22nd Century Group, Inc.

^{On December 17, 2019, the FDA publicly announced that the FDA had authorized us to market in the U.S. our VLNC tobacco cigarettes under the product names of Moonlight® and Moonlight Menthol® that were the subject of our PMTA. Our Moonlight® and Moonlight Menthol® cigarettes are made with our proprietary VLNC tobacco and, as a result, contain very low levels of nicotine. Our Moonlight® and Moonlight Menthol® cigarettes were modeled after our VLNC SPECTRUM® research cigarettes. Our PMTA reference more than 50 independent studies conducted using our proprietary SPECTRUM®} research cigarettes. In its public announcement relating to our PMTA, the FDA stated that following a rigorous science-based review of our PMTA, the FDA had determined that authorizing these reduced nicotine products for sale in the U.S. is appropriate for the protection of the public health because of, among several key considerations, the potential to reduce nicotine dependence in addicted adult smokers, who may also benefit from decreasing nicotine exposure and cigarette consumption. The FDA further stated that the FDA had determined that non-smokers, including youth, are also unlikely to start using these products, and those who experiment are less likely to become addicted than people who experiment with conventional cigarettes.

During the year ended December 31, 2019, we decided on a going-forward basis that we will be concentrating our business and scientific resources, personnel and efforts on the portion of our intellectual property portfolio (patents, patent applications and trademarks) that relate to very low nicotine tobacco plants and potential products, as well as unique hemp/cannabis plants and potential products, in order to more strategically pursue our objectives. Accordingly, we decided to no longer support and maintain the portions of our intellectual property portfolio that are no longer areas of our focus on a going-forward basis, such as the portion of our intellectual property portfolio relating to increased nicotine in tobacco; potentially reduced exposure products involving higher nicotine products; older scientific methods of working with genes in tobacco plants; methods of utilizing the biomass of tobacco plants; and trademarks that do not fit within the types of products that we desire to commercialize in the future. We further decided on a going-forward basis to narrow the countries in which we will support our intellectual property filings to more strategically focus on protecting our intellectual property in countries that are scientifically or commercially of highest importance rather than a broader focus. We intend to continue to review and refine our business and scientific focus, resources and efforts in the future in order to continue to strategically pursue our objectives in cost-effective ways. We also believe that certain portions of our intellectual property portfolio that we will not be utilizing in the future nevertheless still have value, so we will be investigating potential opportunities to out-license to third-parties those portions of our intellectual property portfolio that we will not be utilizing in the future, but which may be desirable by third-parties.

A natural disaster (such as an earthquake, hurricane, fire, or flood) 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, the outbreak of the coronavirus currently being experienced globally could disrupt our supply chain for tobacco, as well as negatively impact employee productivity, including affecting the availability of employees reporting for work. Further, the coronavirus outbreak has affected, and may continue to affect, the economies and financial markets of many countries, which may result in an economic downturn.

On November 25, 2019, we entered into Warrant Exercise Agreements (the “Exercise Agreements”) with all of the holders (the “Exercising Holders”) of our outstanding warrants to purchase up to 11,293,211 shares of common stock with an exercise price of $2.15 per share (the "Original Warrants") whereby we and the Exercising Holders agreed that the Exercising Holders would exercise for cash all of the Original Warrants at a reduced exercise price of $1.00 per share, generating gross proceeds of approximately $11.3 million. In consideration for the Exercising Holders exercising their Original Warrants for cash, we issued to each Exercising Holder a new warrant (each, a "New Warrant") to purchase shares of common stock equal to the number of shares of common stock underlying the Original Warrants. The terms of the New Warrants are substantially similar to the terms of the Original Warrants, except that the New Warrants are (i) exercisable from first issuance of the New Warrants for a period of five years and (ii) have an exercise price equal to $1.11 per share.

On December 3, 2019, we announced that we had conducted an initial closing of an investment in Panacea, a vertically-integrated developer, producer and seller of legal, hemp-derived, CBD products, with extraction, distillation, testing and manufacturing operations located in a 51,000 square foot facility in Golden, Colorado. In that public announcement, we stated that our investments in Panacea from such initial closing through the ensuing twelve to eighteen month period are expected to be approximately $24 million, in a combination of cash and shares of our common stock in exchange for Panacea-issued debt and Panacea preferred stock. We also received a warrant from Panacea to purchase additional shares of preferred stock of Panacea, which upon full exercise will provide us with a controlling equity position in Panacea. To date, the Company has issued a $7 million convertible note receivable, purchased 3,733,334 shares of Series B Preferred Shares at a cost of $5 million, issued 1,297,017 shares of 22nd Century common stock to Panacea, and received a warrant to purchase additional Series B Preferred Shares at $2.344.

The Company recorded an accrual for employee severance during the third quarter of 2019 in the initial amount of $720,838 in accordance with FASB ASC 712 - “Compensation – Nonretirement Postemployment Benefits.” The severance accrual relates to the resignation of the Company’s former President and Chief Executive Officer (the “former CEO”) effective July 26, 2019. Concurrent with the former CEO’s resignation, the Company entered into a Consulting Agreement (the “Agreement”) with the former CEO. The Agreement calls for the Company to pay a monthly consulting fee to the former CEO in the amount of $16,667 plus health insurance benefits for a period of forty-two months. The Company concluded that the terms of the Agreement met the severance criteria in ASC 712 and accordingly, a severance accrual was recorded. The Company computed the present value of the payments called for under the Agreement and recorded an initial severance liability in the amount of $720,838. As a result of broad-based actions to reduce expenses in the fourth quarter the Company initiated a reduction in its workforce. An additional severance accrual in the amount of $160,000 was recorded as of December 31, 2019. After payments under the Agreement and the accretion of interest during 2019, the accrued severance balance remaining at December 31, 2019 was $804,431 with $358,610 and $445,821, respectively, shown as current and long-term accrued severance on the Company’s Consolidated Balance Sheets.