NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
Dollar Amounts in Thousands ($000’s), except for per-share data
NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation -
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do
not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management,
all adjustments consisting of normal recurring accruals considered necessary for a fair and non-misleading presentation of the
financial statements have been included.
Operating results for the three months ended
March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance
sheet as of December 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include
all the information and footnotes required by GAAP for complete financial statements.
These interim consolidated financial statements
should be read in conjunction with the December 31, 2019 audited consolidated financial statements and the notes thereto contained
in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on
March 11, 2020.
Principles of Consolidation
- The accompanying consolidated financial statements include the accounts of 22nd Century Group, Inc. (“22nd Century
Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products,
LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of
22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles
Pharma”) (collectively, “the Company”). All intercompany accounts and transactions have been eliminated.
Nature of Business - 22nd
Century Group, Inc. is a plant biotechnology company specializing in technology that allows (i) for the level of nicotine and other
nicotinic alkaloids in tobacco plants to be altered through genetic engineering and modern plant breeding and (ii) the levels of
cannabinoids in hemp plants to be decreased or increased through genetic engineering and modern plant breeding. Goodrich Tobacco
and Heracles Pharma are business units for the Company’s potential modified risk tobacco products. NASCO is a federally licensed
tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”)
between the tobacco industry and the settling states under the MSA and operates the Company’s tobacco products manufacturing
business in North Carolina. Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group that performs research and development
related to the Company’s hemp business.
Accounts Receivable - The
Company periodically reviews aged account balances for collectability. The Company determined that an allowance for doubtful
accounts was not necessary at both March 31, 2020 and December 31, 2019.
Revenue Recognition - The
Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. The
Company’s customer contracts consist of obligations to manufacture the customer’s branded filtered cigars and cigarettes.
For certain 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.
The manufacturing process is completed daily and, therefore, there were no performance obligations partially satisfied at March
31, 2020. For the contract where the performance obligation is satisfied at a point in time, the Company recognizes revenue when
the product is transferred to the customer. Revenue from the sale of the Company’s products is recognized net of cash discounts,
sales returns and allowances. There was no allowance for discounts or returns and allowances at March 31, 2020 and December 31,
2019.
The Company generally requires a down payment
from its customers prior to commencement of manufacturing a product. Amounts received in advance of satisfying the performance
obligations are recorded as deferred revenue. Customer payment terms vary depending on the terms of each customer contract, but
payment is generally due prior to product shipment or within extended credit terms up to twenty-one (21) days after shipment.
The Company’s net sales revenue is
derived from customers located primarily in the United States of America and is disaggregated by the timing of revenue recognition.
For the three months ended March 31, 2020, net sales revenue from products transferred over time amounted to approximately $4,357
(approximately $4,215 for the three months ended March 31, 2019), and net sales revenue from products transferred at a point in
time amounted to approximately $2,701 (approximately $2,079 and for the three months ended March 31, 2019).
Use of Estimates - The preparation
of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
- The Company’s financial instruments include cash and cash
equivalents, short-term investment securities, accounts receivable, investments, a convertible note receivable, accounts payable,
accrued expenses, and notes payable. Other than for cash equivalents, short-term investment securities, certain investments, and
convertible note receivable, fair value is assumed to approximate carrying values for these financial instruments, since they are
short term in nature, they are receivable or payable on demand, or had stated interest rates that approximate the interest rates
available to the Company as of the reporting date. The determination of the fair value of cash equivalents, short-term investment
securities, investments, and convertible note receivable are discussed in Note 6.
Investments - Under ASU 2016-01,
equity securities are recorded at fair value, with changes in fair value recorded through the statement of operations. Equity
securities without a readily determinable market value are carried at cost less impairment, adjusted for observable price changes
in orderly transactions for an identical or similar investment of the same issuer. The Company considers debt instruments as available-for-sale
securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment
to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations
and Comprehensive Loss.
During the fourth quarter of 2019, the Company made an investment in Panacea Life Sciences, Inc. (“Panacea”)
consisting of preferred shares that are not considered in-substance common stock, a stock warrant and a convertible note receivable.
The convertible note receivable and the preferred shares are considered debt instruments and were recorded at a discount that
is being amortized into interest income over the term of the securities. Interest on the notes accrues monthly and any unpaid
amount is included in Other current assets.
The Company has an investment in Aurora
Cannabis Inc. (“Aurora”) stock warrants that are considered equity securities under ASC 321 – Investments –
Equity Securities and a derivative instrument under ASC 815 – Derivatives and Hedging. The stock warrants are not designated
as a hedging instrument, and in accordance with ASC 815, the Company’s investment in stock warrants are recorded at fair
value with changes in fair value recorded in the Company’s Consolidated Statements of Operations and Comprehensive Loss.
The Company also has Panacea stock warrants that are not considered a derivative under ASC 815. As such, the Panacea stock warrants
are considered an equity investment with no readily determinable market value and are carried at cost less impairment, adjusted
for observable price changes in orderly transactions for an identical or similar investment of the same issuer.
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. For the three months ended March 31, 2020, income tax expense of $38 was recorded due to an increase in the valuation
allowance.
