What changed in this filing

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Item 9A. Controls and Procedures

2022-03-01 compared with 2021-03-11 · 340 added, 311 removed, 771 unchanged (46% of the section changed)

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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.

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 chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

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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, 2021.

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.

Freed Maxick, CPAs.

P.C., an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued a report, included herein, on the effectiveness of our internal control over financial reporting.

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.

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Other Information.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspection

Not applicable.

Directors, Executive Officers and Corporate Governance.

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Set forth below is information regarding our directors, executive officers, and key personnel as of March 1, 2022:

Chief Executive Officer

Chief Executive Officer and Director

Michael Zercher

President and Chief Operating Officer

Chief Financial Officer

John Franzino

Chief Financial Officer & Treasurer

Chief Administrative Officer

Michael Koganov

Anthony Johnson

(1) Since 2019, Dr.

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

Johnson is co-founder, President, and CEO of Kodikaz Therapeutic Solutions, a next-generation, non-viral gene therapy company, and a founding partner of Buffalo Biosciences, a life science strategic business management firm that supports the evaluation and commercialization of bioscience technologies from concept to market.

Code of Ethics

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

We adopted a Code of Ethics that applies to all our employees.

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

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

Future material amendments or waivers relating

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

To request a copy of our Code of Ethics, please make a written request to our General Counsel, c/o 22nd Century Group, Inc., 500

Seneca Street, Suite 507, Buffalo, New York 14204.

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

Executive Compensation.

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(a) Financial Statements

(b) Financial Statement Schedules

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 0 317 )

Consolidated Financial Statements:

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Notes to Consolidated Financial Statements

(b) Financial Statement Schedules

Form 10-K Summary.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

22nd Century Group, Inc.

Opinion on the Financial Statements

To the Shareholders and the Board of Directors of 22nd Century Group, Inc.

Opinions on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of 22nd 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").

and Subsidiaries (the "Company") as of December 31, 2021 and 2020, 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, 2021, and the related notes and schedules to the consolidated financial statements (collectively, the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Controls Over Financial Reporting”.

Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements 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.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

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

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of

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

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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

Critical Audit Matters

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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.

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.

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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.

evaluating the reasonableness and consistency of the methodology and assumptions applied by management, and obtaining an understanding and testing the operating effectiveness of management’s controls related to the impairment test.

Panacea Life Sciences – restructuring agreement

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.

As discussed in Note 6 to the consolidated financial statements, a conversion of the Panacea Life Sciences, Inc.

(Panacea) investment occurred on June 30, 2021.

As part of this transaction, Exactus, Inc.

(Exactus) fully acquired Panacea and (i)

the Series B Preferred Stock of Panacea owned by the Company was converted into shares of Exactus, and (ii) the convertible note receivable and all accrued interest from Panacea was converted into 1) Panacea owned farm related land and equipment 2) additional shares of Panacea’s Series B Preferred Stock, which was subsequently converted to Exactus common stock and 3) a new non-interest bearing promissory note due June 30, 2026 (the Promissory Note).

All other rights and obligations of the Company were terminated, including the warrant rights and obligation for further investment.

This transaction was accounted for as a non-monetary exchange, resulting in all assets received being recorded at fair value and a gain reflected in the Consolidated Statements of Operations and Comprehensive Loss.

The Promissory Note was recorded net of a discount representing the present value of the payments and is included in Other assets on the balance sheet.

The Company intends to hold the Promissory note to maturity and the associated discount will be amortized into interest income over the term if the note.

The farmland and equipment is included Property, plant and equipment on the balance sheet.

The Company concluded that the common shares in Exactus are considered equity securities with a readily determinable fair value, which are included in Investments on the balance sheet.

Changes in fair value each period are reflected as gains or losses included in net loss in the Statement of Operations and Comprehensive loss.

Due to the magnitude of the assets involved, the complexity of the terms of the agreements, the multiple accounting conclusions required, and the need to determine the fair value of the assets acquired, we identified this transaction as a critical audit matter.

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.

inquiring of management and examining the terms of various agreements to gain an understanding of the transaction;

evaluating accounting conclusions reached;

evaluating assumptions and methodologies used to estimate the fair value of assets acquired;

agreeing pre and post transaction balances to underlying support ensuring such information was complete and accurate in all material respect;

and obtaining and understanding and testing the operating effectiveness of management’s controls related to the transaction.

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

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CONSOLIDATED BALANCE SHEETS

($ in thousands)

($ in thousands, except per-share data)

Current assets:

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Total current assets

Property, plant and equipment:

Machinery and equipment, net

Property, plant and equipment, net

Operating leases right-of-use assets, net

Total property, plant and equipment

Other assets:

Intangible assets, net

Convertible note

Total other assets

LIABILITIES AND SHAREHOLDERS' EQUITY

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Accrued expenses

Accrued payroll

Accrued excise taxes and fees

Accrued severance

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Long-term liabilities:

Notes payable

Operating lease obligations

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Shareholders' equity

10,000,000 preferred shares, $ .00001 par value

300,000,000 common shares, $ .00001 par value

Preferred stock, $ .00001 par value, 10,000,000 shares authorized

Common stock, $ .00001 par value, 300,000,000 shares authorized

Capital stock issued and outstanding :

162,872,875 common shares ( 139,061,690 at December 31, 2020)

Common stock value

Common stock, par value

Capital in excess of par value

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Impairment of Panacea investment

Realized gain on investments

Gain on Panacea investment conversion

Realized gain (loss) on short-term investment securities

Litigation settlement

Gain on the sale of machinery and equipment

Dividend income and other

Gain on the sale of property, plant and equipment

Interest income, net

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Shareholders'

Income (Loss)

Balance at December 31, 2018

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Stock issued in connection with option exercises

Stock issued in connection with RSU vesting

Equity-based compensation

Reclassification of warrant liability to capital in excess of par

Stock issued in connection with litigation expense

Stock issued in connection with Panacea investment

Unrealized gain (loss) on short-term investment securities

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Balance at December 31, 2019

Stock issued in connection with warrant exercises

Stock issued in connection with option exercises

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Equity-based compensation

Stock issued in connection with litigation expense

Stock issued in connection with Panacea investment

Unrealized gain (loss) on short-term investment securities

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Balance at December 31, 2020

Stock issued in connection with RSU vesting

Stock issued in connection with warrant exercises

Stock issued in connection with option exercises

Stock issued in connection with RSU vesting, net of shares withheld for taxes

Stock issued in connection with capital raise

Equity-based compensation

Unrealized gain (loss) on short-term investment securities

Reclassification of losses (gains) to net loss

Balance at December 31, 2021

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Amortization of ROU Asset

Realized gain on the sale of investments

Unrealized (gain) loss on investment

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Gain on the sale of machinery and equipment

Warrant liability (gain) loss

Accretion of non cash interest expense

Accretion of non cash interest income

Gain on Panacea investment conversion

Accretion of non-cash interest expense (income)

Equity-based employee compensation expense

Inventory write-off

(Decrease) increase in inventory reserves

(Increase) decrease in assets:

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Accrued expenses

Accrued payroll

Accrued excise taxes and fees

Accrued severance

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Acquisition of patents, trademarks, and licenses

Acquisition of machinery and equipment

Acquisition of property, plant and equipment

Proceeds from the sale of machinery and equipment

Investment in Panacea

Proceeds from the sale of investments

Sales and maturities of short-term investment securities

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Net proceeds from warrant exercise

Net proceeds from issuance of common stock

Taxes paid related to net share settlement of RSUs

Proceeds from SBA loan

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Patent and trademark additions included in accounts payable

Machinery and equipment additions included in accounts payable

Property, plant and equipment additions included in accounts payable

Right-of-use assets and corresponding operating lease obligations

Patent and trademark additions included in accrued expenses

Licenses acquired with notes payable

Reclassification of warrant liability to capital in excess of par

Stock issued in connection with investment

Panacea investment conversion

See accompanying notes to consolidated financial statements.

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– 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”).

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

(“22nd Century Group”);

(ii) its four wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), Botanical Genetics, LLC (“Botanical Genetics”), and 22nd Century Canada, Inc.

(“22nd Century Group Canada”);

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

and (iv) one wholly-owned subsidiary of Botanical Genetics, 22nd Century Holdings, LLC (“22nd Century Holdings”).

This group of subsidiaries is referred to as collectively with 22nd Century Group as 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.

Nature of Business – 22nd Century Group is a leading agricultural biotechnology and intellectual property company focused on tobacco harm reduction, reduced nicotine tobacco and improving health and wellness through plant science.

22nd Century Ltd performs research and development related to the level of nicotine and other nicotinic alkaloids in tobacco plants and Botanical Genetics performs research and development related to hemp/cannabis plants.

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

22nd Century Holdings and 22nd Century Group Canada are two newly formed subsidiaries where 22nd Century Holdings own and operate the newly acquired Needle Rock Farm assets and 22nd Century Group Canada will allow for future international business opportunities in Canada.

COVID-19 Pandemic – The COVID-19 pandemic has adversely impacted the U.S.

economy and supply chains and created volatility in U.S.

financial markets.

The COVID-19 pandemic has had a minimal impact on the Company’s operations in 2020 and 2021, but there is a risk that state and federal authorities’ responses to the COVID-19 pandemic or another pandemic may disrupt our business in the future.

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.

Foreign currency translation– The functional currency of our foreign subsidiaries is generally the respective local currency.

The translation from the applicable foreign currencies to U.S.

dollars is performed for balance sheet accounts using period-end rates of exchange and for revenue and expense accounts using an average rate of exchange during the period.

The resulting translation adjustments are recognized as a component of AOCI.

Gains or losses resulting from foreign currency denominated transactions are included in selling, general, and administrative expenses.

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

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government agency bonds, U.S.

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

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.

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

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

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

Realized gains and losses on short-term investment securities are recorded in the other income (expense) portion of the Company’s Consolidated Statements of Operations and Comprehensive Loss.

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.

Accounts receivable – The Company extends credit to customers in the normal course of business.

Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts.

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, 2021 and December 31, 2020.

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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 .

Property, plant and equipment – Plant and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives.

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.

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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.

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

The Company’s capitalized intellectual property costs are amortized using the straight-line method over the remaining statutory life of the patent assets in each of the Company’s patent families, which have estimated expiration dates ranging from 2026 to 2042.

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.

License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which have expected expiration dates from 2028 through 2036.

The Company believes that costs associated with becoming a signatory to the MSA, costs related to the acquisition of a predicate cigarette brand and trademarks have indefinite lives.

As such, no amortization is taken.

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

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

If the carrying value of such assets are not recoverable, the carrying value will be reduced to fair value and record the difference as an impairment.

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.

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

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

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

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

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

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

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

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

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

Right-of-use (“ROU”) assets and Lease Obligations – The Company reviews any lease arrangements in accordance with 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 an 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 lease term is determined based on the contractual conditions, including whether renewal options are reasonably certain to be exercised.

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.

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There are no pending audits as of December 31, 2021.

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.

Stock Based Compensation – The Company’s Omnibus Incentive Plan allows for various types of equity-based incentive awards.

Stock based compensation expense is based on awards that are expected to vest over the requisite service periods and are based on the fair value of the award measured on the grant date.

Vesting requirements vary for directors, officers, and employees.

In general, time-based awards fully vest after one year for directors and vest in equal annual installments over a three-year period for officers and employees.

Performance-based awards vest upon achievement of certain milestones.

Forfeitures are accounted for when they 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.

Derivatives –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, if applicable, 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.

During 2020 and 2021, the Company did not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks.

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

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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.

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

The carrying values of these financial instruments approximate fair value.

The Company carries cash equivalents, short-term investment securities, investments, and other assets at fair value which is described further in Note 7.

Investments –The Company’s equity securities are recorded at fair value with changes in fair value included within 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.

The Company considers certain 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.

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.

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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.

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), based on a determination date as of November 15, 2019, which have an effective date beginning after December 15, 2022 and interim periods within those fiscal years.

The Company is evaluating the expected impacts of the ASU.

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.

If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our financial statements and related disclosures.

Inventories at December 31, 2021 and December 31, 2020 consisted of the following:

Inventory - tobacco leaf

Inventory - hemp/cannabis

Inventory - finished goods

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inventory reserve

During the year ended December 31, 2021, the Company wrote off inventory totaling $ 317 which is included within costs of goods sold on the Company’s Consolidated Statement of Operations and Comprehensive Loss.

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

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

– MACHINERY AND EQUIPMENT

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

Cigarette manufacturing equipment

3 or 10 years

– PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net at December 31, 2021 and December 31, 2020 consisted of the following:

Building and leasehold improvements

7 to 40 years

Manufacturing equipment

3 to 10 years

Office furniture, fixtures and equipment

Laboratory equipment

Leasehold improvements

Construction in progress

accumulated depreciation

Machinery and equipment, net

Property, plant and equipment, net

Depreciation expense was $ 633 , $ 688 , and $ 589 for the years ended December 31, 2021, 2020 and 2019, respectively.

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

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

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

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

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

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

During the fourth quarter of 2020, the Company made the decision to not renew its corporate headquarters lease in Williamsville, NY which had an initial term expiring 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 inclusive 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 operated on a month-to-month basis 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.

On January 15, 2021, the Company signed a lease agreement to relocate its corporate headquarters to the Larkinville District in downtown Buffalo, New York.

The Company moved into the new office location in April 2021 and signed an amended lease agreement which revised the original lease commencement date to April 1, 2021.

The lease has a monthly base rent of $ 6 , which escalates 2.5 % annually after the first year, and an initial term of 36 months —with two twenty-four-month optional renewal options at the Company’s discretion.

On July 28, 2021, the Company signed a lease agreement for a new research and development (“R&D”) laboratory in Rockville, MD.

The new laboratory space has over four thousand square feet and will support the Company’s continued growth and R&D partnerships.

The lease has an initial monthly base rent of $ 12 (escalating 2.5 % annually after the first year), a term of 51 months , and commenced on December 1, 2021.

The lease also calls for abatement of 100% of the base rent for the first five months following the lease commencement date.

On October 18, 2021, the Company signed a lease extension for its manufacturing facility and warehouse in North Carolina.

The lease commenced upon expiration of the previous lease term, which was November 1, 2021.

The lease has a monthly base rent of $ 17 and an initial term of twenty-four months —with one twenty-four month renewal option at the Company’s discretion.

The following table summarized the Company’s discount rate and remaining lease terms as of December 31, 2021:

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imputed interest

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

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

The Company also leases warehouse space in North Carolina and a small office space in Paoli, PA which do not fall under ASC 842 and are not included within our Consolidated Balance Sheets.

Operating lease costs for the years ended December 31, 2021, 2020 and 2019, were $ 301 , $ 335 and $ 250 respectively.

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

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

– INTANGIBLE ASSETS

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Amortization expense relating to the above intangible assets for the years ended December 31, 2021, 2020 and 2019 amounted to $ 615 , $ 658 , and $ 836 , 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.

During the year ended December 31, 2021, the Company incurred a charge of $ 78 related to a write-down of our trademarks.

During the years ended December 31, 2020 and 2019, the Company incurred an impairment related to patent intellectual property that either would be expired prior to expected commercialization or did not align to the Company’s strategic objectives.

Impairment expense for the year ended December 31, 2020 and 2019, amounted to $ 176 (cost of approximately $ 448 less accumulated amortization of approximately $ 302 ) and $ 1,142 (cost of $ 2,092 less accumulated amortization of approximately $ 950 ), respectively.

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 $ 387 for patent costs and $ 249 for license fees .

– INVESTMENTS & CONVERTIBLE NOTE RECEIVABLE

– INVESTMENTS & OTHER ASSETS

Investment in Panacea Life Sciences, Inc.

Initial Investment:

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:

The Company’s investment consisted of three instruments:

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

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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.

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

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

The preferred stock carried an annual 10 % cumulative dividend, compounded annually, and had an implicit put option after the fifth anniversary date so long that the stock warrants had not been exercised.

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

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

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

These rights entitled 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.

The value of the stock warrant was allocated to the preferred stock and the convertible note receivable, equally, at 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 for issuing the note at a below market interest rate for similar instruments.

The convertible note receivable and the preferred stock investment were considered available for sale debt securities with a private company that was 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.

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

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

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

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

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

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

The impairment is recorded within the Consolidated Statements of Operations and Comprehensive Loss as “Impairment of Panacea Investment.” During the fourth quarter of 2020, the Company entered into a non-binding agreement with Panacea to potentially restructure the investment and business relationship—including the transfer of an agricultural facility and other assets.

As of December 31, 2020, the Company adjusted certain assets to represent the fair value outlined in the non-binding agreement.

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

(ii) an amendment of transaction documents to remove any future investment rights and obligations of the Company in Panacea, (iii) cancellation of the stock warrant to purchase additional Series B preferred stock;

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

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

Conversion of Panacea Investment:

On June 30, 2021, the Company entered into a Promissory Note Exchange Agreement with Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc.

(“Exactus”) (OTCQB:EXDI) and certain other Panacea shareholders.

Pursuant to the Securities Exchange Agreement, Exactus fully acquired Panacea.

These transactions effected the (i) conversion of all of the Company’s Series B Preferred Stock in Panacea into 91,016,026 shares of common stock in Exactus valued at $ 9,102 as of June 30, 2021 and (ii) the conversion of the Company’s existing debt in Panacea by converting the outstanding $ 7,000 principal balance convertible note receivable and all accrued but unpaid interest thereon for fee simple ownership of Needle Rock Farms ( 224 acres in Delta County, Colorado) and equipment valued at $ 2,248 , $ 500 in Panacea’s Series B Preferred Stock (which was subsequently converted to Exactus common stock under the Securities Exchange Agreement;

this balance is reflected in final shares as stated above), and a new $ 4,300 promissory note (the “Promissory note receivable”) with a maturity date of June 30, 2026 and a 0 % interest rate.

The Promissory note receivable is with a related party of Panacea and is fully secured by a first priority lien on Panacea’s headquarters located in Golden, Colorado.

All other rights and obligations of the Company in Panacea and Panacea’s affiliate, Quintel-MC Incorporated, were terminated by this transaction—including all warrant rights and obligations for future investment.

The conversion was recorded as a non-monetary transaction, based on the fair value of the assets received, and resulted in a gain of $ 2,548 which is included within the Consolidated Statements of Operations and Comprehensive Loss as “Gain on Panacea investment conversion.”

The Promissory note receivable was valued at $ 3,684 ($ 4,300 face value less $ 616 discount) and is included within the Consolidated Balance Sheets as “Other Assets.” The Company intends to hold the Promissory note receivable to maturity and the associated discount will be amortized into interest income over the term of the note.

The ownership of Needle Rock Farms and related equipment is included within “Property, plant, and equipment, net” on the Consolidated Balance Sheets.

The common shares of Exactus, Inc.

are considered equity securities in accordance with ASC 321 and are recorded at fair value—changes in fair value will be included within the statement of operations.

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

On October 25, 2021, Exactus announced the completion of a 1 for 28 reverse stock split as well as an entity name change to Panacea Life Sciences Holdings, Inc (OTCQB:

Panacea Life Sciences Holdings, Inc.

was assigned a temporary stock symbol of “EXDID” which formally changed to “PLSH” after twenty business days.

As a result of the reverse stock split, our 91,016,026 shares were adjusted to 3,250,573 shares.

As of December 31, 2021, the total carrying value of the Company’s investment in Panacea is outlined below, net of 2020 impairment expense:

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Panacea stock warrant

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

Accrued interest on convertible note receivable

(included within prepaid expenses and other assets)

Convertible note receivable

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 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.

Promissory note receivable

Panacea Holdings common stock

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.

In 2018, in connection with the sale of its investment in a Canadian plant biotechnology company, the Company acquired stock warrants to purchase 973,971 common stock of Aurora Cannabis, Inc.

(“Aurora”), a Canadian company (NYSE:

The stock warrants have a five-year contractual term ending August 8, 2023 and had an exercise price of $ 9.37 Canadian Dollars (CAD) per share.

During the second quarter of 2020, Aurora announced a 12 -to-1 reverse stock split 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 warrants 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, 2021 and December 31, 2020 consisted of the following:

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Panacea stock warrant

Panacea Holdings common stock

Total Investments

Convertible note receivable

Promissory note receivable

– FAIR VALUE MEASUREMENTS AND SHORT-TERM INVESTMENTS

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Investment - Aurora stock warrants

Investment - Panacea preferred stock

Convertible note receivable

Investment - Panacea Holdings common shares

December 31, 2020

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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 investment in the Aurora stock 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 92 % and 137 % as of December 31, 2021 and December 31, 2020, 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 .

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

A 20 % increase or decrease in the volatility factor used as of December 31, 2021 would have the impact of increasing or decreasing the fair value measurement of the stock warrants by an average of approximately $ 6 .

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

The investment in Panacea Holdings common shares is considered an equity security with a readily determinable fair value.

The fair value is determined using the quotable market price as of the last trading day of the fiscal quarter.

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.

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Fair Value at December 31, 2019

Unrealized gain as a result of change in fair value

Accretion of interest income on convertible note receivable

Panacea convertible note receivable

Preferred stock in Panacea

Fair Value at December 31, 2019

Unrealized loss as a result of change in fair value

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Fair Value at December 31, 2020

Unrealized loss on Aurora stock warrants

Accretion of interest on Panacea preferred stock

Panacea investment conversion

Fair Value at December 31, 2021

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, 2021 and December 31, 2020:

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Corporate bonds

Convertible note receivable

Investment - Panacea preferred stock

Available for Sale Debt Securities

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Investment - Panacea preferred stock

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

The following table sets forth a summary of the Company’s available-for-sale debt securities from amortized cost basis and fair value by contractual maturity as of December 31, 2021 and December 31, 2020:

Available for Sale Debt Securities

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Due after one year through five years

Due in five years

– NOTES PAYABLE

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

License Agreement.

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

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

As of November 30, 2021, the Company paid the final milestone payment of $ 300 .

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.

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

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

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The Company paid $ 662 as a premium down payment and financed the remaining $ 2,653 of policy premiums over nine months at a 3.49 % annual percentage rate.

During the second quarter of 2020, the Company renewed its 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.

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Total current notes payable

Long term license fees

Accretion of non-cash interest expense amounted to $ 7 , $ 20 , and $ 36 for the years ended December 31, 2021, 2020 and 2019, respectively.

– 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.

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 .

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

– 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.

– CAPITAL RAISE AND WARRANTS FOR COMMON STOCK

On June 7, 2021, the Company entered into a placement agent agreement (the “Placement Agent Agreement”) with Cowen and Company, LLC (the “Placement Agent”) relating to the Company’s registered direct offering (the “Offering”) to a select investor (the “Investor”).

In addition, on June 7, 2021, the Company and the Investor entered into a securities purchase agreement relating to the issuance and sale of shares of common stock pursuant to which the Investor purchased 10,000,000 shares of common stock at $ 4.00 per share.

The net proceeds to the Company from the Offering, after deducting Placement Agent fees and offering expenses, was $ 38,206 .

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 .

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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.

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

On December 22, 2019, the Company entered in to a Warrant Amendment Agreement with the holders of the 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.

During the first quarter of 2021, the Company’s warrant holders exercised all 11,293,211 outstanding warrants for cash in exchange for common stock.

In connection with these exercises, the Company received net proceeds of $ 11,782 .

No warrants remain outstanding as of December 31, 2021.

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

Warrants outstanding at December 31, 2018

Warrants exercised in Q4 2019

( 11,293,211 )

Warrants issued in Q4 2019

Warrants outstanding at December 31, 2019

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

Warrants outstanding at December 31, 2020

( 11,293,211 )

Warrants outstanding at December 31, 2021

– RETIREMENT PLAN

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Minimum annual royalty

Research Agreement

Sublicense Agreement

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Annual license fee

Growing Agreement

Growing Agreements

Consulting Agreements

(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 initial term of the agreement was five years with an option for an additional two years .

On April 30, 2021, the Company and KeyGene entered into a First Amended and Restated Framework Collaborative Research Agreement which extended the agreement term, from first-quarter 2024 to first-quarter 2027, and preserves the Company’s option for an additional 2-year extension, now through first quarter of 2029.

The Company will exclusively own all results and all intellectual property relating to the results of the collaboration with KeyGene (the "Results”).

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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.

(2) The Company is also responsible for reimbursing NCSU 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.

(3) 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 in all countries except for Canada.

Anandia retains all patent rights, and is responsible for all patent maintenance, in Canada.

(4) Various R&D growing agreements for hemp / cannabis and tobacco.

Investment in Panacea - On December 3, 2019, the Company entered into an agreement to obtain a 15.8 % ownership in Panacea.

The Company paid Panacea $ 12,000 in cash and issued shares of 22nd Century common stock with a fair value of $ 1,297 .

The agreement with Panacea also requires the Company to purchase 5,333,334 shares of puttable preferred stock at $ 1.875 when Panacea achieves certain twelve-month sales targets—payable in cash of $ 8,500 and the remainder in common stock of the Company.

The Company recently entered into a non-binding agreement with Panacea which would include an amendment of transaction documents to remove any future investment rights and obligations of the Company.

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

Modified Risk Tobacco Product Application (“MRTP Application”) – In connection with the Company’s MRTP Application for its Very Low Nicotine Content (“VLNC”) cigarettes with the FDA, the Company has entered in various contracts with third-party service providers to fulfill various requirements of the MRTP Application.

Such contracts include services for clinical trials, perception studies, legal guidance, product testing, and consulting expertise.

During the years ended December 31, 2020, 2019 and 2018 the Company incurred expenses relating to these contracts in

the approximate amount of $ 38 , $ 1,679 , and $ 9,775 , respectively.

The Company will continue to incur consulting and legal expenses as the MRTP Application continues through the FDA review process.

The Company cannot currently quantify the additional expenses that the Company will incur in the FDA review process because it will involve various factors that are within the discretion and control of the FDA.

(5) General corporate consulting agreements.

Crede Settlement

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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.

The Second Circuit has granted an expedited briefing schedule and Plaintiff’s/Appellant’s was filed on April 12, 2021 and the Company’s was filed on May 17, 2021.

The Second Circuit heard oral arguments on September 2, 2021 and the matter remains pending with the Second Circuit.

We believe that the claims are frivolous, meritless and that the Company and Messrs.

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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 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.

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We intend to vigorously defend the Company and the individual defendants against such claims.

– 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.

– LOSS PER COMMON SHARE

The following table sets forth the computation of basic and diluted loss per common share for the years ended December 31, 2021, 2020 and 2019, respectively.

Outstanding warrants, options, and restricted stock units were excluded from the calculation of diluted EPS as the effect was antidilutive.

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Net loss per common share - basic and diluted

Anti-dilutive shares are as follows:

Anti-dilutive shares are as follows as of December 31:

Restricted stock units

– 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.

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.

On May 20, 2021, the stockholders of 22nd Century Group, Inc.

(the “Company”) approved the 22nd Century Group, Inc.

2021 Omnibus Incentive Plan (the “2021 Plan”).

The 2021 Plan allows for the granting of equity awards to eligible individuals over the life of the 2021 Plan, including the issuance of up to 5,000,000 shares of the Company’s common stock, in addition to any remaining shares under the Company’s 2014 Omnibus Incentive Plan pursuant to awards under the 2021 Plan.

The 2021 Plan 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 2021 Plan and the number of shares of common stock to underlie each such award under the 2021 Plan.

As of December 31, 2021, the Company had available 7,526,630 shares remaining for future awards under the 2021 Plan.

Restricted Stock Units (“RSUs”) .

We typically grant RSUs to employees and non-employee directors.

The following table summarizes the changes in unvested RSUs from December 31, 2018 through December 31, 2021.

Unvested RSUs

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Unvested at December 31, 2020

Unvested at December 31, 2021

The fair value of RSUs that vested during the years ended December 31, 2021 and 2020 was approximately $ 5,262 and $ 601 , respectively, based on the stock price at the time of vesting.

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Outstanding at December 31, 2018

Expired / cancelled

Outstanding at December 31, 2019

Outstanding at December 31, 2020

Outstanding December 31, 2020

Outstanding at December 31, 2021

Exercisable at December 31, 2021

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The following assumptions were used for the years ended December 31, 2021 and 2019:

Risk-free interest rate (weighted average)

Risk-free interest rate (1)

Expected dividend yield (2)

Expected stock price volatility

Expected life of options (weighted average)

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:

Expected volatility (3)

Expected term of stock options (4)

(1) The risk-free interest rate is based on the period matching the expected term of the stock options based on the U.S.

Treasury yield curve in effect on the grant date.

(2) The expected dividend yield is assumed as zero.

The Company has never paid cash dividends nor does it anticipate paying dividends in the foreseeable future.

(3) The expected volatility is based on historical volatility of the Company’s stock.

(4) The expected term represents the period of time that options granted are expected to be outstanding based on vesting date and contractual term.

Compensation Expense .

The Company recognized the following compensation costs, net of actual forfeitures, related to RSUs and stock options:

Sales, general, and administrative

Research and Development

Total restricted stock and stock option compensation

Total RSUs and stock option compensation

As of December 31, 2021, unrecognized compensation expense amounted to $ 4,685 which is expected to be recognized over a weighted average period of approximately 0.8 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.

In addition, there is approximately $ 517 of unrecognized compensation expense that requires the achievement of certain milestones which are not yet probable.

– 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:

The following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31, 2021, 2020 and 2019:

Total current

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Research and development credit carryforward

Loss on equity investment

Accrued bonus

Severance liability

Investment in Panacea

Unrealized loss on investments

Operating lease obligations

Capital loss on investment

Deferred tax liabilities:

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Net deferred taxes

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 has net operating loss (“NOL”) carryforwards of approximately $ 70,658 as of December 31, 2021, that do not expire.

The Company had accumulated an NOL carryforward of approximately $ 46,920 through December 31, 2017 and this NOL carryforward begins to expire in 2031.

As of December 31, 2021, the Company has a research and development credit carryforward of approximately $ 1,192 that begins to expire in 2031.

The Company has a capital loss carryover of approximately $ 510 as of December 31, 2021, which expires in 2026.

Utilization of these NOL carryforwards may be subject to an annual limitation in the case of equity ownership changes, as defined by law.

Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future, the Company has recorded a valuation allowance

to reduce the net deferred tax asset to zero.

Due to the uncertainty of the Company’s ability to generate sufficient taxable income in the future, the Company has recorded a valuation allowance to reduce the net deferred tax asset to zero.

These carryforwards are included in the net deferred tax asset that has been fully offset by the valuation allowance.

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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.

Revenue from the sale of the Company’s products, which includes excise taxes and shipping and handling charges billed to customers, is recognized net of cash discounts, sales returns and allowances.

There was no allowance for discounts or returns and allowances at December 31, 2021 and

December 31, 2020.

Excise taxes recorded in Cost of Goods Sold on the Consolidated Statement of Operations and Comprehensive Loss for 2021, 2020, and 2019 were $ 10,135 , $ 9,859 , and $ 9,187 , respectively.

Contract Assets and Liabilities

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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.

Deferred revenue (contract liabilities) relates 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.

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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.

Revenue is primarily related to contract manufacturing.

Net sales-over time

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Total Revenue

The Company had certain customers whose revenue individually represented 10% or more the Company’s total revenue.

The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue.

For the year ended December 31, 2021, three customers accounted for approximately 84 % of 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.

For the year ended December 31, 2019, three customers accounted for approximately 93 % of total revenue.

– SUBSEQUENT EVENT

Corporate Office Relocation

On January 15, 2021, the Company signed a lease agreement to relocate its corporate headquarters to the Larkinville District in downtown Buffalo, NY.

Details on the lease are described below ($ in thousands):

Key Lease Terms

$ in thousands

Commencement Date

February 15, 2021

Monthly Base Rent (Year 1)

Base Rent Annual Increase (Year 2 - onward)

Initial Term (months)

In addition, the lease includes two optional, twenty-four-month extensions at the Company’s discretion.

During the first quarter of 2021, the Company will recognize the respective ROU asset and lease liability for the above operating lease.

Warrant Exercises

During February and March of 2021, the Company’s warrant holders exercised 9,577,612 warrants for cash in exchange for common stock.

In connection with these exercises, the Company received net proceeds of $ 9,993 .

On March 10, 2021, the Company’s warrant holders exercised for cash the remaining 1,715,599 outstanding warrants and no outstanding warrants remain.

– SELECTED QUARTERLY FINANCIAL DATA (unaudited)

Below is selected quarterly financial data for the years ended December 31, 2020 and 2019:

Three Months Ended

September 30,

Gross (loss) profit

Loss from operations

Loss per common share – basic and diluted

Three Months Ended

September 30,

Loss from operations

Net income (loss)

Loss per common share – basic and diluted

Investment in Change Agronomy

On December 10, 2021, we entered into a subscription agreement to invest £ 500 (pounds sterling, in thousands), in exchange for 592,888 ordinary shares of Change Agronomy Ltd.

(“CAL”), a private company existing under the laws of England, at a price per share of £ 0.84333 .

CAL is a vertically integrated sustainable industrial hemp business that combines world-class genetics with leading agronomic techniques and infrastructure to provide full-service industrial hemp products to multiple global end markets.

CAL presently has operations in Manitoba, Canada, and Italy.

This equity investment was part of an Offer for Subscription by CAL for a minimum total of £ 3,000 at the same price per ordinary share.

Approximately U.S.

$ 682 in funds were wired to CAL on January 26, 2022, and our investment of £ 500 equates to approximately 1.8 % of CAL’s total equity.

Financial Statement Schedules

All schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.

22nd CENTURY GROUP, INC.

AND SUBSIDIARIES

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

($ in thousands)

Balance at beginning of period

Charged to costs and expenses

Charged to other accounts

Balance at end of period

Valuation allowance on net deferred tax assets:

Year Ended December 31, 2021

Year Ended December 31, 2020

Year Ended December 31, 2019

Allowance for slow moving or obsolete inventory:

Year Ended December 31, 2021

Year Ended December 31, 2020

Year Ended December 31, 2019

In reviewing the agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements.

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1 to Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 of the Company’s Form 8-K filed with the Commission on April 28, 2015).

Form of New Warrant Agreement (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 25, 2019)

Description of Securities Registered Pursuant to Section 12

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Form of Director Restricted Stock Unit Award under 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed with the Commission on March 6, 2019).

Series B Preferred Stock Purchase Agreement, dated as of December 3, 2019, between Panacea Life Sciences., Inc and 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Convertible Note of Panacea Life Sciences., Inc., dated December 3, 2019, issued to 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Warrant to purchase shares of Series B Preferred Stock of Panacea Life Sciences., Inc., dated December 3, 2019, issued to 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Side Agreement, dated as of December 3, 2019, Panacea Life Sciences, Inc., [EMPLOYEE], [EMPLOYEE], [EMPLOYEE], [EMPLOYEE], Quintel-MC Incorporated, and 22nd Century Group, Inc.

(incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on December 3, 2019).

Framework Collaborative Research Agreement, dated as of April 3, 2019, between KeyGene N.V.

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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).

22nd Century Group, Inc.

2021 Omnibus Incentive Plan (incorporated by reference from Appendix A to the Company’s definitive proxy statement filed April 5, 2021)

Form of Option Award Agreement under 22nd Century Group, Inc.

2021 Omnibus Incentive Plan (incorporated by reference to exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on May 21, 2021).

Form of Executive RSU Award Agreement under 22nd Century Group, Inc.

2021 Omnibus Incentive Plan (incorporated by reference to exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on May 21, 2021).

Form of Director RSU Award Agreement under 22nd Century Group, Inc.

2021 Omnibus Incentive Plan (incorporated by reference to exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on May 21, 2021).

First Amended and Restated Framework Collaborative Research Agreement between 22nd Century Group, Inc.

and Keygene N.V.

dated April 16, 2021 (incorporated by reference to exhibit 10.1 of the Company’s Form 10-Q filed with the Commission on August 5, 2021).

Promissory Note Exchange Agreement between 22nd Century Group, Inc.

and Panacea dated June 30, 2021 (incorporated by reference to exhibit 10.2 of the Company’s Form 10-Q filed with the Commission on August 5, 2021).

Securities Exchange Agreement between 22nd Century Group, Inc.

and PLS, Exactus, Inc.

dated June 30, 2021 (incorporated by reference to exhibit 10.3 of the Company’s Form 10-Q filed with the Commission on August 5, 2021).

Employment Agreement between the Company and Richard Fitzgerald (incorporated by reference to exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 19, 2021).

Consent of Freed Maxick CPAs, P.C.

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March 1, 2022

Chief Executive Officer

Chief Executive Officer and Director

(Principal Executive Officer)

March 1, 2022

/s/ John Franzino

John Franzino

/s/ Richard F.

Chief Financial Officer

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Michael Koganov

March 1, 2022

/s/ Anthony Johnson

Anthony Johnson

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures