What changed in this filing

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Item 9A. Controls and Procedures

2021-03-11 compared with 2020-03-11 · 740 added, 1646 removed, 342 unchanged (87% of the section changed)

1 unchanged sentence

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation

of our management, including our president (principal executive officer) and chief financial officer, we conducted an evaluation

of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities

Exchange Act of 1934, as amended (the "Exchange Act").

Based on this evaluation, our president and chief financial officer

concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report

on Form 10-K to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded,

processed, summarized and reported, within the time period specified in the SEC's rules and forms.

These disclosure controls and

procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we

file or submit is accumulated and communicated to management, including our president and chief financial officer, as appropriate,

to allow timely decisions regarding required disclosure.

Management's Annual Report on Internal Control over Financial

Our management is responsible for establishing

and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and

Under the supervision and with the participation of our management, including our president and chief financial officer,

we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal

Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

evaluation under the framework in Internal Control - Integrated Framework (2013) , our management concluded that our internal

control over financial reporting was effective as of December 31, 2019.

Freed Maxick CPAs, P.C., an independent

registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K

and, as part of their audit, has issued a report, included herein, on the effectiveness of our internal control over financial

Our system of internal control over financial

reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements

in accordance with accounting principles generally accepted in the United States.

All internal control systems, no matter how well

designed, have inherent limitations.

Therefore, even those systems determined to be effective can provide only reasonable assurance

and may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject

to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies

or procedures may deteriorate.

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act").

Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms.

These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our president and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on our evaluation under the framework in Internal Control - Integrated Framework (2013) , our management concluded that our internal control over financial reporting was effective as of December 31, 2020.

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting due to the change in definition of accelerated filer.

Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States.

All internal control systems, no matter how well designed, have inherent limitations.

Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Controls over Financial Reporting

There was no change in the Company’s

internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December

31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over

financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Shareholders and Board of Directors

22nd Century Group, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited 22nd Century Group Inc.

and Subsidiaries (the

Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control

— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects,

effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control

— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the

Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and

2018, and the related consolidated statements of operations and comprehensive loss, changes in shareholders’

equity and cash

flows of the Company for each of the three years in the period ended December 31, 2019 of the Company and our report dated March

11, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining

effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial

reporting in the accompanying “Management’s Annual Report on Internal Controls Over Financial Reporting”.

Our responsibility is to express an opinion on the Company’s

internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are

required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules

and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal

control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal

control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and

operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures

as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial

A company's internal control over financial reporting is a process

designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements

for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial

reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately

and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions

are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,

and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors

of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use

or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial

reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject

to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies

or procedures may deteriorate.

/s/ Freed Maxick CPAs, P.C.

Buffalo, New York

March 11, 2020

There was no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Other Information.

Directors, Executive Officers and Corporate Governance.

Information concerning our executive officers,

directors and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities

and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2020 Annual

Meeting of Stockholders.

Set forth below is information regarding

our directors, executive officers and key personnel as of March 11, 2020:

Information concerning our executive officers, directors and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2021 Annual Meeting of Stockholders.

Set forth below is information regarding our directors, executive officers and key personnel as of March 11, 2021:

Chief Executive Officer

Michael Zercher

President and Chief Operating Officer

Andrea Jentsch

John Franzino

Chief Financial Officer & Treasurer

O’Brien

Director*****

Cornell is currently the President and Chief Executive

Officer of Praxiis, LLC, an enterprise that provides support for clients in organizational change, leadership development and transactional

advisory services.

Cornell is also the current Manager of Larkin Center Management, LLC, a real estate development company,

and has served in this capacity since October 2010.

Michael Koganov

(1) Since 2019, Dr.

Koganov has served as President and Co-Founder of Intellebio LLC, a consulting and testing firm focused on the development of novel technologies, advanced test methods, and breakthrough products in the life science field.

(2) Since August 2009, Mr.

Sanders has served as a General Partner

of Phase One Ventures, LLC, a venture capital firm which focuses on nanotechnology and biotechnology start-up opportunities in

New Mexico and surrounding states.

Sanders has served as a General Partner of Phase One Ventures, LLC, a venture capital firm which focuses on nanotechnology and biotechnology start-up opportunities in New Mexico and surrounding states.

Sanders is also an active Angel and private placement investor.

(3) Since May 18, 2015, Ms.

Sullivan is President of Sullivan Capital Partners, LLC, a financial services company providing investment

banking and consulting services to businesses seeking growth through acquisitions or strategic partnerships.

focuses on due diligence, deal structure, strategic planning and governance matters.

Fleet previously served as the President and Chief Executive Officer of the Company from August

3, 2019 until December 13, 2019.

Fleet also served as a strategic advisor consultant to the Company from December 2018 to August

Since December 31, 2019, Mr.

Fleet has served as the President and Chief Executive Officer of the Colonial Williamsburg

Prior to August 2019, Mr.

Fleet served as a Managing Partner at SIR, a strategic management consultancy based in Richmond,

Virginia since his retirement in 2017 from Philip Morris USA.

Sullivan is President of Sullivan Capital Partners, LLC, a financial services company providing investment banking and consulting services to businesses seeking growth through acquisitions or strategic partnerships.

Sullivan focuses on due diligence, deal structure, strategic planning and governance matters.

(4) Since January 2020, Mr.

Fleet has served as President and CEO of the Colonial Williamsburg Foundation.

Prior to that, Mr.

Fleet previously served as the President and Chief Executive Officer of the Company from August 3, 2019 until December 13, 2019 and served as a strategic advisor consultant to the Company from December 2018 to August 3, 2019.

Prior to that, Mr.

Fleet served as President and CEO of Philip Morris USA.

(5) Since 2000 Mr.

O’Brien has been the

President of O’Brien Associates, LLC, a general management consulting firm providing advisory and implementation

services to companies in a variety of competitive industries, with special focus on general management, technology

commercialization, organizational development and strategy.

O’Brien has been the President of O’Brien Associates, LLC, a general management consulting firm providing advisory and implementation services to companies in a variety of competitive industries, with special focus on general management, technology commercialization, organizational development and strategy.

O’Brien has also served as an officer of several publicly held companies, including Sun Microsystems and Ultralife Batteries, Inc.

Code of Ethics

In 2006, we adopted a Code of Ethics that

applies to all our employees.

A copy of our Code of Ethics is available on our website at http://www.xxiicentury.com and

will be provided to any person requesting same without charge.

To request a copy of our Code of Ethics, please make a written

request to our General Counsel, c/o 22nd Century Group, Inc., 8560 Main Street, Suite 4, Williamsville, New York 14221.

material amendments or waivers relating to the Code of Ethics will be disclosed on our website within four business days following

the date of such amendment or waiver.

In 2006, we adopted a Code of Ethics that applies to all our employees.

A copy of our Code of Ethics is available on our website at http://www.xxiicentury.com and will be provided to any person requesting same without charge.

To request a copy of our Code of Ethics, please make a written request to our General Counsel, c/o 22nd Century Group, Inc., 8560 Main Street, Suite 4, Williamsville, New York 14221.

Future material amendments or waivers relating

to the Code of Ethics will be disclosed on our website within four business days following the date of such amendment or waiver.

Executive Compensation.

Information is incorporated herein by reference

to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the

fiscal year covered by this Form 10-K with respect to its 2020 Annual Meeting of Stockholders.

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2021 Annual Meeting of Stockholders.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information is incorporated herein by reference

to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the

fiscal year covered by this Form 10-K with respect to its 2020 Annual Meeting of Stockholders.

Certain Relationships and Related Transactions, and Director Independence.

Information is incorporated herein by reference

to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the

fiscal year covered by this Form 10-K with respect to its 2020 Annual Meeting of Stockholders.

Principal Accounting Fees and Services.

Information is incorporated herein by reference

to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the

fiscal year covered by this Form 10-K with respect to its 2020 Annual Meeting of Stockholders.

Exhibits and Financial Statement Schedules.

Financial Statements

Financial Statement Schedules

(a) Financial Statements

(b) Financial Statement Schedules

Report of Independent Registered Public Accounting Firm

2 unchanged sentences

Consolidated Statements of Operations and Comprehensive Loss

Consolidated Statements of Changes in Shareholders’

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Form 10-K Summary

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

1 unchanged sentence

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets

of 22nd Century Group, Inc.

and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated

statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows for each of the three years

in the period ended December 31, 2019, and the related notes and the schedule in item 15 (b) (collectively referred to as the “financial

statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of

the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years

in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the

Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal controls over financial

reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework issued

by Committee of Sponsoring Organizations of the Treadway Committee in 2013, and our report dated March 11, 2020 expressed an

unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

We have audited the accompanying consolidated balance sheets of 22 nd Century Group, Inc.

and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public

accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks

of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audits also included evaluating the accounting principles used and significant estimates made by management, as

well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis

for our opinion.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Intangible Assets – impairment analysis

Critical Audit Matter Description

As discussed in Note 1 to the consolidated financial statements, intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third-parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patents from third parties (2) license fees paid for third-party intellectual property (3) costs to become a signatory under the tobacco Master Settlement Agreement and (4) license fees paid to acquire a predicate cigarette brand.

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.

On at least an annual basis, the Company assesses whether events or changes in circumstances indicate that the carrying amount may not be recoverable.

If any such indicators are present, the Company will test for recoverability.

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.

In addition, the Company will assess the expected future undiscounted

cash flows for its intellectual property based on consideration of future market and economic conditions, competition, federal and state regulations, and licensing opportunities.

If the carrying value of such assets are not recoverable, the carrying value will be reduced to fair value.

Indefinite-lived intangible asset carrying values are reviewed at least annually or more frequently if events or changes in circumstances indicate that it is more likely than not that an impairment exists.

The Company first performs a qualitative assessment and considers its current strategic objectives, future market and economic conditions, competition, and federal and state regulations to determine if an impairment is more likely than not.

Because the Company has not fully commercialized its core intellectual property and the markets for those products are not yet developed, the Company assesses recoverability by reviewing the strategic importance and commercialization opportunities and making assumptions related to future market and economic conditions, competition, federal and state regulations, and licensing opportunities.

Due to the magnitude of intangible assets and subjectivity of these assumptions, we identified the impairment analysis of intangible assets as a critical audit matter, which required a high degree of auditor judgment.

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

The primary procedures we performed include:

obtaining an understanding of the process and assumptions used by management to perform the impairment test;

testing the completeness and accuracy of the gross and net capitalized costs by asset group used in the analysis;

evaluating the reasonableness and consistency of the methodology and assumptions applied by management.

Accounting for investment instruments of Panacea Life Sciences, Inc.

Critical Audit Matter Description

As discussed in Notes 1 and 6, the investment in Panacea reported as of December 31, 2020 includes three instruments:

Series B preferred stock (“preferred stock”), a convertible note receivable, and a stock warrant to purchase additional shares of Series B preferred stock.

The preferred stock and convertible note receivable are recorded at fair value as available-for-sale debt securities, while the stock warrant is an equity instrument recorded at its cost basis less impairment in accordance with the practicability exception under ASU 2016-01.

Panacea is a private company that is not traded in active markets.

To assess fair value and impairment, the Company must use qualitative factors when considering change to fair value for the debt securities and potential impairment to all three instruments.

The Company considers the current market conditions of the cannabidiol (“CBD”) consumer product industry, competition, governmental regulation developments, preferred stock priority equity preferences and rights, and the overall financial performance of Panacea to assess if fair value supports the investment’s carrying value.

Additionally, as discussed in Note 6 to the consolidated financial statements, the Company entered into a non-binding agreement to restructure the investment and business relationship with Panacea.

Under the terms of this agreement being negotiated, the convertible note receivable, accrued interest on the note receivable, and the equity warrant would be exchanged for a combination of certain operational assets.

Certain other amendments to the securities purchase agreement are also being considered.

Management included consideration of this non-binding agreement when estimating fair value and potential impairment of the Panacea investment.

Due to the magnitude of this investment and subjectivity of the qualitative factors used to value the investment, we identified fair value accounting of the Panacea investment instruments as a critical audit matter, which required a high degree of auditor judgment.

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

The primary procedures we performed include:

evaluating assumptions related to change in fair value, evaluating the reasonableness and consistency of the methodology and assumptions applied by management in their impairment analysis including understanding the terms of the non-binding agreement and consideration of fair value of assets to be acquired in the exchange, how management gained comfort over forecasts used in the preferred shares impairment model;

and consideration of the preferred shares equity preferences and rights, along with reasonableness of other assumptions and qualitative factors used in Management’s impairment analysis.

/s/ Freed Maxick, CPAs, P.C.

5 unchanged sentences

CONSOLIDATED BALANCE SHEETS

($ in thousands)

Current Assets:

1 unchanged sentence

Short-term investment securities

Accounts receivable

Accounts receivable, net

Inventory, net

4 unchanged sentences

Operating leases right-of-use assets, net

Total property, plant and equipment

Other assets:

Intangible assets, net

Convertible note receivable, net

Convertible note

Total other assets

11 unchanged sentences

Operating lease obligations

Accrued severance

Severance obligations

Total liabilities

5 unchanged sentences

139,061,690 common shares ( 138,362,809 at December 31, 2019)

Capital in excess of par

Accumulated other comprehensive income

Common stock value

Capital in excess of par value

Accumulated other comprehensive (loss) income

Accumulated deficit

(125,693,027 )

(99,134,483 )

Total shareholders' equity

Total liabilities and shareholders’ equity

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

22nd CENTURY GROUP, INC.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

Year Ended December 31,

($ in thousands except per-share data)

Sale of products, net

2 unchanged sentences

Operating expenses:

Research and development (including equity-based compensation of $373,762;$1,846,116 and $182,854, respectively)

Sales, general and administrative (including

equity-based compensation of $3,165,983;

$1,341,215 and $758,796, respectively)

Research and development

Research and development - MRTP

Sales, general and administrative

Impairment of intangible assets

Total operating expenses

Operating loss

(23,566,461 )

(24,018,627 )

(13,299,864 )

Operating income (expense):

Unrealized (loss) gain on investments

Other income (expense):

Unrealized gain (loss) on investments

Impairment of Panacea investment

Realized gain on investments

Realized gain (loss) on short-term investment securities

Litigation expense

Litigation settlement

Gain on the sale of machinery and equipment

Warrant liability gain (loss), net

Dividend income

Dividend income and other

Interest income, net

Interest expense

Total other income (expense)

Loss before income taxes

(26,558,544 )

(13,029,117 )

$ (26,558,544 )

$ (7,966,911 )

$ (13,029,117 )

Other comprehensive income (loss):

Unrealized gain (loss) on short-term investment securities

Reclassification of (gains) losses to net loss

Reclassification of (gain) loss to net loss

Other comprehensive income (loss)

Comprehensive loss

$ (26,572,833 )

$ (7,945,548 )

$ (13,029,117 )

Net loss per common share - basic and diluted

Common shares used in basic and diluted earnings per share calculation

See accompanying notes to consolidated financial

Weighted average common shares outstanding - basic and diluted (in thousands)

See accompanying notes to consolidated financial statements.

22nd CENTURY GROUP, INC.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

($ in thousands)

Years Ended December 31, 2020, 2019, and 2018

2 unchanged sentences

Balance at December 31, 2017

$ 102,471,907

$ (78,138,455 )

Stock issued in connection with warrant exercises

Stock issued in connection with option exercises

Equity-based compensation

in connection with warrant exercises

Stock issued in connection

with option exercises

Stock issued in October

2017 registered direct offering, net

(13,029,117 )

Reclassification of warrant liability to capital in excess of par

Unrealized gain (loss) on short-term investment securities

Reclassification of losses (gains) to net loss

Balance at December 31, 2018

(91,167,572 )

in connection with warrant exercises

Stock issued in connection

with option exercises

Stock issued in connection with warrant exercises

Stock issued in connection with option exercises

Stock issued in connection with RSU vesting

Equity-based compensation

Reclassification of warrant

liability to capital in excess of par

Unrealized loss on short-term investment

Reclassification of losses to net loss

Stock issued in connection with litigation expense

Stock issued in connection with Panacea investment

Unrealized gain (loss) on short-term investment securities

Reclassification of losses (gains) to net loss

Balance at December 31, 2019

(99,134,483 )

in connection with warrant exercises

Stock issued in connection

with option exercises

Stock issued in connection with RSU vesting

Stock issued in connection with option exercises

Equity-based compensation

Stock issued in connection

with litigation expense

Stock issued in connection with Panacea investment

Unrealized gain on short-term

Reclassification of gains

(26,558,544 )

Unrealized gain (loss) on short-term investment securities

Reclassification of losses (gains) to net loss

Balance at December 31, 2020

$ 187,735,391

$ (125,693,027 )

See accompanying notes to consolidated financial statements.

