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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>As filed with
the Securities and Exchange Commission on February 4, 2013</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: right"><B>Registration <FONT STYLE="color: black">No.
333-______</FONT></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><FONT STYLE="font-size: 12pt"><B>UNITED
STATES SECURITIES AND EXCHANGE COMMISSION</B></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Washington, D.C. 20549</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Form S-1</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;<B>REGISTRATION STATEMENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>UNDER</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>THE SECURITIES
ACT OF 1933</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><FONT STYLE="font-size: 12pt"><B>22nd
CENTURY GROUP, INC.</B></FONT><B> </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><I>(Exact name of
registrant as specified in its charter)</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
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    <TD STYLE="width: 32%"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Nevada</B></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>(State or other jurisdiction
        of</I></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>Incorporation or organization)</I></P></TD>
    <TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="width: 32%"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>5194</B></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>(Primary Standard Industrial</I></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>Classification Code Number)</I></P></TD>
    <TD STYLE="font-size: 10pt; width: 2%">&nbsp;</TD>
    <TD STYLE="width: 32%"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>98-0468420</B></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>(I.R.S. Employer</I></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>Identification No.)</I><FONT STYLE="color: black">
        </FONT></P></TD></TR>
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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>9530 Main Street</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Clarence, New York 14031</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(716) 270-1523</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><I>(Address, including zip code, and telephone
number, including area code, of registrant&rsquo;s principal executive offices)</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>Henry Sicignano
III</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>President</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd Century Group, Inc.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>9530 Main Street</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Clarence, New York 14031</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(716) 270-1523</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><I>(Address, including
zip code, and telephone number, including area code, of agent for service)</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B><I>Copies to:</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>Michael B. Kirwan,
Esq.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Thomas L. James, Esq.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Foley &amp; Lardner LLP </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>One Independent Drive, Suite 1300 </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Jacksonville, Florida 32202 </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(904) 359-2000 </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0"><B>Approximate date of commencement of proposed
sale to the public:</B> As soon as practicable after the Registration Statement becomes effective.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="color: black">If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box. </FONT><FONT STYLE="font-family: Wingdings">x</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="color: black">If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. </FONT><FONT STYLE="font-family: Wingdings">&uml;
</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="color: black">If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. </FONT><FONT STYLE="font-family: Wingdings">&uml;
</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="color: black">If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. </FONT><FONT STYLE="font-family: Wingdings">&uml;
</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of &ldquo;large accelerated
filer,&rdquo; &ldquo;accelerated filer&rdquo; and &ldquo;smaller reporting company&rdquo; in Rule 12b-2 of the Exchange Act. (Check
one):</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 23%"><FONT STYLE="font-size: 10pt; color: black">Large accelerated filer </FONT><FONT STYLE="font-family: Wingdings">&uml;
    </FONT></TD>
    <TD STYLE="width: 24%; text-align: center"><FONT STYLE="font-size: 10pt; color: black">Accelerated filer </FONT><FONT STYLE="font-family: Wingdings">&uml;
    </FONT></TD>
    <TD STYLE="width: 25%; text-align: center"><FONT STYLE="font-size: 10pt; color: black">Non-accelerated filer </FONT><FONT STYLE="font-family: Wingdings">&uml;
    </FONT></TD>
    <TD STYLE="width: 28%; text-align: right"><FONT STYLE="font-size: 10pt; color: black">Smaller reporting company </FONT><FONT STYLE="font-family: Wingdings">x
    </FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CALCULATION OF REGISTRATION FEE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Title of each class of <BR>securities to be registered</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Amount to be <BR>Registered (1)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Proposed <BR>maximum <BR>offering<BR>
 price <BR>per share</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Proposed maximum <BR>aggregate offering <BR>price</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Amount of <BR>registration fee</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 48%">Common stock, par value $0.00001 per share, underlying Series A-1 10% Convertible Preferred Stock, par value $0.00001 per share</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: right">10,833,332</P></TD><TD STYLE="width: 1%; text-align: left">(2)</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 5%; color: black; text-align: right">$</TD><TD STYLE="width: 5%; color: black; text-align: right">0.71</TD><TD STYLE="width: 1%; color: black; text-align: left">(3)</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 5%; color: black; text-align: right">$</TD><TD STYLE="width: 5%; color: black; text-align: right">7,691,665.72</TD><TD STYLE="width: 1%; color: black; text-align: left">(3)</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 5%; color: black; text-align: right">$</TD><TD STYLE="width: 5%; color: black; text-align: right">1,049.14</TD><TD STYLE="width: 1%; color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Common stock underlying outstanding Series A Warrants</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right"><FONT STYLE="font-size: 10pt; color: black">8,333,332</FONT></TD><TD STYLE="color: black; text-align: left">(4)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">0.72</TD><TD STYLE="color: black; text-align: left">(5)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">5,999,999.04</TD><TD STYLE="color: black; text-align: left">(5)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">818.40</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Common stock underlying outstanding Series B Warrants</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right"><FONT STYLE="font-size: 10pt; color: black">4,166,668</FONT></TD><TD STYLE="color: black; text-align: left">(6)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">0.71</TD><TD STYLE="color: black; text-align: left">(5)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">2,958,334.28</TD><TD STYLE="color: black; text-align: left">(5)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">403.52</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">&nbsp;</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Common stock underlying outstanding Series C Warrants</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right"><FONT STYLE="font-size: 10pt; color: black">4,166,668</FONT></TD><TD STYLE="color: black; text-align: left">(4)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">0.72</TD><TD STYLE="color: black; text-align: left">(5)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">3,000,000.96</TD><TD STYLE="color: black; text-align: left">(5)</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">409.20</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="color: black">Total</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">27,500,000</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">19,650,000.00</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: right">$</TD><TD STYLE="color: black; text-align: right">2,680.26</TD><TD STYLE="color: black; text-align: left">(7)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: left; margin-bottom: 0pt">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR>
    <TD STYLE="vertical-align: top; width: 3%; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(1) </FONT></TD>
    <TD STYLE="vertical-align: top; width: 1%">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; width: 96%"><FONT STYLE="font-size: 10pt; color: black">Pursuant to Rule 416 under the
    Securities Act of 1933, as amended (the &ldquo;Securities Act&rdquo;), the number of shares of common stock registered hereby
    is subject to adjustment to prevent dilution resulting from stock splits, stock dividends or similar transactions.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(2) </FONT></TD>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt; color: black">For purposes of calculating the number of shares
    of common stock included in this registration statement (due to potential adjustments to the conversion price and anti-dilution
    provisions), we have included 200% of the aggregate number of shares currently issuable (i) upon conversion of issued and
    outstanding shares of Series A-1 10% Convertible Preferred Stock at an initial conversion price of $0.60 per share and (ii)
    issuable as dividends in lieu of cash over a three (3) year period on issued and outstanding shares of Series A-1 10% Convertible
    Preferred Stock (at an assumed price of $0.60 per share). The shares of common stock are being registered for resale by the
    selling stockholders named in this registration statement.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(3)</FONT></TD>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt; color: black">Estimated solely for the purpose of calculating
    the registration fee pursuant to Rule 457(c) under the Securities Act based on the average of the high and low sale prices
    of the common stock reported on the OTC Bulletin Board on January 31, 2013, which was $0.71 per share.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(4)</FONT></TD>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt; color: black">For purposes of calculating the number of shares
    of common stock included in this registration statement (due to potential adjustments to the exercise price and anti-dilution
    provisions), we have included 200% of the aggregate number of shares currently issuable upon exercise of warrants to purchase
    shares of common stock held by the selling stockholders named in this registration statement, at an initial exercise price
    of $0.72 per share. </FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(5)</FONT></TD>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt; color: black">Represents the higher of: (i) the exercise
    price of the convertible security and (ii) the offering price of securities of the same class as the common stock underlying
    the convertible security calculated in accordance with Rule 457(c) under the Securities Act, for the purpose of calculating
    the registration fee pursuant to 457(g) under the Securities Act.</FONT></TD></TR>
<TR>
    <TD STYLE="vertical-align: top; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(6)</FONT></TD>
    <TD STYLE="vertical-align: top">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt; color: black">For purposes of calculating the number of shares
    of common stock included in this registration statement (due to potential adjustments to the exercise price and anti-dilution
    provisions), we have included 200% of the aggregate number of shares currently issuable upon exercise of warrants to purchase
    shares of common stock held by the selling stockholders named in this registration statement, at an exercise price of $0.60
    per share.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR>
    <TD STYLE="vertical-align: top; width: 3%; text-align: right"><FONT STYLE="font-size: 10pt; color: black">(7)</FONT></TD>
    <TD STYLE="vertical-align: top; width: 1%">&nbsp;</TD>
    <TD STYLE="vertical-align: bottom; width: 96%"><FONT STYLE="font-size: 10pt; color: black">The Registrant previously filed
    Form S-1 (333-173420) on April 8, 2011, and paid a filing fee of $788.68. The Registrant did not sell an aggregate of 4,632,534
    securities pursuant to that Form S-1, and that Form S-1 was terminated on May 18, 2012. Pursuant to Rule 457(p), the Registrant
    hereby applies $672 of the previously paid filing fee against amounts due herewith.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>The Registrant hereby amends this Registration Statement
on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; color: Red">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; color: Red"></P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 100%; border: windowtext 1pt solid"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: red">The information in
        this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration
        statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these
        securities and the selling stockholders are not soliciting an offer to buy these securities in any jurisdiction where
        the offer or sale is not permitted.</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; color: red">&nbsp;</P></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; color: red"><B>SUBJECT TO COMPLETION, DATED
FEBRUARY 4, 2013</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; color: red">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PRELIMINARY PROSPECTUS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>

<P STYLE="font: 24pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP, INC.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Up to 27,500,000 Shares of Common Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">This prospectus relates to the resale at
various times by the selling stockholders indentified in this prospectus of up to 27,500,000 shares of common stock, par value
$0.00001 per share, issuable (i) upon conversion of our Series A-1 Preferred Stock, (ii) as dividend payments on our Series A-1
Preferred Stock (at our option) and (iii) upon the exercise of Series A Warrants, Series B Warrants and Series C Warrants. These
shares were privately issued to the selling stockholders in connection with a private placement transaction. We will not receive
any proceeds from the sale of common stock by the selling stockholders, but we will receive funds from the exercise of the Series
A Warrants, Series B Warrants and Series C Warrants, if exercised for cash.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>



<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="font-size: 10pt; color: black">The
selling stockholders have advised us that they will sell the shares of common stock from time to time in broker&rsquo;s transactions,
in the open market, on the OTC Bulletin Board, in privately negotiated transactions or a combination of these methods, at market
prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices. We will pay
the expenses incurred to register the shares for resale, but the selling stockholders will pay any</FONT> <FONT STYLE="font-size: 10pt; color: black">underwriting
discounts, commissions or agent&rsquo;s commissions related to the sale of their shares of common stock.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our common stock is traded on the OTC Bulletin
Board under the symbol &ldquo;XXII.OB&rdquo;. On January 29, 2013, the closing sale price of our common stock was $0.90 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B>Investing in our common stock involves
risks. Before making any investment in our securities, you should read and carefully consider risks described in the &ldquo;Risk
Factors&rdquo; section beginning on page 7 of this prospectus.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">You should rely only on the information
contained in this prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with
different information. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus
is only accurate on the date of this prospectus, regardless of the time of any sale of securities.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B>Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal offense.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">This date of this prospectus is <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U>,
2013</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with information that is different from that contained in this prospectus.
