Attached files
EXHIBIT 99.2
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
|
CONSOLIDATED
BALANCE SHEETS
|
September
30, 2010 with Comparative Figures at December 31, 2009
|
2010
|
2009
|
|||||||
ASSETS
|
(unaudited)
|
|||||||
Current
assets:
|
||||||||
Cash
|
$ | 1,288 | $ | 158 | ||||
Accounts
receivable
|
40,604 | — | ||||||
Inventory
|
317,503 | 55,023 | ||||||
Prepaid
expenses
|
23,254 | — | ||||||
Total
current assets
|
382,649 | 55,181 | ||||||
Other
assets:
|
||||||||
Patent
and trademark costs, net
|
1,471,765 | 1,484,167 | ||||||
Debt
issuance costs, net
|
3,592 | 35,923 | ||||||
Deferred
private placement costs
|
352,930 | — | ||||||
Deposits
|
1,535 | 1,535 | ||||||
Total
other assets
|
1,829,822 | 1,521,625 | ||||||
Total
assets
|
$ | 2,212,471 | $ | 1,576,806 | ||||
LIABILITIES
AND MEMBERS' DEFICIT
|
||||||||
Current
liabilities:
|
||||||||
Demand
bank loans
|
$ | 239,352 | $ | 246,735 | ||||
Accounts
payable
|
2,468,072 | 2,144,207 | ||||||
Accrued
interest payable to members
|
153,683 | 80,188 | ||||||
Accrued
expenses
|
195,942 | 36,500 | ||||||
Unearned
revenue
|
20,302 | — | ||||||
Notes
payable to members, net of unamortized discount
|
834,852 | 597,468 | ||||||
Due
to related party
|
33,270 | 126,970 | ||||||
Due
to member
|
8,800 | 930 | ||||||
Total
current liabilities
|
3,954,273 | 3,232,998 | ||||||
Long-term
notes payable to members - net of unamortized discount
|
64,224 | 141,551 | ||||||
Total
liabilities
|
4,018,497 | 3,374,549 | ||||||
Commitments
and contingencies (Note 9)
|
— | — | ||||||
Members'
deficit:
|
||||||||
Contributed
capital
|
3,448,856 | 2,466,138 | ||||||
Accumulated
deficit
|
(5,254,759 | ) | (4,263,762 | ) | ||||
Non-controlling
interest - consolidated subsidiary
|
(123 | ) | (119 | ) | ||||
Total
members' deficit
|
(1,806,026 | ) | (1,797,743 | ) | ||||
Total
liabilities and members' deficit
|
$ | 2,212,471 | $ | 1,576,806 | ||||
See accompanying notes to consolidated financial
statements.
- 1
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Three
Months Ended September 30, 2010 with Comparative Figures for
2009
|
(unaudited)
|
2010
|
2009
|
|||||||
Research
cigarette sales
|
$ | 20,302 | $ | — | ||||
Operating
expenses:
|
||||||||
Costs
of goods sold
|
5,302 | — | ||||||
Research
and development
|
67,528 | 117,021 | ||||||
General
and administrative
|
138,911 | 58,782 | ||||||
Amortization
|
40,803 | 38,313 | ||||||
252,544 | 214,116 | |||||||
Operating
loss
|
(232,242 | ) | (214,116 | ) | ||||
Interest
expense and debt expense
|
(68,642 | ) | (70,035 | ) | ||||
Net
loss
|
(300,884 | ) | (284,151 | ) | ||||
Net
loss attributable to non-controlling interest
|
— | — | ||||||
Net
loss attributed to members
|
$ | (300,884 | ) | $ | (284,151 | ) | ||
Loss
per common unit - basic
|
$ | (0.02 | ) | $ | (0.05 | ) | ||
Units
used in basic earnings per share calculation
|
15,322,529 | 5,238,176 | ||||||
See accompanying notes to consolidated financial
statements.
