22nd Century Group, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as well as our Condensed Consolidated Financial Statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1 of this Form 10-Q.

For purposes of this MD&A, references to the “Company,” “we,” “us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein. In addition, dollars are in thousands, except per share data or unless otherwise specified.

Forward Looking Statements

Except for historical information, all of the statements, expectations, and assumptions contained in this section are forward-looking statements. Forward-looking statements typically contain terms such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “explore,” “foresee,” “goal,” “guidance,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “preliminary,” “probable,” “project,” “promising,” “seek,” “should,” “will,” “would,” and similar expressions. Forward looking statements include, but are not limited to, statements regarding (i) our ability to continue as a going concern, (ii) our expectations regarding our debt obligations, (iii) our financial and operating performance, (iv) our strategic alternatives, including our cost savings initiatives, (v) our expectations regarding regulatory enforcement (vi) our products, and (vii) the volatility of our common stock and warrants. Actual results might differ materially from those explicit or implicit in forward-looking statements. Important factors that could cause actual results to differ materially are set forth in “Risk Factors” herein and in our Annual Report on Form 10-K filed on March 9, 2023. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law. All information provided in this quarterly report is as of the date hereof, and we assume no obligation to and do not intend to update these forward-looking statements, except as required by law.

Our Business

22nd Century Group, Inc. is a leading biotechnology company focused on utilizing advanced plant technologies to improve health and wellness with reduced nicotine tobacco, hemp/cannabis and hops.

On September 5, 2023, the Company announced its intent to explore strategic alternatives, including engaging financial advisors, in an effort to maximize shareholder value. While the initial focus was primarily on 22nd Century Inc.’s tobacco portfolio, the Company subsequently received indications of interest regarding its other assets, in addition to tobacco. The Company continues to be committed to the process of exploring a wide range of strategic, operational, and financial transactions and alternatives. We have also engaged a financial advisor to assist us in this strategic process with respect to identifying strategic partners and financing to fund operations and to take actions to maximize our liquidity. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations.

Recent Highlights and Other Events

• Capital Markets Transactions
• The Company completed registered direct offerings in July 2023, for total gross proceeds of approximately $14,635, before expenses and a public offering in October 2023 for total gross proceeds of approximately $5,250, before expenses.
• In October 2023, the Company reduced the outstanding principle of it Senior Secured Credit Facility by $8,100.
• Cost Savings & Reduction of Operating Expenses
• During July 2023, the Company implemented a cost savings initiative intended to simplify operations as it continues to tighten its focus on key end markets and operating strategies resulting in an estimated $15,000 in annualized cost reductions across its operations once fully in place.

Financial Overview

• Net revenues for the third quarter of 2023 were $17,811, a decrease of 8.1% from $19,383 in 2022.
• Revenue from tobacco-related products for the third quarter was $7,871 compared to $11,535 in the prior year period reflecting a decrease in unit sales of filtered cigars, partially offset by increases in unit sales of cigarettes and export cigarettes.
• Revenue from hemp/cannabis-related products was $9,940, compared to $7,848 in the prior year third quarter, due to continued strong volume for bulk ingredient sales.
• Gross profit for the third quarter of 2023 was a loss of $1,966 compared to profit of $619 in the prior year period.
• Gross profit from tobacco-related products was a profit of $77, a decrease of $559 compared to the prior year period, reflecting lower unit sales in contract manufacturing products and increases in tobacco excise taxes.
• Gross profit from hemp/cannabis-related products was a loss of $2,043 compared to a loss of $17 in the prior year. In connection with evaluation of strategic alternatives for the Company’s assets and cost cut initiatives, during the third quarter of 2023, the Company increased the reserve for excess, obsolete or expired hemp/cannabis inventory by $1,687.
• Total operating expenses for the third quarter of 2023 increased to $69,516 compared to $15,887 in the prior year quarter driven by:
• Sales, general and administrative expenses decreased to $11,199 compared to $14,528 in the prior year period, primarily driven by lower compensation and benefits and strategic consulting, partially offset by higher sales and marketing expenses and royalty, license and contract costs.
• Research development expenses increased to $1,613, compared to $1,318 in the prior year period, driven by higher contract costs.
• Other operating expenses, net was $23,344, primarily reflecting restructuring costs of $24,317, including impairment charges, partially offset by the change in fair value of warrant liabilities.
• In connection with initiating a process to review strategic alternatives for the Company’s assets and implementing cost cut initiatives, during the third quarter of 2023, the Company recorded a goodwill impairment charge of $33,360.
• Operating loss for the third quarter 2023 was $71,482, compared to a loss of $15,268 in the prior year period for the reasons described above.
• Net loss in the third quarter of 2023 was $72,720 and basic and diluted loss per common share was $3.68 compared with net loss in the third quarter of 2022 of $13,102, and basic and diluted net loss per common share of $0.94.
• As of September 30, 2023, we had $2,850 in cash and cash equivalents and $7,500 in restricted cash pursuant to the Senior Secured Credit Facility. In October 2023, the restricted cash was subsequently used to pay down a portion of the outstanding principle balance under the Senior Secured Credit Facility.

