondary meaning in the eye of the public.
(c)Use. Licensee shall use the Licensed Property only in association with the Approved Licensor Products and uses pursuant to the terms and conditions of this Agreement. Licensee shall comply with all trademark, service mark, design mark and copyright marking laws and comply with any commercially reasonable requests by Licensor connected with using the Licensed Property.
Page 3 of 22
(d)Changes. Licensee shall not make any changes or substitutions to the Marks or Copyrights unless directed by Licensor in writing. Licensor reserves the right to change the Marks or Copyrights at any time. Upon receipt of written notice from Licensor to change the Marks or Copyrights, Licensee shall cease using the former Licensed Property and commence using the new Licensed Property; provided, that Licensee shall be entitled to sell off any Approved Licensor Products bearing the old Marks and/or Copyrights as long as it is permitted to do so in accordance with Applicable Law.
(e)Litigation. In the event any person or entity improperly uses or infringes the Licensed Property or challenges Licensee’s use, or Licensor’s or any IP Owner’s use or ownership of the Licensed Property, Licensor shall control all litigation and shall use commercially reasonable methods to stop the infringement and prevent subsequent infringement. Licensor agrees to monitor the Internet and other means of inquiry to detect and stop infringements. Licensee shall have the authority, and hereby is dully authorized by Licensor, to act in any capacity allowed by Applicable Law or commercial practice to search and hunt for any infringing or counterfeit product, manufacturer, distributor, retailer, or producer of Approved Licensor Products (“Bad Actors”).
(f)Additional Documents. Without limited Section 4(e), Licensee shall, at Licensor’s request and expense, execute any documents and provide any truthful testimony Licensor deems commercially reasonable to maintain, protect, or enforce the Licensed Property within the Territory.
(g)Licensee Permits. Licensee owns all licenses and permits that are necessary to operate its business (collectively, the “Licensee Business”) in compliance with Applicable Law and that are needed to fulfill Licensee’s obligations and activities under this Agreement in accordance with Applicable Law (the “Licensee Business Permits”). “Applicable Law” means all applicable laws, requirements, rules and/or regulations relating, affecting or pertaining to the Licensee Business, the performance of this Agreement and/or the use of any Licensed Property, including, without limitation: (i) all anti-bribery and corruption laws, requirements, rules and/or regulations that apply to the activities, goods and/or services subject to this Agreement; (ii) all laws, requirements, rules and/or regulations relating to tax, advertising, promotional offers and/or privacy; and (iii) all applicable laws, rules and/or regulations relating, affecting or pertaining to the taxation, sale, advertising, marketing, promotion and/or use of each and every Approved Licensor Product.
5.PRODUCTION & PACKAGING OF APPROVED LICENSOR PRODUCTS. Pursuant to the Manufacturing License, Licensee (and/or its subcontractors) is authorized to manufacture and produce Approved Licensor Products. With respect to such Approved Licensor Products:
(a)Inputs & Components. Licensee shall be responsible for sourcing and manufacturing Approved Licensor Products; provided, that:
(i) all hardware components, inputs and source material used in such Approved Licensor Products shall be from a source and/or manufacturer that has been approved by Licensor in writing; and
(ii) such Approved Licensor Products:
(A) shall be produced in compliance with Applicable Law;
(B) shall have passed all required regulatory tests;
(C) shall be of merchantable quality under Applicable Law; and
(D) shall meet the standard and quality so as to maintain or enhance the Licensed
Page 4 of 22
Property and associated goodwill (the standards described in this clause (ii), the “Manufacturing Quality Standards”).
(b)Improvements in Standards and Quality. If Licensor determines on a commercially reasonable basis that the standards and quality of any Approved Licensor Products are not met, Licensee agrees to either:
(i) comply with the new standards or quality requirements; or
(ii) use the dispute resolution process described below to resolve any Disputes (defined below) to improve the standards and quality involved on a commercially reasonable basis.
Licensor shall have fifteen (15) days from the date any sample of an Approved Licensor Product is first delivered to Licensor for approval to approve or reject the quality of such Approved Licensor Product or it shall be deemed mutually approved.
(c)Branded Packaging. All Branded Packaging used on Approved Licensor Products shall be pre-approved in writing by Licensor and shall comply with Section 7. Upon Licensee’s written request, Licensor shall supply commercially reasonable Licensed Property (e.g., images, pantones, art files and Marks and/or Copyrights) that shall be used by Licensee to design Branded Packaging that shall be used on Approved Licensor Products.
6.DISTRIBUTION.
(a)Authorized Retailers.
(i)Appointment. Licensor hereby appoints Licensee as the exclusive distributor of Approved Licensor Products in the Territory and authorizes Licensee to distribute Approved Licensor Products to the Retailers. Licensee accepts such appointment and agrees to act in such capacity as described in this Agreement and to be bound by all terms herein.
(ii)Pricing. [REDACTED].
(iii)Sales Efforts. Licensee agrees to use commercially reasonable efforts to promote the sale of Approved Licensor Products in the Territory to Retailers in order to realize the maximum profits for the Approved Licensor Products in the Territory.
(c)General.
(i)Quality Standards. Licensee shall maintain, store, and transport the Approved Licensor Products in accordance with those Quality Standards (as defined in Section 10(a)).
(ii)Shelf Life. Licensee shall, and shall use commercially reasonable efforts to cause that all Retailers shall, rotate Approved Licensor Products on a first-in, first-out basis and only sell Approved Licensor Products with a commercially reasonable remaining shelf life. Under no circumstances shall Licensee sell any Approved Licensor Product that has exceeded its shelf life or knowingly allow Retailers to do so.
7.BRANDED PACKAGING.
Page 5 of 22
(a)Branded Packaging. The term “Branded Packaging” means any packaging that bears the Licensed Property and that is used to package Approved Licensor Products.
