Item 1. Business
Item 1. Business.
Overview
22nd Century Group, Inc. is a tobacco products company with sales and distribution of our own proprietary new reduced nicotine tobacco products authorized as Modified Risk Tobacco Products by the FDA. Additionally, we provide contract manufacturing services for conventional combustible tobacco products for third-party brands.
Our mission in tobacco is dedicated to mitigating the harms of smoking through our proprietary reduced nicotine content (“RNC”) tobacco plants and our Very Low Nicotine, VLN ® combustible cigarette products. In December 2021, we secured the first and only authorization from the FDA to market a combustible cigarette, our brand VLN ® as a Modified Risk Tobacco Product (“MRTP”) using certain reduced nicotine exposure claims. In April 2022, the inaugural launch of our proprietary VLN ® cigarettes commenced through a pilot program in select Circle K stores in and around Chicago, Illinois. Building on the success of the pilot, we initiated a phased rollout strategy in 2023, progressing state by state and region by region to a store footprint spanning more than 5,000 stores in 26 states. Our VLN ® tobacco products are supported by a substantial intellectual property portfolio comprising issued patents and patent applications related to tobacco plants, and in particular our reduced nicotine tobacco plants.
In addition to continued focus on VLN ® , we renewed our focus on utilizing our tobacco assets to attract additional tobacco business to help fund the growth of VLN ® . In addition to existing business relationships with multiple tobacco products companies, we will continue to expand the number of brands in our contract manufacturing operations (“CMO”) portfolio in 2024.
GVB Divestiture
On December 22, 2023, we completed the sale of substantially all of the GVB hemp/cannabis business (referred to as the “GVB Divestiture”). As a result, we have classified the results of operations of the hemp/cannabis segment and disposal group as discontinued operations in the Consolidated Statements of Operations for all periods presented. Additionally, the associated assets and liabilities linked to the discontinued operations have been designated as held for sale in the Consolidated Balance Sheet as of December 31, 2023 and 2022, respectively. All results and information presented exclude the hemp/cannabis segment and disposal group unless otherwise noted. For more detailed information regarding the divestiture, please refer to Note 2, titled “Discontinued Operations and Divestiture,” in the Notes to Consolidated Financial Statements, which can be found in Item 15 of this report.
Tobacco Overview
Our unwavering commitment is centered around reducing the effects of nicotine from smoking and smoking cessation. We believe we can achieve this mission through the commercialization of our proprietary RNC tobacco plants and cigarette products, prominently featured in our VLN ® brand. These products contain 95% less nicotine content compared to conventional tobacco and cigarettes, which are intended to help users smoke less. The urgency of our mission is underscored by alarming statistics – the FDA publicly acknowledged on July 28, 2017, that tobacco use remains the leading cause of preventable disease and death in the United States. The repercussions include over 480,000 deaths annually and an economic toll of nearly $300 billion in lost productivity and direct health care costs, as reported the U.S. Centers for Disease Control and Prevention (“CDC”).
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Our innovative approach involves utilizing both genetically modified organism (“GMO”) and non-GMO methods to modify and develop proprietary bright, burley, and oriental RNC tobaccos, ensuring they grow with at least 95% less nicotine content. Our SPECTRUM ® research cigarettes, developed 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, have played and continue to play a crucial role in independent clinical studies, with more than 32.8 million variable nicotine research cigarettes provided since 2011. The extensive body of scientific evidenced derived from these studies, published in peer-reviewed journals, including the New England Journal of Medicine and the Journal of the American Medical Association , supports the potential impact of our RNC tobaccos. Smokers who opt for our RNC cigarettes in clinical studies experienced reductions in smoking (measured in cigarettes per day), nicotine exposure, and dependence, coupled with minimal or no evidence of compensatory smoking or withdrawal and without serious adverse events. A list of ongoing as well as completed and published clinical studies using cigarettes made with our RNC tobaccos may be viewed at https://www.xxiicentury.com/vln-clinical-studies/published-clinical-studies-on-very-low-nicotine-content-vlnc-cigarettes . These studies showed that smokers who used for RNC cigarettes increased their frequency of smoke-free days and doubled their efforts to quit smoking. SPECTRUM ® research cigarettes persist as a key component in various independent scientific studies, aimed at substantiating the public health advantage acknowledged by the FDA and other entities. This advantage is associated with the FDA’s proposal to establish a national product standard requiring that all cigarettes incorporate “minimally or nonaddictive” levels of nicotine. Notably, our SPECTRUM ® variable nicotine research cigarettes serve as the precursor to our innovative VLN ® cigarette products.
Our conviction in the significant global market potential of our proprietary RNC cigarettes, marketed under the brand name VLN ® , is rooted in substantial data. As outlined in a 2021 report by the Foundation for a Smoke Free World, global full nicotine cigarette retail sales reached an estimated 84.1% or $612 billion of the $853 billion market for products that contain nicotine. The statistics from the CDC and the World Health Organization (“WHO”) highlight a substantial market, with over 1 billion global adult smokers and 30 million in the U.S.
Despite the prevalence of various nicotine delivery systems, including vaping, our belief is that smokers are actively seeking alternatives to traditional addictive combustible cigarettes. Our confidence is reinforced by consumer perception studies, in which 60% of adult smokers expressed a likelihood to adopt VLN ® as their preferred choice. Importantly, VLN ® is currently available in the market for sale, positioning itself as a viable option for smokers seeking reduced harm alternatives.
Our VLN ® cigarettes are currently available in a large number of top U.S. markets and present a groundbreaking alternative with 95% less nicotine content than conventional cigarettes. Maintaining a familiar combustible product format, VLN ® replicates the conventional cigarette smoking experience, encompassing sensory and experiential elements such as taste, scent, smell, and the familiar “hand-to-mouth” behavior.
The tobacco in VLN ® cigarettes is meticulously crafted to contain a targeted 0.5 milligrams of nicotine per gram of tobacco, a threshold recognized by the FDA, based on clinical studies, as “minimally or non-addictive.” We believe the reduced nicotine content of VLN ® can establish a dissociation between the act of smoking and the rapid introduction of nicotine to the bloodstream, which extensive clinical data indicates helps smokers to smoke less and potentially quit.
The results of numerous completed studies serve as an independent scientific foundation for the FDA’s advanced notice of proposed rule-making (“ANPRM”) on July 28, 2017, which announced FDA’s intention to institute a new rule to require that all combustible cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine, also referred to as the Comprehensive Plan for Tobacco and Nicotine Regulation. Although this proposal has not yet been finalized or adopted by the FDA, the announcement supported our decision to submit and seek modified risk orders under MRTP applications (“MRTPAs”) for our VLN products. On December 23, 2021, we received authorization to market our VLN ® cigarettes as a Modified Risk Tobacco Product (“MRTP”) using certain modified exposure claims.
We initiated efforts to offer our proprietary VLN ® cigarettes for domestic sale after receiving the modified risk granted order. Furthermore, we continue to plan to evaluate opportunities to make VLN ® available for international sale or licensing by third parties.
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Proposed Government Mandates Limiting the Nicotine in Cigarettes.
In a press release dated June 16, 2010, Dr. David Kessler, a former FDA Commissioner, advocated for swift action by the FDA to decrease nicotine levels in cigarettes to non-addictive thresholds. Dr. Kessler emphasized that lowering the stimulus level would consequently diminish cravings, deeming it the “ultimate harm reduction strategy.” Shortly thereafter, in a Washington Post article, Dr. Kessler proposed reducing the nicotine content in cigarettes from approximately 10 milligrams to less than 1 milligram. Notably, VLN ® cigarettes contain between 0.3 to 0.7 mg/g.
In 2015, the WHO Study Group on Tobacco Product Regulation issued an advisory note endorsing a global nicotine reduction strategy, urging limitations on the sale of cigarettes to brands with nicotine content insufficient for addiction development or maintenance. Although the WHO did not specify absolute threshold for addiction, it suggested a likely threshold equal to or possibly less than 0.4 mg/g of dry cigarette tobacco filler. Our proprietary SPECTRUM ® research cigarettes were cited in the WHO study as meeting this low nicotine level criterion at 0.4 mg/g of cigarette tobacco filler.
The WHO report concluded that establishing a maximum allowable nicotine content for all cigarettes could (i) reduce the initiation of smoking and progression to addiction, (ii) decrease smoking prevalence among addicted smokers through behavioral extinction, and (iii) increase quit rates while reducing relapse rates. Emphasizing population-wide benefits, the report highlighted the potential decrease in combusted tobacco use among current cigarette smokers and the prevention of non-smokers, particularly young people, from developing addiction to cigarettes.
On July 28, 2017, in connection with the ANPRM then-FDA Commissioner Scott Gottlieb, M.D., announced the FDA’s intention to use 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. We believe this announcement marked a significant step towards reducing the addictive nature of cigarettes.
Following this announcement, on August 16, 2017, FDA Commissioner Scott Gottlieb, M.D., and Mitchell Zeller, J.D., the Director of the FDA’s Center for Tobacco Products (“FDA/CTP”), authored and titled “A Nicotine-Focused Framework of Public Health,” published in The New England Journal of Medicine . The article discussed the regulatory tool provided by the Tobacco Control Act, known as a tobacco “product standard,” which could be employed to alter the addictiveness of combustible cigarettes. While the statute prohibited reducing nicotine yields to zero, the FDA asserted its clear authority to otherwise reduce nicotine levels. The conclusion drawn was that a nicotine-limiting standard could render cigarettes minimally or non-addictive, aiding current users in quitting and preventing most future users from developing addiction. The FDA emphasized its commitment to being guided by scientific principles in shaping health policy. This commitment was reiterated in the context of addressing nicotine levels in cigarettes, underlining the importance of evidence-based decision-making.
We believe that recent political changes and perceptions towards nicotine addiction have the potential to 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 could refocus on implementing its ground-breaking Comprehensive Plan for Tobacco and Nicotine Regulation, and specifically could renew efforts 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 our VLN ® cigarettes could serve as a powerful catalyst supporting any such policies.
For example, 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. 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.
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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. We believe our research cigarettes will continue to fuel numerous independent, scientific studies that could evaluate the potential benefits suggested by the FDA and others of implementing a national standard requiring all cigarettes to contain minimally or non-addictive levels of nicotine.
The FDA rule making process continued to advance throughout 2023 on both the proposed menthol ban and the proposed reduced nicotine content standard, but announcement of an FDA proposed rule was delayed multiple times for additional public comment and analysis.
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 burley VLN ® tobacco varieties to begin in 2024.We believe that our RNC tobacco technology and our production and delivery of millions of proprietary variable nicotine research cigarettes since 2011 demonstrates the technical achievability of the FDA’s plan to dramatically reduce nicotine in cigarettes.
In the United States, we are focused on working with the FDA on its efforts to reduce nicotine in cigarettes. Outside the United States, we will focus on working with WHO-member countries that desire to utilize our proprietary RNC 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 (MRTP)
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 so-called MRTP, which includes, among other things tobacco products that may (i) reduce harm or the risk of tobacco-related disease or (ii) reduce or eliminate exposure to a substance. The Tobacco Control Act also includes provisions allowing the submission and authorization of a Premarket Tobacco Product Application (“PMTA”) for a new tobacco product, where the PMTA includes scientific data that demonstrates the new tobacco product is appropriate for the protection of public health.
On December 5, 2018, we submitted to the FDA a PMTA and on December 17, 2019, the FDA issued a marketing order in response to our PMTA. While the FDA’s marketing order authorized us to market the products in the U.S., it did not allow us to make reduced exposure claims which would indicate that the product contains 95% less nicotine. Marketing such reduced exposure claims requires the FDA to authorize an MRTPA.
Because of this, on December 27, 2018, we submitted to the FDA an MRTPA, seeking FDA authorization to market our reduced nicotine combustible cigarettes with certain reduced exposure claims. In the MRTPA, we requested authorization from the FDA to market our reduced nicotine tobacco cigarettes with certain product labeling claims under the brand name of VLN ® .
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On December 23, 2021, we secured the 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 reduced exposure claims: “ 95% less nicotine ”, “ Helps reduce your nicotine consumption ”, and “ Greatly reduces your nicotine consumption ,”. The FDA also required that any use of these claims be accompanied by the statement that the product “ Helps You Smoke Less, ” which we consider an evidence-based claim supporting our products.
In previous years, we contracted with farmers to grow considerable quantities of RNC 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. As of March 1, 2024, we have secured regulatory authorizations to sell VLN ® in 48 states and the District of Columbia. At year-end 2023, our phased rollout strategy, progressing state by state and region by region, had placed VLN into a store footprint spanning more than 5,000 stores in 26 states.
Tobacco Master Settlement Agreement
In September 2013, we entered into a Membership Interest Purchase Agreement (the “NASCO Acquisition”) to purchase all 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 our 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.
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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-designated 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. With high-speed manufacturing capabilities we continue to attract additional CMO business to absorb our manufacturing overhead and help keep our unit cost profile low.
In 2023, we leased additional warehouse space in Winston-Salem, North Carolina. This bonded and temperature conditioned space will further support VLN ® growth and provide additional distribution opportunities for customers.
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.
Research & Development (R&D) & Intellectual Property (IP)
Tobacco R&D
Since our inception, most 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.
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. 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. 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 laboratory from Buffalo, New York to Rockville, Maryland, where we were conducting our own proprietary research and development activities in tobacco. In February 2024, we relocated our laboratory activities to our Mocksville, NC manufacturing facility. This reduces the fixed cost of our research and development activities, plus provides us an advantage with the proximity to our factory and NCSU.
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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 RNC 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 by modifying the expression of genes that control the biosynthesis of nicotine in the tobacco plant. Our patent families related to nicotine biosynthesis are expected to expire between 2026 and 2043, 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 to at least one common earlier application).
Plant variety protection (“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 RNC tobaccos are protected by our patent portfolio.
In addition to our patents, patent applications, and PVP certificates, we own various registered trademarks in the United States and around the world. In November 2023, we signed an additional reduced nicotine content technology license with NCSU, providing additional modes of efficiently producing reduced nicotine content tobacco plants and extending our IP portfolio. This license will provide exclusive rights to the technology until 2042.
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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FDA Regulation of Tobacco Products
The Family Smoking Prevention and Tobacco Control Act (“Tobacco Control Act”) amended the Federal Food, Drug, and Cosmetic Act (“FDCA”) to provide the FDA with broad authority to regulate the manufacture, quality control, advertising, promotion, labeling, packaging, storage, distribution, recordkeeping, premarket authorization, post-authorization monitoring and post-authorization reporting of tobacco products, including our tobacco products. Among its authorities, the FDA requires that manufacturers of tobacco products first introduced or modified after February 15, 2007, undergo premarket review and obtain premarket authorization prior to commercialization. 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.
The Tobacco Control Act requires manufacturers of tobacco products to, among, other things, provide FDA with a list of ingredients added to tobacco products in the manufacturing process and register any establishment engaged in the manufacture, preparation, or processing of a tobacco product. 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.
The Tobacco Control Act also authorizes FDA to promulgate regulations requiring that the methods used in, and the facilities and controls used for, the manufacture, preproduction design validation, packing, and storage of a tobacco product conform to current good manufacturing practice (“CGMP”). On March 8, 2023, FDA issued a proposed rule to promulgate such regulations. The proposed rule, if finalized, would establish requirements for manufacturers of finished and bulk tobacco products on the methods used in, and the facilities and controls used for, the manufacture, pre-production design validation, packing, and storage of tobacco product.
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Regulation of Menthol Cigarettes
In April 2022, the FDA announced proposed product standards to prohibit menthol as a characterizing flavor in cigarettes) and prohibit all characterizing flavors (other than tobacco) in cigars. In January 2023, the Semi-Annual Agenda for Fall 2022 was released in the US. Here, the Department of Health and Human Services (HHS), stated that it intended to issue a final rule on Menthol in Cigarettes. This product standard, if enacted, would prohibit menthol as a characterizing flavor in cigarettes. Although this proposed rule was expected to be finalized in August 2023, its implementation has been delayed. There has been increasing activity on the state and local levels with respect to scrutiny of menthol and flavored tobacco products. For example, 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.
Premarket Tobacco Product Application (PMTA)
Certain of our products, including our low nicotine cigarettes, are marketed in the United States pursuant to a PMTA. Under Section 910(b) of the FDCA, a PMTA can be submitted for any new tobacco product seeking a marketing order to enable commercialization of a new tobacco product in the United States. For FDA to grant such an order, the PMTA must enable the FDA to determine that: (1) permitting the marketing of the new tobacco product would be appropriate for the protection of the public health; (2) the methods used in, or the facilities and controls used for, the manufacture, processing, or packing of the product conform to the requirements of Section 906(e) of the FD&C Act (21 U.S.C. 387f(e)); (3) the product labeling is not false or misleading in any particular; and (4) the product complies with any applicable product standard in effect under section 907 of the FDCA or that there is adequate information to justify a deviation from such standard. In determining whether to authorize a PMTA, FDA considers, among other things:
● risks and benefits to the population as a whole, including people who would use the proposed new tobacco product as well as nonusers;
● whether people who currently use any tobacco product would be more or less likely to stop using such products if the proposed new tobacco product were available;
● whether people who currently do not use any tobacco products would be more or less likely to begin using tobacco products if the new product were available; and
● the methods, facilities, and controls used to manufacture, process, and pack the new tobacco product.
Once a PMTA is submitted FDA conducts an initial acceptance review to determine whether the product falls under CTP jurisdiction and to confirm that the statutory and regulatory requirements of an application are met based upon the criteria set forth in the Tobacco Control Act. The FDA endeavors to complete its acceptance review within 21 to 60 days of receipt. If the application does not appear to contain the required information (except for product samples), the FDA may refuse to accept the application for review, and in either case, will notify the applicant. Once accepted for further review, the FDA makes a threshold determination of whether the application contains enough information to permit a substantive review, referred to as “filing,” and may refuse to file any application that does not include sufficient information. Once filed, the FDA intends to complete its review of a PMTA within 180 days of receipt, however the FDA’s review period may be paused or even restarted in response to new information from the applicant, and as such, FDA’s review may take significantly longer than expected. After the FDA completes its review of a PMTA, the FDA may issue a marketing denial order letter, or issue a marketing granted order letter. A marketing granted order becomes effective on the date it is issued in response to a PMTA and permits the new tobacco product to be legally marketed in the United States.
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A marketing order may include restrictions on the sale and distribution of the product, including restrictions on the access to, and the advertising and promotion of, the tobacco product, and unique requirements for record-keeping and post market reporting, among other things. Holders of authorized PMTAs are, among other things, required to submit detailed periodic and annual reports to the FDA within specified timelines, and are further required to submit reports for serious and unexpected adverse events associated with the product. Once granted the FDA may suspend or withdraw any marketing order on various grounds, such as a determination that the continued marketing of the tobacco product is no longer appropriate for the protection of public health, or where the PMTA holder has failed to comply with applicable post-market requirements.
Modified Risk Tobacco Products (MRTP)
Certain of our products, including our VLN® cigarettes, are marketed in the United States as MRTPs. MRTPs are tobacco products that are sold or distributed for use to reduce harm, or the risk of tobacco-related disease associated with commercially marketed tobacco products. Before an MRTP can be introduced or delivered into interstate commerce in the United States, the FDA must issue a either a “risk modification order” or “exposure modification order” pursuant to the Tobacco Control Act. An order permitting the sale of an MRTP, if granted by the FDA, enables the applicant to utilize certain claims with respect to a single, specific product, not an entire class of tobacco products.
To obtain a risk modification order under the FDCA, an applicant must demonstrate that the product, as it is actually used by consumers, will: (i) significantly reduce harm and the risk of tobacco-related disease to individual tobacco users; and (ii) benefit the health of the population as a whole; taking into account both users of tobacco products and persons who do not currently use tobacco products. To obtain an exposure modification order under the FDCA, an applicant must demonstrate that:
● such an order would be appropriate to promote the public health;
● any aspect of the label, labeling, and advertising for the product that would cause the product to be a modified risk tobacco product is limited to an explicit or implicit representation that the tobacco product or its smoke does not contain or is free of a substance or contains a reduced level of a substance, or presents a reduced exposure to a substance in tobacco smoke;
● scientific evidence is not available and, using the best available scientific methods, cannot be made available without conducting long-term epidemiological studies for an application to meet the standards for obtaining a risk modification order; and
● the scientific evidence that is available without conducting long-term epidemiological studies demonstrates that a measurable and substantial reduction in morbidity or mortality among individual tobacco users is reasonably likely in subsequent studies.
Furthermore, for FDA to issue an exposure modification order, FDA must find, among other things, that the applicant has demonstrated that the magnitude of overall reductions in exposure to the substance specified in the application is substantial, that such substance is harmful, that the product as actually used exposes consumers to the specified reduced level of the substance or substances, and will not expose them to higher levels of other harmful substances similar marketed products, unless such increases are minimal and the reasonably likely overall impact of use of the product remains a substantial and measurable reduction in overall morbidity and mortality among individual tobacco users. Notably the FDA also requires the applicant to demonstrate, through testing of actual consumer perception, that consumers will not be misled into believing that the product is or has been demonstrated to be less harmful or presents less of a risk of disease than other commercially marketed tobacco products.
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Similar to its review of PMTAs, once an MRTPA is submitted FDA conducts an initial acceptance review to determine whether the product falls under CTP jurisdiction and to confirm that the statutory and regulatory requirements of an application are met based upon the criteria set forth in the Tobacco Control Act. If the application does not appear to contain the required information, the FDA may refuse to accept the application for review. If and when the MRTP is accepted for further review, the FDA conducts a preliminary scientific review to ensure the application contains the information required for MRTPAs under the FDCA, a process referred to as “filing,” and the FDA may refuse to file any application that does not include the required information. Once filed, the FDA intends to complete its review of the PMTA within 360 days of receipt, however the FDA’s review may take significantly longer. As part of its substantive review, the FDA is required to send the application to the Tobacco Products Scientific Advisory Committee (“TPSAC”) and ask the TPSAC to report its recommendations on the application to the FDA within 60 days. After the FDA completes its review of the MRTPA, including the views expressed by the TPSAC, the FDA may issue a modified risk order letter, or issue a no modified risk order letter. If the FDA grants a risk modification order, the applicant must submit protocols for required post market surveillance for FDA concurrence within 30 days after receiving notice that they are required to conduct such surveillance. If the FDA grants an exposure modification order, the applicant must agree to conduct post market surveillance and studies in accordance with a protocol approved by the FDA. In either case, an FDA order permitting marketing of an MRTP is valid only for the fixed time period specified in the order and is not permanent, and such period may not be longer than five years. To continue marketing an MRTP after the set term, the company must submit a new MRTPA for FDA to determine that the product still satisfies the requirements set forth in the Tobacco Control Act.
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.
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
Although our products are not approved as smoking cessation aids, we believe that our RNC tobacco cigarettes may compete with FDA-approved smoking cessation aids. In the market for FDA-approved smoking cessation aids, 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.
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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.
Human Capital Resources
As of December 31, 2023, we had 64 employees. All employees are located in the United States. 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.
We are a Nevada corporation, and our corporate headquarters is located at 321 Farmington Road, Mocksville, North Carolina 27028. 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.
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