2 unchanged sentences

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

($ in thousands)

Cash flows from operating activities:

$ (26,558,544 )

$ (7,966,911 )

$ (13,029,117 )

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

Impairment of intangible assets

Impairment of Panacea investment

Amortization and depreciation

Amortization of license fees

Lease expense

Severance expense

Unrealized loss (gain) on investments

Amortization of ROU Asset

Realized gain on the sale of investments

(14,492,968 )

Unrealized (gain) loss on investment

Realized (gain) loss on short-term investment securities

Litigation expense

Litigation settlement

Gain on the sale of machinery and equipment

Warrant liability (gain) loss

Accretion of interest on note payable and accrued severance

Accretion of interest income on

convertible note receivable

Accretion of non cash interest expense

Accretion of non cash interest income

Equity-based employee compensation expense

Inventory write-off

Decrease in allowance for doubtful accounts

(Decrease) increase in inventory reserve

(Decrease) increase in inventory reserves

(Increase) decrease in assets:

2 unchanged sentences

Increase (decrease) in liabilities:

Operating lease obligation

Operating lease obligations

Accounts payable

1 unchanged sentence

Accrued severance

Deferred revenue

Net cash used in operating activities

(14,587,364 )

(17,844,266 )

(12,068,383 )

Deferred income

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Acquisition of patents and trademarks

Acquisition of patents, trademarks, and licenses

Acquisition of machinery and equipment

Acquisition of license

Proceeds from the sale of machinery and equipment

Investment in Panacea

(12,000,000 )

Proceeds from the sale of investments

1 unchanged sentence

Purchase of short-term investment securities

(34,215,994 )

(58,979,131 )

Net cash provided by (used in) investing activities

(60,586,245 )

Cash flows from financing activities:

Payment on notes payable

Proceeds from exercise of stock options

Net proceeds from exercise of stock warrants

Net proceeds from October 2017 registered direct offering

Payment on note payable

Proceeds from note payable issuance

Net proceeds from option exercise

Net proceeds from warrant exercise

Proceeds from SBA loan

Repayment of SBA loan

Net cash provided by (used in) financing activities

Net decrease in cash

Cash and cash equivalents - January 1,

Cash and cash equivalents - December 31,

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents - beginning of period

Cash and cash equivalents - end of period

Supplemental disclosures of cash flow information:

1 unchanged sentence

Cash paid during the period for interest

Cash paid during the period for income taxes

Non-cash transactions:

1 unchanged sentence

Machinery and equipment additions included in accounts payable

Unrealized (gain) loss on short-term investment securities

Right-of-use assets and corresponding operating lease obligations

Patent and trademark additions included in accrued expenses

Licenses acquired with notes payable

Reclassification of warrant liability to capital in excess of par

Stock issued in connection with equity investment

Stock issued in connection with investment

See accompanying notes to consolidated financial statements.

3 unchanged sentences

December 31, 2020

- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING

of Consolidation - The accompanying consolidated financial statements include the accounts of 22nd Century

(“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century

Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two

wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals,

LLC (“Heracles Pharma”, formerly known as Hercules Pharmaceuticals, LLC) (collectively, the “Company”).

Amounts in thousands, except for share and per share data

– NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The accompanying consolidated financial statements include the accounts of 22nd Century Group, Inc.

(“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”) (collectively, “the Company”).

All intercompany accounts and transactions have been eliminated.

Nature of Business - 22nd

Century Ltd is a plant biotechnology company specializing in technology that allows (i) for the level of nicotine and other nicotinic

alkaloids in tobacco plants to be altered through genetic engineering and modern plant breeding and (ii) the levels of cannabinoids

in hemp plants to be decreased or increased through genetic engineering and modern plant breeding.

Goodrich Tobacco and Heracles

Pharma are business units for the Company’s (i) potential modified risk tobacco products and (ii) smoking cessation product,

respectively.

NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco

Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA and operates

the Company’s tobacco products manufacturing business in North Carolina.

Botanical Genetics is a wholly-owned subsidiary

of 22nd Century Group and was incorporated to facilitate the original investment in Anandia, Inc., and performs research

and development related to the Company’s hemp business.

Reclassifications

- Certain items in the 2018 and 2017 financial statements have been reclassified to conform to the 2019 classification.

During the third quarter of 2019, the Company combined sales and marketing expenses with general and administrative expenses to

create a single line item in the operating expense section of the Company’s Consolidated Statements of Operations and Comprehensive

Loss titled sales, general and administrative expenses.

The comparative classifications for 2018 and 2017 have been reclassified

to conform to the new presentation.

stock authorized - The Company is authorized to issue “blank check” preferred stock, which could

be issued with voting, liquidation, dividend and other rights superior to our common stock.

Concentration

of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk

consist of cash accounts in financial institutions.

Although the cash accounts exceed the federally insured deposit amount, management

does not anticipate nonperformance by the financial institutions.

Management reviews the financial viability of these institutions

on a periodic basis.

and cash equivalents –

The Company considers all highly liquid

investments with maturities of three months or less at the date of acquisition to be cash equivalents.

However, the Company has

elected to classify money market mutual funds related to its short-term investment portfolio as short-term investment securities.

investment securities – The Company’s short-term investment securities are classified as available-for-sale

securities and consist of money market funds, corporate bonds, U.S.

Nature of Business – 22nd Century Group is a biotechnology company developing disruptive plant-based solutions for the life science, consumer product, and pharmaceutical markets.

The Company is focused on technology that allows it to alter the level of nicotine and other nicotinic alkaloids in tobacco plants and the levels of cannabinoids and terpenes in hemp/cannabis plants through genetic engineering and modern plant breeding techniques.

Goodrich Tobacco and Heracles Pharma are business units for the Company’s potential modified risk tobacco products.

NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA and operates the Company’s tobacco products manufacturing business in North Carolina.

Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group that performs research and development related to the Company’s hemp business.

Reclassifications – Certain items in the 2019 and 2018 financial statements have been reclassified to conform to the 2020 classification.

During 2020, the Company expanded its research and development expense line item into two line items in the operating expense section of the Company’s Consolidated Statements of Operations and Comprehensive Loss:

(i) Research and development and (ii) Research and development—MRTP.

The comparative classifications for 2019 and 2018 have been reclassified to conform to the new presentation.

Preferred stock authorized – The Company is authorized to issue “blank check” preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.

Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consist of cash accounts in financial institutions.

Although the cash accounts exceed the federally insured deposit amount, management does not anticipate nonperformance by the financial institutions.

Management reviews the financial viability of these institutions on a periodic basis.

Cash and cash equivalents – The Company considers all highly liquid investments with maturities of three months or less at the date of acquisition to be cash equivalents.

However, the Company has elected to classify money market mutual funds related to its short-term investment portfolio as short-term investment securities.

There are no restrictions on the Company’s cash and cash equivalents.

Short-term investment securities – The Company’s short-term investment securities are classified as available-for-sale securities and consist of money market funds, corporate bonds, U.S.

government agency bonds, U.S.

treasury securities, and commercial

paper with maturities greater than three months at the time of acquisition.

The Company’s short-term investment securities

are carried at fair value within current assets on the Company’s Consolidated Balance Sheets.

The Company views its available-for-sale

securities as available for use in current operations regardless of the stated maturity date of the security.

The Company’s

investment policy states that all investment securities must have a maximum maturity of twenty-four (24) months or less and the

maximum weighted maturity of the investment securities must not exceed twelve (12) months.

All the Company’s short-term investment

securities are fixed-income debt instruments, and accordingly, all unrealized gains and losses incurred on the short-term investment

securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated

Statements of Operations and Comprehensive Loss.

treasury securities, and commercial paper with maturities greater than three months at the time of acquisition.

The Company’s short-term investment securities are carried at fair value within current assets on the Company’s Consolidated Balance Sheets.

The Company views its available-for-sale securities as available for use in current operations regardless of the stated maturity date of the security.

The Company’s investment policy states that all investment securities must have a maximum maturity of twenty-four (24) months or less and the maximum weighted maturity of the investment securities must not exceed twelve (12) months.

All the Company’s short-term investment securities are fixed-income debt instruments, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

Realized gains and losses on short-term investment securities are recorded in

the other income (expense) portion of the Company’s Consolidated Statements of Operations and Comprehensive Loss.

income is recorded on the accrual basis and presented net of investment related fees.

Accounts receivable - The Company periodically

reviews aged account balances for collectability.

The Company concluded that an allowance for doubtful accounts was not required

at both December 31, 2019 and December 31, 2018.

Inventory - Inventories

are valued at the lower of historical cost or net realizable value.

Cost is determined using an average cost method for

tobacco leaf inventory and raw materials inventory and standard cost is primarily used for finished goods inventory.

Inventories are evaluated to determine whether any amounts are not recoverable based on slow moving or obsolete condition and

are written off or reserved as appropriate.

For the year ended December 31, 2019, the Company wrote off tobacco

leaf inventory with a cost of $985,238 and this cost is included in research and development expenses on the Company’s

Consolidated Statement of Operations and Comprehensive Loss.

Inventories at December 31, 2019 and 2018 consisted

of the following:

Inventory - tobacco leaf

Inventory - finished goods

Cigarettes and filtered cigars

Inventory - raw materials

Cigarette and filtered cigar components

inventory reserve

and equipment – Machinery and equipment are recorded at their acquisition cost and depreciated on a

straight-line basis over their estimated useful lives ranging from 3 to 10 years.

Depreciation commences when the asset is placed

assets - On January 1, 2019, the Company adopted ASU 2016-02, Subtopic ASC 842, Leases, and as a result has recorded

Right-to-use assets and corresponding Lease obligations as more fully discussed in Note 3.

Intangible Assets - Intangible

assets are recorded at cost and consist primarily of (1) expenditures incurred with third-parties related to the processing of

patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third-parties, (2) license

fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid

to acquire a predicate cigarette brand.

The amounts capitalized relate to intellectual property that the Company owns or to which

it has exclusive rights.

The Company’s intellectual property capitalized costs are amortized using the straight-line method

over the remaining statutory life of the granted patent assets in each of the Company’s patent families, which have estimated

expiration dates ranging from 2019 to 2036.

Interest income is recorded on the accrual basis and presented net of investment related fees.

Accounts receivable – The Company periodically reviews aged account balances for collectability.

The Company concluded that an allowance for doubtful accounts was not required at both December 31, 2020 and December 31, 2019.

Inventory – Inventories are valued at the lower of historical cost or net realizable value.

Cost is determined using (i) an average cost method for tobacco leaf inventory and raw materials inventory, and (ii) a standard cost method, approximating average costs, for finished goods inventory.

Inventories are evaluated to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved as appropriate.

Machinery and equipment – Machinery and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives, generally ranging from ranging from 3 to 10 years .

Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the estimate useful life of the asset, whichever is shorter.

Depreciation commences when the asset is placed in service.

Intangible Assets – Intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third-parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third-parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand.

The amounts capitalized relate to intellectual property that the Company owns or to which it has exclusive rights.

The Company’s capitalized intellectual property costs are amortized using the straight-line method over the remaining statutory life of the granted patent assets in each of the Company’s patent families, which have estimated expiration dates ranging from 2026 to 2041.

Periodic maintenance or renewal fees are expensed as incurred.

Annual minimum license

fees are charged to expense.

License fees paid for third-party intellectual property are amortized on a straight-line basis over

the last to expire patents, which patent expiration dates are expected to range from 2019 through 2036.

The Company believes costs

associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such,

no amortization is taken.

Total intangible assets at December 31,

2019 and 2018 consisted of the following:

Intangible assets, net

Patent and trademark costs

accumulated amortization and impairment

Patent and trademark costs, net

License fees, net

accumulated amortization

License fees, net

MSA signatory costs

License fee for predicate cigarette brand

Amortization expense relating to the above

intangible assets for the years ended December 31, 2019, 2018, and 2017 amounted to $835,693, $819,640 and $539,562, respectively.

The estimated annual average amortization

expense for the next five years is approximately $401,500 for patent costs and $239,100 for license fees.

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.

During the year ended December 31,

2019, the Company decided on a going-forward basis that it will be concentrating its business and scientific resources,

personnel and efforts on the portion of our intellectual property portfolio (patents, patent applications and trademarks)

that relate to very low nicotine tobacco plants and potential products, as well as unique hemp/cannabis plants and potential

products, in order to more strategically pursue our objectives.

Accordingly, we recorded a non-cash impairment charge of

$1,142,349 (cost of $2,092,485 less accumulated amortization of $950,136) relating to patent and trademark costs not

associated with these strategic objectives.

This impairment charge is included as a separate line item in operating expenses

on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

There was no impairment loss recorded

during the years ended December 31, 2018, and 2017.

Taxes - The Company recognizes deferred tax assets and liabilities for any basis differences in its assets

and liabilities between tax and U.S.

Annual minimum license fees are charged to expense.

License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which patent expiration dates are expected to range from 2019 through 2036.

The Company believes costs associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such, no amortization is taken.

At each reporting period, the Company evaluates whether events and circumstances continue to support the indefinite-lived classification.

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.

On at least an annual basis, the Company assesses whether events or changes in circumstances indicate that the carrying amount may not be recoverable.

If any such indicators are present, the Company will test for recoverability in accordance with ASC 360- Property, plant, and equipment or ASC 350- Intangibles, Goodwill, and Other .

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.

In addition, the Company will assess the expected future undiscounted cash flows for its intellectual property based on consideration of future market and economic conditions, competition, federal and state regulations, and licensing opportunities.

If the carrying value of such assets are not recoverable, the carrying value will be reduced to fair value.

If it is determined that an impairment is more likely than not, a quantitative assessment is performed to compare the asset carrying value to fair value.

Right-of-use assets (ROU) and Lease Obligations – On January 1, 2019, the Company adopted ASU 2016-02, Subtopic ASC 842, Leases (the “new guidance”).

Under the new guidance, the Company was required to evaluate its

leases and record a Right-of-use (“ROU”) asset and a corresponding lease obligation for leases that qualified as either finance or operating leases.

The Company elected to use the practical expedient which allowed the Company to carry forward the historical lease classifications of the existing leases.

The Company determined that its leases contained (1) no variable lease expenses, (2) no termination options, (3) no residual lease guarantees, and (4) no material restrictions or covenants.

All remaining renewal options were included in the computation of the ROU assets and lease obligations upon adoption.

The Company reviews any lease arrangements in accordance with ASU 2016-02, Subtopic ASC 842, Leases.

Any lease having a lease term greater than twelve months will be recognized on the Consolidated Balance Sheets as a ROU asset with an associated lease obligation—all other leases are considered short-term in nature and will be expensed on a month-to-month basis.

The ROU assets and lease obligations are recognized as of the commencement date at the net present value of the fixed minimum lease payments for the lease term.

The discount rate used is the interest rate implicit in the lease, if available, or the Company’s incremental borrowing rate which is determined using a base line rate plus an applicable spread.

All financial results and disclosures for periods beginning after January 1, 2019 are presented in accordance with Subtopic ASC 842.

2018 results have not been adjusted continue to be reported under ASC 840.

Refer to Note 4 for additional information regarding our ROU assets and liabilities.

Income Taxes – The Company recognizes deferred tax assets and liabilities for any basis differences in its assets and liabilities between tax and U.S.

GAAP reporting, and for operating loss and credit carry-forwards.

As a result of the Company’s history

of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance

to fully offset its net deferred tax assets as of December 31, 2019 and 2018.

Additionally, because the Company has a full valuation

allowance offsetting its deferred tax assets and as a result has an effective tax rate of zero, the Company has elected to present

other comprehensive income items relating to net unrealized gains on short-term investment securities gross and not net of taxes.

The Company’s federal and state

tax returns for the years ended December 31, 2016 through December 31, 2018 are currently open to audit under the statutes of limitations.

As a result of the Company’s history of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance to fully offset its net deferred tax assets as of December 31, 2020 and December 31, 2019.

Additionally, the Company has elected to present other comprehensive income items relating to net unrealized gains on short-term investment securities gross and not net of taxes.

The Company’s federal and state tax returns for the years ended December 31, 2017 through December 31, 2019 are currently open to audit under the statutes of limitations.

There are no pending audits as of December 31, 2020.

The Tax Cuts and Jobs Act of 2017 (the “TCJA”)

was signed into law on December 22, 2017.

The TCJA includes significant changes to the U.S.

corporate income tax system, including

a Federal corporate rate reduction from 35% to 21%.

In accordance with a question and answer document issued by the Financial

Accounting Standards Board (“FASB”) staff on January 18, 2018, the Company is applying the guidance in Securities

and Exchange Commission Staff Accounting Bulletin (“SAB”) 118, Income Tax Accounting Implications of the Tax Cuts

and Jobs Act, which provides guidance on applying FASB Accounting Standards Codification (“ASC”) 740, Income Taxes,

if the accounting for certain income tax effects of the TCJA are incomplete by the time the financial statements are issued for

a reporting period.

Specifically, SAB 118 permits companies to use reasonable estimates and provisional amounts for some line

items for taxes when preparing year-end 2018 and 2017 financial statements.

The Company has completed the accounting under the

TCJA, and accordingly, has reported the effects in the Company’s consolidated financial statements for the years ended December

31, 2019, 2018, and 2017.

Additional disclosures required by SAB 118 are included in Note 13.

Based Compensation - The Company uses a fair-value based method to determine compensation for all

arrangements under which Company employees and others receive shares, restricted stock units or options to purchase common shares

of the Company.

Stock based compensation expense is recorded over the requisite service period based on estimates of probability

and time of achieving milestones and vesting.

For accounting purposes, the shares will be considered issued and outstanding upon

vesting or risks of forfeiture expiring.

Recognition - On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers and all related

amendments (the “new revenue standard”) for all contracts using the modified retrospective method.

Under the modified

retrospective method, the Company was required to record a cumulative-effect adjustment to the opening balance of retained earnings

on January 1, 2018.

The Company has determined that the adoption of the new revenue standard did not require a cumulative-effect

The comparative information has not been restated and continues to be reported under the accounting standards in effect

for those periods.

The Company recognizes revenue when it satisfies

a performance obligation by transferring control of the product to a customer.

The Company’s customer contracts consist of

obligations to manufacture the customer’s branded filtered cigars and cigarettes.

For certain 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 manufactured.

The manufacturing process is completed

on a daily basis and, therefore, there were no performance obligations partially satisfied at December 31, 2019 and 2018.

For contracts

where the performance obligation is satisfied at a point in time, the Company recognizes revenue when the product is transferred

to the customer.

Revenue from the sale of the Company’s products is recognized net of cash discounts, sales returns and allowances.

There was no allowance for discounts or returns and allowances at December 31, 2019 and 2018.

The Company provides assurance to customers that the product

complies with agreed-upon contractual specifications.

Shipping and handling activities associated with the outbound freight after

control of the product has transferred to a customer are considered a fulfillment activity.

The related shipping and handling expenses

are included in cost of goods sold.

The Company generally requires a down payment

from its customers prior to commencement of manufacturing the product.

Amounts received in advance of satisfying the performance

obligations are recorded as deferred revenue.

Customer payment terms vary depending on the terms of each customer contract, but

payment is generally due prior to product shipment or within extended credit terms up to twenty-one (21) days after shipment;

therefore The Company’s contracts with customers do not include a significant financing component.