(b)Labeling Requirements. As soon as practicable after the Effective Date, the Parties shall use commercially reasonable efforts to incorporate any Labels (as defined below) into the Branded Packaging to cause such Branded Packaging to comply with Applicable Law, incorporates any necessary identifying information of Licensee and incorporates any other information required by Applicable Law. “Labels” means any and all warning labels, instructions or notices that appear with, on, or otherwise in connection with any Approved Licensor Products including, without limitation, warning labels, instructions or notices regarding chemical or other materials present in or used in connection with any Approved Licensor Products that is required by Applicable Law.
(c)Compliance. With respect to any Branded Packaging used to package Approved Licensor Products, Licensee shall be solely responsible for causing such Branded Packaging and any Labels to comply with Applicable Law for the Territory.
(d)Purchase of Branded Packaging. Licensee shall present any Branded Packaging proposed to be used in connection with the distribution and sale of Approved Licensor Products under this Agreement to Licensor for its prior written approval. Licensee shall not utilize any Branded Packaging in connection with the Approved Licensor Products without Licensor’s prior written consent, which shall be given on a commercially reasonable basis.
(e)No Changes. Licensee shall not make any alterations to or obscure any part of the Branded Packaging without the prior written approval of Licensor.
8.FEES; TAXES.
(a)Access and Exclusivity Fee. As partial consideration for the exclusivity granted to Licensee under this Agreement, Licensee agrees to grant Licensor five (5) million shares of common stock of within fifteen (15) business days of the Effective Date (the “Exclusivity Fee”).
(b)The issuance of such Shares shall be controlled by the following restrictions, representations and conditions on Transfer:
(i)In partial consideration for the rights granted to Licensee under this Agreement, Licensee shall issue to Licensor 5.0 million unregistered shares of common stock of Licensee, par value $0.00001 per share (“Common Stock”), within fifteen (15) Business Days following the date of this Agreement (the “Shares”).
(ii)The Shares shall be issued via a book entry statement at Licensee’s stock transfer agent, or at the election of Licensor, a physical stock certificate.
(iii)Licensor shall not, prior to the date that is twelve (12) months following the date of issuance of the Shares:
(A) | distribute; lend; offer; pledge; hypothecate; encumber; grant a security interest in; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or otherwise transfer, convey or dispose of, directly or indirectly, any of the Shares; or |
Page 6 of 22
(B) | enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of the Shares, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of Common Stock or other securities or otherwise. |
(iv) | provided, however, that: |
(A) | on and following the date the is six (6) months following the date of issuance of the Shares, the foregoing restrictions shall cease to apply to 2.0 million of the Shares; |
(B) | on and following the date that is nine (9) months following the date of issuance of the Shares, the foregoing restrictions shall cease to apply to an additional 2.0 million of the Shares (totaling 4.0 million of the total amount of Shares); and |
(C) | on and following the date that is twelve (12) months following the date of issuance of the Shares, the foregoing restrictions shall cease to apply to all of the Shares. |
(v) | Restrictive Legends. The Shares shall contain the following restrictive legends until such time as Licensor shall receive an opinion of legal counsel satisfactory to Licensee that specifies that such restrictive legend is no longer required by applicable law and/or this Agreement: |
(vi) | THE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD UNLESS: (I) A REGISTRATION STATEMENT COVERING SUCH SALE OR TRANSFER IS EFFECTIVE UNDER THE ACT, OR (II) THE TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE ACT AND, AN OPINION SATISFACTORY TO THE COMPANY TO SUCH EFFECT HAS BEEN RENDERED BY COUNSEL |
(vii) | THE SHARES OF COMMON STOCK ARE ALSO SUBJECT TO RESTRICTIONS ON TRANSFER PURSUANT TO THAT CERTAIN LICENSE AGREEMENT, A COPY OF WHICH IS AVAILABLE UPON REQUEST TO THE COMPANY. |
(viii)Representations of Licensor related to the private placement of the Shares:
(A) | The Shares to be issued under this Agreement are being acquired for investment for Licensor’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof. |
Page 7 of 22
(B) | As of the date hereof, Licensor has no present intention of transferring, selling, granting any participation or otherwise distributing the Shares. |
(C) | Licensor has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares, and has so evaluated the merits and risks of such investment. Licensor is able to bear the economic risk of an investment in the Shares and, at the present time, is able to afford a complete loss of such investment. |
(D) | Licensor is not acquiring the Shares as a result of: |
(X) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television, radio or the Internet, in each case, relating to Licensee; or
(Y) any seminar or meeting whose attendees, including Licensor, have been invited by any general solicitation or general advertising related to Licensee.
(ix) Licensor is an “accredited investor” as defined in Rule 501 under the Securities Act of 1933, as amended.
(x) Licensor acknowledges that it has had the opportunity to review the reports filed by Licensee with the Securities and Exchange Commission and has been afforded:
(A) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of Licensee concerning the terms and conditions of the offering of the Shares hereby and the merits and risks of investing in the Shares;
(B) access to information about Licensee and its financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and
(C) the opportunity to obtain such additional information that Licensee possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the Shares.
(c)License Fee. During the Term, and as partial consideration for the License, Licensee agrees to pay Licensor [REDACTED] (the “License Fee”). For purposes of this Agreement:
(i)“Net Sales” means Gross Sales (as defined below) less only Allowable Deductions (as defined below).
(ii)“Gross Sales” means all revenues derived from the sale by Licensee or its affiliates of each Approved Licensor Product to Retailers in the Territory.
(iii)“Allowable Deductions” means returns supported by credit memos actually issued to a customer.
(iv)“Net Profits” means Net Sales less Business Expenses.
(vi)“Business Expenses” means:
Page 8 of 22
(A) cost of materials incorporated into the Approved Licensor Products;
(B) warehousing/storage costs related to Approved Licensor Products;
(C) shipping and production costs related to Approved Licensor Products (not otherwise deducted and not otherwise paid for by Retailers);
(D) fulfillment and customer service costs associated with Approved Licensor Products; and
(E) general liability insurance.