Our Financial Results

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

*Giving retroactive effect to the 1-for-15 reverse stock split effectuated on July 5, 2023

Refer to Note 16, “Segment and Geographic Information,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding operating results for our two operating and reportable segments: (1) Tobacco, and (2) Hemp/cannabis.

Three and Nine Months Ended September 30, 2023 Compared to Three and Nine Months Ended September 30, 2022

Revenue, net

The decrease in revenue for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to the decrease in tobacco revenue of $3,664, offset by an increase in hemp/cannabis revenue of $2,092.

• Tobacco revenue was $7,871, a decrease of 31.8% from $11,535 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products. Third quarter 2023 cartons sold of 827 compared to 1,573 in the comparable prior year period.
• Hemp/cannabis revenue was $9,940, compared to $7,848 in the prior year period. Third quarter 2023 bulk ingredient sales volume in kilograms was 49,142 compared to 27,912 in the comparable prior year period.

The increase in revenue for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to the increase in hemp/cannabis revenue of $25,998, offset by a decrease in tobacco revenue of $5,703.

• Tobacco revenue was $24,848, a decrease of 18.7% from $30,551 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products. Third quarter 2023 year-to-date cartons sold of 2,591 compared to 4,427 in the comparable prior year period.
• Hemp/cannabis revenue was $38,352, compared to $12,354 in the prior year third quarter, reflecting a full period of sales following the acquisition of GVB and continued growth in bulk ingredient sales. Third quarter 2023 year-to-date bulk ingredient sales volume in kilograms was 195,876 compared to 70,977 in the comparable prior year period (the GVB acquisition occurred on May 13, 2022).

Gross (loss) profit

The decrease in gross profit and gross profit as a percent of revenues, net for the three and nine month periods-ended September 30, 2023 as compared to September 30, 2022 is driven by declines in tobacco gross profit of ($559) and ($2,757), respectively due to lower volume due to an intentional shift in product mix and decreases in hemp/cannabis gross profit of ($2,026) and ($4,622), respectively resulting from incremental costs associated with buying and selling ingredients while the Company rebuilds its distillate and isolate manufacturing capacity following the November 2022 Grass Valley fire. In connection with evaluation of strategic alternatives for the Company’s assets and cost cut initiatives, during the third quarter of 2023, the Company increased the reserve for excess, obsolete or expired hemp/cannabis inventory by $1,687.

Sales, general and administrative (“SG&A”) expense

(a) Compensation and benefits decreased for the three-month period ending September 30, 2023 due to a reduction of headcount as part of our cost cut initiatives and increased severance and equity comp expense in the prior year period due to the termination of our COO. Increases in compensation and benefits for the nine-month period ending September 30, 2023, is mainly attributable to inflationary increases, as well as increases in headcount for a portion of the year prior to our cost cut initiatives as compared to the prior year period.

(b) Decrease of strategic consulting for the three-month period ending September 30, 2023 was due to reduced spending as part of our cost cut initiatives.

(c) Increases due to the ongoing expansion of store count and launch of VLN® compared to the prior year period.

(d) Other expenses decreased for the three-month ended September 30, 2023, due to decreases of $115 of insurance expenses, $104 of travel and entertainment, $32 of legal and other expenses offset by increases of $96 for public company expenses and $79 for facilities expenses. For the nine months period ended September 30, 2023, other expenses increased due to $704 of IT and technology, $303 of travel and entertainment, $332 of facilities expense, $171 of public company expenses, and $134 of bad debt expenses, offset by a decrease of $308 of insurance expenses.