The Company’s net sales revenue is

derived from customers located primarily in the United and is disaggregated by the timing of revenue recognition.

For the years ended December 31, 2019 and 2018, net sales revenue from products transferred over time amounted to approximately

$16,466,000 and $16,785,000, respectively, and net sales revenue from products transferred at a point in time amounted to approximately

$9,367,000 and $9,641,000, respectively.

The Company had certain customers whose

revenue individually represented 10% or more the Company’s total revenue and whose accounts receivable balances individually

represented 10% or more the Company’s total accounts receivable.

For the years ended December 31, 2019, and 2018, three customers

accounted for over 92.7% and 92.0% of our revenue and approximately 98.5% and 85.6%, respectively, of accounts receivable.

- The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

evaluates all our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded

Derivative financial instruments are initially recorded at fair market value and then are revalued at each reporting

date, with changes in fair value reported in the Consolidated Statements of Operations and Comprehensive Loss.

The classification

of derivative instruments is evaluated at the end of each reporting period.

Derivative instruments are classified on the balance

sheet as current or non-current based on if the net-cash settlement of the derivative instrument could be required within twelve

months of the balance sheet date.

and Development - Research and development costs are expensed as incurred.

Per Common Share - Basic loss per common share is computed using the weighted-average number of common shares outstanding.

Stock Based Compensation – The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and others receive shares, restricted stock units or options to purchase common shares of the Company.

Stock based compensation expense is recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting.

For accounting purposes, the shares will be considered issued and outstanding.

Forfeitures are accounted for when the occur.

Revenue Recognition – The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer.

For additional discussion on revenue recognition, refer to Note 16.

Derivatives – The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

The Company evaluates all our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.

Derivative financial instruments are initially recorded at fair market value and then are revalued at each reporting date, with changes in fair value reported in the Consolidated Statements of Operations and Comprehensive Loss.

The classification of derivative instruments is evaluated at the end of each reporting period.

Derivative instruments are classified on the balance sheet as current or non-current based on if the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

Research and Development – Research and development costs are expensed as incurred.

Loss Per Common Share – Basic loss per common share is computed using the weighted-average number of common shares outstanding.

Diluted loss per share is computed assuming conversion of all potentially dilutive securities.

Potential common shares outstanding

are excluded from the computation if their effect is anti-dilutive.

of Estimates - The preparation of financial statements in conformity with accounting principles generally

accepted in the U.S.

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.

Potential common shares outstanding are excluded from the computation if their effect is anti-dilutive.

Refer to Note 13 for additional information.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.

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.

Value of Financial Instruments - The Company’s financial instruments

include cash and cash equivalents, short-term investment securities, accounts receivable, investments, a convertible note receivable, accounts payable, accrued expenses, and notes payable.

Other than for cash equivalents,

short-term investment securities, investments, and convertible note receivable, fair value

is assumed to approximate carrying values for these financial instruments, since they are short term in nature, they are receivable

or payable on demand, or had stated interest rates that approximate the interest rates available to the Company as of the reporting

The determination of the fair value of cash equivalents, short-term investment securities, investments (stock warrants and

equity investment), and convertible note receivable are discussed in Note 5.

The Company accounts for investments in

equity securities of other entities under the equity method of accounting if the Company’s investment in the stock of the

other entity provides the Company with the ability to have significant influence over the operating and financial policies of the

If the Company does not have significant influence over the operating or financial policies of the entity, and such equity

investment does not have a readily determinable market value, then the Company accounts for such equity investments in accordance

with FASB ASU 2016-01, Financial Instruments –

Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assts

and Financial Liabilities, which the Company adopted in the first quarter of 2018 with respect to the Company’s investments.

Fair Value of Financial Instruments – The Company’s financial instruments include cash and cash equivalents, short-term investment securities, accounts receivable, investments, a convertible note receivable, accounts payable, accrued expenses, and notes payable.

Other than for cash equivalents, short-term investment securities, investments, and convertible note receivable, fair value is assumed to approximate carrying values for these financial instruments, since they are short term in nature, they are receivable or payable on demand, or had stated interest rates that approximate the interest rates available to the Company as of the reporting date.

The determination of the fair value of cash equivalents, short-term investment securities, investments (stock warrants and equity investment), and convertible note receivable are discussed in Note 7.

Investments – The Company accounts for investments in equity securities of other entities under the equity method of accounting if the Company’s investment in the stock of the other entity provides the Company with the ability to have significant influence over the operating and financial policies of the investee.

If the Company does not have significant influence over the operating or financial policies of the entity, and such equity investment does not have a readily determinable market value, then the Company accounts for such equity investments in accordance with FASB ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assts and Financial Liabilities, which the Company adopted in the first quarter of 2018 with respect to the Company’s investments.

Under ASU 2016-01 equity securities are recorded at fair value, with changes in fair value recorded through the statement of operations.

Equity securities without a readily determinable market value are carried at cost less impairment, adjusted for observable price

changes in orderly transactions for an identical or similar investment of the same issuer.

The Company considers debt instruments

as available-for-sale securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities

(the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements

of Operations and Comprehensive Loss.

The Company has an investment in Aurora

stock warrants that are considered equity securities under ASC 321 –

Investments –

Equity Securities and a derivative

instrument under ASC 815 –

Derivatives and Hedging.

The stock warrants are not designated as a hedging instrument, and in

accordance with ASC 815, the Company’s investment in stock warrants are recorded at fair value with changes in fair value

recorded in the Company’s Consolidated Statements of Operations and Comprehensive Loss.

The Company also has Panacea stock

warrants that are not considered a derivative under ASC 815.

As such, the Panacea stock warrants are considered an equity investment

with no readily determinable market value and are carried at cost less impairment, adjusted for observable price changes in orderly

transactions for an identical or similar investment of the same issuer.

During the fourth quarter of 2019, the

Company made an investment in Panacea consisting of preferred shares that are not considered in-substance common stock, a

stock warrant and a convertible note receivable.

The convertible note receivable was recorded at a discount with the note

discount amortized into interest income over the term of the note.

This transaction, along with the related valuation

techniques are more fully described in Note 4.

Pronouncement -

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit

Losses on Financial Instruments.”

The standard replaces the incurred loss model with the current expected credit loss (CECL)

model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures.

The CECL model requires companies to estimate credit losses expected over the life of the financial assets based on historical

experience, current conditions and reasonable and supportable forecasts.

The provisions of the ASU are effective for fiscal years

beginning after December 15, 2019 and interim periods within those fiscal years.

The ASU requires retrospective approach by recording

a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.

The Company will adopt ASU

2016-13 on January 1, 2023 and is evaluating the expected impacts.

Equity securities without a readily determinable market value are carried at cost less impairment, adjusted for observable price changes in orderly transactions for an identical or similar investment of the same issuer.

The Company considers debt instruments as available-for-sale securities, and accordingly, all unrealized gains and losses incurred on the short-term investment securities (the adjustment to fair value) are recorded in other comprehensive income or loss on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

Refer to Note 6 for additional disclosures relating to the Company’s investments.

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.

Our current legal matters are discussed further in Note 12.

Recent Accounting Pronouncement(s) –

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures.

The CECL model requires companies to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts.

The provisions of the ASU are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years—excluding small reporting companies (SRCs) which have an effective date beginning after December 15, 2022 and interim periods within those fiscal years.

The Company plans to adopt ASU 2016-13 on January 1, 2023 and is evaluating the expected impacts.

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 appliable or would have an immaterial impact on our financial statements and related disclosures.

Inventories at December 31, 2020 and December 31, 2019 consisted of the following:

Inventory - tobacco leaf

Inventory - finished goods

Cigarettes and filtered cigars

Inventory - raw materials

Cigarette and filtered cigar components

inventory reserve

During the year ended December 31, 2020, the Company wrote off inventory totaling $ 521 on the Company’s Consolidated Statement of Operations and Comprehensive Loss ( $ 361 included within research and development expenses and $ 161 included within cost of goods sold).

During the year ended December 31, 2019, the Company wrote off inventory totaling $ 985 which is included within research and development expenses on the Company’s Consolidated Statement of Operations and Comprehensive Loss.

– MACHINERY AND EQUIPMENT

Machinery and equipment at December 31,

2019 and December 31, 2018 consisted of the following:

Machinery and equipment at December 31, 2020 and December 31, 2019 consisted of the following:

Cigarette manufacturing equipment

3 or 10 years

Office furniture, fixtures and equipment

3 unchanged sentences

Machinery and equipment, net

Depreciation expense was $589,310, $522,695

and $353,435 for the years ended December 31, 2019, 2018, and 2017, respectively.

- RIGHT-OF-USE ASSETS, LEASE

OBLIGATIONS, AND OTHER LEASES

On January 1, 2019, the Company adopted

ASU 2016-02, Subtopic ASC 842, Leases (the “new guidance”).

Under the new guidance, the Company was required to evaluate

its leases and record a Right-of-use (“ROU”) asset and a corresponding lease obligation for leases that qualified as

either finance or operating leases.

Prior to the adoption of the new guidance, the Company had various operating leases for real

The Company elected to use the practical expedient which allowed the Company to carry forward the historical lease classifications

of the existing leases.

The Company determined that its leases contained (1) no variable lease expenses, (2) no termination options,

(3) no residual lease guarantees, and (4) no material restrictions or covenants.

The new guidance calls for the lease obligations

to be recorded at the present value of the remaining lease payments under the leases and the ROU assets are recorded as the sum

of the present value of the lease obligations plus any initial direct costs minus lease incentives plus prepaid lease payments.

All remaining renewal options have been included in the computation of the ROU assets and lease obligations.

The present value

of the remaining lease payments was computed using a discount rate of 5.14%.

The Company determined that two real estate leases

qualified as operating leases under the new guidance as discussed below.

Further, FASB issued ASU 2018-11, Re-Leases

Targeted Improvements to ASC 842, to provide entities with relief from the costs of implementing certain aspects of the new guidance.

Under ASU 2018-11, entities may elect not to recast comparative periods when transitioning to the new guidance.

The Company has

adopted ASU 2018-11, and accordingly, will (1) apply ASC 840 Lease Accounting (the “old guidance”) in comparative periods,

(2) provide disclosures for all comparative periods presented in accordance with the old guidance, and (3) recognize the effects

of applying the new guidance as a cumulative-effects adjustment to retained earnings as of January 1, 2019.

No cumulative-effects

adjustment was made as the Company determined it to be immaterial.

The Company leases a manufacturing facility

and warehouse located in North Carolina on a triple net lease basis with a monthly lease payment of $14,094.

As of January 1, 2019,

the lease had a remaining term of thirty-four (34) months including all renewal options.

Under the new guidance, the Company recorded

a ROU asset and a corresponding lease obligation in the amount of $446,950 on January 1, 2019 and recorded a lease expense for

the year ended December 31, 2019 of approximately $168,100.

On October 4, 2017, the Company entered

a lease for office space at a location in Williamsville, New York with an initial monthly lease payment of $6,375 per month for

the first three years of the lease.

The monthly lease payment increases by 5% annually for the remainder of the lease.

As of January

1, 2019, the lease had a remaining term of sixty-two (62) months including all renewal options.

Under the new guidance, the Company

recorded a ROU asset and a corresponding lease obligation in the amount of $367,325 on January 1, 2019 and recorded a lease expense

for the year ended December 31, 2019 of approximately $76,500.

As of December 31, 2019, the ROU assets

and corresponding operating lease obligations had a balance of $601,979, with $219,814, and $382,165 of the operating lease obligation

shown as current and long-term, respectively.

In addition, the Company has two leases

that did not qualify as operating or financing leases under the new guidance as discussed below.

On August 14, 2017, the Company

entered into a lease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment, to store

the Company’s proprietary tobacco leaf and to store inventory used in the Company’s contract manufacturing

On August 14, 2019 the Company signed an amended month to month lease agreement.

The lease calls for a monthly

payment of $4,665 and expires on August 14, 2020.

On May 1, 2016, the Company entered a sublease

for laboratory space in Buffalo, New York.

During the years ended December 31, 2017, 2018, and 2019 the Company entered various

sublease amendments that changed the subleased laboratory space and increased the monthly sublease payments and extended the sublease

periods until February 2020.

On January 15, 2020 the Company entered a new lease agreement with the landlord.

The lease commences

on February 1, 2020 with an initial one-year term, a monthly lease payment of $8,408 and an option to renew for an additional

12 months with a 3% increase in the monthly lease payments.

The lease expense for the laboratory space was approximately $68,700,

$62,600 and $30,483 for the years ended December 31, 2019, 2018, and 2017, respectively.

Future minimum annual lease payments

under the laboratory space lease will be approximately $100,000, $104,000, and $8,700 for the years ended December 31, 2020, 2021,

and 2022, respectively.

- INVESTMENTS

Investments at December 31, 2019 and 2018 are $8,402,527 and

$3,092,358, respectively.

The investments at December 31, 2019 consist of the fair value of the Aurora stock warrants of $673,010,

the fair value of the Panacea preferred stock of $4,864,517 and the cost of the Panacea stock warrants of $2,865,000.

also has a convertible note receivable from Panacea in the amount of $5,589,478 at December 31, 2019.

The investment at December

31, 2018 consists of the fair value of the Aurora stock warrants.

These investments are described in more detail below.

Investment in Panacea

On December 3, 2019, the Company entered

into an agreement to obtain a 15.8% ownership in Panacea as part of its strategy to expand its operations to the legal, hemp/cannabis,

consumer packaged goods space.

Panacea offers a line of legal, THC-free, hemp-derived cannabinoid products for humans and animals,

including fast-acting sublingual tablets, soft gels, gummies, tinctures, cosmetics and other topicals.

The transaction gives the

Company 33% voting interest in the board of directors of Panacea.

Pursuant to the agreement, the Company received 3,733,334 shares

of preferred stock with an embedded put right, warrants to purchase additional preferred stock, and a $7,000,000 note receivable

bearing interest at 10% that is convertible to 3,733,334 preferred shares.

The Company paid Panacea $12,000,000 in cash and issued

1,297,017 shares of 22nd Century common stock with a fair value of $1,297,017.

The agreement with Panacea also requires the Company

to purchase 5,333,334 shares of puttable preferred stock at $1.875 when Panacea achieves a certain twelve-month sales target that

is payable in $8,500,000 of cash and the remainder in 22nd Century Group common stock.

The financial instruments acquired are as

warrant allows the Company to purchase additional shares of preferred stock sufficient to obtain a 51% controlling interest in

The warrant can be exercised any time after December 3, 2024, or earlier if Panacea achieves certain sales targets for

two consecutive years at an exercise price of $2.344 per share.

Upon the exercise of the warrant, the other stockholders of Panacea

have the option to put their remaining stock in Panacea to the Company at $2.344 per share, which shall be payable in cash

and/or 22nd Century common stock at the Company’s discretion.

The preferred stock in Panacea accrues cumulative

preferred dividends at 10% of face value of $7,000,000 compounded annually payable upon a liquidation event, conversion or redemption.

The preferred stock also includes an embedded put right that expires at the earlier date of December 3, 2024 or when the warrants

are exercised.

The put allows the Company to require Panacea to redeem its 3,733,334 preferred stock at its original issue price

of $1.875 per preferred share plus any unpaid cumulative preferred dividends.

The put option is not considered a derivative instrument

for accounting purposes.

Note receivable from Panacea with a par

value of $7,000,000 bears interest at 10% payable monthly, with final principal payment due on December 3, 2024.

The note receivable

has an embedded conversion option that allows the Company to convert the note to 3,733,333 additional shares of preferred stock.

The embedded conversion option is not considered a derivative instrument for accounting purposes.

The Company allocated the purchase price

of its investment in Panacea as follows:

Depreciation expense was $ 688 , $ 589 , and $ 523 for the years ended December 31, 2020, 2019 and 2018, respectively.

– RIGHT-OF-USE ASSETS, LEASE OBLIGATIONS, AND OTHER LEASES

The Company leases a manufacturing facility and warehouse in North Carolina, a corporate headquarters in Williamsville, New York, and a laboratory space in Buffalo, New York.

During the fourth quarter of 2020, the Company made the decision to not renew its corporate headquarters lease which initial term expired on January 1, 2021.

Upon adoption of ASC 842-Leases, the Company assumed all three optional one-year renewal options which created a lease term expiration of all initial renewal options within the lease agreement—which assumed a lease term expiration in 2023.

With the non-renewal decision, the Company’s lease will operate month-to-month beginning on January 1, 2021.

As such, the ROU asset and lease obligation was removed from the Consolidated Balance Sheets as of December 31, 2020.

The remaining ROU assets and lease obligations relate to the laboratory space in New York and the manufacturing facility and warehouse in North Carolina.

The following table summarized the Company’s discount rate and remaining lease terms as of December 31, 2020:

Weighted average remaining lease term in years

Weighted average discount rate

Future minimum lease payments as of December 31, 2020 are as follows:

Total lease payments

imputed interest

The Company also leases a warehouse space in North Carolina to store and operate tobacco leaf processing equipment as well as proprietary tobacco leaf inventory.

This lease is month-to-month and is not included within our Consolidated Balance Sheets.

Operating lease costs for the years ended December 31, 2020 and 2019 were $ 335 and $ 250 , respectively.

In January 2021, the Company announced that it would relocate its corporate headquarters to the Larkinville District in downtown Buffalo and executed a new lease agreement for such space.

Refer to Note 17 for additional information on this Type II subsequent event.

– INTANGIBLE ASSETS

Our intangible assets at December 31, 2020 and December 31, 2019 consisted of the following:

Intangible assets, net

Patent and trademark costs

accumulated amortization

Patent and trademark costs, net

accumulated amortization

License fees, net

MSA signatory costs

License fee for predicate cigarette brand

Amortization expense relating to the above intangible assets for the years ended December 31, 2020, 2019 and 2018 amounted to $ 658 , $ 836 , and $ 820 , respectively.

During years ended December 31, 2020 and 2019, the Company incurred an impairment related to patent intellectual property that would be expired prior to expected commercialization.

Impairment expense the year ended December 31, 2020 amounted to $ 176 (cost of approximately $ 448 less accumulated amortization of approximately $ 302 ).