- 2
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22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Nine
Months Ended September 30, 2010 with Comparative Figures for
2009
|
(unaudited)
|
2010
|
2009
|
|||||||
Research
cigarette sales
|
$ | 22,102 | $ | — | ||||
Operating
expenses:
|
||||||||
Costs
of goods sold
|
6,302 | — | ||||||
Research
and development
|
282,971 | 411,704 | ||||||
General
and administrative
|
383,576 | 259,731 | ||||||
Amortization
|
121,735 | 108,691 | ||||||
794,584 | 780,126 | |||||||
Operating
loss
|
(772,482 | ) | (780,126 | ) | ||||
Interest
expense and debt expense
|
(218,519 | ) | (202,525 | ) | ||||
Net
loss
|
(991,001 | ) | (982,651 | ) | ||||
Net
loss attributable to non-controlling interest
|
4 | — | ||||||
Net
loss attributed to members
|
$ | (990,997 | ) | $ | (982,651 | ) | ||
Loss
per common unit - basic
|
$ | (0.09 | ) | $ | (0.19 | ) | ||
Units
used in basic earnings per share calculation
|
11,232,202 | 5,238,176 | ||||||
See accompanying notes to consolidated financial
statements.
- 3
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22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Nine
Months Ended September 30, 2010 with Comparative Figures for
2009
|
(unaudited)
|
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (991,001 | ) | $ | (982,651 | ) | ||
Adjustments
to reconcile net Ioss to cash used by operating
activities:
|
||||||||
Amortization
of intangible assets
|
121,735 | 108,691 | ||||||
Amortization
of debt issuance costs
|
32,331 | 32,329 | ||||||
Amortization
of debt discount - warrants issued with notes payable
|
114,500 | 103,162 | ||||||
Equity
based employee compensation expense
|
134,808 | 150,878 | ||||||
Increase
in assets:
|
||||||||
Accounts
receivable
|
(40,604 | ) | — | |||||
Inventory
|
(262,480 | ) | (12,318 | ) | ||||
Prepaid
expense
|
(23,254 | ) | (77,078 | ) | ||||
Increase in
liabilities:
|
||||||||
Accounts
payable
|
8,955 | 290,889 | ||||||
Accrued
interest payable to members and accrued expenses
|
234,192 | 281,041 | ||||||
Unearned
revenue
|
20,302 | — | ||||||
Net
cash used by operating activities
|
(650,516 | ) | (105,057 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Acquisition
of patents and trademarks
|
(88,382 | ) | — | |||||
Net
cash used by investing activities
|
(88,382 | ) | — | |||||
Cash
flows from financing activities:
|
||||||||
Payment
of deferred private placement costs
|
(58,970 | ) | — | |||||
Payment
on demand loan
|
(7,383 | ) | (1,371 | ) | ||||
Payment
on note payable to repurchase membership units
|
(4,389 | ) | — | |||||
Proceeds
from issuance of notes
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80,000 | 45,000 | ||||||
Proceeds
from issuance of warrants
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405,000 | — | ||||||
Proceeds
from issuance of units
|
411,600 | — | ||||||
Advances
from member
|
7,870 | 21,257 | ||||||
Net
(repayments to) advances from related party
|
(93,700 | ) | 26,650 | |||||
Net
cash provided by financing activities
|
740,028 | 91,536 | ||||||
Net
increase (decrease) in cash
|
1,130 | (13,521 | ) | |||||
Cash
- beginning of period
|
158 | 13,560 | ||||||
Cash
- end of period
|
$ | 1,288 | $ | 39 | ||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 8,834 | $ | 3,773 | ||||
Supplemental
disclosure of noncash investing
|
||||||||
and
financing activities:
|
||||||||
Patent
and trademark additions included in accounts payable
|
$ | 20,950 | $ | 229,544 | ||||
Deferred
private placement cost additions included in accounts
payable
|
$ | 293,960 | $ | — | ||||
Convesion
of member note and accrued interest to membership units
|
$ | 31,311 | $ | — | ||||
See accompanying notes to consolidated financial
statements.
- 4
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22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation -
The accompanying unaudited statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included.
The
results of operations for any interim period are not necessarily indicative of
results for the full year. Operating results for the three month and nine month
periods ended September 30, 2010 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2010. The balance
sheet at December 31, 2009 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements
On
October 5, 2010 the Company authorized a 37,100.5626 to 1 split of its
Membership Units. The amounts shown for Membership Units, warrants and loss per
unit amounts have been retroactively adjusted to reflect this
split.
Nature of
Business - 22nd
Century Limited, LLC (“22nd Century”) is a plant biotechnology company founded
in 1998. 22nd Century owns or exclusively controls 97 issued patents
in 79 countries related to modifying the content of nicotinic alkaloids in
plants, specifically tobacco plants, through genetic engineering and plant
breeding.
The
overall objective of 22nd Century is to reduce smoking-related disease by
increasing smoking cessation with its botanical smoking cessation aid, X-22 and reducing the harm to
smokers with 22nd Century’s potential modified risk cigarettes, Brand A and
Brand B for smokers unwilling to quit. 22nd Century does not currently and does
not intend to market conventional cigarettes.
22nd
Century is primarily involved in the following activities:
|
·
|
The
development of its botanical smoking cessation aid, X-22;
|
|
·
|
The
development of its modified risk tobacco products, Brand A and Brand
B;
|
|
·
|
The
pursuit of necessary regulatory approvals/authorizations at the FDA to
market X-22 as a
prescription smoking cessation aid and Brand A and Brand B as modified
risk tobacco products in the U.S.;
|
|
·
|
The
manufacture of research cigarettes with multiple nicotine levels (from
very low to high) for the U.S. government (National Institute on Drug
Abuse, a department within the National Institutes of
Health);
|
|
·
|
The
manufacture, marketing and distribution of Brand A and Brand B cigarettes
in the traditional tobacco products market in the U.S. through its
subsidiary Xodus LLC; and
|
|
·
|
The
international licensing of 22nd Century’s trademarks, brands, proprietary
tobaccos, and technology.
|
Principles of
Consolidation - The accompanying
consolidated financial statements include Xodus, LLC, a subsidiary of 22nd
Century (collectively, the “Company”). 22nd Century owns 96% of the outstanding
Membership Units of Xodus, LLC. All intercompany accounts and transactions have
been eliminated.
Inventory
- The Company’s inventory consists mainly of raw materials (tobacco leaf,
payments to contract tobacco growers for crops in the field and cigarette
components such as filters and packaging) as of September 30, 2010 and December
31, 2009. Inventories are valued at the lower of cost or market. Cost
is determined on the first-in, first-out (FIFO) method.
- 5
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Intangible Assets
- Intangible assets are recorded at cost and consist primarily of
expenditures incurred with third parties related to the processing of patent
claims and trademarks with government authorities. The Company also capitalized
costs as a result of one if its exclusively licensed patent applications (now an
issued U.S. Patent) being the subject to an interference proceeding invoked by
the U.S. Patent and Trademark Office, which favorably resulted in the Company
obtaining rights to a third party’s issued patent. The amounts capitalized
relate to patents the Company owns or has exclusive rights to and trademarks,
and exclude approximately $1.8 million recovered from a former licensee as
direct reimbursements of costs incurred. These capitalized costs are amortized
using the straight-line method over the remaining statutory life of the
Company’s current primary patent family, which expires in 2019 (the assets’
estimated lives). Periodic maintenance or renewal fees, which are generally due
on an annual basis are expensed as incurred. Annual minimum license
fees are charged to expenses in the year the licenses are effective. Total
patent and trademark costs capitalized and accumulated amortization amounted to
$1,927,041and $455,276, respectively, as of September 30, 2010 ($1,817,709 and
$333,542, respectively, as of December 31, 2009).
Impairment of
Long-Lived Assets - The Company reviews the carrying value of its
amortizing long-lived assets whenever events or changes in circumstances
indicate that the historical cost-carrying value of an asset may no longer be
recoverable.
The
Company assesses recoverability of the asset by estimating the future
undiscounted net cash flows expected to result from the asset, including
eventual disposition. If the estimated future undiscounted net cash flows are
less than the carrying value of the asset, an impairment loss is recorded equal
to the difference between the asset’s carrying value and its fair value. There
was no impairment loss recorded during the nine months ended September 30, 2010
or 2009.
Debt
Discounts - The Company accounts for warrants
issued to note holders as inducement to provide financing for the Company in
accordance with the FASB’s guidance on Accounting for Convertible Debt and
Convertible Debt Issued with Stock Purchase Warrants. Fair value of the warrants
is determined by unit price according to recent equity transactions since there
is no vesting period and a negligible exercise price. The proceeds allocated to
the warrant based on the fair value is recorded as a debt discount and amortized
over the life of the corresponding financing as interest
expense.
Research and
Development - Research and
development costs are expensed as incurred
Loss Per
Common
Membership Unit - Basic loss per common unit
is computed using the weighted-average number of common units
outstanding. Diluted loss per unit is computed assuming conversion of
all potentially dilutive instruments. Potential common units outstanding are
excluded from the computation if their effect is anti-dilutive.
Commitment and
Contingency Accounting
- The Company evaluates each commitment and/or contingency in accordance
with the accounting standards, which state that if an item is more likely than
not to become a direct liability then the Company will record the liability in
the financial statements. If not, the Company will disclose any material
commitments or contingencies that may arise.
Use of
Estimates - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassification
– Certain items in 2009 were reclassified to conform to the
classifications adopted in 2010.
Subsequent
Events –
These financial statements have not been updated for any events occurring after
December 13, 2010.
- 6
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
2 - LIQUIDITY AND MANAGEMENT’S PLANS
Since
2006, 22nd Century has experienced limited revenues and incurred substantial
operating losses as it transitioned from being only a licensor of its
proprietary technology and tobaccos to commercializing its own tobacco products.
At September 30, 2010, the Company had current assets of approximately $383,000
and current liabilities of approximately $3,954,000. The Company needs to raise
additional capital to reduce outstanding current liabilities and complete the
FDA-approval process for X-22. The Company’s ability
to reduce outstanding current liabilities, undertake and complete the necessary
clinical trials and related activities for FDA-approval of X-22 will be dependent upon
additional funding. On February 24, 2010 the Company engaged Rodman &
Renshaw, LLC to serve as exclusive placement agent, on a best efforts basis, to
raise equity capital in the Company. Since September 30, 2010, the Company has
received additional equity and debt financing from some of its members totaling
approximately $277,000 which should be sufficient to cover the Company’s cash
needs through the conclusion of the Rodman & Renshaw private placement,
which is currently expected to close by December 30, 2010. The ability to
complete this equity placement and other future financings on acceptable terms
will depend on a number of factors, including the general performance of the
capital markets, the Company’s progress in the FDA approval process and the
manufacture, distribution and sale of its products. Any equity financing will be
dilutive to the Company’s existing shareholders ownership
percentages.
Pending
FDA approval regarding its products, the Company also expects to generate cash
from the sale of cigarettes for research purposes and to tobacco product
distributors. On August 30, 2010, the Company received an initial purchase order
from a research customer totaling $152,660 for 1.15 million cigarettes; of which
$40,604 was billed as of September 30, 2010. The Company expects to
receive two more purchase orders for an additional 8.275 million cigarettes over
the next six months and several additional orders of approximately the same
magnitude over the next five years.
The
Company’s believes, but can offer no assurances that the above business plans
will provide sufficient cash flow to fund the Company’s operations during
2011.
NOTE
3 - AMOUNTS OWED NORTH CAROLINA STATE UNIVERSITY (“NCSU”)
Pursuant
to the terms of an exclusive license agreement with NCSU, the Company owes NCSU
approximately $1,118,000 as of September 30, 2010 for patent costs ($1,045,000
as of December 31, 2009), including the costs associated with the interference
invoked by the U.S. Patent and Trademark Office. These amounts are included in
accounts payable in the consolidated balance sheets. The Company is required to
pay these amounts within thirty days of being invoiced and they are past
due. The Company has made payments on account from time to time and
plans substantial or complete payment to NCSU. NCSU has the right to send a
60-day written notice to Company to demand payment and claim interest on the
balance, and if the total amount is not paid within 60 days, NCSU may elect to
terminate the license agreement. In a letter agreement dated September 21, 2010
between NCSU and the Company, which was requested by the Company to facilitate
its equity capital raise discussed in Note 2, NSCU has agreed it would not
exercise any rights it may have to terminate the agreement through December 1,
2010 for non-payment of such patent costs. Subsequent to the letter
agreement not to terminate, NCSU may have the right to cancel the exclusive
license agreement, but can only do so with a 60-day prior written notice,
including the opportunity to cure within this timeframe (as of December 13, 2010
no such notice from NCSU has been received by the Company). As of
September 30, 2010, patent costs associated with the exclusive license
agreements that could potentially be terminated had a carrying value of
approximately $850,000. Additionally, NCSU has not imposed interest charges on
past due amounts invoiced to the Company and as such the Company has not
recorded accrued interest or interest expense as of September 30, 2010. The
Company intends to pay a substantial portion of the outstanding payable in the
event it concludes the Rodman & Renshaw private placement discussed in Note
2.
- 7
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4 - DEMAND BANK
LOANS
The
demand loans are payable to two commercial banks under revolving credit
agreements. In both cases the loans are guaranteed by a member of the
Company.
The first
demand loan has a balance of $174,925 at both September 30, 2010 and December
31, 2009. The Company is required to pay interest monthly at 0.75% above the
prime rate, 4.00% all-in at September 30, 2010 (4.00% - December 31, 2009). The
Company has met this interest payment obligation. The terms of the demand loan
includes an annual “clean-up” provision, which require the Company to repay all
principal amounts outstanding. The Company has not complied with this
requirement; however, the bank has not demanded payment.
The
second demand loan has a balance of $64,427 at September 30, 2010 ($71,840 at
December 31, 2009) which was paid in the fourth quarter of 2010 and this
revolving credit facility is closed.
NOTE
5 - NOTES PAYABLE
Notes payable members and warrant
holders, net of unamortized discount –
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Note
dated October 28, 2008, net of unamortized discount
|
$ | 319,604 | $ | 271,041 | ||||
Note
dated November 11, 2008, net of unamortized discount
|
319,604 | 271,041 | ||||||
Note
dated May 20, 2009, net of unamortized discount
|
30,000 | 20,367 | ||||||
Note
dated January 1, 2008
|
100,014 | — | ||||||
Note
dated September 1, 2010
|
35,000 | — | ||||||
Note
payable to repurchase Membership Units
|
30,630 | 35,019 | ||||||
$ | 834,852 | $ | 597,468 |
Note dated
October 28, 2008 - On October 28, 2008, the Company issued a note payable
to a third party in the amount of $325,000, and a warrant to purchase
371,006 Membership Units at less than $.0001 per unit. The
warrant was valued at $129,500 and recorded as a discount to the note payable
and is being amortized over the term of the note which significantly adjusts the
effective interest rate. The weighted average annual effective rate on the note
is 41%. The intrinsic value of the warrant at the time of issuance was
determined to be $215,540; the debt discount recorded was based on allocating
the $325,000 in transaction proceeds proportionally between the note and the
warrant. The note bears interest at a rate of 10% and the outstanding principal
and interest is due and payable on October 28, 2010, the maturity
date. As of September 30, 2010, the outstanding principal and
unamortized debt discount amounted to $325,000 and $5,396, ($325,000 and
$53,959– December 31, 2009), respectively. The note is guaranteed by
a related party, Virgil Properties, LLC (Virgil), which is owned by two members
of the Company. The note is secured by a mortgage on property owned
by Virgil. Virgil received 148,402 warrants as consideration for this guarantee.
These warrants were valued at $86,216 and recorded as a deferred financing cost
being amortized over the term of the loan. On December 30, 2009, Virgil agreed
to rescind these warrants. In consideration of the rescission of warrants, the
Company agreed to convert certain cash advances totaling $271,992 from the two
members of the Company that own Vigil into 1,009,106 Membership Units of the
Company. The note remained unpaid at the maturity date however no demand for
repayment has been made by the note holder.
- 8
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
5 - NOTES PAYABLE (continued)
Note dated
November 11, 2008 - On November 11, 2008, the Company issued a note
payable to a member in the amount of $325,000, and a warrant to purchase
371,006 Membership Units at less than $.0001 per unit. The
warrant valued at $129,500 and was recorded as a discount to the note payable
and is being amortized over the term of the note which significantly adjusts the
effective interest rate. The weighted average annual effective rate on the note
is 41%. The intrinsic value of the warrant at the time of issuance was
determined to be $215,540; the debt discount recorded was based on allocating
the $325,000 in transaction proceeds proportionally between the note and the
warrant. The note bears interest at a rate of 10% and the
outstanding principal and interest is due and payable on November 11, 2010, the
maturity date. As of September 30, 2010, the outstanding principal
and unamortized debt discount amounted to $325,000 and $5,396, ($325,000 and
$53,959 – December 31, 2009), respectively. The note is guaranteed by a
related party, Virgil Properties, LLC, which is owned by two members of the
Company. Effective December 1, 2010 the note was amended to extend
the maturity sixty days to January 10, 2011 and increase the interest rate to
15% during the extension period.
Note dated May
20, 2009 (unsecured)
- On May 20, 2009, the Company issued a note payable to a third party in the
amount of $30,000, and a warrant to purchase 185,503 Membership Units at
less than $.0001 per unit. The warrant was valued at $18,132 and
recorded as a discount to the note payable and is being amortized over the term
of the note, which significantly adjusts the effective interest rate. The
weighted average annual effective rate on the note is 178%. The intrinsic value
of the warrant at the time of issuance was determined to be $45,833; the debt
discount recorded was based on allocating the $30,000 in transaction proceeds
proportionally between the notes and the warrant. The note bears
interest at a rate of 10% and the outstanding principal and interest was due and
payable on May 19, 2010, the maturity date. The $30,000 in principal
and accrued interest remains outstanding as of September 30, 2010. As of
December 31, 2009, the outstanding principal and unamortized debt discount
amounted to $30,000 and $6,233. No demand for payment has been made
by the note holder.
Note dated
January 1, 2008 (unsecured) - The Company issued a
note to a member as of January 1, 2008 for $100,014. The note bears
interest at a rate of 7%, and interest and principal are due on the maturity
date of January 15, 2011. The note is subordinated to senior debt,
which consists of amounts payable on demand loans to commercial
banks.
Note dated
September 1, 2010 – The Company issued a note payable to a member in the
amount of $35,000. The note bears interest at a rate of 15%, and interest and
principal are due on the maturity date of November 1, 2010. The note remained
unpaid at the maturity date however no demand for repayment has been made by the
note holder. The note is guaranteed by a member of the Company.
Note payable to
repurchase Membership
Units (unsecured)
- Prior to December 31, 2009, the Company agreed to repurchase
51,637 Membership Units previously issued to the member for $35,019 which
remained unpaid as of December 31, 2009. Subsequently the company issued a note
dated January 1, 2010 to evidence the obligation. The note bears interest at a
rate of 7% and the outstanding principal and interest is due and payable on
September 30, 2010, the maturity date. As of September 30, 2010 the
outstanding principal amounted to $30,629 ($35,019 as of December 31,
2009). The note remained unpaid at the maturity date, however, no
demand for repayment has been made by the note holder.
Long term notes payable to members,
net of unamortized discount –
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Notes
dated September 15 and October 15, 2009, net of unamortized
discount
|
$ | 19,225 | $ | 11,483 | ||||
Note
Dated May 27, 2010
|
45,000 | — | ||||||
Note
dated January 1, 2008
|
— | 100,014 | ||||||
Subordinated
Note Dated December 30, 2009
|
— | 30,054 | ||||||
$ | 64,225 | $ | 141,551 |
- 9
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
5 - NOTES PAYABLE (continued)
Notes dated
September 15 and October 15, 2009 (unsecured)
- On September 15 and October 15, 2009, the Company issued two notes payable to
the same third party in the amounts of $15,000 and $10,000,
respectively. In conjunction with the $15,000 note, a warrant to
purchase 185,503 membership units at less than $.0001 per unit
was issued, and in conjunction with the $10,000 note, a warrant to purchase
92,751 Membership Units at less than $.0001 per unit was
issued. The warrants were valued at $11,301 for the $15,000 note and
$6,962 for the $10,000 and recorded as discounts to the respective notes payable
and are being amortized over the term of each note which significantly adjusts
the effective interest rate. The intrinsic value of the warrants at the time of
issuance was determined to be $68,750; the debt discount recorded was based on
allocating the $25,000 in transaction proceeds proportionally between the notes
and the warrants. The notes bear interest at a rate of 10% and the outstanding
principal and interest is due and payable at maturity. As of September 30, 2010,
the total outstanding principal and unamortized debt discounts for the two notes
amounted to $25,000 and $5,775 ($25,000 and $13,517 – December 31, 2009),
respectively. As of May 27, 2010, the maturity dates of these notes were
extended to January 31, 2012.
Note Dated May
27, 2010 (unsecured) – During the first quarter of 2010 the holder of the
Notes dated September 15 and October 15, 2009 advanced additional funds,
totaling $450,000, to the Company and obtained conversion rights to warrants to
acquire Membership Units. In March 2010 $225,000 was converted into warrants to
acquire approximately 1,706,626 Membership Units and this amount was
recorded as equity. Pursuant to an agreement effective on May 27, 2010 the
Company issued warrants to acquire approximately 1,409,821 Membership Units
and a note for $45,000 in exchange for the remaining $225,000 advanced. The note
bears interest at 10%, which is due with the principal amount on January 31,
2012.
Subordinated note
Dated December 30, 2009 (unsecured) - On December 30, 2009, the Company
issued a subordinated note to a member in exchange for advances the member
previously made to the Company. The original amount of the note was
$30,054 and, in June 2010, the Company agreed to allow the principal and accrued
interest to be converted into 165,951 Membership Units.
NOTE
6 - DUE TO RELATED PARTY
Alternative Cigarettes, Inc. (“AC”) is
entirely owned by certain members of the Company. The net amount due
to AC as a result of advances, repayments and expenses incurred and reimbursed
amounted to $33,270 as of September 30, 2010 ($126,970 – December 31, 2009). No
interest has been accrued or paid on amount due to AC and there are no repayment
terms. During the nine months ended September 30, 2010 and 2009 the transactions
with AC consisted entirely of advances and repayments.
- 10
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
estimated fair value of cash, advances from members and related party, demand
bank loans and notes payable approximate the carrying value due to their
short-term nature. In applying the accounting standards for fair value
determination the Company has taken into account what the Company would have to
pay someone to take over its debt obligations. Considerable judgment is required
in developing estimates of fair value. Therefore, the estimates presented herein
are not necessarily indicative of the amounts that the Company would realize in
a current market exchange.
The
estimated fair value of long-term debt is summarized as follows:
September 30, 2010
|
December 31, 2009
|
|||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||
Amount
|
Fair Value
|
Amount
|
Fair Value
|
|||||||||||
$ |
64,224
|
$ | 60,000 | $ | 141,551 | $ | 90,000 |
Differences
between fair value and carrying amount of long-term debt are primarily due to
instruments that provide fixed interest or contain fixed interest rate elements.
Inherently, such instruments are subject to fluctuations in fair value due to
subsequent movements in interest rates that are available to the
Company.
NOTE
8 – MEMBERSHIP UNIT WARRANTS
The
Company has granted membership unit warrants in connection with borrowings as an
additional incentive for providing financing to the Company and as additional
compensation to officers, consultants and advisors. The warrants are granted
with a conversion price of less than $.0001 and the number of warrants issued
has been negotiated based on the agreement at the time of the grant. The
warrants have been issued for terms of two to five years.
Membership
Unit warrants issued and outstanding during the twenty-one month period ended
September 30, 2010:
Number
of
|
||||
Warrants
|
||||
Warrants
outstanding at December 31, 2008
|
927,514 | |||
Warrants
issued during 2009
|
946,064 | |||
Warrants
exercised during 2009
|
(37,100 | ) | ||
Warrants
forfeited during 2009
|
(148,402 | ) | ||
Warrants
outstanding at December 31, 2009
|
1,688,076 | |||
Warrants
issued during the nine months ended September, 2010
|
3,116,447 | |||
Warrants
exercised during the nine months ended September, 2010
|
(4,804,523 | ) | ||
Warrants
outstanding at September 30, 2010
|
— |
The
Company granted an award for service to an executive officer of 445,207
warrants, vesting over a one year service period ending February 1, 2010. The
related compensation cost of $258,648 was determined by the intrinsic value of
the underlying common Membership Units at the time of the award of $21,554 per
unit and is being charged to expense on a straight line basis over the service
period. For the nine months ended September 30, 2010, $43,090 was recorded as
expense ($150,858 nine months ended September 30, 2009). There
is no unrecognized compensation expense related to the grant of these
warrants.
The
Company issued 2,784,052 units for $411,600 of cash and 515,163 units as payment
for approximately $92,000 of employee compensation during the nine months ended
September 30, 2010.
- 11
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
9 - COMMITMENTS
License
Agreements - Under its license agreement with NCSU the Company is
required to pay minimum annual royalty payments. The annual minimum royalty for
each of the calendar years 2010 through 2013 is $75,000; in 2014 the annual
minimum increases to $200,000. These minimum royalty payments are due each
February following the end of the applicable calendar year reduced by any
running royalties paid or payable for that year. The agreement also requires a
milestone payment of $150,000 upon FDA approval of a product that uses the
licensed technology. The Company is also responsible for reimbursing NCSU for
actual third-party patent costs incurred. These costs vary from year to year and
the Company has certain rights to direct the activities that result in these
costs.
The
Company has two other technology license agreements which require aggregate
annual license fees of approximately $55,000.
NOTE
10. - EARNINGS PER UNIT
The
following table sets forth the computation of basic and diluted earnings per
share for the three months ending September 30, 2009:
2010
|
2009
|
|||||||
Net
loss attributable to members
|
$ | (300,884 | ) | $ | (284,151 | ) | ||
Denominator
for basic earnings per unit, weighted average units
outstanding
|
15,322,529 | 5,238,176 | ||||||
Effect
of dilutive securities:
|
||||||||
warrants
outstanding
|
— | — | ||||||
Denominator
for diluted earnings per unit, weighted average units adjusted for
dilutive securities
|
15,322,529 | 5,238,176 | ||||||
Loss
per common unit - basic
|
$ | (0.02 | ) | $ | (0.05 | ) | ||
Loss
per common unit- diluted
|
$ | (0.02 | ) | $ | (0.05 | ) |
The
following table sets forth the computation of basic and diluted earnings per
share for the nine months ending September 30, 2009:
2010
|
2009
|
|||||||
Net
loss attributable to members
|
$ | (990,997 | ) | $ | (982,651 | ) | ||
Denominator
for basic earnings per share-weighted average units
outstanding
|
11,232,202 | 5,238,176 | ||||||
Effect
of dilutive securities:
|
||||||||
warrants
outstanding
|
— | — | ||||||
Denominator
for diluted earnings per unit - weighted average units adjusted for
dilutive securities
|
11,232,202 | 5,238,176 | ||||||
Loss
per common unit - basic
|
$ | (0.09 | ) | $ | (0.19 | ) | ||
Loss
per common unit- diluted
|
$ | (0.09 | ) | $ | (0.19 | ) |
- 12
-
22ND
CENTURY LIMITED, LLC AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
10. - EARNINGS PER UNIT (continued)
Securities
outstanding that were excluded from the computation because they would have been
anti-dilutive are as follows:
2010
|
2009
|
|||||||
Warrants
|
— | 927,514 |
NOTE
11 - SUBSEQUENT EVENTS
Equity and Debt
Issuances –
On October 5, 2010 the Company issued 556,508 Membership Units for $150,000 and
issued $150,000 in notes which mature on January 31, 2011. Total cash proceeds
from these issuances were $276,540; the balance of $23,460 was issued as payment
for services.
Membership
Units
Split – On
October 5, 2010 the Company authorized a 37,100.5626 to 1 split of its
Membership Units. The amounts shown in these financial statements for Membership
Units, warrants and loss per unit amounts have been retroactively adjusted to
reflect this split.
Warrants – On October 25, 2010
the Company authorized a pro rata distribution of warrants to its members to
acquire 5,000,000 Membership Units at $3.00 per Unit. This distribution is to
take effect immediately prior to the closing of the Rodman & Renshaw private
placement discussed in Note 2. The Warrants expire on October 21,
2015.
- 13 -