(vii)“First Hurdle Period” means [REDACTED].
(viii)“Second Hurdle Period” means [REDACTED].
(ix)“First Door Count Goal” means [REDACTED].
(x)“Second Door Count Goal” means [REDACTED].
(xi)“Door Count Goals” means the First Door Count Goal and the Second Door Count Goal.
Other than the Allowable Deductions, there shall be no deductions from or reductions of Net Sales of any kind, including, but not limited to, deductions for so-called “free goods,” any general or administrative costs of any kind, any taxes, freight, insurance or other costs or expenses of any nature.
(d)License Profit.
(i) On a monthly basis, within twenty (20) days of the end of each month of the Term, Licensee shall pay Licensor the License Fee.
(e)Remittances and Certification.
(i) Licensee shall certify the computation of the License Fees (“License Fee Certification”).
(ii) If Licensee owes any additional Licensee Fee to the Licensor, Licensee shall remit all License Fees for each calendar month during the Term to Licensor on or before 5:00 p.m., Pacific time, on the twentieth (20th) day of the following month.
(f)Interest Charges; Late Fees. If Licensee or Licensor is delinquent in any payment due to the other under this Agreement, said amount shall accrue interest at the rate of one percent (1.0%) per month or the maximum amount allowed by law (whichever is lower).
(g)Records. During the Term and for a period of time equal to the longer of (i) the period of time required by the applicable taxation authorities to whose jurisdiction a Party is subject, or (ii) two (2) years after the expiration or termination thereof, each Party agrees to maintain accurate records of all transactions related to this Agreement.
(h)Reports; Audit.
Page 9 of 22
(i)Within seven (7) business days after the end of each such calendar month during the Term, Licensee shall prepare and deliver to Licensor a preliminary report (the “Fee Report”) that includes all of the sales data related to the sale of Approved Licensor Products to Retailers in the Territory and the computation of the License Fees payable to Licensor. Licensee shall report all Fee Reports to be true and correct within twenty (20) days after the end of each such month .
(ii)Licensor or its authorized representatives shall have the right at all times during ordinary business hours, and upon no less than forty-eight (48)-hours prior notice, to enter the premises where Licensee’s books and records are kept and to evaluate, copy and audit such books and records solely as they relate to this Agreement. If any such evaluation or audit proves an understatement of two percent (2%) or more of the profits payable to Licensor, Licensee shall pay the commercially reasonable cost of the audit. Furthermore, if Licensee intentionally understates or underreports the profits payable to Licensor at any time, in addition to any other remedies provided for in this Agreement, at law or in equity, Licensor shall have the right to terminate this Agreement immediately.
(i)Taxes. Except for taxes based upon the fees received by the Licensor from Licensee, Licensee is responsible for the payment of all sales, use, gross receipts, excise, access, bypass, franchise, special district, cultivation, harvest, manufacturing, distribution, retail, and other local, state, and federal taxes, fees, charges, or surcharges, however designated, imposed on or based upon the sale of Approved Licensor Products by Licensee to Retailers.
9.GOALS AND PROMOTION OF THE APPROVED LICENSOR PRODUCTS.
(a)Licensee shall use commercially reasonable efforts to meet market demand for Approved Licensor Products from Retailers and Direct Customers.
(b)Licensee shall use commercially reasonable efforts to market and promote the sale of Approved Licensor Products in the Territory to the Retailers.
(c)Any marketing or advertising materials, point of sale displays, signage, and related materials created by Licensee in connection with the distribution and marketing of the Approved Licensor Products shall be approved in advance by Licensor on a commercially reasonable basis. Except as set forth below in Section 9(d), al such marketing costs and expenses shall be borne by Licensee.
(d)Licensor shall market and promote the Approved Cookies Branded Products through its existing media, entertainment and influencer relationships and channels, but shall at a minimum do the following:
(i)Licensor shall continue to market the Cookies brand itself as well as Approved Licensor Products distributed by Licensee, including on marketing collateral, advertising units, product packaging, in-store displays, swag and other go-to-market necessities.
(ii)Licensor shall spend [REDACTED] on marketing the Approved Licensor Products.
(iii)Licensor shall market the Approved Licensor Products across its social media foot print organically utilizing [REDACTED]. The same process shall occur during any Renewal Term. Licensor shall use commercially reasonable efforts regarding the timing of these posts to coordinate with the Licensee’s sales team’s entry into new markets, promotional campaigns or new Approved Licensor Product offerings.
Page 10 of 22
(e)As soon as commercially reasonable, after the Effective Date, the Parties shall issue a mutually agreed press release announcing the License and this Agreement.
10.QUALITY STANDARDS. Licensee agrees that its failure to materially meet the standards and comply with the required conduct set forth in this Section 10 (the “Quality Standards”) and the Manufacturing Quality Standards shall constitute a material breach of this Agreement.
(a)Licensee shall protect and maintain the Licensed Property by using the Licensed Property in compliance with the terms of this Agreement and by producing the Approved Licensor Products in compliance with Licensor’s quality standards listed on Exhibit D attached hereto.
(b)Licensee shall, at Licensor’s request, provide Licensor with samples of all packaging, marketing, advertising or any other material bearing the Marks and/or Copyrights or used in connection with the Licensed Property for inspection and prior written approval by Licensor. If the Licensor approves any of the above, the Licensee shall not be required to submit any samples or usages of substantially similar packaging, marketing, advertising, or any other such material.
(c)Subject to Applicable Law, Licensee shall, at Licensor’s request, provide Licensor with samples of the Approved Licensor Products for inspection and approval by Licensor by and through Licensor’s designated agent in the Territory for such purposes. If the Licensor approves any such Approved Licensor Products, the Licensee shall not have a duty to submit samples of the same Approved Licensor Products.
