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What changed in 22nd Century Group, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of 22nd Century Group, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+356 added−471 removedSource: 10-K (2024-03-28) vs 10-K (2023-03-09)

Top changes in 22nd Century Group, Inc.'s 2023 10-K

356 paragraphs added · 471 removed · 190 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

69 edited+57 added−119 removed32 unchanged
Biggest changeIn 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.
Biggest changeThe 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. 12 Table of Contents 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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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 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 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.
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.
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.
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.
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 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.
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. 15 Table of Contents 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.
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.
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.
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. ​
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. ​ 16 Table of Contents
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.
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.
The PEA concluded that the marketing orders would have no significant impact and that environmental impact statements would not be required. 19 Table of Contents Excise Taxes Tobacco products are subject to substantial excise taxes in the U.S. and other countries.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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 August 1, 2022, we submitted public comments in support of a tobacco product standard for menthol in cigarettes. 7 Table of Contents 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.
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.
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.
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 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 the MRTP authorization and the launch of VLN ® serves as a powerful catalyst for the FDA’s proposed policies. 8 Table of Contents 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 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.
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.
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.
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.
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 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.
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.
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 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.
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.
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.
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. 20 Table of Contents We are a Nevada corporation and our corporate headquarters is located at 500 Seneca Street, Suite 507, Buffalo, New York 14204.
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.
In the United States, we are focused on working with the FDA on its nicotine reduction mandate.
In the United States, we are focused on working with the FDA on its efforts to reduce nicotine in cigarettes.
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.
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).
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 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.
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.
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.
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. 17 Table of Contents 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.
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. 11 Table of Contents 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.
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 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.
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.
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.
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. 10 Table of Contents 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”).
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”).
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.
Plant variety protection (“PVP”) certificates are issued in the United States by the U.S. Department of Agriculture.
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.
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 ,”.
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.
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. 9 Table of Contents 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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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. 14 Table of Contents 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.
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.
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 .
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.
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.
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 .
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.
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 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”). 9 Table of Contents 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.
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.
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.
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 ® . 8 Table of Contents 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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
We believe that recent political changes will likely be favorable to our business prospects from a policy priority and regulatory standpoint.
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.
Our telephone number is (716) 270-1523. Our internet address is www.xxiicentury.com.
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.
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.
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.
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. 7 Table of Contents 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.
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.
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 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.
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.
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.
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 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.
There has been increasing activity on the state and local levels with respect to scrutiny of menthol and flavored tobacco products. 18 Table of Contents 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”).
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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 ® .
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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.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThere can be no assurance that the FDA will implement such new regulations or, if implemented, when such regulations would take effect or whether such regulations would increase or create demand for our VLNC cigarettes. 24 Table of Contents The commercial success of our VLNC tobacco cigarettes will depend on a number of factors, including, but not limited to our ability to: ● achieve, maintain and grow market acceptance of, and demand for, such products; ● successfully create consumer awareness of such products; ● market the product with the phrase “ Helps You Smoke Less ”; ● maintain, manage or scale the necessary sales, marketing, manufacturing and other capabilities and infrastructure that are required to successfully commercialize such products; ● grow or otherwise maintain an adequate supply of VLNC tobacco; ● maintain and extend intellectual property protection for such products; ● comply with applicable legal and regulatory requirements, including FDA and MSA regulations on advertising; ● competitively price our products; ● compete with other similar products or new technologies (if any); ● obtain cost-effective distribution outlets; and ● effectively sell our products into established markets where there is substantial market dominance by large tobacco enterprises.
Biggest changeThe commercial success of our RNC tobacco cigarettes will depend on a number of factors, including, but not limited to our ability to: ● achieve, maintain and grow market identify of, acceptance of, and demand for, such products; ● successfully create consumer awareness of such products; ● market the product with the phrase “ Helps You Smoke Less ” and any other required warnings or statements; ● maintain, manage or scale the necessary sales, marketing, manufacturing and other capabilities and infrastructure that are required to successfully commercialize such products; ● grow or otherwise maintain an adequate supply of RNC tobacco; ● maintain and extend intellectual property protection for such products; ● comply with applicable legal and regulatory requirements, including FDA and MSA regulations or requirements with respect to product advertising and our obligations in connection with our PMTAs and MRTPs; ● competitively price our products; ● compete with other similar products or new technologies (if any); ● obtain cost-effective distribution outlets; and ● effectively sell our products into established markets where there is substantial market dominance by large tobacco enterprises.
Product liability claims, product recalls, or other claims could cause us to incur losses or damage our reputation. The risk of product liability claims or product recalls, and associated adverse publicity, is inherent in the development, manufacturing, marketing, and sale of tobacco products.
Product liability claims, product recalls, or other claims could cause us to incur losses or damage our reputation. The risk of product liability claims, product recalls, and associated adverse publicity, is inherent in the development, manufacturing, marketing, and sale of tobacco products.
However, a failure of our systems to function as intended, or penetration of our systems by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could place us at a competitive disadvantage, result in a loss of revenue, assets or personal or other sensitive data, litigation and regulatory action, cause damage to our reputation and that of our brands and result in significant remediation and other costs.
However, a failure of our systems to function as intended, or penetration of our systems by outside parties intent on extracting or corrupting information or otherwise disrupting business processes, could interrupt our business and place us at a competitive disadvantage, result in a loss of revenue, assets or personal or other sensitive data, litigation and regulatory action, cause damage to our reputation and that of our brands and result in significant remediation and other costs.
Our competitors may: ● develop and market similar or new products that are less expensive, safer, or otherwise more appealing than our products; ● develop similar or new technologies and products that render our products obsolete; ● operate larger research and development programs or have substantially greater financial resources than we do; ● have greater success in recruiting skilled technical and scientific workers from the limited pool of available talent; ● more effectively negotiate third-party licenses and strategic relationships; ● commercialize competing products before we or our partners can launch our products; ● be more effective in marketing and creating brand awareness of their products that we are; ● develop tobacco or hemp plants with superior traits to ours; ● initiate or withstand substantial price competition more successfully than we can; and/or ● take advantage of acquisition or other opportunities more readily than we can.
Our competitors may: ● develop and market similar or new products that are less expensive, safer, or otherwise more appealing than our products; ● develop similar or new technologies and products that render our products obsolete; ● operate larger research and development programs or have substantially greater financial resources than we do; ● have greater success in recruiting skilled technical and scientific workers from the limited pool of available talent; ● more effectively negotiate third-party licenses and strategic relationships; ● commercialize competing products before we or our partners can launch our products; ● be more effective in marketing and creating brand awareness of their products that we are; ● develop tobacco with superior traits to ours; ● initiate or withstand substantial price competition more successfully than we can; and/or ● take advantage of acquisition or other opportunities more readily than we can.
Even if we develop marketable products, we may not be able to obtain the necessary approvals or marketing authorizations for these potential products or our anticipated time of bringing these potential products to the market may be substantially delayed. The development of new products is costly, time-consuming, and has no guarantee of success.
Even if we develop marketable products, we may not be able to obtain the necessary marketing authorizations for these potential products or our anticipated time of bringing these potential products to the market may be substantially delayed. The development of new products is costly, time-consuming, and has no guarantee of success.
The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: ● general economic conditions, including adverse changes in the global financial markets; ● actual and anticipated fluctuations in our quarterly financial and operating results; ● developments or disputes concerning our intellectual property or other proprietary rights; ● introduction of technological innovations or new commercial products by us or our competitors; ● issues in manufacturing or distributing our products or potential products; ● market acceptance of our products or potential products; ● FDA or other United States or foreign regulatory actions affecting us or our industry; ● litigation or public concern about the safety of our products or potential products; ● negative press or publicity regarding us or our common stock; ● the announcement of litigation against us or the results of on-going litigation; ● additions or departures of key personnel; ● third-party sales of large blocks of our common stock or third party short-selling activity; ● third-party articles regarding us or our securities; ● pending or future shareholder litigation; ● sales of our common stock by our executive officers, directors, or significant stockholders; and ● equity sales by us of our common stock or securities convertible into common stock to fund our operations.
The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock: ● general economic conditions, including adverse changes in the global financial markets; ● actual and anticipated fluctuations in our quarterly financial and operating results; ● developments or disputes concerning our intellectual property or other proprietary rights; ● introduction of technological innovations or new commercial products by us or our competitors; 30 Table of Contents ● issues in manufacturing or distributing our products or potential products; ● market acceptance of our products or potential products; ● FDA or other United States or foreign regulatory actions affecting us or our industry; ● litigation or public concern about the safety of our products or potential products; ● negative press or publicity regarding us or our common stock; ● the announcement of litigation against us or the results of on-going litigation; ● additions or departures of key personnel; ● third-party sales of large blocks of our common stock or third party short-selling activity; ● third-party articles regarding us or our securities; ● pending or future shareholder litigation; ● sales of our common stock by our executive officers, directors, or significant stockholders; and ● equity sales by us of our common stock or securities convertible into common stock to fund our operations.
There can be no assurance about whether any third-parties will or will not be successful in such efforts, how long or short in time such efforts will entail and/or if such efforts will or will not infringe other genes and other intellectual property on which we have continuing patent protection that would need to be used, in combination with QPT, to result in VLNC tobacco.
There can be no assurance about whether any third-parties will or will not be successful in such efforts, how long or short in time such efforts will entail and/or if such efforts will or will not infringe other genes and other intellectual property on which we have continuing patent protection that would need to be used, in combination with QPT, to result in RNC tobacco.
If our competitors develop very low nicotine tobacco without infringing on our intellectual property or other products that are less expensive, safer or otherwise more appealing than our VLNC cigarettes or any of our other potential products, or that reach the market before ours, we may not achieve commercial success.
If our competitors develop very low nicotine tobacco without infringing on our intellectual property or other products that are less expensive, safer or otherwise more appealing than our RNC cigarettes or any of our other potential products, or that reach the market before ours, we may not achieve commercial success.
In the absence of an active trading market for our common stock, shares of common stock may not be able to be resold at or above the purchase price of such shares. Although there can be no assurances, we expect that our common stock will continue to be listed on the NASDAQ Capital Market (“NASDAQ”).
In the absence of an active trading market for our common stock, shares of common stock may not be able to be resold at or above the purchase price of such shares. Although there can be no assurances, we expect that our common stock will continue to be listed on the NASDAQ.
Since our VLNC tobacco is not widely available and must be grown specifically for our potential products, any shortage in such tobacco could prevent us from increasing sales to meet demand and any surplus could result in inventory obsolescence and become a total loss.
Since our RNC tobacco is not widely available and must be grown specifically for our potential products, any shortage in such tobacco could prevent us from increasing sales to meet demand and any surplus could result in inventory obsolescence and become a total loss.
In addition, although we expect that our VLN® Menthol King reduced nicotine cigarettes will be exempted from FDA’s menthol ban on cigarettes, there is no guarantee that they will be exempted by the FDA or any other state or local government.
In addition, although we believe that our VLN® Menthol King reduced nicotine cigarettes will be exempted from FDA’s menthol ban on cigarettes, there is no guarantee that they will be exempted by the FDA or any other state or local government.
In addition, in the future, we may need to record litigation reserves with respect to these matters. Further, 39 Table of Contents regardless of how these matters proceed, it could divert our management’s attention and other resources away from our business. Future sales of our common stock will result in dilution to our common stockholders.
In addition, in the future, we may need to record litigation reserves with respect to these matters. Further, regardless of how these matters proceed, it could divert our management’s attention and other resources away from our business. Future sales of our common stock will result in dilution to our common stockholders.
Our inability to incorrectly estimate demand for future products could negatively harm our operating results and financial condition. 25 Table of Contents The manufacturing of tobacco products subjects us to significant governmental regulation and the failure to comply with such regulations could have a material adverse effect on our business and subject us to substantial fines or other regulatory actions.
Our inability to incorrectly estimate demand for future products could negatively harm our operating results and financial condition. The manufacturing and sale of tobacco products subjects us to significant governmental regulation and the failure to comply with such regulations could have a material adverse effect on our business and subject us to substantial fines or other regulatory actions.
Any significant change in tobacco leaf prices or taxes, quality and quantity could affect our profitability and our business. We distribute and sell our products outside of the U.S., which subjects us to other regulatory risks.
Any significant change in tobacco leaf prices or taxes, quality and quantity could affect our profitability and our business. 24 Table of Contents We distribute and sell our products outside of the U.S., which subjects us to other regulatory risks.
In addition, large companies have the ability to provide entry-level pricing for premium products in order make us less competitive. If we 21 Table of Contents are unable to compete successfully against larger companies with more financial resources and name recognition, our business and prospects would be materially adversely affected.
In addition, large companies have the ability to provide entry-level pricing for premium products in order make us less competitive. If we are unable to compete successfully against larger companies with more financial resources and name recognition, our business and prospects would be materially adversely affected.
The similarities between these plants can cause confusion, and our activities with legal hemp may be incorrectly perceived as us being involved in federally illegal marijuana. Also, despite growing support for the marijuana industry and legalization of marijuana in certain U.S. states, many individuals and businesses remain opposed to the marijuana industry.
The similarities between these plants can cause confusion, and our previous activities with legal hemp may be incorrectly perceived as us having been involved in federally illegal marijuana. Also, despite growing support for the marijuana industry and legalization of marijuana in certain U.S. states, many individuals and businesses remain opposed to the marijuana industry.
This risk is greater for us, as there would be no alternative supply of VLNC tobacco in the event that one of our growers experienced a material adverse event with respect to a particular VLNC tobacco crop or the quantity or quality was not as we anticipated, and we would not be able to supply leaf for our VLN ® cigarettes.
This risk is greater for us, as there would be no alternative supply of RNC tobacco in the event that one of our growers experiences a material adverse event with respect to a particular RNC tobacco crop or the quantity or quality was not as we anticipated, and we would not be able to supply leaf for our VLN ® cigarettes.
Moreover, if our competitors independently develop equivalent knowledge, we would lack any contractual claim to this information, and our business could be harmed. 36 Table of Contents The ability to commercialize our potential products will depend on our ability to sell such products without infringing the patent or proprietary rights of third parties.
Moreover, if our competitors independently develop equivalent knowledge, we would lack any contractual claim to this information, and our business could be harmed. The ability to commercialize our existing and potential products will depend on our ability to sell such products without infringing the patent or proprietary rights of third parties.
Actions by the FDA and other federal, state or local governments or agencies may impact the adult tobacco consumer acceptability of or access to tobacco products (for example, through product standards proposed by the FDA for nicotine and flavors including menthol), delay or prevent the launch of new or modified tobacco products or products with claims of reduced risk, require the recall or other removal of tobacco products from the marketplace, impose additional manufacturing, labeling or packing requirements, interrupt manufacturing or otherwise significantly increase the cost of doing business.
Actions by the FDA and other foreign, federal, state or local governments or agencies may impact the adult tobacco consumer acceptability of or access to tobacco products (for example, through product standards proposed by the FDA for nicotine and flavors including menthol), delay or prevent the launch of new or modified tobacco products or products with reduced exposure claims, 22 Table of Contents require the recall or other removal of tobacco products from the marketplace, impose additional manufacturing, labeling or packing requirements, interrupt manufacturing or otherwise significantly increase the cost of doing business.
Our ability to market our potential products could be substantially limited due to delays in receipt of, or failure to receive, the necessary approvals or clearances. We anticipate commencing the applications required in some or all of these countries in the future. Failure to obtain necessary regulatory approvals could impair our ability to generate revenue from international sources.
Our ability to market our potential products could be substantially limited due to delays in receipt of, or failure to receive, the necessary authorizations or exemptions. We anticipate commencing the applications required in some or all of these countries in the future. Failure to obtain necessary regulatory authorizations or exemptions could impair our ability to generate revenue from international sources.
Our common stock is currently traded on the NASDAQ and the market price for our common stock has been volatile. Further, the market prices for securities in general have been highly volatile and may continue to be highly volatile in the future.
Our stock price may be highly volatile and could decline in value. Our common stock is currently traded on the NASDAQ and the market price for our common stock has been volatile. Further, the market prices for securities in general have been highly volatile and may continue to be highly volatile in the future.
If one of such competitors develops a cigarette that is safe for human consumption, a safer alternative for nicotine that is widely accepted, superior low nicotine tobacco or otherwise develops a superior quitting method, it could render our VLNC tobacco and cigarettes obsolete, which would have a material adverse impact on our business and operations and our ability to achieve profitability.
If one of such competitors develops a cigarette that is safe for human consumption, a safer alternative for nicotine that is widely accepted, superior low nicotine tobacco or 18 Table of Contents otherwise develops a superior quitting method, it could render our RNC tobacco and cigarettes obsolete, which would have a material adverse impact on our business and operations and our ability to achieve profitability.
Marketing of our products is not permitted in certain countries until we have obtained required approvals or exemptions in these individual countries. The regulatory review process varies from country to country, and approval by foreign governmental authorities is unpredictable, uncertain, and generally expensive.
Marketing of our products is not permitted in certain countries until we have obtained required authorizations or exemptions in these individual countries. The regulatory review process varies from country to country, and authorization by foreign governmental authorities is unpredictable, uncertain, and generally expensive.
A natural disaster (such as an earthquake, hurricane, fire, or flood), pandemics (including the COVID-19 pandemic), widespread power outage or internet failure or hack, or an act of terrorism could cause substantial delays in our operations, damage or destroy our equipment or facilities, and cause us to incur additional expenses and lose revenue.
A natural disaster (such as an earthquake, hurricane, fire, or flood), pandemics, widespread power outage or internet failure or hack, or an act of terrorism could cause substantial delays in our operations, damage or destroy our equipment or facilities, and cause us to incur additional expenses and lose revenue.
Any provision of our amended and restated articles of incorporation, our bylaws or Nevada law that has the effect of delaying or deterring a change in control of our Company could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. ​ 40 Table of Contents Item 1B Unresolved Staff Comments.
Any provision of our amended and restated articles of incorporation, our bylaws or Nevada law that has the effect of delaying or deterring a change in control of our Company could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock. ​ Item 1B.
If a third-party claims that we infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including: ● infringement claims that, with or without merit, can be costly and time consuming to litigate, can delay the regulatory approval process, and can divert management’s attention from our core business strategy; ● substantial damages for past infringement which we may have to pay if a court determines that our products or technologies infringe upon a competitor’s patent or other proprietary rights; ● a court order prohibiting us from commercializing our potential products or technologies unless the holder licenses the patent or other proprietary rights to us, which such holder is not required to do; ● if a license is available from a holder, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights; and ● redesigning our process so that it does not infringe the third-party intellectual property, which may not be possible, or which may require substantial time and expense including delays in bringing our potential products to market.
If a third-party claims that we infringe on its patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including: ● infringement claims that, with or without merit, can be costly and time consuming to litigate, can delay regulatory authorization processes, and can divert management’s attention from our core business strategy; ● substantial damages for past infringement which we may have to pay if a court determines that our products or technologies infringe upon a competitor’s patent or other proprietary rights; ● a court order prohibiting us from commercializing our potential products or technologies unless the holder licenses the patent or other proprietary rights to us, which such holder is not required to do; ● if a license is available from a holder, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights; and ● redesigning our process so that it does not infringe the third-party intellectual property, which may not be possible, or which may require substantial time and expense including delays in bringing our potential products to market. 28 Table of Contents Such actions could harm our competitive position and our ability to generate revenue and could result in increased costs.
For example, the outbreak of COVID-19 or another pandemic could disrupt our supply chain for tobacco, as well as negatively impact employee productivity, including affecting the availability of employees reporting for work. Any business interruption caused by such unforeseen events could have a material adverse impact on our business and operations.
For example, another pandemic or comparable heath concern could disrupt our supply chain for tobacco, as well as negatively impact employee productivity, including affecting the availability of employees reporting for work. Any business interruption caused by such unforeseen events could have a material adverse impact on our business and operations.
If we do not succeed in their efforts to develop and commercialize innovative tobacco products or to obtain regulatory approval for the marketing or sale of products, including with claims of reduced risk, but one or more of our competitors does succeed, we may be at a competitive disadvantage, which could have an adverse effect on our ability to commercialize our products.
If we do not succeed in our efforts to develop and commercialize innovative tobacco products or to obtain or maintain regulatory authorizations for the marketing or sale of products, including for the use of claims of reduced exposure, but one or more of our competitors does succeed, we may be at a competitive disadvantage, which could have an adverse effect on our ability to commercialize our products.
As we work towards commercializing one or more of our potential products for sale, including our VLN cigarettes, we base our working capital and inventory decisions on management’s estimates of future demand.
As we work to commercialize one or more of our products for sale, including our VLN cigarettes, we base our working capital and inventory decisions on management’s estimates of future demand.
If demand for such potential new products does not increase as quickly as we have estimated, our inventory costs and working capital expenses could rise, and our business and operating results could suffer. Alternatively, if we experience sales in excess of our estimates, our working capital and inventory needs may be higher than those currently anticipated.
If demand for such potential new products does not increase as quickly as we have estimated, our inventory costs, demands on working capital, expenses could increase, and our business and operating results could suffer. Alternatively, if we experience sales that exceed our estimates, our working capital and inventory needs may be higher than those currently anticipated.
In addition, the authorization to market our VLN® cigarettes as MRTP products was granted for a period of five years, which is the maximum duration for a marketing granted order for such products under the Family Smoking Prevention & Tobacco Control Act (PUBLIC LAW 111–31—JUNE 22, 2009).
In addition, the exposure modification order that enables us to market our VLN® cigarettes as MRTPs was granted for a period of five years, which is the maximum duration for a marketing granted order for such products under the Family Smoking Prevention & Tobacco Control Act (PUBLIC LAW 111–31—JUNE 22, 2009).
In the tobacco industry, we are competing with large tobacco companies and large pharmaceutical companies that have greater resources that us.
We are competing with large tobacco companies and large pharmaceutical companies that have greater resources that us.
If we are ever no longer listed on the NASDAQ or other national stock exchange in the future, then it would be more difficult to dispose of shares or to obtain accurate quotations as to the market value of our common stock compared to securities of companies whose shares are traded on national stock exchanges. 38 Table of Contents Our stock price may be highly volatile and could decline in value.
If we are ever no longer listed on the NASDAQ or other national stock exchange in the future, then it would be more difficult to dispose of shares or to obtain accurate quotations as to the market value of our common stock compared to securities of companies whose shares are traded on national stock exchanges.
Anti-takeover provisions contained in our articles of incorporation and bylaws, as well as provisions of Nevada law, could impair a takeover attempt. Our amended and restated articles of incorporation and bylaws currently contain provisions that, together with Nevada law, could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors.
Our amended and restated articles of incorporation and bylaws currently contain provisions that, together with Nevada law, could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors.
Consequently, these transactions, even if undertaken and announced, may not close or may not yield the benefits that we expect. In addition, we may only be able to conduct limited due diligence on an acquired company’s operations.
Consequently, these transactions, even if undertaken and announced, may not close or may not yield the benefits that we expect. Many of our acquisitions in the past have not yielded the results or synergies that we anticipated. In addition, we may only be able to conduct limited due diligence on an acquired company’s operations.
Currently, there are numerous companies developing Modified Risk Tobacco products, working to develop low nicotine tobacco and other tobacco alternative products in an effort to provide products that are potentially safer for human consumption or to otherwise assist consumers to cease or begin to switch from smoking.
Currently, there are numerous companies developing products for which they may submit MRTPAs, working to develop low nicotine tobacco and other tobacco alternative products to provide products that are potentially safer for human consumption or to otherwise assist consumers to cease or begin to switch from smoking.
We may continue to acquire or invest in other companies, which may divert our management’s attention, result in additional dilution to our stockholders, and consume resources that are necessary to sustain our business or result in losses. We may continue to acquire or invest in complementary solutions, services, technologies, or businesses in the future, such as our acquisition of GVB.
We have in the past invested in other companies and may do so in the future, which may divert our management’s attention, result in additional dilution to our stockholders, and consume resources that are necessary to sustain our business or result in losses. We may acquire or invest in complementary solutions, services, technologies, or businesses in the future.
In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to U.S. patents will be issued.
In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to U.S. patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement than in the United States.
Consequently, the Company will need to reapply to FDA to under a new MRTP application to extend its marketing granted authorization beyond December 23, 2026. The MRTP authorization process is a complex, substantial and lengthy regulatory undertaking.
Consequently, we will need to reapply to FDA under a new MRTP application to extend the FDA’s exposure modification order beyond December 23, 2026. The MRTP authorization process is a complex, substantial and lengthy regulatory undertaking.
These agreements may be breached, and we may not have adequate remedies for a breach. In addition, we cannot ensure that those agreements will provide adequate protection for our trade secrets, know-how, or other proprietary information, or prevent their unauthorized use or disclosure.
In addition, we cannot ensure that those agreements will provide adequate protection for our trade secrets, know-how, or other proprietary information, or prevent their unauthorized use or disclosure.
We have not paid cash dividends to date on our common stock. We currently intend to retain our future earnings, if any, to fund the development and growth of our business, and we do not anticipate paying any cash dividends on our common stock for the foreseeable future.
We currently intend to retain our future earnings, if any, to fund the development and growth of our business, and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. Additionally, the terms of any future debt facilities may preclude us from paying dividends on the common stock.
A significant failure of our site security measures and other facility requirements, including failure to comply with applicable regulatory requirements, could have an impact on our ability to continue operating under our facility licenses and our prospects of renewing our licenses, and could also result in a suspension or revocation of these licenses.
A significant failure of our site security measures and other facility requirements, including failure to comply with applicable regulatory requirements, could have an impact on our ability to continue operating under our facility licenses and our prospects of renewing our licenses, and could also result in a suspension or revocation of these licenses. 23 Table of Contents The loss of a significant customer for whom we manufacture tobacco products could have an adverse impact on our results of operation.
Any negative press resulting from the incorrect perception that we have entered into the marijuana space could result in a loss of current or future business. It could also adversely affect the public’s perception of us and lead to reluctance by new parties to do business with us or to own our common stock.
Any negativity resulting from our prior cannabis operations could result in a loss of current or future business. It could also adversely affect the public’s perception of us and lead to reluctance by new parties to do business with us or to own our common stock.
Risks Related to Ownership of Our Common Stock An active trading market for our common stock may not be sustained and you may not be able to resell your shares at or above the price at which you purchased them. An active trading market for our shares may not be sustained.
The Company has not implemented the reverse stock split as of March 25, 2024. An active trading market for our common stock may not be sustained and you may not be able to resell your shares at or above the price at which you purchased them. An active trading market for our shares may not be sustained.
Following an acquisition, we may be subject to liabilities arising from an acquired company’s past or present operations and these liabilities may be greater than the warranty and indemnity limitations that we negotiate. Any liability that is greater than these warranty and indemnity limitations could have a negative impact on our financial condition.
Following an acquisition, we may be subject to liabilities arising from an acquired company’s past or present operations and these liabilities may be greater than the warranty and indemnity limitations that we negotiate.
To be successful, we must: ● anticipate and respond to new and evolving adult consumer preferences; ● develop, manufacture, market and distribute new and innovative products that appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, third parties); ● improve productivity; and ● protect or enhance margins through cost savings and price increases. 28 Table of Contents The willingness of adult consumers to purchase premium consumer tobacco products, such as our VLNC cigarettes, depends in part on economic conditions.
To be successful, we must: ● anticipate and respond to new and evolving adult consumer preferences; ● develop, manufacture, market and distribute new and innovative products that appeal to adult consumers (including, where appropriate, through arrangements with, or investments in, third parties); ● improve productivity; and ● protect or enhance margins through cost savings and price increases.
The perpetuation of the illegal market for cannabis may have a material adverse effect on our business, results of operations, as well as the perception of cannabis use. ​ Risks Related to Intellectual Property Certain of our proprietary rights have expired or may expire or may not otherwise adequately protect our intellectual property, products and potential products, and if we cannot obtain adequate protection of our intellectual property, products and potential products, we may not be able to successfully market our products and potential products.
Accordingly, the implementation of these proposed or new laws or rules may have a material adverse impact on our results of operations. ​ Risks Related to Intellectual Property Certain of our proprietary rights have expired or may expire or may not otherwise adequately protect our intellectual property, products and potential products, and if we cannot obtain adequate protection of our intellectual property, products and potential products, we may not be able to successfully market our products and potential products.
We cannot guarantee that our current manufacturing facility will pass FDA inspections and/or similar inspections in foreign countries to produce our tobacco products, or that future changes to cGMP manufacturing standards will not also negatively affect the cost or sustainability of our manufacturing facility.
We cannot guarantee that our current manufacturing facility or any other manufacturing will successfully complete FDA inspections and/or similar inspections in foreign, or that future CGMP regulations will not also negatively affect the cost or sustainability of our manufacturing facility.
Our competitors generally have, and any future competitors may have, greater financial resources and name recognition than we do, and they may therefore develop products or other technologies similar or superior to ours, or otherwise compete more successfully than we do.
Any resulting litigation could be costly and time consuming and an unfavorable outcome could have a significant adverse effect on our business. ​ Our competitors generally have, and any future competitors may have, greater financial resources and name recognition than we do, and they may therefore develop products or other technologies similar or superior to ours, or otherwise compete more successfully than we do.
Such actions could harm our competitive position and our ability to generate revenue and could result in increased costs. Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours. We own or exclusively control many issued patents and pending patent applications.
Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours. We own or exclusively control many issued patents and pending patent applications. We cannot be certain that these patent applications will issue, in whole or in part, as patents.
In addition, we expect new competitors will enter the markets for similar tobacco products in the future and the nature and extent of this market entrance cannot be quantified at this time. In the cannabis industry, many large companies are entering into the cannabis space, along with smaller regional companies and competition from the black market.
In addition, we expect new competitors will enter the markets for similar tobacco products in the future and the nature and extent of this market entrance cannot be quantified at this time.
The Anandia sublicense continues through the life of the last-to-expire patent, which is expected to be in 2035. If any of our license agreements or other intellectual property agreements are not effective at preventing others from competing with us and/or using our intellectual property, our business could be adversely affected.
The NCSU licenses relate predominately to issued patents, and our exclusive rights in the NCSU licenses are expected to expire in 2042. If any of our license agreements or other intellectual property agreements are not effective at preventing others from competing with us and/or using our intellectual property, our business could be adversely affected.
A ban on menthol or flavored tobacco products could have a material adverse impact on our business. ​ On April 27, 2022, the FDA proposed new rules to prohibit menthol as a characterizing flavor in cigarettes and prohibit all characterizing flavors (other than tobacco) in cigars.
Any action by the FDA to remove our products from the U.S. market, including the termination or non-renewal of the exposure modification orders for our VLN ® cigarettes would have a material adverse impact on our business. 26 Table of Contents A ban on menthol or flavored tobacco products could have a material adverse impact on our business. ​ On April 27, 2022, the FDA proposed new rules to prohibit menthol as a characterizing flavor in cigarettes and prohibit all characterizing flavors (other than tobacco) in cigars.
Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities, including litigation against the companies that we may acquire.
Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown liabilities, including litigation against the companies that we may acquire.
In addition to the approval to market and sell our VLNC tobacco cigarettes as a Modified Exposure Cigarette in the U.S., we continue to seek governmental approvals required to market our VLNC tobacco cigarettes and our other products in other countries.
In addition to the authorization to market and sell our RNC tobacco cigarettes using modified risk claims in the U.S., we continue to seek governmental authorizations required to market our RNC tobacco cigarettes and our other products in other countries.
The FDA could, among other things, force us to remove from the U.S. market our VLNC tobacco cigarettes even after the FDA authorization on December 17, 2019 of our PMTA or the authorization of our MRTP application on December 23, 2021, for us to market in the U.S. our VLNC tobacco cigarettes, as well as the FDA could levy fines or change their regulations on advertising.
The FDA could, among other things, force us to remove from the U.S. market our RNC tobacco cigarettes even after the FDA authorization on December 17, 2019 of our PMTA for us to market our RNC tobacco cigarettes, or the authorization of our MRTP application on December 23, 2021, to enable us to use certain modified exposure claims with respect to our VLN® cigarettes.
We cannot assure you that additional business partners, including but not limited to financial institutions, banking institutions and customers, will not attempt to end or curtail their relationships with us. Any such negative press or cessation of business could have a material adverse effect on our business, financial condition, and results of operations.
We cannot assure you that additional business partners, including but not limited to financial institutions, banking institutions and customers, will not attempt to end or curtail their relationships with us.
While we believe that we use reasonable efforts to protect our trade secrets, our own, our licensees’ or our strategic partners’ employees, consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors. We seek to protect this information, in part, through the use of non-disclosure and confidentiality agreements with employees, consultants, advisors, and others.
Trade secrets, however, are difficult to protect. While we believe that we use reasonable efforts to protect our trade secrets, our own, our licensees’ or our strategic partners’ employees, consultants, contractors or advisors may unintentionally or willfully disclose our information to competitors.
Increases in cigarette taxes are expected to continue to have an adverse impact on sales of cigarettes resulting in (i) lower consumption levels, (ii) a shift in sales from manufactured cigarettes to other tobacco products or to lower-price cigarette categories, (iii) a shift from local sales to legal cross-border purchases of lower price products, and (iv) illicit products such as contraband and counterfeit. 27 Table of Contents Government mandated prices or taxes, production control programs, shifts in crops driven by economic conditions, climatic or adverse weather patterns may increase the cost or reduce the quality and/or supply of the tobacco and other agricultural products used to manufacture our products.
Increases in cigarette taxes are expected to continue to have an adverse impact on sales of cigarettes resulting in (i) lower consumption levels, (ii) a shift in sales from manufactured cigarettes to other tobacco products or to lower-price cigarette categories, (iii) a shift from local sales to legal cross-border purchases of lower price products, and (iv) illicit products such as contraband and counterfeit.
Any such delays or the inability to effectively develop new products in a cost-effective manner, or at all, would have a material adverse effect on our business and a loss of our financial resources. 22 Table of Contents We may be unable to successfully integrate GVB’s operations into ours and, even if successfully integrated, we may be unable achieve the expected benefits of such acquisition.
Any such delays or the inability to effectively develop new products in a cost-effective manner, or at all, would have a material adverse effect on our business and a loss of our financial resources.
If independent researchers or our competitors are able to successfully reduce nicotine levels in tobacco plants without violating our patent protections, our ability to license our technology would be negatively impacted and we would likely face increased competition.
If independent researchers or our competitors are able to successfully reduce nicotine levels in tobacco plants without violating our patent protections, our ability to license our technology would be negatively impacted and we would likely face increased competition. 27 Table of Contents We also rely on license agreements and trade secrets to protect our technology, products, and potential products, especially where we do not believe patent protection is appropriate or obtainable.
Additionally, if any of the holders of outstanding options or warrants exercise or convert those shares, as applicable, our common stockholders will incur dilution in their relative percentage ownership. The prospect of this possible dilution may also impact the price of our common stock. We do not expect to declare any dividends on our common stock in the foreseeable future.
Additionally, if any of the holders of outstanding options or warrants exercise or convert those shares, as applicable, our common stockholders will incur dilution in their relative percentage ownership.
In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products, which could have a material adverse effect on the business and profitability.
In periods of economic uncertainty, adult consumers may purchase more discount brands and/or, in the case of tobacco products, consider lower-priced tobacco products, which could have a material adverse effect on the business and profitability. 25 Table of Contents We may be unsuccessful in developing and commercializing adjacent products or processes, including innovative tobacco products that may reduce the health risks associated with certain other tobacco products and that appeal to adult tobacco consumers.
The future extent of the impact of the COVID-19 pandemic or another pandemic, including our ability to execute our business strategies as planned, will depend on future developments, including the duration and severity of the pandemic, which are highly uncertain and cannot be predicted. 23 Table of Contents The failure of our information systems to function as intended or their penetration by outside parties with the intent to corrupt them could result in business disruption, litigation and regulatory action, and loss of revenue, assets, or personal or confidential data (cybersecurity).
The failure of our information systems to function as intended or their penetration by outside parties with the intent to corrupt them could result in business disruption, litigation and regulatory action, and loss of revenue, assets, or personal or confidential data (cybersecurity).
We cannot be certain that these patent applications will issue, in whole or in part, as patents. Patent applications in the United States are maintained in secrecy until the patents are published or are issued.
Patent applications in the United States are maintained in secrecy until the patents are published or are issued.
An unfavorable outcome or settlement of pending tobacco related litigation could encourage the commencement of additional litigation. The variability in pleadings, together with the actual experience of management in litigating claims, demonstrates that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome.
The variability in pleadings, together with the actual experience of management in litigating claims, demonstrates that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Damages claimed in some tobacco-related litigations are significant and, in certain cases, range into the billions of dollars.
While we have received authorization for our MRTP application by the FDA and have been rolling out our VLN ® in select markets across the United States and abroad, there are no guarantees regarding the commercial viability of our VLNC tobacco cigarettes.
While the FDA issued an exposure modification order in connection with our MRTPA and we have been commercializing our VLN ® cigarettes in select markets across the United States, there are no guarantees regarding the commercial viability of our RNC tobacco cigarettes.
No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. The general patent environment outside the United States also involves significant uncertainty.
The patent positions of life sciences companies, like ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States. The general patent environment outside the United States also involves significant uncertainty.
Legal proceedings covering a wide range of matters related to tobacco use are pending or threatened in various U.S. and foreign jurisdictions.
Legal proceedings covering a wide range of matters related to tobacco use are pending or threatened in various U.S. and foreign jurisdictions. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution, and claims of competitors and distributors.
We and our customers for whom we manufacture tobacco products also face significant governmental regulation, including efforts aimed at reducing the incidence of tobacco use.
In addition, we and our customers for whom we manufacture tobacco products also face significant governmental regulation, including efforts aimed at reducing the incidence of tobacco use. We also cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad.
If we are unsuccessful in commercializing our VLNC tobacco cigarettes, or such commercialization takes longer or costs more than we currently expect, our financial results, business and future prospects would be materially adversely effected.
If we are unsuccessful in commercializing our RNC tobacco cigarettes, or such commercialization takes longer or costs more than we currently expect, our financial results, business and future prospects would be materially adversely effected. 21 Table of Contents We have limited experience marketing and selling Modified Exposure Cigarettes and our working capital and inventory estimates based on demand expectations may be incorrect, which could harm our operating results and financial condition.
It is possible that our results of operations, cash flows, or financial position could be materially affected by an unfavorable outcome or settlement of litigation. Our NASCO production facility is integral to our tobacco business and adverse changes or developments affecting our facility may have an adverse impact on our business.
Our production facility (NASCO) is integral to our tobacco business and adverse changes or developments affecting our facility may have an adverse impact on our business. Our production facility is integral to our tobacco business.
The FDA may or may not grant continued authorization, based on FDA's assessment of whether the product application(s) satisfy the statutory requirements for such an order. .
The FDA may or may not grant continued authorization of these product claims, including based on FDA's assessment of whether the product application(s) satisfy the statutory requirements for such an order, and whether we have adequately complied with the conditions imposed on us in connection with the FDA’s exposure modification order, such as requirements relating to recordkeeping, reporting and post-market studies.
We will only be able to protect our technologies, products, and potential products from unauthorized use by third parties to the extent that valid and enforceable patents cover them, or to the extent that other market exclusionary rights apply. 35 Table of Contents The patent positions of life sciences companies, like ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved.
Our commercial success will depend, in part, on obtaining and maintaining intellectual property protection for our technologies, products, and potential products. We will only be able to protect our technologies, products, and potential products from unauthorized use by third parties to the extent that valid and enforceable patents cover them, or to the extent that other market exclusionary rights apply.
A significant increase in the price of industrial hemp or other raw materials that cannot be passed on to customers could have a material adverse effect on our business, financial condition and results of operations.
Our prior operations in the hemp/cannabis space could have a material adverse effect on our business, financial condition, and results of operations. We previously operated in the cannabis space.
Additionally, the terms of any future debt facilities may preclude us from paying dividends on the common stock. As a result, capital appreciation, if any, of our common stock could be the sole source of gain for the foreseeable future.
As a result, capital appreciation, if any, of our common stock could be the sole source of gain for the foreseeable future. Anti-takeover provisions contained in our articles of incorporation and bylaws, as well as provisions of Nevada law, could impair a takeover attempt.
To date, there has never been a comparable product sold in the marketplace and we have only rolled out the cigarettes on a limited basis. These products may not achieve consumer acceptance at levels that make the product commercially viable for profitable sales.
To date, there has never been a comparable product sold in the marketplace and we have only commercialized the cigarettes on a limited basis. We have obtained an exposure modification order for our VLN ® cigarettes, which enables us to make certain claims regarding the reduction of nicotine within these products.
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”).
District Court for the Eastern District of Texas vacated the final rule, and the case is currently pending before the U.S. Court of Appeals for the Fifth Circuit. It is possible that significant regulatory developments will take place over the next few years across global markets, driven principally by the World Health Organization’s Framework Convention on Tobacco Control (“FCTC”).
As such, we may be unable to manage our growth effectively and such failure would have a material adverse impact on our operations. Business interruptions, whether caused by natural disaster, terrorism, economic downturns, global pandemics or other events, could negatively impact our business.
Any cybersecurity incident could cause substantial harm to our business and result in regulatory action, fines, and/or substantial costs. Business interruptions, whether caused by natural disaster, terrorism, economic downturns, global pandemics or other events, could negatively impact our business.
Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement than in the United States. 37 Table of Contents The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain.
The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties. Our principal executive office and headquarters is located in Buffalo, New York, a leased facility. As of December 31, 2022, we operated eight facilities primarily in the United States. Of these locations, the tobacco segment had one manufacturing facility, hemp/cannabis segment had three manufacturing or inventory storage facilities, one office space, and one owned farm.
Biggest changeItem 2. Properties. Our principal executive office and headquarters is located in Mocksville, North Carolina, a leased facility. We previously held our principal executive office and headquarters at leased office space in Buffalo, New York through the end of fiscal 2023. As of December 31, 2023, we operated four tobacco facilities located in Mocksville, North Carolina and surrounding areas.
Additionally, we have one leased research and development laboratory. We believe the facilities we operate and their equipment are effectively utilized, well maintained, generally are in good condition, and will be able to accommodate our capacity needs to meet current and growing levels of demand.
These locations are comprised of one manufacturing facility (which is also our principal executive office and headquarters) and three leased inventory storage facilities. We believe the facilities we operate and their equipment are effectively utilized, well maintained, generally are in good condition, and will be able to accommodate our capacity needs to meet current and growing levels of demand.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeDividend Policy We have not previously and do not plan to declare or pay any dividends on our common stock. Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business.
Biggest changeHowever, because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we believe there are considerably more beneficial holders of our common stock than record holders. 34 Table of Contents Dividend Policy We have not previously and do not plan to declare or pay any dividends on our common stock.
The Plan allows for the granting of equity awards to eligible individuals over the life of the Plan, including the issuance of up to 5,000,000 shares of the Company’s common stock and any remaining shares under the Company’s 2014 Omnibus Incentive Plan pursuant to awards under the Plan.
The Plan allows for the granting of equity awards to eligible individuals over the life of the Plan, including the issuance of up to 566,667 shares of the Company’s common stock and any remaining shares under the Company’s 2014 Omnibus Incentive Plan pursuant to awards under the Plan.
Issuer Purchases of Equity Securities None. 41 Table of Contents Shares authorized for issuance under equity compensation plans On May 20, 2021, the stockholders of 22nd Century Group, Inc. (the “Company”) approved the 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (the “Plan”).
Issuer Purchases of Equity Securities None. 35 Table of Contents Shares authorized for issuance under equity compensation plans On June 16, 2023, the stockholders of 22nd Century Group, Inc. (the “Company”) approved the amendment and restatement of the 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (the “Plan”).
The following table summarizes the number of shares of common stock to be issued upon exercise of outstanding options and vesting of restricted stock units under the Plan and our prior 2010 and 2014 Equity Incentive Plans, the weighted-average exercise price of such stock options, and the number of securities available to be issued under the Plan as of December 31, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of securities ​ ​ ​ ​ ​ ​ ​ remaining available for ​ ​ Number of securities to ​ ​ ​ ​ issuance under equity ​ ​ be issued upon exercise ​ ​ Weighted average ​ compensation plans ​ ​ of outstanding options, ​ ​ exercise price of ​ (excluding securities ​ ​ and restricted stock units ​ ​ outstanding options ​ reflected in column (a)) ​ ​ (a) ​ ​ (b) ​ (c) Equity compensation plans approved by security holders 8,945,064 (1) ​ $ 1.86 4,461,984 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity compensation plans not approved by security holders — ​ ​ N/A — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total 8,945,064 ​ ​ — 4,461,984 (2) (1) Consists of outstanding options of 4,912,105 and unvested restricted stock units of 4,032,959.
The following table summarizes the number of shares of common stock to be issued upon exercise of outstanding options and vesting of restricted stock units under the Plan and our prior 2014 Equity Incentive Plan, the weighted-average exercise price of such stock options, and the number of securities available to be issued under the Plan as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Number of securities ​ ​ ​ ​ ​ ​ ​ remaining available for ​ ​ Number of securities to ​ ​ ​ ​ issuance under equity ​ ​ be issued upon exercise ​ ​ Weighted average ​ compensation plans ​ ​ of outstanding options, ​ ​ exercise price of ​ (excluding securities ​ ​ and restricted stock units ​ ​ outstanding options ​ reflected in column (a)) ​ ​ (a) ​ ​ (b) ​ (c) Equity compensation plans approved by security holders 373,831 (1) ​ $ 26.34 606,406 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equity compensation plans not approved by security holders — ​ ​ N/A — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total 373,831 ​ ​ — 606,406 (2) (1) Consists of outstanding options of 219,316 and unvested restricted stock units of 154,515.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock is listed on the Nasdaq Capital Market under the symbol “XXII.” As of February 22, 2023, there were 183 holders of record of shares of our common stock.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock is listed on the Nasdaq Capital Market under the symbol “XXII.” As of March 25, 2024, there were approximately 122 holders of record of our common stock based on the records of our transfer agent.
As of December 31, 2022, we had available 4,461,984 shares remaining for future awards under the Plan.
As of December 31, 2023, we had available 606,406 shares remaining for future awards under the Plan.
Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs. Recent Sales of Unregistered Securities None.
Our current policy is to retain all funds and any earnings for use in the operation and expansion of our business. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including current financial condition, operating results and current and anticipated cash needs.
Added
Recent Sales of Unregistered Securities On November 2, 2023, we executed a licensing agreement (“NCSU License Agreement”) with North Carolina State University (“NCSU”).
Added
Pursuant to the terms of the License Agreement, NCSU granted the Company exclusive rights to Patent Rights and Plant Materials (each as defined in the NCSU License Agreement) owned by NCSU which will allow us to develop and commercialize reduced nicotine content tobacco using the latest non-GMO technology.
Added
As partial consideration, we issued 183,680 shares of our common stock, equal in value to $100,000, to NCSU (the “Stock Consideration”) calculated using the twenty-day average closing price of the Company’s common stock immediately preceding November 2, 2023.
Added
The Stock Consideration was issued in a private placement and was exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereof as a transaction not involving a public offering and/or Rule 506 of Regulation D promulgated thereunder.
Added
On November 28, 2023, we commenced a warrant inducement offering with the holders of our previously outstanding 31,779,654 warrants consisting of: (i) the common stock purchase warrants issued on or about June 22, 2023; (ii) the common stock purchase warrants issued on or about July 10, 2023; (iii) the common stock purchase warrants of issued on or about July 21, 2023; and/or (iv) the common stock purchase warrants issued on or about October 19, 2023 (collectively, the “Existing Warrants”), which Existing Warrants were exercisable for an equal number of shares of common stock at an exercise price of $0.525.
Added
We offer the holders of the Existing Warrants an inducement period, whereby we agreed to issue new warrants (the “Inducement Warrants”) to purchase up to a number of shares of common stock equal to 200% of the number of shares of common stock issued pursuant to the exercise by the holders of the Existing Warrants during the Inducement Period, for cash, at a reduced exercise price equal to the Nasdaq Minimum Price (as defined in the as defined in Nasdaq Listing Rule 5635(d)).
Added
As a result of the warrant inducement offering, 28,649,654 Existing Warrants were exercised for shares of common stock and 57,299,308 Inducement Warrants were issued. The Inducement Warrants were issued in reliance upon an exemption from registration pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended.
Added
We amended the outstanding Debentures to (i) allow the holders to voluntarily convert the Debentures, in whole or in part, into shares of our common stock (“Voluntary Conversion Option”) on the earlier of (i) June 30, 2024 and (ii) the public announcement of a Fundamental Transaction at a conversion price equal to the lower of (x) $1.00 per share and (y) the closing sale price of our common stock on June 29, 2024 (the “Conversion Price”), and (ii) include a mandatory prepayment of the outstanding principal of the Debentures in an amount equal to 20% of the net cash proceeds of any issuance by us of any of its stock, or other Equity Interests (as defined in the Debentures) or the incurrence or issuance of any indebtedness.
Added
The amended Debentures and shares issuable upon conversion of the amended Debentures were issued in a private placement and were exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereof as a transaction not involving a public offering and/or Rule 506 of Regulation D promulgated thereunder.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe Company has the option to redeem the facility early starting in the second year. ● The Company’s strengthened balance sheet supports growing working capital needs driven by increased VLN ® product shipments to multiple national-scale distribution partners as well as strong customer demand for hemp/cannabis bulk ingredients. ● 22nd Century’s operating cash requirements are anticipated to decrease through fiscal 2023, reflecting higher sales volume of higher margin contract manufacturing operations (CMO) cigarettes and VLN ® products, as well as continued organic growth of GVB’s operations. ​ Our Financial Results The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 8 of this report, for the periods presented (dollars in thousands, except per share amounts): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ ​ December 31 ​ ​ December 31 ​ ​ ​ Change ​ 2022 ​ 2021 ​ ​ $ ​ % Tobacco revenues, net ​ $ 40,501 ​ ​ $ 30,905 ​ ​ $ 9,596 ​ 31.0 Hemp/cannabis revenues, net ​ ​ 21,610 ​ ​ ​ 43 ​ ​ ​ 21,567 ​ NM Total revenues, net ​ ​ 62,111 ​ ​ ​ 30,948 ​ ​ ​ 31,163 ​ 100.7 Cost of goods sold ​ ​ 60,937 ​ ​ ​ 29,462 ​ ​ ​ 31,475 ​ 106.8 Gross profit ​ ​ 1,174 ​ ​ ​ 1,486 ​ ​ ​ (312) ​ (21.0) Gross profit as a % of revenues, net ​ ​ 1.9 % ​ ​ 4.8 % ​ ​ ​ ​ ​ Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales, general and administrative ("SG&A") ​ ​ 44,517 ​ ​ ​ 25,908 ​ ​ ​ 18,609 ​ 71.8 SG&A as a % of revenues, net ​ ​ 71.7 % ​ ​ 41.7 % ​ ​ ​ ​ ​ Research and development ("R&D") ​ ​ 6,561 ​ ​ ​ 3,912 ​ ​ ​ 2,649 ​ 67.7 R&D as a % of revenues, net ​ ​ 10.6 % ​ ​ 6.3 % ​ ​ ​ ​ ​ Other operating expenses, net ("OOE") ​ ​ 7,202 ​ ​ ​ 78 ​ ​ ​ 7,124 ​ 9,170.4 Total operating expenses ​ ​ 58,280 ​ ​ ​ 29,898 ​ ​ ​ 28,382 ​ 94.9 Operating loss ​ ​ (57,106) ​ ​ ​ (28,412) ​ ​ ​ (28,694) ​ 101.0 Operating loss as a % of revenues, net ​ ​ (91.9) % ​ ​ (45.7) % ​ ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized loss on investment ​ ​ (5) ​ ​ ​ (6,994) ​ ​ ​ 6,989 ​ (99.9) Realized (loss) gain on Panacea investment ​ ​ (2,789) ​ ​ ​ 2,548 ​ ​ ​ (5,337) ​ (209.5) Realized loss on short-term investment securities ​ ​ (366) ​ ​ ​ - ​ ​ ​ (366) ​ NM Other income, net ​ ​ 71 ​ ​ ​ - ​ ​ ​ 71 ​ NM Interest income, net ​ ​ 313 ​ ​ ​ 321 ​ ​ ​ (8) ​ (2.5) Interest expense ​ ​ (353) ​ ​ ​ (58) ​ ​ ​ (295) ​ 503.9 Total other expense ​ ​ (3,129) ​ ​ ​ (4,183) ​ ​ ​ 1,054 ​ (25.2) Loss before income taxes ​ ​ (60,235) ​ ​ ​ (32,595) ​ ​ ​ (27,640) ​ 84.8 (Benefit) provision for income taxes ​ ​ (434) ​ ​ ​ 14 ​ ​ ​ (448) ​ (3,196.5) Net loss ​ $ (59,801) ​ ​ $ (32,609) ​ ​ ​ (27,192) ​ 83.4 Net loss as a % of revenues, net ​ ​ (96.3) % ​ ​ (52.5) % ​ ​ ​ ​ ​ Net loss per common share (basic and diluted) ​ $ (0.31) ​ ​ $ (0.21) ​ ​ ​ (0.10) ​ 48.6 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NM - calculated change not meaningful ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Refer to Note 17, “Segment and Geographic Information,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding operating results for our two operating and reportable segments: (1) Tobacco, (2) Hemp/cannabis. 47 Table of Contents Fiscal 2022 Compared with Fiscal 2021 Revenue - Sale of products, net ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ December 31 ​ December 31 ​ Change ​ 2022 2021 ​ $ ​ % Tobacco $ 40,501 ​ $ 30,905 ​ $ 9,596 ​ 31.0 Hemp/cannabis ​ 21,610 ​ ​ 43 ​ ​ 21,567 ​ NM Total revenues, net $ 62,111 ​ $ 30,948 ​ ​ 31,163 ​ 100.7 ​ The increase in revenue for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily the result of an increase in tobacco revenue of $9,596 or 31.0% from 2021 primarily driven by volume increases in the number of cartons sold.
Biggest changeNet loss for the full year 2023 was $54,686, representing a net loss per share of $2.64 compared with net loss for the full year 2022 of $36,553, representing a net loss per share of $2.84. ● As of December 31, 2023, we had $2,058 in cash and cash equivalents. 38 Table of Contents Our Financial Results The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 15 of this report, for the periods presented (dollars in thousands, except per share amounts): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ December 31 ​ ​ December 31 ​ ​ Change ​ 2023 ​ 2022 ​ ​ $ ​ % Revenues, net ​ $ 32,204 ​ ​ $ 40,501 ​ ​ (8,297) ​ (20.5) Cost of goods sold ​ ​ 40,900 ​ ​ ​ 38,654 ​ ​ 2,246 ​ 5.8 Gross (loss) profit ​ ​ (8,696) ​ ​ ​ 1,847 ​ ​ (10,543) ​ NM Gross (loss) profit as a % of revenues, net ​ ​ (27.0) % ​ ​ 4.6 % ​ ​ ​ ​ Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Sales, general and administrative ("SG&A") ​ ​ 31,064 ​ ​ ​ 32,231 ​ ​ (1,167) ​ (3.6) SG&A as a % of revenues, net ​ ​ 96.5 % ​ ​ 79.6 % ​ ​ ​ ​ Research and development ("R&D") ​ ​ 2,644 ​ ​ ​ 3,578 ​ ​ (934) ​ (26.1) R&D as a % of revenues, net ​ ​ 8.2 % ​ ​ 8.8 % ​ ​ ​ ​ Other operating expenses (income), net ("OOE") ​ ​ 2,527 ​ ​ ​ (327) ​ ​ 2,854 ​ NM Total operating expenses ​ ​ 36,235 ​ ​ ​ 35,482 ​ ​ 753 ​ 2.1 Operating loss from continuing operations ​ ​ (44,931) ​ ​ ​ (33,635) ​ ​ (11,296) ​ 33.6 Operating loss as a % of revenues, net ​ ​ (139.5) % ​ ​ (83.0) % ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense), net ​ ​ 334 ​ ​ ​ (366) ​ ​ 700 ​ (191.3) Realized loss on Panacea investment ​ ​ - ​ ​ ​ (2,789) ​ ​ 2,789 ​ NM Loss on transfer of promissory note ​ ​ (895) ​ ​ ​ - ​ ​ (895) ​ NM Interest income, net ​ ​ 219 ​ ​ ​ 313 ​ ​ (94) ​ (30.0) Interest expense ​ ​ (9,366) ​ ​ ​ (55) ​ ​ (9,311) ​ NM Total other expense ​ ​ (9,708) ​ ​ ​ (2,897) ​ ​ (6,811) ​ 235.1 Loss before income taxes ​ ​ (54,639) ​ ​ ​ (36,532) ​ ​ (18,107) ​ 49.6 Provision for income taxes ​ ​ 47 ​ ​ ​ 21 ​ ​ 26 ​ NM Net loss from continuing operations ​ ​ (54,686) ​ ​ ​ (36,553) ​ ​ (18,133) ​ 49.6 Net loss as a % of revenues, net ​ ​ (169.8) % ​ ​ (90.3) % ​ ​ ​ ​ Net loss per common share from continuing operations (basic and diluted)* ​ $ (2.64) ​ ​ $ (2.84) ​ ​ 0.20 ​ (7.04) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NM - calculated change not meaningful ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fiscal 2023 Compared with Fiscal 2022 Revenue - Sale of products, net ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ December 31 ​ December 31 ​ 2023 2022 Revenues, net ​ $ 32,204 ​ $ 40,501 ​ Tobacco revenue was $32,204, a decrease of 20.5% from $40,501 in the prior year period, reflecting lower unit sales as a result of a planned reallocation in production resources during 2023 at the Company’s NASCO facilities away from lower margin filtered cigars to higher margin VLN® and conventional cigarette products.
Goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis on December 1, the measurement date, and whenever events or business conditions change that could indicate that the asset is impaired.
Intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis on December 1, the measurement date, and whenever events or business conditions change that could indicate that the asset is impaired.
When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life. ​ 55 Table of Contents Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment.
When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life. 49 Table of Contents ​ Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment.
For further information regarding the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. ​ Inventories ​ Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value.
For further information regarding the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 15 of this report. ​ Inventories ​ Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value.
The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500,000 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma. ​ Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”).
The Subordinated Note refinanced the 12% Secured Promissory Note with a principal amount of $1,000 dated as of October 29, 2021 payable to Omnia (the “October Note”) and the 12% Secured Promissory Note with a principal amount of $1,500 dated as of January 14, 2022 payable to Omnia (the “January Note”, and together with the October Note, the “Original Notes”), which were assumed by the Company in connection with the acquisition of GVB Biopharma. ​ 45 Table of Contents Under the terms of the Subordinated Note, the Company is obligated to make interest payments in-kind (the “PIK Interest”).
Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations. 53 Table of Contents ​ Critical Accounting Estimates ​ Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.
Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations. ​ Critical Accounting Estimates ​ Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP.
Impairment, if any, is based on the excess of the carrying value over the fair value of these assets. ​ For our indefinite-lived intangible assets—MSA, cigarette brand predicate and trademarks—we performed a qualitative evaluation and considered factors such as current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations.
Impairment, if any, is based on the excess of the carrying value over the fair value of these assets. ​ For our indefinite-lived intangible assets, we performed a qualitative evaluation and considered factors such as current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations.
The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,052,632, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”).
The Debentures are subject to an exit payment equal to 5% of the original principal amount, or $1,053, payable on the maturity date or the date the Debentures are paid in full (the “Exit Payment”).
The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality. ​ Historically, our adjustments or write-off charges recorded against inventory have been adequate to cover our losses. However, variations in methods or assumptions or volatility in spot pricing for hemp/cannabis could have a material impact on our results.
The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality. ​ Historically, our adjustments or write-off charges recorded against inventory have been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results.
If we elect not to use this option, or we determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value. Fair value is estimated using the relief-from-royalty method.
If we elect not to use this option, or we determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value.
C-store chain leveraging these new national scale distribution capabilities. ● Secured additional retail point of sale placements with regional C-stores, such as Texas based CEFCO, and new regional distribution agreements with Hub, Inc., serving regional Midwestern and tribal accounts, and Chambers & Owen, Inc., serving the upper Midwest. ● Gained authorization to test VLN ® sales at four United States military bases located in California, Arizona and North Carolina, beginning in the second quarter. ● Poised to benefit from federal, state and international regulatory appetite for banning menthol and mandating reduced nicotine content.
C-store chain leveraging these new national scale distribution capabilities. ● Secured additional retail point of sale placements with regional C-stores, such as Texas based CEFCO, and new regional distribution agreements with Hub, Inc., serving regional Midwestern and tribal accounts, and Chambers & Owen, Inc., serving the upper Midwest. ● Gained authorization to test VLN ® sales at four United States military bases located in California, Arizona and North Carolina, beginning in the second quarter. ● Launched sales at a top U.S. drugstore chain at approximately 1,200 locations across five states in the third quarter. ● Poised to benefit from federal, state and international regulatory appetite for banning menthol and mandating reduced nicotine content.
Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. ​ We have identified several critical accounting estimates.
Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. ​ 48 Table of Contents We have identified several critical accounting estimates.
Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets on the last day of our fiscal year, unless events occur that trigger the need for an interim impairment review. We have the option to first assess qualitative factors in determining whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired.
We perform an annual impairment review of our indefinite-lived intangible assets on December 1, the measurement date, unless events occur that trigger the need for an interim impairment review. We have the option to first assess qualitative factors in determining whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired.
The primary driver for this increase was higher net loss of $27,192, driven by increased spending in SG&A and R&D both from the acquisition of GVB and acceleration of the launch of VLN ® , an increase of $9,154 related to net adjustments to reconcile net loss to cash, and an increase in cash used for working capital components related to operations in the amount of $10,837 for the year ended December 31, 2022, as compared to the year ended December 31, 2021. 51 Table of Contents Net cash provided by (used in) investing activities Cash provided by investing activities amounted to $22,578 in 2022 as compared to cash used in investing activities of $27,729 in 2021.
The primary driver for this increase was higher net loss of $80,974, driven by increased spending in SG&A and R&D both from the acquisition of GVB and acceleration of the launch of VLN ® , an increase of $67,866 related to net adjustments to reconcile net loss to cash, and an increase in cash used for working capital components related to operations in the amount of $9,835 for the year ended December 31, 2023, as compared to the year ended December 31, 2022. 43 Table of Contents Net cash provided by investing activities Cash provided by investing activities amounted to $16,816 in 2023 as compared to cash provided by investing activities of $22,578 in 2022.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. ​ Evaluation of indefinite-lived intangible assets for impairment ​ Our indefinite-lived intangible assets include the MSA, cigarette brand predicate and trademarks.
The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof.
The Debentures bear interest at a rate of 7% per annum, payable monthly in arrears as of the last trading day of each month and on the maturity date. The Debentures mature on March 3, 2026. At the Company’s election, subject to certain conditions, interest can be paid in cash, shares of the Company’s common stock, or a combination thereof.
Summary of Cash Flow ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2022 2021 Cash provided by (used in): ​ ​ ​ ​ ​ ​ Operating activities ​ $ (51,714) ​ $ (22,839) Investing activities ​ 22,578 (27,729) Financing activities ​ 30,820 50,875 Net change in cash and cash equivalents ​ $ 1,684 $ 307 ​ Net cash used in operating activities Cash used in operations increased $28,875 from $22,839 in 2021 to $51,714 in 2022.
Summary of Cash Flow ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ December 31, ​ Change ​ 2023 2022 ​ $ Cash provided by (used in): ​ ​ ​ ​ ​ ​ ​ ​ Operating activities ​ $ (54,987) ​ $ (51,714) ​ (3,273) Investing activities ​ 16,816 22,578 ​ (5,762) Financing activities ​ 37,209 30,820 ​ 6,389 Net change in cash and cash equivalents ​ $ (962) $ 1,684 ​ ​ ​ Net cash used in operating activities Cash used in operations increased $3,273 from $51,714 in 2022 to $54,987 in 2023.
The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $1.275 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions, as more fully described in the JGB Warrant.
Commencing on May 1, 2024, at its option, the holder of a Debenture may require the Company to redeem 2% of the original principal amount of the Debentures per calendar month which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. ​ The JGB Warrants are exercisable for five years from September 3, 2023, at an exercise price of $19.125 per share, a 50% premium to the VWAP on the closing date, subject, with certain exceptions, to adjustments in the event of stock splits, dividends, subsequent dilutive offerings and certain fundamental transactions.
However, a significant increase in the discount rate, decrease in the terminal growth rate, increase in tax rates, decrease in the royalty rate or substantial reductions in our revenue assumptions could have a negative impact on the estimated fair value of our tradename and require us to recognize additional impairment in a future period. ​ Evaluation of long-lived assets for impairment ​ When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) or definite-lived intangible asset(s) including, but not limited to, PP&E and right-of-use lease assets, exceeds the related undiscounted future cash flows.
Evaluation of long-lived assets for impairment ​ When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) including, but not limited to, PP&E, right-of-use lease assets, and definite-lived intangible asset(s) exceeds the related undiscounted future cash flows.
Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives. ​ Business Combinations The Company accounts for business combinations in accordance with ASC Topic 805, Business Combinations .
Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives. ​ For our long-lived assets, we determined that impairment indicators occurred during the fourth quarter of 2023 in connection with ongoing evaluation of our tobacco strategy and restructuring efforts and concluded that certain definite-lived intangible assets, including patents, were impaired due to obsolescence or abandonment in the amount of $1,375.
GVB Bridge Loan On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,864,767 in favor of Omnia Ventures, LP (“Omnia”).
As of December 31, 2023, the Company has pledged to JGB the $2,000 GVB promissory note and $1,000 assignment of Needle Rock Farms to be applied as principal reduction in 2024. ​ Omnia Subordinated Note ​ On March 3, 2023, the Company executed a Subordinated Promissory Note (the “Subordinated Note”) with a principal amount of $2,865 in favor of Omnia Ventures, LP (“Omnia”).
Operating loss for the full year 2022 was $57,106, compared to a loss of $28,412 in the prior year. ● Net loss in the fourth quarter of 2022 was $26,283, representing a net loss per share of $0.12 compared with net loss in the fourth quarter of 2021 of $13,964, representing a net loss per share of $.09.
Operating loss for the full year 2023 was $44,931, compared to a loss of $33,635 in the prior year. ● Net loss in the fourth quarter of 2023 was $22,068, representing a net loss per share of $0.66 compared with net loss in the fourth quarter of 2022 of $11,114, representing a net loss per share of $0.77.
We determined it is more likely than not that that the assets are not impaired. For our indefinite-lived intangible asset relate to the GVB tradename, we performed a quantitative assessment to test the asset for impairment as of December 1, 2022.
We determined as of December 1, 2023, it is more likely than not that that the assets are not impaired.
($ in thousands, except per share data or unless otherwise specified) 42 Table of Contents Executive Overview ● Executive overview ● Recent business acquisitions ● Tobacco business highlights ● Hemp/cannabis business highlights ● Corporate business highlights ● Financial overview ​ Our Financial Results ● Fiscal 2022 compared with fiscal 2021 ● Liquidity and capital resources ● Impact of recently issued accounting standards ​ Critical Accounting Estimates ● Inventories ● Valuation of long-lived assets ● Business combinations ​ Executive Overview ● On December 23, 2021, the FDA granted MRTP authorization for our reduced nicotine cigarettes, VLN ® King and VLN ® Menthol King.
($ in thousands, except per share data or unless otherwise specified) 36 Table of Contents Executive Overview ● On December 23, 2021, the FDA issued modified risk granted orders for our reduced nicotine cigarettes, VLN ® King and VLN ® Menthol King.
Off-Balance Sheet Arrangement We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. ​ Item 7A. Quantitative and Qu alitative Disclosures About Market Risk ​ Not required for smaller reporting companies. ​
The sensitivity of the fair value calculation to these methods, assumptions, and estimates included could create materially different results under different conditions or using different assumptions. ​ Off-Balance Sheet Arrangement We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. ​ Item 7A.
Announced additional launch plans in Arizona, New Mexico and Utah. ● Commenced an aggressive multi-state VLN ® rollout strategy, targeting up 18 states by year-end 2023, aimed at penetrating geographies and markets with large adult smoker populations, including those with favorable MRTP state excise tax savings, which can be used toward consumer incentives, distribution support, and additional programming to raise awareness of VLN ® products. ● Initiated agreements with national-scale C-store distribution partners, including Core-Mark/Eby-Brown and others pending, to facilitate state-wide or multi-state launches of VLN ® at hundreds of stores within our target markets in an accelerated timeline. ● Announced expansion into Texas, California and Florida, expected in conjunction with the largest multi-state U.S.
In addition to authorizing the Company to market VLN ® cigarettes with the claim, “95% less nicotine”, to clarify the purpose of the brand, the FDA also required the use of the claim, “Helps You Smoke Less.” ● Commenced pilot market sales in Chicago during the first quarter of 2022 of VLN® King and VLN® Menthol King 95% reduced nicotine content cigarettes, the first and only FDA authorized MRTP designated combustible cigarettes, and subsequently expanded sales and distribution channels throughout 2022 and 2023 to more than 5,000 stores across 26 states. ● In December 2023, the Company completed the sale of substantially all of the GVB hemp/cannabis business (referred to as the “GVB Divestiture”) to Specialty Acquisition Corporation, exiting the hemp/cannabis market and focusing fully on the Company’s tobacco operations. ● Appointed Larry Firestone as Chairman and Chief Executive Officer in November 2023, and announced plans for a turnaround in the business, including cost reductions and efforts to reposition the company’s business to focus on its VLN assets and CMO business. ​ Tobacco Business Highlights ● Continued a multi-state VLN ® rollout strategy, having launched sales in more than 5,000 locations across 26 states at year-end 2023, aimed at penetrating geographies and markets with large adult smoker populations, including those with favorable MRTP state excise tax savings, which can be used toward consumer incentives, distribution support, and additional programming to raise awareness of VLN ® products. ● Initiated agreements with national-scale C-store distribution partners, including Core-Mark/Eby-Brown, McLane and others pending, to facilitate state-wide or multi-state launches of VLN ® at hundreds of stores within our target markets in an accelerated timeline. ● Launched a private label premium cigarette brand, Pinnacle, for sale at one of the nation’s top 10 gas station convenience store chains, comprising almost 1,700 stores in 27 states. ● Announced expansion into Texas, California and Florida, expected in conjunction with the largest multi-state U.S.
Sales, general and administrative expense ​ ​ ​ ​ ​ ​ Change 2022 vs 2021 ​ $ ​ % Compensation and benefits (a) $ 2,922 ​ 24.9 Legal (b) ​ 497 ​ 48.7 Strategic consulting (c) ​ 4,994 ​ 63.9 Sales and marketing (d) ​ 1,305 ​ 412.9 Other (e) ​ 1,099 ​ 22.0 GVB (f) ​ 7,793 ​ 100.0 Net increase in SG&A expenses $ 18,609 ​ 71.8 ​ (a) Increases in compensation and benefits primarily due to $716 increased headcount mainly due to the increase in selling and marketing personnel driven by the ongoing expansion and accelerated launch of VLN ® , $1,486 increase in equity comp ($1,237 related to accelerated vesting of an employee’s outstanding equity awards as part of the termination severance agreement), and an increase of $615 in severance.
Sales, general and administrative expense ​ ​ ​ ​ Changes From Prior Year Compensation and benefits (a) $ (2,239) Strategic consulting (b) ​ (393) Sales and marketing (c) ​ 986 Administrative, public company and other expenses (d) ​ 274 Legal (e) ​ 205 Net decrease in SG&A expenses $ (1,167) ​ ​ ​ (a) Decreases in compensation and benefits primarily resulted from $3,200 benefit of lower equity based compensation expense due to current year headcount reduction and forfeitures, and compared with prior year accelerated vesting of an employee’s outstanding equity awards as part of a termination severance agreement; $218 decrease in severance expenses offset by an increase of $1,179 in personnel costs due to increased headcount during the year compared to the prior year period.
The decrease in cash used in investing activities of $50,307 was primarily the result of a net increase in the net cash provided by our short-term investments in the amount of $55,235 offset by an increase in the cash used for acquisition of property, plant and equipment, the acquisition of patents, trademarks and licenses, acquisition of GVB and investment in Change Agronomy Ltd. in the amount of $3,358 for the year ended December 31, 2022 compared to the year ended December 31, 2021.
The decrease in cash provided by investing activities of $5,762 was primarily the result of (i) a decrease in net proceeds from short-term investments of $10,338; (ii) $1,188 related to the acquisition of patents, trademarks and property, plant and equipment; and (iii) $126 of proceeds from the sale of property, plant and equipment.
This decrease in working capital was primarily due to increases from normal fluctuations of current assets such as inventory (i.e. tobacco leaf grow) and an increase of $11,897 attributable to GVB, offset by a decrease of $27,523 in cash, cash equivalents and short-term investment securities.
This decrease in working capital is primarily driven by the decrease in short-term investment securities resulting from cash burn, increase in current portion of long-term debt, and other normal fluctuations from operations in accounts receivable, inventory, accounts payable and accrued expenses.
Removed
In addition to authorizing the Company to market VLN ® cigarettes with the claim, “95% less nicotine”, to clarify the purpose of the brand, the FDA also authorized the claim, “Helps You Smoke Less.” ● Commenced pilot market sales in Chicago during the first quarter of 2022 of VLN ® King and VLN ® Menthol King 95% reduced nicotine content cigarettes, the first and only FDA authorized MRTP designated combustible cigarettes. ● Based on strong pilot outcomes, announced plans for the expansion of VLN ® into additional Illinois locations and the Colorado market as of September 2022.
Added
The Company has the only FDA-authorized combustible cigarette able to meet the stringent reduced nicotine content product standard under the FDA’s Comprehensive Plan requiring that all cigarettes be made “minimally or non-addictive.” o Proposed FDA menthol cigarette ban , in final rules status, could leave VLN ® Menthol King as the only combustible menthol cigarette on the market , providing a critical off-ramp to help current menthol smokers to smoke less , a final decision is now expected in 2024. 37 Table of Contents ​ Recent Business Divestiture ​ On December 22, 2023, we completed the sale of substantially all of the assets of the GVB hemp/cannabis business to Specialty Acquisition Corporation.
Removed
The Company also announced that it will launch VLN ® in three additional states – Arizona, New Mexico, and Utah – covering the Four Corners region. ● Contracted the largest VLN ® tobacco planting in 2022 to support expansion in both the U.S. and international markets. ● Announced an industry-first breakthrough in hemp/cannabis plant transformation with our partner KeyGene, expanding the Company’s capabilities in modifying the principal genes controlling cannabinoid biosynthesis in the plant. ​ Recent Business Acquisitions and Other Events ● On May 13, 2022, we completed the acquisition of GVB Biopharma ("GVB"), a privately held contract development and manufacturing organization (CDMO).
Added
As a result, we 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 and classified the related assets and liabilities associated with the discontinued operations as held for sale in the Consolidated Balance Sheets as of December 31, 2023 and 2022, respectively.
Removed
We believe GVB is one of the largest providers of hemp-derived active ingredients for the pharmaceutical and consumer goods industries worldwide based on total tonnage.
Added
All results and information presented exclude the hemp/cannabis segment and disposal group unless otherwise noted. ​ Refer to Note 2 “Discontinued Operations and Divestitures” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information about the divestiture of the GVB and hemp/cannabis disposal group. ​ Financial Overview – Fourth Quarter and Full Year 2023 Results ● Net revenues for the fourth quarter of 2023 were $7,357, a decrease of 26.1% from $9,951 in 2022, primarily driven by a decrease in volumes of filtered cigars. o Fourth quarter 2023 cartons sold of 823 compared to 1,354 in the comparable prior year period. ● Net revenues for the full year 2023 were $32,204, a decrease of 20.5% from $40,501 in 2022. ● Gross profit for the fourth quarter of 2023 was a loss of $7,829 compared to gross loss of $44 in the prior year period. ● Gross profit for the full year 2023 was a loss of $8,696, compared to a gross profit of $1,847 in 2022. ● Total operating expenses for the fourth quarter 2023 decreased to $6,403 compared to $10,172 in the prior year quarter driven by: o Sales, general and administrative expenses decreased to $4,005 driven primarily by a decrease in personnel costs, strategic consulting, and sales and marketing due to our cost savings initiatives. o Research and development expenses decreased to $493, driven by a decrease in personnel expenses and costs associated with the Company’s research programs. o Other operating expenses, net was $1,905, primarily reflecting restructuring costs of $1,871, including impairment and legal charges. ​ ● Operating loss for the fourth quarter 2023 was $14,232, compared to a loss of $10,216 in the prior year period.
Removed
GVB has industry leading market positions and expertise in all facets of the hemp/cannabis industry, including: research and genetics, proprietary cryogenic hemp extraction; refining, conversion, and product formulation technology; lead supplier of Active Pharmaceutical Ingredients (API); low-cost, scalable manufacturing capabilities; regulatory and compliance expertise; industry trusted high-quality products; and international capabilities ​ ● On November 20, 2022, a fire occurred at the GVB Biopharma distillate and isolate manufacturing facility located in Grass Valley, OR.
Added
Full year 2023 cartons sold were of 3,459 compared to 5,782 in the comparable prior year period. ​ ​ 39 Table of Contents Gross profit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31 ​ December 31 ​ 2023 ​ 2022 Gross (loss) profit ​ $ (8,696) ​ ​ $ 1,847 ​ Percent of Revenues, net ​ ​ (27.0) % ​ ​ 4.6 % ​ The decrease in gross profit and gross profit as a percent of revenues, net for the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily driven by lower volume due to an intentional shift during 2023 in product mix.
Removed
There were no reported life-threatening injuries, but the fire damaged the refinement facility requiring all hemp refining operations on site to be curtailed. Additional equipment and inventory stored in adjacent buildings was not damaged and was relocated to nearby facilities as part of the Company's business continuity plans.
Added
In connection with evaluation of strategic alternatives and tobacco focused restructuring efforts, during the fourth quarter of 2023, the Company increased the reserve for excess, obsolete or expired leaf inventory by $7,720.
Removed
The Company subsequently commenced the insurance claims process and believes that losses resulting from the fire will be covered by its property and business interruption policies.
Added
(b) Decrease of strategic consulting due to restructuring efforts and implementation of cost savings initiatives. (c) Increased sales and marketing related to expansion of VLN ® . (d) Other expenses increased due to $291 of technology expenses, $579 in public company fees, $270 of facilities expense offset by a decrease in insurance expenses of $469 and other of $397.
Removed
Subsequent to the fire, the Company implemented backup sourcing and production plans to continue fulfilling customer orders and to resume production of distillate and isolate ingredients. 43 Table of Contents ​ ● On January 19, 2023, we acquired RX Pharmatech Ltd (“RXP”), a privately held leading United Kingdom distributor of cannabinoids with 1,276 novel food applications with the U.K.
Added
(e) Increased legal expenses due to regulatory compliance, business development, and contract matters. ​ 40 Table of Contents Research and development expense ​ ​ ​ ​ ​ ​ Changes From Prior Year Compensation and benefits (a) ​ $ (164) Royalty, license and contract costs (b) ​ ​ (376) Consulting and professional services (c) ​ ​ (478) Other ​ ​ 84 Net decrease in R&D expenses ​ $ (934) ​ (a) Decreased compensation and benefits primarily related to personnel bonus expense of $255 in the prior year period as compared to $0 in the current year.
Removed
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.
Added
(b) Decreased expenses primarily due to a decrease in royalty fees due in the current year period. (c) Decreased consulting due to an evaluation of strategic opportunities related to our tobacco patent portfolio that occurred in the period year period.
Removed
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. ​ Refer to Note 2 “Business Acquisitions” and Note 21 “Subsequent Events” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about the acquisition of GVB and RXP. ​ Tobacco Business Highlights ● Leveraged the exceptional Chicago pilot results to expand VLN ® sales in Illinois and launch in Colorado, where the state employs a favorable MRTP excise tax program.
Added
Other operating expenses (income), net ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2023 2022 Restructuring costs: ​ ​ ​ ​ ​ ​ Impairment of intangible assets ​ $ 1,375 ​ $ 35 Impairment of fixed assets ​ ​ 56 ​ ​ - Professional services ​ ​ 763 ​ ​ - Severance ​ ​ 221 ​ ​ - Total Restructuring costs (a) ​ ​ 2,415 ​ ​ 35 ​ ​ ​ ​ ​ ​ ​ Acquisition and transaction costs (b) ​ ​ 223 ​ ​ — Gain on sale or disposal of property, plant and equipment (c) ​ ​ (111) ​ ​ (362) Total other operating expenses (income), net ​ $ 2,527 ​ $ (327) ​ ​ ​ ​ ​ ​ ​ NM - calculated change not meaningful ​ ​ ​ ​ ​ ​ ​ (a) During the second half of 2023, the Company undertook various restructuring activities in an effort to better align its internal organizational structure and costs with its strategy, as well as preserve liquidity.
Removed
The Company has the only FDA-authorized combustible cigarette able to meet the stringent reduced nicotine content product standard under the FDA’s Comprehensive Plan requiring that all cigarettes be made “minimally or non-addictive.” o Proposed FDA menthol cigarette ban , in final rules status, could leave VLN ® Menthol King as the only combustible menthol cigarette on the market , providing a critical off-ramp to help current menthol smokers to smoke less , a final decision expected in August 2023. o In December 2022, New Zealand became the first country to pass a nationwide mandate permitting only reduced nicotine content cigarettes to be sold starting in early 2025. ● Planted the largest ever VLN ® tobacco crop in 2022, including the second-generation VLN ® 2.0 reduced nicotine tobacco plants, which have demonstrated approximately 30% higher yields, enhanced quality leaf, improved disease resistance, reduction in nutrient requirements and increased stability across various environments and geographies. o Announced a dedicated seed cultivation program designed to generate enough tobacco to support the entire New Zealand cigarette marketplace with reduced nicotine content tobacco, more than 2 billion sticks annually. ● Completed expansion of existing manufacturing operations and increased capacity by 25%, including installation of a new production line and initiation of a second shift. 44 Table of Contents ​ Hemp/Cannabis Business Highlights ● Fundamentally shifted hemp/cannabis business, moving from primarily research and development efforts to a fully commercialized company with the acquisition of GVB Biopharma, a global scale provider of hemp-derived cannabinoid ingredients and API to the pharmaceutical and consumer goods industries with world-class CDMO capabilities. ● Positioned for global leadership as the largest provider of cannabinoid extracts and isolates in North America, focused on cannabidiol (CBD) and cannabigerol (CBG) extracted and refined at industrial scale into distillates. ● Completed vertical integration of novel cannabinoid value chain from receptor science to finished goods and now CDMO+D capabilities for complete category management to retail points of sale. ● Advancing multiple verticalized license agreements with major consumer CBD and alternative cannabinoid brands to manufacture and distribute key cannabinoid product offerings to retailers throughout the U.S. as a new turnkey solution for consumer facing cannabis product brands. ● Continued expanding CBD crude production capabilities with new Prineville, Oregon facility, one of the largest hemp extraction plants in the world, with expected capacity exceeding 15,000 kg/month at full operation, further improving gross margin on all GVB cannabinoid products. ● Responded to a fire at the Company’s Grass Valley manufacturing facility, immediately shifting to alternate supply sources to fulfill all customer deliveries planned in the fourth quarter.
Added
As a result, the Company incurred $2,415 in restructuring costs for the year ended December 31, 2023, which included costs related to employee termination, professional services and consulting, and long-lived asset impairment. ​ (b) Acquisition and transaction costs primarily relate to professional fees incurred in connection with potential capital markets transactions. ​ (c) Reflects gain on sale resulting from sale of older manufacturing equipment. ​ Refer to Note 18, “Other operating expenses, net,” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information regarding these charges. ​ 41 Table of Contents Other income (expense) ​ ​ ​ ​ ​ ​ Changes From Prior Year Other income (expense): ​ ​ ​ Realized loss on Panacea investment (a) ​ $ (2,789) Other income (expense), net (b) ​ ​ (700) Loss on transfer of promissory note (c) ​ ​ 895 Interest income, net ​ ​ 94 Interest expense (d) ​ ​ 9,311 Net increase in other expense ​ $ 6,811 ​ (a) Realized loss on PLSH investment reflects the change in fair value and write-off of our investment in PLSH common stock during the year ended December 31, 2022 of $2,340 and extinguishment of note receivable of $500 less adjusted discount of $51. ​ (b) Other income (expense), net includes a decrease of $336 of realized losses on short-terms investments and $364 gain on change in fair value of warrant liability. ​ (c) In connection with the Senior Secured Credit Facility October Amendment, the Company assigned $3,800 PLSH promissory note less unamortized discount of $305, and corresponding pay down of indebtedness on outstanding principal of $600 and redemption of the related warrant liability of $2,000 resulting in loss on sale of financial asset of $895. ​ (d) Interest expense increased in 2023, as compared to the prior year period, primarily due to the cash interest of $1,104 and non-cash interest of $2,087 recognized from the Senior Secured Credit Facility (of these totals, $366 of interest was allocated to discontinued operations), and additional charges of $5,158 for extinguishment of debt and $557 of derivative liability in connection with the December Amendment.
Removed
New facilities are being established, replacing the prior capacity, as the Company plans for construction of a new, larger and more efficient distillate and isolate manufacturing campus. ● Submitted DMF to the FDA to produce and supply APIs for the medical and pharmaceutical industries while also pursuing The International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use (ICH) Q7 international pharma-grade audit standard certification in order to supply naturally derived hemp/cannabis APIs. ● Announced a global sales, marketing and distribution agreement with Cannabinoid API Solutions (CAS) and Transo-Pharm for APIs to accelerate opportunities to supply to the largest and most innovative pharmaceutical and consumer goods manufacturers. ● Acquired RX Pharmatech Ltd. in an accretive transaction securing a portfolio of 1,276 CBD product and ingredient based Novel Food Applications with the U.K.
Added
Additionally, interest expense increased as a result of PIK interest of $695 recognized from the Subordinated Note. ​ Liquidity and Capital Resources We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in our tobacco business.
Removed
Food Standards Agency, accelerating CBD product growth in the U.K. and EU food and nutraceuticals markets. ● Announced the Company’s central distribution facility in the Netherlands, opened in November 2022, will support growing demand for hemp/cannabis products in Europe, the Middle East, and Africa (EMEA). Corporate Business Highlights ● Dr.
Added
We had negative cash flow from operations of $54,987 for the year ended December 31, 2023 and an accumulated deficit of $378,707 as of December 31, 2023. As of December 31, 2023, we had cash and cash equivalents of $2,058, and working capital of ($6,826) (compared to working capital of $22,079 at December 31, 2022).
Removed
Calvin Treat joined the Company as our Chief Scientific Officer on May 23, 2022, further enhancing our deep expertise in plant-based biotechnology across all three of our plant franchises. Dr. Treat has led global plant biotechnology programs at Bayer and Monsanto, including corn, soybean, and cotton crop improvement technologies. ● R.
Added
Given our projected operating requirements and existing cash and cash equivalents, there is substantial doubt about our ability to continue as a going concern through one year following the date that the Consolidated Financial Statements herein are issued.
Removed
Hugh Kinsman was appointed Chief Financial Officer on June 16, 2022, expanding his role at GVB Biopharma to include corporate financial leadership functions. ● The Company announced that the position of President and Chief Operating Officer was eliminated effective September 30, 2022. James A.
Added
In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners.
Removed
Mish, assumed the responsibilities of Corporate President, and operations have been integrated into the tobacco and hemp/cannabis business teams. ● Lucie S.
Added
If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory or assets, cease or curtail operations, seek to negotiate new business deals with our business partners or seek protection under applicable bankruptcy laws or similar state proceedings.
Removed
Salhany was appointed to the Company’s Board of Directors in September 2022, extending her experience in positioning unique products for successful launch, corporate strategy, and entrepreneurial ventures to help raise 22nd Century’s profile in tobacco harm reduction and the hemp/cannabis industry. ● The Company announced that John Miller was appointed as an executive officer and President of Tobacco effective November 11, 2022.
Added
There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Accordingly, there is substantial doubt regarding our ability to continue in operations.
Removed
John J. Miller initially joined our tobacco business in May 2022, to help achieve the full potential of our tobacco franchise. Mr.
Added
Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Consolidated Financial Statements are issued. 42 Table of Contents Our cash and short-term investments, and working capital as of December 31, 2023, and 2022, are set forth below: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31 ​ December 31, ​ 2023 2022 Cash and cash equivalents ​ $ 2,058 ​ $ 2,205 Short-term investment securities ​ $ — $ 18,193 Working capital ​ $ (6,826) $ 22,079 ​ Working Capital As of December 31, 2023, we had working capital, excluding assets and liabilities held for sale, of approximately ($6,826) compared to working capital of approximately $22,079 as of December 31, 2022, a decrease of $28,905.
Removed
Miller was the President and CEO of Swisher International, Inc., the largest manufacturer and exporter of cigars and smokeless tobacco products in America. ​ 45 Table of Contents Financial Overview – Fourth Quarter and Full Year 2022 Results ● Net revenues for the fourth quarter of 2022 were $19,206, an increase of 141.3% from $7,960 in 2021. o Revenue from tobacco-related products was $9,951, an increase of 25.7% from 2021, primarily driven by volume increases in contract manufacturing and initial VLN ® sales as part of the early rollout in Illinois and Colorado. ● Fourth quarter 2022 cartons sold of 1,354 compared to 1,144 in the comparable prior year period. o Revenue from hemp/cannabis-related products was $9,255, compared to $43 in the prior year fourth quarter, reflecting the acquisition of GVB. ● Net revenues for the full year 2022 were $62,111, an increase of 100.7% from $30,948 in 2021. ● Gross profit for the fourth quarter of 2022 was a loss of $646 compared to profit of $231 in the prior year period. o Gross profit from tobacco-related products was $(44), a decrease of $400 compared to the prior year period, reflecting lower margin sales mix in contract manufacturing products. o Gross profit from hemp/cannabis-related products was a loss of $(601) compared to $(125) in the prior year.
Added
These decreased cash outflows were partially offset by an increase in cash inflows of (i) $3,500 of property, plant, and equipment casualty loss insurance proceeds collected in the current year; (ii) $1,043 from the acquisition of RXP in the current year and GVB in the prior year period; (iii) $682 from the investment in Change Agronomy Ltd. in the prior year and (iv) $665 from proceeds from the sale of discontinued operations.
Removed
Margin declines in the fourth quarter were primarily due to impact of the Grass Valley fire.
Added
Net cash provided by financing activities During the year ended December 31, 2023, cash provided by financing activities increased by $6,389 resulting from the net proceeds of $16,048 from issuance of long-term debt, proceeds of $6,016 from issuance of detachable warrants, net proceeds of $3,044 from warrant exercises, net proceeds of $2,563 from issuance of common stock related to the prior ATM facility, increased proceeds of $198 from the issuance of notes payable, and a decrease in other financing of $29.
Removed
On a proforma basis, as if the GVB acquisition had occurred effective January 1, 2021, gross profit would have been $1,594 in the fourth quarter 2021. ● Gross profit for the full year 2022 was $1,174, a decrease of 21.0% from 2021. ● Total operating expenses for the fourth quarter 2022 increased to $22,512 compared to $9,262 in the prior year quarter driven by: o Sales, general and administrative expenses increased to $14,097 driven primarily by the acquisition of GVB, higher strategic consulting and marketing, legal, and personnel costs to expand the launch of VLN ® o Research and development expenses increased to $2,093, driven by personnel expenses and costs associated with the Company’s hemp/cannabis and hops research programs. ​ o Other operating expenses, net was $6,322 reflecting the unusual and infrequent charges recorded in connection with the Grass Valley fire in November 2022. ​ ● Operating loss for the fourth quarter 2022 was $23,158, compared to a loss of $9,031 in the prior year period.
Added
These cash inflows were offset by a decrease in net proceeds of issuance of common stock of $9,605, payments of long-term debt of $9,700, increased note payable payments of $1,759, taxes paid related to net share settlement of RSUs of $271 and $174 of option exercises that occurred in 2022.
Removed
Net loss for the full year 2022 was $59,801, representing a net loss per share of $0.31 compared with net loss for the full year 2021 of $32,609, representing a net loss per share of $.21. ● As of December 31, 2022, we had $21,213 in cash, cash equivalents and short-term investments securities. o During the first quarter of 2023, the Company received $5,000 of casualty loss insurance recoveries from the Grass Valley fire with business interruption insurance claims proceeds expected thereafter. ​ o On March 3, 2023, the Company announced a $21,052 senior credit facility to fund increased working capital needs related to the significant consumer demand for its VLN ® product and GVB business lines. ​ ◾ The new three-year credit facility was issued at 5% original issuance discount (OID), will bear cash interest at a rate of 7% per annum, and commence principal amortization in the 46 Table of Contents second year at a rate of 2% of the original balance per month.
Added
Cash demands on operations As of December 31, 2023, we had approximately $2,058 of cash and cash equivalents.
Removed
Full year 2022 cartons sold were of 5,782 compared to 4,331 in the comparable prior year period.
Added
Our principal sources of liquidity are our cash and cash equivalents and cash generated from our tobacco contract manufacturing business and proceeds from debt and equity financing activities, which cash flows provided by financing activities for the year ended December 31, 2023 were $37,209. 44 Table of Contents As discussed above, in response to the cash demands on operations, management has implemented programs to evaluate strategic alternatives for the Company’s assets and cost cut initiatives intended to reduce our operating costs to provide additional cash runway.
Removed
H emp/cannabis revenue was $21,567 in the current year compared to negligible revenues in 2021, primarily as a result of the GVB acquisition . ​ Gross profit ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ December 31 ​ December 31 ​ ​ Change ​ 2022 2021 ​ ​ $ Gross profit $ 1,174 ​ $ 1,486 ​ ​ (312) Percent of Revenues, net ​ 1.9 % ​ 4.8 % ​ ​ ​ The decrease in gross profit and gross profit as a percent of revenues, net for the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily driven by an increase of $218 from favorable tobacco volume offset by losses from hemp/cannabis of $530.
Added
However, our cash, cash equivalents, potential business interruption insurance proceeds, and debt/equity financings, as well as the sustained tobacco contract manufacturing, currently are not forecasted to provide sufficient cash resources or liquidity for a period of twelve months from issuance of these consolidated financial statements.
Removed
Hemp/cannabis gross profit was unfavorable mainly due to non-recurring charges of $1,259, primarily attributable to amortization of inventory step-up resulting from the acquisition of GVB. Additionally, hemp/cannabis gross profits in the fourth quarter were negatively impacted from the Grass Valley fire.
Added
Senior Secured Credit Facility On March 3, 2023, the Company entered into that certain Securities Purchase Agreement (the “SPA”) with JGB Partners, LP (“JGB Partners”), JGB Capital, LP (“JGB Capital”) and JGB Capital Offshore Ltd.
Removed
We anticipate subsequent recoveries in 2023 of gross profit negatively impacted by the fire through our business interruption insurance claims.
Added
(“JGB Offshore” and collectively with JGB Partners and JGB Capital, the “Holders”) and JGB Collateral, LLC, as collateral agent for the Holders (the “Agent”) which pursuant to the agreement, the Company sold 5% original issuance discount senior secured debentures with an aggregate principal amount of $21,053.
Removed
(b) Increased legal expenses due to regulatory compliance for VLN ® launch, and enforcement of our patent portfolios. 48 Table of Contents (c) Increase of strategic consulting due to additional business development, recruitment, and investor relations expenses. (d) Increases due to the ongoing expansion and accelerated launch of VLN ® .

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