May 18, 2022

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22ND CENTURY GROUP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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. This section of the Form 10-K generally discusses 2021 and 2020 items
and year-to-year comparisons of 2021 to 2020. Discussions of 2019 items
and year-to-year comparisons of 2020 and 2019 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 on our Annual Report on
Form 10-K for the year ended December 31, 2020. 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.

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

Executive Overview of Full Year 2021 Results

Key Business and Financial Highlights

On December 23, 2021, the FDA granted MRTP authorization for our reduced

nicotine cigarettes, VLN® King and VLN® Menthol King. In addition to

authorizing the Company to market VLN® cigarettes with the claim, “95% less
? nicotine”, to clarify the purpose of the brand, the FDA also authorized the

claim, “Helps You Smoke Less.” Pending state regulatory approval, we plan to

launch VLN® King and VLN® Menthol King in our first U.S. market on or before

March 23, 2022.

Since reporting third quarter 2021 earnings, we have signed our first IP
? licensing agreement in hemp/cannabis, as well as recognized our first revenue

from the sale of biomass grown at our Needle Rock farms location.

We believe that we have secured the key partnerships needed to maximize each

component in the upstream segment of the hemp/cannabis value chain and expect
? to continue to expand this network of resources to support our business growth.

We believe these partnerships will enable us to accelerate the new development

of valuable, commercial hemp/cannabis lines and intellectual property to

market.

? Revenue increased 8.9% year-over-year to $7,960 for the fourth quarter of 2021

and improved by 10.1% to $30,948 for the full year versus 2020.

Gross profit for the fourth quarter of 2021 was $387 compared to $588 in the
? prior year fourth quarter and increased to $2,069 for the full year compared to

  $1,438 in 2020.


  Net loss in the fourth quarter of 2021 was $13,965 and included a $4,954

non-cash unrealized loss related to the fair value of investments, compared to
? the fourth quarter of 2020 net loss of $6,405. Net loss for the full year of

2021 was $32,609 and included a $6,994 non-cash unrealized loss related to the

fair value of investments, an increase of $12,898 compared to a net loss of

$19,711 for the full year of 2020.

Corporate Business Highlights

During February and March of 2021, our warrant holders exercised all 11,293,211
? outstanding warrants for cash in exchange for common stock. In connection with

these exercises, we received net proceeds of $11,782.

On April 1, 2021, we moved our corporate headquarters to the up-and-coming

Larkinville District in downtown Buffalo, New York. Our new Buffalo office
? space is in a state-of-the-art, restored manufacturing facility located at 500

Seneca Street, joining other multinational technology and professional services

companies. Our new headquarters accommodates all of our staff from our previous

office location in nearby Williamsville and has significant room for expansion.

? On June 7, 2021, we completed a registered direct common stock offering

generating net proceeds of $38,206.

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? On August 16, 2021, we transferred from the NYSE American market and commenced

trading on the Nasdaq Capital Market.

On August 18, 2021, we appointed Anthony Johnson as a new member of our Board

of Directors. Mr. Johnson is co-founder, President, and CEO of Kodikaz
? Therapeutic Solutions, a next-generation, non-viral gene therapy company, and a

founding partner of Buffalo Biosciences, a life science strategic business

  management firm that supports the evaluation and commercialization of
  bioscience technologies from concept to market.

On November 15, 2021, we appointed Richard F. Fitzgerald as our Chief Financial

Officer. Fitzgerald’s other roles include serving as Chief Financial Officer

and Secretary of CleanTech Acquisition Corp, (Nasdaq: CLAQU), a SPAC focused on

the CleanTech sector. Previously, he was a consulting CFO for Atrin

Pharmaceuticals, Co-Founder and CFO of SIRPant Immunotherapeutics and CFO of
? Immunome (Nasdaq: IMNM). He holds a B.S., Business Administration, Accounting

from Bucknell University. John Franzino, the Company’s previous Chief Financial

Officer, transitioned to Chief Administrative Officer, where he is responsible

  for further developing the Company's business processes and leading the
  Company's financial planning and analysis, operational finance, human
  resources, and information technology functions.

On January 17, 2022, we appointed James A. Mish, our Chief Executive Officer,
? as a new member of our Board of Directors, enhancing the Board’s depth of

  experience in the commercialization of science-driven consumer products.

Tobacco Franchise Highlights and Notable Accomplishments

We believe that our proprietary, reduced nicotine content cigarettes, VLN®,

have massive global market opportunity. In 2018, the global tobacco market was

worth $817 billion and of that, $714 billion, or approximately 90% of the

global tobacco market is comprised of combustible cigarettes. There are more
? than 1 billion global and 34 million U.S. adult smokers. More than two-thirds

of adult smokers want to quit, yet less than ten percent of them are able to

quit successfully. We believe that smokers are actively seeking alternatives to

addictive combustible cigarettes. Based on our consumer perception studies, 60%

of adult smokers indicate a likelihood to use VLN®.

Our VLN® cigarettes contain 95% less nicotine than conventional cigarettes and

feature a familiar combustible product format that replicates the conventional

cigarette experience, including the sensory and experiential elements of taste,

scent, smell, and “hand-to-mouth” behavior. VLN® contains 0.5 milligrams of
? nicotine per gram of tobacco, an amount cited by the FDA, based on clinical

studies, to be “minimally or non-addictive”. The lack of reward from nicotine

creates a dissociation between the act of smoking and the introduction of

nicotine to the bloodstream, which helps adult smokers to smoke less and reduce

the harm caused by smoking.

Since 2011, our reduced nicotine content cigarettes have been used in more than

50 independent scientific clinical studies by universities and institutions.

The studies, using our reduced nicotine content tobacco cigarettes, show that
? smokers who use our products: (i) reduce their nicotine exposure and

dependence, (ii) smoke fewer cigarettes per day, (iii) increase their number of

smoke-free days, and (iv) double their quit attempts – all with minimal or no

evidence of nicotine withdrawal or compensatory smoking.

? In December 2019, the FDA granted a PMTA authorization for our reduced nicotine

content cigarettes, giving us the ability to sell the product.

On December 23, 2021, the FDA authorized the marketing of the Company’s VLN®

King and VLN® Menthol King reduced nicotine content cigarettes as modified risk

tobacco products with a modified exposure classification (MRTPs). In doing so,

the FDA stated that VLN® – which smokes, tastes, and smells like a conventional
? cigarette but contains 95% less nicotine than conventional, highly addictive

cigarettes – “help reduce exposure to, and consumption of, nicotine for smokers

who use them.” In its marketing order granting the MRTPs, the FDA authorized an

additional fourth claim: “Helps You Smoke Less” that we must use on the

packaging of all VLN® products where other approved claims are also used.

Following FDA authorization, we commenced activities to launch VLN® within 90

days, including discussions with potential partners in the independent,
? regional, and national retail trade. We anticipate a phased rollout of VLN® in

  select geographies and plan to position VLN® in the premium pricing segment of
  the cigarette market.


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On January 11, 2021, we announced that we expanded our growing program and

increased planting in the 2021 crop year for VLN® reduced nicotine content
? tobacco, leading to a record harvest. This new planting for VLN® tobacco was in

addition to our existing VLN® inventory, which we plan to use for initial sales

  of VLN®.


  We believe that recent political changes will likely be favorable to our

business prospects from a policy priority and regulatory standpoint. Under the

new administration and new leadership at the FDA and Center for Tobacco

Products (CTP), we believe that the FDA will refocus on implementing a menthol
? ban on combustible high nicotine cigarettes and its ground-breaking

Comprehensive Plan for Tobacco and Nicotine Regulation, in particular the

agency’s plan to cap the amount of nicotine in combustible cigarettes to a

“minimally or non-addictive” level. We believe that the MRTP authorization and

the launch of VLN® serves as a starting point for the FDA’s proposed policies.

Our research cigarettes, SPECTRUM®, continue to fuel numerous independent,
? scientific studies to validate the enormous public health benefit identified by

the FDA and others of implementing a national standard requiring all cigarettes

to contain “minimally or non-addictive” levels of nicotine.

We believe that our next generation, non-GMO, plant research is the key to

commercializing our reduced nicotine content tobacco and technology in

international markets where non-GMO products are preferred, or GMO products are

banned. In partnership with North Carolina State University, we completed

successful research field trials. During the first quarter of 2021, we

published a new U.S. patent, entitled “A Genetic Approach for Achieving Ultra
? Low Nicotine Content in Tobacco” (PCT/US2021/012742). The new technology

provides us with methods and a new approach to introduce very low nicotine

traits into virtually any variety of tobacco, including bright, burley, and

oriental tobacco varieties. We have successfully applied our non-GMO technology

to bright and burley varieties of tobacco and have developed a VLN® 2.0

prototype cigarette. We have also run our first field trial of non-GMO reduced

nicotine varieties in the southern hemisphere.

In the spring of 2022, we plan to plant our first commercial crops of non-GMO
? flue cured and burley reduced nicotine tobacco varieties. The reduced tobacco

leaves harvested from these crops will support future VLNC cigarette products.

Hemp/Cannabis Franchise Highlights and Notable Accomplishments

We continue to place an emphasis on our hemp/cannabis strategy to target the

upstream segments of the cannabinoid value chain in the areas of plant

biotechnology research, gene modification and engineering, modern plant
? breeding and development, and extraction. We believe that we can differentiate

ourselves in the hemp/cannabis industry by building upon our core strength and

  expertise in plant science and the ingredient value chain and through our
  strategic, operational partnerships.

We have launched a new, cutting-edge technology platform that we expect to

enable us and our strategic partners to quickly identify and incorporate

commercially valuable traits of hemp/cannabis plants to create new, stable

hemp/cannabis lines. The platform, developed in collaboration with researchers

at KeyGene, incorporates a suite of proprietary molecular tools and a large

library of genomic markers and gene-trait correlations. We have already

characterized millions of high-value single nucleotide polymorphisms (SNPs). By
? targeting these newly identified SNPs, we have been able to locate and isolate

specific sections of genetic code from genome assemblies present in our

state-of-the-art hemp/cannabis bioinformatics database. This breakthrough

enables us to quickly and easily identify the genes responsible for specific

  traits in a plant, which we expect to be a powerful tool for us and the
  hemp/cannabis industry. We have already begun discussions to license this
  platform to strategic partners to help them improve their plant breeding
  techniques and optimize their hemp/cannabis lines.


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We continue to secure commercially, valuable patents and intellectual property

through our internal research capabilities and external research partnerships.

Citing one of the leading achievements in 2021, we are the first Company to

show the introduction of genetic material via transformation techniques

directly leading to functional protein expression in hemp/cannabis. This new

transformation methodology enhances our ability to directly modify specific

target genes in hemp/cannabis with potential commercial value, as compared to
? the broad-based approaches we currently deploy such as molecular breeding and

mutagenesis. These modifications can be tailored to differentiate the content

of specific major and minor cannabinoids, terpenoids or eliminate unwanted

metabolites. With the addition of this highly targeted plant transformation

capability to 22nd Century’s existing molecular breeding and gene editing

capabilities we are now able to increase our bandwidth for the production of

highly tailored new plant strains at accelerated rates, lower cost and lower

risk to our customers.

We have secured an exclusive agreement with CannaMetrix, LLC for the use of

their proprietary, human cell-based testing CannaMetrix EC50Array™ technology

that we believe will enable us to accelerate the commercialization of new,

disruptive hemp/cannabis plant lines and intellectual property. CannaMetrix’s

proprietary CannaMetrix EC50Array™ technology serves as a high-throughput
? roadmap for developing new hemp/cannabis plant lines with tailor-made

cannabinoid and terpenoid profiles for use in the life science, consumer

product, and pharmaceutical markets. The human cell-based assay has the ability

to measure and validate the potency and efficacy of cannabinoids and/or

terpenoids through defined biomarkers and receptor activity and can rapidly

identify optimum plant profiles by measuring the potency and effect on the

human cell system.

In May 2021, we announced an extended and expanded plant research partnership

agreement with our partner KeyGene, a global leader in plant research involving

high-value genetic traits and increased crop yields. The new partnership

agreement extends the length of the exclusive worldwide collaboration 22nd
? Century has with KeyGene to develop new, disruptive hemp/cannabis plants and

  intellectual property for the life science, medicinal, and pharmaceutical
  end-use markets. It also expands the partnership to include research and
  development activity for non-combustible, alternative tobacco plant
  applications, such as protein production, and 22nd Century's third plant
  franchise, specialty hops.

We believe that we can accelerate the development of commercially, valuable
? hemp/cannabis lines and related intellectual property through selective

partnerships and have the key partnerships needed to maximize each component in

the upstream segment of the cannabinoid value chain.

On December 14, 2021, we announced a three-way non-exclusive agreement to
? license biosynthesis intellectual property with Aurora Cannabis Inc. (NASDAQ:

ACB) to Cronos Group Inc. (NASDAQ: CRON), intended to assist in the advancement

of research and development on the biosynthesis of cannabinoids.

Specialty Franchise Highlights and Notable Accomplishments

In August 2021, we announced entry into the global specialty hops market, our

third and newest plant franchise. We will leverage our existing know-how with

the tobacco and hemp/cannabis plants along with the proprietary tools and

technologies possessed by our upstream partnerships with CannaMetrix and
? KeyGene to bring hop breeding into the 21st century. Our relationships with the

world’s leading alkaloid plant producer-breeders, including Extractas

Bioscience, Sawatch Agriculture, and Folium Botanical, will facilitate

year-round growing capabilities at locations in both the southern and northern

hemispheres.

2022 Priorities and Areas of Focus

We remain focused on launching commercial sales of our VLN® products following
1. our MRTP authorization by the FDA. We have also initiated international sales

launch in select markets.

We continue to support and advance the FDA’s plan to require that all
2. cigarettes sold in the U.S. be made “minimally or non-addictive” by limiting

their nicotine content to just 0.5 milligrams of nicotine per gram of tobacco

   and the proposed ban on menthol high nicotine combustible cigarettes.

We continue to target the upstream segment of the cannabinoid value chain;
3. creating proprietary, commercially valuable new plant lines and related

   intellectual property with stabilized genetics to harness and optimize
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hemp/cannabis plant potential. We intend to continue to work to monetize our

existing hemp/cannabis IP and will continue to bring disruptive technology

forward with new plant lines.

We will develop our third, plant-based franchise in specialty hops leveraging
4. our plant science expertise to develop and secure valuable intellectual

property and sign strategic partnerships to support the development of this

franchise.

5. We will maintain diligent financial execution, efficient operating structure,

and balance sheet strength to support our growth initiatives.

Results of Operations

Year Ended December 31, 2021 compared to Year Ended December 31, 2020.

Amounts in thousands, except for share and per-share data

Revenue – Sale of products, net

                                                   Year Ended
                                  December 31      December 31      December 31
                                     2021             2020             2019
Sale of products, net            $      30,948    $      28,111    $      25,833
Dollar Change from Prior Year    $       2,837    $       2,278


The increase in revenue for the year ended December 31, 2021, compared to the
year ended December 31, 2020, was primarily the result of an increase in sales
of filtered cigars of $4,629, primarily driven by increased volume, fulfillment
of our SPECTRUM® research cigarettes of $680, which did not occur in the prior
period, and revenue pertaining to our hemp/cannabis business of $44 which did
not occur in the prior period. This was partially offset by decreased sales of
contract manufactured cigarettes of $2,484 during 2021, which was primarily due
to a lower volume of orders received.

Costs of goods sold – Products / Gross profit

                                                   Year Ended
                                  December 31      December 31      December 31
                                     2021             2020             2019
Cost of goods sold               $      28,879    $      26,673    $      25,818
Percent of Product Sales                  93.3 %           94.9 %           99.9 %
Dollar Change from Prior Year    $       2,206    $         855


                                                   Year Ended
                                  December 31      December 31      December 31
                                     2021             2020             2019
Gross profit                     $       2,069    $       1,438    $          15
Percent of Product Sales                   6.7 %            5.1 %            0.1 %
Dollar Change from Prior Year    $         631    $       1,423


For the year ended December 31, 2021, the increase in gross profit as compared
to 2020 was primarily driven by improved contract manufactured sales mix due to
new customer contracts, cigarette price increases and sales of our higher margin
SPECTRUM® research cigarettes.

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Research and development expense

                                                    Year Ended
                                  December 31      December 31     December 31
                                     2021             2020            2019
Research and Development         $       3,256    $       4,090   $       6,381
Percent of Product Sales                  10.5 %           14.6 %          24.7 %
Dollar Change from Prior Year    $       (834)    $     (2,291)


R&D expense during the year ended December 31, 2021, decreased $834 as compared
to the prior year, primarily driven by lower costs for R&D personnel, consulting
and professional services, and licenses and contracts, as well as a 2020 tobacco
leaf inventory impairment of $360 that did not recur in 2021. Personnel expense
decreased by $222 year over year, due to more focused R&D headcount to
accomplish our strategies. Consulting and professional services decreased by $65
and license and contract costs decreased $100 compared to the prior year
primarily due to fewer milestone payments for certain research agreements which
were not required in 2021. We continue to prioritize our R&D activities to
achieve our strategic objectives.

Sales, general and administrative expense

                                                        Year Ended
                                      December 31      December 31     December 31
                                         2021             2020            2019

Sales, general and administrative $ 25,881 $ 14,971 $

12,954

Percent of Product Sales                      83.6 %           53.3 %          50.1 %
Dollar Change from Prior Year        $      10,910    $       2,017


The increase in sales, general and administrative ("SG&A") expense during the
year ended December 31, 2021, as compared to the prior year, was driven by
increased investor relations and corporate communications expense of $3,198,
strategic consulting expense of $2,598, higher non-cash equity compensation
expense of $2,294, increased insurance expense of $1,188, and higher personnel
expense of $996 due mainly to the hiring of the executives during 2020 and 2021.
In addition, during 2021 director fees increased by $322, legal fees rose by
$156 and travel and entertainment expense increased $113.

We have invested in this incremental SG&A spending to continue to ramp up our
efforts to allow us to move toward market readiness in both tobacco and
hemp/cannabis. We will continue to invest in SG&A spending as growth and
opportunities present themselves.

Impairment of intangible assets

                                                      Year Ended
                                    December 31      December 31     December 31
                                       2021             2020            2019

Impairment of intangible assets $ 78 $ 176 $ 1,142
Percent of Product Sales

                     0.3 %            0.6 %           4.4 %
Dollar Change from Prior Year      $        (98)    $       (966)


During the year ended December 31, 2021, management conducted a review of
intellectual property assets and determined that an adjustment was necessary for
the carrying value of certain trademark costs. As such, we recorded a charge of
approximately $78 in 2021. This compares to an impairment charge of $176
reflected in 2020 for certain patents and trademarks. Refer to Note 5 to our
consolidated financial statements for additional information.

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Depreciation expense

                                                    Year Ended
                                  December 31      December 31     December 31
                                     2021             2020            2019
Depreciation                     $         633    $         688   $         589
Percent of Product Sales                   2.0 %            2.4 %           2.3 %
Dollar Change from Prior Year    $        (55)    $          99


The decrease in depreciation expense during 2021 was primarily due to
impairments taken for the former Williamsville corporate office during the
fourth quarter of 2020.

Amortization expense

                                                    Year Ended
                                  December 31      December 31     December 31
                                     2021             2020            2019
Amortization                     $         615    $         658   $         836
Percent of Product Sales                   2.0 %            2.3 %           3.2 %
Dollar Change from Prior Year    $        (43)    $       (178)


Amortization expense relates to amortization taken on capitalized patent costs
and license fees. The decrease in 2021 was primarily due to amortization expense
on a lower base of amortizable intangible assets.

Unrealized (loss) gain on investments

                                                            Year Ended
                                          December 31      December 31     December 31
                                             2021             2020            2019

Unrealized gain (loss) on investments $ (6,994) $ (434) $

(2,419)

Percent of Product Sales                        (22.6) %          (1.5) %         (9.4) %
Dollar Change from Prior Year            $     (6,560)    $       1,985


Unrealized loss on investments includes fair value adjustments for our
investment in Aurora Cannabis, Inc. ("Aurora") stock warrants and our investment
in Panacea Holdings common stock. Both investments are considered equity
securities and are adjusted to fair value at each reporting period as discussed
within Note 7 to our consolidated financial statements included herein.

The warrants to purchase 81,164 shares of Aurora common stock were valued at $5
as of December 31, 2021, using the Black-Scholes pricing model, which resulted
in an unrealized loss of $234 for the year ended December 31, 2021.

Our shares of Panacea Holdings common stock were valued based on the closing
share price as of December 31, 2021. As of December 31, 2021, the shares were
valued at $2,340 resulting in the recognition of an unrealized loss of $6,761
for the year. Our investment in Panacea Holdings is a small microcap stock which
can be subject to large market volatility resulting in fluctuations to our net
loss and loss per share-due to unrealized gains or losses that are recognized
within the Consolidated Statements of Operations. Our investment is described
further within Note 6 to our financial statements included herein.

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Impairment of Panacea Investment

                                                       Year Ended
                                     December 31      December 31     December 31
                                        2021             2020            2019
Impairment of Panacea Investment    $           -    $     (1,741)   $     
     -
Percent of Product Sales                        - %          (6.2) %             - %
Dollar Change from Prior Year       $       1,741    $     (1,741)


During 2020, we incurred impairment charges on our investment in Panacea. Refer
to Note 6 to our consolidated financial statements for additional information
regarding our investment in Panacea and the conversion related thereto.

Gain on Panacea investment conversion

                                                            Year Ended
                                          December 31      December 31     December 31
                                             2021             2020            2019
Gain on Panacea investment conversion    $       2,548    $           -   $
          -
Percent of Product Sales                           8.2 %              - %             - %
Dollar Change from Prior Year            $       2,548    $           -

On June 30, 2021, we entered into a Promissory Note Exchange Agreement with
Panacea and a Securities Exchange Agreement with Panacea, Exactus, Inc.
("Exactus") (OTCQB:EXDI), renamed to Panacea Life Sciences Holdings, Inc.
(OTCQB:PLSH) as of October 25, 2021 ("Panacea Holdings"), and certain other
Panacea shareholders. Pursuant to the Securities Exchange Agreement, Exactus
fully acquired Panacea. These transactions resulted in the (i) conversion of all
of our existing Series B Preferred Stock in Panacea into 91,016,026 shares of
common stock in Exactus valued at $9,102 as of June 30, 2021 and (ii) the
conversion of our existing debt in Panacea by converting the outstanding $7,000
principal balance convertible note receivable and all accrued but unpaid
interest thereon for fee simple ownership of Needle Rock Farms (224 acres in
Delta County, Colorado) and equipment valued at $2,248, $500 in Panacea's Series
B Preferred Stock (which was subsequently converted to Exactus common stock
under the Securities Exchange Agreement; this balance is reflected in final
shares as stated above), and a new $4,300 promissory note (the "Promissory note
receivable") with a maturity date of June 30, 2026 and a 0% interest rate. The
Promissory note receivable is with a related party of Panacea and is fully
secured by a first priority lien on Panacea's headquarters located in Golden,
Colorado.

The conversion was recorded as a non-monetary transaction, based on the fair
value of the assets received, and resulted in a gain of $2,548 which is included
within the Consolidated Statements of Operations. Our shares of Panacea Holdings
common stock were initially valued based on a closing share price of $0.10 per
share as published on June 30, 2021. Our investment is described further within
Note 6 to our financial statements included herein.

Interest income, net

                                                    Year Ended
                                  December 31      December 31     December 31
                                     2021             2020            2019
Interest Income, net             $         321    $       1,751   $       1,066
Percent of Product Sales                   1.0 %            6.2 %           4.1 %
Dollar Change from Prior Year    $     (1,430)    $         685


Interest income, net (interest income less investment fees) is comprised of cash
interest income and non-cash interest accretion. Cash interest income is
primarily derived from interest earned on our short-term investment securities
and non-cash interest income is primarily related to accretion of short-term
investment securities purchased at a discount or premium and accretion of
certain other assets recorded at a discount.

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Cash interest income for the year ended December 31, 2021 decreased $925 as
compared to the prior year, primarily due to lower bond interest yields on our
short-term investment securities. Non-cash interest accretion for the year ended
December 31, 2021, decreased $506, as compared to the prior year, primarily due
to our Panacea investment conversion which is further described within Note 6 to
our financial statements included herein.

Interest expense

                                                    Year Ended
                                  December 31      December 31     December 31
                                     2021             2020            2019
Interest Expense                 $        (58)    $        (72)   $        (56)
Percent of Product Sales                 (0.2) %          (0.3) %         (0.2) %
Dollar Change from Prior Year    $          14    $        (16)


Interest expense decreased for the year ended December 31, 2021, as compared to
the year ended December 31, 2020, primarily due to the reduction of our
severance liability and lower note payable balances for our licenses.

Net loss

                                                    Year Ended
                                  December 31      December 31     December 31
                                     2021             2020            2019
Net Loss                         $    (32,609)    $    (19,711)   $    (26,558)
Percent of Product Sales               (105.4) %         (70.1) %       (102.8) %
Dollar Change from Prior Year    $    (12,898)    $       6,847


The increase in net loss for the year ended December 31, 2021, as compared to
the prior year, was primarily the result of higher operating expenses of $9,860,
an increase in unrealized loss on investments of $6,560, primarily relating to
our Aurora stock warrants and Panacea Holdings common stock investments, and
lower interest income in the amount of $1,430. This was partially offset by a
$631 increase in gross profit, a gain on our Panacea investment conversion of
$2,548, and a 2020 impairment charge of $1,741 for our investment in Panacea
which did not recur in 2021.

Other comprehensive income (loss)

                                                        Year Ended
                                      December 31      December 31     December 31
                                         2021             2020            2019

Other Comprehensive Income (Loss) $ (236) $ 67 $

   (14)
Percent of Product Sales                     (0.8) %            0.2 %         (0.1) %
Dollar Change from Prior Year        $       (303)    $          81


We maintain an account for short-term investment securities that are classified
as available-for-sale securities and consist of money market funds and corporate
bonds with maturities greater than three months at the time of acquisition.
Unrealized gains and losses on short-term investment securities (the adjustment
to fair value) are recorded as other comprehensive income or loss.

We recorded an unrealized loss on short-term investment securities in the amount
of $236 resulting in other comprehensive loss for the year ended December
31, 2021
, as compared to an unrealized gain of $67 for the prior year.

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Liquidity and Capital Resources

                                                                           Year-to-Date
                                                           December 31      December 31     December 31
                                                              2021             2020            2019

Net cash provided by (used in) operating activities $ (22,839) $ (15,621) $ (14,588)
Net cash provided by (used in) investing activities

            (27,729)           16,469           4,552
Net cash provided by (used in) financing activities              50,875            (304)           9,916
Net increase (decrease) in cash and cash equivalents                307              544           (120)
Cash and cash equivalents - beginning of period                   1,029              485             605
Cash and cash equivalents - end of period                 $       1,336    $       1,029   $         485
Short-term investment securities                          $      47,400   
$      21,313   $      38,477


Working Capital

As of December 31, 2021, we had working capital of approximately $45,958
compared to working capital of approximately $20,998 as of December 31, 2020, an
increase of $24,960. This increase in working capital was primarily due to a
$26,394 increase in cash, cash equivalents and short-term investment securities
resulting from (i) net proceeds of $11,782 from the cash exercises of all
outstanding warrants during the first quarter of 2021; and (ii) net proceeds of
$38,206 from a capital raise in June 2021 described below, offset primarily by
cash and cash equivalents consumed in the operating activities of the Company.

On June 7, 2021, we entered into a placement agent agreement (the "Placement
Agent Agreement") with Cowen and Company, LLC (the "Placement Agent") relating
to a registered direct offering (the "Offering") to a select investor (the
"Investor"). Pursuant to the Placement Agent Agreement, we agreed to pay the
Placement Agent a cash fee of 3.0% of the gross proceeds from the Offering. In
addition, on June 7, 2021, we and the Investor entered into a securities
purchase agreement relating to the issuance and sale of shares of common stock.
The Investor purchased $40,000 of shares, consisting of an aggregate of
10,000,000 shares of common stock at $4.00 per share, resulting in net proceeds
of $38,206. The common stock was offered and sold pursuant to our Form S-3 shelf
registration statement.

Net cash used in operating activities

Cash used in operations increased $7,218 from $15,621 in 2020 to $22,839 in
2021. The primary driver for this increase was higher SG&A spending, most
notably in the areas of investor relations and corporate communication,
strategic consulting, insurance and the addition of senior management personnel.

Net cash provided by (used in) investing activities

Cash used in investing activities amounted to $27,729 in 2021 as compared to
cash provided by investing activities of $16,469 in 2020. This overall change of
$44,198 in cash used in investing activities was primarily related to activity
in our short-term investments, which was mainly due to increased funds for
investment from the warrant exercises and capital raise described above. We used
$1,071 in 2021 to invest in the acquisition of intangible assets and property,
plant and equipment, as compared to $522 in 2020. The increase in cash used for
the acquisition of machinery and equipment and the acquisition of patents,
trademarks and licenses was primarily due to new office furnishings and
additional intellectual property costs.

Net cash provided by (used in) financing activities

During the year ended December 31, 2021, cash provided by financing activities
increased by $51,179 resulting from (i) the net proceeds of $11,782 resulting
from cash exercises of all outstanding warrants during the first quarter of
2021; (ii) net proceeds of $38,206 resulting from a capital raise in June 2021;
(iii) net proceeds pertaining to notes payable issuances and payments of $49;
and (iv) net proceeds from stock option exercises of $1,307. These increases
were partially offset by cash paid for taxes related to settlement of restricted
stock units of $469.

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Cash demands on operations

Our principal sources of liquidity are our cash and cash equivalents, short-term
investment securities, and cash generated from our contract manufacturing
business. As of December 31, 2021, we had approximately $48,736 of cash and cash
equivalents and short-term investments which is an increase of $26,394 from
December 31, 2020. This increase was primarily due to the cash exercise of our
outstanding warrants in the first quarter of 2021 and a capital raise in the
second quarter of 2021. We believe our short-term investment securities, along
with sustained contract manufacturing sales and anticipated growth in our VLN®
product line, provide sufficient resources for estimated contractual
commitments, described further in Note 12 to our consolidated financial
statements included herein, and normal cash requirements for operations beyond
the next twelve months. In addition to the commitments described in Note 12 to
our consolidated financial statements included herein, we have secured contracts
with select tobacco farmers to assist with the growing of our VLNC tobacco.
These contracts will increase the quantity of our current leaf inventory which
will help support expected demand of VLN®, particularly now that MRTP
authorization was granted by the FDA in December 2021. The cost of such growing
efforts is dependent on the final agricultural yields and leaf quality, but we
expect the cost to be approximately $4.6 million for deliveries received and to
be received in 2022 and early 2023. We also believe that we have appropriate
liquidity to successfully manufacture and distribute our VLN® cigarette within
90 days of MRTP authorization by the FDA which was received in December 2021, as
well as appropriate liquidity for continued R&D investment in all our plant
franchises.

We also have an effective S-3 shelf registration statement on file with the U.S.
Securities and Exchange Commission
(SEC), which provides us flexibility and
optionality to raise additional capital as needed. However, there can be no
assurance that capital will be available to us on acceptable terms or at all.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP") which requires
management to make estimates, judgements, and assumptions that affect the
amounts reported in our consolidated financial statements and accompanying
notes. For a discussion of our significant accounting policies, refer to Note 1
to our consolidated financial statements. We believe that our most critical
accounting estimates relate to investment valuation and impairment of long-lived
intangible assets.

Conversion of Panacea Investment -As described further within Note 6 to our
consolidated financial statements included herein, in June 2021 we exchanged
certain assets pertaining to our investment in Panacea. The determination of the
carrying value of the assets received required us to use certain estimates. For
instance, we received farmland and equipment for which we relied in part by an
independent valuation firm to assess the current market value of these assets.
In addition, we received a secured, non-interest bearing $4,000 note. Based on
the stated term of the note, we used current market interest rates for a
comparable security to determine an implied interest rate and adjust the value
of the note recorded in our consolidated financial statements.

Impairment of Long-Lived Assets - Our intangible asset portfolio consists of
both definite-lived and indefinite-lived intangible assets which include
patents, trademarks, licenses, and our inclusion within the tobacco MSA. Our
intangible assets subject to amortization are reviewed for strategic importance
and commercialization opportunity prior to expiration. If it is determined that
the asset no longer supports the Company's strategic objectives and/or will not
be commercially viable prior to expiration, the asset is impaired. To determine
if an asset's carrying value is appropriate, we are required to estimate the
expected commercialization of our tobacco and cannabis intellectual
property-either through future product sales or potential license opportunities.
This estimate process includes expected future cash flow projections, industry
market assessments, and assumptions around positive regulatory developments from
government agencies-including ongoing developments following the recent approval
of our MRTP application.

For our indefinite-lived intangible assets-MSA, cigarette brand predicate and
trademarks-we consider current and future sales projections, strategic
objectives, future market and economic conditions, competition, and federal and
state regulations to determine if it is more likely than not that that the asset
is impaired. If it is more likely than not that the asset is impaired, we will
compare the asset carrying value to fair value and record the difference as
an
impairment.

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Management has discussed these critical accounting policies and estimates with
the Audit Committee of the Company's Board of Directors. While our estimates and
assumptions are based on our knowledge of current events and future actions,
actual results may ultimately differ from these estimates and assumptions.

Off-Balance Sheet Arrangement

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

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