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UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2024

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________ to ________

Commission File Number: 001-36338

22nd Century Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada

    

98-0468420

(State or other jurisdiction

(IRS Employer

of incorporation)

Identification No.)

321 Farmington Road Mocksville, North Carolina 27028

(Address of principal executive offices)

(716) 270-1523

(Registrant’s telephone number, including area code)

Securities registered under Section 12(b) of the Act:

Title of each class

    

Ticker symbol

    

Name of Exchange on Which Registered

Common Stock, $0.00001 par value

 

XXII 

 

NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No  

As of May 14, 2024, there were 8,292,518 shares of common stock issued and outstanding.

22nd CENTURY GROUP, INC.

INDEX

 

 

Page

Number

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (unaudited)

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months ended March 31, 2024 and 2023 (unaudited)

4

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Three Months ended March 31, 2024 and 2023 (unaudited)

5

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2024 and 2023 (unaudited)

6

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

7

 

 

Item 2.

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

30

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

39

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

PART II.

OTHER INFORMATION

41

 

 

 

Item 1.

Legal Proceedings

41

 

 

 

Item 1A.

Risk Factors

41

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

 

Item 3.

Default Upon Senior Securities

41

 

 

 

Item 4.

Mine Safety Disclosures

42

 

 

 

Item 5.

Other Information

42

 

 

 

Item 6.

Exhibits

42

 

 

 

SIGNATURES

43

2

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(amounts in thousands, except share and per-share data)

March 31, 

December 31, 

    

2024

    

2023

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

1,517

$

2,058

Accounts receivable, net

 

1,747

 

1,671

Inventories

 

2,889

 

4,346

Insurance recoveries

 

3,768

 

3,768

GVB promissory note

 

2,000

 

2,000

Prepaid expenses and other current assets

 

699

 

1,180

Current assets of discontinued operations held for sale

 

1,093

 

1,254

Total current assets

 

13,713

 

16,277

Property, plant and equipment, net

 

3,236

 

3,393

Operating lease right-of-use assets, net

 

1,832

 

1,894

Intangible assets, net

 

5,820

 

5,924

Other assets

15

15

Total assets

$

24,616

$

27,503

 

  

 

  

LIABILITIES AND SHAREHOLDERS' DEFICIT

 

  

 

  

Current liabilities:

 

  

 

  

Notes and loans payable - current

$

$

543

Current portion of long-term debt

6,577

5,848

Operating lease obligations

 

238

 

231

Accounts payable

 

5,046

 

4,445

Accrued expenses

 

1,449

 

1,322

Accrued litigation

 

3,768

 

3,768

Accrued payroll

 

466

 

883

Accrued excise taxes and fees

 

2,525

 

2,234

Deferred income

376

726

Other current liabilities

 

1,672

 

1,849

Current liabilities of discontinued operations held for sale

 

3,147

 

3,185

Total current liabilities

 

25,264

 

25,034

Long-term liabilities:

 

  

 

  

Operating lease obligations

 

1,635

 

1,698

Long-term debt

8,136

8,058

Other long-term liabilities

1,205

1,123

Total liabilities

36,240

35,914

Commitments and contingencies (Note 11)

 

 

Shareholders' equity (deficit)

 

  

 

  

Preferred stock, $.00001 par value, 10,000,000 shares authorized

 

  

 

  

Common stock, $.00001 par value, 250,000,000 shares authorized

 

  

 

  

Capital stock issued and outstanding:

 

  

 

  

3,600,935 common shares (2,720,437 at December 31, 2023)

 

 

Common stock, par value

Capital in excess of par value

 

372,822

 

370,297

Accumulated deficit

 

(384,446)

 

(378,707)

Total shareholders' deficit

 

(11,624)

 

(8,410)

Total liabilities and shareholders’ deficit

$

24,616

$

27,503

See accompanying notes to Condensed Consolidated Financial Statements.

