22nd Century Group, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023, 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 28, 2024. 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 an agricultural biotechnology company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science. With dozens of patents allowing it to control nicotine biosynthesis in the tobacco plant, the Company has developed proprietary reduced nicotine content (RNC) tobacco plants and cigarettes, which have become the cornerstone of the FDA’s Comprehensive Plan to address the widespread death and disease caused by smoking. The Company received the first and only FDA Modified Risk Tobacco Product (MRTP) authorization for a combustible cigarette in December 2021. 22nd Century uses modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the life science and consumer products industries by creating new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits.

To support the launch and expansion of VLN®, we are vertically integrated and utilize our tobacco assets for contract manufacturing operations (“CMO”) that consists primarily of branded filtered cigars and conventional cigarettes. With high-speed manufacturing capabilities we continue to attract additional CMO business to absorb our manufacturing overhead and help keep our unit cost profile low. The Company is a subsequent participating manufacturer under the Master Settlement Agreement (“MSA”), of which all cigarette products are compliant.

Recent Highlights and Other Events

• Capital Markets Transactions
• On April 2, 2024, the Company completed a reverse stock split of its outstanding shares of common stock, par value $0.00001 per share at a ratio of 1-for-16 effective. Subsequently, Nasdaq Stock Market LLC ("Nasdaq") notified the Company on April 16, 2024 that it has regained compliance with the minimum bid price requirement under Nasdaq Listing Rule 5550(a)(2) for continued listing.
• Nasdaq notified the Company on April 4, 2024 that it has received a deficiency letter with the minimum shareholders’ equity requirement of $2,500 under Nasdaq Listing Rule 5550(b)(1) for continued listing.
• In April 2024, the Company completed a registered direct offering for total net proceeds of $3,913.
• In April 2024, the Company reduced the outstanding principle of its Senior Secured Credit Facility by $428 through conversion of 200,000 shares of common stock.
• In April 2024, the Company eliminated $5,228 of indebtedness related to the Subordinate Note in a primarily equity transaction.
• In April 2024, the Company settled an approximate aggregate of $1,500 of outstanding indebtedness under various commercial agreements in equity issuances.
• In May 2024, the Company further reduced debt by exchanging $2,328 of amounts owed under the Senior Secured Credit Facility for 1,375,000 shares of common stock and pre-funded warrants.
• Corporate Updates
• On February 13, 2024, the Company announced a reduction in board compensation expenses expected to save more than $1 million in annual cost for 2024. Additionally, the board waived cash compensation for the fourth quarter 2023 and first quarter 2024.
• On April 8, 2024, The Company announced the appointment of Daniel Otto as Chief Financial Officer and Jonathan Staffeldt as General Counsel.
• On April 18, 2024, the Company announced the resignation of Nora Sullivan and James Mish as Directors. The Company reduced the board to 4 seats as part of its focus on corporate cost efficiency.

Financial Overview

• Net revenues for the first quarter of 2024 were $6,469, a decrease of 27.5% from $8,926 in 2023, primarily driven by a decrease in volume.
• First quarter 2024 cartons sold of 629 compared to 1,002 in the comparable prior year period.
• Gross profit for the first quarter of 2024 was a loss of $1,129 compared to profit of $17 in the prior year period.
• Total operating expenses for the first quarter of 2024 decreased to $3,305 compared to $10,421 in the prior year quarter driven by:
• Sales, general and administrative expenses decreased to $2,906 compared to $9,837 in the prior year period, primarily driven by lower headcount (compensation and benefits), strategic consulting, and sales and marketing costs due to our cost savings initiatives implemented in the second half of 2023.
• Research development expenses decreased to $425, compared to $730 in the prior year period, driven by lower headcount (compensation and benefits costs) and continued focus on cost savings with our tobacco research.
• Other operating expenses, net was ($26), compared to ($146) in the prior year period, primarily reflecting gains on sale of property, plant and equipment.
• Operating loss from continuing operations for the first quarter 2024 was $4,434, compared to a loss of $10,404 in the prior year period for the reasons described above.
• Net loss from continuing operations in the first quarter of 2024 was $5,450 and basic and diluted loss from continuing operations per common share was $1.72 compared with net loss from continuing operations in the first quarter of 2023 of $10,830, and basic and diluted net loss from continuing operations per common share of $12.80.
• As of March 31, 2024, we had $1,517 in cash and cash equivalents.

Our Financial Results

*Giving retroactive effect to the 1-for-16 reverse stock split on April 2, 2024 and the 1-for-15 reverse stock split on July 5, 2023.

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Revenue, net

Tobacco revenue was $6,469, a decrease of 27.5% from $8,926 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources during 2023 at the Company’s NASCO facilities away from negative margin filtered cigars to higher margin VLN® and conventional cigarette products. Price increases and new cigarette export contract volume commence in the second quarter of 2024, among other additional new CMO revenue opportunities, while the Company concurrently exits certain filtered cigar production with negative profitability.

Gross (loss) profit

The decrease in gross profit and gross profit as a percent of revenues, net for the quarter ended March 31, 2024, compared to the quarter ended March 31, 2023, was primarily driven by lower volume due to carryover from 2023 of our intentional shift in product mix, production staffing, and capacity as we stabilize operations in connection with ongoing restructuring efforts. During the quarter ended March 31, 2024, the Company recorded an additional reserve for excess, obsolete or expired leaf inventory of $431 related to the 2023 crop year received in the first quarter 2024 and an additional $233 for excise taxes on products based on an assessment received related to prior periods.

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

(a) Compensation and benefits and equity compensation expense decreased for the three-month period ending March 31, 2024 compared to the prior year period due to a reduction of headcount as part of our cost cut initiatives.

(b) Decreases of strategic consulting, sales and marketing and travel and entertainment for the three-month period ending March 31, 2024, were due to reduced spending as part of our cost cut initiatives.

(c) Other expenses decreased for the three-month ended March 31, 2024, due to decreases of $412 of for public company expenses, $310 of insurance expenses, $150 of facilities expenses and $122 of other.

Research and development (“R&D”) expense

(a) Decreased compensation and benefits for the three-month period ended March 31, 2024 are mainly related to the a decrease in headcount in the current year period compared to the prior year period.

(b) Other expenses decreased for the three months ended March 31, 2024, due to decreases of $57 of patent and license amortization, $48 of consulting and professional services, and $48 of patent maintenance. These decreases are mainly attributable to our continued cost cutting initiatives implanted during the third quarter of 2023.

Other income (expense)

(a) Other income (expense), net decreased from the prior year period due to a decrease of $16 of realized losses on short term investments and $139 decrease in fair value of warrant liability.

(b) Interest expense increased in 2024, as compared to the prior year period, primarily due to increases in cash interest of $66 and a decrease of non-cash interest of $62 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations increased by $37), and additional increases of $82 of derivative liability fair value changes. Additionally, interest expense increased as a result of PIK interest of $639 recognized from the Subordinated Note.

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 business. We had negative cash flow from operations of $2,255 for the three months ended March 31, 2024 and an accumulated deficit of $384,446 as of March 31, 2024. As of March 31, 2024, we had cash and cash equivalents of $1,517 and working capital from continuing operations of ($9,497) (compared to working capital from continuing operations of ($6,826) at December 31, 2023). 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.

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory or assets, cease or curtail operations, seek to negotiate new business deals with our business partners 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. Accordingly, there is substantial doubt regarding our ability to continue in 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, and cash equivalents and working capital as of March 31, 2024 and December 31, 2023 are set forth below:

Working Capital

As of March 31, 2024, we had working capital from continuing operations, excluding assets and liabilities held for sale, of approximately ($9,497) compared to working capital of approximately ($6,826) at December 31, 2023 a decrease of $2,671. This decrease in working capital was primarily due to a $2,403 decrease in net current assets and an increase in net current liabilities of $268. Cash and cash equivalents decreased by $541 and the remaining net current assets increased by $1,862. As a result of the 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 decreased $15,245 from $17,500 in 2023 to $2,255 in 2024. The primary driver for this decrease was lower net loss of $12,443, a decrease of $1,016 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 $3,818 for the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

Net cash provided by investing activities

Cash provided by investing activities amounted to $15 the three months ended March 31, 2024, as compared to cash provided by investing activities of $14,723 for the three months ended March 31, 2023. The decrease in cash provided by investing activities of $14,708 was the result of (i) a decrease in net proceeds from short-term investments of $12,959; (ii) $3,500 of property, plant and equipment casualty loss insurance proceeds collected in the prior year period (iii) $90 from the acquisitions of RXP in the prior year period and (iv) a decrease of $178 of proceeds from the sale of property, plant and equipment. These decreased cash inflows were partially offset by a decrease in cash outflows of $2,019 related to the acquisitions of patents, trademarks and property, plant and equipment.

Net cash provided by financing activities

During the three months ended March 31, 2024, cash provided by financing activities decreased by $16,510, from $18,209 in the prior year period, to $1,699, resulting from decreases in (i) the net proceeds of $16,048 from issuance of long-term debt, (ii) proceeds of $6,016 from issuance of detachable warrants, and (iii) proceeds from issuance of notes payable of $71 offset by an increase in net proceeds from warrant exercise of $2,245. These cash inflows were offset by a decrease in cash outflows of note payable payments of $2,967 and taxes paid related to net share settlement of RSUs of $413.

Cash demands on operations

As of March 31, 2024, we had approximately $1,517 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 proceeds from debt and equity financing activities, which cash flows provided by financing activities for the quarter ended March 31, 2024 were $1,699.

Senior Secured Credit Facility

On March 3, 2023, the Company entered into that certain Securities Purchase Agreement (the “SPA”) with JGB Partners, LP (“JGB Partners”), JGB Capital, LP (“JGB Capital”) and JGB Capital Offshore Ltd. (“JGB Offshore” and collectively with JGB Partners and JGB Capital, the “Holders”) and JGB Collateral, LLC, as collateral agent for the Holders (the “Agent”) which pursuant to the agreement, the Company sold 5% original issuance discount senior secured debentures with an aggregate principal amount of $21,053. The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof. The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”). Any time after, March 3, 2024, the Company may irrevocably elect to redeem all of the then outstanding principal amount of the Debentures for cash in an amount equal to the entire outstanding principal balance, including accrued and unpaid interest, the Exit Payment and a prepayment premium in an amount equal to 3% of the outstanding principal balance as of the prepayment date (collectively, the “Prepayment Amount”). Upon the entry into a definitive agreement that would effect a change in control (as defined in the Debentures) of the Company, the Agent may require the Company to prepay the outstanding principal balance in an amount equal to the Prepayment Amount.

The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $306.00 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. As a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 20,834 shares of the Company’s common stock for an exercise price of $306.00 per share were automatically adjusted to be $205.248 exercise price for up to 31,063 shares of common stock. There are no further anti-dilution adjustments on such warrants. In connection with the JGB October Amendment, the Company and Holders agreed to exercise the outstanding put provision to redeem 10,418 Warrants for an aggregate put price equal to $2,500.

Following the JGB October and December Amendments (as further described in Note 6 “Debt” of the Notes to Condensed Consolidated Financial Statements contained), as of March 31, 2024 and December 31, 2023, respectively, the remaining principal loan balance is approximately $10,752, exit fee of $1,052 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. As of March 31, 2024, the Company has pledged to JGB the $2,000 GVB promissory note and $1,000 assignment of Needle Rock Farms to be applied as principal reduction in 2024.

On April 8, 2024, the Company, the Holders and the Agent entered into that certain Letter Agreement to modify the terms of the Amendment Agreement, the JGB SPA and the Debentures, as amended.

Under the terms of the Letter Agreement, the Holders are permitted to convert their debt to common stock at anytime and the Conversion Price (as defined in the Debentures) at which the Holders may convert the principal amount of their Debentures to the Company’s common stock is reduced to $2.14 per share in accordance with applicable Nasdaq rules. The principal amount of the Debentures converted shall be applied to the Monthly Allowance (as defined in the Debentures) for that month, and any excess shall be applied to the Monthly Allowances for the succeeding months. The conversions will be a dollar for dollar reduction of the remaining outstanding obligation owed to the Holders. The Agent and Holders have also agreed to daily limits on trading volume and minimum conversion amounts. The Holders converted $428 of debt in exchange for 200,000 shares of common stock during the 20-day period.

The provisions in Section 3(c)(i) of the Debentures requiring 20% of any equity issuances to be paid to the Holders was suspended for 20 days.

On May 10, 2024, the Company, the Holders and the Agent entered into that certain May 2024 Exchange Agreement and May 2024 Letter Agreement to modify the terms of the Amendment Agreement, the Securities Purchase Agreement and the Debentures, as amended.

Under the terms of the May 2024 Letter Agreement, the Company and Holders have agreed the Company shall incur an aggregate amendment charge to the undersigned holders equal to $275, which shall be added to the principal balance of the Debentures.

Under the terms of the May 2024 Exchange Agreement, the Company and Holders exchanged an aggregate of $2,328 in principal, fees and expenses owed under the Debentures for 395,000 shares of common stock and 895,000 immediately exercisable pre-funded warrants to purchase shares of common stock at an exercise price of $.00001 (at an effective per share price of $1.69). The remaining principal balance of the Debentures is $9,825 of which $3,000 remains current with corresponding pledged assets.

As a result of the transaction, the exercise price on 5,876,887 of the Company’s outstanding warrants is reduced to $1.69 per share in accordance with the adjustment provisions therein.

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 was May 1, 2024.

In connection with the Subordinated Note, the Company issued to Omnia, warrants to purchase up to 2,813 shares of the Company’s common stock. The Omnia Warrants are exercisable for seven years from September 3, 2023, at an exercise price of $205.248 per share subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.

On April 29, 2024, the Company entered into a General Release and Settlement Agreement (the “Omnia Agreement”) with Omnia Capital LP (“Omnia”). The Omnia Agreement settles and extinguishes all outstanding debt and interest owed to Omnia under the outstanding Subordinated Promissory Note dated March 3, 2023 (the “Old Note”) and the put provision contained the outstanding common stock purchase warrant dated March 3, 2023 (the “Old Warrant”), amounting to a total of approximately $5,228, for (i) a cash payment of $249; (ii) 1,150,000 shares of common stock and 1,150,000 immediately exercisable pre-funded warrants to purchase shares of common stock at an exercise price of $0.0001 that are exercisable until May 1, 2029 (at an effective per share price of $2.14) and (iii) 460,000 immediately exercisable warrants to purchase an equal number of shares of common stock at an exercise price of $2.14 until May 1, 2029 (the “New Warrant”). The New Warrant contains a put provision that permits the holder to require the Company to redeem the New Warrants, no earlier than May 1, 2025, for a purchase price equal to $2.675 per New Warrant. Subject to limited exceptions, a holder of pre-funded warrants and New Warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 19.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. As part of the Omnia Agreement, the parties agreed to terminate and cancel the Old Note and the Old Warrant and released all debts, claims or other obligations against each other occurring prior to the date of the Omnia Agreement.

Warrant Inducement Offering

On November 28, 2023, the Company commenced a warrant inducement offering with the holders of the Company’s outstanding 1,986,229 warrants consisting of: (i) the common stock purchase warrants of the Company issued on or about June 22, 2023; (ii) the common stock purchase warrants of the Company issued on or about July 10, 2023; (iii) the common stock purchase warrants of the Company issued on or about July 21, 2023; and/or (iv) the common stock purchase warrants of the Company issued on or about October 19, 2023 (collectively, the “Existing Warrants”), which Existing Warrants are exercisable for an equal number of shares of common stock at an exercise price of $8.40. The Company agreed to issue new warrants (the “Inducement Warrants”) to purchase up to a number of shares of common stock equal to 200% of the number of shares of common stock issued pursuant to the exercise by the holders of the Existing Warrants during the inducement period, for cash, at a reduced exercise price equal to the Nasdaq Minimum Price (as defined in the as defined in Nasdaq Listing Rule 5635(d)).

For the period from January 1, 2024 to February 15, 2024, the date of shareholder approval, the Company entered into warrant inducement agreements with certain holders of the Existing Warrants to purchase an aggregate of 820,769 shares of common stock at a reduced weighted average exercise price of approximately $2.9504 (which were subsequently reduced to $1.69 in connection with the May 2024 JGB debt for equity exchange). Pursuant to the warrant inducement agreements, the exercising holders of the Existing Warrants received 1,641,535 Inducement Warrants and the Company received aggregate gross proceeds of approximately $2,421 from the exercise of the Existing Warrants. Additionally, on the date of Shareholder Approval, the exercise price of the 3,581,213 outstanding Inducement Warrants, was reduced to $2.8237 based on the lowest Nasdaq Minimum Price (as defined in the as defined in Nasdaq Listing Rule 5635(d)) during the inducement period.

April 2024 Registered Direct Offering.

On April 8, 2024, the Company and certain investors entered into a securities purchase agreement (“April SPA”) relating to the issuance and sale of approximately $4,200 of shares and warrants, consisting of an aggregate of 1,855,000 shares of common stock, 125,000 pre-funded warrants and 1,980,000 warrants to purchase an equal number of shares, at a purchase price of $2.14 per unit. The warrants are exercisable immediately at an exercise price of $2.14 per share of common stock and expire five years after shareholder approval, as defined in the April SPA (which were subsequently reduced to $1.69 in connection with the May 2024 JGB debt for equity exchange). The net proceeds to the Company from the offering were approximately $3,913.

Outstanding Warrants

As of May 13, 2024, we had the following warrants outstanding:

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.

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, 2023.

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, 2023.

(a) Evaluation of Disclosure Controls and Procedures:

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

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

(b) Changes in Internal Control over Financial Reporting:

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as set forth below, there have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on March 28, 2024.

Our securities are currently listed on the Nasdaq. If Nasdaq delists our securities from trading on its exchange, we could face significant material adverse consequences, including:

• a limited availability of market quotations for our securities;
• reduced liquidity with respect to our securities;
• a determination that shares of our Class A common stock are “penny stock” which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares;
• a limited amount of news and analyst coverage; and
• a decreased ability to issue additional securities or obtain additional financing in the future.

On April 4, 2024, we received a deficiency letter from the Nasdaq Listing Qualifications Department indicating that we were not in compliance with Nasdaq’s Listing Rule 5550(b)(1) because our stockholders’ equity for the year ended December 31, 2023, as reported in our Form 10-K, was below the minimum stockholders’ equity requirement of $2,500,000 (the “Stockholders’ Equity Requirement”). In accordance with Nasdaq rules, we have been provided 45 calendar days to submit a plan to regain compliance with the Stockholders’ Equity Requirement (the “Compliance Plan”). If the Compliance Plan is accepted, Nasdaq may grant up to 180 calendar days from the date of the notice for us to regain compliance with the Stockholders’ Equity Requirement.

We intend to timely submit a Compliance Plan to Nasdaq to regain compliance with the Stockholders’ Equity Requirement. There can be no assurance that Nasdaq will accept our plan or that we will be able to regain compliance with Listing Rule 5550(b)(1) or maintain compliance with any other Nasdaq requirement in the future. If our securities are delisted from Nasdaq due to non-compliance with Rule 5550(b)(1) or the failure to satisfy another applicable Nasdaq rule, such delisting would have a material adverse impact on the trading price and ability to transfer our securities.