If anyone provides you with different or inconsistent information, you should not rely on it. The selling stockholders are offering
to sell and seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. You should assume
that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects
may have changed since that date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>TABLE OF CONTENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="width: 95%">Prospectus Summary</TD>
    <TD STYLE="width: 5%; text-align: right">1</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Recent Developments</TD>
    <TD STYLE="text-align: right">3</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>The Offering</TD>
    <TD STYLE="text-align: right">5</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Cautionary Note Regarding Forward-Looking Statements</TD>
    <TD STYLE="text-align: right">6</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Risk Factors</TD>
    <TD STYLE="text-align: right">7</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Principal Stockholders</TD>
    <TD STYLE="text-align: right">21</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Selling Stockholders</TD>
    <TD STYLE="text-align: right">23</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Use of Proceeds</TD>
    <TD STYLE="text-align: right">25</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Dividend Policy</TD>
    <TD STYLE="text-align: right">25</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Determination of Offering Price</TD>
    <TD STYLE="text-align: right">25</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Market for Common Equity and Related Stockholder Matters</TD>
    <TD STYLE="text-align: right">25</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Shares Authorized for Issuance Under Equity Compensation Plans</TD>
    <TD STYLE="text-align: right">26</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Business</TD>
    <TD STYLE="text-align: right">27</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Management&rsquo;s Discussion and Analysis of Financial Condition and Results of Operations</TD>
    <TD STYLE="text-align: right">44</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Directors and Executive Officers</TD>
    <TD STYLE="text-align: right">52</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Corporate Governance</TD>
    <TD STYLE="text-align: right">54</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Executive Compensation</TD>
    <TD STYLE="text-align: right">57</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Certain Relationships and Related Transactions</TD>
    <TD STYLE="text-align: right">59</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Plan of Distribution</TD>
    <TD STYLE="text-align: right">62</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Description of Securities</TD>
    <TD STYLE="text-align: right">64</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Legal Matters</TD>
    <TD STYLE="text-align: right">71</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Experts</TD>
    <TD STYLE="text-align: right">71</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Changes In and Disagreements With Accountants On Accounting and Financial Disclosure</TD>
    <TD STYLE="text-align: right">71</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD>Where You Can Find More Information</TD>
    <TD STYLE="text-align: right">72</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD>Index to Financial Statements</TD>
    <TD STYLE="text-align: right">F-1</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; text-align: center; margin-bottom: 0pt">&nbsp;&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Prospectus
Summary</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>This summary highlights information contained elsewhere
in this prospectus. This summary is not complete and does not contain all the information that should be considered before investing
in our common stock. Investors should read the entire prospectus carefully, including the more detailed information contained
herein under the &ldquo;Risk Factors&rdquo; and &ldquo;Cautionary Note Regarding Forward-Looking Statements&rdquo; sections and
our consolidated financial statements and the notes to those financial statements. </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>As used in this prospectus, unless the context otherwise
requires, the &ldquo;Company,&rdquo; &ldquo;we,&rdquo; &ldquo;us&rdquo; and &ldquo;our&rdquo; refer to 22nd Century Group, Inc.,
a Nevada corporation, as well as its subsidiaries, 22nd Century Limited, LLC, a Delaware limited liability company, Goodrich Tobacco
Company, LLC, a Delaware limited liability company, and Hercules Pharmaceuticals, LLC, a Delaware limited liability company, taken
as a whole, and also refer to the operations of 22nd Century Limited, LLC, as discussed below.</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Our Company</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Background</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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. We changed our name to 22nd Century Group, Inc. on
November 23, 2010 in anticipation of the Merger with 22nd Century Limited, LLC. After the Merger, we succeeded to the business
of 22nd Century Limited, LLC as our sole line of business.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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. Since inception, 22nd Century
Limited, LLC has used biotechnology to regulate the nicotine content in tobacco plants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Overview</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">22nd Century Limited, LLC, our wholly-owned
subsidiary,<FONT STYLE="color: black"> is a plant biotechnology company focused on tobacco harm reduction and smoking cessation
products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding. We exclusively
control 107 issued patents and exclusively control an additional 38 patent applications; of these, we own 12 issued patents plus
23 patent applications and we license on an exclusive basis, 95 issued patents and 15 patent applications. </FONT>Hercules Pharmaceuticals,
LLC and Goodrich Tobacco Company, LLC are subsidiaries of 22nd Century Limited, LLC and are business units for our (i) smoking
cessation product and (ii) premium cigarettes and modified risk tobacco products, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We are in the process of transitioning
from solely developing proprietary technology and tobacco to developing and commercializing our own products. In March 2011, our
subsidiary, Goodrich Tobacco Company, LLC introduced two of our products, <I>RED SUN</I> and <I>MAGIC </I>cigarettes into the
U.S. market.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">For more information about our business,
see &ldquo;Business&rdquo; and &ldquo;Management&rsquo;s Discussion and Analysis of Financial Condition&rdquo; in this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Current Financial Condition</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have operated at a loss since 2006
when we increased our research and development expenditures. We had net losses of $2.4 million, $1.3 million and $1.4
million, respectively, in the nine months ended September 30, 2012 and years ended December 31, 2011 and 2010. We realized
revenue of $15,683 in the nine months ended September 30, 2012 from the sale of research cigarettes. In the year ended
December 31, 2011, we realized revenue of $788,601 mainly from our research cigarette program and in 2010, we realized
revenue of $49,784 from this program. As of January 22, 2013, we had cash on hand of approximately $660,000 due to the
capital raises described under &ldquo;Recent Developments,&rdquo; which should be sufficient to fund operations for
approximately 5 months.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We will need additional capital to continue
operations and make payments on obligations that are and become due in 2013. Our expected capital requirements over the next 12
months without any extraordinary expenses such as exposure studies or clinical trials are approximately $1 million. We will need
to raise funds through the issuance of debt or equity securities or through licensing our technology during the next twelve months
in order to continue operations. Failure to raise sufficient funds would significantly increase the risk that we would be unable
to continue operations. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed
could materially adversely impact our plans to commercialize our products, our ability to continue as a going concern and our
financial condition and results of operations. Additional equity financing will be dilutive to shareholders of our common stock.
To the extent that we raise additional funds through collaboration and licensing arrangements, it will be necessary in certain
countries to relinquish some rights to our technologies or our potential products or grant licenses on terms that are not favorable
to us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Corporate Information</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our principal executive offices are located
at 9530 Main Street, Clarence, New York 14031. The telephone number at our principal executive offices is (716) 270-1523. Our
website address is www.xxiicentury.com. Information contained on our website is not deemed part of this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><FONT STYLE="text-transform: uppercase"><B>Recent
Developments</B></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Private Placement of Preferred Stock and Warrants</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 11, 2013, we entered into and
closed the transactions described in a Securities Purchase Agreement with certain accredited investors indentified therein (collectively,
the &ldquo;Purchasers&rdquo;), whereby we sold 2,500 shares of newly created Series A-1 10% Convertible Preferred Stock (the &ldquo;Series
A-1 Preferred Stock&rdquo;) and Warrants (as defined below) for an aggregate purchase price of $2,500,000. We also entered into
a Registration Rights Agreement whereby we agreed to file a registration statement to register the resale of the shares of our
common stock that are potentially issuable under each of the securities described below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The shares of Series A-1 Preferred Stock
are initially convertible into a total of 4,166,666 shares of the Company&rsquo;s common stock at a conversion price of $0.60
per share (the &ldquo;Conversion Price&rdquo;), subject to future adjustments. The Series A-1 Preferred Stock will pay a 10.0%
annual cash dividend, which may be payable in shares of our common stock in certain circumstances, and will have a liquidation
preference equal to the stated value of the Series A-1 Preferred Stock of $1,000 per share plus any accrued and unpaid dividends
thereon. The Series A-1 Preferred Stock has no voting rights. The Conversion Price of the Series A-1 Preferred Stock is subject
to adjustment as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in">(i)</TD><TD>on the effective date of this registration statement, the Conversion
                                                           Price will be reduced to the lesser of (1) the then Conversion Price,
                                                           as adjusted and taking into consideration any prior resets, (2) the
                                                           greater of $0.35 (subject to adjustment for reverse and forward stock
                                                           splits and the like) and 70% of the average of the five (5) trading
                                                           day volume weighted average prices, or VWAPs, immediately prior to
                                                           each such effective date or (3) $0.60 (subject to adjustment for forward
                                                           and reverse stock splits and the like);</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in">(ii)</TD><TD>if on the 180th day immediately following the closing date of
                                                            January 11, 2013 (the &ldquo;Closing Date&rdquo;), 70% of the average
                                                            of the five (5) trading day VWAPs immediately prior to such date is
                                                            less than the then Conversion Price, then on such 180th day the Conversion
                                                            Price shall be reduced, and only reduced, to the lesser of (1) the
                                                            then Conversion Price, as adjusted and taking into consideration any
                                                            prior resets, (2) the greater of $0.15 (subject to adjustment for
                                                            reverse and forward stock splits and the like) and 70% of the average
                                                            of the five (5) trading day VWAPs immediately prior to each such 180th
                                                            day immediately following the Closing Date or (3) $0.35 (subject to
                                                            adjustment for forward and reverse stock splits and the like); and</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in">(iii)</TD><TD>if all of the shares required to be registered are not registered
                                                             pursuant to an effective registration statement within the 120th
                                                             day anniversary of the Closing Date, then on the 180th day and 270th
                                                             day following the Closing Date, the Conversion Price shall be reduced,
                                                             and only reduced, to the lesser of (1) the then Conversion Price,
                                                             as adjusted and taking into consideration any prior resets, (2) the
                                                             greater of $0.15 (subject to adjustment for reverse and forward stock
                                                             splits and the like) and 70% of the average of the five (5) trading
                                                             day VWAPs immediately prior to each such date or (3) $0.35 (subject
                                                             to adjustment for forward and reverse stock splits and the like).</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The foregoing description of the Series
A-1 Preferred Stock is only a summary and is not complete. For additional information about the terms of the Series A-1 Preferred
Stock, including the anti-dilution features, liquidated damages provisions for certain events and negative covenants, see the
section entitled &ldquo;Description of Securities &ndash; Preferred Stock&rdquo; in this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We also issued to the Purchasers a Series
A warrant (the &ldquo;Series A Warrant&rdquo;), a Series B warrant (the &ldquo;Series B Warrant&rdquo;), and a Series C warrant
(the &ldquo;Series C Warrant&rdquo;) (with the Series A Warrant, Series B Warrant and Series C Warrant being collectively referred
to herein as the &ldquo;Warrants&rdquo;). The Series A Warrant allows the Purchasers the right to acquire, initially before any
adjustments to the conversion price, up to an additional 4,166,666 shares of the Company&rsquo;s common stock at an exercise price
of approximately $0.72 per share over a period of five (5) years. The Series A Warrant also allows for such warrant to be exercised
on a cashless basis. The Series B Warrant allows the Purchasers a one-year period to exercise an overallotment option as contained
in the Series B Warrant to purchase, initially before any adjustments to the conversion price, up to an additional aggregate of
2,083,334 shares of the Company&rsquo;s common stock at a price of $0.60 per share. The Series B Warrant may not be exercised
on a cashless basis except only in certain limited circumstances. In the event the Purchasers exercise, in whole or in part the
overallotment option as contained in the Series B warrant, then the Purchasers shall have the right to exercise on a pro rata
basis the portion of the Series C Warrant issued to the Purchasers to acquire, initially before any adjustments to the conversion
price, up to an additional aggregate of 2,083,334 shares of the Company&rsquo;s common stock at an exercise price of approximately
$0.72 per share over a period of five (5) years. The Series C Warrant allows for such warrant to be exercised on a cashless basis.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The foregoing description of the Warrants
is only a summary and is not complete. For additional information about the terms of the Warrants, including the anti-dilution
features, see the section entitled &ldquo;Description of Securities &ndash; Warrants and Convertible Notes&rdquo; in this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>



<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series A-1 Preferred Stock and the
Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the case
may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any of its
affiliates would beneficially own in excess of 9.99% of the outstanding shares of common stock immediately after giving effect
to such conversion or exercise (as the case may be).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series A-1 Preferred Stock and the
Warrants were offered and sold pursuant to an exemption from the registration requirements under Sections 4(2), Section 4(6) and
Regulation S of the Securities Act and Rule 506 of Regulation D promulgated thereunder.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We paid Chardan Capital Markets LLC a commission
equal to (i) ten percent (10%) of the cash received by us and (ii) 416,666 shares of common stock. In the event the Purchasers
exercise for cash any of the Warrants, then we will also pay an additional cash commission to Chardan Capital Markets LLC equal
to eight percent (8%) (with no additional equity) of any such additional cash amounts received by us. After deducting fees and
expenses, the aggregate net proceeds from the sale of the Series A-1 Preferred Shares and the Warrants were approximately $2.125
million. We intend to use the net proceeds for the payment of certain financial obligations and for working capital and other
general corporate purposes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Modification of Convertible Notes Due December 14, 2012</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On December 14, 2011, we sold approximately
$1.9 million of convertible promissory notes for an aggregate purchase price of approximately $1.7 million in a private placement.
The notes were issued with an original issue discount of approximately 15% and the original maturity date of the notes was December
14, 2012 (which was extended as set forth below). The notes were initially convertible into shares of our common stock at any
time prior to maturity at a per share conversion price equal to $0.75, which conversion price was subsequently adjusted pursuant
to its terms to be equal to $0.7004 per share as of January 22, 2013. Upon conversion of all or a portion of the notes into common
stock, the holder will receive at that time a warrant to purchase an exercise price of $1.50 per share (i) such number of shares
of common stock from such warrant equal to 120% of such number of shares of common stock issuable upon conversion of the note
and (ii) a pro rata portion of an increase of such warrant in the aggregate of an additional 239,890 shares of common stock that
were the result of inducements granted to holders of such notes to execute lock-up agreements, which restrict the note holders
from selling the underlying shares of common stock issuable upon conversions of the notes or exercising the warrants for a period
from January 11, 2013 until the date which is 2 months after the effective date of this registration statement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Between December 14, 2012 and January 2,
2013, we entered into agreements with holders of $1,675,000 of the notes. Holders of $1,330,000 of the notes agreed to extend
the maturity date of the notes to April 14, 2013. Holders of $100,000 of the notes elected to convert into shares of the common
stock pursuant to the terms of the notes. Holders of $215,000 of the notes elected to enter into a forbearance agreement and were
subsequently paid in full. Holders of $30,000 of the notes agreed to be paid over time. On January 24, 2013, we sent out notices
to the holders of the notes regarding our intent to repay the notes at the expiration of a 15-day period during which time the
holders may convert to common stock and warrants to purchase common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The foregoing description of the notes
is only a summary and is not complete. For additional information about the terms of the notes, see the section entitled &ldquo;Description
of Securities&rdquo; in this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Private Placement of Common Stock and Warrants</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On November 9, 2012, we sold for an aggregate
purchase price of approximately $809,500 in a private placement of approximately 3,238,000 shares of our common stock and warrants
with a 5-year term to purchase up to 1,619,000 shares of our common stock at an initial exercise price of $1.00 per share, which
warrant exercise price was subsequently adjusted pursuant to its terms to be equal to $0.60 per share as of January 22, 2013.
We used the proceeds from such private placement for licensing expenses, tobacco leaf purchases, working capital and other general
corporate purposes. For additional information about these warrants, see the section entitled &ldquo;Description of Securities
&ndash; Warrants and Convertible Notes &ndash; Warrants issued in 2012&rdquo; in this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">The Offering</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR>
    <TD STYLE="vertical-align: top; width: 40%"><FONT STYLE="font-size: 10pt; color: black">Common stock currently outstanding</FONT></TD>
    <TD STYLE="vertical-align: bottom; width: 60%"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">35,415,139<FONT STYLE="color: black"> shares (1) (2)</FONT></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Common stock offered by us</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P></TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">None.</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt; color: black">Common stock offered by the selling stockholders</FONT></TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Up to 27,500,000<FONT STYLE="color: black"> shares
        issuable (i) upon conversion of our Series A-1 Preferred Stock, (ii) as dividend payments on our Series A-1 Preferred
        Stock and (iii) upon the exercise of the Warrants.</FONT></P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt; color: black">Use of Proceeds</FONT></TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">We will not receive any proceeds from the sale of common
        stock by the selling stockholders, but we will receive funds from the exercise of the Warrants, if exercised for cash.</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt; color: black">Risk Factors</FONT></TD>
    <TD STYLE="vertical-align: bottom"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See &ldquo;Risk Factors&rdquo; and other information
        included in this prospectus for a discussion of factors that you should consider before deciding to invest in shares of
        our common stock.</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P></TD></TR>
<TR>
    <TD STYLE="vertical-align: top"><FONT STYLE="font-size: 10pt; color: black">OTC Bulletin Board Symbol</FONT></TD>
    <TD STYLE="vertical-align: bottom"><FONT STYLE="font-size: 10pt; color: black">XXII.OB</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(1) As of January 22, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(2) Unless otherwise indicated, the number of shares in this
prospectus does not give effect to:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>up to 4,166,666
                                                                                                             shares of common
                                                                                                             stock that could
                                                                                                             be issued as a result
                                                                                                             of the conversion
                                                                                                             of the shares of
                                                                                                             Series A-1 Preferred
                                                                                                             Stock, which is subject
                                                                                                             to adjustment as
                                                                                                             described under &ldquo;Description
                                                                                                             of Securities &ndash;
                                                                                                             Preferred Stock&rdquo;;</TD></TR></TABLE>

<P STYLE="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>up to 2,055,000
                                                                                                             shares of common
                                                                                                             stock reserved for
                                                                                                             future issuance under
                                                                                                             the Equity Incentive
                                                                                                             Plan;</TD></TR></TABLE>

<P STYLE="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>up to 465,000
                                                                                                             shares of common
                                                                                                             stock issuable upon
                                                                                                             exercise of outstanding
                                                                                                             stock options;</TD></TR></TABLE>

<P STYLE="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>up to 2,411,734
                                                                                                             shares of common
                                                                                                             stock currently issuable
                                                                                                             upon the conversion
                                                                                                             of convertible notes
                                                                                                             (subject to adjustment
                                                                                                             for anti-dilution
                                                                                                             adjustments);</TD></TR></TABLE>

<P STYLE="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>up to 19,700028
                                                                                                             shares of common
                                                                                                             stock currently issuable
                                                                                                             upon the exercise
                                                                                                             of outstanding warrants
                                                                                                             (including the Series
                                                                                                             A Warrants and Series
                                                                                                             B Warrants) (subject
                                                                                                             to adjustment for
                                                                                                             anti-dilution adjustments);
                                                                                                             and</TD></TR></TABLE>

<P STYLE="font: 10pt Symbol; margin: 0pt 0 0pt 1in; text-indent: -0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>up to 5,142,797
                                                                                                             shares of common
                                                                                                             stock issuable upon
                                                                                                             exercise of warrants
                                                                                                             issuable upon conversion
                                                                                                             or exercise of other
                                                                                                             instruments (including
                                                                                                             the Series C Warrants)
                                                                                                             (subject to adjustment
                                                                                                             for anti-dilution
                                                                                                             adjustments).</TD></TR></TABLE>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>


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<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Cautionary
Note Regarding Forward-Looking Statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">This prospectus contains forward-looking
statements.&nbsp;&nbsp;This prospectus includes statements regarding our plans, goals, strategies, intentions, beliefs or current
expectations.&nbsp;&nbsp;These statements are expressed in good faith and based upon a reasonable basis when made, but there can
be no assurance that these expectations will be achieved or accomplished.&nbsp;&nbsp;These forward looking statements can be identified
by the use of terms and phrases such as &ldquo;believe,&rdquo; &ldquo;plan,&rdquo; &ldquo;intend,&rdquo; &ldquo;anticipate,&rdquo;
&ldquo;target,&rdquo; &ldquo;estimate,&rdquo; and &ldquo;expect.&rdquo; Items contemplating or making assumptions about, actual
or potential future sales, market size, collaborations, and trends or operating results also constitute forward-looking statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">These forward-looking statements are only
predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our
(or our industry&rsquo;s) actual results, levels of activity or performance to be materially different from any future results,
levels of activity or performance expressed or implied by these forward-looking statements.&nbsp;&nbsp;The &ldquo;Risk Factors&rdquo;
section of this prospectus sets forth detailed risks, uncertainties and cautionary statements regarding our business and these
forward-looking statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Since our common stock is considered a
&ldquo;penny stock,&rdquo; we are ineligible to rely on the safe harbor for forward-looking statements provided in Section 27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We cannot guarantee future results, levels
of activity or performance.&nbsp;&nbsp;You should not place undue reliance on these forward-looking statements, which speak only
as of the date that they were made.&nbsp;&nbsp;These cautionary statements should be considered with any written or oral forward-looking
statements that we may issue in the future.&nbsp;&nbsp;Except as required by applicable law, including the securities laws of
the United States, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual
results, later events or circumstances or to reflect the occurrence of unanticipated events.&nbsp;&nbsp;You should carefully review
and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt
to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation
and cash flows.&nbsp;&nbsp;If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove
incorrect, our actual results may vary materially from those expected or projected.</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>


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<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Risk Factors</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>An investment in shares of our common stock is highly speculative
and involves a high degree of risk. We face a variety of risks that may affect our operations or financial results and many of
those risks are driven by factors that we cannot control or predict. The following discussion addresses those risks that management
believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than
expected, that may affect our operations or financial results. Only those investors who can bear the risk of loss of their entire
investment should participate in this offering. Prospective investors should carefully consider the following risk factors in
evaluating an investment in our common stock.</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to Our Business and Operations</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We may not be able to continue as a going concern unless
we obtain additional capital and future sales of equity securities will cause stockholders to experience substantial dilution.
</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Recurring losses from operations, our negative
working capital of approximately $3.1 million and $1.9 million as of September&nbsp;30, 2012 and December&nbsp;31, 2011, respectively,
shareholders&rsquo; deficit of $2.4 million and $1.2 million as of September 30, 2012 and December 31, 2011, respectively, and
the uncertainty of obtaining additional capital on a timely basis, raise doubt about our ability to continue as a going concern.
It is highly probable that any sales of equity securities will cause our stockholders to experience substantial dilution. It is
also possible that such equity securities will have rights, preferences or privileges senior to those of existing stockholders.
The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2011
expressed substantial doubt regarding whether we can continue as a going concern. We cannot guarantee our ability to continue
as a going concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We have had a history of losses, and we may be unable
to achieve or sustain profitability.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We experienced
net losses of approximately $2.4 million, $1.3 million and $1.4 million during the nine months ended September 30, 2012 and the
years ended December 31, 2011 and 2010, respectively. We expect to continue to incur net losses and negative operating cash flows
in the foreseeable future and cannot be certain that we will ever achieve profitability. Since 2007, we </FONT>have<FONT STYLE="color: black">
received only limited licensing revenue from a former licensee and our only significant revenue has been from research cigarettes
for which the market is limited. We will need to spend significant capital to fulfill planned operating goals and conduct clinical
studies, achieve regulatory approvals and, subject to such approvals, successfully produce products for commercialization. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We have a history of negative cash flow, and our ability
to generate positive cash flow is uncertain.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We had negative cash flow before financing
activities of approximately $1,303,000, $4,057,000 and $1,018,000 during the nine months ended September 30, 2012 and the years
ended December 31, 2011 and 2010, respectively. We anticipate that we will continue to have negative cash flow for the foreseeable
future even though we have suspended clinical trials for <I>X-22</I> because we have significant liabilities that are due or that
will become due in 2013 and we will continue to incur expenses for sales and marketing, and general and administrative expenses.
Our business will also require significant amounts of working capital to support our growth. Therefore, we will likely need to
raise additional investment capital to achieve growth, and we may not achieve sufficient revenue growth to generate positive future
cash flow. An inability to generate positive cash flow for the foreseeable future or raise additional capital on reasonable terms
may decrease our long-term viability.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our ability to obtain future debt financing is limited
while shares of our Series A-1 Preferred Stock is outstanding.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our Certificate of Designations regarding
our Series A-1 Preferred Stock contains restrictive covenants that limit our ability to, among other things, incur or assume additional
debt or provide guarantees in respect of obligations of other persons (in each case, so long as 1,000 or more shares of our Series
A-1 Preferred Stock are outstanding, and other than with respect to lease obligations and purchase money indebtedness in an amount
up to $200,000 in the aggregate), or create, assume, or suffer to exist any liens (other than liens for taxes not yet due, liens
contested in good faith, and liens imposed in the ordinary course of business that do not materially impair the operation of the
business) without, in each instance, the prior written consent of at least 67% in stated value of the then-outstanding shares
of Series A-1 Preferred Stock. A breach of these covenants would trigger the ability of the holders of the Series A-1 Preferred
Stock to redeem their shares of Series A-1 Preferred Stock for cash or shares of our common stock or elect to increase the dividend
payments to be made on their shares of Series A-1 Preferred Stock to 18% per annum.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our limited operating history makes it difficult to evaluate
our current business and future prospects.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We have been
in existence since 1998, but our activities have been limited primarily to licensing and funding research and development activities.
Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have </FONT>encountered
<FONT STYLE="color: black">and will continue to encounter risks and difficulties frequently experienced by growing companies in
rapidly changing industries, including increasing expenses as we continue to grow our business. If we do not manage these risks
successfully, our business will be harmed.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We have no experience in managing growth. If we fail
to manage our growth effectively, we may be unable to execute our business plan or address competitive challenges adequately.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We currently
have six employees. Any growth in our business will place a significant strain on our managerial, administrative, operational,
financial, information technology and other resources. We intend to further expand our overall business, customer </FONT>base<FONT STYLE="color: black">,
employees and operations, which will require substantial management effort and significant additional investment in our infrastructure.
We will be required to continue to improve our operational, financial and management controls and our reporting procedures and
we may not be able to do so effectively. As such, we may be unable to manage our growth effectively.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our working capital requirements involve estimates based
on demand expectations and may increase beyond those currently anticipated, which could harm our operating results and financial
condition.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have no experience in selling smoking
cessation products or Modified Risk Cigarettes on a commercial basis. As a result, we intend to base our funding and inventory
decisions on estimates of future demand. If demand for our products does not increase as quickly as we have estimated, our inventory
and expenses could rise, and our business and operating results could suffer. Alternatively, if we experience sales in excess
of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet any demand for
our products may depend on our ability to arrange for additional financing for any ongoing working capital shortages, since it
is likely that cash flow from sales will lag behind our investment requirements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We have suspended further clinical trials for FDA approval
of our X-22 smoking cessation product and will not resume this process until additional capital is raised and we will need additional
capital before we can complete the FDA authorization process for our Modified Risk Cigarettes.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We will require
additional capital in the future before we can resume our own clinical trials for FDA approval of our <I>X-22 </I>smoking cessation
</FONT>product<FONT STYLE="color: black"> and complete the FDA authorization process for our Modified Risk Cigarettes. We do not
expect to undertake a capital raise for the purpose of funding further <I>X-22</I> clinical trials until the results of two independent
Phase II trials are released later in 2013. If we resume our own clinical trials for our <I>X-22 </I>smoking cessation product,
we estimate the cost of completing a Phase II trial will be approximately $2 million and the cost of completing two Phase III
trials to be approximately $12 million. We estimate that the cost of completing the FDA authorization process for each of our
potential Modified Risk Cigarettes to be at least $2 million. If we raise additional funds through the issuance of equity securities
for these activities, our stockholders may experience substantial dilution, or the equity securities may have rights, preferences
or privileges senior to those of existing stockholders. If we raise additional funds through debt financings, these financings
may involve significant cash payment obligations and covenants that restrict our ability to operate our business and make distributions
to our stockholders. However, our ability to raise funds through debt financing is limited while any shares of our Series A-1
Preferred Stock is outstanding. We also could elect to seek funds through arrangements with collaborators or licensees. To the
extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some
rights to our technologies or our potential products or grant licenses on terms that are not favorable to us.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">If we choose to resume our own clinical
trials for FDA approval of our <I>X-22 </I>smoking cessation product and we cannot raise additional capital on acceptable terms,
we may not be able to, among other things:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&bull; complete clinical trials
of our <I>X-22 </I>smoking cessation aid;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 49.5pt; text-indent: -9pt">&bull; undertake the steps necessary
to seek FDA authorization of our Modified Risk Cigarettes;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&bull; develop or enhance our
potential products or introduce new products;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&bull; expand our development,
sales and marketing and general and administrative activities;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&bull; attract tobacco growers,
customers or manufacturing and distribution partners;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&bull; acquire complementary
technologies, products or businesses;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 4.5pt; text-indent: 0.5in">&bull; expand our operations
in the United States or internationally;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 4.5pt; text-indent: 0.5in">&bull; hire, train and retain
employees; or</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt">&bull; respond to competitive
pressures or unanticipated working capital requirements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We currently are not in compliance with annual &ldquo;clean-up&rdquo;
provisions under a revolving line of credit.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Included in
current liabilities at September 30, 2012 is a demand loan under a revolving credit agreement with a balance outstanding of $174,925,
which is payable to a commercial bank and guaranteed by one of our shareholders. This exact same principal amount has been outstanding
for over four years on a continuous basis, notwithstanding the fact that we have not complied with annual &ldquo;clean-up&rdquo;
provisions which require that we repay all amounts outstanding for a period of 30 consecutive days each </FONT>year<FONT STYLE="color: black">.
There are no additional amounts available to us under this credit agreement. We have paid interest only since 2008 (currently
at the bank&rsquo;s annual prime rate plus 0.75% or 4%) on a monthly basis according to the bank&rsquo;s monthly payment statements.
Our plans contemplate that this balance remains outstanding while we continue to pay interest only on a monthly basis. We may
incur disruptions in our operations in the event the bank were to demand repayment in full, close the revolving credit agreement,
and not allow us sufficient time to locate additional capital.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We will depend on third parties to manufacture our products.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We currently
do not manufacture any of our products and depend on contract manufacturers to produce our products according to our </FONT>specifications<FONT STYLE="color: black">,
in sufficient quantities, on time, in compliance with appropriate regulatory standards and at competitive prices. We currently
do not have an arrangement with any contract manufacturer to produce our final version of <I>X-22 </I>smoking cessation aid once
it is approved by the FDA.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Manufacturers
supplying our potential products must comply with FDA regulations which require, among other things, compliance with the FDA&rsquo;s
evolving regulations on Current Good Manufacturing Practices (&ldquo;cGMP(s)&rdquo;), which are enforced by the FDA through its
facilities inspection program. The manufacture of products at any facility will be subject to strict quality control, testing
and record keeping requirements, and continuing obligations regarding the submission of safety reports and other </FONT>post<FONT STYLE="color: black">-market
information. We cannot guarantee that our current contract manufacturers will pass FDA and/or similar inspections in foreign countries
to produce the final version of our <I>X-22 </I>smoking cessation aid, or that future changes to cGMP manufacturing standards
will not also affect the manufactures of our other products. Therefore, we may have to build our own manufacturing facility which
would require additional capital.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We will mainly depend on third parties to market, sell
and distribute our products, and we currently have no commercial arrangements for the marketing, sale or distribution of our X-22
smoking cessation aid.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We expect to
depend on third parties to a great extent to market, sell and distribute our products and we currently have no arrangements with
third </FONT>parties<FONT STYLE="color: black"> in place to provide such services for our <I>X-22 </I>smoking cessation aid. We
cannot be sure that we will be able to enter into such arrangements on acceptable terms, or at all.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">If we are unable
to enter into marketing, sales and distribution arrangements with third parties for our <I>X-22 </I>smoking cessation aid, we
would </FONT>need<FONT STYLE="color: black"> to incur significant sales, marketing and distribution expenses in connection with
the commercialization of <I>X-22 </I>and any future potential products. We do not currently have a dedicated sales force, and
we have no experience in the sales, marketing and distribution of pharmaceutical products. Developing a sales force is expensive
and time-consuming, and we may not be able to develop this capacity. If we are unable to establish adequate sales, marketing and
distribution capabilities, independently or with others, we may not be able to generate significant revenue and may not become
profitable.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>If our X-22 smoking cessation aid does not gain market
acceptance among physicians, patients, third-party payers and the medical community, we may be unable to generate significant
revenue.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Our <I>X-22
</I>smoking cessation aid may not achieve market acceptance among physicians, patients, third-party payers and others in the medical
</FONT>community<FONT STYLE="color: black">. If we receive FDA approval for the marketing of <I>X-22 </I>as a smoking cessation
aid in the U.S., the degree of market acceptance could depend upon a number of factors, including:</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">&bull;&#9;limitations on the indications for use
for which <I>X-22</I> may be marketed;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt">&bull;</TD><TD>the establishment and demonstration in the medical community
                                                               of the clinical efficacy and safety of our potential products and
                                                               their potential advantages over existing products;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt; text-align: left">&bull;</TD><TD STYLE="text-align: justify">the prevalence and severity of any side effects;</TD>
</TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt; text-align: left">&bull;</TD><TD STYLE="text-align: justify">the strength of marketing and distribution support; and</TD>
</TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt; text-align: left">&bull;</TD><TD STYLE="text-align: justify">sufficient third-party coverage or reimbursement.</TD>
</TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The market may
not accept our <I>X-22 </I>smoking cessation aid, based on any number of the above factors. Even if the FDA approves the marketing
of <I>X-22 </I>as a smoking cessation aid, there are other FDA-approved products available and there will also be future </FONT>competitive
<FONT STYLE="color: black">products which directly compete with <I>X-22</I>. The market may prefer such existing or future competitive
products for any number of reasons, including familiarity with or pricing of such products. The failure of any of our potential
products to gain market acceptance could impair our ability to generate revenue, which could have a material adverse effect on
our future business, financial condition, results of operations and cash flows.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our principal competitors in the smoking cessation market
have, and any future competitors may have, greater financial and marketing resources 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.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We have no experience
in selling smoking cessation products. Competition in the smoking cessation aid products industry is intense, and we may not be
able to successfully compete in the market. In the market for FDA-approved smoking cessation aids, our principal competitors include
Pfizer Inc., GlaxoSmithKline PLC, Perrigo Company, 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
which we plan to sell, as well as financial, technical, </FONT>marketing<FONT STYLE="color: black">, sales, manufacturing, scaling
capacity, distribution and other resources and name recognition substantially greater than ours. In addition, we expect new competitors
will enter the markets for our products in the future. Potential customers may choose to do business with our more established
competitors, because of their perception that our competitors are more stable, are more likely to complete various projects, can
scale operations more quickly, have greater manufacturing capacity, are more likely to continue as a going concern and lend greater
credibility to any joint venture. If we are unable to compete successfully against manufacturers of other smoking cessation products,
our business could suffer, and we could lose or be unable to obtain market share.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We face intense competition in the market for our RED
SUN and MAGIC cigarettes and our BRAND A and BRAND B cigarettes, and our failure to compete effectively could have a material
adverse effect on our profitability and results of operations.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Cigarette companies
compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing,
advertising, retail shelf space and price. We are subject to highly competitive conditions in all aspects of our business and
we may not be able to effectively market and sell our <I>RED SUN and MAGIC </I>cigarettes or other cigarettes we may </FONT>introduce
<FONT STYLE="color: black">to the market such as our <I>BRAND A</I> and <I>BRAND B</I> cigarettes as Modified Risk Cigarettes,
upon FDA authorization. The competitive environment and our competitive position can be significantly influenced by weak economic
conditions, erosion of consumer confidence, competitors&rsquo; introduction of low-price products or innovative products, higher
cigarette taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability
to differentiate tobacco products. Domestic competitors include Philip Morris USA Inc., Reynolds American Inc., Lorillard Inc.,
Commonwealth Brands, Inc., Liggett Group LLC, Vector Tobacco Inc. and Star Scientific Inc. International competitors include Philip
Morris International Inc., British American Tobacco, JT International SA, Imperial Tobacco Group PLC and regional and local tobacco
companies; and in some instances, government-owned tobacco enterprises such as the China National Tobacco Corporation.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our competitors may develop products that are less expensive,
safer or more effective, which may diminish or eliminate the commercial success of any potential product that we may commercialize.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">If our competitors market products that
are less expensive, safer or more effective than our potential products, or that reach the market before our potential products,
we may not achieve commercial success. The market may choose to continue utilizing existing products for any number of reasons,
including familiarity with or pricing of these existing products. The failure of our <I>X</I>-22 smoking cessation aid or our
cigarette brands to compete with products marketed by our competitors would impair our ability to generate revenue, which would
have a material adverse effect on our future business, financial condition, results of operations and cash flows. Our competitors
may:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; develop and market products that
are less expensive or more effective than our products;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; commercialize competing products
before we or our partners can launch our products; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; initiate or withstand substantial
price competition more successfully than we can.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>If we fail to stay at the forefront of technological
change, we may be unable to compete effectively. </I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; operate larger research and development
programs or have substantially greater financial resources than we do;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-indent: 0in">&bull; have greater success in
recruiting skilled technical and scientific workers from the limited pool of available talent;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; more effectively negotiate third-party
licenses and strategic relationships; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; take advantage of acquisition or
other opportunities more readily than we can.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Government mandated prices, production control programs,
shifts in crops driven by economic conditions and adverse weather patterns may increase the cost or reduce the quality of the
tobacco and other agricultural products used to manufacture our products.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We depend upon
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 </FONT>crop
<FONT STYLE="color: black">quality can be influenced by variations in weather patterns, diseases and pests. 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,
quality and quantity could affect our profitability and our business.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our future success depends on our ability to retain key
personnel.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our success will depend to a significant
extent on the continued services of our senior management team, and in particular Joseph Pandolfino, our Chief Executive Officer,
Henry Sicignano III, our Chief Financial Officer and President, and Michael Moynihan, Ph.D., our Vice President of R&amp;D. The
loss or unavailability of any of these individuals may significantly delay or prevent the development of our potential products
and other business objectives by diverting management&rsquo;s attention to transition matters. While each of these individuals
is party to employment agreements with us, they could terminate their relationships with us at any time, and we may be unable
to enforce any applicable employment or non-compete agreements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We also rely on consultants and advisors
to assist us in formulating our research and development, manufacturing, distribution, marketing and sales strategies. All of
our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest
or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute
to us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Product liability claims, product recalls or other claims
could cause us to incur losses or damage our reputation.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The risk of product liability claims or
product recalls, and associated adverse publicity, is inherent in the development, manufacturing, marketing and sale of tobacco
and smoking cessation products. We do not currently have product liability insurance for our products or our potential products
and do not expect to be able to obtain product liability insurance at reasonable commercial rates for these 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. We cannot assure you that
such claims will not be made in the future.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to Regulatory Approvals and Insurance Reimbursement</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>If we fail to obtain FDA and foreign regulatory approvals
of X-22 as a smoking cessation aid and FDA authorization to market BRAND A and BRAND B as Modified Risk Cigarettes, we will be
unable to commercialize these potential products in and outside the U.S., other than the sale of our BRAND A and BRAND B cigarettes
as conventional cigarettes.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">There can be
no assurance that our <I>X-22 </I>smoking cessation aid will be approved by the FDA, European Medicines Agency, or any other </FONT>governmental
<FONT STYLE="color: black">body. In addition, there can be no assurance that all necessary approvals will be granted for our potential
products or that review or actions will not involve delays caused by requests for additional information or testing that could
adversely affect the time to market for and sale of our potential products. Our ability to complete the FDA-approval process in
a timely manner is dependent, in part, on our ability to obtain &ldquo;Fast Track&rdquo; designation for <I>X-22 </I>by the FDA.
</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We submitted
a request for Fast Track designation for <I>X-22</I>, and on August 18, 2011, the FDA informed us that it would not grant the
designation of <I>X-22 </I>as a Fast Track product at this time because we did not demonstrate that <I>X-22 </I>shows potential
to address an unmet medical need. </FONT>Except for our Phase II-B clinical trial, all smoking cessation studies with very low
nicotine (&ldquo;VLN&rdquo;) cigarettes containing our proprietary tobacco were independent studies and were not sponsored by
22nd Century Limited, LLC under its own Investigational New Drug (&ldquo;IND&rdquo;). We plan to reapply for Fast Track designation,
but not until results of a clinical trial conducted by us demonstrates an advantage (over currently approved smoking cessation
products)&nbsp;in one of the following areas: efficacy, safety or improvement in some other factor such as compliance (a patient
using a product as directed) or convenience. There is no guarantee that the FDA will grant Fast Track designation to <I>X-22</I>.
We may also not obtain Priority Review of our <I>X-22</I> New Drug Application (NDA), which would further delay FDA approval of
<I>X-22</I>.<FONT STYLE="color: black"> The length of the FDA&rsquo;s review of a New Drug Application without a Priority Review
designation is normally ten months from the date of filing of the New Drug Application, although it is possible in certain cases
for such review time to be longer. However, the FDA&rsquo;s goal for reviewing a product with Priority Review status is normally
six months from the date of the filing of a NDA. If we do not obtain Priority Review of our New Drug Application, we would then
expect the timing of FDA approval of <I>X-22 </I>to be extended several additional months. Even if <I>X-22 </I>is approved by
the FDA, the FDA may require the product to only be prescribed to patients who have already failed to quit smoking with another
approved therapy. Further, failure to comply with applicable regulatory requirements can, among other things, result in the suspension
of regulatory approval as well as possible civil and criminal sanctions.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The development,
testing, manufacturing and marketing of our potential products are subject to extensive regulation by governmental authorities
in the United States and throughout the world. In particular, the process of obtaining approvals by the FDA, European Medicines
Agency and other international FDA equivalent agencies in targeted countries is costly and time consuming, and the time required
for such approval is uncertain. Our <I>X-22 </I>smoking cessation aid must undergo rigorous clinical testing and an extensive
regulatory approval process mandated by the FDA or EMEA. Such regulatory review includes the </FONT>determination<FONT STYLE="color: black">
of manufacturing capability and product performance. Generally, only a small percentage of pharmaceutical products are ultimately
approved for commercial sale.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The scope of review, including product
testing and exposure studies, to be required by the FDA under the Tobacco Control Act in order for cigarettes such as <I>BRAND
A </I>and <I>BRAND B </I>to be marketed as Modified Risk Cigarettes has not yet been fully established. We may be unsuccessful
in establishing that <I>BRAND A </I>or <I>BRAND B </I>are Modified Risk Cigarettes, and we may fail to demonstrate that either
<I>BRAND A </I>or <I>BRAND B </I>significantly reduces exposure to certain tobacco smoke toxins. Even upon demonstrating significant
reduced exposure to certain tobacco smoke toxins, the FDA may decide that allowing a modified risk claim is not in the best interest
of the public health, and the FDA may not allow us to market our <I>BRAND A </I>and/or <I>BRAND B </I>cigarettes as Modified Risk
Cigarettes. Furthermore, the FDA could force us to remove from the U.S. market our other tobacco products such as RED SUN or MAGIC
and even <I>BRAND A</I> and/or <I>BRAND B</I> after FDA authorization to market <I>BRAND A</I> and <I>BRAND B </I>as Modified
Risk Cigarettes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>In the future, we intend to distribute and sell our potential
products outside of the United States, which will subject us to further regulatory risk.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">In addition
to seeking approval from the FDA for our <I>X-22 </I>smoking cessation aid in the United States, we intend to seek governmental
approvals required to market <I>X-22 </I>and our other potential products in other countries. Marketing of our <I>X-22 </I>smoking
cessation aid is not permitted in certain countries until we have obtained required approvals or exemptions in the individual
country. The regulatory review process varies from country to country, and approval 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 approvals or clearances. We anticipate commencing </FONT>the<FONT STYLE="color: black">
applications required in some or all of these countries following approval by the FDA; however, we may decide to file applications
in advance of the FDA approval if we determine such filings to be both time and cost effective. If we export any of our potential
products or products that have not yet been cleared for commercial distribution in the United States, such products may be subject
to FDA export restrictions. Failure to obtain necessary regulatory approvals could impair our ability to generate revenue from
international sources.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Market acceptance of our X-22 smoking cessation aid could
be limited if users are unable to obtain adequate reimbursement from third-party payers.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Government health
</FONT>administration<FONT STYLE="color: black"> authorities, private health insurers and other organizations generally provide
reimbursement for FDA-approved smoking cessation products, and our commercial success could depend in part on these third-party
payers agreeing to reimburse patients for the costs of our <I>X-22 </I>smoking cessation aid. Even if we succeed in bringing our
<I>X-22 </I>smoking cessation aid to market, there is no assurance that third-party payers will consider <I>X-22 </I>cost effective
or provide reimbursement in whole or in part for its use.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Significant
uncertainty exists as to the reimbursement status of newly approved health care products. Our <I>X-22 </I>smoking cessation aid
is intended to replace or alter existing therapies or procedures. These third-party payers may conclude that our <I>X-22 </I>smoking
</FONT>cessation<FONT STYLE="color: black"> aid is less safe, effective or cost-effective than these existing therapies or procedures.
Therefore, third-party payers may not approve <I>X-22 </I>for reimbursement.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">If third-party
payers do not approve our potential products for reimbursement or fail to reimburse for them adequately, sales could suffer as
</FONT>some<FONT STYLE="color: black"> physicians or their patients could opt for a competing product that is approved for reimbursement
or is adequately reimbursed. Even if third-party payers make reimbursement available, these payers&rsquo; reimbursement policies
may adversely affect our ability and the ability of our potential collaborators to sell our potential products on a profitable
basis.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The trend toward
managed healthcare in the United States and, the Affordable Care Act </FONT><FONT STYLE="font-family: Times New Roman, Times, Serif; color: #222222">enacted
on March 23, 2010, and </FONT><FONT STYLE="color: black">legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for
our potential products which could adversely affect our business, financial condition, results of operations and cash flows.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In addition, legislation and regulations
affecting the pricing of our potential products may change in ways adverse to us before or after the FDA or other regulatory agencies
approve any of our potential products for marketing. While we cannot predict the likelihood of any of these legislative or regulatory
proposals, if any government or regulatory agency adopts these proposals, they could materially adversely affect our business,
financial condition, results of operations and cash flows.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our clinical trials for any of our potential products
may produce negative or inconclusive results and we may decide, or regulators may require us, to conduct additional clinical and/or
preclinical testing for these potential products or cease our trials.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We do not know
whether clinical trials of our potential products will demonstrate safety and efficacy sufficiently to result in marketable products.
Because our clinical trials for our <I>X-22 </I>smoking cessation aid and any other potential products may produce negative or
inconclusive results, we may decide, or regulators may require us, to conduct additional clinical and/or preclinical </FONT>testing
<FONT STYLE="color: black">for these potential products or cease our clinical trials. If this occurs, we may not be able to obtain
approval or marketing authorization for these potential products or our anticipated time of bringing these potential products
to the market may be substantially delayed and we may also experience significant additional development costs. We may also be
required to undertake additional clinical testing if we change or expand the indications for our potential products.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to the Tobacco Industry</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our business faces significant governmental action aimed
at increasing regulatory requirements with the goal of preventing the use of tobacco products.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Cigarette companies face significant governmental
action, especially in the United States pursuant to the Tobacco Control Act, including efforts aimed at reducing the incidence
of tobacco use, restricting marketing and advertising, imposing regulations on packaging, warnings and disclosure of flavors or
other ingredients, prohibiting the sale of tobacco products with certain flavors or other characteristics, 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. Governmental actions, combined with the diminishing social acceptance of smoking and private actions
to restrict smoking, have resulted in reduced industry volume in the United States and certain other countries, and we expect
that these factors will continue to reduce consumption levels in these countries.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Certain of such actions may have a favorable
impact on our <I>X-22 </I>smoking cessation aid, or on our <I>BRAND A </I>and <I>BRAND B </I>cigarettes if we are able to market
them as Modified Risk Cigarettes. However, there is no assurance of such favorable impact and such actions may have a negative
impact on our ability to market <I>RED SUN </I>and <I>MAGIC</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Significant regulatory developments will
take place over the next few years in many markets, driven principally by the World Health Organization&rsquo;s Framework Convention
on Tobacco Control (&ldquo;FCTC&rdquo;). 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. Partly because of some or a combination of these efforts, unit sales of tobacco products
in certain markets, principally Western Europe and Japan, have been in general decline and we expect this trend to continue. Our
operating results could be significantly affected by any significant decrease in demand for cigarettes, any significant increase
in the cost of complying with new regulatory requirements and requirements that lead to a commoditization of tobacco products
such as the 2012 implementation of plain packaging in Australia.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>The FDA requirement regarding graphic health warnings
on cigarette packaging and in cigarette advertising in September 2012 is likely to have a negative impact on sales of our products.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In November 2010, as required by the Tobacco
Control Act, the FDA issued a proposed rule to modify the required warnings that appear on cigarette packages and in cigarette
advertisements. These warning were finalized on June 21, 2011 and consist of nine new textual warning statements accompanied by
color graphics depicting the negative health consequences of smoking. The FDA selected nine images from the originally proposed
36 images after reviewing the relevant scientific literature, analyzing the results from an 18,000 person study and considering
more than 1,700 comments from a variety of groups. The graphic health warnings will be located beneath the cellophane wrapping
on cigarette packages, and will comprise the top 50 percent of the front and rear panels of cigarette packages. The graphic health
warnings will occupy 20 percent of a cigarette advertisement and will be located at the top of the advertisement. Each warning
is accompanied by a smoking cessation phone number, 1-800-QUIT-NOW. Although these graphic health warnings were supposed to be
implemented in September 2012, a federal judge ruled that these warnings are unconstitutional. If and when these graphic health
warnings are implemented, all cigarettes manufactured for sale or distribution in the United States will need to include these
new graphic health warnings on their packages. Any reduction in the number of smokers will probably reduce the demand for MAGIC
and RED SUN, as well as <I>X-22</I>, <I>BRAND A </I>and <I>BRAND B</I>, if and when approved/authorized by the FDA. <I>MAGIC</I>,
<I>RED SUN</I>, <I>BRAND A </I>and <I>BRAND B </I>will be subject to these new packaging and advertising regulations<I>. </I>It
is unclear at this time whether the FDA may require <I>X-22 and SPECTRUM </I>to be subject to these new packaging and advertising
regulations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We may become subject to litigation related to cigarette
smoking and exposure to environmental tobacco smoke, or ETS, which could severely impair our results of operations and liquidity.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Although we are not currently subject to
legal proceedings, we may become subject to litigation related to the sale of our <I>RED SUN </I>and <I>MAGIC </I>cigarettes and,
upon FDA authorization, our <I>BRAND A </I>and <I>BRAND B </I>cigarettes. 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Damages claimed in some tobacco-related
litigation 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>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 our sales and profitability and make us less competitive versus certain of our competitors.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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 <I>RED SUN </I>and <I>MAGIC </I>cigarettes and, upon FDA authorization,
our <I>BRAND A </I>and <I>BRAND B </I>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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We may become subject to governmental investigations
on a range of matters.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Cigarette 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 &ldquo;lights&rdquo; and &ldquo;ultra lights.&rdquo; We cannot predict the outcome of any to which we may
become subject, and we may be materially affected by an unfavorable outcome of future investigations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to Intellectual Property</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our proprietary rights may not adequately protect our
intellectual property, products and potential products, and if we cannot obtain adequate protection of our intellectual property,
products and potential products, we may not be able to successfully market our products and potential products.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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 other market exclusionary rights apply.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The patent positions of life sciences companies,
like ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain
unresolved. No consistent policy regarding the breadth of claims allowed in such companies&rsquo; patents has emerged to date
in the United States. The general patent environment outside the United States also involves significant uncertainty. 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, life science 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Although there are currently no challenges
to any portion of our intellectual property, our issued patents may be subject to challenge and possibly invalidated by third
parties. Changes in either the patent laws or in the interpretations of patent laws in the United States or 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 obtain patent rights to similar
products or technology, this may have an adverse effect on our business.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We also rely on 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 or our strategic partners&rsquo; 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>The ability to commercialize our potential products will
depend on our ability to sell such products without infringing the patent or proprietary rights of third parties. If we are sued
for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and an unfavorable
outcome could have a significant adverse effect on our business.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt">&bull;</TD><TD>infringement claims that, with or without merit, can be costly
                                                               and time consuming to litigate, can delay the regulatory approval
                                                               process and can divert management&rsquo;s attention from our core
                                                               business strategy;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt">&bull;</TD><TD>substantial damages for past infringement which we may have
                                                               to pay if a court determines that our products or technologies
                                                               infringe upon a competitor&rsquo;s patent or other proprietary
                                                               rights;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt">&bull;</TD><TD>a court order prohibiting us from commercializing our potential
                                                               products or technologies unless the holder licenses the patent
                                                               or other proprietary rights to us, which such holder is not required
                                                               to do;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt">&bull;</TD><TD>if a license is available from a holder, we may have to pay
                                                               substantial royalties or grant cross licenses to our patents or
                                                               other proprietary rights; and</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 9pt">&bull;</TD><TD>redesigning our process so that it does not infringe the third-party
                                                               intellectual property, which may not be possible, or which may
                                                               require substantial time and expense including delays in bringing
                                                               our potential products to market.</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Such actions could harm our competitive
position and our ability to generate revenue and could result in increased costs.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>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.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We own 12 issued patents and we have the
exclusive license to an additional 95 issued patents in an aggregate of 78 countries. In addition, we own or exclusively license
approximately 38 pending patent applications, of which we own 23 such patent applications and have an exclusive license to 15
such patent applications. We cannot assure you 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>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.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">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. 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.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our two worldwide exclusive licenses, one
from North Carolina State University (&ldquo;NCSU&rdquo;) and the other from National Research Council of Canada, Plant Biotechnology
Institute in Saskatoon, Canada (&ldquo;NRC&rdquo;), each involve multiple patent families.&nbsp; The exclusive rights under the
NCSU agreement expires 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 <FONT STYLE="color: black">NCSU
</FONT>license relates predominately to issued patents,&nbsp;and the NCSU license will expire in 2023.&nbsp;&nbsp;The exclusive
rights under the NRC agreement expires on the date on which the last patent or covered by the subject license expires in the country
or countries where such patents are in effect. The NRC license relates predominately to patent applications, and the NRC license
will expire in 2028.&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Risks Related to Ownership of Our Common Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>An active trading market for our common stock may not
develop or be sustained, and you may not be able to resell your shares at or above the price at which you purchased them.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">An active trading market for our shares
may never develop or 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 quoted on the OTC Bulletin Board, an over-the-counter quotation system, on which the shares of
our common stock are currently quoted. However, even if our common stock continues to be quoted on the OTC Bulletin Board, it
is unlikely that an active market for our common stock will develop in the foreseeable future. It may be more difficult to dispose
of shares or obtain accurate quotations as to the market value of our common stock compared to securities of companies whose shares
are traded on the NASDAQ Stock Market or other stock exchanges.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Trading in our common stock is currently limited and
our stock price may be highly volatile and could decline in value.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our common stock is currently traded on
the OTC Bulletin Board, and, therefore, the trading volume is currently more limited and sporadic than if our common stock were
traded on a national stock exchange such as the NASDAQ Stock Market or the NYSE. 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:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; results from and any delays in any
clinical trials programs;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; failure or delays in entering potential
products into clinical trials;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; failure or discontinuation of any
of our research programs;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; delays in establishing new strategic
relationships;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; delays in the development
of our potential products and commercialization of our potential products;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; market conditions in our
sector and issuance of new or changed securities analysts&rsquo; reports or recommendations;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -4.5pt"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; general economic conditions,
including recent adverse changes in the global financial markets;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; actual and anticipated fluctuations
in our quarterly financial and operating results;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; developments or disputes concerning
our intellectual property or other proprietary rights;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; introduction of technological
innovations or new commercial products by us or our competitors;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; issues in manufacturing or distributing
our products or potential products;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; market acceptance of our products
or potential products;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; third-party healthcare reimbursement
policies;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; FDA or other United States or foreign
regulatory actions affecting us or our industry;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; litigation or public concern about
the safety of our products or potential products;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; additions or departures of key personnel;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; third-party sales of large blocks
of our common stock;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; sales of our common stock
by our executive officers, directors or significant stockholders; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; equity sales by us of our
common stock or securities convertible into common stock to fund our operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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. If any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>The conversion of our Series A-1 Preferred Stock and
exercise of outstanding warrants, convertible notes and options may depress our stock price and will likely result in significant
dilution to our common stockholders.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">There are a significant number of outstanding
warrants, convertible notes and options to purchase shares of our stock and we have issued shares of Series A-1 Preferred Stock
that are convertible into our common stock. If the market price of our common stock <FONT STYLE="color: black">exceeds</FONT>
the exercise price of outstanding warrants and options or the conversion price of our convertible notes and shares of Series A-1
Preferred Stock, holders of those securities may be likely to exercise or convert such shares and sell the common stock acquired
in the open market. Sales of a substantial number of shares of our common stock in the public market by holders of warrants, convertible
notes, options or preferred shares 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, if the holders of outstanding options, convertible
notes, warrants or preferred shares exercise or convert those shares, as applicable, our common stockholders will incur dilution
in their relative percentage ownership.&nbsp;&nbsp;The prospect of this possible dilution may also impact the price of our common
stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In addition, our Series A-1 Preferred Stock
and the majority of our outstanding warrants contain anti-dilution provisions, which may, under <FONT STYLE="color: black">certain
</FONT>circumstances, reduce the exercise or conversion price or increase the number of shares issuable, or both.&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Any downward adjustment to the conversion price of our
Series A-1 Preferred Stock may depress our stock price and will result in significant dilution to our common stockholders.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The conversion price of the Series A-1
Preferred Stock is subject to adjustment in certain events. See &ldquo;Description of Securities &ndash; Preferred Stock&rdquo;
for a <FONT STYLE="color: black">description</FONT> of the events that could cause an adjustment of the conversion price of such
shares. This potential reduction in conversion price could significantly increase the number of shares that could be issued upon
conversion of the Series A-1 Preferred Stock and would result in substantial dilution to the other holders of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Our common stock is a &ldquo;penny stock,&rdquo; which
is likely to limit its liquidity.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The market price of our common stock is,
and will likely remain for the foreseeable future, less than $5.00 per share, and therefore will be a &ldquo;penny stock&rdquo;
according to SEC rules, unless our common stock is listed on a national securities exchange. The OTC Bulletin Board is not a national
securities exchange. Designation as a &ldquo;penny stock&rdquo; requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser
is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common
stock and may affect the ability of current holders of our common stock to sell their shares. Such rules may also deter broker-dealers
from recommending or selling our common stock, which may further limit its liquidity. This may also make it more difficult for
us to raise additional capital in the future. Because of such expected illiquidity, it will likely be difficult to re-sell shares
of our common stock as desired.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We are controlled by our current officers and directors.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As of January 22, 2013, our directors and
executive officers as a group beneficially owned approximately 38% of the shares of our common stock. Accordingly, our directors
and executive officers will have substantial influence over, and may have the ability to control, the election of our board of
directors and the outcome of issues submitted to a vote of our stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>We do not expect to declare any dividends on our common
stock in the foreseeable future.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have not paid cash dividends to date
on our common stock. We currently intend to retain our future earnings, if any, to fund the development and growth of our business,
and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. In addition, the terms of the
Series A-1 Preferred Stock prevent the payment of dividends on our common stock unless holders of at least 67% in stated value
of the then-outstanding shares of Series A-1 Preferred Stock consent to such dividend. 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>Anti-takeover provisions contained in our articles of
incorporation and bylaws, as well as provisions of Nevada law, could impair a takeover attempt.</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 45pt; text-indent: -9pt">&bull; authorizing blank check
preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&bull; limiting the liability of, and providing
indemnification to, our directors and officers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">These provisions, alone or together, could
delay hostile takeovers and changes in control of us or changes in our management.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As a Nevada corporation, we also may become
subject to the provisions Nevada Revised Statutes Sections 78.378 through 78.3793, which prohibit an acquirer, under certain circumstances,
from voting shares of a corporation&rsquo;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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As a Nevada corporation, we are subject
to the provisions of Nevada Revised Statutes Sections 78.411 through 78.444, which prohibit an &ldquo;interested stockholder&rdquo;
from entering into a combination with the corporation, unless certain conditions are met. An &ldquo;interested stockholder&rdquo;
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&rsquo;s voting stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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.</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>


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<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Principal
Stockholders</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table sets forth information
regarding the beneficial ownership of our common stock as of January&nbsp;22, 2013, <FONT STYLE="color: black">by</FONT> (i) each
person who, to our knowledge, owns more than 5% of our common stock, (ii) each of our current directors and executive officers,
and (iii) all of our current directors and executive officers as a group. Derivative securities exercisable or convertible into
shares of our common stock within sixty (60) days of January 22, 2013 are deemed to be beneficially owned and outstanding for
computing the share ownership and percentage of the person holding securities, but are not deemed outstanding for computing the
percentage of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*). The address of
named beneficial owners that are officers and/or directors is: c/o 22nd Century Group, Inc., 9530 Main Street, Clarence, New York
14031. The following table is based upon information supplied by officers and directors, and with respect to 5% or greater stockholders
who are not officers or directors, information filed with the SEC.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 90%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Name&nbsp;of&nbsp;Beneficial&nbsp;Owner</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number&nbsp;of<BR> Shares<BR> Beneficially<BR> Owned</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Percent&nbsp;of&nbsp;Class<BR> Beneficially&nbsp;Owned&nbsp;(1)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="color: black; font-weight: bold; font-style: italic; text-align: left">Management &amp; Directors</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 74%; color: black; text-align: left">Joseph Pandolfino (2)</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right">7,207,296</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 1%; color: black; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; color: black; text-align: right">19.4</TD><TD STYLE="width: 1%; color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="color: black; text-align: left">Henry Sicignano III (3)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">5,859,927</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">16.0</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="color: black; text-align: left">Michael R. Moynihan, Ph.D. (4)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,457,645</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">4.1</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="color: black; text-align: left">Joseph Alexander Dunn, Ph.D.(5)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">175,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right"><FONT STYLE="font-size: 10pt; color: black">*</FONT></TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="color: black; text-align: left">James W. Cornell (6)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">175,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right"><FONT STYLE="font-size: 10pt; color: black">*</FONT></TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="color: black; text-align: left">All directors and executive officers as a group (5 persons) (2)-(6)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">14,874,868</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">37.9</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="color: black; font-weight: bold; font-style: italic; text-align: left">Other 5% Owners</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="color: black; text-align: left">Clearwater Partners, LLC (7)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">5,144,279</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">14.0</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="color: black; text-align: left">Angelo J. Tomasello (8)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">4,385,214</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">12.0</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="color: black; text-align: left">Sabby Volatility Warrant Master Fund, Ltd. (9)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,500,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">7.1</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="color: black; text-align: left">Sabby Heathcare Volatility Master Fund, Ltd. (10)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,506,098</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">9.9</TD><TD STYLE="color: black; text-align: left">%</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0">(1) Based on 35,415,139 shares of common
stock issued and outstanding (including outstanding restricted stock), as of January&nbsp;22, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(2) Includes (a) 1,831,761 shares of common stock issuable
to Mr. Pandolfino upon exercise of warrants and (b) 5,375,535 shares of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(3) Consists of (a) 2,027,603 shares of common stock
held by Henry Sicignano III (including 550,000 restricted shares issued as equity incentive awards under the
Company&rsquo;s Equity Incentive Plan), (b) 2,542,347 shares of common stock held by Henry Sicignano III Group, LLC, (c)
389,564 shares of common stock issuable to Mr. Sicignano upon exercise of warrants, (d) 100,000 shares of common stock
issuable to Mr. Sicignano upon exercise of stock options and (e) 800,413 shares of common stock issuable to Henry Sicignano
III Group, LLC upon exercise of warrants. Mr. Sicignano is Managing Member of Henry Sicignano III Group, LLC and,
accordingly, exercises voting and investment power with respect to the shares held by Henry Sicignano III Group, LLC. 450,000
of the shares issued to Mr. Sicignano under the Company&rsquo;s Equity Incentive Plan are time-based awards subject to
vesting on April 1 of 2013, 2014 and 2015, such that 150,000 shares shall vest on April 1 of each such
year. Mr. Sicignano also holds 100,000 performance based shares of restricted stock issued as equity incentive awards under
the Company&rsquo;s Equity Incentive Plan, which are subject to forfeiture unless certain performance milestones are
achieved.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(4) Includes (a) 963,934 shares of common stock, (b) 393,711
shares of common stock issuable upon exercise of warrants and (c) 100,000 shares issuable upon the exercise of stock options.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(5) Includes (a) 85,000 shares of common stock, (b) 30,000
shares of common stock issuable upon exercise of warrants and (c) 60,000 shares issuable upon the exercise of stock options.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(6) Includes (a) 85,000 shares of common stock, (b) 30,000
shares of common stock issuable upon exercise of warrants and (c) 60,000 shares issuable upon the exercise of stock options.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(7) Includes (a) 3,905,515 shares of common stock and (b) 1,238,764
shares of common stock issuable upon exercise of warrants. Richard G. Saffire, Managing Member of Clearwater Partners, LLC exercises
voting and investment power with respect to shares owned by Clearwater Partners, LLC. The address of Clearwater Partners, LLC
is 34 Sunburst Circle, East Amherst, New York 14051.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(8) Includes (a) 3,301,909 shares of common stock, (b) 1,044,972
shares of common stock issuable upon exercise of warrants and (c) 38,333 shares of common stock issuable upon conversion of convertible
notes. The address of Angelo Tomasello is 4720 Spaulding Drive, Clarence, New York 14031.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(9) Consists of shares of common stock issuable upon the conversion
of an aggregate of 500 shares of Series A-1 Preferred Stock and upon the exercise of Warrants. The Series A-1 Preferred Stock
and the Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the
case may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any
of its affiliates would beneficially own in excess of 9.99% of our outstanding shares of common stock immediately after giving
effect to such conversion or exercise (as the case may be). However, the 9.99% limitation would not prevent a selling stockholder
from acquiring and selling in excess of 9.99% of our common stock through a series of acquisitions and sales while never beneficially
owning more than 9.99% in aggregate. Sabby Management, LLC serves as the investment manager of Sabby Volatility Warrant Master
Fund, Ltd. and, as such, Sabby Management, LLC shares voting and investment powers with respect to these shares on behalf of Sabby
Volatility Warrant Master Fund, Ltd. The address for Sabby Volatility Warrant Master Fund, Ltd. is c/o Ogier Fiduciary Services
(Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman KY1-9007, Cayman Islands. As manager of Sabby Management, LLC, Hal Mintz
also shares voting and investment power on behalf of Sabby Volatility Warrant Master Fund, Ltd. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(10) Consists of shares of common stock issuable upon the conversion
of an aggregate of 2,000 shares of Series A-1 Preferred Stock and upon the exercise of Warrants. The Series A-1 Preferred Stock
and the Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the
case may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any
of its affiliates would beneficially own in excess of 9.99% of our outstanding shares of common stock immediately after giving
effect to such conversion or exercise (as the case may be). However, the 9.99% limitation would not prevent a selling stockholder
from acquiring and selling in excess of 9.99% of our common stock through a series of acquisitions and sales while never beneficially
owning more than 9.99% in aggregate. Sabby Management, LLC serves as the investment manager of Sabby Healthcare Volatility Master
Fund, Ltd. and, as such, Sabby Management, LLC shares voting and investment powers with respect to these shares on behalf of Sabby
Healthcare Volatility Master Fund, Ltd. The address for Sabby Healthcare Volatility Master Fund, Ltd. is c/o Ogier Fiduciary Services
(Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman KY1-9007, Cayman Islands. As manager of Sabby Management, LLC, Hal Mintz
also shares voting and investment power on behalf of Sabby Healthcare Volatility Master Fund, Ltd. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Selling
Stockholders</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 11, 2013, Sabby Volatility Warrant
Master Fund Ltd. and Sabby Healthcare Volatility Master Fund, Ltd., collectively referred to as the selling stockholders, acquired
an aggregate of 2,500 shares of newly created Series A-1 Preferred Stock and Warrants for an aggregate purchase price of $2,500,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series A-1 Preferred Stock and the
Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the case
may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any of its
affiliates would beneficially own in excess of 9.99% of the outstanding shares of common stock immediately after giving effect
to such conversion or exercise (as the case may be). However, the 9.99% limitation would not prevent a selling stockholder from
acquiring and selling in excess of 9.99% of our common stock through a series of acquisitions and sales while never beneficially
owning more than 9.99% in aggregate.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">This prospectus
relates to the resale by the selling stockholders from time to time of up to an aggregate of 27,500,000 shares that are issuable
to the selling stockholders. </FONT>Pursuant to a Registration Rights Agreement between<FONT STYLE="color: black"> </FONT>us and
the selling stockholders, this prospectus covers the resale of 200% of the number of shares currently issuable<FONT STYLE="color: black">
(i) upon conversion of our Series A-1 Preferred Stock, (ii) as dividend payments on our Series A-1 Preferred Stock (at our option),
and (iii) upon the exercise of Series A Warrants, Series B Warrants, and Series C Warrants. We agreed to register 200% of the
number of shares initially issuable due to the potential adjustments to the conversion price and certain anti-dilution features
that are described in the section entitled &ldquo;Description of Securities.&rdquo; We will not receive any proceeds from the
sale of common stock by the selling stockholders, but we will receive funds from the exercise of the Series A Warrants, Series
B Warrants, and Series C Warrants, if exercised for cash. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The table below, which was prepared based
on information supplied to us by the selling stockholders, sets forth information regarding the beneficial ownership of outstanding
shares of our common stock owned by the selling stockholders and the shares that they may sell or otherwise dispose of from time
to time under this prospectus. Each of the selling stockholders, or their respective affiliates, transferees, donees or their
successors, may resell, from time to time, all, some or none of the shares of our common stock covered by this prospectus, as
provided in this prospectus under the section entitled &ldquo;Plan of Distribution&rdquo; and in any applicable prospectus supplement.
