22nd Century Group Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2024

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 branded tobacco products and contract manufacturing services for third-party brands. The Company’s flagship product is a reduced nicotine combustible cigarette authorized by the FDA as a Modified Risk Tobacco Product.

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 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 $9,947 and $50,184 for the nine months ended September 30, 2024 and 2023, respectively, and an accumulated deficit of $389,315 and $378,707 as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, the Company had cash and cash equivalents of $5,341.

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. 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.

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; 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 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 Capital in excess of par value at the time of issuance. For additional discussion on warrants, see Note 5 and Note 10.

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. Additionally, the initial fair value of replacement warrants provided to holders under an inducement similarly is treated as a deemed dividend. These deemed dividends are presented as a reduction in net income or an increase in net loss available to common shareholders and a corresponding increase to Capital in excess of par value resulting in no change to shareholders’ equity (deficit). During the three and nine months ended September 30, 2024, total deemed dividends were $3,677 and $7,711, compared to the three and nine months ended September 30, 2023 of $564 and $931, respectively, resulting from equity offerings (see Note 10).

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).

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 three and nine months ended September 30, 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 12.

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.

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

The following table summarizes the classification of severance charges on the Condensed Consolidated Statements of Operations and Comprehensive Loss:

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 items. 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.

Recently Issued Accounting Pronouncements –

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.

In November 2023, the FASB issued ASU 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU requires additional disclosures regarding segment expenses and other items on an interim and annual basis. The amendments in ASU 2023-07 were adopted by the Company effective January 1, 2024. While this update will result in enhanced disclosures in our annual report for the fiscal year-ended December 31, 2024 and interim reports beginning in fiscal year 2025, the Company does not expect it will have a material impact on the Company’s consolidated financial statements.

Accounting Guidance Not Yet Elected or Adopted

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.

NOTE 2. DISCONTINUED OPERATIONS AND DIVESTITURES

As of September 30, 2024, all assets and liabilities of the former hemp/cannabis disposal group are presented as current in the Condensed Consolidated Balance Sheets. The carrying amounts of the former hemp/cannabis disposal group assets and liabilities that were classified as assets and liabilities of discontinued operations held for sale were as follows:

Net income (loss) from discontinued operations for the three and nine months ended September 30, 2024 and 2023 was as follows:

During the three- and nine-month periods ended September 30, 2024, the Company settled outstanding obligations which resulted in reversals of previously accrued liabilities of $10 and $1,561, respectively.

Cash flow information from discontinued operations for the three and nine months ended September 30, 2024 and 2023 was as follows:

NOTE 3. – INVENTORIES

Inventories at September 30, 2024 and December 31, 2023 consisted of the following:

NOTE 4. – INTANGIBLE ASSETS, NET

Intangible Assets, Net

Our intangible assets, net at September 30, 2024 and December 31, 2023 consisted of the following:

Aggregate intangible asset amortization expense comprises of the following:

Estimated future intangible asset amortization expense based on the carrying value as of September 30, 2024 is as follows:

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.

The following table presents information about our liabilities measured at fair value as of September 30, 2024 and December 31, 2023, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Warrants

The following table sets forth a summary of the changes in fair value of the Company’s common stock warrants accounted for as liabilities (Level 3) for the period ended September 30, 2024:

The Omnia warrants were measured at September 30, 2024 and December 31, 2023 using a Monte Carlo valuation model with the following assumptions:

The warrants are measured at fair value using certain estimated factors which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs that are used in the fair value measurement of the Company’s detachable warrants include the volatility factor, anti-dilution provisions, and contingent put option. Significant increases or decreases in the volatility factor would have resulted in a significantly higher or lower fair value measurement. Additionally, a change in probability regarding the anti-dilution provision or put option would have resulted in a significantly higher or lower fair value measurement. The Omnia 2023 warrants were extinguished and the Omnia 2024 warrants were issued in April 2024. See Note 6 for further details.

Derivative Liability

The following table sets forth a summary of the changes in fair value of the Company’s derivative liability accounted for as liabilities (Level 3) as of September 30, 2024:

The derivative liability related to the debentures and embedded conversion option was measured at September 30, 2024 and December 31, 2023 using a binomial lattice valuation model and contained the following assumptions:

The debentures and derivative liability are measured at fair value using certain estimated factors which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs that are used in the fair value measurement of the Company’s derivative liability include a decrease/increase in our stock price, stock price volatility, credit rating, and simulated stock price upon conversion could significantly change the fair value measurement as either an increase or decrease.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three and nine months ended September 30, 2024 and 2023 respectively, the Company did not have any financial assets or liabilities measured at fair value on a nonrecurring basis.

** NOTE 6. DEBT**

The Company has a senior secured credit facility (the “Senior Secured Credit Facility”), which consists of Debentures (as defined below) and previously, a subordinated promissory note (the “Subordinated Note). The Debentures were issued at a 5% original issuance discount and are subject to a 5% exit payment. The Subordinated Note was extinguished in April 2024, as described below.

Debt related to the Senior Secured Credit Facility and Subordinate Note as of September 30, 2024 and December 31, 2023 consists of the following:

Debentures

On March 3, 2023, the Company entered into a Securities Purchase Agreement with each of the purchasers party thereto (collectively, the “Purchasers”) and JGB Collateral, LLC, as collateral agent for the Purchasers (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. Commencing on March 3, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof.

The Company’s obligations under the Debentures can be accelerated upon the occurrence of certain customary events of default. In the event of a default and acceleration of the Company’s obligations, the Company would be required to pay the Prepayment Amount, liquidated damages and other amounts owing in respect thereof through the date of acceleration.

The Debentures contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict the Company from incurring additional indebtedness, creating or permitting liens on assets, making or holding any investments, repaying outstanding indebtedness, paying dividends or distributions and entering into transactions with affiliates. Substantially all of the company’s assets, including intellectual property, are collateralized and at risk if Debenture obligation is not satisfied. In addition, the Company was required to maintain at least $7,500 on its balance sheet as restricted cash in a separate account and has financial covenants to maintain certain quarterly revenue targets.

In connection with the sale of the Debentures, the Company issued warrants to purchase up to 20,835 shares of common stock for an exercise price of $306.00 per share (the “JGB Warrants”), which had an initial fair value of $4,475 net of issuance costs of $139. On June 22, 2023, as a result of the June 19, 2023 offering, the Company’s outstanding JGB warrants to purchase up to 20,835 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 31,060 shares of common stock. There areno further anti-dilution adjustments on such warrants.

On October 16, 2023, the Company entered into a Waiver and Amendment Agreement (the “October Amendment”) with each of the subsidiaries of the Company executing the Debentures, the Holders and the Agent, pursuant to which, among other things, (a) the Holders waived an event of default under Section 7(d) of the Debentures which required the Company to achieve revenue of at least $18,500 for the quarter ended September 30, 2023 (the “waiver”), (b) the parties agreed to amend Schedule E of the Debentures to reduce the Revenue Target (as such term is defined in the Debentures), for the quarter ended December 31, 2023, to $15,500, and (c) the Company agreed to release to the Purchasers the $7,500 that the Company was required to maintain in a separate account (the “Escrow Funds”) which Escrow Funds were applied to, and reduce, the outstanding principal amount of the Debentures on a dollar-for-dollar basis.

As additional consideration for the waiver, the Company agreed to assign, transfer and convey to the Agent, the Company’s entire right, title and interest in and to (i) the Promissory Note made by J&N Real Estate Company, L.L.C. (“J&N”) payable to the Company in the principal amount of $3,800 and (ii) the Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated June 30, 2021, between J&N, as borrower, for the benefit of the Company, as lender (collectively, the “Pledged Indebtedness”). Upon assignment of the Pledged Indebtedness, the Company recognized the $2,600 of consideration in exchange to be applied as a $2,000 reduction of the Put Price (as defined below), $600 reduction of the outstanding principal amount of Debentures and $895 loss on sale of financial asset.

In connection with the waiver, 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 (the “Put Price”), which was concurrently reduced by $2,000, as described above, with the remaining $500 payable by the Company on the Maturity Date recorded as Other long-term liabilities on the Condensed Consolidated Balance Sheets. No cash was exchanged as a result of executing the October 2023 Amendment.

Subsequently, on December 22, 2023, the Company, the Holders and the Agent entered into an Amendment Agreement (the “December 2023 Amendment”) pursuant to which the Holders and the Agent consented to the Purchase Agreement, as amended by the GVB Amendment (see Note 2 “Discontinued Operations and Divestitures”). In consideration of the Holders and the Agents’ consent, the Company agreed to (i) pay to the Agent, a cash payment of $2,200 to reduce the outstanding principal of the Debentures (which includes the cash portion of the New Purchase Price paid directly to Agent by Buyer which consists of a cash payment of $1,100 and an additional $1,100 paid by the Company), (ii) a 12% secured promissory note issued to the Company’s senior lender, on behalf of and at the direction of the Company, in an aggregate principal amount of $2,000 (the “GVB Promissory Note”), (iii) assign the GVB Insurance Proceeds to the Agent until the outstanding aggregate principal amount of the Debentures, plus accrued and unpaid interest, has been repaid in full; provided that the first $1,000 of Insurance Proceeds in excess of $5,000 shall be applied as stated in the agreement, and (iv) post-closing enter into a deed in lieu of foreclosure agreement with respect to 224 acres of real property in Delta County, Colorado commonly known as Needle Rock Farms, resulting in a non-monetary exchange yielding additional debt reduction of $1,000.

Effective June 24, 2024, GVB Biopharma (“GVB”), the Company’s former subsidiary, made a scheduled principal and interest payment against the Company’s outstanding indebtedness to JGB, reducing the Company’s total outstanding principal indebtedness with JGB by $1,500. The remaining $500 payable by GVB under the GVB Promissory Note has been extended to December 31, 2024.

As of September 30, 2024, the $500 remaining GVB Promissory Note and $1,000 real estate farm asset are pledged to the senior lender for principal reduction and accordingly $1,500 of the Senior Secured Credit Facility is recorded as Current portion of long-term debt on the Condensed Consolidated Balance Sheets.

As part of the December amendment, the Company, the Holders and the Agent also agreed to amend the Debentures to (i) allow the Holders to voluntarily convert the Debentures, in whole or in part, into shares of the Company’s common stock (“Voluntary Conversion Option”) on the earlier of (i) June 30, 2024 and (ii) the public announcement of a Fundamental Transaction at a conversion price equal to the lower of (x) $1.00 per share and (y) the closing sale price of the Company’s common stock on June 29, 2024 (the “Conversion Price”), and (ii) include a mandatory prepayment of the outstanding principal of the Debentures in an amount equal to 20% of the net cash proceeds of any issuance by the Company of any of its stock, or other Equity Interests (as defined in the Debentures) or the incurrence or issuance of any indebtedness. The Voluntary Conversion Option was approved by the Company’s shareholders on June 28, 2024 and the conversion option price in effect is $0.7458.

Additional terms of the December 2023 Amendment include a financial covenant holiday through the third quarter of 2024 and revised certain covenants thereafter to reflect the sale of the Purchased Interests, including lowering the Company’s quarterly revenue targets. As of September 30, 2024, the Company was in compliance with these financial covenants.

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 (“April 2024 Amendment”).

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 through the conversion option reset date on June 28, 2024. 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 quarter-ended June 30, 2024.

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 (“May 2024 Amendment”).

Under the terms of the May 2024 Amendment, 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). All pre-funded warrants were subsequently exercised during the quarter-ended June 30, 2024.

On August 27, 2024, the Company, the Holders and the Agent entered into that certain August 2024 Letter Agreement to modify the terms of the Amendment Agreement, the JGB SPA, and the Debentures, as amended (“August 2024 Amendment”).

Under the terms of the August 2024 Agreement, each Holder agreed that it shall not exercise its Holder Redemption Right (as defined in the Debentures) for more than 50% of its Monthly Allowance (as defined in the Debentures)through and including July 2025. Further, the provisions in Section 3(c)(i) of the Debentures requiring 20% of any equity issuances to be paid to the Holders shall be suspended through December 31, 2024. In consideration for the amendments set forth in the August 2024 Amendment, the Company paid an amendment fee of$746,000, which was added to the aggregate principal amount of the Debentures. JGB subsequently issued a conversion notice for 440,000 shares of common stock equal to principal reduction of$328,152.

In accordance with ASC 470-60 Troubled Debt Restructurings by Debtors and ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be a troubled debt restructuring, and if no, whether the transaction was deemed modification of existing debt, or an extinguishment of existing debt and new debt.

The October 2023 Amendment, April 2024 Amendment, May 2024 Amendment, and August 2024 Amendment were concluded to be a modification, and not an extinguishment, based on an analysis of the present value of future cash flows. A new effective interest rate was determined, and the debt continued to be amortized. The December 2023 Amendment was concluded to be an extinguishment, due to the addition of a substantive conversion option. As a result, the pre-amended debt carrying value was extinguished and the new debt was recorded at fair value, which is subsequently amortized using the effective interest method. Extinguishment charges were $5,158 and recorded in Interest expense on the Consolidated Statements of Operations and Comprehensive Loss for the quarter ended December 31, 2023.

The Company analyzed the conversion feature of the December 2023 Amendment for derivative accounting consideration under ASC 815-15 and determined that the embedded conversion features should be classified as a bifurcated derivative because the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability at fair value in the amount of $75 as of September 30, 2024 and $557 as of December 31, 2023 as a component of Other Long-Term Liabilities on the Condensed Consolidated Balance Sheets. See Note 5 “Fair Value Measurement” for additional information related to measurement of the debentures and derivative liability.

See Note 13 “Subsequent Events” for additional information related to the Debentures.

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 monthly at a compounding 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. The Subordinated Note was terminated and extinguished in April 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 “2023 Omnia Warrants”). The 2023 Omnia Warrants were exercisable forseven 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 in the 2023 Omnia Warrants, 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 “2024 Omnia Warrants”). The 2024 Omnia Warrants contain a put provision that permits the holder to require the Company to redeem the 2024 Omnia Warrants, no earlier than May 1, 2025, for a purchase price equal to $2.675 per warrant, and had an initial fair value of $1,515 (see Note 5). Subject to limited exceptions, a holder of pre-funded warrants and 2024 Omnia 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 2023 Omnia Warrants 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 for the three months ended June 30, 2024, recorded in Interest expense in the Statement of Operations and Comprehensive Loss.

Contractual Maturities

The Company has $1,500 pledged against outstanding indebtedness under the Senior Secured Credit Facility comprised of (i) $500 GVB promissory note and (ii) $1,000 assignment of Needle Rock Farms to be applied as principal reduction in 2024. As of September 30, 2024, contractual maturities under the Senior Secured Credit Facility for the remainder of 2024 and through maturity, excluding any discounts or premiums, were to be paid in 2024 of $1,500 and 2026 of $6,821.

Additionally, commencing August 2024, at its option, JGB may require the Company to redeem 2% of the original principal amount of the Debentures, as amended to be no more than 50% or $210 per calendar month through July 2025 and $421 per calendar month thereafter which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. JGB elected the monthly redemption feature and the Company repaid $421 in cash during the three month period ended September 30, 2024. If the redemption feature is elected, as of September 30, 2024, contractual maturities under the senior secured credit Facility for the remainder of 2024 are $632, for 2025 are $3,579, and for 2026 are $4,110.

Debt Issuance Costs

The fair values of the warrants at issuance of $5,791, together with the Debentures original issuance discount of $1,053, Debentures exit payment of $1,053, and third-party debt issuance costs of $801, are being amortized using the effective interest method over the term of the respective debt instrument, recorded as Interest expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss. The components and activity of unamortized discount and deferred debt issuance costs related to the Senior Secured Credit Facility and Subordinated Note is as follows:

NOTE 7. – NOTES & LOANS PAYABLE

The table below outlines our notes and loans payable balances as of September 30, 2024 and December 31, 2023:

Insurance loans payable

During the second quarter of 2024, the Company renewed its Director and Officer (“D&O”) insurance for aone-year policy premium totaling $866. The Company paid $147 as a premium down payment and financed the remaining $719 of policy premiums overten months at a 8.3% annual percentage rate.

During the second quarter of 2023, the Company renewed its Director and Officer (“D&O”) insurance for aone-year policy premium totaling $1,626. The Company paid $285 as a premium down payment and financed the remaining $1,341 of policy premiums overten months at a 7.88% annual percentage rate. Additionally, during the third quarter of 2023, the Company expanded its D&O coverage, resulting in additional financing of $143, at 9.38% annual percentage rate oversix months.

The Company also has other insurance loans payable related to property and general liability across the Company.

Estimated future principal payments to be made under the above notes and loans payable as of September 30, 2024 are as follows:

NOTE 8. – REVENUE RECOGNITION

The Company’s revenues are derived primarily from contract manufacturing organization (“CMO”) customer contracts that consist of obligations to manufacture the customers’ branded filtered cigars and cigarettes. Additional revenues are generated from sale of the Company’s proprietary low nicotine content cigarettes, sold under the brand name VLN®, or research cigarettes sold under the brand name SPECTRUM®.

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer. For certain CMO contracts, the performance obligation is satisfied over time as the Company determines, due to contract restrictions, it does not have an alternative use of the product and it has an enforceable right to payment as the product is manufactured. The Company recognizes revenue under those contracts at the unit price stated in the contract based on the units to customers and is recognized net of cash discounts, sales returns and allowances. There wasno allowance for discounts or returns at September 30, 2024 and December 31, 2023.

Disaggregation of Revenue

The Company’s net revenue is derived from customers located primarily in the United States and is disaggregated by the timing of revenue. Revenue recognized from Tobacco products transferred to customers over time represented 44% and 58%, respectively, of total Tobacco revenue for the three and nine months ended September 30, 2024, compared to 57% and 63%, respectively, for the three and nine months ended September 30, 2023.

The following table presents net revenue by product line:

The following tables present net revenues by significant customers, which are defined as any customer who individually represents 10% or more of disaggregated product line net revenues:

Contract Assets and Liabilities

Unbilled receivables (contract assets) represent revenues recognized for performance obligations that have been satisfied but have not been billed. These receivables are included as Accounts receivable, net on the Condensed Consolidated Balance Sheets. Customer payment terms vary depending on the terms of each customer contract, but payment is generally due prior to product shipment or within credit terms up to 30 days after shipment. Deferred income (contract liabilities) relates to down payments received from customers in advance of satisfying a performance obligation and is included as Deferred income on the Condensed Consolidated Balance Sheets.

Total contract assets and contract liabilities are as follows:

During the nine months ended September 30, 2024, the Company recognized $726 of revenue that was included in the contract liability balance as of December 31, 2023. During the nine months ended September 30, 2023, the Company recognized $688 of revenue that was included in the contract liability balance as of December 31, 2022.

NOTE 9 – EQUITY- BASED COMPENSATION

The Company maintains certain stock-based compensation plans that were approved by the Company’s shareholders and are administered by the Compensation Committee of the Company’s Board of Directors. The stock-based compensation plans provide for the granting of stock options, time and performance based restricted stock units (RSU’s), among other awards to employees, non-employee directors, consultants, and service providers. The 2021 Omnibus Incentive Plan was amended on June 28, 2024, increasing the authorized shares by an additional 5,000,000. As of September 30, 2024, the Company had available 5,191,421 shares remaining for future awards under its Omnibus Incentive Plans.

*Compensation Expense –The *Company recognized the following compensation costs, net of actual forfeitures, related to restricted stock units (“RSUs”) and stock options:

Restricted Stock Units – We typically grant RSUs to employees and non-employee directors. The following table summarizes the changes in unvested RSUs from January 1, 2024 through September 30, 2024.

The fair value of RSUs related to employee grants that vested during the nine months ended September 30, 2024 was approximately $9 based on the stock price at the time. During the nine months ended September 30, 2024, there were 516,163 shares granted during the period for settled indebtedness for consulting and other services provided; in which the fair value at the time of vesting amounted to $89. As of September 30, 2024, there are 145,250 unvested shares that require the achievement of certain milestones to be met which have not yet been achieved and compensation expense for all other unvested shares amounted to $148 which is expected to be recognized over a weighted average period of approximately 1.4 years.

*Stock Options –*Our outstanding stock options were valued using the Black-Scholes option-pricing model on the date of the award. There was no stock option grant activity during the nine months ended September 30, 2024. A summary of the status of stock options activity since January 1, 2024 and at September 30, 2024 is as follows:

The intrinsic value of a stock option is the amount by which the current market value or the market value upon exercise of the underlying stock exceeds the exercise price of the option.

NOTE 10. – CAPITAL RAISES AND WARRANTS FOR COMMON STOCK

The following tables summarize the Company’s warrant activity:

The following tables summarizes the Company’s outstanding warrants as of September 30, 2024:

2023 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 “2023 Existing Warrants”), which Existing Warrants were 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 “2023 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 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 2023 Existing Warrants to purchase an aggregate of 820,769 shares of common stock at a reduced weighted average exercise price of approximately$2.9504. Pursuant to the warrant inducement agreements, the exercising holders of the 2023 Existing Warrants received 1,641,535 of the 2023 Inducement Warrants and the Company received aggregate gross proceeds of approximately$2,421 from the exercise of the 2023 Existing Warrants. As a result of the inducement and subsequent exercise, the Company determined the incremental fair value provided to the holders using Black Scholes and Monte Carlo models as (i)$148 increase in fair value due to the adjustment in exercise price of 2023 Existing Warrants

attributable to down round pricing protection (ii)$3,441 fair value of Inducement Warrants issued to the holders that exercised 2023 Existing Warrants. The incremental fair value is recorded as non-cash deemed dividend. The proceeds of the warrant inducement and issuance of common stock are recorded as Capital in excess of par value.

As a result of subsequent offerings, the exercise price on 3,581,213 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.

In connection with the September 2024 Warrant Inducement Offering,3,245,744 were subsequently exercised under the terms described below. As of September 30, 2024,335,468 of 2023 Inducement Warrants remained outstanding with an exercise price of$0.06 of which 332,968 warrants were subsequently cash exercised in October 2024.

April 2024 Registered Direct Offering

On April 8, 2024, the Company and certain investors entered into a securities purchase agreement (the “April SPA”) relating to the issuance and sale of shares of common stock (or pre-funded warrants in lieu of common stock) pursuant to a registered direct offering and a private placement of warrants to purchase shares of common stock (collectively, the “April Offering”). The investors purchased approximately $4,237 of shares and warrants, consisting of an aggregate of 1,855,000 shares of common stock, pre-funded warrants to purchase 125,000 shares of common stock and warrants to purchase 1,980,000 shares of common stock, at a purchase price of $2.14 per share and accompanying warrant. The warrants are exercisable at an exercise price of $2.14 per share of common stock, expire on June 28, 2029 and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered. The pre-funded warrants are exercisable immediately upon issuance at an exercise price of $0.00001.

The Company also issued an aggregate of 118,800 placement agent warrants to the Placement Agent and its designees with substantially the same terms as the warrants to the Investors, except that the placement agent warrants will terminate five years following the commencement of sales of the Offering and have an exercise price of $2.675.

The net proceeds to the Company from the Offering, after deducting placement agent fees and the Company’s estimated offering expenses, were approximately $3,913.

As a result of subsequent offerings, the exercise price on 2,098,800 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.

In connection with the September 2024 Warrant Inducement Offering,1,833,500 were subsequently exercised under the terms described below. As of September 30, 2024,265,300 of the April 2024 warrants remained outstanding with an exercise price of$0.06 of which 250,000 warrants were subsequently cash exercised in October 2024.

September 2024 Registered Direct Offering

On September 27, 2024, the Company and certain investors entered into a securities purchase agreement (the “September SPA”) relating to the issuance and sale of shares of common stock of the Company pursuant to a registered direct offering and a private placement of warrants to purchase shares of common stock. The Investors purchased approximately$1,175 of shares and warrants, consisting of an aggregate of 5,153,508 shares of Common Stock and warrants to purchase 10,307,016 shares of common stock, at a purchase price of$0.228 per share and accompanying warrant. The Warrants are exercisable after the Shareholder Approval Date (as defined in the Securities Purchase Agreement) at an exercise price of$1.00 per share of common stock, expire on the date that is five(5) years after the Shareholder Approval Date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such Warrants, then such exercise price shall be lowered to such price at which the shares were offered.

The net proceeds to the Company from the Offering, after deducting placement agent fees and the Company’s offering expenses were$1,054.

In addition, the Company issued an placement agent warrants to purchase an aggregate of 309,211 shares of common stock with substantially the same terms as the warrants, except that the placement agent warrants will terminate five years following the commencement of sales of the offering and have an exercise price of$1.25.

As a result of subsequent offerings, the exercise price on 10,616,227 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.

2024 Warrant Inducement

On September 29, 2024, the Company commenced a warrant inducement offering (the “2024 Warrant Inducement”) with the holders of outstanding warrants to purchase 5,079,244 shares of common stock, consisting of: (i) common stock purchase warrants to purchase 3,245,744 shares of common stock issued on or about November 29, 2023, and (ii) common stock purchase warrants to purchase 1,833,500 shares of common stock issued on or about April 9, 2024 ((i) and (ii) collectively, the “2024 Existing Warrants”), which are exercisable for an equal number of shares of common stock at an exercise price of$0.228. The net proceeds to the Company from the 2024 Warrant Inducement, after deducting placement agent fees and the Company’s offering expenses were$1,073.

In connection with the 2024 Warrant Inducement, the Company issued 10,158,488 new warrants (the “2024 Inducement Warrants”).** **The 2024 Inducement Warrants will be issued on substantially the same terms as the 2024 Existing Warrants, except that the Inducement Warrants will be exercisable at any time on or after the Shareholder Approval Date, have an expiration date offive years from the Shareholder Approval Date, and have an exercise price equal to$1.00.

In addition, the Company agreed to issue placement agent warrants to purchase an aggregate of 304,754 shares of common stock with substantially the same terms as the 2024 Inducement Warrants, except that the placement agent 2024 Inducement Warrants will terminate five years following the commencement of sales of the 2024 Warrant Inducement and have an exercise price of$1.25.

The incremental fair value, determined using a Black Scholes valuation model, of the 2024 Inducement Warrants issued to the holders that exercised the 2024 Existing Warrants was$1,530 and is recorded as non-cash deemed dividend. The proceeds of the warrant inducement and issuance of common stock are recorded as Capital in excess of par value.

As a result of a subsequent offerings in October 2024, the exercise price on 10,463,242 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.

Other Equity Financings

Pursuant to a Regulation A offering of Form 1-A, the Company entered into subscription agreements with certain accredited investors and high net worth individuals, pursuant to which the Company issued and sold to the investors 9,720,000 shares of its Common Stock, par value $0.0001 per share of the Company at a price of $0.57 per share for net proceeds to the Company of $5,208, net of offering costs of $332.

The shares that were offered and sold above or at-the-market under Nasdaq rules and pursuant to the Company’s Form 1-A, initially filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, on August 2, 2024 and qualified on August 13, 2024.

Private Placement of Warrants

During the third quarter of 2024, the Company and certain investors entered into warrant purchase agreements related to the private placement of 14,796,000 warrants to purchase an equal number of shares of common stock at a purchase price of $0.00001 per warrant. The warrants are immediately exercisable at an exercise price of$1.00 per share of common stock, expire five years following the issuance date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered; provided however, that such lower exercise price shall not be effected unless and until the Company has obtained shareholder approval for such adjustment.

As a result of subsequent offerings, the exercise price on 14,796,000 warrants was automatically adjusted triggering non-cash deemed dividends as a result of the down-round adjustments.

Other Agreements

During the second quarter of 2024, the Company settled an aggregate of $1,192 of outstanding indebtedness under various commercial agreements for an aggregate of 700,958 shares of common stock at an effective average price per share of $2.14.

During the third quarter of 2024, the Company settled an aggregate of $525 of outstanding indebtedness under various commercial and licensing agreements for an aggregate of 1,770,688 shares of common stock at an effective average price per share of $0.2965.

NOTE 11. – LOSS PER COMMON SHARE

The following table sets forth the computation of basic and diluted loss per common share for the three and nine months ended September 30, 2024 and 2023, respectively. Outstanding warrants, options and RSUs were excluded from the calculation of diluted EPS as the effect was antidilutive to consolidated net loss.1,150,000 pre-funded warrants are included in weighted average common shares outstanding – basic and diluted for purposes of calculating loss per common share for the three and nine month periods ended September 30, 2024.

NOTE 12. - COMMITMENTS AND CONTINGENCIES

License agreements and sponsored research* –* The Company has entered into various consulting, license and tobacco growing agreements (the “Agreements”) with various counter parties in connection with the Company’s plant biotechnology business relating to tobacco. The schedule below summarizes the Company’s commitments, both financial and other, associated with each Agreement. Costs incurred under the Agreements are generally recorded as research and development expenses on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss.

Litigation-* *The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future. In accordance with applicable accounting guidance, 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 connection with ongoing restructuring efforts and the hemp/cannabis disposal group (see Note 2 “Divestitures and discontinued operations”) the Company has received unasserted claims related to disputed contracts, which could result in accrual of an additional amount up to $1,314 on the Condensed Consolidated Balance Sheets. The Company is vigorously defending its position against these claims.

Shareholder Derivative Cases

On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc., Case No. 1:19 cv 00748. Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b 5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a 9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement. Numerous other shareholder derivative cases were subsequently filed and consolidated into the main action.

On December 5, 2023, the parties entered into a Memorandum of Settlement to fully resolve all claims pending the Court’s approval of a motion for preliminary approval of settlement. The settlement amount is $768 related to plaintiffs attorney and legal fees and is fully covered by the Company’s insurance. The Company expects the settlement to be approved and funded in the fourth quarter of 2024. Accordingly, the Company has recorded an accrual for litigation settlement and corresponding indemnification receivable on the Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023.

Insurance Litigation

In November 2022, there was a fire at the Company’s Grass Valley manufacturing facility in Oregon, which resulted in a total loss of the facility. The Company submitted an insurance claim with Dorchester Insurance Company, Ltd. (“Dorchester”) for casualty loss and business interruption coverage which was acknowledged on November 23, 2022. Dorchester funded$5,000 of casualty loss insurance but has failed to issue any payments in connection with the Company’s business interruption claim.

On July 19, 2023, the Company filed a Complaint against Dorchester in the United States District Court for the District of Oregon, Pendleton Division, Case No. 2:23-cv-01057-HL. The Company is alleging breach of contract and breach of duty of good faith and fair dealing. The Company is seeking full recovery of its business interruption claim of approximately$9,000 under the policy plus direct and indirect damages resulting from Dorchester’s continued delay in issuing coverage payments. Discovery is ongoing. The Company filed a Motion for Partial Summary Judgment which is scheduled for hearing on December 18, 2024. The trial date is November 4, 2025.

KeyGene Dispute

On April 11, 2024 the Company received a Request for Arbitration from Keygene N.V. (“Keygene”) in connection with the Company’s termination of various framework collaborative research agreements described below. On April 3, 2019, the Company entered into the Framework Collaborative Research Agreement with KeyGene in the field of hemp/cannabis. On April 30, 2021, the Company and KeyGene entered into a First Amended and Restated Framework Collaborative Research Agreement which extended the agreement term, from first quarter 2024 to first quarter 2027. On March 30, 2022, the Company and KeyGene entered into a new Framework Collaborative Research Agreement for a term ofthree years in the field related to the hops plant. On January 8, 2024, the Company formally terminated both Framework Collaborative Research Agreements, as amended, related to hemp/cannabis and hops. KeyGene is seeking payment in the amount of$1,885 for current and future services under the Framework Collaborative Research Agreements and has invoiced the Company $881 for services performed. The matter is being arbitrated under the administration of the International Court of Arbitration.

The Company filed its Answer to Request for Arbitration with Defenses and Counterclaims on June 4, 2024. On July 25, 2024, an arbitrator was formally appointed. Discovery commenced in September 2024. The arbitration date has been set for March 24, 2025. The Company believes it has substantial defenses to KeyGene’s claims and intends to defend itself vigorously.

Maison Dispute

On January 23, 2024, the Company received a Notice of Intent to Arbitrate from Maison Placements Canada Inc. (“Maison”) in connection with the Company’s March 2023 Senior Secured Credit Facility transaction. Maison claims it is owed fees for closure of the Senior Secured Credit Facility transaction as a result of discussions with former Company personnel and a purported letter of engagement dating from 2021. The parties have mutually agreed on settlement terms which are expected to be finalized in November 2024.

Cookies Retail Products Dispute

On October 23, 2024, Cookies Retail Products, LLC (“CRP”) filed a complaint against the Company, a subsidiary of the Company (“PTB”), Cookies Creative Consulting, Inc. (“CCC”), Cookies SF, LLC (“CSF”), GMLC WLNS, LLC (“GMLC”) and other defendants, Case No. 24STCV27828, Superior Court of California, County of Los Angeles.

The complaint alleges three counts against all defendants: Count I for Breach of Contract related to a Settlement Agreement entered into between CRP, Paul Rock, CSF, GMLC, CCC and PTB (the “Settlement Agreement”), and a Purchase Agreement entered into between PTB and CRP (the “Purchase Agreement”); Count II for Fraud – False Promise related to the Settlement Agreement and Purchase Agreement; and Count III for Violation of Penal Code Section 496 related to a Licensing and Distribution Agreement between GMLC, CCC and PTB. CRP is seeking monetary damages.

The Company has not been served with the Complaint. The Company believes it has substantial defenses to CRP’s claims, and counterclaims, and intends to defend itself vigorously.

NOTE 13. SUBSEQUENT EVENTS

Senior Secured Credit Facility

On October 10, 2024, the Company entered into that certain Letter Agreement to modify the terms of the Securities Purchase Agreement dated March 3, 2023 (the “JGB SPA”) and debentures (the “Debentures”), as amended, 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”).

Under the terms of the Letter Agreement, subject to obtaining shareholder approval as described below, Company will be able to reset the Conversion Price (as defined in the Debentures) currently in effect, at the discretion of the Board of Directors and on a one time basis, to an amount equal to the average of the daily VWAPs for each of thefive (5) consecutive Nasdaq trading days immediately preceding the date on which the Conversion Price shall be reset. The reset Conversion Price shall in no event be greater than the Conversion Price in effect on the date of the Letter Agreement, which is $0.7458.

The reduction in the Conversion Price will be subject to shareholder approval. The Company has agreed to seek shareholder approval for the Conversion Price reset pursuant to applicable Nasdaq rules no later than December 31, 2024, and to seek shareholder approval at each shareholder meeting thereafter if approval is not obtained by then.

October 2024 Registered Direct Offering

On October 11, 2024, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of shares of common stock of the Company pursuant to a registered direct offering and a private placement of warrants to purchase shares of common stock. The investors purchased approximately$2,140 of shares and warrants, consisting of an aggregate of 14,266,666 shares of common stock and warrants to purchase 28,533,332 shares of common stock, at a purchase price of$0.15 per share and accompanying warrant. The Warrants are exercisable after the Shareholder Approval Date (as defined in the Securities Purchase Agreement) at an exercise price of$1.00 per share of common stock, expire on the date that isfive (5) years after the Shareholder Approval Date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such Warrants, then such exercise price shall be lowered to such price at which the shares were offered.

The net proceeds to the Company from the Offering, after deducting the placement agent fees and the Company’s offering expenses were$2,002.

In addition, the Company agreed to issue placement agent warrants to purchase an aggregate of 856,000 shares of common stock with substantially the same terms as the warrants, except that the placement agent warrants will terminate five years following the commencement of sales of the offering and have an exercise price of$1.25.

The October 2024 registered direct equity offering resulted in down-round adjustments wherebythe exercise price on 36,673,113 warrants was automatically adjusted to $0.06 triggering non-cash deemed dividends.

October 2024 PIPE Offering

On October 23, 2024, the Company and certain investors entered into a securities purchase agreement relating to the issuance and sale of prefunded warrants to purchase shares of common stock of the Company and warrants to purchase shares of Common Stock pursuant to a private placement. The investors purchased approximately$3,039 of prefunded warrants and warrants, consisting of prefunded warrants to purchase an aggregate of 28,354,914 shares of common stock and warrants to purchase an aggregate of 42,532,372 shares of Common Stock, at a purchase price of$0.10719 per prefunded warrant and accompanying warrant. The prefunded warrants are immediately exercisable upon issuance. The warrants are exercisable after the stockholder approval date (as defined in the securities purchase agreement) at an exercise price of$1.00 per share of common stock, expire on the date that isfive (5) years after the stockholder approval date and are subject to adjustment in certain circumstances, including upon any subsequent equity sales at a price per share lower than the then effective exercise price of such warrants, then such exercise price shall be lowered to such price at which the shares were offered.

The net proceeds to the Company from the offering, after deducting placement agent fees and the Company’s offering expenses, are approximately$2,909.

The shares issuable upon exercise of the warrants are subject to stockholder approval. The Company has agreed to hold an annual or special meeting on or before May 30, 2025, to have stockholders approve the issuance of the shares of common stock underlying the warrants pursuant to applicable Nasdaq rules.

In addition, the Company agreed to issue placement agent warrants to purchase an aggregate of 2,268,393 shares of common stock with substantially the same terms as the Warrants, except that the placement agent warrants have an exercise price of$1.25.

The October 2024 PIPE offering resulted in down-round adjustments wherebythe exercise price on 65,323,227 warrants was automatically adjusted to $0.0504 triggering non-cash deemed dividends.