(e) Depreciation and amortization increased due to the buildout of our GVB Prineville facilities and newly acquired intangible assets in the current year period.

(f) Royalty, license and contract costs are mainly related to our contract development, manufacturing and distribution service offering licenses.

Research and development (“R&D”) expense

(a) Increased compensation and benefits for the nine-month period ended September 30, 2023 are mainly related to the additional R&D personnel in the current year period compared to the prior year period.

(b) Increased contract costs were due to costs related to our Keygene research offset by a decrease in royalty fees owed.

Other operating expenses, net (“OOE”)

(a) In November 2022, there was a fire at our Grass Valley manufacturing facility in Oregon, which manufactures bulk ingredients, primarily CBD isolate and distillate. The Company has continuous expenses related to consulting, legal and demolition at this facility.

(b) During the third quarter of 2023, the Company undertook various restructuring activities in an effort to better align its internal organizational structure and costs with its strategy, as well as preserve liquidity. As a component of the restructuring, the Company has initiated a process to evaluate strategic alternatives with respect to the Company’s tobacco assets. The process will include consideration of a range of strategic, operational and financial transactions and alternatives, such as business combinations, asset sales, licensing agreements, alternate financing strategies and other options.

(c) Expenses associated with non-ordinary course legal matters and corresponding settlement related to water rights dispute for Needle Rock Farms.

(d) Represents change in fair value of warrant liability resulting from remeasurement.

(e) Represents change in fair value of RXP contingent consideration from remeasurement.

(f) Reflects gain on sale primarily from the sale of older tobacco equipment.

Refer to Note 9, “Other operating expenses, net,” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these charges.

Goodwill impairment

In connection with our strategic restructuring initiatives, the Company recorded goodwill impairment of $33,360.

Other income (expense)

(a) Unrealized loss on investment includes fair value adjustments for our investment in Panacea Life Sciences Holdings, Inc. (“PLSH”) during the three and nine month-period ended September 30, 2022. The investment was subsequently liquidated during 2022.

(b) Interest expense increased in 2023, as compared to the prior year period, primarily due to the interest recognized on the Senior Secured Credit Facility and Subordinated Note, as described below under ‘Liquidity and Capital Resources.’

Liquidity and Capital Resources

We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in our tobacco and hemp/cannabis businesses. We had negative cash flow from operations of $50,184 for the nine months ended September 30, 2023 and an accumulated deficit of $349,373 as of September 30, 2023. As of September 30, 2023, we had cash and cash equivalents of $2,850, restricted cash of $7,500 and working capital of $856 (compared to working capital of $31,587 at December 31, 2022). Given our projected operating requirements and existing cash and cash equivalents, there is substantial doubt about our ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements herein are issued.

Additionally, for the quarter ended September 30, 2023, the Company was not in compliance with the financial covenant related to consolidated Revenues, net pursuant to the Senior Secured Credit Facility debentures. The lenders have granted a waiver for the covenant violation. Without a waiver or other relief under the Senior Secured Credit Facility debenture agreements, one of the remedies the lenders have available to them, amongst others, is the ability to accelerate repayment of the debt, which the Company would not be able to immediately repay.

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing strategic alternatives which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. The Company has engaged a financial advisor to assist it in identifying strategic partners and financing to fund operations and to take actions to maximize the Company’s liquidity. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.

Our cash, short term investments, restricted cash and working capital as of September 30, 2023 and December 31, 2022 are set forth below:

Working Capital

As of September 30, 2023, we had working capital of $856 compared to working capital of $31,587 at December 31, 2022 a decrease of $30,731. This decrease in working capital was primarily due to a $3,989 decrease in net current assets and was offset by an increase in net current liabilities of $26,741, which includes in the third quarter $18,165 of current portion of long-term debt obligations related to our Senior Secured Credit Facility and Subordinate Note, previously classified as Non-current. Cash, cash equivalents, short-term investment securities and restricted cash decreased by $10,863 and the remaining net current assets increased by $6,874. As a result of the insignificant positive working capital balance, management has taken a number of steps to improve liquidity. Refer below to “Cash demands on operations.”

Summary of Cash Flows

Net cash used in operating activities

Cash used in operating activities increased $17,536 from $32,648 in 2022 to $50,184 in 2023. The primary driver for this increase was higher net loss of $77,923, as explained above, an increase of $60,104 related to net adjustments to reconcile net loss to cash, and a decrease in cash used for working capital components related to operations in the amount of $283 for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Net cash provided by investing activities

Cash provided by investing activities amounted to $17,352 the nine months ended September 30, 2023, as compared to cash provided by investing activities of $380 for the nine months ended September 30, 2022. The increase in cash provided by investing activities of $16,972 was the result of (i) an increase in net proceeds from short-term investments of $12,985; (ii) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the current period (iii) $682 from the investment in Change Agronomy Ltd. in the prior year period; (iv) $1,043 from the acquisitions of RXP in the current period and GVB in the prior year period and (v) $251 of proceeds from the sale of property, plant and equipment. These increased cash inflows were partially offset by an increase in cash outflows of $1,489 related to the acquisitions of patents, trademarks and property, plant and equipment.

Net cash provided by financing activities

During the nine months ended September 30, 2023, cash provided by financing activities increased by $6,866, from $33,296 in the prior year period, to $40,162, resulting from the net proceeds of $16,048 from issuance of long-term debt, proceeds of $6,016 from issuance of detachable warrants, net proceeds of $2,563 from issuance of common stock related to the ATM, increased proceeds of $198 from the issuance of notes payable, and a decrease in other financing of $16. These cash inflows were offset by a decrease in net proceeds of issuance of common stock of $14,217, increased note payable payments of $3,164, taxes paid related to net share settlement of RSUs of $420 and $174 of option exercises that occurred in 2022.

Cash demands on operations

As of September 30, 2023, we had approximately $2,850 of cash and cash equivalents. Our principal sources of liquidity are our cash and cash equivalents and cash generated from our tobacco contract manufacturing business and hemp/cannabis business and proceeds from debt and equity financing activities, which such financings have provided total net proceeds throughout 2023 of $37,173, including registered direct offerings completed in October 2023 (refer below for details of all debt and equity financing activities). The Company has also received $5,000 of casualty loss insurance recoveries from the Grass Valley fire, has business interruption coverage and has filed litigation to enforce its claim.

As discussed above, in response to the cash demands on operations, management has implemented programs to evaluate strategic alternatives for the Company’s assets and cost cut initiatives intended to reduce our operating costs to provide additional cash runway. In October 2023 the Company decreased its principal debt balances by $8,100, resulting in cash interest savings of approximately $500 annually. However, our cash, cash equivalents, short-term investment securities, insurance proceeds, and debt/equity financings, as well as the sustained tobacco contract manufacturing and hemp/cannabis sales, currently are not forecasted to provide sufficient cash resources or liquidity through the remainder of fiscal 2023.

Senior Secured Credit Facility

On March 3, 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with each of the purchasers party thereto (each, including its successors and assigns, a “Purchaser” and collectively, the “Purchasers”) and JGB Collateral, LLC, a Delaware limited liability company, as collateral agent for the Purchasers (the “Agent”). Pursuant to the Purchase Agreement, the Company agreed to sell to the Purchasers (i) 5% Original Issue Discount Senior Secured Debentures (the “Debentures”) with an aggregate principal amount of $21,053 and (ii) warrants to purchase up to 333,334 shares of the Company’s common stock, par value $0.00001 per share (the “Common Stock”), for an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date (the “JGB Warrants”), for a total purchase price of $20,000.

The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.

The Company is required to maintain at least $7,500 on its balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets. As of September 30, 2023, the Company was not in compliance with its financial covenant tied to minimum consolidated Revenues, net of $18,500. The Company has obtained a waiver (as described below) with the lender executed on October 16, 2023; accordingly, no event of default has occurred.

The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

On June 22, 2023, as a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted to be $12.828 exercise price for up to 496,960 shares of common stock. There are no further anti-dilution adjustments on such warrants.