3

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(amounts in thousands, except share and per-share data)

Three Months Ended

March 31, 

2024

    

2023

Revenues, net

$

6,469

$

8,926

Cost of goods sold

4,213

4,724

Excise taxes and fees on products

 

3,385

 

4,185

Gross (loss) profit

 

(1,129)

 

17

Operating expenses:

 

 

Sales, general and administrative

 

2,906

 

9,837

Research and development

 

425

 

730

Other operating expense (income), net

 

(26)

 

(146)

Total operating expenses

 

3,305

 

10,421

Operating loss from continuing operations

 

(4,434)

 

(10,404)

Other income (expense):

 

 

Other income (expense), net

 

 

(155)

Interest income, net

 

 

57

Interest expense

 

(1,016)

 

(328)

Total other expense

 

(1,016)

 

(426)

Loss from continuing operations before income taxes

 

(5,450)

(10,830)

Provision (benefit) for income taxes

 

 

Net loss from continuing operations

$

(5,450)

$

(10,830)

Discontinued operations:

Loss from discontinued operations before income taxes

$

(289)

$

(7,352)

Provision (benefit) for income taxes

Net loss from discontinued operations

$

(289)

$

(7,352)

Net loss

$

(5,739)

$

(18,182)

Deemed dividends

(3,589)

Net loss available to common shareholders

$

(9,328)

$

(18,182)

Basic and diluted loss per common share from continuing operations

$

(1.72)

$

(12.80)

Basic and diluted loss per common share from discontinued operations

$

(0.09)

$

(8.69)

Basic and diluted loss per common share from deemed dividends

$

(1.13)

$

Basic and diluted loss per common share

$

(2.94)

$

(21.49)

Weighted average common shares outstanding - basic and diluted

3,165,237

846,005

Net loss

$

(5,739)

$

(18,182)

Other comprehensive income:

 

 

Unrealized gain on short-term investment securities

 

 

61

Foreign currency translation

 

 

(4)

Reclassification of realized losses to net loss

 

 

13

Other comprehensive income

70

Comprehensive loss

$

(5,739)

$

(18,112)

See accompanying notes to Condensed Consolidated Financial Statements.

4

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(amounts in thousands, except share data)

Three Months Ended March 31, 2024

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding*

    

Shares*

    

Par Value*

    

Income (Loss)

    

Deficit

    

Deficit

Balance at January 1, 2024

 

2,720,437

$

 

$

370,297

 

$

 

$

(378,707)

$

(8,410)

Stock issued in connection with RSU vesting, net of 405 shares withheld for taxes

 

3,810

 

 

(1)

 

 

 

(1)

Stock issued in connection with licensing arrangement

11,480

100

100

Stock issued in connection with warrant exercises, net of fees of $176

747,001

2,245

2,245

Equity-based compensation

 

 

 

181

 

 

 

181

Fractional shares issued for reverse stock split

 

118,207

 

 

 

 

 

Net loss

 

 

 

 

 

(5,739)

 

(5,739)

Balance at March 31, 2024

3,600,935

$

 

$

372,822

 

$

 

$

(384,446)

$

(11,624)

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

Three Months Ended March 31, 2023

Accumulated

Common

Par Value

Capital in

Other

Total

Shares

of Common

Excess of

Comprehensive

Accumulated

Shareholders’

    

Outstanding*

    

Shares*

    

Par Value*

    

Income (Loss)

    

Deficit

    

Equity

Balance at January 1, 2023

 

843,731

$

 

$

333,900

 

$

(111)

 

$

(237,814)

$

95,975

Stock issued in connection with RSU vesting, net of 1,976 shares withheld for taxes

 

5,644

 

 

(414)

 

 

 

(414)

Stock issued in connection with acquisition

1,941

503

503

Equity-based compensation

 

 

 

1,175

 

 

 

1,175

Adoption of ASU 2016-13

 

 

 

 

 

(118)

 

(118)

Equity detachable warrants

 

 

 

1,577

 

 

 

1,577

Other comprehensive income

 

 

 

 

70

 

 

70

Net loss

 

 

 

 

 

(18,182)

 

(18,182)

Balance at March 31, 2023

851,316

$

 

$

336,741

 

$

(41)

 

$

(256,114)

$

80,586

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

See accompanying notes to Condensed Consolidated Financial Statements.