NOTE 2. - INVENTORY
Inventories are valued at the lower of historical
cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory
and standard cost is primarily used for finished goods inventory. Inventories are evaluated to determine whether any amounts are
not recoverable based on slow moving or obsolete condition and are written off or reserved as appropriate. Inventories at March
31, 2020 and December 31, 2019 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Inventory - tobacco leaf
|
|
$
|
1,184
|
|
|
$
|
1,178
|
|
Inventory - finished goods
|
|
|
|
|
|
|
|
|
Cigarettes and filtered cigars
|
|
|
239
|
|
|
|
106
|
|
Inventory - raw materials
|
|
|
1,125
|
|
|
|
1,082
|
|
Cigarette and filtered cigar components
|
|
|
2,548
|
|
|
|
2,366
|
|
|
|
|
|
|
|
|
|
|
Less: inventory reserve
|
|
|
100
|
|
|
|
100
|
|
|
|
$
|
2,448
|
|
|
$
|
2,266
|
|
NOTE 3. - MACHINERY AND EQUIPMENT
Machinery and equipment at March 31, 2020
and December 31, 2019 consisted of the following:
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
2020
|
|
|
2019
|
|
Cigarette manufacturing equipment
|
|
3 or 10 years
|
|
$
|
4,878
|
|
|
$
|
4,870
|
|
Office furniture, fixtures and equipment
|
|
5 Years
|
|
|
152
|
|
|
|
152
|
|
Laboratory equipment
|
|
5 Years
|
|
|
125
|
|
|
|
125
|
|
Leasehold improvements
|
|
6 Years
|
|
|
257
|
|
|
|
257
|
|
|
|
|
|
|
5,412
|
|
|
|
5,404
|
|
Less: accumulated depreciation
|
|
|
|
|
2,440
|
|
|
|
2,284
|
|
Machinery and equipment, net
|
|
|
|
$
|
2,972
|
|
|
$
|
3,120
|
|
Depreciation expense was $156 for the three months ended March 31, 2020, ($135 for the three months ended March 31, 2019).
NOTE 4. - RIGHT-OF-USE ASSETS, LEASE
OBLIGATIONS, AND OTHER LEASES
On January 1, 2019, the Company adopted
ASU 2016-02, Subtopic ASC 842, Leases (the “new guidance”). Under the new guidance, the Company was required to evaluate
its leases and record a Right-of-Use (“ROU”) asset and a corresponding lease obligation for leases that qualified as
either finance or operating leases. Prior to the adoption of the new guidance, the Company had various operating leases for real
estate. The Company elected to use the practical expedient which allowed the Company to carry forward the historical lease classifications
of the existing leases. The Company determined that its leases contained (1) no variable lease expenses, (2) no termination options,
(3) no residual lease guarantees, and (4) no material restrictions or covenants. The new guidance calls for the lease obligations
to be recorded at the present value of the remaining lease payments under the leases and the ROU assets are recorded as the sum
of the present value of the lease obligations plus any initial direct costs minus lease incentives plus prepaid lease payments.
All remaining renewal options have been included in the computation of the ROU assets and lease obligations. The present value
of the remaining lease payments was computed using a discount rate of 5.14%.
Further, FASB issued ASU 2018-11, Leases
(Topic 842) Targeted Improvements, to provide entities with relief from the costs of implementing certain aspects of the new guidance.
Under ASU 2018-11, entities may elect not to recast comparative periods when transitioning to the new guidance. The Company has
adopted ASU 2018-11, and accordingly, will (1) apply ASC 840 Lease Accounting (the “old guidance”) in comparative periods,
(2) provide disclosures for all comparative periods presented in accordance with the old guidance, and (3) recognize the effects
of applying the new guidance as a cumulative-effects adjustment to retained earnings as of January 1, 2019. No cumulative-effects
adjustment was made as the Company determined it to be immaterial.
The Company leases a manufacturing facility
and warehouse located in North Carolina on a triple net lease basis with a monthly lease payment of $14. As of January 1, 2019,
the lease had a remaining term of thirty-four (34) months including all renewal options. Under the new guidance, the Company recorded
a ROU asset and a corresponding lease obligation in the amount of $447 on January 1, 2019 and recorded a lease expense for the
quarter ended March 31, 2020 and 2019 of approximately $42 and $42, respectively.
On October 4, 2017, the Company entered
a lease for office space at a location in Williamsville, New York with an initial monthly lease payment of $6 per month for the
first three years of the lease. The monthly lease payment increases by 5% annually for the remainder of the lease. As of January
1, 2019, the lease had a remaining term of sixty-two (62) months including all renewal options. Under the new guidance, the Company
recorded a ROU asset and a corresponding lease obligation in the amount of $367 on January 1, 2019 and recorded a lease expense
for the quarter ended March 31, 2019 and 2020 of approximately $20 and $20, respectively.
On February 1, 2020, the Company entered
a two-year lease for laboratory space at a location in Buffalo, New York with an initial monthly lease payment of $8 per month
for the first year of the lease. The monthly lease payment increases by 3% annually for the second year of the lease. Under the
new guidance, the Company recorded a ROU asset and a corresponding lease obligation in the amount of $198. The discount rate used
for the transaction was 3.61% and recorded a lease expense for the quarter ended March 31, 2020 of approximately $17.
As of March 31, 2020, the ROU assets and
corresponding lease obligation has a balance of $729, with $300 and $429 of the lease obligations shown as current and long-term,
respectively (ROU asset and lease obligations of $602 and December 31, 2019, with $220 and $382 of the lease obligation shown
as current and long-term, respectively).
NOTE 5. - INVESTMENTS
The carrying value of the Company’s
investments at March 31, 2020 and December 31, 2019 were $8,096 and $8,403, respectively. The investments at March 31, 2020 and
December 31, 2019 consist of the fair value of the Aurora stock warrants of $228 and $673, respectively, the fair value of the
Panacea preferred stock of $5,003 and $4,865, respectively, and the cost of the Panacea stock warrants of $2,865 and $2,865, respectively.
NOTE 6. - FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS
FASB ASC 820 - “Fair Value Measurements
and Disclosures” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value.
This hierarchy prioritizes the inputs into three broad levels as follows:
|
·
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;
|
|
·
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
|
|
·
|
Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
|
A financial asset’s or a financial
liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the
fair value measurement.
The following table presents information
about our assets and liabilities measured at fair value at March 31, 2020 and December 31, 2019, and indicates the fair value hierarchy
of the valuation techniques the Company utilized to determine such fair value:
|
|
Asset and Liabilities at Fair Value
|
|
|
|
As of March 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
3,933
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,933
|
|
Corporate bonds
|
|
|
-
|
|
|
|
29,341
|
|
|
|
-
|
|
|
|
29,341
|
|
Total short-term investment securities
|
|
$
|
3,933
|
|
|
$
|
29,341
|
|
|
$
|
-
|
|
|
$
|
33,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment - Stock warrants Aurora
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
228
|
|
|
$
|
228
|
|
Investment - Preferred stock in Panacea
|
|
|
-
|
|
|
|
-
|
|
|
|
5,003
|
|
|
|
5,003
|
|
Convertible note receivable - Panacea
|
|
|
-
|
|
|
|
-
|
|
|
|
5,660
|
|
|
|
5,660
|
|
|
|
Assets and Liabilities at Fair Value
|
|
|
|
As of December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
12,146
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,146
|
|
Corporate bonds
|
|
|
-
|
|
|
|
26,331
|
|
|
|
-
|
|
|
|
26,331
|
|
Total short-term investment securities
|
|
$
|
12,146
|
|
|
$
|
26,331
|
|
|
$
|
-
|
|
|
$
|
38,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment - Stock warrants Aurora
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
673
|
|
|
$
|
673
|
|
Investment - Preferred stock in Panacea
|
|
|
-
|
|
|
|
-
|
|
|
|
4,865
|
|
|
|
4,865
|
|
Convertible note receivable - Panacea
|
|
|
-
|
|
|
|
-
|
|
|
|
5,589
|
|
|
|
5,589
|
|
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 are valued using pricing
models maximizing the use of observable inputs for similar securities.
The investment in stock warrants that
are accounted for under ASC 815 are measured at fair value using the Black-Scholes pricing model and are classified within
Level 3 of the valuation hierarchy. The unobservable input is an estimated volatility factor of 83% at December 31, 2019. A
20% increase or decrease in the volatility factor used at December 31, 2019 would have the impact of increasing or decreasing
the fair value measurement of the stock warrants by approximately $260. The stock warrants (the Panacea warrants) are not
recorded under ASC 815 and are not adjusted to fair value at each reporting date due to the practical expedient under ASU
2016-01. The investment in the Aurora stock warrant is measured at fair value using the Black-Scholes pricing model and is
classified within Level 3 of the valuation hierarchy. The unobservable input is an estimated volatility factor of 98.5% and
83% at March 31, 2020 and December 31, 2019, respectively. A 20% increase or decrease in the volatility factor used at March
31, 2020 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately
$121.
The convertible note receivable and the
preferred stock in Panacea is with a private company (Panacea) that is not traded in active markets. Since observable price quotations
were not available, fair value was estimated based on cost less an appropriate discount, and the fair value is evaluated based
on Panacea’s financial performance and credit worthiness, and changes in market interest rates.
The following
table sets forth a summary of the changes in fair value of the Company’s Level 3 investments for the quarter ended March
31, 2020:
Fair Value at December 31, 2018
|
|
$
|
3,092
|
|
Unrealized loss as a result of change in fair value
|
|
|
(2,419
|
)
|
Accretion of discount on convertible note receivable
|
|
|
22
|
|
Panacea convertible note receivable
|
|
|
5,568
|
|
Preferred stock in Panacea
|
|
|
4,865
|
|
Fair Value at December 31, 2019
|
|
|
11,127
|
|
Unrealized loss as a result of change in fair value
|
|
|
(445
|
)
|
Accretion of discount on convertible note receivable and
preferred stock
|
|
|
209
|
|
Fair Value at March 31, 2020
|
|
$
|
10,891
|
|
The following
tables sets forth a summary of the Company’s available-for-sale debt securities from amortized cost basis to fair value at
March 31, 2020 and December 31, 2019:
|
|
Available for Sale Debt Securities - March 31, 2020
|
|
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Corporate bonds
|
|
$
|
29,530
|
|
|
$
|
3
|
|
|
$
|
(192
|
)
|
|
$
|
29,341
|
|
Convertible Note Receivable
|
|
|
5,660
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,660
|
|
Preferred stock in Panacea
|
|
|
5,003
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,003
|
|
|
|
$
|
40,193
|
|
|
$
|
3
|
|
|
$
|
(192
|
)
|
|
$
|
40,004
|
|
|
|
Available for Sale Debt Securities - December 31, 2019
|
|
|
|
Amortized
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Cost
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Basis
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Corporate bonds
|
|
$
|
26,324
|
|
|
$
|
64
|
|
|
$
|
(57
|
)
|
|
$
|
26,331
|
|
Convertible Note Receivable
|
|
|
5,589
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,589
|
|
Preferred stock in Panacea
|
|
|
4,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,865
|
|
|
|
$
|
36,778
|
|
|
$
|
64
|
|
|
$
|
(57
|
)
|
|
$
|
36,785
|
|
The following table sets forth a summary
of the Company’s available-for-sale securities from amortized cost basis and fair value by contractual maturity at March
31, 2020 and December 31, 2019:
|
|
Available for Sale Debt Securities
|
|
|
Available for Sale Debt Securities
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
|
Cost Basis
|
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
21,507
|
|
|
$
|
21,390
|
|
|
$
|
16,823
|
|
|
$
|
16,851
|
|
Due after one year through five years
|
|
|
8,023
|
|
|
|
7,951
|
|
|
|
9,501
|
|
|
|
9,480
|
|
Due in five years
|
|
|
10,663
|
|
|
|
10,663
|
|
|
|
10,454
|
|
|
|
10,454
|
|
|
|
$
|
40,193
|
|
|
$
|
40,004
|
|
|
$
|
36,778
|
|
|
$
|
36,785
|
|
NOTE 7. – INTANGIBLE ASSETS
Intangible assets are recorded at cost and
consist primarily of (1) expenditures incurred with third-parties related to the processing of patent claims and trademarks with
government authorities, as well as costs to acquire patent rights from third-parties, (2) license fees paid for third-party intellectual
property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette product.
The amounts capitalized relate to intellectual property that the Company owns or to which it has exclusive rights. The Company’s
intellectual property capitalized costs are amortized using the straight-line method over the remaining statutory life of the granted
patent assets in each of the Company’s patent families, which have estimated expiration dates ranging from 2020 to 2036.
Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees
paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which patent
expiration dates are expected to range from 2020 through 2036. The Company believes costs associated with becoming a signatory
to the MSA and acquiring a predicate cigarette product have an indefinite life and as such, no amortization is taken.
Total intangible assets at March 31, 2020
and December 31, 2019 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
Patent and trademark costs
|
|
$
|
5,900
|
|
|
$
|
5,712
|
|
Less: accumulated amortization and impairment
|
|
|
2,948
|
|
|
|
2,839
|
|
Patent and trademark costs, net
|
|
|
2,952
|
|
|
|
2,873
|
|
|
|
|
|
|
|
|
|
|
License fees, net
|
|
|
3,776
|
|
|
|
3,777
|
|
Less: accumulated amortization
|
|
|
768
|
|
|
|
708
|
|
License fees, net
|
|
|
3,008
|
|
|
|
3,069
|
|
|
|
|
|
|
|
|
|
|
MSA signatory costs
|
|
|
2,202
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
License fee for predicate cigarette brand
|
|
|
350
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,512
|
|
|
$
|
8,494
|
|
Amortization expense relating to the above
intangible assets for the three months ended March 31, 2020 and 2019 amounted to $169 and $216, respectively.
NOTE 8. - NOTES PAYABLE FOR LICENSE FEE
On June 22, 2018, the Company entered
into the Second Amendment to the License Agreement (the “Second Amendment”) with North Carolina State University
(“NCSU”) that amended an original License Agreement between the Company and NCSU, dated December 8, 2015, and the
First Amendment, dated February 14, 2018, to the original License Agreement. Under the terms of the Second Amendment, the
Company is obligated to pay NCSU milestone payments totaling $1,200, of which amount $900 was paid over a two year period and
the final $300 will be payable on the second anniversary of the execution of the Second Amendment. The Company has recorded
the present value of the obligations under the Second Amendment as a note payable that originally amounted to $1,175. The
cost of the of acquired license amounted to $1,175 and is included in Intangible assets, net on the Company’s
Consolidated Balance Sheets, and will be amortized on a straight-line basis over the last-to-expire patent, which is expected
to be in 2036.
On October 22, 2018, the Company entered
into a License Agreement with the University of Kentucky. Under the terms of the License Agreement, the Company is obligated to
pay the University of Kentucky milestone payments totaling $1,200, of which amount $300 was payable upon execution, and $300 will
be payable annually over the next three years on the anniversary of the execution of the License Agreement. The Company has recorded
the present value of the obligations under the License Agreement as a note payable that originally amounted to $1,151. The cost
of the of acquired licenses amounted to $1,151 and is included in Intangible assets, net on the Company’s Consolidated Balance
Sheets, and will be amortized on a straight-line basis over the last-to-expire patent, which is expected to be in 2033.
After the accretion of interest during the
three months ended March 31, 2020 in the amount of $6, the balance remaining on these two notes payable as of March 31, 2020 amounted
to $879, with $587 and $292 reported as current and long-term, respectively, on the Company’s Consolidated Balance Sheets
(notes payable balance of $873 as of December 31, 2019, with $581 and $292 reported as current and long-term, respectively).
NOTE 9. - SEVERANCE LIABILITY
The Company recorded an accrual for severance
during the third quarter of 2019 in the initial amount of $721 in accordance with FASB ASC 712 - “Compensation – Nonretirement
Postemployment Benefits.” The severance accrual relates to the resignation of the Company’s former President and Chief
Executive Officer (the “former CEO”) effective July 26, 2019. Concurrent with the former CEO’s resignation,
the Company entered into a Consulting Agreement (the “Agreement”) with the former CEO. The Agreement calls for the
Company to pay a monthly consulting fee to the former CEO in the amount of $17 plus health insurance benefits for a period of
forty-two months. The Company concluded that the terms of the Agreement met the severance criteria in ASC 712 and accordingly,
a severance accrual was recorded. The Company computed the present value of the payments called for under the Agreement and recorded
an initial severance liability in the amount of $721. The accrued severance balance remaining at March 31, 2020 was $598 with
$199 and $399 shown as current and long-term accrued severance on the Company’s Consolidated Balance Sheets (accrued severance
balance of $805 at December 31, 2019, with $359 and $446 of the accrued severance balance shown as current and long-term, respectively).
NOTE 10. - WARRANTS FOR COMMON STOCK
At March 31, 2020 there were outstanding
warrants to purchase 11,293,211 shares of common stock of the Company with an exercise price of $1.11 per share and an expiration
date of November 25, 2024.
The Company’s outstanding warrants
at March 31, 2020 do not include anti-dilution features and therefore are not considered derivative instruments and do not have
an associated warrant liability.
The following table summarizes the Company’s
warrant activity since December 31, 2018:
|
|
Number of
|
|
|
|
Warrants
|
|
Warrants outstanding at December 31, 2018
|
|
|
11,293,211
|
|
Warrants exercised during 2019
|
|
|
(11,293,211
|
)
|
Warrants issued in Q4 2019
|
|
|
11,293,211
|
|
Warrants outstanding at December 31, 2019 and March 30, 2020
|
|
|
11,293,211
|
|
There were no warrants issued
or exercised during the first three months of 2020.
NOTE 11. - COMMITMENTS AND CONTINGENCIES
License agreements and sponsored
research – The Company has entered into various license agreements and sponsored research and development
agreements. The costs associated with the following three agreements are initially recorded as a Prepaid expense on the Company’s
Consolidated Balance Sheets and subsequently expensed on a straight-line basis over the applicable period and included in Research
and development costs on the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. The amount
expensed during the three months ended March 31, 2020 and 2019 was $62 and $87, respectively.
Under its exclusive worldwide license agreement
with North Carolina State University (“NCSU”), the Company is required to pay minimum annual royalty payments, which
are credited against running royalties on sales of licensed products. The minimum annual royalty is $225. The license agreement
continues through the life of the last-to-expire patent, which is expected to be 2022. The license agreement also requires a milestone
payment of $150 upon FDA approval or clearance of a product that uses the NCSU licensed technology. The Company is also responsible
for reimbursing NCSU for actual third-party patent costs incurred. These costs vary from year to year and the Company has certain
rights to direct the activities that result in these costs. During the three months ended March 31, 2020 and the three months ended
March 31, 2019, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $5
and $5, respectively.
On December 8, 2015, the Company entered
into an additional license agreement (the “License”) with NCSU. Under the terms of the License, the Company paid NCSU
a non-refundable, non-creditable lump sum license fee of $150. The License calls for the Company to pay NCSU a non-refundable,
non-creditable minimum annual royalty in the amount of $15 in 2019, $25 in 2020 and 2021, and $50 per year thereafter for the remaining
term of the License. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During
the three months ended March 31, 2020 and 2019, the aggregate costs incurred related to capitalized patent costs and patent maintenance
expense amounted to $26 and $4, respectively. This License continues through the life of the last-to-expire patent, expected to
be in 2036.
On February 10, 2014, the Company entered
into a sponsored research and development agreement (the “Agreement”) with NCSU. In February 2018, the Company finalized
an additional extension to this Agreement through April 30, 2018 at a cost of $88. In May 2018, the Company finalized an additional
extension to this Agreement through April 30, 2019 at a total cost of $121. A final fee related to 2019 work was invoiced by NCSU
in early 2020 generating current year expenses. During the three months ended March 31, 2020 and 2019, the Company expensed $78
and $30, respectively under this Agreement.
Other license agreements
- Additionally, the Company has entered into the following five license agreements and the costs associated with these license
agreements are included in Intangible assets, net in the Company’s Consolidated Balance Sheets and the applicable license
fees will be amortized over the term of the agreements based on their last-to-expire patent date. Amortization amounted to $62
for the three months ended March 31, 2020 ($60 for three months ended March 31, 2019) and was included in Amortization expense
on the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income.
On October 22, 2018, the Company entered
into a License Agreement (the “License”) with the University of Kentucky. Under the terms of the License, the Company
is obligated to pay the University of Kentucky a non-refundable, non-creditable license fee of $1,200. The license fee is payable
in accordance with a note payable more fully described in Note 8 – Notes Payable for License Fee. The present value of the
payments in the amount of $1,151 are included in Intangible assets, net on the Company’s Consolidated Balance Sheets, and
will be amortized on a straight-line basis over the last-to-expire patent, which is expected to be in 2033.
On June 22, 2018, the Company entered into
the Second Amendment to the License Agreement (the “Second Amendment”) with NCSU that amended an original License Agreement
between the Company and NCSU, dated December 8, 2015. Under the terms of the Second Amendment, the Company is obligated to pay
NCSU a non-refundable, non-creditable license fee of $1,200. The license fee is payable in accordance with a note payable more
fully described in Note 8 – Notes Payable for License Fee. The present value of the payments in the amount of $1,175 are
included in Intangible assets, net on the Company’s Consolidated Balance Sheets, and will be amortized on a straight-line
basis over the last-to-expire patent, which is expected to be in 2036.
On August 22, 2014, the Company entered
into a Commercial License Agreement with Precision PlantSciences, Inc. (the “Precision License”). The Precision License
grants the Company a non-exclusive, but fully paid up right and license to use technology and materials owned by Precision PlantSciences
for a license fee of $1,250. The Precision License continues through the life of the last-to-expire patent, which is expected to
be in 2028.