(d)Licensor shall have the right to rely on Licensee to:
(i) materially comply at all times with all Applicable Laws in connection with the manufacture, distribution and/or sale of Approved Licensor Products in the Territory;
(ii) make commercially reasonable efforts to cause all others authorized by Licensee or acting on Licensee’s behalf in connection with this Agreement to materially comply at all times with all Applicable Laws in connection with the manufacture, distribution and/or sale of Approved Licensor Products in the Territory; and
(iii) regularly monitor and audit such material compliance.
11.MUTUAL NON-DISPARAGEMENT.
Except in Disputes, Party covenants and agrees that, during the Term of this Agreement, neither it nor any of its agents, subsidiaries, affiliates, successors, assigns, officers, key employees, or directors, shall in any way, directly or indirectly, alone or in concert with others, cause, express, or cause to be expressed, orally or in writing, any remarks, statements, comments, or criticisms that disparage, call into disrepute, defame, slander, or which can be construed on a commercially reasonable basis to be derogatory, critical of, or negative toward the other Party, any IP Owner, its or their Products or services, or such Parties’ subsidiaries, affiliates, successors, assigns, officers, directors, employees, stockholders, agents, attorneys or representatives, or any of their products or services.
12.INSURANCE.
(a)During the Term of this Agreement and for a period of three (3) years thereafter, Licensee shall maintain, at its sole cost and expense, in full force and effect its own:
Page 11 of 22
(i) comprehensive general business liability insurance policy, consistent with commercial practices or standards for similar industries, insuring against any and all loss, liability, or business interruption arising from the obligations and activities of that Party hereunder including, without limitation, those arising from, product liability, personal injury, wrongful death, or property damage and contractual liability with respect to the indemnity obligations set forth in this Section. The coverage amount of such insurance policy shall [REDACTED];
(ii) Errors and Omissions/Professional Liability [REDACTED]; and
(iii) Worker’s compensation insurance in amounts as may be required by Applicable Law.
(b)The insurance companies providing such insurance required under this Section 12 shall have an A.M. Best rating of A- or better. The policies shall contain a waiver of subrogation with respect to Licensor and each policy shall contain all appropriate riders and endorsements based on the nature of any Licensed Product manufactured or sold hereunder and its intended use. Licensee shall name Licensor as an “additional insured” on all required insurance policies and shall provide Licensor with originals or copies of certificates of insurance so reflecting. Such insurance shall also provide that Licensor shall be notified in writing by the insurance carrier of any change or modification in the policy (including termination) not less than thirty (30) days prior to the effective date of such change (including termination).
13.REPORTING; RECALLS.
(a)Licensee shall promptly inform Licensor, in writing, of any and all material consumer complaints or claims (each, a “Claim”) regarding the Approved Licensor Products or any product containing the Licensed Property delivered to it or which comes to its attention. Such Claim reports shall contain the date the consumer complaint was received, the name and address of the reporting person, and a detailed description of the circumstances. Claims shall be reported within fourteen (14) days of receipt, except for “serious” Claims, which shall be reported not later than twenty-four (24) hours following receipt. A “serious” Claim shall mean one alleging an adverse reaction or product defect that causes injury to the consumer that is fatal, life-threatening, disabling, incapacitating, or which results in prolonged hospitalization, and shall also include any media inquiry or government inquiry with respect thereto.
(b)If Licensor or a governmental authority notifies Licensee of the need to recall any Approved Licensor Products currently in the marketplace, Licensee agrees that it shall fully cooperate with Licensor and take all necessary actions reasonably requested by Licensor in connection with a recall of any Approved Licensor Products, including but not limited to, a notification to accounts and retrieval of recalled Approved Licensor Products from accounts, at Licensee’s sole expense unless Licensor is deemed to be at fault for all or any portion of the need to recall any Pre-Packaged Approved Licensor Products, in which case Licensor shall share such costs commensurate with its responsibility.
14.CONFIDENTIAL INFORMATION. The Parties shall be bound by those confidentiality provisions attached hereto as Exhibit F. In addition, subject to disclosures required by securities laws, the terms of this Agreement shall be deemed confidential information and shall not be shared without Licensor’s prior written consent.
15.TERMINATION.
(a)Termination.
(i)Mutual Written Consent. This Agreement may be terminated at any time upon the mutual written consent of the Parties.
Page 12 of 22
(ii)Immediate Right to Terminate. This Agreement may be terminated:
(A) by either Party if the other Party fails to pay any amount when due under this Agreement and such failure is not cured within thirty (30) days of written notice of such failure;
(B) by either Party immediately upon written notice to the other Party if any warranty, representation, certification, or other statement made by or on behalf of the other Party and contained in this Agreement or in any other document furnished in compliance with or in reference to this Agreement is made incorrect, false, misleading, or untrue without the non-breaching Party’s prior written consent;
(C) by Licensor immediately if Licensee has any license or permit associated with its obligations as contemplated herein revoked, suspended, or otherwise penalized and such default is not cured within thirty (30) days;
(D) by Licensor immediately upon written notice to Licensee if Approved Licensor Products fail Quality Standards on three (3) or more occasions within a twelve (12)-month period, regardless of cure;
(E) by either Party immediately if the other Party is or becomes Insolvent (as defined below);
(F) immediately by Licensor after the Second Hurdle Period if the Second Door Count Goal is not met for three (3) consecutive months;
(G) immediately upon written notice by either Party in the event that the other Party engages in any act or omission that constitutes Incompatible Conduct (as defined below); or
(H) by Licensor upon written notice to Licensee, if, on a commercially reasonable basis, Licensee’s business activities materially damage the quality associated with the Licensed Property, or the associated goodwill, and Licensee fails to cure or adequately address such damage within thirty (30) days after notice thereof.