On October 16, 2023, the Company entered into a waiver and amendment that resulted in a reduction of the outstanding principle of its Senior Secured Credit Facility by $8,100. The reduction reflects a waiver and repayment of the $7,500 restricted cash balance required under terms of the original debenture agreements, which was held in an escrow account. The Company also assigned an existing promissory note pertaining to the Company’s previous holdings in Panacea Life Science Holdings as additional consideration in the debt reduction transaction. In a non-monetary exchange, the assigned value of the promissory note was allocated as $600 to further principal reduction and $2,000 to a reduction in the put price associated with the lenders outstanding warrants, which 166,667 of such the warrants were concurrently cancelled.

The remaining principal loan balance of approximately $14,005 and remaining $500 of the put price will be due at maturity in March 2026 in accordance with the original terms of the debenture agreements. The Company was not required to pay any cash to the lenders in connection with this transaction.

Omnia Subordinated Note

On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”). The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma.

Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”). The PIK Interest accrues at a rate of 26.5% per annum, payable monthly. The Company is not permitted to prepay all or any portion of the outstanding balance on the Subordinated Note prior to maturity. The maturity date of the Subordinated Note is May 1, 2024.

In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 45,000 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $12.828 per share subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

ATM Offering

On March 9, 2023 the Company entered into a Sales Agreement (the “Sales Agreement”) with Cowen and Company, LLC (the “Sales Agent”) under which the Company may issue and sell in a registered offering shares of our common stock having an aggregate offering price of up to $50,000 from time to time through or to the Sales Agent (the “ATM Offering”). The Company will pay 3.00% sales commission based on the gross proceeds of the sales price per share of common stock sold. Total net proceeds during the second quarter of 2023 were $2,639. On June 19, 2023, the Company terminated the ATM Program in connection with the June 2023 Capital Raise.

June 19, 2023 Registered Direct Offering

On June 19, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of shares of approximately $5,300 of shares and warrants, consisting of an aggregate of 747,974 shares of common stock and 747,974 warrants to purchase an equal number of shares, at a purchase price of $7.05 per unit. The net proceeds to the Company from the offering were approximately $4,800.

The warrants were exercisable immediately upon issuance at an exercise price of $7.05 per share of common stock, expire on June 22, 2028 and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered.

As part of the offering, the Company entered into a warrant reprice letter and agreed to reduce the exercise price on the previously issued 747,974 warrants owned by the investors participating in the Offering from $30.75 to $7.05 and to add a provision in the warrants that upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, such exercise price shall be lowered to such price at which the shares were offered. As a result of the offerings completed in July 2023, the exercise price on the 1,495,948 warrants was automatically adjusted to $2.42 per share and subsequently adjusted to $0.525 per share in October.

The remaining 390,247 previously issued warrants were not repriced and remain at an exercise price of $30.75 on their original terms.

In addition, as a result of the offering, the Company’s outstanding warrants to purchase up to 333,334 shares of the Company’s common stock for an exercise price of $19.125 per share were automatically adjusted as follows: $12.828 exercise price for up to 496,960 shares of common stock, of which 166,667 were canceled in October 2023 (see above discussion of amendment and waiver under Senior Secured Credit Facility).

July 6, 2023 Registered Direct Offering.

On July 6, 2023, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of approximately $3,000 of shares and warrants, consisting of an aggregate of 778,634 shares of common stock and 1,557,268 warrants to purchase an equal number of shares, at a purchase price of $3.80 per unit. The warrants are exercisable six months after issuance at an exercise price of $3.80 per share of common stock and expire on the later of January 10, 2029 and the date Stockholder Approval (as defined below) is obtained. The net proceeds to the Company from the offering were approximately $2,600. As a result of the subsequent offering completed in July 2023, the exercise price on the 1,557,268 warrants was automatically adjusted to $2.42 per share and subsequently adjusted to $0.525 per share in October.

July 19, 2023 Registered Direct Offering.

On July 19, 2023, the Company and certain investors (entered into a securities purchase agreement relating to the issuance and sale of approximately $11,700 of shares and warrants, consisting of an aggregate of 4,373,219 shares of common stock and 8,746,438 warrants to purchase an equal number of shares, at a purchase price of $2.67 per unit. The warrants are exercisable immediately at an exercise price of $2.42 per share of common stock and expire five years after issuance. The net proceeds to the Company from the offering were approximately $10,742. As a result of the subsequent offering completed in October 2023, the exercise price on the 8,746,438 warrants was automatically adjusted to $0.525 per share.