5

22nd CENTURY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(amounts in thousands)

Three Months Ended

March 31, 

    

2024

    

2023

Cash flows from operating activities:

 

  

 

  

Net loss

$

(5,739)

$

(18,182)

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

 

  

 

  

Amortization and depreciation

 

266

 

881

Amortization of right-of-use asset

 

62

 

294

Other non-cash losses

6

Provision for credit losses

2

61

Loss on the sale of machinery and equipment

 

65

 

103

Debt related charges included in interest expense

807

231

Equity-based employee compensation expense

 

181

 

1,175

Gain on change of contingent consideration

 

 

22

Change in fair value of warrant liabilities

139

Change in fair value of derivative liability

82

Increase in inventory reserves

431

Changes in operating assets and liabilities, net of acquisition:

 

  

 

  

Accounts receivable

 

(77)

 

(3,624)

Inventories

 

1,026

 

(495)

Prepaid expenses and other assets

 

486

 

1,971

Accounts payable

 

632

 

312

Accrued expenses

 

127

 

1,544

Accrued payroll

 

(417)

 

(1,923)

Accrued excise taxes and fees

 

291

 

906

Other liabilities

(480)

 

(921)

Net cash used in operating activities

 

(2,255)

 

(17,500)

Cash flows from investing activities:

 

  

 

Acquisition of patents, trademarks, and licenses

 

 

(116)

Acquisition of property, plant and equipment

 

(7)

 

(1,910)

Proceeds from the sale of property, plant and equipment

 

22

 

200

Acquisition, net of cash acquired

90

Property, plant and equipment insurance proceeds

3,500

Sales and maturities of short-term investment securities

 

 

15,726

Purchase of short-term investment securities

 

 

(2,767)

Net cash provided by investing activities

 

15

 

14,723

Cash flows from financing activities:

 

  

 

Payments on notes payable

(545)

(3,512)

Proceeds from issuance of notes payable

71

Proceeds from issuance of long-term debt

16,849

Payment of debt issuance costs

(801)

Proceeds from issuance of detachable warrants

6,016

Net proceeds from warrant exercise

2,245

Taxes paid related to net share settlement of RSUs

(1)

(414)

Net cash provided by financing activities

 

1,699

 

18,209

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(541)

 

15,432

Cash, cash equivalents and restricted cash - beginning of period

 

2,058

 

3,020

Cash, cash equivalents and restricted cash - end of period

$

1,517

$

18,452

Reconciliation of cash and cash equivalents and restricted cash

Cash and cash equivalents at beginning of period

$

2,058

$

3,020

Restricted cash at beginning of period

Cash, cash equivalents and restricted cash at beginning of period

$

2,058

$

3,020

Cash and cash equivalents at end of period

$

1,517

$

10,952

Restricted cash at end of period

7,500

Cash, cash equivalents and restricted cash at end of period

$

1,517

$

18,452

Supplemental disclosures of cash flow information:

 

  

 

  

Non-cash transactions:

 

  

 

  

Capital expenditures incurred but not yet paid

$

8

$

142

Right-of-use assets and corresponding operating lease obligations

$

$

2,928

Deemed dividends

$

3,589

$

Non-cash consideration RXP acquisition

$

$

1,926

See accompanying notes to Condensed Consolidated Financial Statements.

6

22nd CENTURY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024

(Unaudited)

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

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

Basis of Presentation – 22nd Century Group, Inc. (together with its consolidated subsidiaries, “22nd Century Group” or the “Company”) is a Nevada corporation publicly traded on the NASDAQ Capital Market under the symbol “XXII.” 22nd Century Group is a tobacco products company with sales and distribution of the Company’s own proprietary new reduced nicotine tobacco products authorized as Modified Risk Tobacco Products by the FDA. Additionally, the Company provides contract manufacturing services for conventional combustible tobacco products for third-party brands.

The accompanying Condensed Consolidated Financial Statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

In the opinion of management, the Condensed Consolidated Financial Statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. The results for interim periods are not necessarily indicative of results or trends that may be expected for the fiscal year as a whole. The Condensed Consolidated Financial Statements were prepared using U.S. GAAP, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates.

Liquidity and Capital Resources – These Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company has incurred significant losses and negative cash flows from operations since inception and expects to incur additional losses until such time that it can generate significant revenue and profit in its tobacco business. The Company had negative cash flow from operations of $2,255 and $17,500 for the three months ended March 31, 2024 and 2023, respectively, and an accumulated deficit of $384,446 and $378,707 as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, the Company had cash and cash equivalents of $1,517. The Company has raised additional capital during April 2024. See Note 12 “Subsequent Events.”

Given the Company’s projected operating requirements and its existing cash and cash equivalents, there is 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.

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. 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.

7

The Condensed Consolidated Financial Statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Other Significant Risks and Uncertainties - The Company is subject to a number of risks, including, but not limited to, the lack of available capital; the possible delisting of our common stock from Nasdaq; future covenant non-compliance with respect to the Company’s Senior Secured Credit Facility giving rise to an event of default; inability to identify or consummate any strategic initiatives and transactions; unsuccessful commercialization strategy and launch plans for the Company’s products or market acceptance of the Company’s products; risks inherent in litigation, including purported class actions; and protection of proprietary technology.

Reclassifications – The Company has revised the presentation and classification of Excise taxes on products, net which was previously recorded in Cost of goods sold in the Condensed Consolidated Statement of Operations and Comprehensive Loss.

Reverse Stock Split – On April 2, 2024, the Company effected a 1-for-16 reverse stock split of its common stock in order to regain compliance with Nasdaq's continued listing requirements. Fractional shares resulting from the reverse stock split were rounded up to the nearest whole share, which resulted in the issuance of a total of 118,207 shares of common stock to implement the reverse stock split. All share and per share amounts, and exercise prices of stock options, and warrants in the Condensed Consolidated Financial Statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split.

Warrants - The Company accounts for stock warrants as either equity instruments, derivative liabilities, or liabilities in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) and ASC 815, Derivatives and Hedging (ASC 815) depending on the specific terms of the warrant agreement. The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. 

Warrants that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities pursuant to ASC 480 and are initially and subsequently measured at their estimated fair values. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For additional discussion on warrants, see Note 5 and Note 9.

Deemed dividends associated with anti-dilution or down round provisions (commonly referred to as “ratchets”) represent the economic transfer of value to holders of equity-classified freestanding financial instruments when these provisions are triggered. These deemed dividends are presented as a reduction in net income or an increase in net loss available to common stockholders and a corresponding increase to additional paid-in-capital resulting in no change to shareholders’ equity/deficit.

Debt Issued with Detachable Warrants - The Company considers guidance within ASC 470-20, Debt (ASC 470), ASC 480, and ASC 815 when accounting for the issuance of debt with detachable warrants. As described above under the caption “Warrants”, the Company classifies stock warrants as either equity instruments, derivative liabilities, or liabilities depending on the specific terms of the warrant agreement. In circumstances in which debt is issued with detachable warrants, the proceeds from the issuance of the debt are first allocated to the warrants at their full estimated fair value with a corresponding debt discount. The remaining proceeds, as further reduced by discounts (including those created by the bifurcation of embedded derivatives), is allocated to the debt. The Company accounts for debt as liabilities measured at amortized cost and amortizes the resulting debt discount from the allocation of proceeds, to interest expense using the effective interest method over the expected term of the debt instrument pursuant to ASC 835, Interest (ASC 835).

8

Embedded Derivatives – The Company considers whether there are any embedded features in debt instruments that require bifurcation and separate accounting as derivative financial instruments pursuant to ASC 815. Embedded derivatives are initially and subsequently measured at fair value. With the exception of the bifurcated embedded conversion option as described in Note 6 “Debt”, the embedded derivatives associated with the Company’s Senior Secured Credit Facility and Subordinated Note are not material.

Debt Issuance Costs and Discounts - Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the term of the related debt. Debt issuance costs and discounts related to the Company’s Senior Secured Credit Facility and Subordinated Note are recorded as a reduction of the carrying value of the related debt and are amortized to Interest expense using the effective interest method over the period from the date of issuance to the maturity date, whichever is earlier. The amortization of debt issuance costs and discounts are included in Debt related charges included in interest expense in the Condensed Consolidated Statements of Cash Flows. Note 6 “Debt” contains additional information on the Company’s debt issuance costs and discounts.

Impairment of Long-Lived Assets - The Company reviews all long-lived assets to be held and used for recoverability, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying value of the assets from the expected future cash flows (undiscounted and without interest expense) of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss for the difference between the estimated fair value and carrying value is recorded. The Company determined that there were no impairment indicators during the quarter ended March 31, 2024.

Gain and Loss Contingencies – The Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of related expenses. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.

In accordance with ASC 450-30, Gain Contingencies, gain contingencies are recognized when earned and realized, which typically will occur at the time of final settlement or when cash is received. Insurance recoveries may be realized earlier than cash receipt if a claim and amount of reimbursement is acknowledged by the insurance company that payment is due and collection is probable.