Impairment expense for the year ended December 31, 2019 amounted to $ 1,142 (cost of $ 2,092 less accumulated amortization of approximately $ 950 ) and related to tobacco intellectual property (patents, patent applications, and trademarks) that did not align to the Company’s very low nicotine strategic objectives.

The impairment charges are included as a separate line item in operating expenses on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

There was no impairment recorded during for the year ended December 31, 2018.

The estimated annual average amortization expense for the next five years is approximately $ 350 for patent costs and $ 244 for license fees .

– INVESTMENTS & CONVERTIBLE NOTE RECEIVABLE

Investment in Panacea Life Sciences, Inc.

On December 3, 2019, the Company entered into a securities purchase agreement with Panacea Life Sciences, Inc.

(“Panacea”) for consideration valued at $ 13,297 ( $ 12,000 cash and $ 1,297 of the Company’s shares of common stock valued at $ 1 per share) in exchange for a 15.8 % ownership interest.

The Company’s investment consists of three instruments:

shares of Series B preferred stock (“preferred stock”);

a convertible note receivable with a $ 7,000 face value;

and a warrant (“stock warrant”) to purchase additional shares of Series B preferred stock, to obtain 51 % ownership of Panacea, at an exercise price of $ 2.344 per share.

The convertible note receivable has a term of five years , bears interest of 10 % per annum, and can be converted to shares of Series B preferred stock at the Company’s discretion.

The embedded conversion option is not considered a derivative instrument for accounting purposes The preferred stock carries an annual 10 % cumulative dividend, compounded annually, and has an implicit put option after the fifth anniversary date so long that the stock warrants have not been exercised.

The put option is not considered a derivative instrument for accounting purposes.

The stock warrant may be exercised at any time after the fifth anniversary date and would be accelerated if Panacea achieves certain sales targets for two consecutive years.

The Series B preferred stock also has first priority equity preferences in the event of a liquidation, sale, or transfer of Panacea assets.

These rights entitle the Company to the original Series B issuance price of $ 7,000 plus any unpaid accrued dividends.

To allocate the cost of the stock warrant, the Company calculated a fair value based on the following assumptions:

volatility of 70 %, discount of 25 % for lack of marketability, and a risk-free rate of 2 %.

The value of the stock warrant was allocated to the preferred stock and the convertible note receivable, equally, as a discount to the acquisition price.

The discount on the preferred stock was determined to be for lack of control and the discount on the convertible note receivable was determined to be related to issuing the note at a below market interest rate for similar instruments.

The discount on the convertible note receivable amounted to $ 1,433 and is being amortized into interest income over the term of the note.

The discount on the preferred stock amounted to $ 1,433 and is being amortized into interest income over the term of the implicit put option.

The convertible note receivable and the preferred stock investment are considered available for sale debt securities with a private company that is not traded in active markets.

Since observable price quotations were not available at acquisition, fair value was estimated based on cost less an appropriate discount upon acquisition.

The discount of each instrument is accreted into interest income over the respective term as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss.

See Note 7 for additional information on these fair value measurements.

The stock warrant was recorded at its cost basis in accordance with the practicability exception under ASU 2016-01.

Impairment of Panacea Investment:

As a result of increased competition and other macroeconomic factors, the Company recognized an impairment of $ 1,062 on the Panacea stock warrant during the second quarter of 2020.

The impairment is recorded within the Consolidated Statements of Operations and Comprehensive Loss as “Impairment of Panacea Investment.”

The Company recently entered into a non-binding agreement with Panacea to potentially restructure the investment and business relationship.

The non-binding agreement with Panacea generally provides for (i) the transfer of $ 7,170 in operational assets, including an agricultural facility and various extraction and distillation equipment, from Panacea to the Company in exchange for the cancellation of the $7,000 convertible note receivable plus accrued interest;

(ii) an amendment of transaction documents to remove any future investment rights and obligations of the Company in

Panacea, (iii) cancellation of the stock warrant to purchase additional Series B preferred stock;

and (iv) various other amendments to Panacea’s charter to amend various investors rights therein.

As a result of the expected outcome of this non-binding agreement, the Company determined that the carrying value of the stock warrant and the convertible note receivable plus accrued interest exceeded the fair value outlined in the non-binding agreement.

As such, the Company recorded an impairment of $ 679 , which reduced the stock warrant carrying value, so that the carrying value of the stock warrant, and convertible note receivable plus accrued interest amounted to a value of $ 7,170 as of December 31, 2020.

The impairment is recorded within the Consolidated Statements of Operations and Comprehensive Loss as “Impairment of Panacea Investment.”

In accordance with ASC 326- Financial Instruments-Credit Losses , the Company reviewed the fair value of its preferred stock investment and considered the following:

(i) increased competition in the cannabinoid industry;

(ii) the Company’s preferred stock priority equity preferences;

and (iii) other macroeconomic factors.

Based on the assessment performed, it was determined that no credit loss existed for the preferred stock available-for-sale debt security.

As of December 31, 2020, the total carrying value of the Company’s investment in Panacea is outlined below, net of 2020 impairment expense:

Panacea preferred stock

Panacea stock warrant

Accrued interest on convertible note receivable (included within prepaid expenses and other assets)

Convertible note receivable

Preferred stock

Preferred stock warrants

To allocate the cost of its investment in

Panacea, the Company determined the fair value of the warrants of $2,865,00 based on the following assumptions:

volatility of 70%,

discount of 25% for lack of marketability and risk-free rate of 2% and is classified as level 3 of the fair value hierarchy at

the time of its acquisition.

The value of the warrants was allocated to the preferred stock and the note receivable equally as

a discount to the acquisition price.

The discount on the preferred shares was determined to be for lack of control and the discount

on the note receivable was determined to be related to issuing the note at an interest rate below market rates for similar instruments.

The discount on the convertible note receivable amounted to $1,432,500 and is being amortized into interest income over the term

The amortization of the discount amounted to $21,978 for the year ended December 31, 2019, leaving convertible note

receivable with a balance of $5,589,478 at December 31, 2019.

There were no adjustments recorded to the fair value of the convertible

note receivable for the year ended December 31, 2019.

The Company accounts for its warrant to

purchase additional preferred stock of Panacea using the practical expedient for equity securities without readily determinable

fair values at its cost minus an impairment charge, if any, plus or minus changes resulting from observable price changes in orderly

transactions for the identical or a similar investment of the same issuer.

There were no adjustments recorded to the original

cost basis, for the year ended December 31, 2019.

The note receivable and the preferred stock in Panacea are considered an available

for sale security debt securities and are recorded at fair value.

Investment in Anandia

Company (through its wholly-owned subsidiary, Botanical Genetics) held an equity investment in Anandia, a Canadian plant

biotechnology company.

On August 8, 2018, all of Anandia’s outstanding common stock was acquired by Aurora Cannabis,

(“Aurora”), a Canadian company (NYSE:

ACB), and as a result the Company received in exchange

for its Anandia equity:

(i) 1,947,943 free trading shares of Aurora common stock, and (ii) stock warrants to purchase 973,971

shares of Aurora common stock (the “Anandia transaction”).

The Company sold all the shares of Aurora common stock

during the third quarter of 2018 but retains ownership of the stock warrant to purchase 973,971 shares of Aurora common stock

as of December 31, 2019.

The stock warrants have a five-year contractual term, an exercise price of $9.37 per share (Canadian

approximately $7.21 per share U.S.

Dollars at December 31, 2019), is currently exercisable, is considered an equity

security, and is recorded at fair value (Level 3 of the valuation hierarchy).

The Company recorded the fair value of the

Aurora common stock warrant of $673,010 and $3,092,358 at December 31, 2019 and December 31, 2018, respectively, using the

Black-Scholes pricing model and was classified within Other assets on the Company’s Consolidated Balance Sheets.

Company recorded an unrealized (loss) gain, the adjustment to fair value, in the amount of ($2,419,348) and $284,400 for the

years ended December 31, 2019 and 2018, respectively.

Effective January 1, 2018, the Company adopted

Financial Accounting Standards Board ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):

Recognition and Measurement

of Financial Assets and Financial Liabilities.

This guidance changed how entities account for equity investments that do not result

in consolidation and are not accounted for under the equity method of accounting.

Under ASU 2016-01, the Company was required to

measure its investment in Anandia at fair value at the end of each reporting period and recognize changes in fair value in net

As allowed by ASU 2016-01, since the Company’s investment in Anandia did not have readily determinable fair value,

the Company elected to account for its investment at cost.

The cost basis is required to be adjusted in the event of impairment,

if any, and for any observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Accordingly, and as a result of, an equity issuance in January of 2018 by Anandia that was considered an orderly transaction, the

Company recorded an unrealized gain on its investment in Anandia in the amount of $6,147,088 during the first quarter of 2018.

There were no further changes in the fair value of the Company’s equity investment in Anandia through the acquisition of

Anandia by Aurora on August 8, 2018, as discussed above.

As a result of the Anandia transaction, the Company received 1,947,943

shares of Aurora common stock and warrants to purchase 973,971 shares of Aurora common stock that had a fair value of $9,221,594

and $2,807,958, respectively.

The Company recorded a realized gain on the transaction in the amount of $4,515,971 during the third

quarter of 2018.

Additionally, the unrealized gain on the Company’s investment in Anandia in the amount of $6,147,088 under

ASU 2016-01 from the first quarter of 2018 became a realized gain at time of the Anandia transaction (see the paragraph below for

additional details).

Subsequent to the transaction, the Company sold all of its Aurora common stock resulting in net sales proceeds

to the Company of $13,051,503 and realized a gain on the sale of $3,829,909 during the year ended December 31, 2018.

transaction, the gain from ASU 2016-01, and the sale of the Aurora common shares resulted in an aggregate realized gain of $14,492,968

for the year ended December 31, 2018.

The Company’s investment in Anandia

was recorded using the equity method of accounting until the first quarter of 2017, when a dilutive event occurred bringing the

Company’s investment percentage in Anandia below 20%.

Accordingly, the Company discontinued applying the equity method of

accounting for its investment in Anandia and began accounting for its investment in Anandia under the cost method of accounting.

The Company’s unrealized gain (loss) on the investment in Anandia was $346,180 for the year ended December 31, 2017.

was no unrealized gain (loss) for the year ended December 31, 2018.

At December 31, 2017, the Company’s investment balance

in Anandia was $1,366,493, and was classified within Other assets on the accompanying Consolidated Balance Sheets.

– FAIR VALUE MEASUREMENTS

AND SHORT-TERM INVESTMENTS

FASB ASC 820 - “Fair Value Measurements

and Disclosures” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value.

The Company (through its wholly-owned subsidiary, Botanical Genetics) previously held an equity investment in Anandia, a Canadian plant biotechnology company.

Effective January 1, 2018, the Company adopted Financial Accounting Standards Board ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities.

This guidance changed how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting.

Under ASU 2016-01, the Company was required to measure its investment in Anandia at fair value at the end of each reporting period and recognize changes in fair value in net income.

As allowed by ASU 2016-01, since the Company’s investment in Anandia did not have readily determinable fair value, the Company elected to account for its investment at cost.

The cost basis is required to be adjusted in the event of impairment, if any, and for any observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

As result of an equity issuance by Anandia in January of 2018, the Company recorded an unrealized gain on its investment in Anandia in the amount of $ 6,147 during the first quarter of 2018.

On August 8, 2018, all of Anandia’s outstanding common stock was acquired by Aurora Cannabis, Inc.

(“Aurora”), a Canadian company (NYSE:

ACB), and as a result the Company received in exchange for its Anandia equity:

(i) 1,947,943 free trading shares of Aurora common stock, and (ii) Aurora stock warrants to purchase 973,971 shares of Aurora common stock (the “Anandia transaction”).

The stock warrants have a five-year contractual term, an exercise price of $ 9.37 Canadian Dollars (CAD) per share.

The fair value of the Aurora common stock and Aurora stock warrant was $ 9,222 and $ 2,808 , respectively.

The Company recorded a realized gain on the transaction in the amount of $ 4,516 during the third quarter of 2018.

Additionally, the $ 6,147 unrealized gain on the Company’s investment in Anandia became a realized gain at time of the Anandia transaction.

Subsequent to the transaction, the Company sold all of its Aurora common stock resulting in net sales proceeds to the Company of $ 13,052 and realized a gain on the sale of $ 3,830 during the year ended December 31, 2018.

Investment in Aurora Cannabis, Inc.

The Company’s investment in Aurora Cannabis Inc.

(“Aurora”) stock warrant, discussed in the Anandia section above, are considered equity securities in accordance with ASC 321 – Investments – Equity Securities and a derivative instrument under ASC 815 – Derivatives and Hedging.

The stock warrants are not designated as a hedging instrument, and in accordance with ASC 815, the Company’s investment in stock warrants are recorded at fair value with changes in fair value recorded to unrealized gain/loss as shown within the Company’s Consolidated Statements of Operations and Comprehensive Loss.

See Note 7 for additional information on the fair value measurements.

Reverse stock split- During the second quarter of 2020, Aurora announced a 12 -to-1 reverse stock which adjusted our total warrant to purchase 81,164 shares of Aurora common stock (from 973,971 ) at an exercise price of $ 112.44 CAD per share (from $ 9.37 CAD per share).

The carrying value of the Company’s investments at December 31, 2020 and December 31, 2019 consisted of the following:

Aurora stock warrants

Panacea preferred stock

Panacea stock warrant

Total Investments

Convertible Note Receivable

– FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS

FASB ASC 820 - “Fair Value Measurements and Disclosures” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value.

This hierarchy prioritizes the inputs into three broad levels as follows:

1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or

liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

A financial asset’s or a financial

liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the

fair value measurement.

The following table presents information

about our assets and liabilities measured at fair value at December 31, 2019 and 2018, and indicates the fair value hierarchy of

the valuation techniques the Company utilized to determine such fair value:

Asset and Liabilities at Fair Value

As of December 31, 2019

● Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

● Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

● Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

A financial asset’s or a financial liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table presents information about our assets and liabilities measured at fair value at December 31, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

December 31, 2020

Short-term investment securities:

2 unchanged sentences

Total short-term investment securities

Investments :

Stock warrants

Investment - Aurora stock warrants

Investment - Panacea preferred stock

Convertible note receivable

Preferred stock in Panacea

Total Investment

Asset and Liabilities at Fair Value

As of December 31, 2018

December 31, 2019

Short-term investment securities:

1 unchanged sentence

Corporate bonds

treasury securities

government agency bonds

Total short-term investment securities

Stock warrants

Money market mutual funds are valued at

their daily closing price as reported by the fund.

Money market mutual funds held by the Company are open-end mutual funds that

are registered with the SEC that generally transact at a stable $1.00 Net Asset Value (“NAV”) representing its estimated

On a daily basis the fund’s NAV is determined by the fund based on the amortized cost of the funds underlying

government agency bonds, U.S.

securities, and corporate bonds are valued using pricing models maximizing the use of observable inputs for similar securities.

investment in stock warrants that are accounted for under ASC 815 are measured at fair value using the Black-Scholes pricing

model and are classified within Level 3 of the valuation hierarchy.

The unobservable input is an estimated volatility factor of

83% at December 31, 2019.

A 20% increase or decrease in the volatility factor used at December 31, 2019 would have the impact

of increasing or decreasing the fair value measurement of the stock warrants by approximately $260,000.

The stock warrants (the

Panacea warrants) are not recorded under ASC 815 and are not adjusted to fair value at each reporting date due to the practical

expedient under ASU 2016-01.

The convertible note receivable is with

a private company (Panacea) that is not traded in active markets.

Since observable price quotations were not available, fair value

was estimated based on cost less an appropriate discount, and the fair value is evaluated based on Panacea’s financial performance

and credit worthiness, and changes in market interest rates.

The discount is amortized into interest income over the life of the

convertible note receivable and amounted to $21,978 for the year ended December 31, 2019.

As a result of the put option included

in the Panacea preferred shares, they are not considered equity instruments.

Fair value is determined similarly to the convertible

following table sets forth a summary of the changes in fair value of the Company’s Level 3 investments for the

year ended December 31, 2019 :

Investment - Aurora stock warrants

Investment - Panacea preferred stock

Convertible note receivable

Money market mutual funds are valued at their daily closing price as reported by the fund.

Money market mutual funds held by the Company are open-end mutual funds that are registered with the SEC that generally transact at a stable $1.00 Net Asset Value (“NAV”) representing its estimated fair value.

On a daily basis the fund’s NAV is determined by the fund based on the amortized cost of the funds underlying investments.

Corporate bonds are valued using pricing models maximizing the use of observable inputs for similar securities.

The investment in the Aurora stock (ACB) warrants is measured at fair value using the Black-Scholes pricing model and is classified within Level 3 of the valuation hierarchy.

The unobservable input is an estimated volatility factor of 137 % and 83 % as of December 31, 2020 and December 31, 2019, respectively.

Therefore, changes in market volatility will impact the fair value measurement of our ACB investment.

A 20 % increase or decrease in the volatility factor used as of December 31, 2020 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately $ 115 .

A 20 % increase or decrease in the volatility factor used at December 31, 2019 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by approximately $ 260 .

The Panacea convertible note receivable and the preferred stock investment are considered available-for-sale debt securities with a private company that is not traded in active markets.

Since observable price quotations were not available, fair value was estimated based on cost less an appropriate discount upon acquisition.

The discount of each instrument is accreted into interest income over the respective term and will adjust the amortized cost basis of the investments.

See Note 6 for further information regarding the Company’s investment in Panacea.

The following table sets forth a summary of the changes in fair value of the Company’s Level 3 investments for the year ended December 31, 2020.

Fair Value at December 31, 2018

Fair value of stock warrants acquired on August 8, 2018

Unrealized gain as a result of change in fair value

Fair value at December 31, 2018

Unrealized loss as a result of change in fair value

Accretion of interest income on convertible note receivable

2 unchanged sentences

Fair Value at December 31, 2019

The warrant liability was measured at fair

value using certain estimated factors such as volatility and probability 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 warrant liabilities

including the volatility factor.

