22nd Century Group, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures 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, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. ​ 45 Table of Contents ​ Item 9B. Other Information. None. ​ PART III Item 10. 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 2021 Annual Meeting of Stockholders. Set forth below is information regarding our directors, executive officers and key personnel as of March 11, 2021: ​ ​ ​ ​ ​ ​ Name Age Position ​ James A. Mish ​ 57 ​ Chief Executive Officer ​ Michael Zercher ​ 50 ​ President and Chief Operating Officer ​ John Franzino 64 Chief Financial Officer & Treasurer ​ Dr. Michael Koganov 70 Director (1) Richard M. Sanders 68 Director (2) Nora B. Sullivan 63 Director (3) Clifford B. Fleet 50 Director (4) Roger D. O’Brien 72 Director (5) (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. Mr. 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. Ms. 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. Mr. 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. Future material amendments or waivers relating 46 Table of Contents to the Code of Ethics will be disclosed on our website within four business days following the date of such amendment or waiver. ​ Item 11. 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 2021 Annual Meeting of Stockholders. ​ Item 12. 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 2021 Annual Meeting of Stockholders. ​ Item 13. 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 2021 Annual Meeting of Stockholders. ​ Item 14. 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 2021 Annual Meeting of Stockholders. ​ ​ 47 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial Statements (b) Financial Statement Schedules Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements: Consolidated Balance Sheets F-5 Consolidated Statements of Operations and Comprehensive Loss F-6 Consolidated Statements of Changes in Shareholders’ Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 – F-30 ​ ​ ​ Item 16. Form 10-K Summary None. ​ ​ ​ F-1 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors 22nd Century Group, Inc. Opinion on the Financial Statements 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 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 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 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 F-2 Table of Contents 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. (“Panacea”) 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. F-3 Table of Contents 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. ​ ​ ​ We have served as the Company’s auditor since 2011. ​ ​ ​ Buffalo, New York ​ March 11, 2021 ​ ​ ​ ​ F-4 Table of Contents ​ ​ ​ 22nd CENTURY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ 2020 2019 ASSETS ​ ​ Current Assets: ​ ​ Cash and cash equivalents ​ $ 1,029 ​ $ 485 Short-term investment securities ​ 21,313 ​ 38,477 Accounts receivable, net ​ 2,159 ​ 867 Inventory, net ​ 2,034 ​ 2,266 Prepaid expenses and other assets ​ 1,806 ​ 648 Total current assets ​ 28,341 ​ 42,743 Property, plant and equipment: ​ ​ Machinery and equipment, net ​ 2,483 ​ 3,120 Operating leases right-of-use assets, net ​ 247 ​ 602 Total property, plant and equipment ​ 2,730 ​ 3,722 Other assets: ​ ​ ​ Intangible assets, net ​ 8,211 ​ 8,494 Investments ​ 6,536 ​ 8,403 Convertible note ​ ​ 5,876 ​ ​ 5,589 Total other assets ​ 20,623 ​ 22,486 ​ ​ ​ ​ ​ ​ ​ Total assets ​ $ 51,694 ​ $ 68,951 ​ ​ ​ LIABILITIES AND SHAREHOLDERS' EQUITY ​ ​ Current liabilities: ​ ​ Notes payable ​ $ 539 ​ $ 581 Operating lease obligations ​ 247 ​ 220 Accounts payable ​ 1,116 ​ 1,997 Accrued expenses ​ 4,830 ​ 2,619 Accrued severance ​ 339 ​ 359 Deferred income ​ 272 ​ 5 Total current liabilities ​ 7,343 ​ 5,781 Long-term liabilities: ​ ​ Notes payable ​ — ​ 292 Operating lease obligations ​ — ​ 382 Severance obligations ​ ​ 241 ​ ​ 446 Total liabilities ​ ​ 7,584 ​ ​ 6,901 Commitments and contingencies (Note 12) ​ ​ ​ ​ Shareholders' equity ​ ​ 10,000,000 preferred shares, $ .00001 par value ​ ​ 300,000,000 common shares, $ .00001 par value ​ ​ Capital stock issued and outstanding : ​ ​ 139,061,690 common shares ( 138,362,809 at December 31, 2019) ​ ​ ​ ​ Common stock value ​ ​ 1 ​ ​ 1 Capital in excess of par value ​ 189,439 ​ 187,735 Accumulated other comprehensive (loss) income ​ 74 ​ 7 Accumulated deficit ​ ( 145,404 ) ​ ( 125,693 ) Total shareholders' equity ​ 44,110 ​ 62,050 Total liabilities and shareholders’ equity ​ $ 51,694 ​ $ 68,951 ​ See accompanying notes to consolidated financial statements. ​ F-5 Table of Contents ​ ​ ​ 22nd CENTURY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS ($ in thousands except per-share data) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2020 2019 2018 Revenue: ​ ​ ​ ​ ​ Sale of products, net ​ $ 28,111 ​ $ 25,833 ​ $ 26,426 Cost of goods sold (exclusive of depreciation shown separately below): ​ ​ ​ Products ​ 26,673 ​ 25,818 ​ 25,527 Gross profit (loss) ​ 1,438 ​ 15 ​ 899 Operating expenses: ​ ​ ​ Research and development ​ 4,090 ​ 6,381 ​ 5,215 Research and development - MRTP ​ ​ 38 ​ ​ 1,679 ​ ​ 9,775 Sales, general and administrative ​ 14,971 ​ 12,954 ​ 8,585 Impairment of intangible assets ​ ​ 176 ​ ​ 1,142 ​ ​ — Depreciation ​ 688 ​ 589 ​ 523 Amortization ​ 658 ​ 836 ​ 820 Total operating expenses ​ 20,621 ​ 23,581 ​ 24,918 Operating loss ​ ( 19,183 ) ​ ( 23,566 ) ​ ( 24,019 ) Other income (expense): ​ ​ ​ Unrealized gain (loss) on investments ​ ( 434 ) ​ ( 2,419 ) ​ 284 Impairment of Panacea investment ​ ​ ( 1,741 ) ​ ​ — ​ ​ — Realized gain on investments ​ ​ — ​ ​ — ​ ​ 14,493 Realized gain (loss) on short-term investment securities ​ 5 ​ 221 ​ ( 54 ) Litigation settlement ​ ​ — ​ ​ ( 1,891 ) ​ ​ — Gain on the sale of machinery and equipment ​ 1 ​ 87 ​ — Dividend income and other ​ ​ — ​ ​ — ​ ​ 271 Interest income, net ​ 1,751 ​ 1,066 ​ 1,069 Interest expense ​ ( 72 ) ​ ( 56 ) ​ ( 11 ) Total other income (expense) ​ ( 490 ) ​ ( 2,992 ) ​ 16,052 Loss before income taxes ​ ( 19,673 ) ​ ( 26,558 ) ​ ​ ( 7,967 ) Income taxes ​ 38 ​ — ​ ​ — Net loss ​ $ ( 19,711 ) ​ $ ( 26,558 ) ​ $ ( 7,967 ) Other comprehensive income (loss): ​ ​ ​ Unrealized gain (loss) on short-term investment securities ​ 72 ​ 207 ​ ( 22 ) Reclassification of (gain) loss to net loss ​ ( 5 ) ​ ( 221 ) ​ 43 Other comprehensive income (loss) ​ ​ 67 ​ ​ ( 14 ) ​ ​ 21 Comprehensive loss ​ $ ( 19,644 ) ​ $ ( 26,572 ) ​ $ ( 7,946 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss per common share - basic and diluted ​ $ ( 0.14 ) ​ $ ( 0.21 ) ​ $ ( 0.06 ) Weighted average common shares outstanding - basic and diluted (in thousands) ​ 138,813 ​ 125,883 ​ 124,299 ​ See accompanying notes to consolidated financial statements. ​ F-6 Table of Contents ​ ​ ​ 22nd CENTURY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Years Ended December 31, 2020, 2019, and 2018 ​ ​ Common ​ Par Value ​ Capital in ​ Other ​ ​ ​ ​ ​ ​ ​ ​ Shares ​ of Common ​ Excess of ​ Comprehensive ​ Accumulated ​ Shareholders' ​ Outstanding Shares Par Value Income Deficit Equity Balance at December 31, 2017 123,569,367 ​ $ 1 ​ $ 166,591 ​ $ — ​ $ ( 91,168 ) ​ $ 75,424 ​ ​ ​ ​ ​ ​ Stock issued in connection with warrant exercises 490,012 ​ — ​ — ​ — ​ — ​ — ​ ​ ​ ​ ​ ​ Stock issued in connection with option exercises 583,214 ​ — ​ 445 ​ — ​ — ​ 445 ​ ​ ​ ​ ​ ​ Equity-based compensation — ​ — ​ 3,187 ​ — ​ — ​ 3,187 ​ ​ ​ ​ ​ ​ Reclassification of warrant liability to capital in excess of par — ​ — ​ 168 ​ — ​ — ​ 168 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gain (loss) on short-term investment securities ​ — ​ ​ — ​ ​ — ​ ​ ( 22 ) ​ ​ — ​ ​ ( 22 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Reclassification of losses (gains) to net loss ​ — ​ ​ — ​ ​ — ​ ​ 43 ​ ​ — ​ ​ 43 ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ — ​ ( 7,967 ) ​ ( 7,967 ) ​ ​ ​ ​ ​ ​ Balance at December 31, 2018 124,642,593 ​ 1 ​ 170,391 ​ 21 ​ ( 99,135 ) ​ 71,278 ​ ​ ​ ​ ​ ​ Stock issued in connection with warrant exercises 11,293,211 ​ — ​ 10,616 ​ — ​ — ​ 10,616 ​ ​ ​ ​ ​ ​ ​ Stock issued in connection with option exercises 39,988 ​ — ​ — ​ — ​ — ​ — ​ ​ ​ ​ ​ ​ ​ Stock issued in connection with RSU vesting ​ 100,000 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity-based compensation — ​ — ​ 3,540 ​ — ​ — ​ 3,540 ​ ​ ​ ​ ​ ​ Stock issued in connection with litigation expense 990,000 ​ — ​ 1,891 ​ — ​ — ​ 1,891 ​ ​ ​ ​ ​ ​ Stock issued in connection with Panacea investment 1,297,017 ​ — ​ 1,297 ​ — ​ — ​ 1,297 ​ ​ ​ ​ ​ ​ Unrealized gain (loss) on short-term investment securities — ​ — ​ — ​ 207 ​ — ​ 207 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Reclassification of losses (gains) to net loss ​ — ​ ​ — ​ ​ — ​ ​ ( 221 ) ​ ​ — ​ ​ ( 221 ) ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ — ​ ( 26,558 ) ​ ( 26,558 ) ​ ​ ​ ​ ​ ​ Balance at December 31, 2019 138,362,809 ​ 1 ​ 187,735 ​ 7 ​ ( 125,693 ) ​ 62,050 ​ ​ ​ ​ ​ ​ Stock issued in connection with RSU vesting 552,800 ​ — ​ — ​ — ​ — ​ — ​ ​ ​ ​ ​ ​ Stock issued in connection with option exercises 146,081 ​ — ​ 50 ​ — ​ — ​ 50 ​ ​ ​ ​ ​ ​ Equity-based compensation — ​ — ​ 1,654 ​ — ​ — ​ 1,654 ​ ​ ​ ​ ​ ​ Unrealized gain (loss) on short-term investment securities — ​ — ​ — ​ 72 ​ — ​ 72 ​ ​ ​ ​ ​ ​ Reclassification of losses (gains) to net loss — ​ — ​ — ​ ( 5 ) ​ — ​ ( 5 ) ​ ​ ​ ​ ​ ​ Net loss — ​ — ​ — ​ — ​ ( 19,711 ) ​ ( 19,711 ) ​ ​ ​ ​ ​ ​ Balance at December 31, 2020 139,061,690 ​ $ 1 ​ $ 189,439 ​ $ 74 ​ $ ( 145,404 ) ​ $ 44,110 ​ See accompanying notes to consolidated financial statements. ​ F-7 Table of Contents ​ ​ ​ 22nd CENTURY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ​ ($ in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2020 2019 2018 Cash flows from operating activities: ​ ​ ​ ​ ​ Net loss ​ $ ( 19,711 ) ​ $ ( 26,558 ) ​ $ ( 7,967 ) Adjustments to reconcile net loss to cash used in operating activities: ​ ​ ​ Impairment of intangible assets ​ ​ 176 ​ ​ 1,142 ​ ​ — Impairment of Panacea investment ​ ​ 1,741 ​ ​ — ​ ​ — Amortization and depreciation ​ 1,094 ​ 1,186 ​ 1,200 Amortization of license fees ​ 251 ​ 239 ​ 143 Amortization of ROU Asset ​ 182 ​ 212 ​ — Realized gain on the sale of investments ​ ​ — ​ ​ — ​ ​ ( 14,493 ) Unrealized (gain) loss on investment ​ 434 ​ 2,419 ​ ( 284 ) Realized (gain) loss on short-term investment securities ​ ​ ( 5 ) ​ ​ ( 221 ) ​ ​ 54 Litigation settlement ​ — ​ 1,891 ​ — Gain on the sale of machinery and equipment ​ ( 1 ) ​ ( 87 ) ​ — Warrant liability (gain) loss ​ — ​ — ​ ( 49 ) Accretion of non cash interest expense ​ ​ 43 ​ ​ 48 ​ ​ 11 Accretion of non cash interest income ​ ( 369 ) ​ ( 22 ) ​ — Equity-based employee compensation expense ​ 1,654 ​ 3,540 ​ 3,187 Inventory write-off ​ ​ 521 ​ ​ 985 ​ ​ — (Decrease) increase in inventory reserves ​ ​ — ​ ​ — ​ ​ ( 95 ) (Increase) decrease in assets: ​ ​ ​ — Accounts receivable ​ ( 1,292 ) ​ 4 ​ 86 Inventory ​ ( 289 ) ​ ( 207 ) ​ 334 Prepaid expenses and other assets ​ ( 787 ) ​ 280 ​ ( 182 ) Increase (decrease) in liabilities: ​ — ​ ​ — Operating lease obligations ​ ( 552 ) ​ ( 212 ) ​ — Accounts payable ​ ( 936 ) ​ ( 732 ) ​ 322 Accrued expenses ​ 2,183 ​ 792 ​ ( 167 ) Accrued severance ​ ​ ( 225 ) ​ ​ 792 ​ ​ — Deferred income ​ 267 ​ ( 78 ) ​ 55 Net cash provided by (used in) operating activities ​ ( 15,621 ) ​ ( 14,588 ) ​ ( 17,845 ) Cash flows from investing activities: ​ ​ ​ ​ Acquisition of patents, trademarks, and licenses ​ ( 468 ) ​ ( 565 ) ​ ( 657 ) Acquisition of machinery and equipment ​ ( 54 ) ​ ( 527 ) ​ ( 449 ) Proceeds from the sale of machinery and equipment ​ 6 ​ 166 ​ — Investment in Panacea ​ ​ — ​ ​ ( 12,000 ) ​ ​ — Proceeds from the sale of investments ​ ​ — ​ ​ — ​ ​ 13,052 Sales and maturities of short-term investment securities ​ 39,728 ​ 19,320 ​ 37,415 Purchase of short-term investment securities ​ ( 22,743 ) ​ ( 1,842 ) ​ ( 34,216 ) Net cash provided by (used in) investing activities ​ 16,469 ​ 4,552 ​ 15,145 Cash flows from financing activities: ​ ​ ​ ​ Payment on note payable ​ ​ ( 2,549 ) ​ ​ ( 700 ) ​ ​ ( 800 ) Proceeds from note payable issuance ​ ​ 2,195 ​ ​ — ​ ​ — Net proceeds from option exercise ​ ​ 50 ​ ​ — ​ ​ 445 Net proceeds from warrant exercise ​ ​ — ​ ​ 10,616 ​ ​ — Proceeds from SBA loan ​ ​ 1,183 ​ ​ — ​ ​ — Repayment of SBA loan ​ ​ ( 1,183 ) ​ ​ — ​ ​ — Net cash provided by (used in) financing activities ​ ( 304 ) ​ 9,916 ​ ( 355 ) Net increase (decrease) in cash and cash equivalents ​ 544 ​ ( 120 ) ​ ( 3,055 ) Cash and cash equivalents - beginning of period ​ 485 ​ 605 ​ 3,660 Cash and cash equivalents - end of period ​ $ 1,029 ​ $ 485 ​ $ 605 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Supplemental disclosures of cash flow information: ​ ​ ​ Net cash paid for: ​ ​ ​ Cash paid during the period for interest ​ $ 29 ​ $ 3 ​ $ — Non-cash transactions: ​ ​ ​ Patent and trademark additions included in accounts payable ​ $ 55 ​ $ 155 ​ $ 152 Machinery and equipment additions included in accounts payable ​ $ 2 ​ $ — ​ $ 19 Right-of-use assets and corresponding operating lease obligations ​ $ 198 ​ $ 814 ​ $ — Patent and trademark additions included in accrued expenses ​ $ 28 ​ $ — ​ $ — Licenses acquired with notes payable ​ $ — ​ $ — ​ $ 2,326 Reclassification of warrant liability to capital in excess of par ​ $ — ​ $ — ​ $ 168 Stock issued in connection with investment ​ $ — ​ $ 1,297 ​ $ — ​ See accompanying notes to consolidated financial statements. ​ F-8 Table of Contents 22nd CENTURY GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 Amounts in thousands, except for share and per share data ​ NOTE 1. – 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 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. Realized gains and losses on short-term investment securities are recorded in F-9 Table of Contents the other income (expense) portion of the Company’s Consolidated Statements of Operations and Comprehensive Loss. 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. 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. 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. 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 F-10 Table of Contents 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, 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. 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. Refer to Note 13 for additional information. F-11 Table of Contents 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. 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. 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. F-12 Table of Contents . ​ NOTE 2. – INVENTORY Inventories at December 31, 2020 and December 31, 2019 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ 2020 2019 Inventory - tobacco leaf ​ $ 821 ​ $ 1,178 Inventory - finished goods ​ ​ ​ ​ ​ Cigarettes and filtered cigars ​ 171 ​ 106 Inventory - raw materials ​ ​ ​ ​ Cigarette and filtered cigar components ​ ​ 1,142 ​ ​ 1,082 ​ ​ ​ ​ ​ ​ ​ Less: inventory reserve ​ ( 100 ) ​ ( 100 ) ​ ​ $ 2,034 ​ $ 2,266 ​ 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. ​ NOTE 3. – MACHINERY AND EQUIPMENT Machinery and equipment at December 31, 2020 and December 31, 2019 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ Useful Life 2020 2019 Cigarette manufacturing equipment ​ 3 or 10 years ​ $ 4,893 ​ $ 4,870 Office furniture, fixtures and equipment ​ 5 Years ​ 20 ​ 152 Laboratory equipment ​ 5 Years ​ 117 ​ 125 Leasehold improvements ​ 6 Years ​ 123 ​ 257 ​ ​ ​ ​ ​ ​ ​ Less: accumulated depreciation ​ ​ ( 2,670 ) ​ ( 2,284 ) Machinery and equipment, net ​ ​ $ 2,483 ​ $ 3,120 ​ Depreciation expense was $ 688 , $ 589 , and $ 523 for the years ended December 31, 2020, 2019 and 2018, respectively. ​ NOTE 4. – 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. F-13 Table of Contents 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 ​ ​ 1.1 ​ Weighted average discount rate ​ 4.5 % ​ Future minimum lease payments as of December 31, 2020 are as follows: ​ ​ ​ ​ ​ 2021 ​ $ 245 2022 ​ 9 Total lease payments ​ 254 Less: imputed interest ​ ( 6 ) Total ​ $ 248 ​ 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. NOTE 5. – INTANGIBLE ASSETS Our intangible assets at December 31, 2020 and December 31, 2019 consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ 2020 2019 Intangible assets, net ​ ​ Patent and trademark costs ​ $ 5,667 ​ $ 5,712 Less: accumulated amortization ​ ( 2,936 ) ​ ( 2,839 ) Patent and trademark costs, net ​ 2,731 ​ 2,873 ​ ​ ​ ​ ​ ​ ​ License fees ​ 3,876 ​ 3,777 Less: accumulated amortization ​ ( 948 ) ​ ( 709 ) License fees, net ​ 2,928 ​ 3,069 ​ ​ ​ ​ ​ ​ ​ MSA signatory costs ​ 2,202 ​ 2,202 ​ ​ ​ ​ ​ ​ License fee for predicate cigarette brand ​ 350 ​ 350 ​ ​ $ 8,211 ​ $ 8,494 ​ 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. F-14 Table of Contents 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 . ​ NOTE 6. – 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 F-15 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2020 Panacea preferred stock $ 5,173 Panacea stock warrant ​ ​ 1,124 Accrued interest on convertible note receivable (included within prepaid expenses and other assets) ​ ​ 170 Convertible note receivable ​ ​ 5,876 Total ​ $ 12,343 ​ Investment in Anandia 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 TSX: 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. F-16 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ ​ 2020 ​ 2019 Aurora stock warrants $ 239 $ 673 Panacea preferred stock ​ ​ 5,173 ​ ​ 4,865 Panacea stock warrant ​ ​ 1,124 ​ ​ 2,865 Total Investments ​ $ 6,536 ​ $ 8,403 Convertible Note Receivable ​ $ 5,876 ​ $ 5,589 ​ ​ NOTE 7. – 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: ● 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; and ● 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. F-17 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value ​ ​ December 31, 2020 ​ Level 1 Level 2 Level 3 Total Assets ​ ​ ​ ​ Short-term investment securities: ​ ​ ​ ​ Money market funds ​ $ 8,636 ​ $ — ​ $ — ​ $ 8,636 Corporate bonds ​ — ​ 12,677 ​ — ​ 12,677 Total short-term investment securities ​ $ 8,636 ​ $ 12,677 ​ $ — ​ $ 21,313 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investment - Aurora stock warrants ​ $ — ​ $ — ​ $ 239 ​ $ 239 Investment - Panacea preferred stock ​ $ — ​ $ — ​ $ 5,173 ​ $ 5,173 Convertible note receivable ​ $ — ​ $ — ​ $ 5,876 ​ $ 5,876 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value ​ ​ December 31, 2019 ​ Level 1 Level 2 Level 3 Total Assets ​ ​ ​ ​ Short-term investment securities: ​ ​ ​ ​ Money market funds ​ $ 12,146 ​ $ — ​ $ — ​ $ 12,146 Corporate bonds ​ — ​ 26,331 ​ — ​ 26,331 Total short-term investment securities ​ $ 12,146 ​ $ 26,331 ​ $ — ​ $ 38,477 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Investment - Aurora stock warrants ​ $ — ​ $ — ​ $ 673 ​ $ 673 Investment - Panacea preferred stock ​ $ — ​ $ — ​ $ 4,865 ​ $ 4,865 Convertible note receivable ​ $ — ​ $ — ​ $ 5,589 ​ $ 5,589 ​ 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. F-18 Table of Contents 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 $ 3,092 Unrealized gain as a result of change in fair value ​ ( 2,419 ) Accretion of interest income on convertible note receivable ​ ​ 22 Panacea convertible note receivable ​ ​ 5,567 Preferred stock in Panacea ​ ​ 4,865 Fair Value at December 31, 2019 ​ $ 11,127 Unrealized loss as a result of change in fair value ​ ​ ( 434 ) Accretion of interest on Panacea investment ​ ​ 595 Fair Value at December 31, 2020 ​ $ 11,288 ​ 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 ​ ​ Amortized ​ Gross ​ Gross ​ ​ ​ ​ ​ Cost ​ Unrealized ​ Unrealized ​ Fair ​ Basis Gains Losses Value Corporate bonds ​ $ 12,603 ​ $ 74 ​ $ — ​ $ 12,677 Convertible note receivable ​ 5,876 ​ — ​ — ​ 5,876 Investment - Panacea preferred stock ​ 5,173 ​ — ​ — ​ 5,173 ​ ​ $ 23,652 ​ $ 74 ​ $ — ​ $ 23,726 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available for Sale Debt Securities ​ ​ December 31, 2019 ​ ​ Amortized ​ Gross ​ Gross ​ ​ ​ ​ ​ Cost ​ Unrealized ​ Unrealized ​ Fair ​ Basis Gains Losses Value Corporate bonds ​ $ 26,324 ​ $ 64 ​ $ ( 57 ) ​ $ 26,331 Convertible note receivable ​ 5,589 ​ — ​ — ​ 5,589 Investment - Panacea preferred stock ​ 4,865 ​ — ​ — ​ 4,865 ​ ​ $ 36,778 ​ $ 64 ​ $ ( 57 ) ​ $ 36,785 ​ 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 ​ December 31, 2019 ​ ​ Amortized ​ ​ ​ ​ Amortized ​ ​ ​ ​ Cost Basis Fair Value Cost Basis Fair Value Due in one year or less ​ $ 11,692 ​ $ 11,753 ​ $ 16,823 ​ $ 16,851 Due after one year through five years ​ 11,960 ​ 11,973 ​ 9,501 ​ 9,480 Due in five years ​ ​ — ​ ​ — ​ ​ 10,454 ​ ​ 10,454 ​ ​ $ 23,652 ​ $ 23,726 ​ $ 36,778 ​ $ 36,785 ​ ​ NOTE 8. – NOTES PAYABLE 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 F-19 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ 2020 2019 License Fees ​ $ 293 ​ $ 581 ​ D&O Insurance ​ 246 ​ — ​ Total current notes payable ​ $ 539 ​ $ 581 ​ ​ ​ ​ ​ ​ ​ Long term license fees ​ $ — ​ $ 292 ​ ​ Accretion of non-cash interest expense amounted to $ 20 , $ 36 , and $ 11 for the years ended December 31, 2020, 2019 and 2018, respectively. ​ NOTE 9. – SEVERANCE LIABILITY 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. F-20 Table of Contents ​ NOTE 10. – WARRANTS FOR COMMON STOCK 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: ​ ​ ​ ​ ​ ​ Number of ​ ​ Warrants Warrants outstanding at December 31, 2018 ​ 11,293,211 Warrants exercised in Q4 2019 ( 11,293,211 ) Warrants issued in Q4 2019 ​ 11,293,211 Warrants outstanding at December 31, 2020 11,293,211 ​ See Note 17 “Subsequent Events” for information regarding the cash exercise of the outstanding warrants subsequent to December 31, 2020. ​ ​ NOTE 11. – RETIREMENT PLAN 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. 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. ​ F-21 Table of Contents NOTE 12. – COMMITMENTS AND CONTINGENCIES 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 ​ Commitment Counter Party Product Relationship Commitment Type 2021 2022 2023 2024 2025 & After Total Research Agreement ​ KeyGene ​ Hemp / Cannabis ​ Contract fee ​ $ 1,200 ​ $ 1,200 ​ $ 1,200 ​ $ 1,200 ​ $ 300 ​ $ 5,100 (1) License Agreement ​ NCSU ​ Tobacco ​ Annual royalty fee ​ ​ 225 ​ ​ 225 ​ ​ — ​ ​ — ​ ​ — ​ ​ 450 (2), (3) License Agreement ​ NCSU ​ Tobacco ​ Minimum annual royalty ​ ​ 25 ​ ​ 50 ​ ​ 50 ​ ​ 50 ​ ​ 600 ​ ​ 775 (3) License Agreement ​ NCSU ​ Tobacco ​ Minimum annual royalty ​ ​ 50 ​ ​ 50 ​ ​ 50 ​ ​ 50 ​ ​ 500 ​ ​ 700 (3) Research Agreement ​ NCSU ​ Tobacco ​ Contract fee ​ ​ 121 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 121 (4) Sublicense Agreement ​ Anandia Laboratories, Inc. ​ Hemp / Cannabis ​ Annual license fee ​ ​ 10 ​ ​ 10 ​ ​ 10 ​ ​ 10 ​ ​ 110 ​ ​ 150 (5) Growing Agreement ​ Various ​ Various ​ Contract fee ​ ​ 115 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 115 (6) ​ ​ ​ ​ ​ ​ ​ ​ $ 1,746 ​ $ 1,535 ​ $ 1,310 ​ $ 1,310 ​ $ 1,510 ​ $ 7,411 ​ ​ (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 F-22 Table of Contents 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. Litigation - Crede Settlement 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. v. 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. 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 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. ​ Class Action 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. 22nd Century Group, Inc., Henry Sicignano III, and John T. Brodfuehrer , Case No. 1:19-cv-00409 . 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 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 . 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. 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; Count II sues Messrs. Sicignano and Brodfuehrer pursuant to Section 10(b) of the Securities Exchange Act and Rule 10b5(a) and (c); and Count III sues Messrs. 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. F-23 Table of Contents On January 29, 2020, the Company and Messrs. Sicignano and Brodfuehrer filed a Motion to Dismiss the Amended Complaint. 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. We intend to vigorously defend the Company and Messrs. Sicignano and Brodfuehrer against such claims. Shareholder Derivative Cases On February 6, 2019, Melvyn Klein, a resident of Nassau County New York, filed a shareholder derivative claim against the Company, the Company’s then Chief Executive Officer, Henry Sicignano III, the Company’s Chief Financial Officer, John T. Brodfuehrer, and each member of the Company’s Board of Directors in the United States District Court for the Eastern District of New York entitled: Melvyn Klein, derivatively on behalf of 22nd Century Group v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer and 22nd Century Group, Inc ., Case No. 1:19-cv-00748 . Mr. Klein brings this action derivatively alleging that (i) the director defendants supposedly breached their fiduciary duties for allegedly allowing the Company to make false statements; (ii) the director defendants supposedly wasted corporate assets to defend this lawsuit and the other related lawsuits; (iii) the defendants allegedly violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made; and (iv) the director defendants allegedly violated Section 14(a) of the Securities Exchange Act and Rule 14a-9 promulgated thereunder for allegedly approving or allowing false statements regarding the Company to be made in the Company’s proxy statement. 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. v. Henry Sicignano, III, John T. Brodfuehrer, Richard M. Sanders, Joseph Alexander Dunn, James W. Cornell, Nora B. Sullivan and 22nd Century Group, Inc., Index No. 801786/2019 . Mr. 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. v. Henry Sicignano, III, Richard M. Sanders, Joseph Alexander Dunn, Nora B. Sullivan, James W. Cornell, John T. Brodfuehrer, and 22nd Century Group, Inc. , Index No. 807214/2019 . Ms. 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 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. v. James W. Cornell, Richard M. F-24 Table of Contents Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. Broccuto brings this action derivatively alleging three counts: Count I alleges that the defendants breached their fiduciary duties; 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. v. James W. Cornell, Richard M. Sanders, Nora B. Sullivan, Henry Sicignano, III, and John T. Brodfuehrer, Case No. A-20-808599. Mr. 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. ​ NOTE 13. – EARNINGS PER COMMON SHARE 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2020 2019 ​ 2018 ​ ​ (in thousands, except for per-share data) Net loss ​ $ ( 19,711 ) ​ $ ( 26,558 ) ​ $ ( 7,967 ) Weighted average common shares outstanding - basic and diluted ​ ​ 138,813 ​ ​ 125,883 ​ ​ 124,299 Net loss per common share - basic and diluted ​ $ ( 0.14 ) ​ $ ( 0.21 ) ​ $ ( 0.06 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Anti-dilutive shares are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ Warrants ​ ​ 11,293 ​ ​ 11,293 ​ ​ 11,293 Options ​ ​ 6,581 ​ ​ 7,837 ​ ​ 8,672 Restricted stock units ​ ​ 2,938 ​ ​ 951 ​ ​ — ​ ​ ​ 20,812 ​ ​ 20,081 ​ ​ 19,965 ​ ​ NOTE 14. – EQUITY BASED COMPENSATION 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. F-25 Table of Contents 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 ​ ​ ​ ​ Weighted ​ ​ ​ ​ Average ​ ​ Number of ​ Grant-date ​ Shares Fair Value ​ ​ in thousands ​ $ per share Unvested at December 31, 2018 ​ — ​ $ — Granted ​ 1,301 ​ $ 2.21 Vested ​ ( 100 ) ​ $ 2.02 Forfeited ​ ( 250 ) ​ $ 2.02 Unvested at December 31, 2019 951 ​ $ 2.15 Granted 2,885 ​ $ 0.71 Vested ​ ( 325 ) ​ $ 1.07 Forfeited ​ ( 573 ) ​ $ 1.90 Unvested at December 31, 2020 ​ 2,938 ​ $ 0.85 ​ 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. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ Average ​ ​ ​ ​ ​ ​ ​ ​ Average ​ Remaining ​ ​ Aggregate ​ ​ Number of ​ Exercise ​ Contractual ​ ​ Intrinsic ​ Options Price Term Value ​ ​ in thousands ​ $ per share ​ ​ ​ ​ ​ ​ Outstanding at December 31, 2017 8,157 ​ $ 1.28 ​ Granted 1,632 ​ $ 2.64 ​ Exercised ( 613 ) ​ $ 0.87 ​ Expired / cancelled ( 504 ) ​ $ 1.71 ​ Outstanding at December 31, 2018 8,672 ​ $ 1.54 ​ Granted 600 ​ $ 2.07 ​ Exercised ​ ( 75 ) ​ $ 0.93 ​ ​ ​ ​ ​ ​ Forfeited ​ ( 1,360 ) ​ $ 2.09 ​ ​ ​ ​ ​ ​ Outstanding at December 31, 2019 ​ 7,837 ​ $ 1.49 ​ ​ ​ ​ ​ ​ Exercised ​ ( 399 ) ​ $ 1.04 ​ ​ ​ ​ ​ ​ Forfeited ​ ( 169 ) ​ $ 1.83 ​ ​ ​ ​ ​ ​ Expired ​ ( 688 ) ​ $ 1.51 ​ ​ ​ ​ ​ ​ Outstanding December 31, 2020 6,581 ​ $ 1.50 3.9 years $ 3,983 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Exercisable at December 31, 2020 5,737 ​ $ 1.51 3.7 years $ 4,325 ​ 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. F-26 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ 2019 2018 Risk-free interest rate (weighted average) 1.54 % 2.77 % Expected dividend yield — % — % Expected stock price volatility 70 % 90 % Expected life of options (weighted average) 5.15 years 5.61 years ​ 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. 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 . 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2020 2019 2018 Sales, general, and administrative ​ $ 1,526 ​ $ 3,166 ​ $ 1,341 Research and Development ​ 128 ​ 374 ​ 1,846 Total restricted stock and stock option compensation ​ $ 1,654 ​ $ 3,540 ​ $ 3,187 ​ 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. ​ NOTE 15. – INCOME TAXES 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 2018 Current: ​ ​ ​ Federal ​ $ — ​ $ — ​ $ — State ​ — ​ — ​ — Total current ​ $ — ​ $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferred: ​ ​ ​ Federal ​ ​ ( 3,932 ) ​ ( 5,607 ) ​ ( 1,446 ) State ​ ( 200 ) ​ 55 ​ ( 14 ) Total deferred ​ ( 4,132 ) ​ ( 5,552 ) ​ ( 1,460 ) Change in valuation allowance ​ 4,170 ​ 5,552 ​ 1,460 Total income taxes ​ $ 38 ​ $ — ​ $ — ​ F-27 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 2018 Statutory federal rate ( 21.0 ) % ( 21.0 ) % ( 21.0 ) % Other items ( 0.3 ) ( 0.1 ) 0.1 ​ Litigation Settlement — 1.5 ​ Derivative liability — — ( 0.1 ) ​ Stock based compensation 0.7 1.8 2.5 ​ Research and development credit carryforward 0.2 ( 3.3 ) ( 1.2 ) ​ State tax provision, net of federal benefit ( 0.8 ) 0.2 ( 0.1 ) ​ Equity investment — — 1.5 ​ Federal tax rate change — — — ​ Valuation allowance 21.4 20.9 18.3 ​ ​ ​ ​ ​ ​ ​ ​ ​ Effective tax rate (benefit) provision 0.2 % — % — % ​ Individual components of deferred taxes consist of the following as of December 31: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 2019 2018 Deferred tax assets: ​ ​ ​ Net operating loss carry-forward ​ $ 18,498 ​ $ 14,996 ​ $ 11,527 Inventory ​ 115 ​ 52 ​ 21 Stock-based compensation ​ 1,099 ​ 1,049 ​ 813 Start-up expenditures ​ 199 ​ 221 ​ 243 Research and development credit carryforward ​ 1,171 ​ 1,209 ​ 326 Loss on equity investment ​ — ​ — ​ — Accrued bonus ​ 423 ​ 200 ​ 101 Severance liability ​ 122 ​ 134 ​ — Investment in Panacea ​ 360 ​ 40 ​ — Operating lease obligations ​ 52 ​ 127 ​ — Other ​ 29 ​ 22 ​ 20 ​ ​ $ 22,068 ​ $ 18,050 ​ $ 13,051 Deferred tax liabilities: ​ ​ ​ Machinery and equipment ​ ( 237 ) ​ ( 239 ) ​ ( 215 ) Patents and trademarks ​ ( 358 ) ​ ( 351 ) ​ ( 562 ) Gain on investment ​ ( 13 ) ​ ( 104 ) ​ ( 612 ) Accrued expense ​ ( 24 ) ​ ( 51 ) ​ ( 71 ) Operating lease right-of-use assets ​ ( 52 ) ​ ( 126 ) ​ — Other intangible assets ​ ( 224 ) ​ ( 189 ) ​ ( 153 ) ​ ​ ( 908 ) ​ ( 1,060 ) ​ ( 1,613 ) Valuation allowance ​ ( 21,198 ) ​ ( 16,990 ) ​ ( 11,438 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net deferred taxes ​ $ ( 38 ) ​ $ — ​ $ — ​ 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 F-28 Table of Contents 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. ​ NOTE 16. – 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ 2020 2019 Unbilled receivables $ 349 $ 406 Deferred Revenue ​ ​ ( 272 ) ​ ​ ( 5 ) Net contract assets ​ $ 77 ​ $ 401 ​ 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2020 2019 2018 Net sales-over time ​ $ 16,326 ​ $ 16,466 ​ $ 16,785 Net sales-point in time ​ 11,785 ​ 9,367 ​ 9,641 Total Revenue ​ $ 28,111 ​ $ 25,833 ​ $ 26,426 ​ 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. ​ F-29 Table of Contents NOTE 17. – 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) $ 6 ​ Base Rent Annual Increase (Year 2 - onward) ​ 2.5 % Initial Term (months) ​ 36 ​ ​ 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. ​ NOTE 18. – SELECTED QUARTERLY FINANCIAL DATA (unaudited) Below is selected quarterly financial data for the years ended December 31, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ March 31, ​ June 30, ​ September 30, ​ December 31, ​ 2020 2020 2020 2020 Revenue, net ​ $ 7,058 ​ $ 6,435 ​ $ 7,310 ​ $ 7,308 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross (loss) profit ​ $ 287 ​ $ 201 ​ $ 362 ​ $ 588 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss from operations ​ $ ( 4,142 ) ​ $ ( 4,753 ) ​ $ ( 4,040 ) ​ $ ( 6,248 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net loss ​ $ ( 4,028 ) ​ $ ( 5,057 ) ​ $ ( 4,221 ) ​ $ ( 6,405 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss per common share – basic and diluted ​ $ ( 0.03 ) ​ $ ( 0.04 ) ​ $ ( 0.03 ) ​ $ ( 0.04 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ March 31, June 30, September 30, December 31, ​ 2019 2019 2019 2019 Revenue, net ​ $ 6,294 ​ $ 5,815 ​ $ 6,462 ​ $ 7,262 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit ​ $ ( 103 ) ​ $ ( 86 ) ​ $ ( 21 ) ​ $ 225 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss from operations ​ $ ( 5,379 ) ​ $ ( 5,029 ) ​ $ ( 7,606 ) ​ $ ( 5,552 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 2,073 ) ​ $ ( 8,042 ) ​ $ ( 10,245 ) ​ $ ( 6,198 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loss per common share – basic and diluted ​ $ ( 0.02 ) ​ $ ( 0.06 ) ​ $ ( 0.08 ) ​ $ ( 0.05 ) ​ ​ ​ ​ F-30 Table of Contents Item 15(b). Financial Statement Schedules All schedules have been omitted as they are not required, not applicable, or the required information is otherwise included. ​ Item 15(c). Exhibits 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: · 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; · have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; · may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and · 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 . 52 Table of Contents Exhibit No. Description 3.1 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). 3.1.1 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). 3.2 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). 3.2.1 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). 4.1 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) 4.2* Description of Securities Registered Pursuant to Section 12 10.1† 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). 10.2† 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†† 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). 10.3.1 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). 10.4 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). 10.5† Form of Restricted Stock Award Agreement (incorporated by reference to Form 10-Q filed on May 10, 2013). 10.6† Form of Stock Option Award Agreement (incorporated by reference to Form 10-Q filed on May 10, 2013). 10.7† 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). 10.8† 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). 53 Table of Contents 10.9† 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 22, 2019). 10.10†* 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). 10.11†* 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). 10.12 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). 10.13 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). 10.14 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). 10.15 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). 10.16††† 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). ​ ​ ​ 10.17† ​ 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). ​ ​ ​ 10.18† ​ 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). 23.1* Consent of Freed Maxick CPAs, P.C. 31.1* Section 302 Certification. 31.2* Section 302 Certification. 32.1* Written Statement of Principal Executive Officer and Chief Financial Officer pursuant to 18.U.S.C §1350. 101* Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to the Consolidated Financial Statements. 101.INS XBRL Instance Document* 54 Table of Contents 101.SCH XBRL Taxonomy Extension Schema Document* 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document* 101.DEF XBRL Taxonomy Extension Definition Linkbase Document* 101.LAB XBRL Taxonomy Extension Label Linkbase Document* 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document* ​ ​ ​ Exhibit 104 ​ 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 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. ​ 55 Table of Contents ​ ​ SIGNATURES 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. Date: March 11, 2021 By: /s/ James A. Mish James A. Mish Chief Executive Officer (Principal Executive Officer) Date: March 11, 2021 By: /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. Date: March 11, 2021 By: /s/ Nora B. Sullivan Nora B. Sullivan Director Date: March 11, 2021 By: /s/ Richard M. Sanders Richard M. Sanders Director Date: March 11, 2021 By: /s/ Clifford B. Fleet Clifford B. Fleet Director Date: March 11, 2021 By: /s/ Roger D. O’Brien Roger D. O’Brien Director ​ ​ ​ ​ Date: March 11, 2021 By: /s/ Dr. Michael Koganov Dr. Michael Koganov Director ​ ​ ​ ​ ​ ​ ​ ​ 56