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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ Annual Report under Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the fiscal year ended December 31, 2024

or

☐ Transition Report under Section 13 or 15(d) of the

Securities Exchange Act of 1934

Commission File Number: 001-36338

22nd Century Group, Inc.

(Exact name of registrant as specified in its charter)

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321 Farmington Road, Mocksville, North Carolina 27028

(Address of principal executive offices)

(336) 940-3769

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act

Yes ☐ No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes☐ No ⌧

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ⌧ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)

Yes ⌧ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ⌧

The aggregate market value of the registrant’s common stock as of June 30, 2024, the last day of the registrant’s most recently completed second fiscal quarter, was approximately $6.9 million based upon the closing price reported for such date on the Nasdaq Capital Market. On March 17, 2025, the registrant had 2,369,552 shares of common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for its 2025 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 2024.

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Table of Contents

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Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary

This Annual Report on Form 10-K contains forward-looking statements concerning our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “potential,” “positioned,” “predict,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. These statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including the following summary of risks related to our business:

For the discussion of these risks and uncertainties and others that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Risk Factors” in this Annual Report on Form 10-K. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Unless the context otherwise requires, references to the “Company” “we” “us” and “our” refer to 22nd Century Group, Inc., a Nevada corporation, and its direct and indirect subsidiaries.

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PART I

Item 1.Business.

Overview

22nd Century Group is a tobacco products company that enables cigarette smokers to take control of their consumption of nicotine, the addictive drug in cigarettes. We manufacture and distribute the only combustible tobacco products containing minimally or non-addictive levels of nicotine that are authorized by the US Food and Drug Administration (FDA) for retail purchase. We also provide turnkey contract manufacturing of cigarettes and filtered cigars for other established tobacco brands.

We created our flagship product, the VLN® cigarette, to give traditional cigarette smokers an authentic and familiar alternative that helps them decide their consumption of nicotine. VLN® cigarettes have 95% less nicotine than the traditional cigarette and have been proven to greatly reduce nicotine consumption. Instead of offering new ways of delivering the nicotine drug to addicted smokers, we offer smokers the option to make their own informed and more productive choices, including the choice to avoid addictive levels of nicotine altogether and help adult smokers smoke less.

Nicotine Harm Reduction

Since the US Surgeon General first warned of the dangers of cigarette smoking in 1964, the debate over tobacco health harm has been largely dominated by two powerful voices: Big Tobacco and the US Government. After decades of litigation, lobbying and lawmaking, the major tobacco producers still decide the nicotine levels contained in the tobacco products consumed by smokers. In addition, despite prominent and omnipresent government warnings that “Nicotine is an Addictive Chemical,” sales of tobacco products containing addictive levels of nicotine continue unabated, including even delivery of smoke-free nicotine in pure form.

22nd Century believes it is time for the individual tobacco user to decide for themselves how much nicotine they choose to consume. If a consumer chooses to smoke tobacco without nicotine addiction, we offer that alternative.

Transition to Growth

We received Modified Risk Tobacco Product (MRTP) granted orders from the FDA for marketing and sale of our revolutionary RNC cigarettes in December 2021, the first and only such orders ever awarded for a combusted tobacco product. The authorized products are based on our proprietary RNC tobacco blends made possible by comprehensive and patented technologies that regulate nicotine biosynthesis activities in the tobacco plant, resulting in full flavor and high yield with 95% less nicotine.

We designed a pilot program to study retailer and consumer reaction to the RNC concept and our VLN® cigarettes in selected retail outlets during 2022. We commissioned a comprehensive market study to evaluate the results, including participants’ smoking behaviors and history, awareness and purchase of VLN® cigarettes, attitudes and perceptions, and responses to messaging. The program was expanded in 2023, progressing state by state and region by region to a store footprint spanning more than 5,000 stores in 26 states.

Based on extensive consumer feedback and point-of-sale data, we made significant enhancements to nearly every aspect of the consumer and retailer VLN® experience, including improved and revitalized branding, packaging, and messaging. As we enter 2025, we have implemented a marketing approach that leverages our numerous contract manufacturing relationships together with cross branding strategies for integrative volume growth and enhanced retail access. We forecast entering national distribution in 2025, with an eye eventually toward more than 270,000 domestic tobacco retail outlets and a substantial share of the estimated $12 billion non-Tier 1 US tobacco market.

A New and Disruptive Category

Our VLN® cigarettes are currently available in a large number of top reatilers in US markets and present a groundbreaking alternative with 95% less nicotine content than conventional cigarettes. Maintaining a familiar combustible product format, VLN® products replicate the conventional cigarette smoking experience, encompassing sensory and experiential elements such as taste, scent, smell, and the familiar “hand-to-mouth” behavior.

Our approach is not to continue making and selling VLN® cigarettes as a novel idea, but to build an entire Reduced Nicotine Content Category of products, including tiers of proprietary and partner or “flanker” brands that we manufacture and distribute. We expect this “House of Brands” to drive retail shelf visibility, consumer recognition, and overall volume expansion. At the same time, we are leveraging our CMO relationships for cross-sale of brand families to increase distribution and points-of-sale for each of us.

As a category, we expect RNC tobacco to be no less disruptive than the zero- and low-proof spirits segment, which has gone from a dubious notion to a multi-billion-dollar market in only a few years. Rather than attempting to compete against traditional adult beverages, the low-proof spirits category breaks the paradigm by offering individuals the option to participate in a personal routine or social ritual without the alcohol intake, either on occasion or as a lifestyle commitment, for whatever reasons they choose. Moreover, this choice is provided at an above-premium price point with high margin delivery.

Instead of an all-or-nothing proposition – either quit smoking or remain forever addicted to nicotine – the VLN® message is that tobacco users have the option to “Take Control” of their nicotine consumption. As the only manufacturer in the US that makes and sells full-flavored cigarettes with minimally or non-addictive levels of nicotine, we are uniquely positioned to fulfill this choice.

Manufacturing

We lease a 60,000 square foot manufacturing facility in Mocksville, North Carolina capable of producing more than 45 million cartons of combusted tobacco products annually with additional space for expansion. Our factory is operated by NASCO Products, LLC, a federally licensed tobacco product manufacturer and our wholly owned subsidiary. The cigarette and filtered cigar manufacturing equipment we own is high speed and automated, allowing for minimal direct labor costs. Our manufacturing operations are vertically integrated, allowing us to control production priorities and maintain the required high quality of our products, including our MRTP-designated VLN® cigarettes.

Through the acquisition of NASCO and our North Carolina factory in 2014, we qualified as a subsequent participating manufacturer under the Master Settlement Agreement (MSA), an accord reached in 1998 between the State Attorneys General of 46 states, five U.S. territories, the District of Columbia and the four largest tobacco companies in the United States concerning the advertising, marketing and promotion of tobacco products. As a subsequent participating manufacturer (SPM) under the MSA, we are released from claims by the Settling States for smoking-related health costs and contribute actively toward the goal of reducing cigarette smoking among youth and raising public awareness about smoking and the tobacco industry, while adhering to higher standard in all aspects of marketing and sales.

We began producing our proprietary RNC cigarettes in 2015, including our SPECTRUM® variable nicotine research cigarettes provided for independent clinical studies largely funded by the National Institute on Drug Abuse (NIDA) and the FDA. Low nicotine SPECTRUM® cigarettes also served as the basis for our Premarket Tobacco Product Application (PMTA) to the FDA in 2018 to enable commercialization as a new tobacco product. In 2022, our factory began production of VLN® Gold King and VLN® Menthol King cigarettes following their authorization by the FDA as Modified Risk tobacco products.

We also operate as a turnkey contract manufacturing facility for many partnership brands both domestically and internationally. With high-speed manufacturing capabilities, we continue to attract additional contract manufacturing business, including third-party filtered cigar brands and MSA-compliant cigarette brands, to absorb our manufacturing overhead and help keep our unit cost profile low.

Tobacco Sources of Raw Materials

We obtain our reduced nicotine tobacco leaf from third party-growers, primarily in multiple states in the United States who are under direct contracts with us. These contracts prohibit the transfer of our proprietary tobaccos, seeds and plant materials to any other party. We purchase conventional tobacco destined for contract manufacturing operations through third parties.

In 2023, we leased additional warehouse space in Winston-Salem, North Carolina. This bonded and temperature conditioned space further supports growth of our VLN® branded products and provides additional distribution opportunities for customers.

Sales, Distribution, and Growth

Our pilot VLN® cigarette retail programs during 2022-23 proved the viability and potential of RNC tobacco products, and the appeal to consumers of having a choice in their nicotine consumption. The motivation to provide tobacco users with lower nicotine options has only increased with the FDA’s recent January 2025 Notice of Proposed Rulemaking that would mandate substantially reduced nicotine content in all combusted tobacco products sold in the US.

