Quarterly Report (10-q)

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Table of Contents

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 September 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 November 5, 2020, there were 138,859,193 shares of common stock issued and outstanding.

Table of Contents

22nd CENTURY GROUP, INC.

INDEX


		Page Number
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3

	Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months ended September 30, 2020 and 2019 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2020 and 2019 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION	35

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Default Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

SIGNATURES		37

Table of Contents

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

($ in thousands)


	September 30,		December 31,
	2020		2019
ASSETS
Current Assets:
Cash and cash equivalents	$	1,542	$	485
Short-term investment securities		25,276		38,477
Accounts receivable, net		1,559		867
Inventory, net		2,311		2,266
Prepaid expenses and other assets		2,401		648
Total current assets		33,089		42,743
Property, plant and equipment:
Machinery and equipment, net		2,689		3,120
Operating leases right-of-use assets, net		572		602
Total property, plant and equipment		3,261		3,722
Other assets:
Intangible assets, net		8,231		8,494
Investments		7,015		8,403
Convertible note		5,804		5,589
Total other assets		21,050		22,486

Total assets	$	57,400	$	68,951

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable	$	1,523	$	581
Operating lease obligations		339		220
Accounts payable		1,114		1,997
Accrued expenses		3,145		2,619
Accrued severance		423		359
Deferred income		—		5
Total current liabilities		6,544		5,781
Long-term liabilities:
Notes payable		292		292
Operating lease obligations		233		382
Severance Obligations		294		446
Total long-term liabilities		819		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:
138,859,193 common shares (138,362,809 at December 31, 2019)
Common stock value		1		1
Capital in excess of par value		188,897		187,735
Accumulated other comprehensive (loss) income		139		7
Accumulated deficit		(139,000)		(125,693)
Total shareholders' equity		50,037		62,050
Total liabilities and shareholders’ equity	$	57,400	$	68,951

See accompanying notes to consolidated financial statements.

Table of Contents

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

($ in thousands except per-share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Revenue:
Sale of products, net	$	7,310	$	6,462	$	20,803	$	18,571
Cost of goods sold (exclusive of depreciation shown separately below):
Products		6,948		6,483		19,953		18,781
Gross profit (loss)		362		(21)		850		(210)
Operating expenses:
Research and development		906		1,924		2,676		4,838
Research and development - MRTP		4		69		158		1,593
Sales, general and administrative		3,169		4,059		9,809		9,119
Impairment of intangible assets		—		1,142		146		1,142
Depreciation		160		158		473		440
Amortization		163		233		524		671
Total operating expenses		4,402		7,585		13,786		17,803
Operating loss		(4,040)		(7,606)		(12,936)		(18,013)
Other income (expense):
Unrealized gain (loss) on investments		(429)		(2,959)		(562)		(1,410)
Impairment of stock warrant		—		—		(1,062)		—
Realized gain (loss) on short-term investment securities		—		90		—		146
Litigation settlement		—		—		—		(1,891)
Gain on the sale of machinery and equipment		1		—		1		87
Interest income, net		270		242		1,344		757
Interest expense		(23)		(12)		(54)		(36)
Total other income (expense)		(181)		(2,639)		(333)		(2,347)
Loss before income taxes		(4,221)		(10,245)		(13,269)		(20,360)
Income taxes		—		—		38		—
Net loss	$	(4,221)	$	(10,245)	$	(13,307)	$	(20,360)
Other comprehensive income (loss):
Unrealized gain (loss) on short-term investment securities		87		3		132		239
Reclassification of gain to net loss		—		(90)		—		(146)
Other comprehensive income (loss)		87		(87)		132		93
Comprehensive loss	$	(4,134)	$	(10,332)	$	(13,175)	$	(20,267)

Net loss per common share - basic and diluted	$	(0.03)	$	(0.08)	$	(0.10)	$	(0.16)
Weighted average common shares outstanding - basic and diluted (in thousands)		138,857		125,420		138,774		124,912

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

($ in thousands except share data)


	Three and Nine Months Ended September 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
Stock issued in connection with RSU vesting	—		—		—		—		—		—
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
Stock issued in connection with RSU vesting	5,000		—		—		—		—		—
Equity-based compensation	—		—		306		—		—		306
Unrealized gain (loss) on short-term investment securities	—		—		—		87		—		87
Reclassification of losses (gains) to net loss	—		—		—		—		—		—
Net loss	—		—		—		—		(4,221)		(4,221)
Balance at September 30, 2020	138,859,193	$	1	$	188,897	$	139	$	(139,000)	$	50,037

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	Three and Nine Months Ended September 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		—		—		—		—		—
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	$	1	$	170,841	$	184	$	(101,207)	$	69,819
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	$	1	$	171,358	$	201	$	(109,249)	$	62,311
Stock issued in connection with option exercises	8,645		—		—		—		—		—
Stock issued in connection with RSU vesting	100,000		—		—		—		—		—
Stock issued in connection with litigation settlement	990,000		—		1,891		—		—		1,891
Equity-based compensation	—		—		1,440		—		—		1,440
Unrealized gain (loss) on short-term investment securities	—		—		—		3		—		3
Reclassification of losses (gains) to net loss	—		—		—		(90)		—		(90)
Net loss	—		—		—		—		(10,245)		(10,245)
Balance at September 30, 2019	125,772,581	$	1	$	174,689	$	114	$	(119,494)	$	55,310

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in thousands)


	Nine Months Ended
	September 30,
	2020		2019
Cash flows from operating activities:
Net loss	$	(13,307)	$	(20,360)
Adjustments to reconcile net loss to cash used in operating activities:
Impairment of intangible assets		146		1,142
Impairment of stock warrant		1,062		—
Amortization and depreciation		810		932
Amortization of license fees		187		179
Amortization of ROU Asset		232		159
Unrealized (gain) loss on investment		562		1,410
Realized (gain) loss on short-term investment securities		—		(146)
Litigation settlement		—		1,891
Gain on the sale of machinery and equipment		(1)		(87)
Accretion of non cash interest expense		34		33
Accretion of non cash interest income		(256)		—
Equity-based employee compensation expense		1,162		2,406
Inventory write-off		219		882
(Increase) decrease in assets:
Accounts receivable		(692)		97
Inventory		(264)		(222)
Prepaid expenses and other assets		(1,754)		55
Increase (decrease) in liabilities:
Operating lease obligations		(228)		(159)
Accounts payable		(924)		(1,082)
Accrued expenses		481		(30)
Accrued severance		(88)		691
Deferred income		(5)		511
Net cash provided by (used in) operating activities		(12,624)		(11,698)
Cash flows from investing activities:
Acquisition of patents and trademarks		(342)		(444)
Acquisition of machinery and equipment		(33)		(499)
Proceeds from the sale of machinery and equipment		—		166
Sales and maturities of short-term investment securities		28,960		15,966
Purchase of short-term investment securities		(15,830)		(3,079)
Net cash provided by (used in) investing activities		12,755		12,110
Cash flows from financing activities:
Payment on note payable		(1,269)		(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		926		(400)
Net increase (decrease) in cash and cash equivalents		1,057		12
Cash and cash equivalents - beginning of period		485		605
Cash and cash equivalents - end of period	$	1,542	$	617

Supplemental disclosures of cash flow information:
Net cash paid for:
Cash paid during the period for interest	$	19	$	3
Non-cash transactions:
Patent and trademark additions included in accounts payable	$	19	$	154
Machinery and equipment additions included in accounts payable	$	9	$	—
Right-of-use assets and corresponding operating lease obligations	$	198	$	814
Patent and trademark additions included in accrued expenses	$	46	$	—

See accompanying notes to consolidated financial statements.

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22nd CENTURY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

Amounts in thousands, except for share and per-share data

NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - 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 nine months ended September 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 is a leading biotechnology company developing disruptive plant-based solutions for the life science, consumer product, and pharmaceutical markets. The Company is focused on technology that allows it to alter the level of nicotine and other nicotinic alkaloids in tobacco plants and the levels of cannabinoids and terpenes in hemp/cannabis plants through genetic engineering and modern plant breeding techniques. 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 2020, the Company expanded its research and development expense line item into two line items in the operating expense section of the Company’s Consolidated Statements of Operations and Comprehensive Loss: (i) Research and development and (ii) Research and development—MRTP. 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.

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Our Williamsville, NY corporate office and our R&D laboratory in Buffalo, NY remain open 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 our employees where job duties permit. Our laboratory in Buffalo is working to almost full capacity while some of our external research and development partners are operating on a modified or limited schedule during this period of the pandemic. The temporary closure of our laboratory and the interruption to our workflow related to COVID-19 has had a minimum impact on our research operations.

Our NASCO production facility in North Carolina remains open and, 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.

Our executive leadership team and staff are monitoring this evolving situation and its impacts on our business. 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.

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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. During the three and nine months ended September 30, 2020, the Company wrote off inventory totaling $219 on the Company’s Consolidated Statement of Operations and Comprehensive Loss ($58 included within research and development expenses and $161 included within cost of goods sold). During the three and nine months ended September 30, 2019, the Company wrote off inventory totaling $882 which is included within research and development expenses on the Company’s Consolidated Statement of Operations and Comprehensive Loss.

Inventories at September 30, 2020 and December 31, 2019 consisted of the following:


	September 30,		December 31,
	2020		2019
Inventory - tobacco leaf	$	1,105	$	1,178
Inventory - finished goods
Cigarettes and filtered cigars		201		106
Inventory - raw materials
Cigarette and filtered cigar components		1,105		1,082

Less: inventory reserve		(100)		(100)
	$	2,311	$	2,266

NOTE 3. - MACHINERY AND EQUIPMENT

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


		September 30,		December 31,
	Useful Life	2020		2019
Cigarette manufacturing equipment	3 or 10 years	$	4,892	$	4,870
Office furniture, fixtures and equipment	5 Years		162		152
Laboratory equipment	5 Years		117		125
Leasehold improvements	6 Years		273		257

Less: accumulated depreciation			(2,755)		(2,284)
Machinery and equipment, net		$	2,689	$	3,120

Depreciation expense was $160 and $473 for the three and nine months ended September 30, 2020, respectively ($158 and $440 for the three and nine months ended September 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.

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


Weighted average remaining lease term in years	2.3
Weighted average discount rate	4.8	%

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


2020	$	87
2021		324
2022		92
2023		88
2024		15
Total lease payments		606
Less: imputed interest		(34)
Total	$	572

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 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 impairment indicators for the valuation of our Panacea investment. Based on the Company’s assessment, it was determined that no risk of credit loss existed for the available-for-sale debt security instruments as of September 30, 2020. As such, we concluded that the recorded value aligns with the expected cash flows of the instruments.

However, the Company 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 nine months ended September 30, 2020.

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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.

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


	September 30,		December 31,
	2020		2019
Aurora stock warrants	$	111	$	673
Panacea preferred stock		5,101		4,865
Panacea stock warrant		1,803		2,865
Total Investments	$	7,015	$	8,403
Convertible Note Receivable	$	5,804	$	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 September 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
	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Short-term investment securities:
Money market funds	$	5,111	$	—	$	—	$	5,111
Corporate bonds		—		20,165		—		20,165
Total short-term investment securities	$	5,111	$	20,165	$	—	$	25,276

Investment - Aurora stock warrants	$	—	$	—	$	111	$	111
Investment - Panacea preferred stock	$	—	$	—	$	5,101	$	5,101
Convertible note receivable	$	—	$	—	$	5,804	$	5,804

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	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 134% and 83% as of September 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 as of September 30, 2020 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately $64. 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 nine months ended September 30, 2020:


Fair Value at December 31, 2019	$	11,127
Unrealized loss as a result of change in fair value		(562)
Accretion of interest on Panacea Investment		451
Fair Value at September 30, 2020	$	11,016

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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 September 30, 2020 and December 31, 2019:


	Available for Sale Debt Securities
	September 30, 2020
	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
	Basis		Gains		Losses		Value
Corporate bonds	$	20,026	$	139	$	—	$	20,165
Convertible note receivable		5,804		—		—		5,804
Investment - Panacea preferred stock		5,101		—		—		5,101
	$	30,931	$	139	$	—	$	31,070


	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 September 30, 2020 and December 31, 2019:

Available for Sale Debt Securities

September 30, 2020

December 31, 2019

Amortized

Cost Basis

Fair Value

Cost Basis

Fair Value

Due in one year or less

18,197

XXII

22nd Century News