Significant increases or decreases in the volatility factor would have resulted in a significantly

higher or lower fair value measurement.

The Company’s warrants associated with the warrant liability were exercised in July

2018 and the remaining outstanding warrants at December 31, 2018 do not include anti-dilution features and therefore are not considered

derivative instruments and do not have an associated warrant liability.

The following table sets forth a summary

of the Company’s available-for-sale securities from amortized cost basis to fair value

at December 31, 2019 and 2018:

Available-for-sale Securities - December 31, 2019

Unrealized loss as a result of change in fair value

Accretion of interest on Panacea investment

Fair Value at December 31, 2020

The following tables set forth a summary of the Company’s available-for-sale debt securities from amortized cost basis to fair value as of December 31, 2020 and December 31, 2019:

Available for Sale Debt Securities

December 31, 2020

Corporate bonds

Convertible note receivable

Preferred stock in Panacea

Available-for-Sale Securities –

Investment - Panacea preferred stock

Available for Sale Debt Securities

December 31, 2019

Corporate bonds

treasury securities

government agency bonds

The following table sets forth a summary

of the Company’s available-for-sale securities in its short-term investment account for amortized cost basis and fair value

by contractual maturity at December 31, 2019 and 2018:

Available-for-Sale

Convertible note receivable

Investment - Panacea preferred stock

The following table sets forth a summary of the Company’s available-for-sale securities from amortized cost basis and fair value by contractual maturity as of December 31, 2020 and December 31, 2019:

Available for Sale Debt Securities

December 31, 2020

3 unchanged sentences

Due in five years

– NOTE PAYABLES FOR LICENSE FEES

On June 22, 2018, the Company entered into

the Second Amendment to the License Agreement (the “Second Amendment”) with North Carolina State University (“NCSU”)

that amended an original License Agreement between the Company and NCSU, dated December 8, 2015, and the First Amendment, dated

February 14, 2018, to the original License Agreement.

Under the terms of the Second Amendment, the Company is obligated to pay

NCSU milestone payments totaling $1,200,000, of which amount $500,000 was payable upon execution of the Second Amendment, $400,000

was payable on the first anniversary of the execution of the Second Amendment, and $300,000 will be payable on the second anniversary

of the execution of the Second Amendment.

The Company has recorded the present value of the obligations under the Second Amendment

as a note payable that originally amounted to $1,175,226.

The cost of the acquired license amounted

to $1,175,226 and is included in Intangible assets, net on the Company’s Consolidated Balance Sheets, and will be amortized

on a straight-line basis over the last-to-expire patent, which is expected to be in 2036.

On October 22, 2018, the Company entered

into a License Agreement with the University of Kentucky.

Under the terms of the License Agreement, the Company is obligated to

pay the University of Kentucky milestone payments totaling $1,200,000, of which amount $300,000 was payable upon execution, and

$300,000 will be payable annually over the next three years on the anniversary of the execution of the License Agreement.

has recorded the present value of the obligations under the License Agreement as a note payable that originally amounted to $1,151,201.

The cost of the of acquired licenses amounted to $1,151,201 and is included in Intangible assets, net on the Company’s Consolidated

Balance Sheets, and will be amortized on a straight-line basis over the last-to- expire patent, which is expected to be in 2033.

After the accretion of interest during the

year ended December 31, 2019 in the amount of $35,521 the balance remaining on these two notes payable as of December 31, 2019

amounted to $872,886, with $580,709 and $292,177 reported as current and long-term, respectively, on the Company’s Consolidated

Balance Sheets (notes payable balance of $1,537,365 as of December 31, 2018, with $689,148 and $848,217 reported as current and

long-term, respectively).

– NOTES PAYABLE

On June 22, 2018, the Company entered into the Second Amendment to the License Agreement (the “Second Amendment”) with North Carolina State University (“NCSU”) that amended an original License Agreement between the Company and NCSU, dated December 8, 2015, and the First Amendment, dated February 14, 2018, to the original

License Agreement.

Under the terms of the Second Amendment, the Company was obligated to pay NCSU milestone payments totaling $ 1,200 , which originally amounted to a present value of $ 1,175 .

As of June 30, 2020 the Company paid the final milestone payment of $ 300 .

The cost of the of acquired license amounted to $ 1,175 and is included in Intangible assets, net on the Company’s Consolidated Balance Sheets, and is amortized on a straight-line basis over the last-to-expire patent, which is expected to be in 2036.

On October 22, 2018, the Company entered into a License Agreement with the University of Kentucky.

Under the terms of the License Agreement, the Company is obligated to pay the University of Kentucky milestone payments totaling $ 1,200 , of which $ 300 was payable upon execution, and $ 300 will be payable annually over three years on the anniversary of the execution of the License Agreement.

The Company has recorded the present value of the obligations under the License Agreement as a note payable that originally amounted to $ 1,151 .

The cost of the of acquired licenses amounted to $ 1,151 and is included in Intangible assets, net on the Company’s Consolidated Balance Sheets and will be amortized on a straight-line basis over the last-to-expire patent, which is expected to be in 2033.

CARES Act Paycheck Protection Program Loan

On May 1, 2020, the Company received an U.S.

Small Business Administration Loan (“SBA Loan”) from Bank of America, N.A.

related to the COVID-19 crisis in the amount of $ 1,200 .

On May 12, 2020, the Company repaid the SBA loan in full.

D&O Insurance

During the second quarter of 2020, the Company renewed its Director and Officer (“D&O”) insurance for a one-year policy premium totaling $ 2,744 .

The Company paid $ 549 as a premium down payment and financed the remaining $ 2,195 of policy premiums over nine months at a 3.19 % annual percentage rate.

The financed amount is recorded within current notes payable on the Company’s Consolidated Balance Sheets.

The table below outlines our notes payable balances as of December 31, 2020 and December 31, 2019:

D&O Insurance

Total current notes payable

Long term license fees

Accretion of non-cash interest expense amounted to $ 20 , $ 36 , and $ 11 for the years ended December 31, 2020, 2019 and 2018, respectively.

– SEVERANCE LIABILITY

Company recorded an accrual for employee severance during the third quarter of 2019 in the initial amount of $720,838 in accordance

with FASB ASC 712 - “Compensation – Nonretirement Postemployment Benefits.” The severance accrual relates to

the resignation of the Company’s former President and Chief Executive Officer (the “former CEO”) effective July

Concurrent with the former CEO’s resignation, the Company entered into a Consulting Agreement (the “Agreement”)

with the former CEO.

The Agreement calls for the Company to pay a monthly consulting fee to the former CEO in the amount of $16,667

plus health insurance benefits for a period of forty-two months.

The Company concluded that the terms of the Agreement met the

severance criteria in ASC 712 and accordingly, a severance accrual was recorded.

The Company computed the present value of the

payments called for under the Agreement and recorded an initial severance liability in the amount of $720,838.

As a result of

broad-based actions to reduce expenses in the fourth quarter the Company initiated a reduction in its workforce.

An additional

severance accrual in the amount of $160,000 was recorded as of December 31, 2019.

After payments under the Agreement and the accretion

of interest during 2019, the accrued severance balance remaining at December 31, 2019 was $804,431 with $358,610 and $445,821,

respectively, shown as current and long-term accrued severance on the Company’s Consolidated Balance Sheets.

During the second quarter of 2020, the Company recorded an accrual for severance benefits for $ 306 in accordance with FASB ASC 712 - “Compensation – Nonretirement Postemployment Benefits.” Consistent with certain contractual obligations related to a resignation, the Company will provide these severance benefits over a twelve-month period.

During 2019, the Company recorded an accrual for severance benefits for $ 881 in accordance with FASB ASC 712 - “Compensation – Nonretirement Postemployment Benefits.” Consistent with certain contractual obligations, $ 771 of the related accrual will be paid via a monthly consulting fee for a period of forty-two months .

The current and long-term accrued severance balance remaining as of December 31, 2020 was $ 339 and $ 241 , respectively.

The current and long-term accrued severance balance remaining as of December 31, 2019 was $ 359 and $ 446 , respectively.

– WARRANTS FOR COMMON STOCK

At December 31, 2019, the Company had outstanding

warrants to purchase 11,293,211 shares of common stock of the Company that were issued in conjunction with the November 2019 warrant

exchange agreement with an exercise price of $1.11 per share and an expiration date of November 25, 2024.

November 25, 2019, the Company entered into Warrant Exercise Agreements (the “2019 Exercise Agreements”) with all

of the holders (the “Holders”) of its outstanding warrants to purchase up to 11,293,211 shares of common stock of

the Company with an exercise price of $2.15 per share (the “Warrants”) whereby the Holders and the Company agreed

that the Holders would immediately exercise for cash 7,350,000 of the Warrants at a reduced exercise price of $1.00 per share,

generating proceeds to the Company before expenses of approximately $7.4 million.

In addition, the Holders agreed to exercise

the remaining 3,943,211 Warrants for cash on or prior to January 27, 2020 provided that the Holders are in compliance with the

beneficial ownership limitation provisions contained in the Warrants.

The Holders exercised all of the Warrants for cash during

December 2019 and the Company received net proceeds of approximately $10.6 million from the exercise of all of the Warrants, after

deducting expenses associated with the transaction.

In consideration for the Holders

exercising their Warrants for cash, the Company issued to each Holder a new warrant (each, a "2019 Warrant") to

purchase shares of common stock equal to the number of shares of common stock underlying the Warrants that shall be

exercisable to the extent such Holder exercises for cash such Holder's Warrants pursuant to the 2019 Exercise Agreements.

terms of the 2019 Warrants are substantially similar to the terms of the Warrants, except that the 2019 Warrants are (i)

exercisable from first issuance of the 2019 Warrants for a period of five years and (ii) had an initial exercise price equal

to $1.25 per share.

On December 22, 2019, the Company entered in to a Warrant Amendment

Agreement with the holders of the Warrants (the “Amendment”) whereby the Company agreed to amend the Warrants to (i)

reduce the exercise price of the Warrants to $1.11 and (ii) to add a call provision whereby the Company may call the Warrants with

prior notice to the holders for $0.001 per Warrant (during which time the holders may exercise the Warrants) provided that the

Company’s volume weighted average stock price exceeds $3.00 per share for ten consecutive trading days and certain other

conditions are satisfied.

June 19, 2017, the Company entered into Warrant Exercise Agreements (the “

2017 Exercise Agreements”) with all the

holders (the “

2016 Holders”) of outstanding warrants to purchase up to 7,043,211 shares of common stock of the Company

at $1.00 per share and warrants to purchase up to 4,250,000 shares of common stock of the Company at $1.45 per share (collectively,

2016 Warrants”).

The Company and the 2016 Holders agreed that the 2016 Holders would, subject to beneficial

ownership limitations on exercise contained in the 2016 Warrants, exercise all the 2016 Warrants for cash.

During the second and

third quarters of 2017, the 2016 Holders exercised 7,043,211 2016 Warrants at $1.00 per share and 4,250,000 2016 Warrants at $1.45

per share, resulting in net proceeds to the Company in the amount of $12,336,858, after deducting expenses associated with the

consideration for the 2016 Holders exercising their 2016 Warrants for cash, the Company issued to each 2016 Holder a new warrant

(the “New Warrants”) to purchase shares of common stock of the Company equal to the number of shares of common stock

received by each 2016 Holder upon the cash exercise of the 2016 Holder’s 2016 Warrants.

The terms of the New Warrants are

substantially similar to the terms of the 2016 Warrants exercised, except the New Warrants (i) have an exercise price equal to

$2.15 per share and (ii) are exercisable six months from the date of issuance of the New Warrants for a period of five (5) years.

Accordingly, the Company issued an aggregate of 11,293,211 New Warrants to the 2016 Holders, upon exercise of the 2016 Holder’s

2016 Warrants as described above.

These New Warrants were all exercised pursuant to the 2019 Exercise Agreements, described

above, and are no longer outstanding.

the year ended December 31, 2018, warrant holders exercised 794,869 warrants on a cashless basis, resulting in the issuance of

490,012 shares.

Company estimates the value of warrant liability upon issuance of warrants that are considered derivative instruments and at each

balance sheet date using the binomial lattice model to allocate total enterprise value to the warrants and other securities in

the Company’s capital structure.

Volatility was estimated based on historical observed equity volatilities and implied (forward)

or expected volatilities for a sample group of guideline companies and consideration of recent market trends.

The Company’s

outstanding warrants at December 31, 2019 and 2018 do not include anti-dilution features and therefore are not considered derivative

instruments and do not have an associated warrant liability.

All warrants considered derivative instruments with an associated

warrant liability were exercised during 2018.

The following table is a roll-forward

summary of the warrant liability since December 31, 2017:

Fair value at December 31, 2017

Gain as a result of change in fair value

Reclassification of warrant liability to capital in excess of par

Fair value at December 31, 2018

Fair value at December 31, 2019

The aggregate net gain (loss) as a result

of the Company’s warrant liability for the years ended December 31, 2019, 2018, and 2017 amounted to $0, $48,711 and ($157,809),

respectively, and are included in Other income (expense) under Warrant liability gain (loss), net in the accompanying Consolidated

Statements of Operations and Comprehensive Loss.

The following table summarizes the Company’s

warrant activity since December 31, 2016:

Warrants outstanding at December 31, 2016

Warrants exercised during 2017

Warrants expired during 2017

Warrants exercised pursuant to June 2017 warrant exercise agreements

(11,293,211 )

Warrants issued pursuant to June 2017 warrant exercise agreements

Warrants outstanding at December 31, 2017

Warrants exercised during 2018

During 2018, the Company’s warrant holders exercised 794,869 outstanding warrants on a cashless basis resulting in the issuance of 490,012 shares of the Company’s common stock and the recording of a $ 168 reclassification of the remaining warrant liability to capital in excess of par.

As of December 31, 2018, the outstanding warrants did not have an associated warrant liability.

On November 25, 2019, the Company entered into Warrant Exercise Agreements (the "2019 Exercise Agreements") with all of the holders (the "Holders") of its outstanding warrants to purchase up to 11,293,211 shares of common stock of the Company with an exercise price of $ 2.15 per share (the "Warrants") whereby the Holders and the Company agreed that the Holders would immediately exercise for cash 7,350,000 of the Warrants at a reduced exercise price of $ 1.00 per share, generating proceeds to the Company before expenses of approximately $ 7,400 .

In addition, the Holders agreed to exercise the remaining 3,943,211 Warrants for cash on or prior to January 27, 2020 provided that the Holders are in compliance with the beneficial ownership limitation provisions contained in the Warrants.

The Holders exercised all of the Warrants for cash during December 2019 and the Company received net proceeds of approximately $ 10,600 from the exercise of all of the Warrants, after deducting expenses associated with the transaction.

In consideration for the Holders exercising their Warrants for cash, the Company issued to each Holder a new warrant (each, a "2019 Warrant") to purchase shares of common stock equal to the number of shares of common stock underlying the Warrants that shall be exercisable to the extent such Holder exercises for cash such Holder's Warrants pursuant to the 2019 Exercise Agreements.

The terms of the 2019 are (i) exercisable from first issuance of the 2019 Warrants for a period of five years and (ii) had an initial exercise price equal to $ 1.25 per share.

On December 22, 2019, the Company entered in to a Warrant Amendment Agreement with the holders of the 2019 Warrants (the "Amendment") whereby the Company agreed to amend the Warrants to (i) reduce the exercise price of the Warrants to $ 1.11 and (ii) to add a call provision whereby the Company may call the Warrants with prior notice to the holders for $ 0.001 per Warrant (during which time the holders may exercise the Warrants) provided that the Company's volume weighted average stock price exceeds $ 3.00 per share for ten consecutive trading days and certain other conditions are satisfied.

The Company’s outstanding warrants for the year ended December 31, 2020 and December 31, 2019 do not include anti-dilution features and therefore are not considered derivative instruments and do not have an associated warrant liability.

The following table summarizes the Company’s warrant activity since December 31, 2018:

Warrants outstanding at December 31, 2018

Warrants exercised during 2019 pursuant to November 2019 warrant exercise agreement

Warrants exercised in Q4 2019

( 11,293,211 )

Warrants issued during 2019 pursuant to November 2019 warrant exercise agreement

Warrants issued in Q4 2019

Warrants outstanding at December 31, 2020

See Note 17 “Subsequent Events” for information regarding the cash exercise of the outstanding warrants subsequent to December 31, 2020.

– RETIREMENT PLAN

The Company sponsors a defined contribution

plan under IRC Section 401(k).

The Company sponsors a defined contribution plan under IRC Section 401(k).

The plan covers all employees who meet the minimum eligibility requirements.

Under the 401(k) plan

eligible employees are allowed to make voluntary deferred salary contribution to the plan, subject to statutory limits.

has elected to make Safe Harbor Non-Elective Contributions to the plan for eligible employees in the amount of three percent (3%)

of the employee’s compensation.

Total employer contributions to the plan for the years ended December 31, 2019, 2018, and

2017 amounted to $156,908, $141,083 and $98,368, respectively.

Under the 401(k) plan eligible employees are allowed to make voluntary deferred salary contribution to the plan, subject to statutory limits.

The Company has elected to make Safe Harbor Non-Elective Contributions to the plan for eligible employees in the amount of three percent (3%) of the employee’s compensation.

Total employer contributions to the plan for the years ended December 31, 2020, 2019 and 2018 amounted to $ 150 , $ 157 and $ 141 , respectively.

– COMMITMENTS AND CONTINGENCIES

agreements and sponsored research – The Company has entered into various license agreements and sponsored

research and development agreements.

The costs associated with the following three agreements were initially recorded as a Prepaid

expense on the Company’s Consolidated Balance Sheets and subsequently expensed on a straight-line basis over the applicable

period and included in Research and development costs on the Company’s Consolidated Statements of Operations and Comprehensive

The amounts expensed during the years ended December 31, 2019, 2018, and 2017 amounted to $265,452, $394,249, and $232,140,

respectively.

Under its exclusive worldwide license agreement

with North Carolina State University (“NCSU”), the Company is required to pay minimum annual royalty payments, which

are credited against running royalties on sales of licensed products.