Our sales and distribution strategy will be executed with a disciplined route-to-market plan allowing maximum impact for retail development and account depth. We expect our initial focus to be in the convenience store segment, which accounts for the overwhelming share of tobacco revenue, with other channels to follow. We plan to employ consistent marketing collateral combined with a comprehensive digital market campaign, targeting adult smokers to drive point purchase direction with connectivity through age-gated social media platforms and an interactive website for adult smokers. All of this is supported by recently redesigned VLN® packaging with a vibrant, modern look to drive an emotional consumer connection with adult smokers.

With the VLN® concept validated, our unswerving focus now is upon rate-of-sale of our exclusively positioned products and profitable growth. We will build our singular House of Brands by strategic increments, with time-to-market and profitability as our measures of success. Our goal is to release what we see as the enormous untapped value of a disruptive product alternative capable of fulfilling unmet demand within a nearly $12 billion market segment.

In addition to continued focus on VLN® and the Low Nicotine Category, we have renewed our focus on utilizing our tobacco assets and expertise to attract additional tobacco business to help fund our portfolio growth. In addition to existing business relationships with multiple tobacco products companies, we will continue to expand the number of brands and products in our contract manufacturing operations (CMO) portfolio.

Research & Development (R&D) & Intellectual Property (IP)

Since our inception, most of our research and development (R&D) efforts have been outsourced to highly qualified groups in their respective fields. Since 1998, we have had multiple R&D agreements with North Carolina State University (NCSU) and others resulting in exclusive worldwide licenses to various patented technologies. We have utilized the same model employed by many public-sector research organizations, in which we obtain an exclusive option or license agreement to any invention arising out of our funded research. In each case, we fund and control all patent filings as the exclusive licensee. This model of contracting with public-sector researchers has enabled us to control R&D costs while achieving our desired results, including obtaining exclusive intellectual property rights relating to our outsourced R&D.

Pre-Commercialization R&D

Founded as a biotechnology research company, our activities were initially centered on continued development of genetic transformation options for control of nicotine levels in the tobacco plant. In addition to the breakthrough genome modification techniques licensed from NCSU in 1998, we independently invented or obtained exclusive licenses to ways of further affecting the nicotine biosynthetic pathway, including regulation of additional enzymes and transcription factors. These discoveries were instrumental in our formulation of experimental variable-nicotine tobacco products, millions of which were manufactured and furnished for independent clinical trials funded NIDA and the National Cancer Institute (NCI). The results of those trials showed that having a reduced nicotine cigarette option available could substantially affect behaviors and choices among smokers, which charted our course going forward.

In 2014, we entered into sponsored research and license agreements with NCSU for exclusive worldwide rights to bioengineering technologies for achieving low nicotine content in tobacco without having the plant strains regulated as genetically modified organisms (“GMOs”). We subsequently entered into a separate license agreement with the University of Kentucky to license other next-generation very low nicotine content non-GMO tobacco plant lines. In addition, we began assembling studies and data in support of a Premarket Tobacco Product Application (PMTA), a submission authorized under the 2009 Tobacco Control Act, for potential commercialization of consumer tobacco products based on our proprietary low nicotine tobacco. The PMTA for marketing of our SPECTRUM® cigarettes was submitted to the FDA on December 4, 2018.

Beginning in 2018, we also began to extend our R&D activities into the field of hemp (i.e., cannabis). We increased staff at our Rockville, Maryland laboratory facility for this purpose and entered into sponsored and collaborative research agreements with several institutions and consultants for bioengineering of the hemp plant. In 2022, 22nd Century acquired GVB Biopharma, an industrial scale processor of hemp-based derivatives for commercial applications, which itself was engaged in research and development related to its products and processes. In December 2023, the Company divested its GVB subsidiary, terminated all hemp-related research, distribution and consulting agreements, and ceased all R&D activities related to hemp. For more information regarding the GVB divestiture, please refer to Note 2, “Discontinued Operations and Divestiture,” in the Notes to Consolidated Financial Statements, which can be found in Item 15 of this report.

In February 2024, we relocated our laboratory activities from Rockville, Maryland to our Mocksville, NC manufacturing facility in order to reduce fixed costs and take advantage of proximity to the factory and NCSU.

Our R&D Today

We received a marketing order from the FDA on December 17, 2019, authorizing commercialization of our RNC cigarettes. Shortly after, based on further studies and data provided, we received FDA granting orders authorizing our marketing of VLN® cigarettes as Modified Risk Tobacco Products. Since the launch of our VLN® cigarette pilot program in 2022, our research and development activity has been devoted to supporting further VLN® product development and improvements, regulatory compliance, and expanding the RNC portfolio of products.

We continue to pursue improvements in our ability to control nicotine biosynthesis in tobacco, including gene editing techniques that provide for greater crop yields and disease resistance. Our original GMO tobacco strains have been replaced with fully non-GMO engineered low nicotine varieties, which expands accessibility to international markets where GMO agricultural products are disfavored or banned. We have successfully applied our non-GMO bioengineering techniques to increasingly diverse tobacco lines, including bright, burley, and oriental tobaccos. We expect to develop new versions of our RNC cigarettes utilizing these cutting-edge technologies for future commercialization in the U.S. and globally, including the coveted “American blend” of cigarettes in low nicotine form featuring a mix of bright, burley, and oriental proprietary RNC tobacco varieties.

Intellectual Property

Our intellectual property enables us to alter the level of nicotine and other nicotinic alkaloids in tobacco plants through genetic engineering and modern plant breeding. The basic techniques include, but are not limited to, those that are used in the production of genetically modified and gene-edited varieties of other crops, which are also known as “biotech crops.”

We have extensive patent protection and exclusive rights in the US and internationally covering tobacco plants with altered nicotine content produced by modifying the expression of genes that control important steps in the biosynthesis of nicotine in the tobacco plant. The terms of certain patents filed in the 2000s will expire between 2026 and 2029, but those of others will extend into the next decade and beyond. Patent applications currently pending claim substantially improved quality and yield in genetically modified low nicotine varieties, and ways of achieving organically even further reductions in levels of nicotine and those of nicotine nitrosamines upon tobacco combustion, which are among the most carcinogenic and dangerous byproducts of cigarette smoking.

In addition to our patents, patent applications, and exclusive patent license rights, we own valuable trade secrets related to the growth, harvesting, curing and use of our proprietary tobacco plants and the manufacture of our tobacco products. We also own various registered trademarks in the United States and around the world.

Government Regulation

Tobacco Master Settlement Agreement

The Master Settlement Agreement (MSA) is an accord reached in November 1998 between the State Attorneys General of 46 states, five U.S. territories, the District of Columbia and the four largest tobacco companies in the United States concerning the advertising, marketing and promotion of tobacco products. The MSA also set standards for, and imposes restrictions on, the sale and marketing of cigarettes by participating cigarette manufacturers. On August 29, 2014, we entered into an Amended Adherence Agreement with the 46 Settling States under the MSA pursuant to which the Company was approved to acquire NASCO Products, LLC, a federally licensed tobacco product manufacturer and subsequent participating manufacturer under the MSA. On that same date, we closed the NASCO Acquisition and became an SPM under the MSA.

The National Association of Attorneys General (NAAG) coordinates with Settling States through its Center for Tobacco and Public Health to preserve and enforce the monetary and public health mandates of the MSA, including monitoring the compliance of tobacco companies with its terms. As a participating manufacturer under the MSA, we are released from claims by the Settling States for smoking-related health costs and contribute actively toward the goal of reducing cigarette smoking among youth and raising public awareness about smoking and the tobacco industry.

FDA Regulation of 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. Among its authorities, the FDA requires that manufacturers of tobacco products first introduced or modified after February 15, 2007, undergo premarket review and obtain premarket authorization prior to commercialization, and to comply with post-authorization monitoring and reporting requirements. The Tobacco Control Act granted FDA the authority to require the reduction of nicotine to any level other than zero or require reduction of other compouns in tobacco and cigarette smoke. The FDA has further authority to restrict marketing and advertising, impose regulations on packaging, mandate warnings and disclosure of flavors or other ingredients, prohibit the sale of tobacco products with certain flavors or other characteristics, limit or prohibit the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packaging sizes, and seek to hold retailers and distributors responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke.

The Tobacco Control Act requires manufacturers of tobacco products to, among, other things, provide FDA with a list of ingredients added to tobacco products in the manufacturing process and register any establishment engaged in the manufacture, preparation, or processing of a tobacco product. The manufacture of products is subject to strict quality control, testing and record-keeping requirements, and continuing obligations regarding the submission of safety reports and other post-market information. The FDA has several investigatory and enforcement tools available, including document requests and other required information submissions, facility inspections, examinations and investigations, injunction proceedings, monetary penalties, product withdrawal and recall orders, and product seizures. All tobacco products we make and sell in the US are subject to FDA jurisdiction.

Premarket Tobacco Product Application (PMTA)

Under the 2009 Tobacco Control Act, a PMTA must be submitted to the FDA for any new tobacco product seeking a marketing order to enable commercialization of the product in the United States. For FDA to grant such an order, the PMTA must enable the FDA to determine, among other things, that permitting the marketing of the proposed new tobacco product would be appropriate for the protection of the public health (APPH), and that the product manufacturing, processing, and labeling of the product otherwise conform to the requirements of the Food, Drug and Cosmetics Act.

A marketing order may include restrictions on the sale and distribution of the product, including restrictions on the access to, and the advertising and promotion of, the tobacco product, and requirements for record-keeping and post market reporting. Holders of authorized PMTAs are required to submit detailed periodic and annual reports to the FDA within specified timelines, and are further required to submit reports for serious and unexpected adverse events associated with the product. Once granted, the FDA may suspend or withdraw any marketing order on various grounds, such as a determination that the continued marketing of the tobacco product is no longer appropriate for the protection of public health, or where the PMTA holder has failed to comply with applicable post-market requirements.

We submitted a PMTA to the FDA on December 5, 2018, for proposed marketing of our proprietary RNC cigarettes, and, on December 17, 2019, the FDA issued a marketing order authorizing commercialization. Any new tobacco products we wish to commercialize in the US that are not substantially equivalent to products already authorized or exempt from premarket review will require new PMTA authorization. Determination by the FDA of whether to accept the application may take several months. While the FDA endeavors to complete its review of a PMTA within 180 days of acceptance, the FDA’s review period may take significantly longer.

Modified Risk Tobacco Products (MRTP)

The 2009 Tobacco Control Act grants the FDA authority to regulate the labeling and marketing of so-called Modified Risk Tobacco Products (MRTP), which include, among other things, tobacco products that may reduce harm or the risk of tobacco-related disease or reduce or eliminate exposure to a substance. Before an MRTP can be introduced or delivered into interstate commerce in the United States, the FDA must issue a either a “risk modification order” or “exposure modification order” pursuant to the Tobacco Control Act. An order permitting the sale of an MRTP, if granted by the FDA, enables the applicant to utilize certain claims with respect to a single, specific product, not an entire class of tobacco products.

To obtain a risk modification order, an applicant must demonstrate that the product will significantly reduce harm and the risk of tobacco-related disease to individual tobacco users and benefit the health of the population as a whole, taking into account both users of tobacco products and persons who do not currently use tobacco products. The FDA must also find that the applicant has demonstrated that the magnitude of overall reductions in exposure to the substance specified in the application is substantial and that the product as used exposes consumers overall to lower levels of harmful substances.

On May 13, 2019, we submitted to the FDA an MRTP application, seeking FDA authorization to market our reduced nicotine combustible cigarettes with reduced exposure claims. In the application, we requested authorization from the FDA to market our reduced nicotine tobacco cigarettes with certain product labeling claims under the brand name of VLN®. On December 23, 2021, we secured the first ever MRTP designation for a combustible cigarette for VLN® King and VLN® Menthol King 95% reduced nicotine content cigarettes. The FDA authorized the marketing of VLN® with the following reduced exposure claims: “95% less nicotine”, “Helps reduce your nicotine consumption”, and “Greatly reduces your nicotine consumption,”. The FDA also required that any use of these claims be accompanied by the statement that the product “Helps You Smoke Less,” which we consider an evidence-based claim supporting our products. In issuing its granting orders for our VLN® products, the FDA observed that “the data on these products show they can help addicted adult smokers transition away from highly addictive combusted cigarettes.”

Proposed Mandate Limiting Nicotine Content in Cigarettes

On July 28, 2017, the FDA issued an advanced notice of proposed rulemaking (ANPRM) announcing its intention to institute a rule requiring that all combustible cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine, as part pf the FDA’s Comprehensive Plan for Tobacco and Nicotine Regulation. 22nd Century submitted public comments endorsing the proposed rule with citations to clinical studies on the health benefits of RNC tobacco products in curbing nicotine consumption and tobacco-related harms. We submitted further data in support of the technical feasibility of the rule and recommended that the mandated minimally or non-addictive level of nicotine be set at no more than 0.7 milligrams per gram (mg/g) of tobacco dry weight, which the World Health Organization (WHO) identified as the potential threshold to make cigarettes minimally or non-addictive.

On January 15, 2025, the FDA issued a notice of proposed rulemaking (NPRM) that would establish a maximum nicotine level of 0.7 mg/g in cigarettes and certain other combusted tobacco products. According to the FDA, the proposed product standard would limit the addictiveness of the most toxic and widely used tobacco products, which would have significant public health benefits for all age groups. The FDA referenced abundant scientific evidence and clinical studies in support of the proposal, including many furnished by 22nd Century, and noted the current commercial availability of low nicotine content cigarettes such as those currently produced by 22nd Century. The period for public comment on the proposed rule closes on September 15, 2025. We intend to submit comments and to be prominent and active in support of the proposed rule.

Proposed 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. This product standard, if enacted, would prohibit menthol as a characterizing flavor in cigarettes. In January 2024, the FDA formally withdrew its plans to prohibit menthol as a characterizing flavor in cigarettes and prohibit all characterizing flavors (other than tobacco) in cigars. Although some activity has occurred on state and local levels with respect to scrutiny of menthol and flavored tobacco products, the FDA proposal remains unresolved. For example, states like California introduced their own menthol and flavor bans.

Environmental Regulations

We are subject to a variety of federal, state and local environmental laws and regulations. We have developed specific programs across our business units for ensuring high standards of environmental compliance, including, standard operating practices and procedures at our manufacturing facility as well at our research and development centers. We believe that our manufacturing facility complies with all federal, state, and local environmental regulations, including the Clean Air Act, the Clean Water Act, and the Resource Conservation and Recovery Act.

Lastly, in addition, any new products introduced by us are subject to a comprehensive environmental assessment by an independent third-party expert, including an assessment of how such products may create environmental risks. For our PMTA product, the FDA prepared a programmatic environmental assessment (PEA), based on our submitted data in accordance with the Council on Environmental Quality's regulations (40 CFR 1500-1508) implementing the National Environmental Policy Act (NEPA) and FDA’s NEPA regulations (21 CFR 25.40). The PEA concluded that the marketing orders would have no significant impact and that environmental impact statements would not be required.

Excise Taxes

Tobacco products are subject to substantial excise taxes in the U.S. and other countries. Significant increases in tobacco-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted at the federal, state and local levels within the U.S. and other countries. The frequency and magnitude of excise tax increases can be influenced by various factors, including the composition of executive and legislative bodies. Federal, state and local cigarette excise taxes have increased substantially over the past two decades. Tax increases have an adverse impact on sales of tobacco products.

Competition

Although our products are not approved as smoking cessation aids, we believe that our RNC tobacco cigarettes may compete with FDA-approved smoking cessation aids. In the market for FDA-approved smoking cessation aids, principal competitors would include Pfizer Inc., GlaxoSmithKline plc, Perrigo Company plc, Novartis International AG, and Niconovum AB, a subsidiary of Reynolds American Inc. The industry consists of major domestic and international companies, most of which have existing relationships in the markets into which we plan to sell, as well as financial, technical, marketing, sales, manufacturing, scaling capacity, distribution and other resources, and name recognition substantially greater than ours. We are also aware that several domestic and international cigarette companies and other research groups are working to research and grow reduced nicotine tobacco and have filed patent applications.

Cigarette and filtered cigar companies compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing, advertising, retail shelf space, and price. Cigarette sales can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-price products or innovative products, higher taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate or market tobacco products. Domestic cigarette competitors included Philip Morris USA Inc., Reynolds American Inc., ITG Brands, and Vector Group Ltd. International competitors included Philip Morris International Inc., British American Tobacco, JT International SA, Imperial Brands plc, and regional and local tobacco companies; and in some instances, government-owned tobacco enterprises such as the China National Tobacco Corporation.

Human Capital Resources

As of December 31, 2024, we had 56 employees. All employees are located in the United States. Our human capital resource objectives are designed to attract, and retain, highly motivated and well-qualified employees. We believe that we offer a competitive compensation package and have also worked diligently to provide a flexible and safe work environment.

Corporate Information

22nd Century Group, Inc. was incorporated under the laws of the State of Nevada on September 12, 2005 under the name Touchstone Mining Limited. On January 25, 2011, we entered into a reverse merger transaction with 22nd Century Limited, LLC, which we refer to herein as the “merger.” Upon the closing of the merger, 22nd Century Limited, LLC became our wholly-owned subsidiary. After the merger, we succeeded to the business of 22nd Century Limited, LLC as our sole line of business.

22nd Century Limited, LLC was originally formed as a New York limited liability company on February 20, 1998 as 21st Century Limited, LLC and subsequently merged with a newly-formed Delaware limited liability company, 22nd Century Limited, LLC, on November 29, 1999.

We are a Nevada corporation, and our corporate headquarters is located at 321 Farmington Road, Mocksville, North Carolina 27028. Our telephone number is (336) 940-3769. Our internet address is www.xxiicentury.com. All of our filings with the Securities and Exchange Commission, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K can be accessed free of charge through our website promptly after filing; however, in the event that the website is inaccessible, we will provide paper copies of our most recent Annual Report on Form 10-K, the most recent Quarterly Report on Form 10-Q, Current Reports filed or furnished on Form 8-K, and all related amendments, excluding exhibits, free of charge upon request. These filings are also accessible on the SEC’s website at www.sec.gov. We do not incorporate the information on our website into this Annual Report on Form 10-K and our web site address is included as an inactive textual reference only.

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Item 1A. Risk Factors

You should carefully consider the risk factors set forth below and in other reports that we file from time to time with the Securities and Exchange Commission and the other information in this Annual Report on Form 10-K. The matters discussed in the risk factors, and additional risks and uncertainties not currently known to us or that we currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operation and future growth prospects and could cause the trading price of our common stock to decline.

Risks Related to Our Business and Operations

We have a history of losses, and we expect to incur significant expenses and continuing losses for the foreseeable future and there is substantial doubt regarding our ability to continue as a going concern.

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, which casts substantial doubt regarding our ability to continue as a going concern. As of March 17, 2025, we had cash and cash equivalents of approximately $1.7 million and outstanding indebtedness under the Convertible Senior Secured Credit Facility of $4.6 million.

Doubts about our ability to continue as a going concern have and could continue to negatively impact our relationships with our commercial partners and our employees.

We need additional funding to execute our business plan and to continue operations and service our outstanding obligations. We continue to seek and evaluate opportunities to raise additional funds through the issuance of our securities, asset sales, and through arrangements with strategic partners. If capital is not available to us when, and in the amounts needed, we could be required to liquidate our inventory and assets, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that we will be able to raise the capital we need to continue our operations. Without additional capital, we will be unable to continue our operations in the future.

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We may be unable to comply with the covenants in our convertible senior secured debentures.

We have $4.6 million in outstanding convertible senior secured debentures as of March 17, 2025, that contain customary representations, warranties and covenants including among other things and subject to certain exceptions, covenants that restrict us from incurring additional indebtedness, creating or permitting liens on assets, making or holding any investments, repaying outstanding indebtedness, paying dividends or distributions and entering into transactions with affiliates. We are also required to maintain certain quarterly revenue targets.

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As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial transactions, including to obtain additional financing as needed, may be restricted. Furthermore, our failure to comply with the covenants could result in a default under such agreements, which could permit the debt holders to accelerate our obligation to repay the debt. Although we have in the past received a waiver with respect to our compliance with such covenants, there is no assurance that we will be able to secure a similar waiver for the failure to comply with any future covenants. If any of our debt is accelerated, we likely would not have sufficient funds available to repay it. Substantially all of our assets, including intellectual property, are collateralized under the debentures. If such debt is accelerated, we could be required to liquidate our inventory, cease or curtail operations, or seek protection under applicable bankruptcy laws or similar state proceedings.

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Additionally, the senior secured debentures may be converted into shares of the Company’s common. If the senior secured debentures are converted into common stock in whole or in part, the existing stockholders could incur significant dilution in their relative percentage ownership. The prospect of this possible dilution may also negatively impact the price of our common stock.

Our competitors generally 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.

We are competing with large tobacco companies and large pharmaceutical companies that have greater resources than us. The tobacco industry consists of major domestic and international companies, most of which have existing commercial relationships, as well as financial, technical, research and development, marketing, sales, manufacturing, scaling capacity, distribution, lobbying and other resources and name recognition substantially greater than ours. In addition, we expect new competitors will enter the markets for similar or novel tobacco products in the future and the nature and extent of this market entrance cannot be quantified at this time.

Potential customers and other business partners may choose to do business with more established competitors because of their perception that our competitors are more stable, can scale operations more quickly, have greater manufacturing capacity, have robust marketing and sale programs and lend greater credibility to governmental regulators and others. 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.

Our competitors may develop products that are less expensive, safer or otherwise more appealing, which may diminish or eliminate the commercial success of our VLN® cigarettes or any other potential products that we may commercialize.

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. 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. 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 RNC tobacco and cigarettes obsolete, which would have a material adverse impact on our business and operations and our ability to achieve profitability.

Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages that we believe we derive from our research approach and proprietary technologies.

Our competitors may:

Our research and development process may not develop marketable products cost-effectively or at all, which would result in loss of our investment into such process.

We do not know whether our research and development process will result in marketable products. 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. 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.

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 use information systems to help manage business processes, collect and interpret business data and communicate internally and externally with employees, suppliers, customers and others. Some of these information systems are managed by third-party service providers. We have backup systems and business continuity plans in place, and we take care to protect our systems and data from unauthorized access. 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. 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.

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. The insurance we maintain against natural disasters may not be adequate to cover our losses in any particular case, which would require us to expend significant resources to replace any destroyed assets, thereby materially and adversely affecting our financial condition and prospects. Other global incidents could have a similar effect of disrupting our business to the extent they reach and impact the areas in which we operate, the availability of inventory we need, the customers we serve, the partners on whom we rely for products or services or the employees who operate our businesses. 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.

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Risks Related to the Tobacco Industry

We may be unsuccessful in our efforts to commercialize our RNC tobacco using the reduced exposure claims authorized by the FDA.

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. To date, 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. Specifically, we are permitted to market the products with the claims “95% less nicotine,” “helps reduce your nicotine consumption,” and “greatly reduces your nicotine consumption,” and we are required to use the claim “helps you smoke less” in connection with the other authorized claims; we may not market our VLN® cigarettes for claims that have not been authorized pursuant to an FDA order. Although we believe these claims have the potential to increase our product sales, these products may never achieve consumer acceptance at levels that make the product commercially viable for profitable sales. In addition, the process of commercializing such product and creating consumer awareness could take longer and cost more than we expect.

In addition, even if we believe that certain legislative or regulatory changes may increase product demand, such as the proposals that FDA has historically made with respect to requiring minimally or non-addictive levels of nicotine in all cigarettes sold in the U.S., there can be no assurance that such regulations, if implemented, would increase or create demand for our RNC cigarettes.

The commercial success of our RNC tobacco cigarettes will depend on a number of factors, including, but not limited to our ability to:

If we are unsuccessful in commercializing our RNC tobacco cigarettes, our financial results, business and future prospects would be materially adversely effected.

We may be unable to renew our MRTP Application for our VLN® cigarettes.

The FDA has broad authority over the regulation of tobacco products. 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. 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). Consequently, we will need to reapply to the 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. 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. 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.

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.

We have limited experience in introducing a new low nicotine category for selling our VLN® cigarettes pursuant to an exposure modification order. 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, 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. 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. Our inability to correctly 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.

Companies that manufacture and/or sell tobacco products face significant governmental regulation, especially in the United States pursuant to the Tobacco Control Act, including but not limited to efforts aimed at reducing the incidence of tobacco use, restricting marketing and advertising, imposing regulations on packaging, mandating warnings and disclosure of flavors or other ingredients, prohibiting the sale of tobacco products with certain flavors or other characteristics, requiring compliance with certain environmental standards, limiting or prohibiting the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packaging sizes, and seeking to hold retailers and distributors responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke.

The Tobacco Control Act requires manufacturers of tobacco products to, among other things, provide the FDA with a list of ingredients added to tobacco products in the manufacturing process and register any establishment engaged in the manufacture, preparation, or processing of a tobacco product. The manufacture of products is subject to strict quality control, testing and record-keeping requirements, and continuing obligations regarding the submission of safety reports and other post-market information. The Tobacco Control Act also authorizes the FDA to promulgate regulations requiring that the methods used in, and the facilities and controls used for, the manufacture, preproduction design validation, packing, and storage of a tobacco product conform to current good manufacturing practice (CGMP), also known as tobacco product manufacturing practices (TPMP). On March 8, 2023, the FDA issued a proposed rule to promulgate such TRMP regulations. The proposed rule, if finalized, would establish requirements for manufacturers of finished and bulk tobacco products on the methods used in, and the facilities and controls used for, the manufacture, pre-production design validation, packing, and storage of tobacco product.

We cannot guarantee that our current manufacturing facility or any other manufacturing will successfully complete FDA and/or similar inspections, or that future TPMP regulations will not also negatively affect the cost or sustainability of our manufacturing facility. Our failure to comply with applicable manufacturing regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, delays, suspension or withdrawal of marketing orders, seizures or recalls, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our financial position. 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. 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, 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. Any one or more of these actions may have a material adverse impact on us or the business of our customers for whom we make tobacco products, which could have a negative impact on our results of operations.

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”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. In addition, the FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the appeal of tobacco products. Our operating results could be significantly affected by any significant increase in the cost of complying with new regulatory requirements.

Compliance with current and future regulations regarding tobacco could have a material impact on our business and operations and could result in fines, government actions to restrict or prevent sales of products, as well as result in substantial costs and expenses.

We may become subject to litigation related to cigarette smoking and/or exposure to environmental tobacco smoke, or ETS, which could severely impair our results of operations and liquidity.

Although we are not currently subject to legal proceedings related to cigarette smoking or ETS, we may become subject to litigation related to the sale of our Modified Exposure Cigarettes or other tobacco products we sell or manufacture in the future. 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.

Litigation is subject to uncertainty, and it is possible that there could be adverse developments in pending cases. 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.

Damages claimed in some tobacco-related litigations are significant and, in certain cases, range into the billions of dollars. We anticipate that new cases will continue to be filed. The FCTC encourages litigation against tobacco product manufacturers. 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 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. Adverse changes or developments affecting this facility, including, but not limited to, disease or infestation of our raw materials, a fire, an explosion, a serious injury or fatality, a power failure, a natural disaster, an epidemic, pandemic or other public health crisis, or a material failure of our security infrastructure, could reduce or require us to entirely suspend operations.

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.

The loss of a significant customer for whom we manufacture tobacco products could have an adverse impact on our results of operation.

Currently, a significant portion of our revenues (and corresponding accounts receivable) from manufacturing tobacco products are derived from a small number of large customers, and we do not have agreements with such customers requiring them to purchase a minimum amount of products from us or guaranteeing any minimum future purchase amounts from us. Such customers may, at any time, delay or decrease their level of purchases from us or cease doing business with us altogether. Since many of our manufacturing costs are fixed, if sales to such customers cease or are reduced, we may not obtain sufficient purchase orders from other customers necessary to offset any such losses or reductions, which could have a negative impact on our results of operations.

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. Any product recall or lawsuit seeking significant monetary damages may have a material adverse effect on our business and financial condition. A successful product liability claim against us could require us to pay a substantial monetary award. Though we currently have no pending product liability claims against us, we cannot assure you that such claims will not be made in the future and any such claim could cause us to incur substantial losses or damage our reputation.

Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may affect the sales of our potential products and our third-parties customers’ tobacco products manufactured at our factory, which could result in decreased sales and profitability of our manufacturing business.

Tax regimes, including excise taxes, sales taxes, and import duties, can disproportionately affect the retail price of manufactured cigarettes versus other tobacco products, or disproportionately affect the relative retail price of our Modified Exposure Cigarettes versus lower-priced cigarette brands manufactured by our 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.

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.

We depend on a small number of independent tobacco farmers to grow our specialty proprietary tobaccos with specific nicotine contents for our products. As with other agricultural commodities, the price of tobacco leaf can be influenced by imbalances in supply and demand, and crop quality can be influenced by variations in weather patterns, diseases, and pests. 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, such as a natural disaster, 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.

We must also compete with other tobacco companies for contract production with independent tobacco farmers. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products could cause farmers to plant less tobacco. Any significant change in tobacco leaf prices or taxes, quality and quantity could affect our profitability and our business.

We may distribute and sell our products outside of the U.S., which subjects us to other regulatory risks.

We may seek governmental authorizations required to market our RNC tobacco cigarettes and our other products in other countries. 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. 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.

We may become subject to governmental investigations on a range of matters.

Tobacco companies are often subject to investigations, including allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets, allegations of underpayment of custom duties and/or excise taxes, and allegations of false and misleading usage of descriptors such as “lights” and “ultra-lights.” We cannot predict the outcome of any investigations to which we may become subject, but we may be materially affected by an unfavorable outcome of potential future investigations.

We may be unsuccessful in anticipating changes in adult consumer preferences, responding to changes in consumer purchase behavior or managing through difficult competitive and economic conditions, which could have an adverse effect on business.

In the tobacco industry, we are subject to intense competition and changes in adult consumer preferences. To be successful, we must:

The willingness of adult consumers to purchase premium consumer tobacco products, such as our RNC cigarettes, depends in part on economic conditions. 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.

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.

Some innovative tobacco products may reduce the health risks associated with certain other tobacco products, while continuing to offer adult tobacco consumers products that meet their taste expectations and evolving preferences. Examples include tobacco-containing and nicotine-containing products that reduce or eliminate exposure to cigarette smoke and/or constituents identified by public health authorities as harmful, such as electronically heated tobacco products, oral nicotine pouches, and e-vapor products. We may not succeed in our efforts to develop and commercialize any adjacent products.

Further, we cannot predict whether regulators, including the FDA, will permit the marketing or sale of any particular innovative products (including products with claims of reduced risk to adult consumers), the speed with which they may make such determinations or whether regulators will impose an unduly burdensome regulatory framework on such products. In addition, the FDA could, for a variety of reasons, determine that innovative products currently on the market, or those that have previously received authorization, including with a claim of reduced exposure, are not appropriate for the public health and the FDA could require such products be taken off the market. We also cannot predict whether any products will appeal to adult tobacco consumers or whether adult tobacco consumers’ purchasing decisions would be affected by reduced-risk claims on such products if permitted. Adverse developments on any of these matters could negatively impact the commercial viability of such 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.

An extended disruption at a facility or in service by a supplier, distributor or distribution chain service provider could have a material adverse effect on our business.

We face risks inherent in reliance on one manufacturing facility and a small number of key suppliers, distributors and distribution chain service providers. A pandemic (including COVID-19), natural or man-made disaster or other disruption that affects the manufacturing operations, the operations of any key supplier, distributor or distribution chain service provider or any other disruption in the supply or distribution of goods or services (including a key supplier’s inability to comply with government regulations or unwillingness to supply goods or services to a tobacco company) could have a material adverse effect on our business.

A ban on menthol or flavored tobacco products could have a material adverse impact on our business.

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There has been increasing activity on the state and local levels with respect to scrutiny of menthol and flavored tobacco products, including a recent law passed by the State of California prohibiting tobacco retailers from selling most flavored and menthol tobacco products, including VLN® Menthol King. If these proposed rules are finalized and implemented, if new rules are proposed or if additional states or governments pass laws similar to the State of California, we could be negatively impacted through decreased sales, a requirement to remove non-compliant tobacco products from the marketplace, associated interruptions in manufacturing or business disruptions.

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Risks Related to Intellectual Property

We may be unable to adequately protect our intellectual property, products and potential products, and if we cannot obtain adequate protection of our intellectual property.

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.

Patent positions can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. Accordingly, we cannot predict the breadth of claims that may be allowed or that the scope of these patent rights could provide a sufficient degree of future protection that could permit us to gain or keep our competitive advantage with respect to these products and technology. Additionally, companies like ours are often dependent on creating a pipeline of products. We may not be able to develop additional potential products or proprietary technologies that produce commercially viable products or that are themselves patentable.

Our issued patents may be subject to challenge and potential invalidation by third parties and our competitors may develop processes to achieve similar results without infringing on our patents. Changes in either the patent laws or in the interpretations of patent laws in the United States, or in other countries, may diminish the value of our intellectual property. In addition, others may independently develop similar or alternative products and technologies that may be outside the scope of our intellectual property. Should third parties develop alternative methods of regulating nicotine in tobacco or obtain patent rights to similar products or technology without infringing on our intellectual property rights, this may have an adverse effect on our business.

The expiration of a portion of the QPT patent family in 2018 may provide third parties with the freedom to target the QPT gene in the tobacco plant. This could result in experiments to try to reduce nicotine levels in tobacco plants to levels that may satisfy the planned new nicotine reduction regulations coming from the FDA. 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 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.

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. 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. We seek to protect this information, in part, through the use of non-disclosure and confidentiality agreements with employees, consultants, advisors, and others. 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.

To the extent that consultants or key employees apply technological information independently developed by them or by others to our products and potential products, disputes may arise as to the proprietary rights of the information, which may not be resolved in our favor. Key employees are required to assign all intellectual property rights in their discoveries to us. However, these key employees may terminate their relationship with us, and we cannot preclude them indefinitely from dealing with our competitors. If our trade secrets become known to competitors with greater experience and financial resources, the competitors may copy or use our trade secrets and other proprietary information in the advancement of their products, methods, or technologies. If we were to prosecute a claim that a third party had illegally obtained and was using our trade secrets, it could be expensive and time consuming and the outcome could be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets than courts in the United States.

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.

The ability to commercialize our potential products will depend on our ability to sell such products without infringing the patents or other proprietary rights of third parties. Third-party intellectual property rights in our field are complicated, and third-party intellectual property rights in these fields are continuously evolving. While we have conducted searches for such third-party intellectual property rights, we have not performed specific searches for third-party intellectual property rights that may raise freedom-to-operate issues, and we have not obtained legal opinions regarding commercialization of our potential products. As such, there may be existing patents that may affect our ability to commercialize our potential products.

In addition, because patent applications are published up to 18 months after their filing, and because patent applications can take several years to issue, there may be currently pending third-party patent applications and freedom-to-operate issues that are unknown to us, which may later result in issued patents.

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:

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. 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. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. We also cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. 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.

The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. Accordingly, we cannot be certain that the patent applications that we or our licensors file will result in patents being issued, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology. In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our operations.

We license certain patent rights from third-party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects could be harmed.

We license rights to third-party intellectual property that is necessary or useful for our business, and we may enter into additional licensing agreements in the future. Our success could depend in part on the ability of some of our licensors to obtain, maintain, and enforce patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed and may in some instances retain rights to the intellectual property that allows them to compete with us. Even if patents are issued with respect to these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we could. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

Our worldwide exclusive licenses relating to tobacco from NCSU involve multiple patent families and trade secrets. The exclusive rights under the NCSU agreements expire on the date on which the last patent or registered plant variety covered by the subject license expires in the country or countries where such patents or registered plant varieties are in effect. 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.

Risks Related to Ownership of Our Common Stock

Nasdaq may delist our common stock from trading on its exchange which could limit investors’ ability to make transactions in our common stock and subject us to additional trading restrictions.

Our common stock is currently listed on the Nasdaq Capital Market (“NASDAQ”). If Nasdaq delists our common stock from trading on its exchange, we could face significant material adverse consequences, including:

Recently, the Company received deficiency letters from the Nasdaq Listing Qualifications Department notifying the Company not been in compliance with certain Nasdaq trading rules. Although such deficiencies have been addressed and remedied, there can be no assurance of our ability to comply with such rules in the future.

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. 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. However, even if our common stock continues to be listed on the NASDAQ, there is no assurance that an active market for our common stock will continue in the foreseeable future. There also can be no assurance that we can maintain such listing on the NASDAQ. 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.

Our stock price may be highly volatile and could decline in value.

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. 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:

These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock, such as the current class action and derivative lawsuits. Such lawsuits and any future related lawsuits could cause us to incur substantial costs defending the lawsuit and can also divert the time and attention of our management, which would have a negative adverse impact on our business.

We are named defendant in certain litigation matters; if we are unable to resolve these matters favorably, then our business, operating results and financial condition may be adversely affected.

We are currently involved in certain litigation matters. See "Item 3 – Legal Proceedings" included in this Annual Report on Form 10-K. We cannot at this time predict the outcome of these matters or any future litigations matters (whether related or unrelated) or reasonably determine the probability of a material adverse result or reasonably estimate range of potential exposure, if any, that these matters or any future matters might have on us, our business, our financial condition or our results of operations, although such effects, including the cost to defend, any judgements or indemnification obligations, among others, could be materially adverse to us. 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.

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Future sales of our common stock will result in dilution to our common stockholders.

Sales of a substantial number of shares of our common stock in the public market may depress the prevailing market price for our common stock and could impair our ability to raise capital through the future sale of our equity securities. Additionally, as of March 17, 2025, we have outstanding 24,391,163 warrants to purchase an equal number of shares of common stock and $4.6 million in convertible promissory notes (convertible into 754,554 shares). If any of the holders of outstanding warrants or notes exercise or convert them, 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 have a significant number of outstanding warrants with anti-dilution price protection.

We have approximately 24,387,570 outstanding warrants with anti-dilution price protection. The exercise price on these warrants will have the exercise price reduced in the event of any future offerings of securities at a lower price than the current exercise price (subject to limited exceptions) of $4.3021. Such warrants may deter future investors and can result in further dilution to our investors.

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We do not expect to declare any dividends on our common stock in the foreseeable future.

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, reduce our outstanding debt obligations, 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. As a result, capital appreciation, if any, of our common stock could be the sole source of gain for the foreseeable future.

Our common stock may become the target of a “short squeeze.”

In recent years, the securities of several companies have increasingly experienced significant and extreme volatility in stock price due to short sellers of common stock and buy-and-hold decisions of longer investors, resulting in what is sometimes described as a “short squeeze.” Short squeezes have caused extreme volatility in those companies and in the market and have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company. Sharp rises in a company’s stock price may force traders in a short position to buy the shares to avoid even greater losses. Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest in those shares have abated. We may be a target of a short squeeze, and investors may lose a significant portion or all of their investment if they purchase our shares at a rate that is significantly disconnected from our underlying value. 

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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 corporate governance documents presently include the following provisions:

These provisions, alone or together, could delay hostile takeovers and changes in control of our Company or changes in our management.

As a Nevada corporation, we also may become subject to the provisions of Nevada Revised Statutes Sections 78.378 through 78.3793, which prohibit an acquirer, under certain circumstances, from voting shares of a corporation’s stock after crossing specific threshold ownership percentages, unless the acquirer obtains the approval of the stockholders of the issuer corporation. The first such threshold is the acquisition of at least one-fifth, but less than one-third of the outstanding voting power of the issuer. We may become subject to the above referenced Statutes if we have 200 or more stockholders of record, at least 100 of whom are residents of the State of Nevada and do business in the State of Nevada directly or through an affiliated corporation.

As a Nevada corporation, we are subject to the provisions of Nevada Revised Statutes Sections 78.411 through 78.444, which prohibit an “interested stockholder” from entering into a combination with the corporation, unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns (or within the prior two years did own) 10 percent or more of the corporation’s voting stock.

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.

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Item 1B. Unresolved Staff Comments

None.

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Item 1C. Cybersecurity

The Company recognizes the critical importance of maintaining the trust and confidence of our customers, clients, business partners and employees. The Board has delegated to the Audit Committee oversight of cybersecurity and other information technology risks affecting the Company. The Audit Committee and senior management are actively involved in oversight of the Company’s risk management program, and cybersecurity represents an important component of the Company’s overall approach to enterprise risk management (“ERM”). In general, the Company seeks to address cybersecurity risks through a comprehensive, cross-functional approach that is focused on preserving the confidentiality, security and availability of the information that the Company collects and stores by identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.

Risk Management and Strategy

As one of the critical elements of the Company’s overall ERM approach, the Company’s cybersecurity program is focused on the following key areas:

Collaborative Approach: The Company has implemented a comprehensive, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.

Technical Safeguards: The Company deploys technical safeguards that are designed to protect the Company’s information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls, which are evaluated and improved through vulnerability assessments and cybersecurity threat intelligence.

Third-Party Risk Management: The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of the Company’s systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party systems.

Education and Awareness: The Company provides regular, mandatory training for personnel regarding cybersecurity threats as a means to equip the Company’s personnel with effective tools to address cybersecurity threats, and to communicate the Company’s evolving information security policies, standards, processes and practices.

The Company engages a third-party service provider specializing in information technology, which assists with the periodic assessment and testing of the Company’s policies, standards, processes and practices that are designed to address cybersecurity threats and incidents. These efforts include a wide range of activities, including audits, assessments, tabletop exercises, threat modeling, vulnerability testing and other exercises focused on evaluating the effectiveness of our cybersecurity measures and planning.

Governance

The Audit Committee oversees the Company’s ERM process, including the management of risks arising from cybersecurity threats. On an annual basis, the Audit Committee discusses with Senior Management cybersecurity risks, which address a wide range of topics including recent developments, evolving standards, vulnerability assessments, third-party and independent reviews, the threat environment, technological trends and information security considerations arising with respect to the Company’s peers and third parties. As applicable, the Audit Committee also receives prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates regarding any such incident until it has been addressed.

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Senior management, in coordination with the Company’s third-party service provider specializing in information technology, works collaboratively across the Company to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s incident response and recovery plans. Through ongoing communications with the third party service provider, Senior Management monitors the prevention, detection, mitigation and remediation of cybersecurity threats and incidents in real time and report such threats and incidents to the Audit Committee when appropriate.

Cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected or are reasonably likely to affect the Company, including its business strategy, results of operations or financial condition, but we cannot provide assurance that they will not be materially affected in the future by such risks or any future material incidents. For more information on our cybersecurity related risks, see Item 1A Risk Factors in this Annual Report on Form 10-K.

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Item 2.Properties.

As of December 31, 2024, we operated four tobacco facilities located in Mocksville, North Carolina and surrounding areas. These locations are comprised of one leased 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. We continuously review our anticipated requirements for facilities and, on the basis of that review, may from time to time acquire additional facilities, expand or dispose of existing facilities.

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Item 3.Legal Proceedings.

See Note 11 - Commitments and Contingencies – Litigation - to our consolidated financial statements included in this Annual Report for information concerning our on-going litigation. In addition to the lawsuits described in Note 11 to our consolidated financial statements, from time to time we may be involved in claims arising in the ordinary course of business. To our knowledge, other than the cases described in Note 11 to our consolidated financial statements, no material legal proceedings, governmental actions, investigations or claims are currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.

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Item 4.Mine Safety Disclosures.

Not applicable

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PART II

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 17, 2025, there were approximately 136 holders of record of our common stock based on the records of our transfer agent. However, 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.

Dividend 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, debt reduction 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.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

None.

Shares authorized for issuance under equity compensation plans

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 amended and restated 22nd Century Group, Inc. 2021 Omnibus Incentive Plan (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, 2024:

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Item 6.[Reserved]

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion should be read in conjunction with the other sections of this Form 10-K, including “Risk Factors,” and the Financial Statements and notes thereto. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K. See “Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary.” Our actual results may differ materially. For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, references to the “Company,” “we,” us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein.

On December 17, 2024, we implemented a 1-for-135 reverse stock split, on March 28, 2024, we implemented a 1-for-16 reverse stock split, and on July 5, 2023, we implemented a 1-for-15 reverse stock split of our common stock. All historical share and per-share amounts reflected throughout this section have been adjusted to reflect the reverse stock splits. The par value per share of our common stock was not affected.

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($ in thousands, except per share data or unless otherwise specified)

Executive Overview

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Tobacco Business Highlights

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Financial Overview – Fourth Quarter and Full Year 2024 Results

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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):

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2024 Compared with 2023

Revenue - Sale of products, net

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Tobacco revenue was $24,382, a decrease of 24.3% from $32,204 in the prior year, primarily driven by a decrease in volumes of filtered cigars and export cigarettes, offset by increases in cigarettes and new sales in 2024 for cigarillos.

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Gross (loss) profit

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The decrease in gross loss and gross loss as a percent of revenues, net for the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily driven by implementation of cost cut initiatives, efficiency, and the shift in product mix offset by lower sales volume. Additionally, the improvement in gross loss and gross loss as a percent of revenues, net is due to the prior year period reserve for excess, obsolete or expired leaf inventory of $7,720 recorded during the fourth quarter of 2023.

Sales, general and administrative expense

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(a) Compensation and benefits and equity compensation expense decreased for the year ended December 31, 2024 compared to the prior year due to a reduction of headcount as part of our cost cut initiatives.

(b) Decreases of strategic consulting, sales and marketing and travel and entertainment for the year ended December 31, 2024 compared to the prior year were due to reduced spending as part of our cost cut initiatives.

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(c) Other expenses decreased for the year ended December 31, 2024 compared to the prior year ended December 31, 2023 mainly due to decreases in insurance of $1,483, public company expenses of $1,407, legal expenses of $617, travel and entertainment of $615, technology expenses $329 and depreciation expense of $78 which were partially offset by an allocation to our hemp cannabis business that occurred in the prior year.

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Research and development expense

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(a) Decreased compensation and benefits primarily relate to the decrease in headcount in 2024 compared to the prior year.

(b) Contract, IP and other expenses decreased for the year ended December 31, 2024 compared to the prior year primarily due to a decrease in contract costs of $500 and IP related consulting and expenses of $503 due to our cost cutting initiatives.

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Other operating expenses (income), net

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Refer to Note 18, “Other operating expenses (income), net,” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information regarding these charges.

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Other income (expense), net

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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. We had negative cash flow from operations of $14,345 for the year ended December 31, 2024 and an accumulated deficit of $393,871 as of December 31, 2024. As of December 31, 2024, we had cash and cash equivalents of $4,422, indebtedness under the Convertible Senior Secured Credit Facility of $7,690 and working capital from continuing operations of $1,790 (compared to working capital deficit from continuing operations of ($6,826) at December 31, 2023). 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.

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. 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. 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. 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.

Our cash and cash equivalents, and working capital as of December 31, 2024, and 2023, are set forth below:

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Working Capital

As of December 31, 2024, we had working capital, excluding assets and liabilities held for sale, of approximately $1,790 compared to working capital deficit of approximately ($6,826) as of December 31, 2023, an improvement of $8,616. This increase in working capital was primarily due to a decrease in current liabilities of $13,168 offset by a decrease of $4,552 in current assets. Cash and cash equivalents increased by $2,364 and the remaining net current assets decreased by $6,916. As a result of the working capital balance, management has taken a number of steps to improve liquidity. Refer below to “Cash demands on operations.”

Summary of Cash Flow

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Net cash used in operating activities

Cash used in operations decreased $40,642 from $54,987 in 2023 to $14,345 in 2024. The primary driver for this decrease was lower consolidated net loss of $125,611 due to our cost savings initiatives implemented in 2024, a decrease of $89,876 related to net adjustments to reconcile net loss to cash primarily due to a loss on disposal of the hemp cannabis business that occurred in the prior year of $58,521, and a decrease in cash used for working capital components related to operations in the amount of $4,907 for the year ended December 31, 2024, as compared to the year ended December 31, 2023.

Net cash (used in) provided by investing activities

Cash used in investing activities amounted to $139 in 2024 as compared to cash provided by investing activities of $16,816 in 2023. The decrease in cash provided by investing activities of $16,955 was primarily the result of (i) a decrease in net proceeds from short-term investments of $18,239; (ii) $3,500 of property, plant, and equipment casualty loss insurance proceeds collected in the prior year; (iii) $665 from proceeds from the sale of discontinued operations in the prior year and (iv) a decrease in the proceeds from the sale of property, plant and equipment of $261. These decreased cash inflows were partially offset by a decrease in cash outflows of $5,456 related to the acquisitions of patents, trademarks and property, plant and equipment and (ii) $254 from the acquisition of RXP in the prior year.

Net cash provided by financing activities

During the year ended December 31, 2024, cash provided by financing activities decreased by $20,361, from $37,209 in the prior year, to $16,848, resulting from decreases in (i) net proceeds of $16,048 from issuance of long-term debt, (ii) proceeds of $6,016 from issuance of detachable warrants, (iii) net proceeds of $10,335 from the issuance of common stock (iv) proceeds from issuance of notes payable of $1,104 offset by an increase in net proceeds from warrant exercise of $309. These cash inflows were offset by decreases in cash outflows of note payable payments of $4,035, payments of long-term debt of $8,398, and taxes paid related to net share settlement of RSUs of $419.

Cash demands on operations

We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants to purchase common stock and sale of debt instruments with various institutions, accredited investors, high net worth individuals and creditors.

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In January and February 2024, we received net proceeds of $2,245 from the inducement and exercise of 6,081 warrants for shares of common stock and issuance of 12,160 warrants to purchase common stock. In April 2024, we received net proceeds of $3,913 from the issuance of 13,741 shares of common stock, 926 pre-funded warrants and 14,667 warrants to purchase common stock in a registered direct offering. In August and September 2024, we received net proceeds of $5,208 from the issuance of 72,000 shares of common stock pursuant to a Regulation A offering, and in separate private placements, issued 109,600 warrant to purchase common stock. In September 2024 we received net proceeds of $1,054 from the issuance of 38,041 shares of common stock and 76,348 warrants to purchase common stock in a registered direct offering. Also, in September 2024 we received net proceeds of $1,073 from the inducement and exercise of 37,624 warrants for shares of common stock and issuance of 75,248 warrants to purchase common stock. In October 2024 we received net proceeds of $2,002 from the issuance of 105,679 shares of common stock and 211,358 warrants to purchase common stock in a registered direct offering. Also, in October 2024 we received net proceeds of $2,909 from the issuance of 210,036 prefunded warrants to purchase shares of common stock and 315,055 warrants to purchase common stock in a private placement offering.

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Convertible Senior Secured Credit Facility

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As of December 31, 2024, the remaining principal balance under our Senior Secured Credit Facility is $7,690 of which $1,500 remains current with corresponding non-operating pledged assets.  The Debentures under the Senior Secured Credit Facility allow the Holders to voluntarily convert the Debentures, in whole or in part, into shares of the Company’s common stock and the conversion option price in effect as of January 13, 2025 is $6.04.  The Holders exercised conversion notices in the amount of $3,132 in January 2025 and the Company issued 518,600 shares of common stock. The remaining principal balance of the Debentures is $4,558, as of March 17, 2025 following the conversion of which the Company and Holders have $1,500 of non-operating assets pledged for repayment.

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Outstanding Warrants

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As of March 17, 2025, we had the following warrants outstanding:

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Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. 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.

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Critical Accounting Estimates

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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. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.

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We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions have had or are reasonably likely to have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. 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.

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Inventories

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Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.

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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. Additionally, if our demand forecasts for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our gross profit and net income.

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Valuation of Long-Lived Assets

We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our intangible and other long-lived assets. 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. 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.

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Evaluation of indefinite-lived intangible assets for impairment

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Our indefinite-lived intangible assets include the MSA, cigarette brand predicate and trademarks. 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. 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. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.

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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. We determined as of December 1, 2024, it is more likely than not that that the assets are not impaired.

Evaluation of long-lived assets for impairment

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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. In cases where the carrying value exceeds the undiscounted future cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. 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.

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Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment. Events could occur that would materially affect our estimates and assumptions. 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.

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For our long-lived assets, we determined that no impairment indicators occurred during 2024.

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Detachable Warrants

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Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants.

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Embedded Derivatives – Conversion Option

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Our December Amendment to the Senior Secured Credit Facility contained an embedded derivative conversion option. The Company evaluates each debt agreement to determine whether any embedded features require bifurcation from the debt host in accordance with ASC 815, Derivatives and Hedging ("ASC 815"). If the embedded feature requires bifurcation from its debt host, the Company will account for it as either a derivative liability or as a derivative in equity. The Company uses valuation models to estimate the fair value of the embedded derivatives. For the valuation to record the debt and embedded derivative related to the conversion option at fair value, the Company uses a binomial lattice model at inception and on subsequent valuation dates. This model incorporates inputs such as the stock price of the Company, risk-free interest rate, the effective debt yield and expected volatility. Certain inputs involve unobservable inputs and are classified as level 3 of the fair value hierarchy (see Note 8, Fair Value Measurement to our Consolidated Financial Statements included elsewhere in Item 15 of this Annual Report). 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.

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Off-Balance Sheet Arrangement

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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Not required for smaller reporting companies.

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Item 8.Financial Statements and Supplementary Data.

The required financial statements and the notes thereto are contained in a separate section of this Form 10-K beginning with the page following Item 15 (Exhibits and Financial Statement Schedules) and are incorporated by reference into this Item 8.

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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Item 9A.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2024.

Our system of internal control over financial reporting was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to a permanent exemption for smaller reporting companies.

Changes in Internal Controls over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarter ended December 31, 2024 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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Item 9B.Other Information.

Our directors and executive officers may purchase or sell shares of our common stock in the market from time to time, including pursuant to equity trading plans adopted in accordance with Rule 10b5-1 under the Exchange Act (“Rule 10b5-1”) and in compliance with guidelines specified by the Company. In accordance with Rule 10b5-1 and the Company’s insider trading policy, directors, officers and certain employees who, at such time, are not in possession of material non-public information about the Company are permitted to enter into written plans that pre-establish amounts, prices and dates (or formula for determining the amounts, prices and dates) of future purchases or sales of the Company’s common stock, including shares acquired pursuant to the Company’s equity plans (“Rule 10b5-1 Trading Plans”). Under a Rule 10b5-1 Trading Plan, a broker executes trades pursuant to parameters established by the director or executive officer when entering into the plan, without further direction from them. No contracts, instructions or written plans for the sale or purchase of our securities were adopted, terminated or modified by our directors and executive officers during the three months ended December 31, 2024.

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Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection

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Not applicable.

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PART III

Item 10.Directors, Executive Officers and Corporate Governance.

Information concerning our executive officers, directors and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2025 Annual Meeting of Stockholders.

Code of Business Conduct and Corporate Ethics

Our Board of Directors has long maintained a Code of Ethics that applies to all our directors, officers, and employees. A copy of our Code of Ethics is available on our website at http://www.xxiicentury.com. We intend to satisfy any disclosure requirements pursuant to Item 5.05 of Form 8-K regarding any amendment to, or waiver from, certain provisions of the Code of Ethics by posting such information on our website.

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Item 11.Executive Compensation.

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2025 Annual Meeting of Stockholders.

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Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2025 Annual Meeting of Stockholders.

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Item 13.Certain Relationships and Related Transactions, and Director Independence.

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2025 Annual Meeting of Stockholders.

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Item 14.Principal Accounting Fees and Services.

Information is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to its 2025 Annual Meeting of Stockholders.

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PART IV

Item 15.Exhibits and Financial Statement Schedules.

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Financial statement schedules have been omitted because they are not required.

Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index below following the Financial Statements, which are incorporated herein by this reference.

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Report of Independent Registered Public Accounting Firm

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

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of 22nd Century Group, Inc.  and subsidiaries (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, statements of comprehensive loss, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 2024, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred significant losses and negative cash flows from operations since inception and expects to incur additional losses until such time that it can generate significant revenue and profit in its tobacco business. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  

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Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Debt related accounting and classification.

Critical Audit Matter description

As discussed in Note 12 of the financial statements, during the year ended December 31, 2024, the Company amended their debt via a series of letter agreements/amendments.  For each agreement/amendment, the Company was required to evaluate troubled debt restructuring applicability and debt modification versus extinguishment analysis. None of these agreements/agreements met the criteria to qualify as an extinguishment.  We identified the accounting for the various agreements/amendments as a critical audit matter.  Auditing the accounting for these items was especially challenging due to the inherent complexity of the agreements/amendments. Auditing these elements required an increased level of audit effort, including the involvement of professionals with specialized skill and knowledge.

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How the Critical Audit Matter was addressed in the Audit

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedure we performed include: Inspecting the underlying agreements/amendments and ensuring appropriate application of the relevant accounting literature to the terms of the amended Debentures.

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Subordinated note settlement accounting, classification, and valuation

Critical Audit Matter description

As discussed in Note 12 of the financial statements, during the year ended December 31, 2024, the Company entered into a General Release and Settlement Agreement with Omnia Capital LP (Omnia).  This agreement settled and extinguished all outstanding debt and interest owed to Omnia, via their subordinated note, as well as the put provision on the 2023 Omnia warrants.  In return, Omnia received a combination of shares, pre-funded warrants, warrants, and cash.  The warrants were recorded at fair value on the date of the settlement and are subsequently adjusted to fair value at the end of each reporting period.

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We identified the accounting for the settlement as well as the valuations related to the warrants as a critical audit matter. Auditing the accounting for these items was especially challenging due to the inherent complexity of the agreements and the related valuation models. Auditing these elements required an increased level of audit effort, including the involvement of professionals with specialized skill and knowledge.

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How the Critical Audit Matter was addressed in the Audit

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed include: Inspecting the underlying agreements and ensuring appropriate application of the relevant accounting literature to the terms of the settlement; evaluating the appropriateness of the fair value of the warrants; and utilizing personnel with specialized skill and knowledge in valuation to assist in assessing the fair value determined.

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Warrants issued with equity raises and related deemed dividend valuation

Critical Audit Matter description

As discussed in Note 9 of the financial statements, during the year ended December 31, 2024, the Company entered into several warrant and common stock agreements with investors.  Due to anti-dilution and down round provisions with their existing warrants, the agreements triggered these provisions multiple times.  We identified the valuation for these deemed dividends to be a critical audit matter. Auditing these elements required an increased level of audit effort, including the involvement of professionals with specialized skill and knowledge.

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How the Critical Audit Matter was addressed in the Audit

Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures we performed include: Inspecting the underlying agreements; evaluating the appropriateness of the fair value calculations of the warrants; and utilizing personnel with specialized skill and knowledge in valuation to assist in assessing the fair value determined.

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See accompanying notes to consolidated financial statements.

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