(iii)Certain Definitions. For purposes of this Section 14(a):
(A) “Insolvent” means: (1) a Party files a voluntary petition under any bankruptcy, reorganization, or insolvency law of any jurisdiction; (2) a Party consents to or applies for appointment of a trustee, receiver, custodian, or similar official for itself or for all or substantially all its assets; (3) a trustee, receiver, custodian, or similar official is appointed to take possession of all or substantially all of a Party’s assets and is not dismissed within sixty (60) days after appointment; (4) a Party makes any assignment for the benefit of creditors; (5) an order for relief is entered against a Party under any bankruptcy, reorganization, or insolvency law of any jurisdiction or any case, proceeding, or other action seeking such an order remains undismissed for sixty (60) days after its filing; (6) any writ of attachment, garnishment, or execution is levied against all or substantially all of a Party’s assets; or (7) all or substantially all of a Party’s assets become subject to any attachment, garnishment, execution, or other judicial seizure, and the same is not satisfied, removed, released, or bonded within thirty (30) days after the date the
Page 13 of 22
writ was levied or the date of the attachment, garnishment, execution, or other judicial seizure; and
(B) “Incompatible Conduct” means any act or omission that, on a commercially reasonable basis, materially damages either the reputation or image of a Party or, with respect to Licensor, any IP Owner. Incompatible Conduct shall include, but not be limited to, the following: (1) statements by a Party defaming the other Party or, with respect to Licensor, any IP Owner, or such Party’s products; (2) criminal activities under Applicable Law perpetrated by a Party or any of its senior executives; provided, that (3) this section sets forth examples of the gravity of acts and omissions constituting Incompatible Conduct, but that such examples shall not limit the acts and omissions that could be Incompatible Conduct.
(b)Effect of Termination.
(i)Reversion of Rights; Sell-Off.
(A) As of the effective date of termination of this Agreement, except as set forth below, the License shall terminate and all of Licensee’s rights to the use of the Licensed Property pursuant to the License or otherwise and all other rights and licenses granted hereunder shall revert to Licensor without further action by either Party.
(B) Licensee shall not, as of the effective date of termination, reproduce, manufacture, market, sell, offer for sale or distribute any Licensed Product, except as set forth below.
(C) As of the effective date of termination of this Agreement, Licensee shall immediately discontinue any use of the Licensed Property; provided, however, that Licensee may continue to use the Marks and Copyrights in accordance with this Agreement in connection with any remaining inventory of the Approved Licensor Products existing as of the date of such termination for the lesser of six (6) months or until such inventory is exhausted.
(D) Within ten (10) days of termination, each Party shall deliver to the other any and all items designated as Confidential Information of the other Party.
(ii)Survival. Upon the termination of this Agreement as provided above, the Parties shall be released from further obligations hereunder except for: (A) accounting and payment of any fees or compensation accrued and owed to Licensor; (B) the provisions relative to confidentiality; (C) any restrictive covenant contained herein; (D) any damage or liability resulting from the breach of this Agreement; and (E) any obligations pursuant to this Agreement that expressly or by their nature survive the expiration or termination of this Agreement.
(iii)Non-Disparagement. Each Party covenants and agrees that, except for resolving Disputes and future competition, after the Agreement is terminated for any reason, neither it nor any of its respective agents, subsidiaries, affiliates, successors, assigns, executives, officers, key employees, or directors, shall in any way, directly or indirectly, alone or in concert with others, cause, express or cause to be expressed, orally or in writing, any remarks, statements, comments or criticisms that disparage, call into disrepute, defame, slander or which can be commercially reasonably be construed to be derogatory or critical of, or negative toward the other Party or its products or services, or such other Party’s subsidiaries,
Page 14 of 22
affiliates, successors, assigns, executives, officers, directors, key employees, stockholders, agents, attorneys or representatives, or any of their products or services.
(iv)No Damages for Termination. Neither Party shall be liable to the other Party for damages of any kind, including incidental or consequential damages, on account of a lawful expiration or lawful termination of this Agreement.
16.INDEMNIFICATION.
(a)Licensee’s Indemnity. Licensee hereby agrees to indemnify and defend Licensor and its owners, directors, officers, members, partners, shareholders, affiliates, employees, insurers, successors and assigns (collectively, the “Licensor Parties”) and forever hold the Licensor Parties harmless from and against all third-party claims, suits, actions, proceedings, damages, losses or liabilities, costs, or expenses (including commercially reasonable attorneys’ fees and expenses) arising out of, based upon, or in connection with:
(i) any breach of any of Licensee’s representations, warranties or covenants as set forth in this Agreement;
(ii) any alleged defects or dangers inherent in the Approved Licensor Products or the use thereof;
(iv) any injuries or damages to purchasers, users, or consumers of Approved Licensor Products or arising from or related to the use of the Approved Licensor Products;
(v) any violation of Applicable Law as it relates to Licensee’s Business;
(vi) any tax or federal penalty related to Licensee’s Business;
(vii) any use by the Licensee of the Licensed Property other than in accordance with this Agreement.
(b)Licensor’s Indemnity. Licensor hereby agrees to indemnify and defend Licensee and its owners, directors, officers, members, partners, shareholders, affiliates, employees, insurers, successors and assigns (collectively, the “Licensee Parties”) and hold the Licensee Parties harmless from and against all third-party claims, suits, actions, proceedings, damages, losses or liabilities, costs, or expenses (including commercially reasonable attorneys’ fees and expenses) arising out of, based upon, or in connection with:
(i)any breach of any of the Licensor’s representations, warranties or covenants as set forth in this Agreement;
(ii)any violation of Applicable Law as it relates to Licensor’s Business; and
(iii)any tax or federal penalty related to Licensor’s Business.
(c)Conduct of Defense. In connection with any claim arising hereunder, the indemnifying Party may conduct the defense and have control of the litigation and settlement, provided that the indemnified Party shall fully cooperate in defending against such claims. The indemnified Party shall deliver prompt notice to the indemnifying Party of any such claims.