On August 27, 2014, the Company entered
into an additional exclusive License Agreement (the “License Agreement”) with NCSU. Under the License Agreement, the
Company paid NCSU a non-refundable, non-creditable lump sum license fee of $125, and the Company must pay to NCSU an additional
non-refundable, non-creditable lump sum fee of $75 upon issuance of a U.S. utility patent included in the patent rights. The Company
is obligated to pay to NCSU an annual minimum royalty fee of $30 in 2019 and $50 per year thereafter for the remaining term of
the License Agreement. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During
the three months ended March 31, 2020 and 2019, the aggregate costs incurred related to capitalized patent costs and patent maintenance
expense amounted to $16 and $8, respectively. The License Agreement continues through the life of the last-to-expire patent, which
is expected to be in 2034.
On September 15, 2014, the Company entered
into a Sublicense Agreement. (the “Anandia Sublicense”) with Anandia Laboratories, Inc (“Anandia”). Under
the terms of the Anandia Sublicense, the Company was granted an exclusive sublicense in the United States and a co-exclusive sublicense
in the remainder of the world, excluding Canada, to the licensed intellectual property. The Anandia Sublicense required an up-front
fee of $75, an annual license fee of $10, the payment of patent filing and maintenance costs, a running royalty on future net sales
of products made from such sublicensed intellectual property, and a sharing of future sublicensing consideration received from
sublicensing to third-parties such sublicensed intellectual property. The Anandia Sublicense continues through the life of the
last-to-expire patent, which is expected to be in 2035. The Anandia Sublicense is still in effect.
Other research agreements -
Further, the Company has entered into the following agreements relating to sponsored research. Costs associated with these agreements
are expensed when incurred in Research and development costs on the Company’s Consolidated Statements of Operations and Comprehensive
Loss.
On September 28, 2015, the Company’s
wholly-owned subsidiary, Botanical Genetics, entered into a Sponsored Research Agreement (the “Agreement”) with Anandia.
Pursuant to the Agreement, Anandia conducted research on behalf of the Company relating to the hemp/cannabis plant. Under the terms
of the Agreement, the Company will have co-exclusive worldwide rights with Anandia to all the intellectual property resulting from
the sponsored research between the Company and Anandia. The party that commercializes such intellectual property in the future
will pay royalties in varying amounts to the other party, with the amount of such royalties being dependent upon the type of products
that are commercialized in the future. If either party sublicenses such intellectual property to a third- party, then the Company
and Anandia will share equally in such sublicensing consideration. Anandia was purchased by Aurora on August 8, 2018 and has become
a wholly owned subsidiary of Aurora. During the three months ended March 31, 2020 and 2019, no expenses related to the Agreement
were incurred.
In December 2016, the Company entered into a new sponsored research agreement with UVA and an exclusive license agreement with the
University of Virginia Patent Foundation d/b/a University of Virginia Licensing & Ventures Group (“UVA LVG”) pursuant
to which the Company invested approximately $1,000 over a three-year period with UVA to create unique industrial hemp plants with
guaranteed levels of THC below the legal limits and optimize other desirable hemp plant characteristics to improve the plant’s
suitability for growing in Virginia and other legacy tobacco regions of the United States. This work with UVA will also involve
the development and study of medically important cannabinoids to be extracted by UVA from the Company’s hemp plants. UVA
and the Company will conduct all activities in this scientific collaboration within the parameters of state and federal licenses
and permits held by UVA for such work. The agreements with UVA and UVA LVG grant the Company exclusive rights to commercialize
all results of the collaboration in consideration of royalty payments by the Company to UVA LVG. During the three months ended
March 31, 2020 and 2019, expenses related to the agreements amounted to $0 and $75, respectively.
On May 1, 2018, the Company entered
into a University Growing and Evaluation Agreement (the “Agreement”) with the University of Kentucky Research Foundation
(“UKRF”) whereby UKRF will provide the Company with services relating to growing certain tobacco breeding lines of
the Company. Under the Agreement, the Company is obligated to pay $75 to UKRF in three installments of $25 each through January
31, 2019. During the three months ended March 31, 2020 and 2019, expenses related to the Agreement amounted to $0 and $25, respectively.
On February 1, 2019, the Company
entered into a Master Collaboration and Research Agreement (the “Agreement”) with a Natural Good Medicines, LLC (“NGM”),
the owners of certain hemp and cannabis plant lines (the “NGM Material”). The Agreement calls for NGM to cultivate,
grow and process a certain amount of the NGM Material with the financial support of the Company. NGM has granted the Company certain
exclusive rights to the hemp and cannabis plant lines of NGM. Additionally, three (3) years from the effective date of the Agreement,
NGM and the Company will mutually share in the proceeds from the sale of non-propagating parts of the NGM Material. The Company’s
total financial commitment under the Agreement is $403, which has been included in Research and development expenses on the Company’s
Statements of Operations and Comprehensive loss for the three months ended March 31, 2019. There were no expenses pertaining to
this agreement during the three month period ended March 31, 2020.
On April 3, 2019, the Company entered into
a Framework Collaborative Research Agreement (the “Agreement”) with KeyGene under which KeyGene has agreed to work
exclusively with the Company with respect to the Cannabis Sativa L. plant and all uses thereof (the “Field”).
The initial term is for five (5) years with an option for an additional two (2) years in consideration of the Company paying KeyGene
an aggregate of $6,000 over the initial term of the Agreement. A minimum of $1,200 will be paid annually during the initial term
of the Agreement with a portion of such amount being paid based on KeyGene achieving certain milestone deliverables for the Company.
The Company will exclusively own all results and all intellectual property relating to the results from this collaboration with
KeyGene (“Results”). The Company will pay royalties in varying amounts to KeyGene relating to the Company’s commercialization
in the Field of certain Results. The Company has granted KeyGene a license to commercialize the Results outside of the Field and
KeyGene will pay royalties in varying amounts to the Company relating to KeyGene’s commercialization outside of the Field
of the Results. The Agreement also includes customary termination provisions for both KeyGene and the Company as well as representations,
warranties, and covenants by the parties that are customary for a transaction of this nature. During the three months ended March
31, 2020 and 2019, expenses related to the agreement amounted to approximately $300 and $0, respectively.
Investment in Panacea - On
December 3, 2019, the Company entered into an agreement to obtain a 15.8% ownership in Panacea. The Company paid Panacea $12,000
in cash and issued 1,297,017 shares of 22nd Century common stock with a fair value of $1,297. The agreement with Panacea also
requires the Company to purchase 5,333,334 shares of puttable preferred stock at $1.875 when Panacea achieves a certain twelve-month
sales target that is payable in $8,500 of cash and the remainder in common stock of the Company.
Modified Risk Tobacco Product
Application (“MRTP Application”) - In connection with the Company’s MRTP Application for its Very
Low Nicotine Content (“VLNC”) cigarettes with the FDA, the Company has entered in various contracts with
third-party service providers to fulfill various requirements of the MRTP Application. Such contracts include services for
clinical trials, perception studies, legal guidance, product testing, and consulting expertise. During the three months ended
March 31, 2020 and 2019, the Company incurred expenses relating to these contracts in the approximate amount of $149 and
$1,211, respectively. The Company will continue to incur consulting and legal expenses as the MRTP Application continues
through the FDA review process. The Company cannot currently quantify the additional expenses that the Company will incur in
the FDA review process because it will involve various factors that are within the discretion and control of the
FDA.
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. The Complaint alleges that
Plaintiff Mr. Bull purchased shares of the Company’s common stock. Mr. Bull sues individually and seeks to bring a class
action for persons or entities who acquired the Company’s common stock between February 18, 2016 and October 25, 2018, and
alleges in Count I that the Company’s Annual Reports on Form 10-K for the years 2015, 2016 and 2017 allegedly contained false
statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and alleges in Count
II that Messrs. Sicignano and Brodfuehrer are liable for the allegedly false statements pursuant to Section 20(a) of the Securities
Exchange Act. The Complaint seeks declaratory relief, unspecified money damages, and attorney’s fees and costs.
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. The Complaint filing alleges that the Plaintiff
Mr. Fitch purchased shares of the Company’s common stock. Mr. Fitch sues individually and seeks to bring a class action for
persons or entities who acquired the Company’s common stock between February 18, 2016 and October 25, 2018, and alleges in
Count I that the Company’s Annual Reports on Form 10-K for the years 2015, 2016 and 2017 allegedly contained false statements
in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and alleges in Count II that
Messrs. Sicignano and Brodfuehrer are liable for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange
Act. The Complaint seeks declaratory relief, unspecified money damages, and attorney’s fees and costs.
On March 25, 2019, Plaintiffs’ counsel
in the Fitch litigation filed a motion in both the Fitch and Bull actions: (1) proposing Joseph Noto, Garden
State Tire Corp, and Stephens Johnson for Mr. Fitch as purportedly representative plaintiffs, (2) moving to consolidate the Fitch
litigation with the Bull litigation, and (3) seeking to be appointed as lead counsel in the consolidated action. Plaintiffs’
counsel in the Bull litigation filed and then withdrew a comparable motion seeking to consolidate the cases and be appointed
as lead counsel.
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. The Amended Complaint alleges that the Plaintiffs purchased shares of the Company’s
common stock and sues individually and to bring a class action for all persons or entities who acquired the Company’s common
stock between February 18, 2016 and July 31, 2019. The Amended Complaint 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.
On January 3, 2020, the Court reassigned
the Bull case to Judge John L. Sinatra, also in the Western District of New York.
On January 29, 2020, the Company and Messrs.
Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. On March 30, 2020, Plaintiffs filed a brief in opposition
to the motion to dismiss. We then filed our final reply brief on April 29, 2020.
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 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. The Complaint seeks declaratory relief,
unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs. On April 11, 2019,
pursuant to a stipulation by the parties, the Court ordered this litigation stayed and transferred the stayed action to the Western
District of New York. On April 19, 2019, the case was opened in the United States District Court for the Western District of New
York, Case No. 1-19-cv-0513. On August 15, 2019, the case was consolidated with the Mathew case identified below and stayed. 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 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 alleging that (i) the
director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements; (ii)
the director defendants were allegedly unjustly enriched by allegedly benefitting from allegedly allowing the Company to make false
statements; (iii) the defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iv)
the individual defendants allegedly abused their ability to control and influence the Company; and (v) the individual defendants
allegedly engaged in gross mismanagement. The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate
governance actions, and attorney’s fees and costs. On April 12, 2019, the parties jointly filed a Stipulated Notice of Removal
in United States District Court for the Western District of New York. On April 23, 2019, the parties jointly filed an Amended Stipulated
Notice of Removal in the Western District of New York. On May 3, 2019, pursuant to a stipulation from the parties, the Court ordered
this litigation stayed. 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 August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation
by the parties.
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 brings this action derivatively alleging that the director defendants supposedly
breached their fiduciary duties by allegedly allowing the Company to make false statements. The Complaint seeks 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 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. 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.
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 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 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. 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. 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 March 25, 2020, the Court ordered the
Brocutto and Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties.
Shareholder Derivative Demand
On February 19, 2019, the Company received
a demand letter from attorneys representing Van McClendon, a shareholder of the Company, in which Mr. McClendon demanded that the
Company’s Board of Directors take action to pursue certain purported causes of action on behalf of the Company to remedy
alleged breaches of fiduciary duties by each of the members of the Company’s Board of Directors, the Company’s Chief
Executive Officer, Henry Sicignano III, and the Company’s Chief Financial Officer, John T. Brodfuehrer. On February 28, 2019,
the Board appointed a Special Committee of independent directors and instructed the Committee to assess whether pursuing the claims
detailed in the demand letter would be in the best interests of the Company. Subsequently, Mr. McClendon sold his shares and withdrew
his demand. On May 7, 2019, after Mr. McClendon sold his shares, the Company received a similar demand letter from attorneys representing
Jeremy Houck, a shareholder of the Company. Pursuant to the Board’s instruction, the Special Committee completed an investigation
of the claims detailed in Mr. Houck’s demand letter. The Special Committee determined that pursuing such claims would not
be in the best interest of the Company. On February 27, 2020, the Board of Directors adopted and approved the Special Committee’s
determination.
NOTE 12. - EQUITY-BASED
COMPENSATION
On April 12, 2014, the stockholders of the
Company approved the 22nd Century Group, Inc. 2014 Omnibus Incentive Plan (the “OIP”) and the authorization of 5,000,000
shares to be reserved for issuance thereunder. On April 29, 2017, the stockholders approved an amendment to the OIP to increase
the number of shares available for issuance by an additional 5,000,000 shares and on May 3, 2019, the stockholders approved an
additional amendment to the OIP to increase the number of shares available for issuance by an additional 5,000,000 shares. The
OIP allows for the granting of equity and cash incentive awards to eligible individuals over the life of the OIP, including the
issuance of up to an aggregate of 15,000,000 shares of the Company’s common stock pursuant to awards under the OIP. The OIP
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 OIP and the number of shares of common stock
to underlie each such award under the OIP. As of March 31, 2020, the Company had available 4,464,798 shares remaining for future
awards under the OIP.
During the three months ended March 31,
2020 and 2019, the Company issued awards for restricted stock units from the OIP for 2,270 and 633 shares, respectively, to eligible
individuals, with such restricted stock unit awards having vesting periods ranging from one to three years. All restricted stock
units were valued based on the stock price of the Company’s common stock on the date of the award and all stock option awards
were valued using the Black-Scholes option-pricing model on the date of the award.
For the three months ended March 31, 2020
and 2019, the Company recorded compensation expense related to restricted stock unit and stock option awards granted under the
OIP of $481 and $449, respectively.
As of March 31, 2020, unrecognized compensation
expense related to non-vested stock options amounted to approximately $2,666 and $4,134, respectively which is expected to be recognized
as follows: approximately $894, $770, $320 and $45 during 2020, 2021, 2022 and 2023, respectively. Approximately $637 of the unrecognized
compensation expense relates to previously issued stock options, with the vesting of such stock options being based on the achievement
of a certain milestones.
A summary of all stock option activity since
December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Outstanding at December 31, 2018
|
|
|
8,672,082
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
Exercised in 2019
|
|
|
(75,410
|
)
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
Forfeited in 2019
|
|
|
(1,359,500
|
)
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
Granted in 2019
|
|
|
600,000
|
|
|
$
|
2.07
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
7,837,172
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
Forfeited in 2020
|
|
|
(51,833
|
)
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
Expired in 2020
|
|
|
(300,000
|
)
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2020
|
|
|
7,485,339
|
|
|
$
|
1.48
|
|
|
|
5.3 years
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2020
|
|
|
6,620,584
|
|
|
$
|
1.48
|
|
|
|
5.3 years
|
|
|
$
|
22
|
|
There were no stock options issued during
the three months ended March 31, 2020 or 2019. The total fair value of options that vested during the three months ended March
31, 2020 and 2019 amounted to $1,102 and $1,188, respectively. There were 35,000 options exercised on a cashless basis
during the three months ended March 31, 2019 resulting in the issuance of 17,407 shares of the Company’s common stock.
NOTE 13. - SUBSEQUENT
EVENTS
CARES Act Paycheck Protection Program
Loan - On May 1, 2020, the Company received a U.S. Small Business Administration Loan (“SBA Loan”)
from Bank of America, N.A. related to the COVID-19 crisis in the amount of $1.2 million primarily for payroll costs. Under the
Paycheck Protection Program Loan Note (the “Promissory Note”), the SBA Loan has a fixed interest rate of 1%, a maturity
date two years from the date of the funding of the loan and no payments are due on the SBA Loan for six months. Pursuant to the
terms of the SBA Loan and Promissory Note, the Company may apply for forgiveness of the amount due on the SBA Loan in an amount
equal to the sum of the following costs incurred by the Company during the 8-week period (or any other period that may be authorized
by the U.S. Small Business Association) beginning on the date of first disbursement of the loan: payroll costs, any payment of
interest on a covered mortgage obligation, payment on a covered rent obligation, and any covered utility payment. The amount of
SBA Loan forgiveness shall be calculated in accordance with the requirements of the Paycheck Protection Program, including the
provisions of Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), although no more than 25% of
the amount forgiven can be attributable to non-payroll costs.