October 2023 Public Offering

On October 17, 2023, the Company entered into a securities purchase agreement with certain investors, pursuant to which the Company agreed to sell and issue, in a registered public offering, (i) an aggregate of 7,600,000 shares of the Company’s common stock, par value $0.00001 per share, (ii) warrants to purchase 20,000,000 shares of common stock (the “Common Warrants”) and (iii) pre-funded warrants to purchase 2,400,000 shares of common stock (the “Pre-Funded Warrants”). The Common Warrants have an exercise price of $0.525, are immediately exercisable and have a term of exercise equal to five years following the original issuance date. The Pre-Funded Warrants have an exercise price of $0.0001, are immediately exercisable and are exercisable at any time after their original issuance until such Pre-Funded Warrants are exercised in full. The shares were offered at a combined public offering price of $0.525 per share and two accompanying Common Warrants. The Pre-Funded Warrants were offered at a combined public offering price of $0.5249 per Pre-Funded Warrant and two accompanying Common Warrants.

In addition, the Company issued the placement agent warrants to purchase up to 1,000,000 shares of common stock (equal to 10% of the aggregate number of shares and Pre-Funded Warrants sold in the offering) at an exercise price of $0.65625, which represents 125% of the public offering price per share and accompanying Common Warrant. The placement agent agreed not to exercise the such warrants until the Company subsequently increases its authorized shares of common stock.

The offering closed on October 19, 2023 with gross proceeds to the Company of approximately $5,250, before deducting the placement agent fees of $367 and other offering expenses payable by the Company of approximately $288. As a result of the offering, the exercise price on 11,799,654 previously outstanding warrants were automatically adjusted from $2.42 per share to $0.525 per share.

The Pre-Funded Warrants were subsequently exercised on a cashless basis in October 2023, resulting in issuance of 2,399,512 shares of common stock.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.

Except as described below, there have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

Contingent consideration

Contingent consideration is a financial liability recorded at fair value. The amount of contingent consideration to be paid is based on the occurrence of future events, such as the achievement of certain revenue milestones. Accordingly, the estimate of fair value contains uncertainties as it involves judgment about the likelihood and timing of achieving these milestones as well as the discount rate used. Changes in fair value of the contingent consideration liability result from changes to the assumptions used to estimate the probability of success for each milestone, the anticipated timing of achieving the milestones and the discount period and rate to be applied. A change in any of these assumptions could produce a different fair value, which could have a material impact on the results from operations. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.

Detachable Warrants

Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants. The impact of changes in key assumptions are described in Note 6 to the Condensed Consolidated Financial Statements.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

(a) Evaluation of Disclosure Controls and Procedures:

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s interim chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our interim chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure information required to be disclosed is recorded, processed, summarized and reported within the time period specified by SEC rules, based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) Changes in Internal Control over Financial Reporting:

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 9, 2023 or Part II of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, as filed with the SEC on May 9, 2023, other than the following:

We have a history of losses, and we expect to incur significant expenses and continuing losses for the foreseeable future and there is substantial doubt regarding our ability to continue as a going concern.

We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in our tobacco and hemp/cannabis businesses, which casts substantial doubt regarding our ability to continue as a going concern. As of October 31, 2023, we had cash and cash equivalents of approximately $6,298.

Doubts about our ability to continue as a going concern have and could continue to negatively impact our relationships with our commercial partners and our ability, as part of our cost-cutting measures, to obtain, maintain, restructure and/or terminate agreements with them, or negatively impact our negotiating leverage with such parties, which could have a material adverse effect on our business, financial condition and results of operations or result in litigation. Furthermore, any loss of key personnel, employee attrition or material erosion of employee morale arising out of doubts about our ability to operate as a going concern could have a material adverse effect on our ability to effectively conduct our business, and could impair our ability to execute our business plan, thereby having a material adverse effect on our business, financial condition and results of operations.

We need additional funding to execute our business plan and to continue operations even with the anticipated proceeds from the October 2023 public equity offering. We continue to seek and evaluate opportunities to raise additional funds through the issuance of our securities, asset sales, and through arrangements with strategic partners. We have engaged a financial advisor to assist us in identifying strategic partners and financing to fund operations and to take actions to maximize our liquidity. If capital is not available to us when, and in the amounts needed, we could be required to liquidate our inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that we will be able to raise the capital we need to continue our operations.

We may be unable to comply with the covenants in our senior secured debentures.

Our senior secured debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict us from incurring additional indebtedness, creating or permitting liens on assets, making or holding any investments, repaying outstanding indebtedness, paying dividends or distributions and entering into transactions with affiliates. We are also required to maintain certain quarterly revenue targets.

As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial transactions, including to obtain additional financing as needed, may be restricted. Furthermore, our failure to comply with the covenants could result in a default under such agreements, which could permit the debt holders to accelerate our obligation to repay the debt. Although we recently received a waiver with respect to our compliance with such covenants, there is no assurance that we will be able to secure a similar waiver for the failure to comply with any future covenants. If any of our debt is accelerated, we likely would not have sufficient funds available to repay it. Substantially all of our assets, including intellectual property, are collateralized under the debentures. If such debt is accelerated, we could be required to liquidate our inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings.

We could continue to incur restructuring and impairment charges as we continue to pursue a cost cutting initiative and pursue strategic alternatives.

We continue to evaluate opportunities to optimize the cost structure of our operations in order to implement a cost savings initiative. These actions could result in significant charges which could adversely affect our financial condition and results of operations. Future actions could result in restructuring and related charges, including but not limited to impairments and employee termination costs that could be significant. We have incurred significant impairment charges for long-lived assets, including goodwill and intangible assets, which are subject to periodic impairment analysis and review, and remain subject to the potential for additional charges. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions, requires significant judgment. Any of the above future actions could result in charges that could have an adverse effect on our financial condition and results of operations.

The continued success of our cannabinoid-containing products, if any, is subject to a number of constantly-evolving state and federal laws, regulations, and uncertain regulatory enforcement policies pertaining to hemp-derived CBD and/or cannabis more generally.

The Agriculture Improvement Act of 2018, or the “2018 Farm Bill,” was signed into law on December 20, 2018. This 2018 Farm Bill expressly excluded “hemp” from the federal Controlled Substances Act of 1970 and the Controlled Substances Import and Export Act’s, as amended (the “CSA”)’s definition of marijuana and, accordingly, declassified substances derived from or containing any part(s) of the cannabis plant containing not more than 0.3% THC on a dry-weight basis from Schedule I. In effect, the 2018 Farm Bill legalized the cultivation and commercial sale of hemp in the United States, subject to applicable state laws and regulations and applicable federal Food, Drug & Cosmetic Act (FDCA) provisions, including any implementing regulations, as interpreted and enforced by the FDA.

Local, state, federal, and international hemp and CBD laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance requirements. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our current and/or future cannabinoid business(es). It is also possible that the federal government will begin strictly enforcing existing laws, which may limit the legal uses of the hemp plant and its derivatives and extracts, such as cannabinoids. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can it determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on its activities in the cannabis industry.

In addition, the 2018 Farm Bill did not alter the FDA’s authority to regulate products containing cannabis or cannabis-derived compounds, including cannabinoids, under the FDCA. Hemp products, including cannabinoids, that qualify as drugs, food, dietary supplements, veterinary products, and cosmetics, for example, are subject to regulation by the FDA. Following passage of the 2018 Farm Bill, the FDA reaffirmed its enforcement authority and reiterated the requirement that a product containing CBD or other cannabinoid(s) (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit implicitly or explicitly attributed to, or based on, the presence of the cannabinoid as an ingredient, or any other health/medical claim, must be approved by the FDA for its intended use(s) before it may be introduced into interstate commerce. We currently have cannabinoid-containing retail offerings in virtually all forms of consumption (e.g., supplements, topical products, gummies, tinctures, vape products, and others). We are, accordingly, subject to some level of regulatory risk, given the FDA’s current position that CBD is an active drug ingredient that cannot be marketed as a food or dietary supplement under the FDCA. However, we believe our offerings are consistent with others on the market that pose a low risk of regulatory enforcement.

Additionally, while the 2018 Farm Bill and analogous state legislation has reduced the amount of DEA oversight of hemp-derived cannabinoids, this is a rapidly evolving area of U.S. law and substantial uncertainty remains as to the future of federal and state regulation of cannabinoid products. Many states have varying requirements, including licensure requirements that must be met prior to engaging in applicable hemp operations. We are in the process of reviewing and complying with applicable state requirements, but we may not have or be aware of all the necessary authorizations needed to engage in the business we conduct in each applicable state. Any regulations the FDA issues relating to the sale, marketing, and/or other activities involving cannabinoid or certain cannabinoid-containing products could have a material adverse effect on our business, financial condition and results of operations.

Given the uncertainty surrounding future state regulations and the continuing barriers that still exist for cannabinoids in certain product categories due to FDA regulation, it is unknown to what extent FDA’s regulation of the applicable product categories in which we offer cannabinoid-containing products may have on our business.

Costs associated with compliance with numerous laws and regulations could impact our financial results. In addition, we have become and could in the future become subject to increased enforcement and/or litigation risks associated with the CBD industry.

The manufacture, labeling and distribution of products containing CBD or other cannabinoids is governed by various federal, state and local agencies. Our commercialization of various cannabinoid-containing products at the retail level may give rise to heightened regulatory scrutiny and greater risk of consumer litigation, either of which likely restricts the scope of the permissible marketing claims we can lawfully make about such products or our ability to continue selling them in the United States at all. The shifting compliance environment and the need to build and maintain robust systems to comply with different hemp or CBD-related regulations in jurisdictions may increase costs and/or the risk that we may violate one or more applicable regulatory requirements. If our operations, or any of our activities or products, are found to be in violation of any such laws or any other governmental regulations that apply to the manufacture, distribution, or sale of FDA-regulated products, generally, or to products containing cannabinoids, more specifically, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of its operations, any of which could adversely affect our ability to operate its business or its financial results.

Failure to comply with any applicable FDA requirements, relating to CBD or otherwise, may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. Our advertising is also subject to regulation by the FTC under the Federal Trade Commission Act. Additionally, analogous state advertising and labeling laws are often enforced by state attorneys general, and any state or federal enforcement action based on potentially misleading or deceptive advertising is often followed by costly class-action complaints under state consumer-protection laws.

The FDA, on its own and in collaboration with the FTC, has issued numerous warning letters to companies offering for sale of topical, oral, and other types of products containing CBD, which were not approved under the FDA’s NDA process, in response to their making unsubstantiated claims on product webpages, online stores, and social media websites about the products’ purported therapeutic or other drug-like benefits in connection with CBD or other cannabinoids. The FDA deemed that companies “used these online platforms to make unfounded, egregious claims about their products’ ability to limit, treat or cure cancer, neurodegenerative conditions, autoimmune diseases, opioid use disorder, and other serious diseases, without sufficient evidence and the legally required FDA approval.”

The agency has continuously demonstrated its commitment to taking action against companies making medical claims about products containing CBD (as the active ingredient), as selling unapproved products with unsubstantiated therapeutic claims can put patients and consumers at risk. The FDA does not believe CBD has been shown to be safe and effective for any therapeutic use, except as used in Epidiolex, the only new drug containing natural, hemp-derived CBD that has been approved by FDA under the NDA process, which was approved for the treatment of seizures associated with Lennox-Gastaut syndrome or Dravet syndrome in patients 2 years of age and older. The agency’s principal concern with CBD products on the market that are unlawfully claiming to treat serious medical conditions is that deceptive marketing of unproven treatments may keep some patients from accessing appropriate, recognized therapies to treat serious and even fatal diseases. Additionally, because they are not evaluated by the FDA, there may be other ingredients that are not disclosed, which may be harmful.

The FDA has pledged to continue to monitor the marketplace and take enforcement action as-needed to protect the public against companies illegally selling products containing CBD as the active ingredient, claiming to prevent, diagnose, treat, or cure serious diseases, such as cancer, Alzheimer’s disease, psychiatric disorders and diabetes; illegally selling cannabis and cannabis-derived products that can put consumers at risk; and marketing and distributing such products in violation of the FDA’s authorities.

We, or those who market the hemp-derived products we manufacture and/or distribute, may inadvertently make claims in the future about the efficacy or safety of such products, which, due to the presence of CBD or other cannabinoids as ingredients or for any other reason, may be deemed to be unsubstantiated claims and/or render the products unapproved new drugs in violation of the FDCA.