Page 15 of 22
(d)Certain Limits. Except for the Parties’ indemnification obligations hereunder, in no event shall either Party be liable for any indirect, incidental, special, or consequential damages, or damages for loss of profits, revenue, data, or use, incurred by either Party or any third party, whether in an action in contract or tort, even if the other Party or any other person has been advised of the possibility of such damages. The Parties agree that under no circumstances shall the other Party’s liability under this Agreement exceed the fees paid by Licensee to Licensor under this Agreement during the twelve (12) months immediately preceding the date upon which the related claim arose.
17.WARRANTIES.
(a)Licensee’s Warranties. Licensee represents and warrants that:
(i)Approved Licensor Products and any other products sold under this Agreement or in connection with the Licensed Property shall comply with all Applicable Law;
(ii)it has the full right, power and authority to enter into and to perform this Agreement;
(iii)it shall not harm or misuse the Licensed Property or bring the Licensed Property into disrepute;
(iv) (A) neither it nor any Licensee Party is named, either directly or by an alias, pseudonym or nickname, on the lists of “Specially Designated Nationals” or “Blocked Persons” maintained by the U S Treasury Department’s Office of Foreign Assets Control currently located at www.treas gov/offices/enforcement/ofac/, (B) it shall not, and it shall cause each Licensee Party not to, take any action that would constitute a violation of any Applicable Law against corrupt business practices, against money laundering and/or against facilitating or supporting persons or entities who conspire to commit acts of terror against any person or entity, including as prohibited by the US Patriot Act (currently located at www.epic.org/pnvacv/terrorism/hr3162.htmll.) US Executive Order 13244 (currently located at www.treasgov/offices/enforcement/ofac/sanctions/terrorism.html) or any similar laws; and (C) it shall immediately notify Licensor in writing of the occurrence of any event or the development of any circumstance that might render any of the foregoing representations and warranties in this Section 16(a)(iv) false, inaccurate or misleading; and
(v)no representation, warranty or other statement made by Licensee in connection with this Agreement, or in any report or other communication provided by Licensee to Licensor in contemplation of, pertaining to or otherwise in connection with this Agreement, contains any untrue statement or omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.
(b)Licensor’s Warranties. Licensor warrants that it:
(i)owns or licenses the rights to the Licensed Property and that there are not any material suits or proceedings pending or threatened which allege that any Licensed Property or the use thereof infringes upon such patents, copyrights, or trademarks; and
(ii)is a corporation duly organized under Applicable Law and that it has the full right, power and authority to enter into and to perform this Agreement and to grant the rights licensed to Licensee pursuant to this Agreement.
Page 16 of 22
(c)No Other Warranties. THE EXPRESS WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER EXPRESS, IMPLIED, OR STATUTORY, REGARDING THE LICENSED PROPERTY INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT OF THIRD-PARTY RIGHTS.
18.DISPUTES.
(a)If any dispute or controversy between Licensor and Licensee arises related to this Agreement (a “Dispute”), the Parties shall attempt to resolve the Dispute through negotiation. Either Party may initiate negotiations of any Dispute by providing written notice to the other Party, setting forth the subject of the Dispute. The Party receiving such notice shall respond in writing within ten (10) calendar days with a statement of its position on and recommended solution to the Dispute.
(b)If the Dispute is not resolved by this exchange of correspondence, then representatives of each Party with full settlement authority shall meet in person at a commercially reasonable time and place within twenty (20) calendar days of the date of the initial notice in order to exchange relevant information and perspectives, and to attempt to resolve the Dispute.
(c)If the negotiations described above do not resolve the Dispute within thirty (30) calendar days of a request by either Party to negotiate, each Party has the right to submit the Dispute to mediation with JAMS in Orlando, Florida, USA.
(d)If the Dispute is not resolved through mediation within twenty (20) calendar days of the date it was submitted to mediation, such Dispute shall be resolved exclusively by final and binding arbitration in Orlando, Florida, USA, including JAMS appellate review, using the Federal Rules of Civil Procedure, the Federal Rules of Evidence, and the Federal Rules of Appellate Procedure (together, the “Federal Rules”). Any decision reached by an arbitrator or panel of arbitrators shall be based on specific findings of fact and conclusions of law, and they shall be supported by a reasoned decision.
(e)Otherwise, the then current rules of JAMS shall apply, and the arbitration shall be administered by JAMS pursuant JAMS’ Streamlined Arbitration Rules and Procedures only to the extent they are consistent with the Federal Rules.
(f)Any arbitration must be on an non-class action basis. The Parties and the arbitrator shall have no authority or power to proceed with any claim as a class action or otherwise to join or consolidate any claim with any other claim or any other proceeding involving third parties. If a court determines that this limitation on joinder of or class action certification of claims is unenforceable, then this entire commitment to arbitrate shall become null and void and the Parties shall submit all claims to the jurisdiction of the courts.
(g)The Parties submit and consent to the exclusive jurisdiction of the state courts in Orange County, Florida, in United States that are located in the City of Orlando, Florida, to compel arbitration, to confirm an arbitration award or order, or to handle other court functions exclusively in accordance with the Florida Arbitration Act.
(h)The Parties may seek confirmation of and enforcement of any Florida state court judgment confirming an arbitration award or order in any U.S. state court or in any court outside the United States and its territories that has subject matter and personal jurisdiction. By entering into this Agreement, the Parties are waiving their constitutional right to have any Disputes decided before a jury and waive the right of appeal, and instead of relying on said rights, each Party is solely, except as provided in Section 18(j),
Page 17 of 22
and knowingly accepting the use of arbitration as a means of resolution of any Disputes. The Parties agree that this Section has been included to rapidly and inexpensively resolve any disputes between them with respect to this Agreement.
