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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 June 30, 2020

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.)

8560 Main Street, Suite 4, Williamsville, New York 14221

(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 

 

NYSE American

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 August 6, 2020, there were 138,854,193 shares of common stock issued and outstanding.

22nd CENTURY GROUP, INC.

INDEX

 

 

Page

Number

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019

3

 

 

Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months ended June 30, 2020 and 2019 (unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2020 and 2019 (unaudited)

6

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

PART II.

OTHER INFORMATION

32

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Default Upon Senior Securities

32

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

33

 

 

 

SIGNATURES

34

2

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands)

June 30, 

December 31, 

    

2020

    

2019

ASSETS

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

844

$

485

Short-term investment securities

 

28,103

 

38,477

Accounts receivable, net

 

999

 

867

Inventory, net

 

2,769

 

2,266

Prepaid expenses and other assets

 

3,580

 

648

Total current assets

 

36,295

 

42,743

Property, plant and equipment:

 

  

 

  

Machinery and equipment, net

 

2,849

 

3,120

Operating leases right-of-use assets, net

 

651

 

602

Total property, plant and equipment

 

3,500

 

3,722

Other assets:

 

 

  

Intangible assets, net

 

8,239

 

8,494

Investments

 

7,372

 

8,403

Convertible note

5,732

5,589

Total other assets

 

21,343

 

22,486

Total assets

$

61,138

$

68,951

 

  

 

  

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Notes payable

$

2,247

$

581

Operating lease obligations

 

333

 

220

Accounts payable

 

1,019

 

1,997

Accrued expenses

 

2,235

 

2,619

Accrued severance

 

487

 

359

Deferred income

 

 

5

Total current liabilities

 

6,321

 

5,781

Long-term liabilities:

 

  

 

  

Notes payable

 

292

 

292

Operating lease obligations

 

318

 

382

Severance Obligations

342

446

Total long-term liabilities

 

952

 

1,120

Commitments and contingencies (Note 11)

 

 

Shareholders' equity

 

  

 

  

10,000,000 preferred shares, $.00001 par value

 

  

 

  

300,000,000 common shares, $.00001 par value

 

  

 

  

Capital stock issued and outstanding:

 

  

 

  

138,854,193 common shares (138,362,809 at December 31, 2019)

 

 

Common stock value

1

1

Capital in excess of par value

 

188,591

 

187,735

Accumulated other comprehensive (loss) income

 

52

 

7

Accumulated deficit

 

(134,779)

 

(125,693)

Total shareholders' equity

 

53,865

 

62,050

Total liabilities and shareholders’ equity

$

61,138

$

68,951

See accompanying notes to consolidated financial statements.

3

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

($ in thousands except per-share data)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

    

Revenue:

  

 

  

Sale of products, net

$

6,435

$

5,815

$

13,493

$

12,109

Cost of goods sold (exclusive of depreciation shown separately below):

 

  

 

  

 

 

Products

 

6,234

 

5,901

 

13,005

 

12,298

Gross profit (loss)

 

201

 

(86)

 

488

 

(189)

Operating expenses:

 

  

 

  

 

 

Research and development

 

957

 

1,674

 

1,770

 

2,914

Research and development - MRTP

4

313

154

1,524

Sales, general and administrative

 

3,501

 

2,586

 

6,640

 

5,060

Impairment of intangible assets

146

 

 

146

 

Depreciation

 

157

 

147

 

313

 

282

Amortization

 

189

 

223

 

361

 

438

Total operating expenses

 

4,954

 

4,943

 

9,384

 

10,218

Operating loss

 

(4,753)

 

(5,029)

 

(8,896)

 

(10,407)

Other income (expense):

 

  

 

  

 

 

Unrealized gain (loss) on investments

 

312

 

(1,424)

 

(133)

 

1,549

Impairment of stock warrant

(1,062)

(1,062)

Realized gain (loss) on short-term investment securities

 

3

 

72

 

 

56

Litigation settlement

(1,891)

(1,891)

Gain on the sale of machinery and equipment

 

 

 

 

87

Interest income, net

 

462

 

243

 

1,074

 

515

Interest expense

 

(19)

 

(13)

 

(31)

 

(24)

Total other income (expense)

 

(304)

 

(3,013)

 

(152)

 

292

Loss before income taxes

 

(5,057)

(8,042)

 

(9,048)

(10,115)

Income taxes

 

 

38

 

Net loss

$

(5,057)

$

(8,042)

$

(9,086)

$

(10,115)

Other comprehensive income (loss):

 

  

 

  

 

 

Unrealized gain (loss) on short-term investment securities

 

241

 

89

 

45

 

236

Reclassification of gain to net loss

 

(3)

 

(72)

 

 

(56)

Other comprehensive income (loss)

238

17

45

180

Comprehensive loss

$

(4,819)

$

(8,025)

$

(9,041)

$

(9,935)

Net loss per common share - basic and diluted

$

(0.04)

$

(0.06)

$

(0.07)

$

(0.08)

Weighted average common shares outstanding - basic and diluted (in thousands)

 

138,854

 

124,662

 

138,732

 

124,653

See accompanying notes to consolidated financial statements.

4

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands except share data)

Three and Six Months Ended June 30, 2020

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding

    

Shares

    

Par Value

    

Income

    

Deficit

    

Equity

Balance at December 31, 2019

 

138,362,809

$

1

 

$

187,735

 

$

7

 

$

(125,693)

$

62,050

Stock issued in connection with RSU vesting

 

491,384

 

 

 

 

 

Equity-based compensation

 

 

 

480

 

 

 

480

Unrealized gain (loss) on short-term investment securities

 

 

 

 

(196)

 

 

(196)

Reclassification of losses (gains) to net loss

 

 

 

 

3

 

 

3

Net loss

 

 

 

 

 

(4,029)

 

(4,029)

Balance at March 31, 2020

138,854,193

$

1

$

188,215

$

(186)

$

(129,722)

$

58,308

Equity-based compensation

376

376

Unrealized gain (loss) on short-term investment securities

241

241

Reclassification of losses (gains) to net loss

(3)

(3)

Net loss

(5,057)

(5,057)

Balance at June 30, 2020

 

138,854,193

$

1

$

188,591

$

52

$

(134,779)

$

53,865

Three and Six Months Ended June 30, 2019

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding

    

Shares

    

Par Value

    

Income

    

Deficit

    

Equity

Balance at December 31, 2018

 

124,642,593

$

1

$

170,392

$

21

$

(99,134)

$

71,280

Stock issued in connection with option exercises

 

17,407

 

1

 

 

 

 

1

Equity-based compensation

 

 

 

449

 

 

 

449

Unrealized gain (loss) on short-term investment securities

147

147

Reclassification of losses (gains) to net loss

16

16

Net loss

(2,073)

(2,073)

Balance at March 31, 2019

124,660,000

$

2

$

170,841

$

184

$

(101,207)

$

69,820

Stock issued in connection with option exercises

13,936

Equity-based compensation

517

517

Unrealized gain (loss) on short-term investment securities

89

89

Reclassification of losses (gains) to net loss

(72)

(72)

Net loss

(8,042)

(8,042)

Balance at June 30, 2019

 

124,673,936

$

2

$

171,358

$

201

$

(109,249)

$

62,312

See accompanying notes to consolidated financial statements.

5

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)

Six Months Ended

June 30, 

    

2020

    

2019

    

Cash flows from operating activities:

 

  

 

  

Net loss

$

(9,086)

$

(10,115)

Adjustments to reconcile net loss to cash used in operating activities:

 

  

 

  

Impairment of intangible assets

146

Impairment of stock warrant

1,062

Amortization and depreciation

 

549

 

602

Amortization of license fees

 

125

 

119

Amortization of ROU Asset

 

151

 

106

Unrealized (gain) loss on investment

 

133

 

(1,549)

Realized (gain) loss on short-term investment securities

(56)

Litigation settlement

 

 

1,891

Gain on the sale of machinery and equipment

 

 

(87)

Accretion of non cash interest expense

13

21

Accretion of interest on Panacea investment

 

(306)

 

Equity-based employee compensation expense

 

856

 

966

(Increase) decrease in assets:

 

  

 

  

Accounts receivable

 

(132)

 

(39)

Inventory

 

(503)

 

112

Prepaid expenses and other assets

 

(2,934)

 

(345)

Increase (decrease) in liabilities:

 

 

  

Operating lease obligations

 

(149)

 

(107)

Accounts payable

 

(1,033)

 

(610)

Accrued expenses

 

(384)

 

340

Accrued severance

24

Deferred income

 

(5)

 

7

Net cash provided by (used in) operating activities

 

(11,473)

 

(8,744)

Cash flows from investing activities:

 

  

 

Acquisition of patents and trademarks

 

(198)

 

(244)

Acquisition of machinery and equipment

 

(42)

 

(398)

Proceeds from the sale of machinery and equipment

 

 

166

Sales and maturities of short-term investment securities

 

19,272

 

18,287

Purchase of short-term investment securities

 

(8,853)

 

(8,397)

Net cash provided by (used in) investing activities

 

10,179

 

9,414

Cash flows from financing activities:

 

  

 

Payment on note payable

(542)

(400)

Proceeds from note payable issuance

2,195

Proceeds from SBA loan

1,183

Repayment of SBA loan

(1,183)

Net cash provided by (used in) financing activities

 

1,653

 

(400)

Net increase (decrease) in cash and cash equivalents

 

359

 

270

Cash and cash equivalents - beginning of period

 

485

 

605

Cash and cash equivalents - end of period

$

844

$

875

Supplemental disclosures of cash flow information:

 

  

 

  

Net cash paid for:

 

  

 

  

Cash paid during the period for interest

$

6

$

3

Non-cash transactions:

 

  

 

  

Patent and trademark additions included in accounts payable

$

54

$

198

Machinery and equipment additions included in accounts payable

$

$

58

Right-of-use assets and corresponding operating lease obligations

$

198

$

814

Legal settlement included in accrued expenses

$

$

1,891

See accompanying notes to consolidated financial statements.

6

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

Amounts in thousands, 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 six months ended June 30, 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.

Reclassifications - Certain items in the 2019 financial statements have been reclassified to conform to the 2020 classification. During the second quarter of 2020, the Company broke out research and development expense into two lines: (i) Research and development and (ii) Research and development—MRTP in the operating expense section of the Company’s Consolidated Statements of Operations and Comprehensive Loss. The comparative classifications for 2019 have been reclassified to conform to the new presentation.

COVID-19 Pandemic – The COVID-19 pandemic has caused some disruption to our business and poses a risk to our future business, including delays by third party providers of goods or services to our business, interruptions to our sales, research and development, and administrative activities, and disruptions to our manufacturing operations. Similarly, state or federal authorities may also be affected in their capacity or capability to operate as normal and may impact the timeline of product authorizations which may disrupt our business plans.

Our Williamsville, NY corporate re-opened in June and our R&D laboratory in Buffalo, NY re-opened in May and are currently operating under strict safety protocols in accordance with New York State’s reopening guidelines. These protocols include physical distancing, mandatory face coverings, disinfection of surfaces, and other health and safety measures. We continue to encourage remote work arrangements by any and all employees where job duties permit. Although our laboratory in Buffalo reopened

7

in May, some of our external research and development partners were either closed or operating on a modified or limited schedule during the height of the pandemic. The temporary closure of our laboratory and the interruption to our workflow related to COVID-19 have impacted our internal and external laboratory research operations. Our executive leadership team and staff are continuously monitoring this ever-evolving situation and its impacts on our business.

Our NASCO production facility in North Carolina remains open, having been classified as an essential business as it is part of the supply chain for grocery stores and convenience stores. Despite the pandemic, we have been able to fulfill sales orders in a timely manner. The safety and well-being of our employees remains a top priority and we to continue monitor and operate in line with local, state, and federal safety guidelines. An outbreak at our production facility, or disruption in our supply chain, could cause us to slow or temporarily cease our manufacturing operations.

We will continue to monitor the local, state and federal guidance regarding our business practices.

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.

Stock Based Compensation - The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and others receive shares, restricted stock units or options to purchase common shares of the Company. Stock based compensation expense is recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For accounting purposes, the shares will be considered issued and outstanding upon vesting or risks of forfeiture expiring.

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.

8

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 June 30, 2020 and December 31, 2019 consisted of the following:

    

June 30, 

    

December 31, 

    

2020

    

2019

Inventory - tobacco leaf

$

1,191

$

1,178

Inventory - finished goods

 

Cigarettes and filtered cigars

 

212

 

106

Inventory - raw materials

 

 

Cigarette and filtered cigar components

1,466

1,082

Less: inventory reserve

 

(100)

 

(100)

$

2,769

$

2,266

NOTE 3. - MACHINERY AND EQUIPMENT

Machinery and equipment at June 30, 2020 and December 31, 2019 consisted of the following:

June 30, 

December 31, 

    

Useful Life

    

2020

    

2019

Cigarette manufacturing equipment

3 or 10 years

$

4,896

$

4,870

Office furniture, fixtures and equipment

5 Years

 

162

 

152

Laboratory equipment

5 Years

 

125

 

125

Leasehold improvements

6 Years

 

263

 

257

 

 

Less: accumulated depreciation

  

 

(2,597)

 

(2,284)

Machinery and equipment, net

  

$

2,849

$

3,120

Depreciation expense was $157 and $313 for the three and six months ended June 30, 2020, respectively ($147 and $282 for the three and six months ended June 30, 2019, respectively).

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”) and elected to use the practical expedient which allowed the Company to carry forward the historical lease classifications of the existing leases as of adoption. Our lessee right of use (ROU) assets represent our right to use an underlying asset and our lease liabilities represent our obligation to make lease payments.

The Company leases a manufacturing facility and warehouse in North Carolina, a corporate office space in Williamsville, New York, and a laboratory space in Buffalo, New York. The ROU assets and lease liabilities for these operating leases are recognized as of the commencement date at the net present value of the fixed minimum lease payments for the lease term. The discount rate used is the interest rate implicit in the lease, if available, or the Company’s incremental borrowing rate which is determined using a base line rate plus an applicable spread.

The following table summarizes the Company’s discount rate and remaining lease terms:

Weighted average remaining lease term in years

2.4

Weighted average discount rate

 

4.8

%

9

Future minimum lease payments as of June 30, 2020 are as follows:

2020

$

173

2021

 

324

2022

 

92

2023

88

2024

 

15

Total lease payments

 

692

Less: imputed interest

 

(41)

Total

$

651

NOTE 5. – INVESTMENTS & CONVERTIBLE NOTE RECEIVABLE

Investment in Panacea Life Sciences, Inc.

On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc. (“Panacea”) for $13,297 in exchange for a 15.8% ownership interest. The Company’s investment consists of three instruments: shares of Series B preferred stock (“preferred stock”); a convertible note receivable; and a warrant (“stock warrant”) to purchase additional shares of Series B preferred stock, to obtain 51% ownership of Panacea, at an exercise price of $2.344 per share. The convertible note receivable has a term of five years, bears interest of 10% per annum, and can be converted to shares of Series B preferred stock at the Company’s discretion. The preferred stock carries an annual 10% cumulative dividend, compounded annually, and has an implicit put option after the fifth anniversary date so long that the stock warrants have not been exercised. The stock warrant may be exercised at any time after the fifth anniversary date and would be accelerated if Panacea achieves certain sales targets for two consecutive years. The Series B preferred stock also has equity preferences in the event of a liquidation, sale, or transfer of Panacea assets.

The convertible note receivable and the preferred stock investment are considered available for sale debt securities with a private company that is not traded in active markets. Since observable price quotations were not available at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition. The discount of each instrument is accreted into interest income over the respective term as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 6 for additional information on these fair value measurements. The stock warrant was recorded at its cost basis in accordance with the practical expedient under ASU 2016-01.

In accordance with ASC 326-30-35 and ASC 321-35-3, credit loss risk of available-for-sale securities and impairment risk of investments recorded at cost should be evaluated if negative indicators are present. During the first six months of 2020, the cannabidiol (CBD) industry has experienced an overall decline due to increased competition, FDA regulation uncertainty, and continued uncertainty from COVID-19—all relevant indicators for the valuation of our Panacea investment. Based on our assessment, we determined that no credit loss existed for the available-for-sale debt security instruments as of June 30, 2020. As such, we concluded that the recorded value aligns with the expected cash flows of the instruments.

However, we determined that the recorded cost basis of the stock warrant exceeded its fair value due to the negative macroeconomic indicators mentioned above. As such, the Company recognized an impairment charge of $1,062 during the three and six months ended June 30, 2020.

Investment in Aurora Cannabis, Inc.

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 to unrealized gain/loss as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss. See Note 6 for additional information on the fair value measurements.

10

The carrying value of the Company’s investments at June 30, 2020 and December 31, 2019 consisted of the following:

June 30, 

December 31, 

2020

2019

Aurora stock warrants

    

$

540

    

$

673

Panacea preferred stock

5,029

4,865

Panacea stock warrant

1,803

2,865

Total Investments

$

7,372

$

8,403

Convertible Note Receivable

$

5,732

$

5,589

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 as of June 30, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Fair Value

June 30, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets

 

  

 

  

 

  

 

  

Short-term investment securities:

 

  

 

  

 

  

 

  

Money market funds

$

1,123

$

$

$

1,123

Corporate bonds

 

 

26,980

 

 

26,980

Total short-term investment securities

$

1,123

$

26,980

$

$

28,103

Investment - Aurora stock warrants

$

$

$

540

$

540

Investment - Panacea preferred stock

$

$

$

5,029

$

5,029

Convertible note receivable

$

$

$

5,732

$

5,732

11

Fair Value

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 - Aurora stock warrants

$

$

$

673

$

673

Investment - Panacea preferred stock

$

$

$

4,865

$

4,865

Convertible note receivable

$

$

$

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 the Aurora stock (ACB) warrants 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 141% and 83% at June 30, 2020 and December 31, 2019, respectively. Therefore, changes in market volatility will impact the fair value measurement of our ACB investment.

A 20% increase or decrease in the volatility factor used at June 30, 2020 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately $175. 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 Panacea convertible note receivable and the preferred stock investment are considered available-for-sale debt securities with a private company 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 upon acquisition. The discount of each instrument is accreted into interest income over the respective term and will adjust the amortized cost basis of the investments.

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 investments for the quarter ended June 30, 2020:

Fair Value at December 31, 2019

$

11,128

Unrealized loss as a result of change in fair value

(133)

Accretion of interest on Panacea Investment

306

Fair Value at June 30, 2020

$

11,301

12

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 June 30, 2020 and December 31, 2019:

Available for Sale Debt Securities

June 30, 2020

Amortized

Gross

Gross

Cost

Unrealized

Unrealized

Fair

    

Basis

    

Gains

    

Losses

    

Value

Corporate bonds

$

26,928

$

140

$

(88)

$

26,980

Convertible note receivable

 

5,732

 

 

 

5,732

Investment - Panacea preferred stock

 

5,029

 

 

 

5,029

$

37,689

$

140

$

(88)

$

37,741

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

Investment - Panacea preferred stock

 

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 as of June 30, 2020 and December 31, 2019:

Available for Sale Debt Securities

June 30, 2020

December 31, 2019

Amortized

Amortized

    

Cost Basis

    

Fair Value

    

Cost Basis

    

Fair Value

Due in one year or less

$

18,796

$

18,796

$

16,823

$

16,851

Due after one year through five years

 

18,893

 

18,945

 

9,501

 

9,480

Due in five years

10,454

10,454

$

37,689

$

37,741

$

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.

13

Total intangible assets at June 30, 2020 and December 31, 2019 consisted of the following:

June 30, 

December 31, 

    

2020

    

2019

Intangible assets, net

 

  

 

  

Patent and trademark costs

$

5,512

$

5,712

Less: accumulated amortization and impairment

 

(2,774)

 

(2,839)

Patent and trademark costs, net

 

2,738

 

2,873

License fees

 

3,776

 

3,777

Less: accumulated amortization

 

(827)

 

(708)

License fees, net

 

2,949

 

3,069

MSA signatory costs

 

2,202

 

2,202

  

License fee for predicate cigarette brand

 

350

 

350

$

8,239

$

8,494

Amortization expense relating to the above intangible assets for the three and six months ended June 30, 2020 amounted to $189 and $361 respectively ($223 and $438 for the three and six months ended June 30, 2019 respectively). Impairment expense for the three and six months ended June 30, 2020 amounted to $146 (cost of approximately $448 less accumulated amortization of approximately $302). The impairment related to patent intellectual property that would be expired before the Company planned to commercialize.

NOTE 8. – NOTES PAYABLE

License Fees

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 was obligated to pay NCSU milestone payments totaling $1,200, which originally amounted to a present value of $1,175. As of June 30, 2020 the Company paid the final milestone payment of $300. 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 is 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 $300 was payable upon execution, and $300 will be payable annually over 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.

CARES Act Paycheck Protection Program Loan

On May 1, 2020, the Company received an 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. On May 12, 2020, the Company repaid the SBA loan in full.

D&O Insurance

During the second quarter of 2020, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $2,744. The Company paid $549 as a premium down payment and financed the remaining $2,195 of policy

14

premiums over nine months at a 3.19% annual percentage rate. The financed amount is recorded within current notes payable on the Company’s Consolidated Balance Sheets.

The table below outlines our notes payable balances as of June 30, 2020 and December 31, 2019:

June 30, 

December 31, 

 

    

2020

    

2019

 

License Fees

$

293

$

581

D&O Insurance

 

1,954

 

Total current notes payable

$

2,247

$

581

 

 

Long term license fees

$

292

$

292

Accretion of non-cash interest expense amounted to $6 and $13 for the three and six months ended June 30, 2020, respectively, and $10 and $21 for the three and six months ended June 30, 2019, respectively.

NOTE 9. – SEVERANCE LIABILITY

During the second quarter of 2020, the Company recorded an accrual for severance benefits for $306 in accordance with FASB ASC 712 - “Compensation – Nonretirement Postemployment Benefits.” Consistent with certain contractual obligations related to a resignation, the Company will provide cash payments and full reimbursement for health insurance premiums under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”). The cash payments will be paid over a twelve-month period, on a bi-weekly basis, and the COBRA health insurance premiums will be reimbursed over twelve months.

During the third quarter of 2019, the Company recorded an accrual for severance benefits for $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 accrued severance balance remaining as of June 30, 2020 was $829 with $487 and $342 shown as current and long-term accrued severance, respectively, on the Company’s Consolidated Balance Sheets. The accrued severance balance remaining as of December 31, 2019 was $805 with $359 and $446 shown as current and long-term accrued severance, respectively.

NOTE 10. - WARRANTS FOR COMMON STOCK

The Company issued warrants to purchase 11,293,211 shares of common stock which remain outstanding as of June 30, 2020. The warrants have an exercise price of $1.11 per share and an expiration date of November 25, 2024. The outstanding warrants do not include anti-dilution features and therefore are not considered derivative instruments and do not have an associated warrant liability.

15

The following table summarizes the Company’s outstanding warrant activity since December 31, 2018:

Number of

Warrants

    

in thousands

Warrants outstanding at December 31, 2018

11,293

Warrants exercised in Q4 2019

 

(11,293)

Warrants issued in Q4 2019

11,293

Warrants outstanding at June 30, 2020

 

11,293

There were no warrants issued or exercised during the first six months of 2020.

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 counter parties in connection with the Company’s plant biotechnology business relating to tobacco and hemp/cannabis. 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 Consolidated Statements of Operations and Comprehensive Loss.

Future Commitments

Commitment

 

Counter Party

 

Product Relationship

 

Commitment Type

 

2020

 

2021

 

2022

 

2023

 

2024 & After

 

Total

    

Research Agreement

KeyGene

Hemp / Cannabis

Contract fee

$

600

$

1,200

$

1,200

$

1,200

$

295

$

4,495

(1)

License Agreement

NCSU

Tobacco

Annual royalty fee

113

225

225