The Company maintains general liability insurance policies for its facilities. Under the terms of our insurance policies, in the case of loss to a property, the Company follows the guidance in ASC 610-30, Other Income —Gains and Losses on Involuntary Conversions, for the conversion of nonmonetary assets (the properties) to monetary assets (insurance recoveries). Under ASC 610-30, once the recovery is deemed probable the Company recognizes an asset for the insurance recovery receivable in the Condensed Consolidated Balance Sheets, with corresponding income that is offsetting to the casualty losses recorded in the Condensed Consolidated Statements of Operations and Comprehensive Loss. If the insurance recovery is less than the amount of the casualty charges recognized, the Company will recognize a loss whereas if the insurance recovery is greater than the amount of casualty loss recognized, the Company will only recognize a recovery up to the amount of the casualty loss and will account for the excess as a gain contingency. Business interruption insurance is treated as a gain contingency.

Refer to further discussion of all commitments and contingencies in Note 11.

Severance charges - From time to time, the Company evaluates its resources and optimizes its business plan to align to changing needs of executing on its strategy. These actions may result in voluntary or involuntary employee termination benefits. Voluntary termination benefits are accrued when an employee accepts the related offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and when the benefit arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the existence of a substantive plan for severance or termination.

9

The following table summarizes the change in accrued severance liabilities, presented within Other current liabilities on the Condensed Consolidated Balance Sheets:

Balance at January 1, 2024

$

386

Cash payments

(64)

Balance at March 31, 2024

$

322

Income Taxes - For interim income tax reporting, due to a full valuation allowance on net deferred tax assets, no income tax expense or benefit is recorded unless it is related to certain state, local, or franchise taxes, or an unusual or infrequently occurring item. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.

Recent Accounting Pronouncements – Adoption of Accounting Standards Codification Topic 326

The Company adopted ASU 2016-13, or ASC 326 Financial Instruments-Credit Losses, effective January 1, 2023 under a modified retrospective approach. Under the current expected credit losses (“CECL”) model, the Company immediately recognizes an estimate of credit losses expected to occur over the life of the financial asset at the time the financial asset is originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are recognized each period. The new guidance applies to the Company’s trade receivables and contract asset balances. Due to the nature of business operations and contracts with customers, the Company has historically not experienced significant bad debt expense or write-offs and as a result, the adoption of ASC 326 did not have a material impact to the Company’s Condensed Consolidated Financial Statements. In connection with the adoption of ASC 326, the Company recorded a provision for credit losses of $118 with an offsetting cumulative-effect adjustment to the opening balance of accumulated deficit as of January 1, 2023.

Accounting Guidance Not Yet Elected or Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280)-Improvements to Reportable Segment Disclosures. The ASU enhances disclosure of significant segment expenses by requiring disclosure of significant segment expenses regularly provided to the chief operating decision maker, extend certain annual disclosures to interim periods, and permits more than one measure of segment profit or loss to be reported under certain conditions. The amendments are effective for the Company in years beginning after December 15, 2023, and interim periods within years beginning after December 15, 2024. Early adoption of the ASU is permitted, including adoption in any interim period for which financial statements have not been issued. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740)-Improvements to Income Tax Disclosures. The ASU requires additional quantitative and qualitative income tax disclosures to allow readers of the consolidated financial statements to assess how the Company’s operations, related tax risks and tax planning affect its tax rate and prospects for future cash flows. For public business entities, the ASU is effective for annual periods beginning after December 15, 2024. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.

We consider the applicability and impact of all ASUs. If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our financial statements and related disclosures.

10

NOTE 2. DISCONTINUED OPERATIONS AND DIVESTITURES

As of March 31, 2024, all assets and liabilities of the hemp/cannabis disposal group are presented as current in the Condensed Consolidated Balance Sheets. The carrying amounts of the hemp/cannabis disposal group assets and liabilities that were classified as assets and liabilities of discontinued operations held for sale were as follows:

March 31, 

December 31, 

2024

2023

Prepaid expenses and other current assets

$

4

$

9

Property, plant and equipment, net

 

1,051

1,207

Other assets

38

38

Current assets of discontinued operations held for sale

$

1,093

$

1,254

Notes and loans payable - current

$

$

2

Operating lease obligations

 

1,044

 

1,083

Accounts payable

 

1,983

 

2,013

Accrued expenses

 

71

 

79

Deferred income

8

Other current liabilities

49

Current liabilities of discontinued operations held for sale

$

3,147

$

3,185

Net liabilities

$

(2,054)

$

(1,931)

Net loss from discontinued operations for the three months ended March 31, 2024 and 2023 was as follows:

Three Months Ended

March 31, 

2024

    

2023

Revenues, net

$

$

13,036

Cost of goods sold

14,230

Gross loss

(1,194)

Operating expenses:

Sales, general and administrative

67

4,394

Research and development

48

787

Other operating expense, net

99

905

Total operating expenses

214

6,086

Operating loss from discontinued operations

(214)

(7,280)

Other income (expense):

Other income, net

21

Interest expense

(75)

(93)

Total other expense

(75)

(72)

Loss from discontinued operations before income taxes

(289)

(7,352)

Provision (benefit) for income taxes

Net loss from discontinued operations

$

(289)

$

(7,352)

11

Cash flow information from discontinued operations for the three months ended March 31, 2024 and 2023 was as follows:

Three Months Ended

March 31, 

2024

    

2023

Cash used in operating activities

$

255

$

24,891

Cash provided by investing activities

$

22

$

1,869

Depreciation and amortization

$

-

$

520

Capital expenditures

$

-

$

1,683

NOTE 3. – INVENTORIES

Inventories at March 31, 2024 and December 31, 2023 consisted of the following:

    

March 31, 

    

December 31, 

    

2024

    

2023

Raw materials

$

2,047

$

3,580

Work in process

Finished goods

 

842

766

$

2,889

$

4,346

NOTE 4. – INTANGIBLE ASSETS, NET 

Intangible Assets, Net

Our intangible assets, net at March 31, 2024 and December 31, 2023 consisted of the following:

Gross

Accumulated

 

Net Carrying

March 31, 2024

    

Carrying Amount

    

Amortization

 

Amount

Definite-lived:

Patent

$

2,913

$

(2,147)

$

766

License fees

 

4,165

(1,795)

2,370

Total amortizing intangible assets

$

7,078

$

(3,942)

$

3,136

Indefinite-lived:

 

Trademarks

$

132

MSA signatory costs

2,202

License fee for predicate cigarette brand

350

Total indefinite-lived intangible assets

$

2,684

Total intangible assets, net

$

5,820

12

Gross

Accumulated

 

Net Carrying

December 31, 2023

    

Carrying Amount

    

Amortization

 

Impairment

Amount

Definite-lived:

Patent

$

2,913

$

(1,622)

$

(487)

$

804

License fees

 

4,165

(1,666)

(65)

2,434

Total amortizing intangible assets

$

7,078

$

(3,288)

$

(552)

$

3,238

Indefinite-lived:

 

Trademarks

$

134

MSA signatory costs

2,202

License fee for predicate cigarette brand

350

Total indefinite-lived intangible assets

$

2,686

Total intangible assets, net

$

5,924

Aggregate intangible asset amortization expense comprises of the following:

Three Months Ended

March 31, 

2024

    

2023

Cost of goods sold

$

3

$

4

Research and development

 

101

 

158

Total amortization expense

$

104

$

162

Estimated future intangible asset amortization expense based on the carrying value as of March 31, 2024 is as follows:

 

Remainder of 2024

 

2025

 

2026

2027

2028

Thereafter

Amortization expense

$

318

$

415

$

374

$

365

$

295

$

1,369

NOTE 5. – FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include equity investments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.

13

The following table presents information about our liabilities measured at fair value as of March 31, 2024 and December 31, 2023, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Fair Value

March 31, 2024

    

Level 1

    

Level 2

    

Level 3

    

Total

Liabilities

Detachable warrants

$

$

$

1,350

$

1,350

Derivative liability

639

639

Total liabilities

$

$

$

1,989

$

1,989

Fair Value

December 31, 2023

    

Level 1

    

Level 2

    

Level 3

    

Total

Liabilities

 

  

 

  

 

  

 

  

Detachable warrants

$

$

$

1,350

$

1,350

Derivative liability

 

 

 

557

 

557

Total liabilities

$

$