The minimum annual royalty is $225,000.

The license agreement

continues through the life of the last-to-expire patent, which is expected to be 2022.

The license agreement also requires a milestone

payment of $150,000 upon FDA approval or clearance of a product that uses the NCSU licensed technology.

The Company expensed license

fees of $225,000 for each of the years ended December 31, 2019, 2018, and 2017.

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.

During the years ended December 31, 2019, 2018, and 2017 the aggregate costs incurred

related to capitalized patent costs and patent maintenance expense amounted to $33,673, $95,602, and $71,596, respectively.

On December 8, 2015, the Company entered

into an additional license agreement (the “License”) with NCSU.

Under the terms of the License, the Company paid NCSU

a non-refundable, non-creditable lump sum license fee of $150,000.

Additionally, the License calls for the Company to pay NCSU

a non-refundable, non-creditable minimum annual royalty beginning on December 31, 2018 in the amount of $10,000.

The minimum annual

royalty payment increases to $15,000 in 2019, $25,000 in 2020 and 2021, and $50,000 per year thereafter for the remaining term

of the License.

The Company expensed license fees of $15,000, $0, and $0 for the years ended December 31, 2019, 2018, and 2017,

respectively.

The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred.

During the years

ended December 31, 2019, 2018, and 2017 the aggregate costs incurred related to capitalized patent costs and patent maintenance

expense amounted to $11,740, $113,578, and $31,947, respectively.

This License continues through the life of the last-to-expire

patent, expected to be in 2036.

On February 10, 2014, the Company

entered into a sponsored research and development agreement (the “Agreement”) with NCSU.

Under the terms of the

Agreement, the Company paid NCSU $162,408 over the two-year term of the Agreement, which grants certain licensed rights to

The Company had extended the Agreement through January 31, 2017 at an additional cost of $85,681.

2018, the Company finalized an additional extension to this Agreement through April 30, 2018 at a cost of $88,344.

2018, the Company finalized an additional extension to this Agreement through April 30, 2019 at a total cost of $121,357.

amounts expensed during the years ended December 31, 2019, 2018, and 2017 were $40,452, $169,249, and $7,140,

respectively.

Other license agreements -

Additionally, the Company has entered into the following license agreements and the costs associated with these license

agreements are included in Intangible assets, net in the Company’s Consolidated Balance Sheets and the applicable license

fees will be amortized over the term of the agreements based on their last-to-expire patent date.

Amortization expense during the

years ended December 31, 2019, 2018, and 2017 amounted to $238,661, $142,541, and $98,022, respectively, and was included in Amortization

expense on the Company’s Consolidated Statements of Operations and Comprehensive Loss.

On October 22, 2018, the Company entered

into a License Agreement (the “License”) with the University of Kentucky.

Under the terms of the License, the Company

is obligated to pay the University of Kentucky a non-refundable, non-creditable license fee of $1,200,000.

The license fee is payable

in accordance with a note payable more fully described in Note 10.

The present value of the payments in the amount of $1,151,201

are included in Intangible assets, net on the Company’s Consolidated Balance Sheets, and will be amortized on a straight-line

basis over the last-to-expire patent, which is expected to be in 2033.

On June 22, 2018, the Company entered into

the Second Amendment to the License Agreement (the “Second Amendment”) with NCSU that amended an original License Agreement

between the Company and NCSU, dated December 8, 2015.

Under the terms of the Second Amendment, the Company is obligated to pay

NCSU a non-refundable, non-creditable license fee of $1,200,000.

The license fee is payable in accordance with a note payable more

fully described in Note 6.

The present value of the payments in the amount of $1,175,226 are included in Intangible assets, net

on the Company’s Consolidated Balance Sheets, and will be amortized on a straight-line basis over the last-to-expire patent,

which is expected to be in 2036.

22, 2014, the Company entered into a Commercial License Agreement with Precision PlantSciences, Inc.

(the “Precision License”).

The Precision License grants the Company a non-exclusive, but fully paid up right and license to use technology and materials owned

by Precision PlantSciences for a license fee of $1,250,000.

The Precision License continues through the life of the last-to-expire

patent, which is expected to be in 2028.

On August 27, 2014, the Company entered

into an additional exclusive License Agreement (the “License Agreement”) with NCSU.

Under the License Agreement, the

Company paid NCSU a non-refundable, non-creditable lump sum license fee of $125,000, and the Company must pay to NCSU an additional

non-refundable, non-creditable lump sum fee of $75,000 upon issuance of a U.S.

utility patent included in the patent rights.

patent was issued during the first quarter of 2017 under this clause, and accordingly, the $75,000 was due and payable to NCSU.

The $75,000 cost was included in Research and development costs on the Company’s Consolidated Statements of Operations and

Comprehensive Loss for the year ended December 31, 2017.

Additionally, under the License Agreement the Company paid NCSU a non-refundable,

non-creditable license maintenance fee in the amount of $15,000 during the year ended December 31, 2017.

The Company is obligated

to pay to NCSU an annual minimum royalty fee of $20,000 in 2018, $30,000 in 2019, and $50,000 per year thereafter for the remaining

term of the License Agreement.

The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred.

During the years ended December 31, 2019, 2018, and 2017, the aggregated costs incurred related to capitalized patent costs and

patent maintenance expense amounted to $49,714, $24,016, and $41,033, respectively.

The License Agreement continues through the

life of the last-to-expire patent, which is expected to be in 2034.

On September 15, 2014, the Company entered

into a Sublicense Agreement with Anandia, Inc.

(the “Anandia Sublicense”).

Under the terms of the Anandia

Sublicense, the Company was granted an exclusive sublicense in the United States and a co-exclusive sublicense in the remainder

of the world, excluding Canada, to the licensed intellectual property.

The Anandia Sublicense required an up-front fee of $75,000,

an annual license fee of $10,000, the payment of patent filing and maintenance costs, a running royalty on future net sales of

products made from such sublicensed intellectual property, and a sharing of future sublicensing consideration received from sublicensing

to third-parties such sublicensed intellectual property.

The Anandia Sublicense continues through the life of the last-to-expire

patent, which is expected to be in 2035.

As discussed in Note 4, Anandia was purchased by Aurora on August 8, 2018 and has become

a wholly owned subsidiary of Aurora.

The Anandia Sublicense is still in effect.

research agreements - Further, the Company has entered into the following agreements relating to sponsored

Costs associated with these agreements are expensed when incurred in Research and development costs on the Company’s

Consolidated Statements of Operations and Comprehensive Loss.

On September 28, 2015, the Company’s

wholly-owned subsidiary, Botanical Genetics, entered into a Sponsored Research Agreement (the “Agreement”) with Anandia.

Pursuant to the Agreement, Anandia conducted research on behalf of the Company relating

to the hemp/cannabis plant.

During the years ended December 31, 2019, 2018, and 2017 expenses related to the Agreement amounted

to $0, $130,850, and $654,250, respectively.

Under the terms of the Agreement, the Company will have co-exclusive worldwide rights

with Anandia to all the intellectual property resulting from the sponsored research between the Company and Anandia.

that commercializes such intellectual property in the future will pay royalties in varying amounts to the other party, with the

amount of such royalties being dependent upon the type of products that are commercialized in the future.

If either party sublicenses

such intellectual property to a third- party, then the Company and Anandia will share equally in such sublicensing consideration.

As discussed in Note 4, Anandia was purchased by Aurora on August 8, 2018 and has become a wholly owned subsidiary of Aurora.

In December 2016, the Company entered

into a new sponsored research agreement with UVA and an exclusive license agreement with the University of Virginia Patent

Foundation d/b/a University of Virginia Licensing & Ventures Group (“UVA LVG”) pursuant to which the Company

will invest approximately $1,000,000 over a three-year period with UVA to create unique industrial hemp plants with

guaranteed levels of THC below the legal limits and optimize other desirable hemp plant characteristics to improve the

plant’s suitability for growing in Virginia and other legacy tobacco regions of the United States.

This work with UVA

will also involve the development and study of medically important cannabinoids to be extracted by UVA from the

Company’s hemp plants.

UVA and the Company will conduct all activities in this scientific collaboration within the

parameters of state and federal licenses and permits held by UVA for such work.

The agreements with UVA and UVA LVG grant the

Company exclusive rights to commercialize all results of the collaboration in consideration of royalty payments by the

Company to UVA LVG.

The Company incurred expenses under the agreement in the amount $287,535, $360,046, and $296,710 for the

years ended December 31, 2019, 2018, and 2017, respectively.

On May 1, 2018, the Company entered

into a University Growing and Evaluation Agreement (the “Agreement”) with the University of Kentucky Research

Foundation (“UKRF”) whereby UKRF will provide the Company with services relating to growing certain tobacco

breeding lines of the Company.

Under the Agreement, the Company is obligated to pay $75,000 to UKRF in three installments of

$25,000 each through January 31, 2019.

During the years ended December 31, 2019 and 2018 expenses related to the Agreement

amounted to $25,000 and $50,000, respectively.

On February 1, 2019, the Company entered

into a Master Collaboration and Research Agreement (the “Agreement”) with a Natural Good Medicines, LLC (“NGM”),

the owners of certain hemp and cannabis plant lines (the “NGM Material”).

The Agreement calls for NGM to cultivate,

grow and process a certain amount of the NGM Material with the financial support of the Company.

NGM has granted the Company certain

exclusive rights to the hemp and cannabis plant lines of NGM.

Additionally, three (3) years from the effective date of the Agreement,

NGM and the Company will mutually share in the proceeds from the sale of non-propagating parts of the NGM Material.

The Company’s

total financial commitment under the Agreement is $442,333, which has been included in Research and development expenses on the

Company’s Statements of Operations and Comprehensive (Loss) Income for the year ended December 31, 2019.

On April 3, 2019, the Company entered into

a Framework Collaborative Research Agreement (the “Agreement”) with KeyGene under which KeyGene has agreed to work

exclusively with the Company with respect to the Cannabis Sativa L .

plant and all uses thereof (the “Field”).

The initial term is for five (5) years with an option for an additional two (2) years in consideration of the Company paying KeyGene

an aggregate of Six Million United States Dollars ($6,000,000) over the initial term of the Agreement.

A minimum of $1,200,000

will be paid annually during the initial term of the Agreement with a portion of such amount being paid based on KeyGene achieving

certain milestone deliverables for the Company.

The Company will exclusively own all results and all intellectual property relating

to the results from this collaboration with KeyGene (“Results”).

The Company will pay royalties in varying amounts

to KeyGene relating to the Company’s commercialization in the Field of certain Results.

The Company has granted KeyGene

a license to commercialize the Results outside of the Field and KeyGene will pay royalties in varying amounts to the Company relating

to KeyGene’s commercialization outside of the Field of the Results.

The Agreement also includes customary termination provisions

for both KeyGene and the Company as well as representations, warranties, and covenants by the parties that are customary for a

transaction of this nature.

During the year ended December 31, 2019, expenses related to the agreement amounted to approximately

Risk Tobacco Product Application (“MRTP Application”) –

In connection with the Company’s

MRTP Application for its Very Low Nicotine Content (“VLNC”) cigarettes with the FDA, the Company has entered in various

contracts with third-party service providers to fulfill various requirements of the MRTP Application.

Such contracts include services

for clinical trials, perception studies, legal guidance, product testing, and consulting expertise.

During the years ended December

31, 2019 and 2018 the Company incurred expenses relating to these contracts in the approximate amount of $1,675,000 and $9,800,000,

respectively.

The Company will incur consulting and legal expenses as our MRTPA continues through the FDA review process.

cannot currently quantify the additional expenses that the Company will incur in the FDA review process because it will involve

various factors that are within the discretion and control of the FDA.

- 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

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

The Company will then continue to monitor the matter for further developments that could affect the amount of any such

accrued liability.

License agreements and sponsored research – The Company has entered into various license, sponsored research, collaboration, and other agreements (the “Agreements”) with various counter parties in connection with the Company’s plant biotechnology business relating to tobacco and hemp/cannabis.

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 Consolidated Statements of Operations and Comprehensive Loss.

Future Commitments

Counter Party

Product Relationship

Commitment Type

Research Agreement

Hemp / Cannabis

License Agreement

Annual royalty fee

License Agreement

Minimum annual royalty

License Agreement

Minimum annual royalty

Research Agreement

Sublicense Agreement

Anandia Laboratories, Inc.

Hemp / Cannabis

Annual license fee

Growing Agreement

(1) Exclusive agreement with the Company with respect to the Cannabis Sativa L.

plant (the "Field").

The initial term of the agreement is five years with an option for an additional two years .

The aggregate cost of the agreement over the initial term is $ 6,000 .

The Company will exclusively own all results and all intellectual property relating to the results of the collaboration with KeyGene (the "Results”).

The Company will pay royalties in varying amounts to KeyGene relating to the Company's commercialization in the Field of certain Results.

The Company has granted KeyGene a license to commercialize the Results outside of the Field and KeyGene will pay royalties in varying amounts to the Company relating to KeyGene's commercialization outside of the Field of the Results.

(2) The license agreement also requires a milestone payment of $ 150 upon FDA approval or clearance of a product that uses the NCSU licensed technology.

The annual royalty fee is credited against running royalties on sales of licensed products.

(3) The Company is also responsible for reimbursing NSCU for actual third-party patent costs incurred, including capitalized patent costs and patent maintenance costs.

These costs vary from year to year and the Company has certain rights to direct the activities that result in these costs.

(4) On September 11, 2020, the Company entered into a one-year Sponsored Project Agreement with NCSU for continued research of tobacco alkaloid formation.

(5) The Company is also responsible for the payment of certain costs, including, capitalized patent costs and patent maintenance costs, a running royalty on future net sales of products made from the sublicensed intellectual property, and a sharing of future sublicensing consideration received from sublicensing to third parties.

(6) Various R&D growing agreements for hemp / cannabis and tobacco.

Investment in Panacea - On December 3, 2019, the Company entered into an agreement to obtain a 15.8 % ownership in Panacea.

The Company paid Panacea $ 12,000 in cash and issued shares of 22nd Century common stock with a fair value of $ 1,297 .

The agreement with Panacea also requires the Company to purchase 5,333,334 shares of puttable preferred stock at $ 1.875 when Panacea achieves certain twelve-month sales targets—payable in cash of $ 8,500 and the remainder in common stock of the Company.

The Company recently entered into a non-binding agreement with Panacea which would include an amendment of transaction documents to remove any future investment rights and obligations of the Company.

See Note 6 for further information regarding the Company’s investment in Panacea.

Modified Risk Tobacco Product Application (“MRTP Application”) – In connection with the Company’s MRTP Application for its Very Low Nicotine Content (“VLNC”) cigarettes with the FDA, the Company has entered in various contracts with third-party service providers to fulfill various requirements of the MRTP Application.

Such contracts include services for clinical trials, perception studies, legal guidance, product testing, and consulting expertise.

During the years ended December 31, 2020, 2019 and 2018 the Company incurred expenses relating to these contracts in

the approximate amount of $ 38 , $ 1,679 , and $ 9,775 , respectively.

The Company will continue to incur consulting and legal expenses as the MRTP Application continues through the FDA review process.

The Company cannot currently quantify the additional expenses that the Company will incur in the FDA review process because it will involve various factors that are within the discretion and control of the FDA.

Crede Settlement

On June 19, 2019, the Company, Crede CG

(“Crede”) and Terren Peizer (“Peizer”) participated in a settlement conference meeting as required

by the United States District Court for the Southern District of New York (the “SDNY Court”) entitled Crede CG III,

On June 19, 2019, the Company, Crede CG III, LTD.

(“Crede”) and Terren Peizer (“Peizer”) participated in a settlement conference meeting as required by the United States District Court for the Southern District of New York (the “SDNY Court”) entitled Crede CG III, LTD.

22nd Century Group, Inc .

Subsequently, the Company, Crede and Peizer entered into a settlement agreement that settled

this case, with the effective date of the settlement agreement being on July 22, 2019.

Subsequently, the Company, Crede and Peizer entered into a settlement agreement that settled this case, with the effective date of the settlement agreement being on July 22, 2019.

Under the terms of the settlement agreement:

(i) the Company issued to Crede on July 25, 2019 an aggregate of Nine Hundred Ninety Thousand (990,000) shares of common stock

of the Company in full satisfaction of the cashless exchange of the Tranche 1A warrant and in settlement of all disputes between

Crede, Peizer and the Company;

(ii) Crede granted a proxy to the Company for a period of five (5) years for the Company to vote

all of the shares of common stock of the Company owned by Crede in favor of the recommendations by the Company’s Board of

Directors (excluding any extraordinary transactions);

(iii) Crede agreed to not purchase, borrow or short any securities of the

and (iv) the Company, Crede and Peizer agreed to mutual releases of all claims between the parties and the dismissal of

all the litigation claims and counterclaims with prejudice.

The Company accrued an expense related to

the settlement of this case during the second quarter of 2019 in the amount of $1,890,900, which is equal to the fair value of

the 990,000 shares of Company common stock on July 22, 2019.

The accrual was reclassified to capital upon the issuance of the common

stock during the third quarter of 2019.

Class Action Cases

On January 21, 2019, Matthew Jackson Bull,

a resident of Denver, Colorado, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry

Sicignano III, and the Company’s then Chief Financial Officer, John T.

Brodfuehrer, in the United States District Court for

the Eastern District of New York entitled:

(i) the Company issued to Crede on July 25, 2019 an aggregate of Nine Hundred Ninety Thousand ( 990,000 ) shares of common stock of the Company in full satisfaction of the cashless exchange of the Tranche 1A warrant and in settlement of all disputes between Crede, Peizer and the Company;

(ii) Crede granted a proxy to the Company for a period of five (5) years for the Company to vote all of the shares of common stock of the Company owned by Crede in favor of the recommendations by the Company’s Board of Directors (excluding any extraordinary transactions);

(iii) Crede agreed to not purchase, borrow or short any securities of the Company;

and (iv) the Company, Crede and Peizer agreed to mutual releases of all claims between the parties and the dismissal of all the litigation claims and counterclaims with prejudice.

