Business Context and Reporting Period
This Form 8-K, dated January 25, 2011, reports the completion of a reverse merger between 22nd Century Group, Inc. (the "Parent") and 22nd Century Limited, LLC ("22nd Century"). Following the transaction, 22nd Century became a wholly-owned subsidiary of the Parent, and the Parent ceased to be a shell company. The company operates as a plant biotechnology firm focused on modifying nicotine alkaloids in tobacco plants through genetic engineering. Its primary business lines include the development of X-22, a prescription smoking cessation aid, and BRAND A and BRAND B, modified risk tobacco products.
Key Financial Metrics
The filing provides historical financial data for 22nd Century (the accounting acquirer) and details the capital structure changes resulting from the merger.
- Revenue: For the nine months ended September 30, 2010, revenue was $22,102 (primarily from research cigarette sales). For the full year 2009, revenue was $27,612.
- Net Loss: The company reported a net loss of approximately $991,000 for the nine months ended September 30, 2010, and $1.23 million for the year ended December 31, 2009.
- Cash Flow: Net cash used in operating activities was $650,516 for the nine months ended September 30, 2010. Net cash provided by financing activities for the same period was $740,028.
- Liquidity and Debt: As of September 30, 2010, the company had negative working capital of approximately $3.6 million. Current liabilities included approximately $2.8 million in accounts payable and accrued liabilities and $1.2 million in notes and loans payable. Prior to the merger, the Parent obtained forgiveness of $162,327 in outstanding promissory notes.
- Capitalization: Immediately following the merger, 26,759,646 shares of Common Stock were issued and outstanding. The company raised approximately $5.43 million through a Private Placement Offering (PPO) of 5,434,446 securities at $1.00 per unit.
Material Changes Versus Prior Period
The most significant material change is the corporate restructuring via reverse merger, which fundamentally altered the company's capital structure, management, and operational focus.
- Ownership Structure: Pre-merger shareholders of the Parent now own approximately 19.9% of the combined entity. Former 22nd Century unit holders own approximately 59.8%, and PPO investors own approximately 20.3%.
- Management Changes: The board of directors was reconstituted. Joseph Pandolfino was appointed CEO and Director; Henry Sicignano III was appointed President; and C. Anthony Rider was appointed CFO. David Rector, the sole officer prior to the merger, resigned as an officer but remained a director temporarily.
- Asset Disposition: The Parent transferred all pre-merger operating assets and liabilities to a split-off subsidiary, which was sold to David Rector for $1, effectively stripping the Parent of its previous mining-related assets.
- Accounting Treatment: The transaction is accounted for as a reverse acquisition. Consequently, the historical financial statements reflect the operations of 22nd Century, not the Parent.
Guidance, Outlook, and Risks
Outlook and Guidance: The company plans to use proceeds from the PPO to fund clinical trials for X-22 and exposure studies for its modified risk cigarettes. Management expects to initiate a Phase II-B clinical trial in the first quarter of 2011 and Phase III trials in the third quarter of 2011. The company anticipates seeking FDA approval for X-22 as early as the fourth quarter of 2012. It also intends to seek FDA authorization to market BRAND A and BRAND B as Modified Risk Cigarettes in 2011.
Risks and Contingencies:
- Going Concern: The company has a history of losses and negative working capital. The auditors' report for 2009 included an emphasis of matter paragraph expressing substantial doubt about the company's ability to continue as a going concern. Additional financing will be required to complete clinical trials and operations.
- Regulatory Approval: Commercial success is entirely dependent on obtaining FDA approval for X-22 and authorization for BRAND A and BRAND B. There is no assurance these approvals will be granted.
- Intellectual Property Default: The company is currently in payment default on a license agreement with North Carolina State University, which holds crucial intellectual property. Failure to cure this default could materially harm the business.
- Stock Liquidity: The Common Stock is quoted on the OTC Bulletin Board and is considered a "penny stock." Shares issued in the merger are restricted securities, and an active trading market may not develop.
Investor Verification Checklist
- Verify the status of the payment default with North Carolina State University and the company's plan to cure it using PPO proceeds.
- Confirm the timeline and funding sufficiency for the Phase II-B and Phase III clinical trials for X-22.
- Review the specific terms of the lock-up agreements restricting the sale of shares by directors, officers, and major shareholders for 18 months.
- Assess the company's ability to raise additional capital beyond the $5.43 million PPO proceeds, given the negative working capital position.
- Monitor the filing and effectiveness of the registration statement required to allow PPO investors to resell their shares.