This discussion should be read in conjunction with the other sections of this Form 10-K, including "Risk Factors," and the Financial Statements and notes thereto. This section of the Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons of 2021 to 2020. Discussions of 2019 items and year-to-year comparisons of 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 on our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K. See "Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary." Our actual results may differ materially. For purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations, references to the "Company," "we," us" or "our" refer to the operations of22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein.
($ in thousands, except per share data or unless otherwise specified)
Executive Overview of Full Year 2021 Results
Key Business and Financial Highlights
On
nicotine cigarettes, VLN® King and VLN® Menthol King. In addition to
authorizing the Company to market VLN® cigarettes with the claim, “95% less
? nicotine”, to clarify the purpose of the brand, the FDA also authorized the
claim, “Helps You
launch VLN® King and VLN® Menthol King in our first U.S. market on or before
Since reporting third quarter 2021 earnings, we have signed our first IP
? licensing agreement in hemp/cannabis, as well as recognized our first revenue
from the sale of biomass grown at our Needle Rock farms location.
We believe that we have secured the key partnerships needed to maximize each
component in the upstream segment of the hemp/cannabis value chain and expect
? to continue to expand this network of resources to support our business growth.
We believe these partnerships will enable us to accelerate the new development
of valuable, commercial hemp/cannabis lines and intellectual property to
market.
? Revenue increased 8.9% year-over-year to
and improved by 10.1% to
Gross profit for the fourth quarter of 2021 was
? prior year fourth quarter and increased to
$1,438 in 2020. Net loss in the fourth quarter of 2021 was$13,965 and included a$4,954
non-cash unrealized loss related to the fair value of investments, compared to
? the fourth quarter of 2020 net loss of
2021 was
fair value of investments, an increase of
Corporate Business Highlights
During February and March of 2021, our warrant holders exercised all 11,293,211
? outstanding warrants for cash in exchange for common stock. In connection with
these exercises, we received net proceeds of
On
? space is in a state-of-the-art, restored manufacturing facility located at 500
companies. Our new headquarters accommodates all of our staff from our previous
office location in nearby
? On
generating net proceeds of
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? On
trading on the Nasdaq Capital Market.
On
of Directors.
? Therapeutic Solutions, a next-generation, non-viral gene therapy company, and a
founding partner of Buffalo Biosciences, a life science strategic business
management firm that supports the evaluation and commercialization of bioscience technologies from concept to market.
On
Officer. Fitzgerald’s other roles include serving as Chief Financial Officer
and Secretary of CleanTech Acquisition Corp, (Nasdaq: CLAQU), a
the
Pharmaceuticals, Co-Founder and CFO of SIRPant Immunotherapeutics and CFO of
? Immunome (Nasdaq: IMNM). He holds a B.S., Business Administration, Accounting
from
Officer, transitioned to Chief Administrative Officer, where he is responsible
for further developing the Company's business processes and leading the Company's financial planning and analysis, operational finance, human resources, and information technology functions.
On
? as a new member of our Board of Directors, enhancing the Board’s depth of
experience in the commercialization of science-driven consumer products.
Tobacco Franchise Highlights and Notable Accomplishments
We believe that our proprietary, reduced nicotine content cigarettes, VLN®,
have massive global market opportunity. In 2018, the global tobacco market was
worth
global tobacco market is comprised of combustible cigarettes. There are more
? than 1 billion global and 34 million
of adult smokers want to quit, yet less than ten percent of them are able to
quit successfully. We believe that smokers are actively seeking alternatives to
addictive combustible cigarettes. Based on our consumer perception studies, 60%
of adult smokers indicate a likelihood to use VLN®.
Our VLN® cigarettes contain 95% less nicotine than conventional cigarettes and
feature a familiar combustible product format that replicates the conventional
cigarette experience, including the sensory and experiential elements of taste,
scent, smell, and “hand-to-mouth” behavior. VLN® contains 0.5 milligrams of
? nicotine per gram of tobacco, an amount cited by the FDA, based on clinical
studies, to be “minimally or non-addictive”. The lack of reward from nicotine
creates a dissociation between the act of smoking and the introduction of
nicotine to the bloodstream, which helps adult smokers to smoke less and reduce
the harm caused by smoking.
Since 2011, our reduced nicotine content cigarettes have been used in more than
50 independent scientific clinical studies by universities and institutions.
The studies, using our reduced nicotine content tobacco cigarettes, show that
? smokers who use our products: (i) reduce their nicotine exposure and
dependence, (ii) smoke fewer cigarettes per day, (iii) increase their number of
smoke-free days, and (iv) double their quit attempts – all with minimal or no
evidence of nicotine withdrawal or compensatory smoking.
? In
content cigarettes, giving us the ability to sell the product.
On
King and VLN® Menthol King reduced nicotine content cigarettes as modified risk
tobacco products with a modified exposure classification (MRTPs). In doing so,
the FDA stated that VLN® – which smokes, tastes, and smells like a conventional
? cigarette but contains 95% less nicotine than conventional, highly addictive
cigarettes – “help reduce exposure to, and consumption of, nicotine for smokers
who use them.” In its marketing order granting the MRTPs, the FDA authorized an
additional fourth claim: “Helps You
packaging of all VLN® products where other approved claims are also used.
Following FDA authorization, we commenced activities to launch VLN® within 90
days, including discussions with potential partners in the independent,
? regional, and national retail trade. We anticipate a phased rollout of VLN® in
select geographies and plan to position VLN® in the premium pricing segment of
the cigarette market.
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On
increased planting in the 2021 crop year for VLN® reduced nicotine content
? tobacco, leading to a record harvest. This new planting for VLN® tobacco was in
addition to our existing VLN® inventory, which we plan to use for initial sales
of VLN®. We believe that recent political changes will likely be favorable to our
business prospects from a policy priority and regulatory standpoint. Under the
new administration and new leadership at the FDA and
Products (CTP), we believe that the FDA will refocus on implementing a menthol
? ban on combustible high nicotine cigarettes and its ground-breaking
Comprehensive Plan for Tobacco and Nicotine Regulation, in particular the
agency’s plan to cap the amount of nicotine in combustible cigarettes to a
“minimally or non-addictive” level. We believe that the MRTP authorization and
the launch of VLN® serves as a starting point for the
Our research cigarettes, SPECTRUM®, continue to fuel numerous independent,
? scientific studies to validate the enormous public health benefit identified by
the FDA and others of implementing a national standard requiring all cigarettes
to contain “minimally or non-addictive” levels of nicotine.
We believe that our next generation, non-GMO, plant research is the key to
commercializing our reduced nicotine content tobacco and technology in
international markets where non-GMO products are preferred, or GMO products are
banned. In partnership with
successful research field trials. During the first quarter of 2021, we
published a new
? Low Nicotine Content in Tobacco” (PCT/US2021/012742). The new technology
provides us with methods and a new approach to introduce very low nicotine
traits into virtually any variety of tobacco, including bright, burley, and
oriental tobacco varieties. We have successfully applied our non-GMO technology
to bright and burley varieties of tobacco and have developed a VLN® 2.0
prototype cigarette. We have also run our first field trial of non-GMO reduced
nicotine varieties in the southern hemisphere.
In the spring of 2022, we plan to plant our first commercial crops of non-GMO
? flue cured and burley reduced nicotine tobacco varieties. The reduced tobacco
leaves harvested from these crops will support future VLNC cigarette products.
Hemp/Cannabis Franchise Highlights and Notable Accomplishments
We continue to place an emphasis on our hemp/cannabis strategy to target the
upstream segments of the cannabinoid value chain in the areas of plant
biotechnology research, gene modification and engineering, modern plant
? breeding and development, and extraction. We believe that we can differentiate
ourselves in the hemp/cannabis industry by building upon our core strength and
expertise in plant science and the ingredient value chain and through our strategic, operational partnerships.
We have launched a new, cutting-edge technology platform that we expect to
enable us and our strategic partners to quickly identify and incorporate
commercially valuable traits of hemp/cannabis plants to create new, stable
hemp/cannabis lines. The platform, developed in collaboration with researchers
at KeyGene, incorporates a suite of proprietary molecular tools and a large
library of genomic markers and gene-trait correlations. We have already
characterized millions of high-value single nucleotide polymorphisms (SNPs). By
? targeting these newly identified SNPs, we have been able to locate and isolate
specific sections of genetic code from genome assemblies present in our
state-of-the-art hemp/cannabis bioinformatics database. This breakthrough
enables us to quickly and easily identify the genes responsible for specific
traits in a plant, which we expect to be a powerful tool for us and the
hemp/cannabis industry. We have already begun discussions to license this
platform to strategic partners to help them improve their plant breeding
techniques and optimize their hemp/cannabis lines.
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We continue to secure commercially, valuable patents and intellectual property
through our internal research capabilities and external research partnerships.
Citing one of the leading achievements in 2021, we are the first Company to
show the introduction of genetic material via transformation techniques
directly leading to functional protein expression in hemp/cannabis. This new
transformation methodology enhances our ability to directly modify specific
target genes in hemp/cannabis with potential commercial value, as compared to
? the broad-based approaches we currently deploy such as molecular breeding and
mutagenesis. These modifications can be tailored to differentiate the content
of specific major and minor cannabinoids, terpenoids or eliminate unwanted
metabolites. With the addition of this highly targeted plant transformation
capability to 22nd Century’s existing molecular breeding and gene editing
capabilities we are now able to increase our bandwidth for the production of
highly tailored new plant strains at accelerated rates, lower cost and lower
risk to our customers.
We have secured an exclusive agreement with
their proprietary, human cell-based testing CannaMetrix EC50Array™ technology
that we believe will enable us to accelerate the commercialization of new,
disruptive hemp/cannabis plant lines and intellectual property. CannaMetrix’s
proprietary CannaMetrix EC50Array™ technology serves as a high-throughput
? roadmap for developing new hemp/cannabis plant lines with tailor-made
cannabinoid and terpenoid profiles for use in the life science, consumer
product, and pharmaceutical markets. The human cell-based assay has the ability
to measure and validate the potency and efficacy of cannabinoids and/or
terpenoids through defined biomarkers and receptor activity and can rapidly
identify optimum plant profiles by measuring the potency and effect on the
human cell system.
In
agreement with our partner KeyGene, a global leader in plant research involving
high-value genetic traits and increased crop yields. The new partnership
agreement extends the length of the exclusive worldwide collaboration 22nd
? Century has with KeyGene to develop new, disruptive hemp/cannabis plants and
intellectual property for the life science, medicinal, and pharmaceutical end-use markets. It also expands the partnership to include research and development activity for non-combustible, alternative tobacco plant applications, such as protein production, and 22nd Century's third plant franchise, specialty hops.
We believe that we can accelerate the development of commercially, valuable
? hemp/cannabis lines and related intellectual property through selective
partnerships and have the key partnerships needed to maximize each component in
the upstream segment of the cannabinoid value chain.
On
? license biosynthesis intellectual property with Aurora Cannabis Inc. (NASDAQ:
ACB) to Cronos Group Inc. (NASDAQ: CRON), intended to assist in the advancement
of research and development on the biosynthesis of cannabinoids.
Specialty Franchise Highlights and Notable Accomplishments
In
third and newest plant franchise. We will leverage our existing know-how with
the tobacco and hemp/cannabis plants along with the proprietary tools and
technologies possessed by our upstream partnerships with CannaMetrix and
? KeyGene to bring hop breeding into the 21st century. Our relationships with the
world’s leading alkaloid plant producer-breeders, including Extractas
Bioscience, Sawatch Agriculture, and Folium Botanical, will facilitate
year-round growing capabilities at locations in both the southern and northern
hemispheres.
2022 Priorities and Areas of Focus
We remain focused on launching commercial sales of our VLN® products following
1. our MRTP authorization by the FDA. We have also initiated international sales
launch in select markets.
We continue to support and advance the
2. cigarettes sold in the
their nicotine content to just 0.5 milligrams of nicotine per gram of tobacco
and the proposed ban on menthol high nicotine combustible cigarettes.
We continue to target the upstream segment of the cannabinoid value chain;
3. creating proprietary, commercially valuable new plant lines and related
intellectual property with stabilized genetics to harness and optimize
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hemp/cannabis plant potential. We intend to continue to work to monetize our
existing hemp/cannabis IP and will continue to bring disruptive technology
forward with new plant lines.
We will develop our third, plant-based franchise in specialty hops leveraging
4. our plant science expertise to develop and secure valuable intellectual
property and sign strategic partnerships to support the development of this
franchise.
5. We will maintain diligent financial execution, efficient operating structure,
and balance sheet strength to support our growth initiatives.
Results of Operations
Year Ended
Amounts in thousands, except for share and per-share data
Revenue – Sale of products, net
Year Ended
December 31 December 31 December 31
2021 2020 2019
Sale of products, net $ 30,948 $ 28,111 $ 25,833
Dollar Change from Prior Year $ 2,837 $ 2,278
The increase in revenue for the year ended December 31, 2021 , compared to the
year ended December 31, 2020 , was primarily the result of an increase in sales
of filtered cigars of $4,629 , primarily driven by increased volume, fulfillment
of our SPECTRUM® research cigarettes of $680 , which did not occur in the prior
period, and revenue pertaining to our hemp/cannabis business of $44 which did
not occur in the prior period. This was partially offset by decreased sales of
contract manufactured cigarettes of $2,484 during 2021, which was primarily due
to a lower volume of orders received.
Costs of goods sold – Products / Gross profit
Year Ended
December 31 December 31 December 31
2021 2020 2019
Cost of goods sold $ 28,879 $ 26,673 $ 25,818
Percent of Product Sales 93.3 % 94.9 % 99.9 %
Dollar Change from Prior Year $ 2,206 $ 855
Year Ended
December 31 December 31 December 31
2021 2020 2019
Gross profit $ 2,069 $ 1,438 $ 15
Percent of Product Sales 6.7 % 5.1 % 0.1 %
Dollar Change from Prior Year $ 631 $ 1,423
For the year ended December 31, 2021 , the increase in gross profit as compared
to 2020 was primarily driven by improved contract manufactured sales mix due to
new customer contracts, cigarette price increases and sales of our higher margin
SPECTRUM® research cigarettes.
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Research and development expense
Year Ended
December 31 December 31 December 31
2021 2020 2019
Research and Development $ 3,256 $ 4,090 $ 6,381
Percent of Product Sales 10.5 % 14.6 % 24.7 %
Dollar Change from Prior Year $ (834) $ (2,291)
R&D expense during the year ended December 31, 2021 , decreased $834 as compared
to the prior year, primarily driven by lower costs for R&D personnel, consulting
and professional services, and licenses and contracts, as well as a 2020 tobacco
leaf inventory impairment of $360 that did not recur in 2021. Personnel expense
decreased by $222 year over year, due to more focused R&D headcount to
accomplish our strategies. Consulting and professional services decreased by $65
and license and contract costs decreased $100 compared to the prior year
primarily due to fewer milestone payments for certain research agreements which
were not required in 2021. We continue to prioritize our R&D activities to
achieve our strategic objectives.
Sales, general and administrative expense
Year Ended
December 31 December 31 December 31
2021 2020 2019
Sales, general and administrative
12,954
Percent of Product Sales 83.6 % 53.3 % 50.1 % Dollar Change from Prior Year$ 10,910 $ 2,017 The increase in sales, general and administrative ("SG&A") expense during the year endedDecember 31, 2021 , as compared to the prior year, was driven by increased investor relations and corporate communications expense of$3,198 , strategic consulting expense of$2,598 , higher non-cash equity compensation expense of$2,294 , increased insurance expense of$1,188 , and higher personnel expense of$996 due mainly to the hiring of the executives during 2020 and 2021. In addition, during 2021 director fees increased by$322 , legal fees rose by$156 and travel and entertainment expense increased$113 .
We have invested in this incremental SG&A spending to continue to ramp up our
efforts to allow us to move toward market readiness in both tobacco and
hemp/cannabis. We will continue to invest in SG&A spending as growth and
opportunities present themselves.
Impairment of intangible assets
Year Ended
December 31 December 31 December 31
2021 2020 2019
Impairment of intangible assets $ 78 $ 176
Percent of Product Sales
0.3 % 0.6 % 4.4 % Dollar Change from Prior Year$ (98) $ (966) During the year endedDecember 31, 2021 , management conducted a review of intellectual property assets and determined that an adjustment was necessary for the carrying value of certain trademark costs. As such, we recorded a charge of approximately$78 in 2021. This compares to an impairment charge of$176 reflected in 2020 for certain patents and trademarks. Refer to Note 5 to our consolidated financial statements for additional information. 40 Table of Contents Depreciation expense Year Ended December 31 December 31 December 31 2021 2020 2019 Depreciation $ 633 $ 688 $ 589 Percent of Product Sales 2.0 % 2.4 % 2.3 % Dollar Change from Prior Year$ (55) $ 99 The decrease in depreciation expense during 2021 was primarily due to impairments taken for the formerWilliamsville corporate office during the fourth quarter of 2020. Amortization expense Year Ended December 31 December 31 December 31 2021 2020 2019 Amortization $ 615 $ 658 $ 836 Percent of Product Sales 2.0 % 2.3 % 3.2 % Dollar Change from Prior Year$ (43) $ (178) Amortization expense relates to amortization taken on capitalized patent costs and license fees. The decrease in 2021 was primarily due to amortization expense on a lower base of amortizable intangible assets.
Unrealized (loss) gain on investments
Year Ended
December 31 December 31 December 31
2021 2020 2019
Unrealized gain (loss) on investments
(2,419)
Percent of Product Sales (22.6) % (1.5) % (9.4) % Dollar Change from Prior Year$ (6,560) $ 1,985 Unrealized loss on investments includes fair value adjustments for our investment in Aurora Cannabis, Inc. ("Aurora") stock warrants and our investment inPanacea Holdings common stock. Both investments are considered equity securities and are adjusted to fair value at each reporting period as discussed within Note 7 to our consolidated financial statements included herein. The warrants to purchase 81,164 shares of Aurora common stock were valued at$5 as ofDecember 31, 2021 , using the Black-Scholes pricing model, which resulted in an unrealized loss of$234 for the year endedDecember 31, 2021 . Our shares ofPanacea Holdings common stock were valued based on the closing share price as ofDecember 31, 2021 . As ofDecember 31, 2021 , the shares were valued at$2,340 resulting in the recognition of an unrealized loss of$6,761 for the year. Our investment inPanacea Holdings is a small microcap stock which can be subject to large market volatility resulting in fluctuations to our net loss and loss per share-due to unrealized gains or losses that are recognized within the Consolidated Statements of Operations. Our investment is described further within Note 6 to our financial statements included herein. 41
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Impairment of
Year Ended
December 31 December 31 December 31
2021 2020 2019
Impairment of Panacea Investment $ -$ (1,741) $
- Percent of Product Sales - % (6.2) % - % Dollar Change from Prior Year$ 1,741 $ (1,741) During 2020, we incurred impairment charges on our investment in Panacea. Refer to Note 6 to our consolidated financial statements for additional information regarding our investment in Panacea and the conversion related thereto.
Gain on Panacea investment conversion
Year Ended
December 31 December 31 December 31
2021 2020 2019
Gain on Panacea investment conversion$ 2,548 $ - $
- Percent of Product Sales 8.2 % - % - % Dollar Change from Prior Year$ 2,548 $ -
OnJune 30, 2021 , we entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea,Exactus, Inc. ("Exactus") (OTCQB:EXDI), renamed to Panacea Life Sciences Holdings, Inc. (OTCQB:PLSH) as ofOctober 25, 2021 ("Panacea Holdings "), and certain other Panacea shareholders. Pursuant to the Securities Exchange Agreement,Exactus fully acquired Panacea. These transactions resulted in the (i) conversion of all of our existing Series B Preferred Stock in Panacea into 91,016,026 shares of common stock inExactus valued at$9,102 as ofJune 30, 2021 and (ii) the conversion of our existing debt in Panacea by converting the outstanding$7,000 principal balance convertible note receivable and all accrued but unpaid interest thereon for fee simple ownership ofNeedle Rock Farms (224 acres inDelta County, Colorado ) and equipment valued at$2,248 ,$500 in Panacea's Series B Preferred Stock (which was subsequently converted toExactus common stock under the Securities Exchange Agreement; this balance is reflected in final shares as stated above), and a new$4,300 promissory note (the "Promissory note receivable") with a maturity date ofJune 30, 2026 and a 0% interest rate. The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea's headquarters located inGolden, Colorado . The conversion was recorded as a non-monetary transaction, based on the fair value of the assets received, and resulted in a gain of$2,548 which is included within the Consolidated Statements of Operations. Our shares ofPanacea Holdings common stock were initially valued based on a closing share price of$0.10 per share as published onJune 30, 2021 . Our investment is described further within Note 6 to our financial statements included herein. Interest income, net Year Ended December 31 December 31 December 31 2021 2020 2019 Interest Income, net $ 321$ 1,751 $ 1,066 Percent of Product Sales 1.0 % 6.2 % 4.1 % Dollar Change from Prior Year$ (1,430) $ 685 Interest income, net (interest income less investment fees) is comprised of cash interest income and non-cash interest accretion. Cash interest income is primarily derived from interest earned on our short-term investment securities and non-cash interest income is primarily related to accretion of short-term investment securities purchased at a discount or premium and accretion of certain other assets recorded at a discount. 42
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Cash interest income for the year endedDecember 31, 2021 decreased$925 as compared to the prior year, primarily due to lower bond interest yields on our short-term investment securities. Non-cash interest accretion for the year endedDecember 31, 2021 , decreased$506 , as compared to the prior year, primarily due to our Panacea investment conversion which is further described within Note 6 to our financial statements included herein. Interest expense Year Ended December 31 December 31 December 31 2021 2020 2019 Interest Expense$ (58) $ (72) $ (56) Percent of Product Sales (0.2) % (0.3) % (0.2) % Dollar Change from Prior Year $ 14$ (16)
Interest expense decreased for the year ended
the year ended
severance liability and lower note payable balances for our licenses.
Net loss
Year Ended
December 31 December 31 December 31
2021 2020 2019
Net Loss $ (32,609) $ (19,711) $ (26,558)
Percent of Product Sales (105.4) % (70.1) % (102.8) %
Dollar Change from Prior Year $ (12,898) $ 6,847
The increase in net loss for the year ended December 31, 2021 , as compared to
the prior year, was primarily the result of higher operating expenses of $9,860 ,
an increase in unrealized loss on investments of $6,560 , primarily relating to
our Aurora stock warrants and Panacea Holdings common stock investments, and
lower interest income in the amount of $1,430 . This was partially offset by a
$631 increase in gross profit, a gain on our Panacea investment conversion of
$2,548 , and a 2020 impairment charge of $1,741 for our investment in Panacea
which did not recur in 2021.
Other comprehensive income (loss)
Year Ended
December 31 December 31 December 31
2021 2020 2019
Other Comprehensive Income (Loss)
(14) Percent of Product Sales (0.8) % 0.2 % (0.1) % Dollar Change from Prior Year$ (303) $ 81 We maintain an account for short-term investment securities that are classified as available-for-sale securities and consist of money market funds and corporate bonds with maturities greater than three months at the time of acquisition. Unrealized gains and losses on short-term investment securities (the adjustment to fair value) are recorded as other comprehensive income or loss.
We recorded an unrealized loss on short-term investment securities in the amount
of
31, 2021
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Liquidity and Capital Resources
Year-to-Date
December 31 December 31 December 31
2021 2020 2019
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
(27,729) 16,469 4,552 Net cash provided by (used in) financing activities 50,875 (304) 9,916 Net increase (decrease) in cash and cash equivalents 307 544 (120) Cash and cash equivalents - beginning of period 1,029 485 605 Cash and cash equivalents - end of period$ 1,336 $ 1,029 $ 485 Short-term investment securities$ 47,400
$ 21,313 $ 38,477 Working Capital As ofDecember 31, 2021 , we had working capital of approximately$45,958 compared to working capital of approximately$20,998 as ofDecember 31, 2020 , an increase of$24,960 . This increase in working capital was primarily due to a$26,394 increase in cash, cash equivalents and short-term investment securities resulting from (i) net proceeds of$11,782 from the cash exercises of all outstanding warrants during the first quarter of 2021; and (ii) net proceeds of$38,206 from a capital raise inJune 2021 described below, offset primarily by cash and cash equivalents consumed in the operating activities of the Company. OnJune 7, 2021 , we entered into a placement agent agreement (the "Placement Agent Agreement") withCowen and Company, LLC (the "Placement Agent") relating to a registered direct offering (the "Offering") to a select investor (the "Investor"). Pursuant to the Placement Agent Agreement, we agreed to pay the Placement Agent a cash fee of 3.0% of the gross proceeds from the Offering. In addition, onJune 7, 2021 , we and the Investor entered into a securities purchase agreement relating to the issuance and sale of shares of common stock. The Investor purchased$40,000 of shares, consisting of an aggregate of 10,000,000 shares of common stock at$4.00 per share, resulting in net proceeds of$38,206 . The common stock was offered and sold pursuant to our Form S-3 shelf registration statement.
Net cash used in operating activities
Cash used in operations increased
2021. The primary driver for this increase was higher SG&A spending, most
notably in the areas of investor relations and corporate communication,
strategic consulting, insurance and the addition of senior management personnel.
Net cash provided by (used in) investing activities
Cash used in investing activities amounted to$27,729 in 2021 as compared to cash provided by investing activities of$16,469 in 2020. This overall change of$44,198 in cash used in investing activities was primarily related to activity in our short-term investments, which was mainly due to increased funds for investment from the warrant exercises and capital raise described above. We used$1,071 in 2021 to invest in the acquisition of intangible assets and property, plant and equipment, as compared to$522 in 2020. The increase in cash used for the acquisition of machinery and equipment and the acquisition of patents, trademarks and licenses was primarily due to new office furnishings and additional intellectual property costs.
Net cash provided by (used in) financing activities
During the year endedDecember 31, 2021 , cash provided by financing activities increased by$51,179 resulting from (i) the net proceeds of$11,782 resulting from cash exercises of all outstanding warrants during the first quarter of 2021; (ii) net proceeds of$38,206 resulting from a capital raise inJune 2021 ; (iii) net proceeds pertaining to notes payable issuances and payments of$49 ; and (iv) net proceeds from stock option exercises of$1,307 . These increases were partially offset by cash paid for taxes related to settlement of restricted stock units of$469 . 44 Table of Contents Cash demands on operations Our principal sources of liquidity are our cash and cash equivalents, short-term investment securities, and cash generated from our contract manufacturing business. As ofDecember 31, 2021 , we had approximately$48,736 of cash and cash equivalents and short-term investments which is an increase of$26,394 fromDecember 31, 2020 . This increase was primarily due to the cash exercise of our outstanding warrants in the first quarter of 2021 and a capital raise in the second quarter of 2021. We believe our short-term investment securities, along with sustained contract manufacturing sales and anticipated growth in our VLN® product line, provide sufficient resources for estimated contractual commitments, described further in Note 12 to our consolidated financial statements included herein, and normal cash requirements for operations beyond the next twelve months. In addition to the commitments described in Note 12 to our consolidated financial statements included herein, we have secured contracts with select tobacco farmers to assist with the growing of our VLNC tobacco. These contracts will increase the quantity of our current leaf inventory which will help support expected demand of VLN®, particularly now that MRTP authorization was granted by the FDA inDecember 2021 . The cost of such growing efforts is dependent on the final agricultural yields and leaf quality, but we expect the cost to be approximately$4.6 million for deliveries received and to be received in 2022 and early 2023. We also believe that we have appropriate liquidity to successfully manufacture and distribute our VLN® cigarette within 90 days of MRTP authorization by the FDA which was received inDecember 2021 , as well as appropriate liquidity for continued R&D investment in all our plant franchises.
We also have an effective S-3 shelf registration statement on file with the
Securities and Exchange Commission
optionality to raise additional capital as needed. However, there can be no
assurance that capital will be available to us on acceptable terms or at all.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP") which requires management to make estimates, judgements, and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. For a discussion of our significant accounting policies, refer to Note 1 to our consolidated financial statements. We believe that our most critical accounting estimates relate to investment valuation and impairment of long-lived intangible assets. Conversion ofPanacea Investment -As described further within Note 6 to our consolidated financial statements included herein, inJune 2021 we exchanged certain assets pertaining to our investment in Panacea. The determination of the carrying value of the assets received required us to use certain estimates. For instance, we received farmland and equipment for which we relied in part by an independent valuation firm to assess the current market value of these assets. In addition, we received a secured, non-interest bearing$4,000 note. Based on the stated term of the note, we used current market interest rates for a comparable security to determine an implied interest rate and adjust the value of the note recorded in our consolidated financial statements. Impairment of Long-Lived Assets - Our intangible asset portfolio consists of both definite-lived and indefinite-lived intangible assets which include patents, trademarks, licenses, and our inclusion within the tobacco MSA. Our intangible assets subject to amortization are reviewed for strategic importance and commercialization opportunity prior to expiration. If it is determined that the asset no longer supports the Company's strategic objectives and/or will not be commercially viable prior to expiration, the asset is impaired. To determine if an asset's carrying value is appropriate, we are required to estimate the expected commercialization of our tobacco and cannabis intellectual property-either through future product sales or potential license opportunities. This estimate process includes expected future cash flow projections, industry market assessments, and assumptions around positive regulatory developments from government agencies-including ongoing developments following the recent approval of our MRTP application. For our indefinite-lived intangible assets-MSA, cigarette brand predicate and trademarks-we consider current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations to determine if it is more likely than not that that the asset is impaired. If it is more likely than not that the asset is impaired, we will compare the asset carrying value to fair value and record the difference as
an
impairment.
45
Table of Contents
Management has discussed these critical accounting policies and estimates with
the Audit Committee of the Company's Board of Directors. While our estimates and
assumptions are based on our knowledge of current events and future actions,
actual results may ultimately differ from these estimates and assumptions.
Off-Balance Sheet Arrangement
We do not have any off-balance sheet arrangements as defined by
Item 303(a)(4) of Regulation S-K.
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