The Company accrued an expense related to the settlement of this case during the second quarter of 2019 in the amount of $ 1,891 , which is equal to the fair value of the 990,000 shares of Company common stock on July 22, 2019.

The accrual was reclassified to capital upon the issuance of the common stock during the third quarter of 2019.

On January 21, 2019, Matthew Jackson Bull, a resident of Denver, Colorado, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T.

Brodfuehrer, in the United States District Court for the Eastern District of New York entitled:

Matthew Bull, Individually and on behalf of all others similarly situated, v.

Century Group, Inc., Henry Sicignano III, and John T.

22nd Century Group, Inc., Henry Sicignano III, and John T.

Brodfuehrer , Case No.

1:19-cv-00409 .

The Complaint alleges that

Plaintiff Mr.

Bull purchased shares of the Company’s common stock.

Bull sues individually and seeks to bring a class

action for persons or entities who acquired the Company’s common stock between February 18, 2016 and October 25, 2018, and

alleges in Count I that the Company’s Annual Reports on Form 10-K for the years 2015, 2016 and 2017 allegedly contained false

statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and alleges in Count

II that Messrs.

Sicignano and Brodfuehrer are liable for the allegedly false statements pursuant to Section 20(a) of the Securities

Exchange Act.

The Complaint seeks declaratory relief, unspecified money damages, and attorney’s fees and costs.

On January 29, 2019, Ian M.

Fitch, a resident

of Essex County Massachusetts, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano

III, and the Company’s then Chief Financial Officer, John T.

Brodfuehrer, in the United States District Court for the Eastern

District of New York entitled:

Ian Finch, Individually and on behalf of all others similarly situated, v.

22nd Century Group,

Inc., Henry Sicignano III, and John T.

Fitch, a resident of Essex County Massachusetts, filed a Complaint against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, and the Company’s then Chief Financial Officer, John T.

Brodfuehrer, in the United States District Court for the Eastern District of New York entitled:

Ian Fitch, Individually and on behalf of all others similarly situated, v.

22nd Century Group, Inc., Henry Sicignano III, and John T.

Brodfuehrer , Case No.

2:19-cv-00553 .

The Complaint filing alleges that the Plaintiff

Fitch purchased shares of the Company’s common stock.

Fitch sues individually and seeks to bring a class action for

persons or entities who acquired the Company’s common stock between February 18, 2016 and October 25, 2018, and alleges in

Count I that the Company’s Annual Reports on Form 10-K for the years 2015, 2016 and 2017 allegedly contained false statements

in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, and alleges in Count II that

Sicignano and Brodfuehrer are liable for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange

The Complaint seeks declaratory relief, unspecified money damages, and attorney’s fees and costs.

On March 25, 2019, Plaintiffs’

in the Fitch litigation filed a motion in both the Fitch and Bull actions:

(1) proposing Joseph Noto, Garden

State Tire Corp, and Stephens Johnson for Mr.

Fitch as purportedly representative plaintiffs, (2) moving to consolidate the Fitch

litigation with the Bull litigation, and (3) seeking to be appointed as lead counsel in the consolidated action.

Plaintiffs’

counsel in the Bull litigation filed and then withdrew a comparable motion seeking to consolidate the cases and be appointed

as lead counsel.

On May 28, 2019, plaintiff in the Fitch

case voluntarily dismissed that action.

On August 1, 2019, the Court in the Bull case issued an order designating

Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.

On September 16, 2019, pursuant to a joint

motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western

District of New York, where it remains pending as Case No.

On May 28, 2019, the plaintiff in the Fitch case voluntarily dismissed that action.

On August 1, 2019, the Court in the Bull case issued an order designating Joseph Noto, Garden State Tire Corp, and Stephens Johnson as lead plaintiffs.

On September 16, 2019, pursuant to a joint motion by the parties, the Court in the Bull case transferred the class action to federal district court in the Western District of New York, where it remains pending as Case No.

1:19-cv-01285.

On October 9, 2019, the Court in the Bull

case, now pending in the federal district court in the Western District of New York, entered an order requiring Plaintiffs

to file an amended complaint by November 19, 2019, for the Company and Messrs.

Sicignano and Brodfuehrer to file any motion to

dismiss the amended complaint by January 29, 2020, for Plaintiffs then to file their response to the motion to dismiss by March

30, 2020, and for the Company and Messrs.

Sicignano and Brodfuehrer to file their final reply in support of their motion to dismiss

by April 29, 2020.

Plaintiffs filed their Amended Complaint on November 19, 2019.

The Amended Complaint alleges that the Plaintiffs purchased shares of the Company’s common stock and sues individually and

to bring a class action for all persons or entities who acquired the Company’s common stock between February 18, 2016 and

July 31, 2019.

The Amended Complaint alleges three counts:

Plaintiffs in the Bull case filed an Amended Complaint on November 19, 2019 that alleges three counts:

Count I sues the Company and Messrs.

Sicignano and Brodfuehrer and alleges

that the Company’s quarterly and annual reports, SEC filings, press releases and other public statements and documents contained

false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5;

Sicignano and Brodfuehrer and alleges that the Company's quarterly and annual reports, SEC filings, press releases and other public statements and documents contained false statements in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5;

Count II sues Messrs.

Sicignano and

Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c);

Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c);

and Count III sues Messrs.

and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act.

The Amended Complaint

seeks to certify a class, and unspecified compensatory and punitive damages, and attorney’s fees and costs.

Sicignano and Brodfuehrer for the allegedly false statements pursuant to Section 20(a) of the Securities Exchange Act.

The Amended Complaint seeks to certify a class, and unspecified compensatory and punitive damages, and attorney's fees and costs.

On January 29, 2020, the Company and Messrs.

Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint.

Plaintiffs have until March 30, 2020 to file a response

to the Motion to Dismiss.

We believe that the claims are frivolous,

meritless and that the Company and Messrs.

On July 31, 2020, the Court heard oral arguments on the motion to dismiss.

On January 14, 2021, the Court granted motion, dismissing all claims with prejudice.

The Plaintiffs filed a notice of appeal on February 12, 2021 to the Second Circuit Court of Appeals.

The Second Circuit has granted an expedited briefing schedule and Plaintiff’s/Appellant’s must be filed no later than April 12, 2021.

We believe that the claims are frivolous, meritless and that the Company and Messrs.

Sicignano and Brodfuehrer have substantial legal and factual defenses to the claims.

2 unchanged sentences

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.

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.

1 unchanged sentence

Sullivan, James W.

Cornell, John T.

Brodfuehrer and 22nd Century Group, Inc ., Case No.

1:19-cv-00748 .

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

(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.

The Complaint seeks declaratory relief,

unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.

On April 11, 2019,

pursuant to a stipulation by the parties, the Court ordered this litigation stayed and transferred the stayed action to the Western

District of New York.

On April 19, 2019, the case was opened in the United States District Court for the Western District of New

York, Case No.

1-19-cv-0513.

On August 15, 2019, the case was consolidated with the Mathew case identified below and stayed.

believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and

factual defenses to the claims.

We intend to vigorously defend the Company and the individual defendants against such claims.

On February 11, 2019, Stephen Mathew 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

Supreme Court of the State of New York, County of Erie, entitled:

Stephen Mathew, derivatively on behalf of 22nd Century Group,

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.

On February 11, 2019, Stephen Mathew 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 Supreme Court of the State of New York, County of Erie, entitled:

Stephen Mathew, derivatively on behalf of 22nd Century Group, Inc.

Henry Sicignano, III, John T.

2 unchanged sentences

Cornell, Nora B.

and 22nd Century Group, Inc., Index No.

Sullivan and 22nd Century Group, Inc., Index No.

801786/2019 .

Mathew brings this action derivatively alleging that (i) the

director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements;

the director defendants were allegedly unjustly enriched by allegedly benefitting from allegedly allowing the Company to make false

(iii) the defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits;

the individual defendants allegedly abused their ability to control and influence the Company;

and (v) the individual defendants

allegedly engaged in gross mismanagement.

The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate

governance actions, and attorney’s fees and costs.

On April 12, 2019, the parties jointly filed a Stipulated Notice of Removal

in United States District Court for the Western District of New York.

On April 23, 2019, the parties jointly filed an Amended Stipulated

Notice of Removal in the Western District of New York.

On May 3, 2019, pursuant to a stipulation from the parties, the Court ordered

this litigation stayed.

We believe that the claims are frivolous, meritless and that the Company and the individual defendants

have substantial legal and factual defenses to the claims.

We intend to vigorously defend the Company and the individual defendants

against such claims.

On August 15, 2019, the Court consolidated

the Mathew and Klein actions pursuant to a stipulation by the parties.

On June 10, 2019, Judy Rowley 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 Supreme Court of

the State of New York, County of Erie, entitled:

Mathew brings this action derivatively generally alleging the same allegations as in the Klein case.

The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.

On August 15, 2019, the Court consolidated the Mathew and Klein actions pursuant to a stipulation by the parties (Western District of New York, Case No.

1-19-cv-0513).

We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims.

We intend to vigorously defend the Company and the individual defendants against such claims.

On June 10, 2019, Judy Rowley 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 Supreme Court of the State of New York, County of Erie, entitled:

Judy Rowley, derivatively on behalf of 22nd Century Group, Inc.

Henry Sicignano,

III, Richard M.

Henry Sicignano, III, Richard M.

Sanders, Joseph Alexander Dunn, Nora B.

1 unchanged sentence

Cornell, John T.

Brodfuehrer, and 22nd Century Group,

Brodfuehrer, and 22nd Century Group, Inc.

807214/2019 .

Rowley brings this action derivatively alleging that the director defendants supposedly

breached their fiduciary duties by allegedly allowing the Company to make false statements.

The Complaint seeks declaratory relief,

unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.

We believe that the

claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses

to the claims.

Rowley brings this action derivatively alleging that the director defendants supposedly breached their fiduciary duties by allegedly allowing the Company to make false statements.

The Complaint seeks declaratory relief, unspecified monetary damages, corrective corporate governance actions, and attorney’s fees and costs.

We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims.

We intend to vigorously defend the Company and the individual defendants against such claims.

On September 13, 2019,

the Court ordered the litigation stayed pursuant to joint stipulation by the parties.

On January 15, 2020, Kevin Broccuto 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 certain members of the Company’s prior Board of Directors in the District Court of the

State of Nevada, County of Clark, entitled:

On September 13, 2019, the Court ordered the litigation stayed pursuant to a joint stipulation by the parties.

On January 15, 2020, Kevin Broccuto 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 certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled:

Kevin Broccuto, derivatively on behalf of 22nd Century Group, Inc.

Cornell, Richard M.

Sanders, Nora B.

1 unchanged sentence

Brodfuehrer, Case No.

brings this action derivatively alleging three counts:

Broccuto brings this action derivatively alleging three counts:

Count I alleges that the defendants breached their fiduciary duties;

II alleges they committed corporate waste;

and Count III that they were unjustly enriched, by allegedly allowing the Company to

make false statements.

The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement

of alleged profits and imposition of constructive trusts, and attorney’s fees and costs.

The Company and the individual defendants

have not yet filed a response to the Complaint.

We believe that the claims are frivolous, meritless and that the Company and the

individual defendants have substantial legal and factual defenses to the claims.

We intend to vigorously defend the Company and

the individual defendants against such claims.

On February 11, 2020, Jerry Wayne 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 certain members of the Company’s prior Board of Directors in the District

Court of the State of Nevada, County of Clark, entitled:

Count II alleges they committed corporate waste;

and Count III that they were unjustly enriched, by allegedly allowing the Company to make false statements.

On February 11, 2020, Jerry Wayne 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 certain members of the Company's prior Board of Directors in the District Court of the State of Nevada, County of Clark, entitled:

Jerry Wayne, derivatively on behalf of 22nd Century Group, Inc.

3 unchanged sentences

Brodfuehrer, Case No.

brings this action derivatively alleging three counts:

Count I alleges that the defendants breached their fiduciary duties;

II alleges they committed corporate waste;

and Count III that they were unjustly enriched, by allegedly allowing the Company to

make false statements.

The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement

of alleged profits and imposition of constructive trusts, and attorney’s fees and costs.

The Complaint also seeks to declare

as unenforceable the Company’s Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company

is headquartered.

The Company and the individual defendants have not yet filed a response to the Complaint.

We believe that the

claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses

to the claims.

Wayne brings this action derivatively alleging generally the same allegations as the Brocutto case.

The Complaint seeks unspecified monetary damages, corrective corporate governance actions, disgorgement of alleged profits and imposition of constructive trusts, and attorney's fees and costs.

The Complaint also seeks to declare as unenforceable the Company's Bylaw requiring derivative lawsuits to be filed in Erie County, New York, where the Company is headquartered.

On March 25, 2020, the Court ordered the Brocutto and Wayne cases consolidated and stayed pursuant to a joint stipulation from the parties.

We believe that the claims are frivolous, meritless and that the Company and the individual defendants have substantial legal and factual defenses to the claims.

We intend to vigorously defend the Company and the individual defendants against such claims.

Shareholder Derivative Demand

On February 19, 2019, the Company received

a demand letter from attorneys representing Van McClendon, a shareholder of the Company, in which Mr.

McClendon demanded that the

Company’s Board of Directors take action to pursue certain purported causes of action on behalf of the Company to remedy

alleged breaches of fiduciary duties by each of the members of the Company’s Board of Directors, the Company’s Chief

Executive Officer, Henry Sicignano III, and the Company’s Chief Financial Officer, John T.

On February 28, 2019,

the Board appointed a Special Committee of independent directors and instructed the Committee to assess whether pursuing the claims

detailed in the demand letter would be in the best interests of the Company.

Subsequently, Mr.

McClendon sold his shares and withdrew

On May 7, 2019, after Mr.

McClendon sold his shares, the Company received a similar demand letter from attorneys representing

Jeremy Houck, a shareholder of the Company.

Pursuant to the Board’s instruction, the Special Committee

completed an investigation of the claims detailed in Mr.

Houck’s demand letter.

The Special Committee determined that pursuing

such claims would not be in the best interest of the Company.

– EARNINGS PER COMMON SHARE

The following table sets forth the computation

of basic and diluted earnings per common share for the years ended December 31, 2019, 2018, and 2017:

Net loss attributed to common shareholders

$ (26,558,544 )

$ (7,966,911 )

$ (13,029,117 )

Denominator for basic and diluted earnings per common share-weighted average shares adjusted for dilutive securities

Loss per common share - basic and diluted

Securities outstanding that were excluded

from the computation of earnings per share for the years ended December 31, 2019, 2018, and 2017 because they would have been anti-dilutive

are as follows:

The following table sets forth the computation of basic and diluted earnings (loss) per common share for the years ended December 31, 2020, 2019 and 2018, respectively.

Outstanding warrants, options, and restricted stock units were excluded from the calculation of diluted EPS as the effect was antidilutive.

(in thousands, except for per-share data)

Weighted average common shares outstanding - basic and diluted

Net loss per common share - basic and diluted

Anti-dilutive shares are as follows:

Restricted stock units

– EQUITY BASED COMPENSATION

On April 12, 2014, the shareholders of the

Company approved the 22nd Century Group, Inc.

2014 Omnibus Incentive Plan (the “OIP”) and the authorization of 5,000,000

shares thereunder.

On April 29, 2017, the stockholders approved an amendment to the OIP to increase the number of shares available

for issuance by an additional 5,000,000 shares and on May 3, 2019, the stockholders approved an additional amendment to the OIP

to increase the number of shares available for issuance by an additional 5,000,000 shares.

The OIP allows for the granting of equity

and cash incentive awards to eligible individuals over the life of the OIP.

The OIP has a term of ten years and is administered

by the Compensation Committee of the Company’s Board of Directors to determine the various types of incentive awards that

may be granted to recipients under this plan and the number of shares of common stock to underlie each such award under the OIP.

On April 12, 2014, the stockholders of the Company approved the 22nd Century Group, Inc.

2014 Omnibus Incentive Plan (the “OIP”) and the authorization of 5,000,000 shares to be reserved for issuance thereunder.

On April 29, 2017, the stockholders approved an amendment to the OIP to increase the number of shares available for issuance by an additional 5,000,000 shares and on May 3, 2019, the stockholders approved an additional amendment to the OIP to increase the number of shares available for issuance by an additional 5,000,000 shares.

The OIP allows for the granting of equity and cash incentive awards to eligible individuals over the life of the OIP, including the issuance of up to an aggregate of 15,000,000 shares of the Company’s common stock pursuant to awards under the OIP.

The OIP has a term of ten years and is administered by the Compensation Committee of the Company’s Board of Directors to determine the various types of incentive awards that may be granted to recipients under the OIP and the number of shares of common stock to underlie each such award under the OIP.

As of December 31, 2020, the Company had available 3,987,167 shares remaining for future awards under the OIP.

During the year ended December 31, 2019,

the Company issued awards for restricted stock units from the OIP for 1,301,000 shares to eligible individuals with such restricted

stock unit awards having vesting periods from immediate vesting to three years.

During the year ended December 31, 2019, the Company

issued stock option awards from the OIP for 700,000 shares having vesting periods of five and one-half months to thirty-five months.

Additionally, during the year ended December 31, 2019, (1) 100,000 restricted stock units vested and 250,000 restricted stock units

were forfeited, and (2) 75,410 stock options were exercised on a cashless basis and 1,395,500 were forfeited.

During the year ended

December 31, 2018, the Company issued stock option awards from the OIP for 1,631,841 shares, to eligible individuals.

Restricted Stock Units (“RSU”) .

We grant restricted stock units to employees and non-employee directors which are valued based on the Company’s stock price on the award grant date.

The following table summarizes the changes in unvested restricted stock from December 31, 2018 through December 31, 2020.

Unvested RSUs

Unvested at December 31, 2018

Unvested at December 31, 2019

Unvested at December 31, 2020

The fair value of RSUs that vested during the years ended December 31, 2020 and 2019 was approximately $ 601 and $ 202 , respectively, based on the stock price at the time of vesting.

Stock Options.

issued to acquire 1,231,841 shares of Company common stock have vesting periods ranging from one to three years from the date of

the award, and stock options issued to acquire 400,000 shares of Company common stock are scheduled to vest upon the attainment

of various milestones.

Additionally, 300,000 stock options were cancelled due to the death of the Company’s Senior Vice President

of Science and Regulatory Affairs.

All forfeited and cancelled restricted stock units and stock option were added back to the remaining

shares available to be rewarded under the OIP.

All stock option awards were valued using the Black-Scholes option-pricing model

on the date of the award.

For the years ended December

31, 2019, 2018, and 2017, the Company recorded compensation expense related to stock option and restricted stock awards granted

under the OIP of $3,539,745, $3,187,331 and $941,650, respectively.

During the third quarter of 2019, in connection with

the Company’s recent management changes, certain existing stock options were modified with respect to vesting and exercise

The modifications to the stock options, in accordance with ASC 718, resulted in compensation expense in 2019 of approximately

The compensation expense for the year ended December 31, 2018

includes compensation expense in the amount of approximately $1,227,000 recognized in the second quarter of 2018 when 900,000 stock

options vested upon of the death of the Company’s Senior Vice President of Science and Regulatory Affairs on April 19, 2018.

As of December 31, 2019, unrecognized

compensation expense related to non-vested stock options amounted to approximately $2,153,200, which is expected to be recognized

approximately $1,011,500, $450,200 and $54,600 during 2020, 2021 and 2022, respectively.

Approximately $636,900 of

the unrecognized compensation expense relates to previously issued stock options, with the vesting of such stock options being

based on the achievement of a certain milestones.

fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

The following

assumptions were used for the years ended December 31, 2019 , 2018, and 2017:

Our outstanding stock options were valued using the Black-Scholes option-pricing model on the date of the award.

A summary of all stock option activity since December 31, 2017 is as follows:

Outstanding at December 31, 2017

Expired / cancelled

Outstanding at December 31, 2018

Outstanding at December 31, 2019

Outstanding December 31, 2020

Exercisable at December 31, 2020

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.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

No option awards were granted in 2020.

The following assumptions were used for the years ended December 31, 2019 and 2018:

Risk-free interest rate (weighted average)

2 unchanged sentences

Expected life of options (weighted average)

The Company estimated the expected volatility

of the Company’s stock to be 70%.

The Company estimated the expected volatility of the Company’s stock to be 70 %.

The expected term was estimated using the contract life of the option.

The risk-free interest

rate assumption was determined using yield of the equivalent U.S.

The risk-free interest rate assumption was determined using yield of the equivalent U.S.

Treasury bonds over the expected term.

The Company has never

paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future.

Therefore, the Company assumed

an expected dividend yield of zero.

A summary of all stock option activity since December

31, 2016 is as follows:

Outstanding at December 31, 2016

Granted in 2017

Exercised in 2017

Expired in 2017

Outstanding at December 31, 2017

Granted in 2018

Exercised in 2018

Expired / cancelled in 2018

Outstanding at December 31, 2018

Granted in 2019

Exercised in 2019

Forfeited in 2019

Outstanding at December 31, 2019

Exercisable at December 31, 2019

The weighted average grant date fair value of options issued

during the years ended December 31, 2019 and 2018 was $1.19 and $1.81, respectively.

The total fair value of options that vested

during the years ended December 31, 2019 and 2018 amounted to $2,634,010 and $2,628,622, respectively.

There were 75,410 options

exercised on a cashless basis during the year ended December 31, 2019 resulting in the issuance of 39,988 shares of the

Company stock.

There were 612,259 options exercised on a cash and cashless basis during the year ended December 31, 2018 resulting

in the issuance of 583,214 shares and proceeds of $444,614 to the Company.

S tock options to purchase 900,000 shares of the

Company common stock were not exercised by a former employee’s beneficiaries during the twelve-month period following his

death and have subsequently been returned to the OIP.

The Company has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future.

Therefore, the Company assumed an expected dividend yield of zero .

Restricted Stock and Stock Option Compensation Expense .

The Company recognized the following compensation costs, net of actual forfeitures, related to restricted stock and stock options:

Sales, general, and administrative

Research and Development

Total restricted stock and stock option compensation

As of December 31, 2020, unrecognized compensation expense amounted to $ 1,528 which is expected to be recognized over a weighted average period of approximately 0.9 years.

In addition, there is approximately $ 637 of unrecognized stock option compensation expense that requires the achievement of certain milestones which have yet to be obtained.

– INCOME TAXES

The Tax Cuts and Jobs Act

(“TCJA”) was signed into law on December 22, 2017.

The TCJA includes significant changes to the U.S.

income tax system, including a Federal corporate rate reduction from 35% to 21%.

The Company’s income tax provision

(benefit) reflects the effect of this change in Federal corporate tax rates, primarily from the re-measurement of the

Company’s deferred tax assets and liabilities, including prior net operating loss carry-forwards.

The effect of the

rate change attributable to the TCJA on the Company’s effective tax rate was a decrease of approximately 46% in the net

deferred tax assets before the valuation allowance.

The following is a summary of the components

giving rise to the income tax provision (benefit) for the years ended December 31, 2019, 2018, and 2017:

The following is a summary of the components giving rise to the income tax provision (benefit) ended years ended December 31, 2020, 2019 and 2018:

Total current

1 unchanged sentence

Change in valuation allowance

The provision (benefit) for income tax varies

from that which would be expected based on applying the statutory federal rate to pre-tax accounting loss, including the effect

of the change in the U.S.

Total income taxes

The provision (benefit) for income tax varies from that which would be expected based on applying the statutory federal rate to pre-tax accounting loss, including the effect of the change in the U.S.

corporate income tax rates, as follows:

9 unchanged sentences

Effective tax rate (benefit) provision

Individual components of deferred taxes

consist of the following as of December 31:

Individual components of deferred taxes consist of the following as of December 31:

Deferred tax assets:

17 unchanged sentences

Net deferred taxes

The Company generated net operating losses (“NOL”)

of approximately $16,800,000 and $7,700,000 for the years ended December 31, 2019 and 2018, respectively, and these NOL carryforward

losses do not expire.

The Company had accumulated an NOL carryforward of approximately $46,900,000 through December 31, 2017 and

this NOL carryforward begins to expire in 2031.

As of December 31, 2019, the Company has a research and development credit carryforward

of approximately $1,200,000 that begins to expire in 2031.

Utilization of these carryforwards may be subject to an annual limitation

in the case of equity ownership changes, as defined by law.

Due to the uncertainty of the Company’s ability to generate sufficient

taxable income in the future, the Company has recorded a valuation allowance to reduce the net deferred tax asset to zero.

carryforwards are included in the net deferred tax asset that has been fully offset by the valuation allowance.

ASC 740 provides guidance on the financial

statement recognition and measurement for uncertain income tax positions that are taken or expected to be taken in a company’s

income tax return.

The Company generated net operating losses (“NOL”) of approximately $ 15,500 , $ 16,800 , and $ 7,700 for the years ended December 31, 2020, 2019 and 2018 respectively, and these NOL carryforward losses do not expire.

The Company had accumulated an NOL carryforward of approximately $ 46,900 through December 31, 2017 and this NOL carryforward begins to expire in 2031.

As of December 31, 2020, the Company has a research and development credit carryforward of approximately $ 1,171 that begins to expire in 2031.

Utilization of these NOL carryforwards may be subject to an annual limitation in the case of equity ownership changes, as defined by law.

Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future, the Company has recorded a valuation allowance

to reduce the net deferred tax asset to zero.

These carryforwards are included in the net deferred tax asset that has been fully offset by the valuation allowance.

ASC 740 provides guidance on the financial statement recognition and measurement for uncertain income tax positions that are taken or expected to be taken in a company’s income tax return.

The Company has evaluated its tax positions and believes there are no uncertain tax positions as of December 31, 2020.

– REVENUE RECOGNITION

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the product to a customer.

The Company’s customer contracts consist of obligations to manufacture the customer’s branded filtered cigars and cigarettes.

For certain 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 manufactured.

Revenue from the sale of the Company’s products is recognized net of cash discounts, sales returns and allowances.

There was no allowance for discounts or returns and allowances at December 31, 2020 and December 31, 2019.

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 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 extended credit terms up to twenty-one (21) days after shipment.

Deferred Revenue (contract liabilities) relate to down payments received from customers in advance of satisfying a performance obligation.

This deferred revenue is included as Deferred income on the Consolidated Balance Sheets.

Total contract assets and contract liabilities are as follows:

Unbilled receivables

Deferred Revenue

Net contract assets

Disaggregation of Revenue

The Company’s net sales revenue is derived from customers located primarily in the United States of America and is disaggregated by the timing of revenue recognition—net sales transferred over time and net sales transferred at a point in time.

All revenue is related to contract manufacturing.

Net sales-over time

Net sales-point in time

Total Revenue

The Company had certain customers whose revenue individually represented 10% or more the Company’s total revenue.

For the year ended December 31, 2020, two customers accounted for approximately 91 % of total revenue.

For the years ended December 31, 2019, and 2018, three customers accounted for approximately for 92.7 % and 92.0 % of total revenue, respectively.

– SUBSEQUENT EVENT

Corporate Office Relocation

On January 15, 2021, the Company signed a lease agreement to relocate its corporate headquarters to the Larkinville District in downtown Buffalo, NY.

Details on the lease are described below ($ in thousands):

Key Lease Terms

$ in thousands

Commencement Date

February 15, 2021

Monthly Base Rent (Year 1)

Base Rent Annual Increase (Year 2 - onward)

Initial Term (months)

In addition, the lease includes two optional, twenty-four-month extensions at the Company’s discretion.

During the first quarter of 2021, the Company will recognize the respective ROU asset and lease liability for the above operating lease.

Warrant Exercises

During February and March of 2021, the Company’s warrant holders exercised 9,577,612 warrants for cash in exchange for common stock.

In connection with these exercises, the Company received net proceeds of $ 9,993 .

On March 10, 2021, the Company’s warrant holders exercised for cash the remaining 1,715,599 outstanding warrants and no outstanding warrants remain.

– SELECTED QUARTERLY FINANCIAL DATA (unaudited)

Below is selected quarterly financial data

for the years ended December 31, 2019 and 2018:

Below is selected quarterly financial data for the years ended December 31, 2020 and 2019:

Three Months Ended

2 unchanged sentences

Loss from operations

$ (5,379,159 )

$ (5,028,839 )

$ (7,605,516 )

$ (5,552,947 )

$ (2,072,713 )

$ (8,041,682 )

$ (10,245,717 )

$ (6,198,432 )

Loss per common share –

basic and diluted

Loss per common share – basic and diluted

Three Months Ended

1 unchanged sentence

Loss from operations

$ (4,968,772 )

$ (7,040,512 )

$ (6,208,834 )

$ (5,800,509 )

Net income (loss)

$ (6,738,652 )

$ (8,919,401 )

Income (loss) per common share - basic

Income (loss) per common share - diluted

Loss per common share – basic and diluted

Financial Statement Schedules

Valuation and Qualifying Accounts

The following table summarizes the Company’s valuation

and qualifying accounts from December 31, 2016:

Qualifying account valuation at December 31, 2016

Additions charged to costs and expenses during 2017

Deductions during 2016

Qualifying account valuation at December 31, 2017

Additions charged to costs and expenses during 2018

Deductions during 2018

Qualifying account valuation at December 31, 2018

Additions charged to costs and expenses during 2019

Deductions during 2019

Qualifying account valuation at December 31, 2019

In reviewing the agreements included as

exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended

to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements.

All schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.

In reviewing the agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements.

The agreements contain representations and warranties by each of the parties to the applicable agreement.

These representations

and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

2 unchanged sentences

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and

warranties may not describe the actual state of affairs as of the date they were made or at any other time.

We acknowledge that,

notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific

disclosures of material information regarding material contractual provisions are required to make the statements in this report

not misleading.

Additional information about the Company may be found elsewhere in this report and the Company’s other public

files, which are available without charge through the SEC’s website at http://www.sec.gov .

Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010 filed with the Commission on December 1, 2010).

Amendment to Certificate of Incorporation of the Company (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the Commission on March 4, 2014).

Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Commission on January 30, 2014).

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.

Additional information about the Company may be found elsewhere in this report and the Company’s other public files, which are available without charge through the SEC’s website at http://www.sec.gov .

Amendment to Certificate of Incorporation of the Company (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the Commission on March 4, 2014).

Amendment No.

1 to Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Form 8-K filed with the Commission on April 28, 2015).

Form of New Warrant Agreement (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 25, 2019)

1 to Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Form 8-K filed with the Commission on April 28, 2015).

Form of New Warrant Agreement (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 25, 2019)

Description of Securities Registered Pursuant to Section 12

2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Company’s Form S-8 filed with the Commission on March 30, 2011).

Employment Agreement between the Company and Michael J.

Zercher (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on September 13, 2019)

10.3&dagger;&dagger;

License Agreement dated March 6, 2009 between North Carolina State University and 22nd Century Limited, LLC (incorporated by reference to Exhibit 10.21 to the Company’s Form S-1 registration statement filed with the Commission on August 26, 2011).

Amendment dated August 9, 2012 to License Agreement dated March 6, 2009 between North Carolina State University and 22nd Century Limited, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 20, 2012).

Letter Agreement between the Company and North Carolina State University dated November 22, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on November 23, 2011).

Employment Agreement between the Company and Andrea S.

Jentsch (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on January 3, 2020)

Zercher (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on September 13, 2019)

Form of Restricted Stock Award Agreement (incorporated by reference to Form 10-Q filed on May 10, 2013).

1 unchanged sentence

Form of Restricted Stock Award Agreement under 22nd Century Group, Inc.

2014 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on April 14, 2014).

Form of Stock Option Award Agreement under 22nd Century Group, Inc.

2014 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Commission on April 14, 2014).

10.10&dagger;&dagger;

Research Funding Agreement dated December 14, 2016 with The Rector and Visitors of the University of Virginia, a not-for-profit Virginia educational institutional of the Commonwealth of Virginia (incorporated by reference to Exhibit 10.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Commission on March 8, 2017).

10.11&dagger;&dagger;

Exclusive License Agreement dated December 14, 2016 with the University of Virginia Patent Foundation d/b/a University of Virginia Licensing & Ventures Group, a Virginia non-profit corporation (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Commission on March 8, 2017).

10.12&dagger;

2014 Omnibus Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the Commission on April 14, 2014).

22nd Century Group, Inc.

2014 Omnibus Incentive Plan, as amended and restated (incorporated by reference from Appendix A to the Company’s definitive proxy statement filed on March 17, 2017).

10.13&dagger;*

of Executive Restricted Stock Unit Award under 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.15 of the

Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).

10.14&dagger;*

Form of Director Restricted Stock Unit Award under 2014 Omnibus

Incentive Plan (incorporated by reference to Exhibit 10.16 of the

Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).

2014 Omnibus Incentive Plan, as amended and restated (incorporated by reference from Appendix A to the Company’s definitive proxy statement filed on March 22, 2019).

Form of Executive Restricted Stock Unit Award under 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).

Form of Director Restricted Stock Unit Award under 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).

Series B Preferred Stock Purchase Agreement, dated as of December 3, 2019, between Panacea Life Sciences., Inc and 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Convertible Note of Panacea Life Sciences., Inc., dated December 3, 2019, issued to 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Warrant to purchase shares of Series B Preferred Stock of Panacea Life Sciences., Inc., dated December 3, 2019, issued to 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Side Agreement, dated as of December 3, 2019, Panacea Life Sciences, Inc., [EMPLOYEE], [EMPLOYEE], [EMPLOYEE], [EMPLOYEE], Quintel-MC Incorporated, and 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

10.19&dagger;&dagger;&dagger;

(incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Framework Collaborative Research Agreement, dated as of April 3, 2019, between KeyGene N.V.

and 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the Commission on May 7, 2019).

Employment Agreement between the Company and James Mish (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on June 3, 2020).

Employment Agreement between the Company and John Franzino (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on June 3, 2020).

Consent of Freed Maxick CPAs, P.C.

1 unchanged sentence

Section 302 Certification.

Written Statement of Principal Executive Officer and Chief Financial Officer pursuant to 18.U.S.C §1350.

Interactive data files formatted in XBRL (eXtensible Business Reporting Language):

6 unchanged sentences

Taxonomy Extension Presentation Linkbase Document*

Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*

* Filed herewith.

† Management contract or compensatory plan, contract or

†† Certain portions of the exhibit have been omitted

pursuant to a confidential treatment order.

An unredacted copy of the exhibit has been filed separately with the United States

Securities and Exchange Commission pursuant to the request for confidential treatment.

&dagger;&dagger;&dagger;Certain portions of the exhibit have

been omitted pursuant Regulation S-K Item 601(b) because it is both (i) not material to investors and (ii) likely to cause competitive

harm to the Company is publicly disclosed.

Pursuant to the requirements of Section

13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the

undersigned, thereunto duly authorized.

† Management contract or compensatory plan, contract or arrangement.

†† Certain portions of the exhibit have been omitted pursuant to a confidential treatment order.

An unredacted copy of the exhibit has been filed separately with the United States Securities and Exchange Commission pursuant to the request for confidential treatment.

†††Certain portions of the exhibit have been omitted pursuant Regulation S-K Item 601(b) because it is both (i) not material to investors and (ii) likely to cause competitive harm to the Company is publicly disclosed.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

22nd CENTURY GROUP, INC.

March 11, 2021

/s/ Michael J.

President and Chief Operating Officer

Chief Executive Officer

(Principal Executive Officer)

March 11, 2021

/s/ Andrea S.

/s/ John Franzino

John Franzino

Chief Financial Officer

(Principal Accounting and Financial Officer)

Pursuant to the requirements of Section

13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the

undersigned, thereunto duly authorized.

March 11, 2021

/s/ Clifford B.

March 11, 2021

1 unchanged sentence

March 11, 2021

/s/ Clifford B.

March 11, 2021

Michael Koganov

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures