Item 1. Business
Item 1. Business.
Overview
22nd Century Group, Inc. is a leading biotechnology company focused on utilizing advanced alkaloid plant technologies to improve health and wellness with reduced nicotine tobacco, hemp/cannabis and hops. We use modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the consumer goods and pharmaceutical industries by creating new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits. Our mission in tobacco products is dedicated to reduce the harms of smoking by commercializing our proprietary, very low nicotine content “VLNC” tobacco plants and cigarette products. We received the first and only Food and Drug Administration (“FDA”) Modified Risk Tobacco Product (“MRTP”) authorization of a combustible cigarette in December 2021. Beginning in April 2022, we launched our proprietary VLN ® reduced nicotine cigarettes, first through a pilot program conducted in select Circle K stores in and around Chicago, Illinois. Following our successful pilot program, we initiated an ongoing state-by-state, region-by-region rollout strategy.
Our mission in hemp/cannabis is to develop and monetize proprietary varieties of hemp with valuable cannabinoid and terpene profiles and other superior agronomic traits. We are a global scale provider of cannabinoid ingredients and Active Pharmaceutical Ingredients (“API”), as well as a contract development and manufacturing organization (CDMO) provider of hemp-derived consumer products.
In hops, our mission is to leverage our experience with tobacco and hemp/cannabis, a close hop plant relative, to accelerate the development of proprietary specialty hop varieties with valuable traits, for potential applications in life sciences and consumer products.
We have a significant intellectual property portfolio of issued patents and patent applications relating to both tobacco and hemp/cannabis plants and have further resources directed towards creating and securing additional intellectual property pertaining to all three franchises. We continue to prioritize research and development activities to achieve our strategic and investment priorities.
Our Recent Acquisitions
In May 2022, we completed the acquisition of GVB Biopharma ("GVB"), a privately held contract development and manufacturing organization (CDMO). GVB is believed to be one of the largest providers of hemp-derived active ingredients for the pharmaceutical and consumer goods industries worldwide based on total tonnage. GVB has industry-leading market positions and expertise in many facets of the hemp/cannabis industry, which include: research and genetics, proprietary cryogenic hemp extraction; refining, conversion, and product formulation technology; leading supplier of API’s; low-cost, scalable manufacturing capabilities; regulatory and compliance expertise; industry trusted high-quality products; and current international capabilities
We believe that GVB’s strengths complement our existing upstream and downstream value chains, which includes expertise in cannabinoid receptor science with CannaMetrix, plant research, molecular breeding, and proprietary genetics through our KeyGene partnership, and breeding expertise with Extractas Bioscience (formerly Tasmanian Alkaloids PTY). The combination with us results in a vertically integrated, novel cannabinoid value chain by controlling the product cycle from plant genetics to finished ingredients and CDMO formulated products that meet exacting standards required by global consumer and products and pharmaceutical companies.
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The acquisition of GVB has expanded our global footprint adding U.S. and international assets and capabilities. GVB operates three primary manufacturing facilities that have significant capacity to support growth. These three facilities are located in Grass Valley, Oregon (refinement facility), Las Vegas, Nevada (Private Label/Contract Manufacturing), and Prineville, Oregon (crude extraction). GVB’s new Prineville, Oregon facility is one of the largest hemp extraction plants in the world, with expected CBD crude output capacity exceeding 15,000 kg/month at full capacity. The new facility is expected to be fully operational in the first half of 2023, allowing GVB greater vertical integration and improved gross margins as it ramps volume. We are actively pursuing additional business development through both our and GVB’s existing relationships to further accelerate its growth.
In January 2023, we completed the acquisition of RX Pharmatech Ltd (“RXP”), a privately held leading United Kingdom distributor of cannabinoids with 1,276 novel food applications with the U.K. Food Standards Agency (“FSA”). RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others. The U.K. is not accepting new novel food applications for cannabinoid products at this time and denied tens of thousands of product applications earlier in 2022 during the FSA’s first round of screening. Accordingly, we believe this market dynamic could allow us to open new opportunities to land highly accretive contracts with multinationals for quality CBD and hemp-derived consumer products dependent on the novel food licenses.
Tobacco Segment Overview
We are dedicated to reducing the harms of smoking by commercializing our proprietary VLNC tobacco plants and cigarette products, which contain 95% less nicotine than conventional tobacco and cigarettes. The FDA publicly announced on July 28, 2017, that tobacco use remains the leading cause of preventable disease and death in the United States. The website for the U.S. Centers for Disease Control and Prevention (“CDC”) states that tobacco use causes more than 480,000 deaths per year and costs the United States economy nearly $300 billion annually in lost productivity and direct health care costs. The CDC website also states that in 2015, nearly 7 in 10 (68.0%) adult cigarette smokers wanted to stop smoking, and more than 5 in 10 (55.4%) adult cigarette smokers had made a quit attempt in the prior year. That said, CDC statistics state that while more than two-thirds of adult smokers want to quit successfully, less than ten percent of them are able to quit successfully.
Utilizing GMO and non-GMO methods, we have successfully modified and developed unique proprietary bright, burley, and oriental VLNC tobaccos that grow with at least 95% less nicotine than tobacco used in conventional cigarettes. In 2011, we developed our SPECTRUM ® research cigarettes in collaboration with independent researchers, officials from the FDA, the National Institute on Drug Abuse (“NIDA”), which is part of the National Institutes of Health (“NIH”), the National Cancer Institute (“NCI”), and the CDC. Since 2011, we31.6 have provided more than 32.8 million variable nicotine research cigarettes for use in numerous independent clinical studies with agencies of the United States federal government. These independent clinical studies are estimated to have been performed at a cost of more than $125 million. The results of these independent clinical studies have been published in peer-reviewed publications (including the New England Journal of Medicine , the Journal of the American Medical Association , and many others). These studies indicate that use of our VLNC tobaccos have been associated with reductions in smoking (measured in cigarettes per day), nicotine exposure and nicotine dependence with little to no evidence of compensatory smoking and without serious adverse events. A list of ongoing as well as completed and published clinical studies using cigarettes made with our VLNC tobaccos is shown on our website at https://www.xxiicentury.com/vln-clinical-studies/published-clinical-studies-on-very-low-nicotine-content-vlnc-cigarettes . We do not incorporate third party studies or the information on our website into this Annual Report on Form 10-K.
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Our reduced nicotine content cigarettes have been used in more than 50 independent scientific clinical studies by universities and institutions. These studies show that smokers who use our products: (i) reduce their nicotine exposure and dependence, (ii) smoke fewer cigarettes per day, (iii) increase their number of smoke-free days, and (iv) double their quit attempts – all with minimal or no evidence of nicotine withdrawal or compensatory smoking. Our research cigarettes, SPECTRUM ® , continue to be used in numerous independent, scientific studies to validate the enormous public health benefit identified by the FDA and others of implementing a national product standard requiring all cigarettes to contain “minimally or nonaddictive” levels of nicotine. Our SPECTRUM ® variable nicotine research cigarettes are the precursor to our VLN ® cigarette products.
We believe that our proprietary reduced nicotine content cigarettes, sold under the brand name VLN ® , have a large global market opportunity. According to a 2021 report by the Foundation for a Smoke Free World, global nicotine retail sales totaled approximately $853 billion and of that, 84.1% was comprised of combustible cigarettes. According to the CDC and the World Health Organization (“WHO”), there are more than 1 billion global and 30 million U.S. adult smokers. CDC statistics state that while more than two-thirds of adult smokers want to quit, less than ten percent of them are able to quit successfully. Despite the proliferation of vape and other nicotine delivery systems, we believe that smokers are still seeking alternatives to addictive combustible cigarettes. In our consumer perception studies, 60% of adult smokers indicated a likelihood to use VLN ® .
Our VLN ® cigarettes contain 95% less nicotine content than conventional cigarettes in a familiar combustible product format that replicates the conventional cigarette smoking experience, including the sensory and experiential elements of taste, scent, smell, and “hand-to-mouth” behavior. The tobacco in VLN ® cigarettes contain a target of just 0.5 milligrams of nicotine per gram of tobacco, an amount cited by the FDA, based on clinical studies, to be “minimally or non-addictive.” It is believed that the reduced nicotine content of VLN ® creates a dissociation between the act of smoking and the rapid introduction of nicotine to the bloodstream, which helps adult smokers to smoke less.
The results of these numerous completed studies provide the independent scientific foundation for the public announcement on July 28, 2017 by the FDA that the FDA plans to enact a new rule to require that all combustible cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine. This was stated on March 19, 2018, where the FDA publicly announced its Advance Notice of Proposed Rulemaking (“ANPRM”) to solicit public comments on the FDA’s plan to enact a new nicotine reduction rule. On July 16, 2018, we publicly submitted to the FDA our formal written response to the ANPRM in which we described how (i) the FDA’s proposed new rule is supported by rigorous independent, published science, (ii) the FDA’s stated goal to render all cigarettes minimally or non-addictive is immediately feasible as evidenced by our production and delivery of millions of VLNC research cigarettes since the year 2011, and (iii) the FDA’s proposed new rule is exceedingly practical and urgently needed in the interests of public health. On December 23, 2021 we were granted authorization to market our VLN ® cigarettes under a Modified Risk Tobacco Product, modified exposure designation. We subsequently began efforts to offer our proprietary VLNC cigarettes for domestic sale under the brand name of VLN ® within 90 days of the receipt of the Modified Risk Tobacco Product (”MRTP”) marketing order. We also plan to offer VLN ® for international sale and for licensing by third parties. Additional information regarding our regulatory activities with the FDA is described below.
Proposed Government Mandates Limiting the Nicotine in Cigarettes.
In a June 16, 2010 press release, Dr. David Kessler, a former FDA Commissioner, recommended that “the FDA should quickly move to reduce nicotine levels in cigarettes to non-addictive levels. If we reduce the level of the stimulus, we reduce the craving. It is the ultimate harm reduction strategy.” Shortly thereafter in a Washington Post newspaper article, Dr. Kessler said that the amount of nicotine in a cigarette should drop from about 10 milligrams to less than 1 milligram. 22nd Century’s reduced nicotine cigarettes contain between 0.3-0.7 mg/g nicotine.
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In 2015, the World Health Organization (“WHO”) Study Group on Tobacco Product Regulation published an advisory note on a global nicotine reduction strategy of limiting the sale of cigarettes to brands with a nicotine content that is not sufficient to lead to the development and/or maintenance of addiction. The WHO study stated that no specific amount of nicotine has yet been identified by the WHO as the absolute threshold for addiction; however, the WHO report stated that it is likely to be equal to or possibly less than 0.4 mg/g of dry cigarette tobacco filler. The WHO report cites 22nd Century’s proprietary SPECTRUM ® research cigarettes as meeting such a low level of nicotine of 0.4 mg/g of cigarette tobacco filler. The WHO report concluded that the evidence indicates that setting a maximum allowable nicotine content for all cigarettes could (i) reduce the acquisition of smoking and progression to addiction, (ii) reduce the prevalence of smoking in a proportion of addicted smokers as a result of behavioral extinction, and (iii) increase the rate of quitting and reduce the number of smokers who relapse. The WHO report stated that population benefits will result from decreased use of combusted tobacco by current cigarette smokers and from the prevention of addiction of non-smokers to cigarettes, especially among young people.
On July 28, 2017, then FDA Commissioner Scott Gottlieb, M.D., announced the FDA’s plan to exercise its authority under the Tobacco Control Act to require that all combustible cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine.
On August 16, 2017, The New England Journal of Medicine published an article by FDA Commissioner Scott Gottlieb, M.D. and Mitchell Zeller, J.D., the Director of the FDA’s Center for Tobacco Products (“FDA/CTP”), entitled “A Nicotine-Focused Framework of Public Health.” In this article, FDA Commissioner Gottlieb and FDA/CTP Director Zeller stated that the Tobacco Control Act gives the FDA a regulatory tool called a tobacco “product standard” that can be used to alter the addictiveness of combustible cigarettes. Although the statute prohibits the FDA from requiring the reduction of nicotine yields of a tobacco product to zero, the FDA stated in this article that the FDA has clear authority to otherwise reduce nicotine levels. The FDA concluded in this article that a nicotine-limiting standard could make cigarettes minimally addictive or non-addictive, helping current users of combustible cigarettes to quit and allowing most future users to avoid becoming addicted and proceeding to regular use. The FDA stated that, as in all matters of public health policy, the FDA will be led by science in this important area.
In April 2021, the New Zealand government announced a six-week consultation (15 April – 5pm, May 31, 2021) on Proposals for a Smokefree Aotearoa 2025 Action Plan. This consultation included proposals to reduce nicotine in smoked tobacco products to very low levels. The Company returned a detailed, comprehensive submission to the New Zealand Ministry of Health in full support of the Smokefree proposals [Response Identifier 1048733132, publicly available]. The final Smokefree Aotearoa 2025 Action Plan was launched on December 9, 2021[ https://www.health.govt.nz/our-work/preventative-health-wellness/tobacco-control/smokefree-aotearoa-2025-action-plan ].
In December 2022, the New Zealand government parliamentary body passed the Smokefree Environments and Regulated Products (Smoked Tobacco) Amendment Bill requiring all combustible tobacco cigarettes sold in New Zealand to contain no more than 0.8 mg of nicotine per gram of tobacco. After becoming law by Royal Asset later that month, the requirement will take effect within 27 months.
We believe that recent political changes will likely be favorable to our business prospects from a policy priority and regulatory standpoint. Under the new leadership at the FDA and Center for Tobacco Products (“CTP”), we believe that the FDA will refocus on implementing its ground-breaking Comprehensive Plan for Tobacco and Nicotine Regulation, in particular the Agency’s plan to cap the amount of nicotine in combustible cigarettes to a “minimally or non-addictive” level. We believe that the MRTP authorization and the launch of VLN ® serves as a powerful catalyst for the FDA’s proposed policies.
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On January 27, 2022, the FDA posted an update on its FDA Voices site stating that it “remains on track” with its plans to prohibit menthol in combustible tobacco products. We continue to support upcoming FDA action and believe VLN ® Menthol King reduced nicotine cigarettes could be exempted from the menthol ban to help current menthol smokers transition away from highly addictive nicotine cigarettes. The FDA published a proposed tobacco product standard to ban menthol as a characterizing flavor in cigarettes in April 2022. The proposed FDA rule includes a process for firms to request an exemption from the standard for specific products of certain types on a case-by-case basis, indicating “reduced nicotine” as an example of such an exemption. On August 1, 2022, we submitted public comments in support of a tobacco product standard for menthol in cigarettes.
Subsequently, in January 2023 the FDA’s proposed ban on menthol as a flavoring in combustible cigarettes advance to final rule status, with expectations of a final decision in August 2023.
In June 2022, the FDA announced that the Biden-Harris Administration published plans for future regulatory action that includes the FDA’s plans to develop a proposed product standard that would establish a maximum nicotine level to reduce the addictiveness of cigarettes and certain other combusted tobacco products. On June 21, 2022, a proposed rule for a tobacco product standard for nicotine level of certain tobacco products was published in the Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions.
In late October 2022, in coordination with the FDA, the National Institute on Drug Abuse (NIDA), and others, we received an order for 2.8 million variable nicotine cigarettes. Our research cigarettes will continue to fuel numerous independent, scientific studies to validate the enormous public health benefits identified by the FDA and others of implementing a national standard requiring all cigarettes to contain minimally or non-addictive levels of nicotine.
We continue to advance on our reduced nicotine technology as we believe that our next generation, non-GMO plant research is the key to commercializing our reduced nicotine content tobacco and technology in international markets where non-GMO products are preferred or where GMO products are banned. Our patented, non-GMO technology can introduce very low nicotine traits into virtually any variety of tobacco, including bright, burley, and oriental. We have successfully applied our non-GMO technology to bright and burley varieties of tobacco and have initiated commercial growing activities for our non-GMO bright and burley reduced nicotine varieties. We anticipate commercial production of our American blend cigarettes featuring a mix of bright and burly VLN ® tobacco varieties to begin in 2023.We believe that our VLNC tobacco technology and our production and delivery of millions of proprietary variable nicotine research cigarettes since 2011 reflects that the FDA’s plan to dramatically reduce nicotine in cigarettes is technically achievable.
In the United States, we are focused on working with the FDA on its nicotine reduction mandate. Outside the United States, we will focus on working with WHO-member countries that desire to utilize our proprietary VLNC tobacco to implement the WHO recommendation of limiting the sale of cigarettes to brands with a nicotine content that is not sufficient to lead to development and/or maintenance of addiction.
Modified Risk Tobacco Products
The Family Smoking Prevention and Tobacco Control Act of 2009 (“Tobacco Control Act”) granted the FDA authority over the regulation of all tobacco products in the United States. The Tobacco Control Act further establishes procedures for the FDA to regulate the labeling and marketing of Modified Risk Tobacco Products, which includes cigarettes marketed to (i) reduce harm or the risk of tobacco-related disease or (ii) reduce or eliminate exposure to a substance (“Modified Exposure Cigarettes”).
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On December 5, 2018, we submitted to the FDA a new Premarket Tobacco Application (“PMTA”) and on December 27, 2018 we submitted to the FDA a new MRTP application, for our reduced nicotine tobacco cigarettes. Through our applications, we requested a reduced exposure marketing authorization from the FDA to market these products as Modified Exposure Cigarettes with product labeling that includes the brand name of VLN ® and states that VLN ® has 95% less nicotine than conventional cigarettes.
On December 17, 2019, the FDA authorized our PMTA. While the PMTA authorized us to market the products in the U.S. it did not allow us to make product claims which would indicate that the product contains 95% less nicotine. Marketing product claims requires the FDA to authorize an MRTP application.
On December 23, 2021, we secured the world’s first and only MRTP designation for a combustible cigarette for VLN ® King and VLN ® Menthol King 95% reduced nicotine content cigarettes. The FDA authorized the marketing of VLN ® with the following claims, “ 95% less nicotine ”, “ Helps reduce your nicotine consumption ”, and “ Greatly reduces your nicotine consumption ,”. The FDA also proactively added “ Helps You Smoke Less, ” an evidence-based headline claim to our requested claims.
In previous years, we contracted with farmers to grow considerable quantities of VLNC tobacco in anticipation of FDA authorization of our MRTP and subsequent commercial launch of VLN ® cigarettes. In January 2022, at our manufacturing facility in North Carolina, we produced the first cartons of our VLN ® reduced nicotine cigarettes, destined for commercial sale. In April 2022, we launched VLN ® cigarettes in the U.S. market. We believe that the commercialization of VLN ® cigarettes will create further opportunities for us to license our proprietary technology tobaccos and the VLN ® brand.
VLN ® Commercialization Plan
In April 2022, we initiated VLN ® sales in more than 150 Circle K stores in the Chicago metro area through a pilot launch. After the pilot concluded and, given the positive results, we made the decision to further deepen our reach in the state of Illinois and launch VLN ® in Colorado to more than 3,000 potential locations across the state with our network of retailers and distribution partners, including Eagle Rock Distributing Company and Creager Mercantile.
The pilot enabled us to refine our VLN ® rollout strategy and helped us develop our VLN ® Sales Launch Blueprint, an efficient, reproducible sales plan that focuses our resources to achieve the greatest returns. In November 2022, we announced that we intend to expand our VLN ® launch to Arizona, New Mexico, and Utah, and announced plans to expand into up to 18 U.S. states over the following 12 months. In January 2023 we announced distribution partnerships with Core-Mark International and Eby-Brown Company, two of the largest convenience store distributors in the U.S., providing access to retailers in virtually every key U.S. market.
By concentrating and going deeper into select geographies and markets with high cigarette volume and large adult smoker populations, we believe we can capture greater market share effectively. We also plan to target states where there is a tax exemption for MRTP products. As of March 1, 2023, we have secured regulatory authorizations to sell VLN ® in 48 states and the District of Columbia.
To meet anticipated demand for our VLN ® products in the U.S. and elsewhere, we contracted with third parties to plant our largest ever VLN ® tobacco crop in 2022, which includes our second-generation reduced nicotine tobacco plants. We are seeing 30% higher yields, enhanced quality leaf, improved disease resistance, a reduction in nutrient inputs, and increased stability across various environments and geographies. We have also expanded our existing manufacturing operations to increase capacity by 25%, including installation of a new production line and initiation of a second shift.
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Tobacco Master Settlement Agreement
In September 2013, we entered into a Membership Interest Purchase Agreement (the “NASCO Acquisition”) to purchase all of the issued and outstanding membership interests of NASCO, a federally licensed tobacco product manufacturer and subsequent participating manufacturer under the Master Settlement Agreement (“MSA”). The MSA is an accord reached in November 1998 between the State Attorneys General of 46 states, five U.S. territories, the District of Columbia and the five largest tobacco companies in the United States concerning the advertising, marketing and promotion of tobacco products. The MSA also set standards for, and imposes restrictions on, the sale and marketing of cigarettes by participating cigarette manufacturers. On August 29, 2014, we entered into an Amended Adherence Agreement with the 46 Settling States under the MSA pursuant to which the Company was approved to acquire NASCO and become a subsequent participating manufacturer under the MSA. On that same date, we closed the NASCO Acquisition and became a subsequent participating manufacturer under the MSA. NASCO has since been our wholly-owned subsidiary.
Tobacco Manufacturing
We lease a cigarette manufacturing facility and warehouse located in Mocksville, North Carolina. In 2013, we purchased certain (i) cigarette manufacturing equipment, and (ii) equipment parts, factory items, office furniture and fixtures, vehicles and computers from the bankruptcy estate of PTM Technologies, Inc. for approximately $3.2 million.
The facility was primarily in a pre-manufacturing stage during 2014 as we sought approval during that time for us to become a subsequent participating manufacturer under the MSA. On August 29, 2014, we became a subsequent participating manufacturer under the MSA. Since 2015, we have manufactured and sold our SPECTRUM ® variable nicotine research cigarettes, as well as third-party filtered cigar brands and MSA-compliant cigarette brands, at our factory in North Carolina.
The strategic acquisition of our factory has allowed us to become vertically integrated so that we can control production priorities/timing and maintain the required high quality of our products, including our SPECTRUM ® research cigarettes and our MRTP-designation VLN ® brand cigarettes featuring 95% less nicotine than the top 100 leading brands sold in the United States. In January 2022, our cigarette manufacturing facility began production of VLN ® King and VLN ® Menthol King cigarettes.
Tobacco Sources of Raw Materials
We obtain our reduced nicotine tobacco leaf from third party-growers, primarily in multiple states in the United States who are under direct contracts with us. These contracts prohibit the transfer of our proprietary tobaccos, seeds and plant materials to any other party. We purchase conventional tobacco destined for contract manufacturing operations through third parties. In anticipation of the FDA’s authorization of our MRTP application for our VLN ® cigarettes, we increased the amount of tobacco leaf we obtain directly from growers under contract during 2021 and 2022. In 2023, we will again grow substantial quantities of VLNC tobacco to supply the expansion of VLN ® cigarette sales.
Hemp/Cannabis Segment Overview
Following the May 2022 acquisition of GVB, our hemp/cannabis business is a global scale provider of hemp-derived cannabinoid ingredients and API, as well as a CDMO to the consumer goods industry. We are also a solutions provider to companies that utilize cannabinoids in their consumer products, companies looking to optimize their plant genetics and companies seeking large-scale production of high-quality finished products. Our vertically integrated, novel cannabinoid value chain covers elements from receptor science and plant genetics to finished ingredients and CDMO formulated products that meet the exacting standards required by global consumer product and pharmaceutical companies.
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Our innovative product development cycle can potentially produce new, disruptive, and highly differentiated product solutions, including plant lines or ingredients (flower, extracts, distillates, isolates, etc.) derived from hemp/cannabis plants. Most existing hemp/cannabis plant lines do not exhibit the stable genetics, predictable yield, and specific composition of cannabinoids required to fully unlock the value of the hemp/cannabis industry. We believe our plant genetics and innovative upstream cannabinoid value chain provide for rapid development and optimization of plant products and scale-up as the industry evolves toward mass production.
We believe we are set to be one of the largest providers of hemp-derived active ingredients for the pharmaceutical and consumer goods industries worldwide based on total tonnage. We have industry leading market positions and expertise in all facets of the hemp/cannabis industry, which include: research and genetics, proprietary cryogenic hemp extraction; refining, conversion, and product formulation technology; leading supplier of Active Pharmaceutical Ingredients (API); low-cost, scalable manufacturing capabilities; regulatory and compliance expertise; industry trusted high-quality products; current international capabilities
We believe that GVB’s strengths complement our existing upstream and downstream value chains, which includes expertise in cannabinoid receptor science with CannaMetrix, plant research, molecular breeding, and proprietary genetics through our KeyGene partnership, and breeding expertise with Extractas Bioscience (formerly Tasmanian Alkaloids PTY). The combination of the Companies has resulted in a vertically integrated novel cannabinoid value chain by (1) controlling the product cycle from plant genetics to finished ingredients, (2) allows for CDMO formulated products that meet exacting standards required by global consumer products and pharmaceutical companies, and (3) has expanded our global footprint adding U.S. and international assets and capabilities.
At the time of the acquisition, GVB operated three primary manufacturing facilities with significant capacity to support growth with limited capital expenditure. These three facilities are located in Grass Valley, Oregon (refinement facility), Las Vegas, Nevada (Private Label/Contract Manufacturing), and Prineville, Oregon (crude extraction). Our new Prineville, Oregon facility is one of the largest hemp extraction plants in the world, with expected CBD crude output capacity exceeding 15,000 kg/month at full capacity. The new facility is expected to be fully operational in the first half of 2023, allowing us greater vertical integration and improved gross margins as it ramps volume. We are actively pursuing additional business development through both our and GVB’s existing relationships to further accelerate its growth.
During the third quarter 2022, we passed the NSF International Audit with a grade A, and no deficiencies were found and, as a result, we obtained a renewal of our cGMP registration for Dietary Supplements Registration for our manufacturing facilities. NSF is one of the largest third-party compliance and standards organizations globally. It provides testing, auditing, and certification services, assuring suppliers that an independent organization has reviewed a product or system to comply with specific standards for safety, quality, sustainability or performance. Our cGMP registration encompasses dietary supplements, dietary ingredients, and functional food facility certification. With this audit and certification secured, we plan to pursue pharma-grade manufacturing.
In November 2022, a fire occurred at our Grass Valley manufacturing facility in Oregon, where we manufactured bulk ingredients, primarily CBD isolate and distillate. The site was safely evacuated and there were no serious reported injuries; however, there was extensive damage to the manufacturing site. We promptly shifted sourcing to alternate suppliers in order to continue fulfilling customer orders. Operations for bulk ingredient customers will have minor disruptions continuing in the first half of 2023. We are presently establishing interim distillate and isolate production capabilities, which we believe will replace the approximate capacity lost at our Grass Valley facilities. Longer term, we are evaluating options to build a comprehensive production and manufacturing campus with appropriate scale and expansion capabilities to meet both present and future demand requirements for our manufactured bulk ingredients.
In January 2023, we submitted a Drug Master File (DMF) to the FDA to produce and supply cannabinoid-based APIs for the medical and pharmaceutical industries requiring the highest quality cannabinoids in the U.S. We also expect to pursue The International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) Q7 international pharma-grade audit standard certification so we can supply naturally derived hemp/cannabis APIs to companies globally.
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In November 2022, we opened a central distribution facility in the Netherlands to support the growing demand for hemp/cannabis products in Europe, the Middle East, and Africa (EMEA). The facility is intended to speed up transaction flow and optimize cross border tax and customs treatment.
In January 2023, we completed the acquisition of RXP, a privately held distributor of cannabinoids with 1,276 novel food applications with the U.K.’s FSA. RXP has exclusively utilized GVB’s technical data and worked closely with the FSA on developing their highly effective application and compliance programs that secured 1,276 novel food applications. RXP’s products include CBD isolate and numerous variations of finished products like gummies, oils, drops, candies, tinctures, sprays, capsules and others.
Hemp/Cannabis Regulatory Background
On December 20, 2018, the Agricultural Improvement Act of 2018, which is also known as the “2018 Farm Bill,” was enacted and, among other things, further legalized hemp under U.S. federal law, but with compliance still being required with all applicable state hemp laws. The 2018 Farm Bill includes certain benefits for the hemp industry in the United States, including: (i) the extension of the protections for hemp research and researchers and the conditions in which hemp research can be done, (ii) the protection of hemp farmers and hemp production under federal crop insurance programs, (iii) the permitting of the cultivation, interstate transportation and sale of hemp and hemp products in the U.S. in compliance with all other applicable federal and state laws, and (iv) the removal of hemp and hemp derived products from Schedule 1 of the Controlled Substances Act (“CSA”).
As of March 1, 2023, (i) federal law and the laws of 50 states in the United States and the District of Columbia have legalized hemp to at least some degree, (ii) 37 states in the United States, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands have enacted laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis/marijuana and consumer use of cannabis/marijuana in connection with medical treatment, and (iii) 31 states in the United States, the District of Columbia, Guam, and the Northern Mariana Islands have decriminalized cannabis/marijuana for adult recreational use. Many other states are considering similar legislation. Conversely, under the federal CSA, the policies and regulations of the federal government and its agencies are that cannabis/marijuana has no medical benefit and a range of activities are prohibited, including cultivation, possession, personal use and interstate distribution of cannabis/marijuana.
In hemp, we are developing proprietary hemp varieties with increased levels of certain cannabinoids and other desirable agronomic traits with the goal of generating new and valuable intellectual property and plant lines. Our activities in the United States involve only working with legal hemp in full compliance with U.S. federal and state laws. Hemp and marijuana are from the same cannabis genus. One major difference is that hemp does not have more than 0.3% dry weight content of delta-9-tetrahydrocannabinol (“THC”). While the 2018 Farm Bill legalized hemp and cannabinoids extracted from hemp in the U.S., such extracts remain subject to state laws and regulation by other U.S. federal agencies such as the FDA, U.S. Drug Enforcement Administration (“DEA”), and the U.S. Department of Agriculture (“USDA”). The same plant, with a higher THC content is marijuana, which is legal under certain state laws, but is currently not legal under U.S. federal law. The similarities between these plants can cause confusion. To reflect this difference in law, sometimes we refer to legal hemp and the legal hemp industry as hemp/cannabis to distinguish this as being separate and apart from marijuana/cannabis which is not legal under U.S. federal law. Our activities with legal hemp have sometimes been incorrectly perceived as us being involved in federally illegal marijuana/cannabis. This is not the case. In the United States, we work only with legal hemp in full compliance with federal and state laws, and outside the U.S., we operate in full compliance with the laws of each country in which we operate.
In 2022, we expanded our research facilities in Rockville, Maryland with new state of art laboratory with more than 4,500 square feet and obtained a license in the State of Maryland to do research on and grow hemp.
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Hemp/Cannabis Partnerships
In Europe and the United States, we are currently working with KeyGene NV (“KeyGene”), a global leader in plant research involving high-value genetic traits and increased crop yields. In our exclusive collaboration with KeyGene, we are focused on traditional and molecular breeding along with genetic engineering using gene editing and mutagenesis to develop hemp/cannabis plants with exceptional cannabinoid profiles and other superior agronomic traits for medical, therapeutic and agricultural uses, among many other applications. In 2021, we further enhanced our partnership with KeyGene to extend our relationship for an additional three years and to solidify a governance structure whereby we agree on specific research activities to develop intellectual property jointly with KeyGene in the future.
In 2021, we entered into several research contracts with plant breeders and organizations committed to researching the potential effects which cannabis products have on human cell biology. We have evolved our strategy to align with companies which provide for excellent synergies to our research efforts. We continue to review potential candidate companies in the hemp/cannabis field for strategic collaborations, affiliations, joint ventures, investments, and/or acquisitions.
Hops Business Overview
On August 30, 2021, we announced our intention to commence research and development in hops, a plant that possesses similar biological characteristics to hemp/cannabis. We are leveraging our experience with tobacco and hemp/cannabis to accelerate the development of proprietary specialty hop varieties with valuable competitive advantages to increase yields and distinctive aroma, flavor, nutraceutical and medicinal properties, and disease/pest resistance. We believe that our innovative upstream alkaloid plant value chain is critical to unlocking new disruptive hop plant varieties and IP at large-scale. We are leveraging research findings from the closely related hemp/cannabis plant and our strategic partnerships to support the development of our new technologies based on molecular breeding, flowering time, and double haploid breeding to accelerate the stabilization or creation of hop varieties. Industry reliance on high-risk traditional breeding techniques makes hops ripe for disruption with our new accelerated molecular breeding technologies and gene editing tools.
Hops is a large global addressable market with well-established hops providers and consumer brands. We are actively engaged in discussions with multiple hops growers and consumer product partners to develop specific desired traits in leading hop strains that are already well-accepted by the brewing industry. In early 2022, we expanded our exclusive research agreement with KeyGene to identify specific traits which, if appropriately engineered, could benefit consumers of hop products in both the beer and nutraceuticals segment on the industry. We believe hops presents a faster route to commercialization than tobacco and hemp/cannabis due to lower regulatory barriers.
Research & Development (R&D) & Intellectual Property (IP)
Tobacco R&D
Since our inception, the majority of our research and development (“R&D”) efforts have been outsourced to highly qualified groups in their respective fields. Since 1998, we have had multiple R&D agreements with North Carolina State University (“NCSU”) and others resulting in exclusive worldwide licenses to various patented technologies. We have utilized the same model employed by many public-sector research organizations, which entails obtaining an exclusive option or license agreement to any invention arising out of our funded research. In all such cases, we fund and control all patent filings as the exclusive licensee. This model of contracting with public-sector researchers has enabled us to control R&D costs while achieving our desired results, including obtaining exclusive intellectual property rights relating to our outsourced R&D.
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On June 22, 2018, we entered into an amendment to our existing license agreement with NCSU under which we exclusively licensed several bright and burley tobacco plant lines with Very Low Nicotine Content that are not genetically modified (non-GMO) plants. The amendment provided for us to pay NCSU a total exclusive license fee of $1.2 million—refer to Note 8 to our consolidated financial statements for additional information. We will also pay running royalties to NCSU based on a portion of the net sales revenue received by us from sales of products that contain any portions of the plant materials that have been received by us from NCSU.
On October 22, 2018, we entered into a license agreement with the University of Kentucky (“UK”) to license on a non-exclusive basis a next-generation very low nicotine content burley tobacco plant lines that are not genetically modified (non-GMO) plants. The UK license agreement provided for us to pay UK a total license fee of $1.2 million—refer to Note 8 to our consolidated financial statements for additional information. We will also pay running royalties to UK based on a portion of the net sales revenue received from sales of products that contain any portions of the plant materials that have been received from UK.
On December 1, 2021, we relocated our own laboratory from Buffalo, New York to Rockville, Maryland, where we are conducting our own proprietary research and development activities in tobacco. The new laboratory space has over four thousand square feet, is near our strategic research partner, KeyGene, and will help support our continued growth and R&D partnerships.
In 2022, our R&D collaboration with NCSU delivered the proof of concept and field data for a new gene combination (non-GMO) to reduce nicotine below 95%. This unique gene combination enables the production of a better-quality leaf and an increase in yield. In January 2022, a utility patent to protect the new combination was filed. Our exclusive NCSU collaboration also yielded proof of concept and field data for Oriental lines with a 90-95% nicotine reduction. These results will give us the option in the future to produce VLN cigarettes that comprise burley, oriental, and bright tobacco thus improving overall quality. In addition, this year we extended our VLN production field trial to include new burley and flue-cured VLN (non-GMO).
We are currently developing new versions of our VLNC cigarettes utilizing these non-GMO tobacco lines for future commercialization in the U.S. and globally.
Tobacco IP
Our intellectual property enables us to alter the level of nicotine and other nicotinic alkaloids in tobacco plants through genetic engineering and modern plant breeding. The basic techniques include, but are not limited to, those that are used in the production of genetically modified and gene-edited varieties of other crops, which are also known as “biotech crops.”
We have extensive patent protection and exclusive rights covering tobacco plants with altered nicotine content produced from modifying expression of certain genes in the tobacco plant. Our patent families related to nicotine biosynthesis are expected to expire between 2026 and 2041, with certain extensions of terms in the U.S. applications resulting from patent term adjustments at the U.S. Patent and Trademark Office. (A “patent family” is a set of patent applications and patents, filed in various countries, that relate back to at least one common earlier application.). Our Vector 21-41 VLNC tobacco plants with the QPT modification are also protected by plant variety protection (“PVP”), which further restricts third-parties from using such plants.
We also have exclusive plant variety protection rights in the United States and many other countries. PVP certificates are issued in the United States by the U.S. Department of Agriculture. A PVP certificate prevents anyone other than the owner/licensee from planting, propagating, selling, importing or exporting a plant variety for twenty (20) years in the U.S. and, generally, for twenty (20) years in other member countries of the International Union for the Protection of New Varieties of Plants, known as UPOV, an international treaty concerning plant breeders’ rights. There are currently more than 70 countries that are members of UPOV. Our current VLNC tobaccos are protected by our patent portfolio and our Vector 21-41 VLNC tobacco is additionally protected by PVP.
In addition to our patents, patent applications, and PVP certificates, we own various registered trademarks in the United States and around the world.
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Hemp/Cannabis R&D and IP
Our intellectual property and know-how enables us to alter the levels of cannabinoids in cannabis plants through genetic engineering and modern plant breeding. The basic techniques include, but are not limited to, those that are used in the production of genetically modified and gene-edited (new breeding techniques) varieties of other crops. We have developed various types of cannabis plants with agronomically desirable traits for commercial uses and/or unique cannabinoid/terpenoid levels. We believe that we have many types of superior and unique cannabis plant varieties in development, including (i) plants with low to no amounts of THC and other desirable agronomic traits for the legal hemp industry and (ii) plants with high levels of cannabinoids (including CBD and many minor cannabinoids) for use in legal cannabinoid markets.
In September 2014, we entered into a Sublicense Agreement with Anandia (the “Anandia Sublicense”). Under the terms of the Anandia Sublicense, we were granted an exclusive sublicense in the United States and a co-exclusive sublicense in the remainder of the world, excluding Canada, to four U.S. patents and 26 patent applications relating to genes in the cannabis plant that are required for the production of cannabinoids in the cannabis plant or any microorganism, including yeast or bacteria. Three of these patents are essential for all the cannabinoids’ core biosynthesis and one is specific for CBC and derivatives. The Anandia Sublicense continues through the life of the last-to-expire patent, which is expected to be in 2035.
In December 2016, we entered into a sponsored research agreement with the University of Virginia (“UVA”) and an exclusive license agreement with the University of Virginia Patent Foundation d/b/a University of Virginia Licensing & Ventures Group (“UVA LVG”) pursuant to which we invested approximately $1 million over a three-year period with UVA to work on the creation of unique industrial hemp plants with guaranteed levels of THC below the legal limits and to optimize other desirable hemp plant characteristics to improve the plant’s suitability for growing in Virginia and other legacy tobacco regions in the United States.
On October 19, 2017, we announced that UVA had completed its first harvest of our hemp plants and identified several promising hemp varieties that could form the foundation for commercial hemp production throughout the legacy tobacco regions of the United States. The 22nd Century-UVA hemp field trials used multiple varieties of hemp. In 2018 and 2019, we continued to use our proprietary hemp plants for plantings with UVA in Virginia. UVA and 22nd Century conducted all activities in this scientific collaboration within the parameters of state and federal licenses and permits held by UVA for such work. The agreements with UVA and UVA LVG grant us exclusive rights to commercialize all results of the collaboration in consideration of royalty payments by our Company to UVA LVG. This project with UVA completed in December 2019 and all seeds and plants were transferred to KeyGene for further research and development.
Through our partnership with KeyGene, we have completed a deep analysis of several hemp/cannabis lines, established and expanded a proprietary cannabis genomic database, began the sequencing and development of high-quality de novo assemblies of several hemp/cannabis plant lines, and developed novel laboratory analysis techniques. These activities will facilitate our on-going hemp/cannabis research efforts focused on developing hemp/cannabis plants with exceptional cannabinoid profiles and other superior agronomic traits for medical, therapeutic and agricultural uses. Towards this end, we have identified several lines with superior cannabinoids and terpenoids profiles using standard genomics and molecular breeding technologies. Also, we have developed metabolomics methods, male-female flower induction, and rapid cycle breeding.
On February 10, 2021, we announced that we have developed and launched a new, cutting-edge technology platform that will enable us and our strategic partners to quickly identify and incorporate commercially valuable traits of hemp/cannabis plants to create new, stable hemp/cannabis lines. The platform incorporates a suite of proprietary molecular tools and a large library of genomic markers and gene-trait correlations. The platform was developed in collaboration with researchers at KeyGene, a global leader in plant research involving high-value genetic traits and increased crop yields. Using this new breeding technology, we have already characterized millions of high-value single nucleotide polymorphisms (SNPs). SNPs are molecular markers or guideposts within a plant’s genome that indicate important variations in Deoxyribonucleic acid (DNA) sequences. Targeting these newly identified SNPs, we were able to locate and isolate specific sections of genetic code from genome assemblies present in our state-of-the-art hemp/cannabis bioinformatics database.
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Our bioinformatics database continues to grow and already contains hundreds of hemp/cannabis genomes and thousands of expression datapoints across a wide array of hemp/cannabis varieties and phenotypes. The ability to identify specific genetic variations allows researchers to isolate high-value traits, like increased CBD or tetrahydrocannabinol (THC) production, and then introduce those traits in new plant lines using modern plant breeding techniques, including trait tracking using molecular marker profiles and proprietary accelerated breeding.
On December 14, 2021, we announced a three-way non-exclusive agreement to license the Anandia biosynthesis intellectual property jointly owned with Aurora to Cronos Group Inc., intended to assist in the advancement of research and development on the biosynthesis of cannabinoids.
On February 23, 2022, we made a breakthrough in our hemp/cannabis plant research. We successfully transformed the hemp/cannabis plant genome using a proprietary plant transformation and regeneration technology, resulting in clear protein expression by the introduced genes. We are one of the first companies to show proof of the successful modification of the hemp/cannabis plant genome via transformation techniques directly leading to functional protein expression in hemp/cannabis. This new transformation methodology is a critical enabling technology that dramatically enhances our ability to directly and quickly modify specific target genes in hemp/cannabis. This unique know-how adds another essential tool to our modern plant science capabilities that also includes an extensive library of hemp and cannabis germplasm, a genome database, marker-assisted, rapid-cycle molecular breeding, and mutagenesis, all supported by KeyGene’s bioinformatics and genome sequencing capabilities utilizing machine learning and artificial intelligence. Together, these tools are being used to create new, proprietary hemp/cannabis plants tailored to differentiate the content of specific major and minor cannabinoids, terpenoids or eliminate unwanted metabolites to develop new commercial lines tailored to the preferences and needs of end-users, often at a fraction of the time and cost of traditional breeding methods.
In the second quarter of 2022, a significant milestone in our research was the development of gene-editing transformation technology to create non-GMO plants in hemp/cannabis. We led the research with our partner KeyGene for this breakthrough in hemp/cannabis using a proprietary plant transformation and regeneration technology. This development allows us to use macronuclease constructs to gene edit the cannabis biosynthesis pathway. Another 2022 milestone from the KeyGene cannabis collaboration was the successful development of the directed mutagenesis program targeting 30 genes involved in cannabinoid biosynthesis, disease resistance, yield, and terpene regulations. This program will deliver a number of mutational changes (non-GMO) to relevant commercial traits.
In April 2022, we signed a development agreement and license of our hemp/cannabis lines to Extractas Bioscience (Australia). This agreement gives us the capability to enter the Asian/ Pacific region and test our lines for commercialization in the southern hemisphere. In addition, we extended for 2 years our development and exclusive IP license with CannaMetrix company. This collaboration is developing technology based on a cell‐based assay for quantifying the potency (ED50) and efficacy of one or more cannabinoids and terpenoids, alone or in combination, using a cellular transduction mechanism.
Government Regulation
The development, testing, manufacturing, and marketing of our products and potential products are subject to extensive regulation by governmental authorities in the United States and throughout the world.
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Tobacco
The Family Smoking Prevention and Tobacco Control Act (“Tobacco Control Act”) provides the FDA with broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of tobacco products; the authority to require disclosures of related information; and the authority to enforce the Tobacco Control Act and related regulations. While the Tobacco Control Act prohibits the FDA from banning cigarettes outright, or mandating that nicotine levels be reduced to zero, it does allow the FDA to require the reduction of nicotine or other compounds in tobacco and cigarette smoke. The FDA has authority to restrict marketing and advertising, impose regulations on packaging, mandate warnings and disclosure of flavors or other ingredients, prohibit the sale of tobacco products with certain flavors or other characteristics, limit or prohibit the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packaging sizes, and seek to hold retailers and distributors responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. In 2009, the Tobacco Control Act also banned all sales in the United States of cigarettes with flavored tobacco (other than menthol). As of June 2010, all cigarette companies were required to cease use of the terms “low tar,” “light” and “ultra light” in describing cigarettes sold in the United States.
The Tobacco Control Act, its implementing regulations and its 2016 deeming regulations establish broad FDA regulatory authority over all tobacco products and, among other provisions:
● impose restrictions on the advertising, promotion, sale and distribution of tobacco products;
● establish pre-market review pathways for new and modified tobacco products;
● prohibit any express or implied claims that a tobacco product is or may be less harmful than other tobacco products without FDA authorization;
● authorize the FDA to impose tobacco product standards that are appropriate for the protection of the public health; and
● equip the FDA with a variety of investigatory and enforcement tools, including the authority to inspect product manufacturing and other facilities.
Manufacturers of tobacco products must comply with FDA regulations which require, among other things, compliance with the FDA’s evolving regulations on Current Good Manufacturing Practices (“cGMP(s)”), which are enforced by the FDA through its facilities inspection program. The manufacture of products is subject to strict quality control, testing and record keeping requirements, and continuing obligations regarding the submission of safety reports and other post-market information. The FDA has several investigatory and enforcement tools available to it, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures.
In April, 2022, the FDA announced proposed product standards to prohibit menthol as a characterizing flavor in cigarettes (Notice of Proposed Rule Making, NPRM) and prohibit all characterizing flavors (other than tobacco) in cigars. We provided a robust response to the public consultation on the rule in August 2022. We supported the proposed ban of menthol in highly addictive cigarettes and maintain that this rule should not extend to the companies previously authorized PMTA and MRTP products. In January 2023, the Semi-Annual Agenda for Fall 2022 was released in the US. Here, the Department of Health and Human Services (HHS), informed that it currently intends to issue a Final Rule on Menthol in Cigarettes. This product standard would prohibit menthol as a characterizing flavor in cigarettes, and is currently indicated to be issued in August, 2023. Similarly, in 2022, the State of California banned tobacco retailers from selling most flavored and menthol tobacco products, including VLN ® Menthol King. The state of Massachusetts has similar laws prohibiting the sale of flavored tobacco sales, including menthol cigarettes. There has been increasing activity on the state and local levels with respect to scrutiny of menthol and flavored tobacco products.
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We expect significant regulatory developments to take place over the next few years in many markets, driven principally by the World Health Organization’s Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation.
Hemp/Cannabis
On December 20, 2018, the Agricultural Improvement Act of 2018, which is also known as the “2018 Farm Bill,” was enacted and legalized hemp and hemp products under U.S. federal law, but with compliance still being required with all applicable state hemp laws and all regulations developed by the USDA. In addition, the FDA is regulating products derived from hemp, including CBD, for compliance under the Federal Food, Drug and Cosmetic Act and has issued several warning letters to firms marketing CBD products to treat disease or for other therapeutic uses. Under the Federal Food, Drug and Cosmetic Act, any product intended to affect the structure or function of the body of humans or animals is considered a drug that must receive premarket approval by the FDA through its new drug application process.
As of February 1, 2022, (i) federal law and the laws of 47 states in the United States and the District of Columbia have legalized hemp, (ii) 37 states in the United States, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands have enacted laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis/marijuana and consumer use of cannabis/marijuana in connection with medical treatment, and (iii) 18 states in the United States, the District of Columbia, Guam, and the Northern Mariana Islands have legalized cannabis/marijuana for adult recreational use. Many other states are considering similar legislation. Conversely, under the federal CSA, the policies and regulations of the federal government and its agencies are that marijuana has no medical benefit and a range of activities are prohibited, including cultivation, possession, personal use, and interstate distribution of marijuana. In the event the U.S. Department of Justice begins strict enforcement of the CSA in states that have laws legalizing medical and/or adult recreational marijuana, there may be a direct and adverse impact to any future business or prospects that we may have in the marijuana business. Even in those jurisdictions in which the manufacture and use of medical marijuana has been legalized at the state level, the possession, use, and cultivation of marijuana all remain violations of federal law that are punishable by imprisonment and substantial fines. Moreover, individuals and entities may violate federal law if they intentionally aid and abet another in violating these federal controlled substance laws or conspire with another to violate them.
We currently conduct sponsored research on hemp in Maryland and the Netherlands with third parties that possess all necessary permits and licenses to engage legally in such activities. We have conducted hemp research in Virginia, Oregon, and Canada with third-parties and in Colorado and New York with Company personnel, while possessing all necessary permits and licenses to engage legally in such activities. In order to carry out research in other countries, similar licenses are required to be issued by the relevant authority in each country.
Environmental Regulations
We are subject to a variety of federal, state and local environmental laws and regulations. We have developed specific programs across our business units for ensuring high standards of environmental compliance, including, standard operating practices and procedures at our manufacturing facility as well at our research and development centers. We believe that our manufacturing facility complies with all federal, state, and local environmental regulations, including the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act.
In addition, any new products introduced by us are subject to a comprehensive environmental assessment by an independent third-party expert, including an assessment of how such products may create environmental risks. For our PMTA product, the FDA prepared a programmatic environmental assessment (PEA), based on our submitted data in accordance with the Council on Environmental Quality's regulations (40 CFR 1500-1508) implementing the National Environmental Policy Act (NEPA) and FDA’s NEPA regulations (21 CFR 25.40). The PEA concluded that the marketing orders would have no significant impact and that environmental impact statements would not be required.
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Excise Taxes
Tobacco products are subject to substantial excise taxes in the U.S. and other countries. Significant increases in tobacco-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted at the federal, state and local levels within the U.S. and other countries. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies. Federal, state and local cigarette excise taxes have increased substantially over the past two decades. Tax increases have an adverse impact on sales of tobacco products.
Competition
It is possible that our VLNC tobacco cigarettes may compete with FDA-approved smoking cessation aids. In the market for FDA-approved smoking cessation aids, our principal competitors would include Pfizer Inc., GlaxoSmithKline plc, Perrigo Company plc, Novartis International AG, and Niconovum AB, a subsidiary of Reynolds American Inc. The industry consists of major domestic and international companies, most of which have existing relationships in the markets into which we plan to sell, as well as financial, technical, marketing, sales, manufacturing, scaling capacity, distribution and other resources, and name recognition substantially greater than ours. We are also aware that several domestic cigarette companies and other research groups are working to research and grow reduced nicotine tobacco and have filed patent applications.
Cigarette and filtered cigar companies compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing, advertising, retail shelf space, and price. Cigarette sales can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-price products or innovative products, higher taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products. Domestic cigarette competitors included Philip Morris USA Inc., Reynolds American Inc., ITG Brands, and Vector Group Ltd. International competitors included Philip Morris International Inc., British American Tobacco, JT International SA, Imperial Brands plc, and regional and local tobacco companies; and in some instances, government-owned tobacco enterprises such as the China National Tobacco Corporation.
In the hemp/cannabis and hop industries, there are numerous companies conducting research and development on the hemp/cannabis and hop plants in order to develop new and differentiated products. Our competitors in the hemp/cannabis industry are primarily smaller or niche companies focused in a specific product or service as opposed to our vertically integrated business model. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages that we believe we derive from our research approach and proprietary technologies.
Human Capital Resources
As of December 31, 2022, we had 198 employees, of which 99 are attributable to the acquisition of GVB. Substantially all employees are located in the United States and we consider our employee relations to be good. Our human capital resource objectives are designed to attract, and retain, highly motivated and well qualified employees. We believe that we offer a competitive compensation package and have also worked diligently to provide a flexible and safe work environment.
Corporate Information
22nd Century Group, Inc. was incorporated under the laws of the State of Nevada on September 12, 2005 under the name Touchstone Mining Limited. On January 25, 2011, we entered into a reverse merger transaction with 22nd Century Limited, LLC, which we refer to herein as the “merger.” Upon the closing of the merger, 22nd Century Limited, LLC became our wholly-owned subsidiary. After the merger, we succeeded to the business of 22nd Century Limited, LLC as our sole line of business.
22nd Century Limited, LLC was originally formed as a New York limited liability company on February 20, 1998 as 21st Century Limited, LLC and subsequently merged with a newly-formed Delaware limited liability company, 22nd Century Limited, LLC, on November 29, 1999.
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We are a Nevada corporation and our corporate headquarters is located at 500 Seneca Street, Suite 507, Buffalo, New York 14204. Our telephone number is (716) 270-1523. Our internet address is www.xxiicentury.com. All of our filings with the Securities and Exchange Commission, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K can be accessed free of charge through our website promptly after filing; however, in the event that the website is inaccessible, we will provide paper copies of our most recent Annual Report on Form 10-K, the most recent Quarterly Report on Form 10-Q, Current Reports filed or furnished on Form 8-K, and all related amendments, excluding exhibits, free of charge upon request. These filings are also accessible on the SEC’s website at www.sec.gov . We do not incorporate the information on our website into this Annual Report on Form 10-K and our web site address is included as an inactive textual reference only.