22nd Century Group, Inc.: Form 10-Q for the period ended Jun 30, 2024

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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.

The following 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.

On March 28, 2024, we implemented a 1-for-16 reverse stock split (the “Reverse Stock Split”) of our common stock. As a result of the Reverse Stock Split, every sixteen (16) shares of our pre-Reverse Stock Split common stock were combined and reclassified into one share of our Common Stock. The number of shares of common stock subject to outstanding options, warrants, and convertible securities were also reduced by a factor of sixteen and the exercise price of such securities increased by a factor of sixteen, as of March 28, 2024. All historical share and per-share amounts reflected throughout this section have been adjusted to reflect the Reverse Stock Split. The par value per share of our common stock was not affected by the Reverse Stock Split.

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 ability to remain listed on NASDAQ (iv) our financial and operating performance, (v) our strategic alternatives, including our cost savings initiatives, (vi) our expectations regarding regulatory enforcement (vii) our products, and (viii) 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 and within Part II Item 1A of our Form 10-Q for the three months ended March 31, 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. (NASDAQ: XXII) is an agricultural biotechnology company focused on tobacco harm reduction by offering tobacco products with 95% less nicotine, designed to improve health and wellness by helping smokers smoke less. Backed by comprehensive and extensively patented technologies that regulate nicotine biosynthesis activities in the tobacco plant, the Company has pioneered development of high-yield, proprietary reduced nicotine content (RNC) tobacco plants and clinically validated RNC cigarette products. The Company received the first and only FDA Modified Risk Tobacco Product (MRTP) authorization for a combustible cigarette in December 2021. The Company is a subsequent participating manufacturer under the Master Settlement Agreement ("MSA") and vertically integrated for the production of its both own products and contract manufacturing operations ("CMO"), which consist primarily of branded filtered cigars and conventional cigarettes.

Financial Overview

• Net revenues for the second quarter of 2024 were $7,947, a decrease of 1.3% from $8,050 in the prior year period.
• Second quarter 2024 cartons sold of 719 compared to 774 in the comparable prior year period.
• Gross profit for the second quarter of 2024 was a profit of $570 compared to a loss of $961 in the prior year period.
• Total operating expenses for the second quarter of 2024 decreased to $2,617 compared to $11,082 in the prior year quarter driven by:
• Sales, general and administrative expenses decreased to $2,360 compared to $10,283 in the prior year period, primarily driven by lower headcount (compensation and benefits), strategic consulting, sales and marketing costs due to our cost savings initiatives implemented in the second half of 2023.
• Research development expenses decreased to $250, compared to $799 in the prior year period, driven by lower headcount (compensation and benefits costs), contract and IP costs due to our continued cost saving initiatives with a focus on specific tobacco research.
• Operating loss from continuing operations for the second quarter 2024 was $2,047, compared to a loss of $12,043 in the prior year period for the reasons described above.
• Net loss from continuing operations in the second quarter of 2024 was $2,214 and basic and diluted loss from continuing operations per common share was $0.30 compared with net loss from continuing operations in the second quarter of 2023 of $13,708, and basic and diluted net loss from continuing operations per common share of $15.61.
• As of June 30, 2024, we had $1,279 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.

*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 and Six Months Ended June 30, 2024 Compared to Three and Six Months Ended June 30, 2023

Product line revenue, net

For the second quarter and first six months of 2024, cigarette net revenues, including export volume, increased to $4,107 million or 8%, and decreased to $6,867 or (17%), respectively, compared to the prior year periods. For the second quarter 2024, cigarette sales benefitted from strong summer seasonal demand with key customers, price increases that took effect in April 2024 and a one-time Spectrum® research cigarette order which provided a $0.9 million boost, sequentially compared to the first quarter 2024. For the first six months of 2024, volume decreases were result of prior year comparable period stocking orders of Pinnacle cigarettes launched in a top-five convenience store chain and a large one-time order of export product.

For the second quarter and first six months of 2024, filtered cigars net revenues decreased to $3,303 and $6,927, respectively, compared to $3,931 and $8,326 in the prior year comparable periods, reflecting lower volumes as the Company continues to transition away from low or negative margin manufacturing agreements, in favor of higher margin cigarette manufacturing agreements. Additionally, price increases for certain customers took effect in April 2024.

Cigarillo distribution net revenues for the second quarter and first six months of 2024 amounted to $552, reflective of the expanded Pinnacle branded product offerings launched in April 2024 with a top-five national convenience store chain.

VLN® cigarette net revenues were negligible in the second quarter 2024, a decrease from the comparable prior year period which benefited from stocking orders with major c-stores. While the Company has secured broad distribution of its VLN® products, the sell-through has not yet materialized. The Company is currently making changes to rebrand and relaunch its VLN® products.

Gross (loss) profit

The improvement in gross profit and gross profit as a percent of revenues, net for the three and six-month periods ended June 30, 2024, compared to the prior year periods, was primarily due to the benefit of ongoing cost cut initiatives, efficiency, and the shift in product mix.

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

(a) Compensation and benefits and equity compensation expense decreased for the three and six months ended June 30, 2024 compared to the prior year periods 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 and six months ended June 30, 2024 compared to the prior year periods were due to reduced spending as part of our cost cut initiatives.

(c) Decreases in public company expenses for the three- and six-month periods ended June 30, 2024 compared to the prior year periods were mainly due to waived board of director compensation fees in the current year periods and a decrease in professional services fees due to the restructuring of our business.

(d) Other expenses decreased for the three and six months ended June 30, 2024 compared to the three and six month periods ended June 30, 2023 were mainly due to decreases in insurance, technology and legal expenses.

Research and development (“R&D”) expense

(a) Decreased compensation and benefits for the three and six months ended June 30, 2024 are mainly related to the decrease in headcount in the current year periods compared to the prior year periods.

(b) Decreases in licenses, royalty and contract costs for the three- and six-month periods ended June 30, 2024 relate to growing and contract arrangements that occurred in the prior year periods.

(c) Decreases in IP costs for the three- and six-month periods ended June 30, 2024 compared to the prior year periods relate to a decrease in patent expenses and amortization from restructuring of our tobacco IP portfolio to align to our current strategy.

(d) Other expenses decreased for the three and six months ended June 30, 2024 compared to the prior year periods, were attributable to a decrease in consulting and testing costs due to our cost cut initiatives.

Other income (expense)

(a) Other income (expense), net decreased for the three months ended June 30, 2024 compared to the same prior year period, due to a decrease of $44 of realized losses on short term investments and $908 gain resulting from change in fair value of warrant liabilities.

Other income (expense), net decreased for the six months ended June 30, 2024 compared to the same prior year period, due to a decrease of $60 of realized losses on short term investments and $1,047 gain resulting from change in fair value of warrant liabilities.

(b) For the three months ended June 30, 2024 compared to the prior year period, interest expense primarily decreased as a result of ongoing repayment and elimination of debt obligations on our balance sheet. Cash interest decreased $169 and non-cash interest amortization decreased $287 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $56), and additional decreases of $541 as a result of change in fair value of conversion option derivative liability. Additionally, interest expense decreased $29 from the Subordinated Note, which was extinguished prior to maturity in April 2024, and resulted in a loss on extinguishment of $400.

For the six months ended June 30, 2024 compared to the prior year period, interest expense partially increased as a result of higher PIK interest accrual prior to extinguishment in April 2024 of $609, and $400 loss on extinguishment. This is offset by the ongoing repayment and elimination of debt obligations on our balance sheet, resulting in a decrease of cash interest of $102 and a decrease of non-cash interest amortization of $349 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $18), and additional decreases of $459 as a result of change in fair value of conversion option derivative liability.

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 $6,970 for the six months ended June 30, 2024 and an accumulated deficit of $385,558 as of June 30, 2024. As of June 30, 2024, we had cash and cash equivalents of $1,279 and working capital deficit from continuing operations of ($2,249) (compared to working capital deficit 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 from continuing operations as of June 30, 2024 and December 31, 2023 are set forth below:

Working Capital

As of June 30, 2024, we had working capital deficit from continuing operations, excluding assets and liabilities held for sale, of approximately ($2,249) compared to working capital deficit of approximately ($6,826) at December 31, 2023 an increase of $4,577. This increase in working capital was primarily due to a $2,597 increase in net current assets and a decrease in net current liabilities of $7,174. Cash and cash equivalents decreased by $779 and the remaining net current assets decreased by $1,818. 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 $30,362 from $37,332 in 2023 to $6,970 in 2024. The primary driver for this decrease was lower net loss of $31,870, a decrease of $5,830 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 $4,322 for the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

Net cash (used in) provided by investing activities

Cash used in investing activities amounted to $49 the six months ended June 30, 2024, as compared to cash provided by investing activities of $18,923 for the six months ended June 30, 2023. The decrease in cash provided by investing activities of $18,972 was primarily the result of (i) a decrease in net proceeds from short-term investments of $18,239; (ii) decrease of $3,500 in property, plant and equipment casualty loss insurance proceeds collected in the prior year period (iii) decrease of $90 from the acquisition of RXP in the prior year period and (iv) a decrease of $229 of proceeds from the sale of property, plant and equipment. These decreased cash inflows were partially offset by a decrease in cash outflows of $3,086 related to the acquisitions of patents, trademarks and property, plant and equipment.

Net cash provided by financing activities

During the six months ended June 30, 2024, cash provided by financing activities decreased by $21,082, from $27,322 in the prior year period, to $6,240, resulting from decreases in (i) net proceeds of $16,048 from issuance of long-term debt, (ii) proceeds of $6,016 from issuance of detachable warrants, (iii) net proceeds of $3,501 from the issuance of common stock (iv) proceeds from issuance of notes payable of $962 offset by an increase in net proceeds from warrant exercise of $2,245. These cash inflows were offset by decreases in cash outflows of note payable payments of $3,030 and taxes paid related to net share settlement of RSUs of $419 and increases in payments of long-term debt of $249.

Cash demands on operations

As of June 30, 2024, we had approximately $1,279 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 six months ended June 30, 2024 were $6,240.

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 2023 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.

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). 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.

As of June 30, 2024, the remaining principal balance of the Debentures is $8,325 of which $1,500 remains current with corresponding pledged assets.

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, and had an initial fair value of $1,515. 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. The total cash and non-cash consideration amounted to $5,628, resulting in extinguishment charges of $400.

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 August 1, 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 June 30, 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.

As previously disclosed, on April 4, 2024, we received a letter from Nasdaq Stock Market LLC (“Nasdaq”) indicating that we were not in compliance with Nasdaq Listing Rule 5550(b)(1), because (i) the stockholders’ equity (deficit) was below the minimum stockholders’ equity requirement of $2,500,000 and (ii) we did not, as of April 3, 2024, meet the alternatives standards of market value of listed securities or net income from continuing operations for compliance with Nasdaq Listing Rule 5550(b)(1). On June 3, 2024, we received a letter from Nasdaq notifying us that Nasdaq had reviewed our plan for regaining compliance with Nasdaq Listing Rule 5550(b)(1) and granted us a 180-calendar day extension from April 4, 2024 (or until October 1, 2024) to evidence compliance with Nasdaq Listing Rule 5550(b)(1).

In addition, on July 16, 2024, we received a deficiency letter from the Nasdaq Listing Qualifications Department indicating that for the last 30 consecutive business days our common stock did not maintain a minimum closing bid price of $1.00 (“Minimum Bid Price Requirement”) per share for continued listing on Nasdaq pursuant to Nasdaq Listing Rule 5550(a)(2). Under Nasdaq Listing Rule 5810(c)(3)(A), if during the 180 calendar days following the date of the notification, or prior to January 13, 2025, the closing bid price of our stock is at or above $1.00 for a minimum of 10 consecutive business days, we will regain compliance with the Minimum Bid Price Requirement. If the Company does not regain compliance with Rule 5550(a)(2) by January 13, 2025, the Company may be afforded a second 180 calendar day period to regain compliance.

If we fail to evidence compliance with Nasdaq listing rules, we will be delisted and we could face significant adverse consequences.