(i)As long as the federal law classifies any aspect of the transactions covered by this Agreement to be a violation of law, the Parties waive any right: (i) of removal to the United States federal courts; or (ii) to seek any aid or assistance of any kind in the United States federal courts.
(j)Notwithstanding the above, the Parties agree that any action for declaratory or equitable relief, including, without limitation, seeking preliminary or permanent injunctive relief, specific performance, other relief in the nature of equity to enjoin any harm or threat of harm to such Party’s tangible or intangible property, may be brought at any time, by submitting such application for relief to JAMS using the procedures set forth in the JAMS Comprehensive Arbitration Rules and Procedures, including, without limitation, prior to or during the pendency of any negotiations referred to above. Licensor and Licensee shall be entitled to seek specific performance of the terms and conditions set forth herein and to preliminary and permanent injunctive relief relating to the enforcement of such terms and conditions. Licensor and Licensee shall not be required to post a bond or to show special damages in any proceeding seeking any such equitable relief.
(k)Upon the expiration or termination of this Agreement, neither the (i) Licensor nor (ii) Licensee shall assert any claim or cause of action against relating to this Agreement or the business of Licensor after the shorter period of the applicable statute of limitations or one (1) year following the effective date of termination of this Agreement; provided, that where the one (1) year limitation of time is prohibited or invalid by or under any applicable law, then no suit or action may be commenced or maintain unless commenced within the applicable statute of limitations.
(l)Non-Exclusive Remedy. The exercise by either Party of any remedy under this Agreement shall be without prejudice to its other remedies under this Agreement.
19.NET PROFITS ALLOCATION. [REDACTED].
20.MISCELLANEOUS TERMS.
(a)Authority. This Agreement constitutes a legally binding obligation of Parties in accordance with its terms and conditions. Each Party is empowered and duly authorized to enter into this Agreement.
(b)Further Assurances. The Parties agree and covenant that, at any time, and from time-to-time, they shall promptly execute and deliver to the other Party such further instruments and documents and take such further commercially reasonable action as each Party may request this Agreement, and to comply with all federal, state, local, or foreign laws, constitutions, codes, statutes, and ordinances of any governmental authority that may be applicable hereunder.
(c)Attorneys’ Fees. If either Party institutes any arbitration or other legal action permitted by this Agreement, against the other Party, to enforce this Agreement or obtain any other remedy arising out of or relating to this Agreement, the prevailing Party shall be entitled to receive, in addition to all other damages to which it may be entitled, the costs incurred by such Party in conducting the suit, action, or proceeding, including commercially reasonable attorneys’ fees and expenses.
(d)Remedy. Money damages may not be a sufficient remedy for any breach of this Agreement by either Party. Therefore, in addition to all other remedies, each Party may seek (and may be
Page 18 of 22
entitled to) because of or to prevent such breach, specific performance and injunctive or other equitable relief as a remedy, without the need for posting bond or other security.
(e)Notices. All notices, requests, consents, claims, demands, waivers, and other communications hereunder shall be in writing and shall be deemed to have been given: (i) when delivered by hand (with written confirmation of receipt); (ii) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (iii) the date after being sent by email if sent during normal business hours of the recipient, and on the second business day if sent after normal business hours of the recipient; or (iv) on the third day after the date mailed, by certified or registered mail (in each case, return receipt requested, postage pre-paid). Notices shall be sent to the respective Parties at the following addresses or at such other address for a Party as shall be specified in a notice given in accordance with this section:
If to Licensor: | If to Licensee: |
| |
Cookies Creative Consulting & | PTB Investment Holdings, LLC |
| |
Address: [REDACTED] | Address: [REDACTED] |
| |
Attn: [REDACTED] | Attn: [REDACTED] |
| |
Email: [REDACTED] | Email: [REDACTED] |
| |
With a copy to (which shall not constitute notice): _ | With a copy to (which shall not constitute notice): [REDACTED] |
(f)Written Consents. The terms “written” and “in writing” as used in this Agreement, include any form of recorded message in the English language capable of comprehension by ordinary visual means and may include electronic transmissions, such as facsimile, e-mail, text messaging, and other forms of electronic messaging, provided that: (i) The Party sending an electronic transmissions has in effect commercially reasonable measures to verify that the sender is the person purporting to have sent such transmission; and (ii) the transmission creates a record that can be retained, retrieved, reviewed, and rendered into clearly legible tangible form.
(g)Severability of Sections. If any provision of this Agreement shall be determined to be illegal or unenforceable by any arbitrator or court of law or any competent governmental or other authority, the remaining provisions shall be severable and enforceable in accordance with their terms so long as this Agreement without such terms or provisions does not fail in its essential commercial purposes. The Parties shall negotiate to replace any such illegal or unenforceable provision or provisions with suitable substitute provisions that shall maintain the economic purposes and intentions of this Agreement and use the above dispute resolution provisions if they fail to reach an agreement.
(h)Entire Agreement. This Agreement and its exhibits and schedules, which are incorporated herein by reference, constitutes the sole and entire contract between the Parties to this Agreement with respect to the subject matter contained herein. This Agreement supersedes all prior and
Page 19 of 22
contemporaneous understandings, agreements, representations, and warranties, both written and oral, with respect to such subject matter.
(i)Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by email or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement.
(j)Amendment and Modification. This Agreement may only be amended, modified, or supplemented by an agreement in writing signed by each Party hereto and shall become effective upon complete execution by both Parties.
(k)Waiver. No waiver by any Party of any of the provisions hereof shall be effective unless set forth in writing and signed by the Party so waiving. No waiver by any Party shall operate or be construed as a waiver in respect of any failure, breach, or default not expressly identified by such written waiver, whether of a similar or different character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power, or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege.
(l)Force Majeure. If the performance of this Agreement or any obligations hereunder (other than an obligation for the payment of money when due) is prevented, restricted or interfered with by reason of earthquake, fire, flood, or other casualty or due to strikes, riot, storms, explosions, acts of God, war, terrorism, or a similar occurrence or condition beyond the commercially reasonable control of either Party to prevent, and prepare for, the Party so affected shall, upon giving prompt notice to the other Party, be excused from such performance during such prevention, restriction, or interference, and any failure or delay resulting therefrom shall not be considered a breach of this Agreement.
(m)Assignment.
(i) Licensor may, in its sole discretion, assign this Agreement and its rights and obligations hereunder, in whole or in part:
(A) to any corporation or other entity with or into which Licensor may hereafter merge or consolidate; or
(B) if all the marketing requirements of marketing by “Berner” continue to be met, to any corporation or other entity which Licensor may transfer all or substantially all of its assets.
(ii) Licensee may, in its sole discretion, assign this Agreement and its rights and obligations hereunder, in whole or in part, to any entity that, directly or indirectly through one or more entities, controls or is controlled by, or is under common control with Licensee.
(iii) Neither Party may otherwise assign this Agreement or its rights and obligations hereunder without the prior written consent of the other Party, which consent shall be given, if it would be commercially reasonable to do so.
(iv) This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.
Page 20 of 22
(n)No Third-Party Beneficiaries. This Agreement is for the sole benefit of the Parties hereto and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit, or remedy of any nature whatsoever under or by reason of this Agreement.
(o)Governing Law. This Agreement and all related documents including all exhibits attached hereto and all matters arising out of or relating to this Agreement, whether sounding in contract, tort, or statute are governed by, and construed in accordance with, the laws of the State of Florida, including the Florida Arbitration Act, without giving effect to the conflict of laws provisions thereof to the extent such principles or rules would require or permit the application of the laws of any jurisdiction other than those of the State of Florida. EACH PARTY ACKNOWLEDGES THAT: (I) CALIFORNIA AND FLORIDA HAVE ENACTED CERTAIN LEGISLATION TO GOVERN THE CANNABIS INDUSTRY; AND (II) THE POSSESSION, SALE, MANUFACTURE, AND CULTIVATION OF CANNABIS PRODUCTS IS ILLEGAL UNDER FEDERAL LAW. EACH PARTY WAIVES ANY DEFENSES BASED UPON ILLEGALITY OR INVALIDITY OF CONTRACTS FOR PUBLIC POLICY REASONS AND/OR THE SUBSTANCE OF ANY DEFINITIVE AGREEMENT VIOLATING FEDERAL LAW. EACH PARTY HEREBY VOLUNTARILY AND UNCONDITIONALLY WAIVES, IN RELATION TO THIS AGREEMENT OR ANY ISSUE THEREUNDER: (A) ANY RIGHT OF REMOVAL OR APPEAL TO THE UNITED STATES FEDERAL DISTRICT COURTS, INCLUDING WITHOUT LIMITATION WAIVING THE RIGHT TO REMOVE TO FEDERAL COURT BASED ON DIVERSITY OF CITIZENSHIP; AND (B) ANY RIGHT TO COMPEL OR APPEAL ARBITRATION, TO CONFIRM ANY ARBITRATION AWARD OR ORDER, OR TO SEEK ANY AID OR ASSISTANCE OF ANY KIND IN THE UNITED STATES FEDERAL DISTRICT COURTS. Notwithstanding any provision to the contrary, this Agreement shall be enforced in accordance with Florida law, namely, commercial activity conducted in compliance with Florida law and any applicable local standards, requirements, and regulations shall be deemed to be a lawful object of a contract and not contrary to, an express provision of law, any policy of express law, good morals, or public policy.
(p)No Merger of Entities, Financial Partnership, or Joint Venture. This Agreement creates an independent contractor relationship between the Parties. Nothing contained in this Agreement shall be construed to:
(i) give either Party the power to direct, manage and control the day-to-day activities of the other Party;
(ii) constitute the Parties as partners, joint-venturers, co-owners or otherwise as participants in a joint or common undertaking; or
(iii) constitute a Party, its agents or employees as employees or agents of the other Party or grant any of them the power or authority to act for, bind, or otherwise create or assume any obligation on behalf of the other Party for any purpose whatsoever.
(q)Covenant of Good Faith and Fair Dealing. The covenant of Good Faith and Fair Dealing shall apply to the entire Agreement.
[Signature Page Follows]
Page 21 of 22
IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the Effective Date.
[Signature page to License and Distribution Agreement]
Exhibit 31.1
CERTIFICATIONS
I, James A. Mish, Chief Executive Officer of 22nd CENTURY GROUP, INC., certify that:
1. I have reviewed this quarterly report on Form 10-Q of 22nd CENTURY GROUP, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15 (f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 9, 2023 |
|
|
|
|
| /s/ James A. Mish |
|
| James A. Mish |
|
| Chief Executive Officer |
|
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, R. Hugh Kinsman, Chief Financial Officer of 22nd CENTURY GROUP, INC., certify that:
1. I have reviewed this quarterly report on Form 10-Q of 22nd CENTURY GROUP, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15 (f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 9, 2023 |
|
|
|
|
| /s/ R. Hugh Kinsman |
|
| R. Hugh Kinsman |
|
| Chief Financial Officer |
|
| (Principal Accounting and Financial Officer) |
Exhibit 32.1
Written Statement of the Principal Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350
Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Chief Executive Officer of 22nd CENTURY GROUP, INC. (the “Company”), and I, the undersigned Chief Financial Officer of the Company, hereby certify, to the best of my knowledge, that the quarterly report on Form 10-Q of the Company for the quarter ended March 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
| Date: | May 9, 2023 |
|
|
|
|
| /s/ James A. Mish |
|
| James A. Mish |
|
| Chief Executive Officer |
|
|
|
| Date: | May 9, 2023 |
|
|
|
|
| /s/ R. Hugh Kinsman |
|
| R. Hugh Kinsman |
|
| Chief Financial Officer |