However, we do not know when, in what amount, or at what specific prices the selling stockholders may offer their shares for sale
under this prospectus, if any. Each selling stockholder&rsquo;s percentage of ownership in the following table is based upon 35,415,139
shares of our common stock outstanding as of January 22, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Information concerning any of the selling
stockholders may change from time to time, and any changed information will be presented in a prospectus supplement as necessary.
Please carefully read the footnotes located below the table in conjunction with the information presented in the table.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: right">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="6" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Beneficially&nbsp;Owned&nbsp;Prior&nbsp;to<BR> Offering</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="6" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Beneficially&nbsp;Owned<BR> After&nbsp;Offering</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; border-bottom: Black 1pt solid">Selling&nbsp;Stockholder&nbsp;Name</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number&nbsp;of<BR> Shares&nbsp;of<BR> Common&nbsp;Stock<BR> (1),&nbsp;(2)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Percentage</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Shares&nbsp;of&nbsp;Common&nbsp;Stock<BR> that&nbsp;may&nbsp;be<BR> Offered&nbsp;and&nbsp;Sold&nbsp;Hereby&nbsp;(3)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number&nbsp;of<BR> Shares</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Percent</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 35%; text-align: left">Sabby Volatility Warrant Master Fund, Ltd.</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right">2,500,000</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right">7.1</TD><TD STYLE="width: 1%; text-align: left">%</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right">5,500,000</TD><TD STYLE="width: 1%; text-align: left">(4)</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right">0</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; text-align: right">0</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Sabby Healthcare Volatility Master Fund, Ltd.</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,506,098</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">9.9</TD><TD STYLE="text-align: left">%</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">22,000,000</TD><TD STYLE="text-align: left">(5)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">0</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">0</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(1) Includes all shares beneficially owned by the selling stockholders
as of January 22, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(2) The Series A-1 Preferred Stock and the Warrants contain
exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the case may be) to the extent
that, if after giving effect to such conversion or exercise (as the case may be), the holder or any of its affiliates would beneficially
own in excess of 9.99% of the outstanding shares of common stock immediately after giving effect to such conversion or exercise
(as the case may be). Accordingly, the number of shares of common stock set forth in the table as being registered for a selling
stockholder exceeds the number of shares of common stock that the selling stockholder could own beneficially at any given time
through its ownership of the Series A-1 Preferred Stock and the Warrants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(3) We have assumed (i) that each share of Series
A-1 Preferred Stock is convertible into shares of common stock at a conversion price of $0.60 per share of common stock and
(ii) that each Warrant is exercisable at its initial exercise price, without adjustment. We have also assumed the payment
of dividends on the Series A-1 Preferred Stock is paid in shares of common stock instead of cash, which is at our option, at an
assumed price of $0.60 per share for a period of three years, resulting in the issuance of 1,250,000 shares. In order
to adequately cover the<FONT STYLE="color: black"> </FONT>number of shares required due to adjustments and
anti-dilution features and pursuant to a Registration Rights Agreement between<FONT STYLE="color: black"> </FONT>us and the
selling stockholders, this prospectus covers the resale of 200% of such shares.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(4) Includes 200% of (i) the 833,333 shares of common stock
currently issuable upon conversion of the 500 shares of the Series A-1 Preferred Stock held by this selling stockholder, (ii)
833,333 shares of common stock currently issuable upon exercise of the Series A Warrant at $0.72 per share, (iii) 416,667 shares
currently issuable upon exercise of the Series B Warrant at $0.60 per share, (iv) 416,667 shares of common stock currently issuable
upon exercise of the Series C Warrant at $0.72 per share (1,666,667 in the aggregate for all three Warrants), and (v) 250,000
shares of common stock currently issuable as dividends. The Series A-1 Preferred Stock and the Warrants contain exercise and conversion
limitations providing that a holder thereof may not convert or exercise (as the case may be) to the extent that, if after giving
effect to such conversion or exercise (as the case may be), the holder or any of its affiliates would beneficially own in excess
of 9.99% of our outstanding shares of common stock immediately after giving effect to such conversion or exercise (as the case
may be). However, the 9.99% limitation would not prevent a selling stockholder from acquiring and selling in excess of 9.99% of
our common stock through a series of acquisitions and sales while never beneficially owning more than 9.99% in aggregate. Sabby
Management, LLC shares voting and investment power with respect to these shares on behalf of this stockholder. As manager of Sabby
Management, LLC, Hal Mintz also shares voting and investment power on behalf of this stockholder. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(5) Includes 200% of (i) 3,333,333 shares of common stock currently
issuable upon conversion of the 2,000 shares of the Series A-1 Preferred Stock held by this selling stockholder, (ii) 3,333,333
shares of common stock currently issuable upon exercise of the Series A Warrant at $0.72 per share, (iii) 1,666,667 shares currently
issuable upon exercise of the Series B Warrant at $0.60 per share, (iv) 1,666,667 shares of common stock currently issuable upon
exercise of the Series C Warrant at $0.72 per share (6,666,667 in the aggregate for all three Warrants), and (v) 1,000,000 shares
of common stock currently issuable as dividends. The Series A-1 Preferred Stock and the Warrants contain exercise and conversion
limitations providing that a holder thereof may not convert or exercise (as the case may be) to the extent that, if after giving
effect to such conversion or exercise (as the case may be), the holder or any of its affiliates would beneficially own in excess
of 9.99% of our outstanding shares of common stock immediately after giving effect to such conversion or exercise (as the case
may be). However, the 9.99% limitation would not prevent a selling stockholder from acquiring and selling in excess of 9.99% of
our common stock through a series of acquisitions and sales while never beneficially owning more than 9.99% in aggregate. Sabby
Management, LLC shares voting and investment power with respect to these shares on behalf of this stockholder. As manager of Sabby
Management, LLC, Hal Mintz also shares voting and investment power on behalf of this stockholder. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Use of
Proceeds</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We will not receive any proceeds from the
sale of common stock by the selling stockholders, but we will receive funds from the exercise of the Warrants, if exercised for
cash. We have agreed to bear the expenses (other than any underwriting discounts or commissions or agent&rsquo;s commissions)
in connection with the registration of the common stock being offered hereby by the selling stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Dividend
Policy</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have not previously and do not plan
to declare or pay any dividends on our common stock. Our current policy is to retain all funds and any earnings for use in the
operation and expansion of our business. 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">In addition,
the terms of the Series A-1 Preferred Stock prevent the payment of dividends on our common stock unless holders of at least 67%
in stated value of the then-outstanding shares of Series A-1 Preferred Stock consent to such dividend.</FONT> In the event we
do declare a dividend, the holders of the Series A-1 Preferred Stock and Warrants will participate in such dividend payment on
an as-converted basis to common stock (without regard to the 9.99% beneficial ownership limitation).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Determination
of Offering Price</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">All shares of our common stock being offered
will be sold by the selling stockholders without our involvement. As a result, the selling stockholders will determine at what
prices they may sell the offered shares, and these sales may be made at prevailing market prices or at privately negotiated prices.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Market
for Common Equity and Related Stockholder Matters</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Our common stock
is quoted on the OTC Bulletin Board under the symbol &ldquo;XXII.OB.&rdquo; </FONT>As of January 22, 2013, there were 63 holders
of record of shares of our common stock. The following table sets forth, for the quarters indicated, the high and low bid prices
per share of our common stock, as derived from quotations provided by the OTC Bulletin Board Information Center.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="margin-left: 1in; border-collapse: collapse; width: 70%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Quarter Ended</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">High Bid</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Low Bid</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%">December 31, 2012</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">0.95</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">0.15</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>September 30, 2012</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.88</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.20</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>June 30, 2012</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.13</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.35</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>March 31, 2012</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.75</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.25</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>December 31, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.34</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.25</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>September 30, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.30</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">0.60</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>June 30, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.30</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.10</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>March 31, 2011*</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.41</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1.01</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-indent: 0.5in">*From January 25, 2011, the date of the
Merger.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Trades in our common stock may be subject
to Rule 15g-9 of the Exchange Act, which imposes requirements on broker/dealers who sell securities subject to the rule to persons
other than established customers and accredited investors. For transactions covered by the rule, broker/dealers must make a special
suitability determination for purchasers of the securities and receive the purchaser&rsquo;s written agreement to the transaction
before the sale.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The SEC also has rules that regulate broker/dealer
practices in connection with transactions in &ldquo;penny stocks.&rdquo; Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities listed on some national exchanges, provided that the current price and volume information
with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require
a broker/dealer, before effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in
the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market
value of each penny stock held in the customer&rsquo;s account. The bid and offer quotations, and the broker/dealer and salesperson
compensation information, must be given to the customer orally or in writing before effecting the transaction, and must be given
to the customer in writing before or with the customer&rsquo;s confirmation. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for shares of common stock. As a result of these rules, investors
may find it difficult to sell their shares.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Shares
Authorized for Issuance Under Equity Compensation Plans</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">October 21,
2010, the Company established the 2010 Equity Incentive Plan, or EIP, for </FONT>officers, employees, directors, consultants and
advisors to the Company and its affiliates<FONT STYLE="color: black">, consisting of 4,250,000 shares of common stock. </FONT>The
EIP authorizes the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares, restricted stock and restricted stock units.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table summarizes the number
of stock options issued and shares of restricted stock granted, net of forfeitures and sales, the weighted-average exercise price
of such stock options and the number of securities remaining to be issued under all outstanding equity compensation plans as of
December&nbsp;31, 2012:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">&nbsp;</FONT></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 90%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number&nbsp;of&nbsp;securities&nbsp;to <BR> be&nbsp;issued&nbsp;upon&nbsp;exercise <BR> of&nbsp;outstanding&nbsp;options, <BR> warrants&nbsp;and&nbsp;rights <BR> (a)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Weighted-average <BR> exercise&nbsp;price&nbsp;of <BR> outstanding&nbsp;options, <BR> warrants&nbsp;and&nbsp;rights <BR> (b)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number&nbsp;of&nbsp;securities <BR> remaining&nbsp;available&nbsp;for <BR> issuance&nbsp;under&nbsp;equity <BR> compensation&nbsp;plans <BR> (excluding&nbsp;securities <BR> reflected&nbsp;in&nbsp;column&nbsp;(a)) <BR> (c)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 46%; text-align: left; text-indent: -10pt; padding-left: 10pt">Equity compensation plans approved by security holders</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 15%; text-align: right">1,015,000</TD><TD STYLE="width: 1%; text-align: left">(1)</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 15%; text-align: right">0.69</TD><TD STYLE="width: 1%; text-align: left">(2)</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 1%; color: black; text-align: left">&nbsp;</TD><TD STYLE="width: 15%; color: black; text-align: right">2,055,000</TD><TD STYLE="width: 1%; color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; text-indent: -10pt; padding-left: 10pt">Equity compensation plans not approved by security holders</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">0</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt; text-align: right"><FONT STYLE="font-size: 10pt">N/A</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">0</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-indent: -10pt; padding-left: 20pt">Total</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,015,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">2,055,000</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;&nbsp;</B></P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.25in">(1)</TD><TD>Includes 550,000 restricted stock awards that are issued but not
                                                            vested as of December 31, 2012.</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.25in">(2)</TD><TD>Weighted average exercise price only applies to the 465,000 shares
                                                            issuable upon exercise of outstanding stock options.</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Business</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>On January 25, 2011, 22nd Century Limited
LLC completed a reverse merger transaction (the &ldquo;Merger&rdquo;) with 22nd Century Group, Inc. 22nd Century Limited, LLC
is a wholly owned subsidiary of 22nd Century Group, Inc. which continues to operate the business of 22nd Century Limited, LLC.
All references to shareholders or common shares include the historical members and membership Units of 22nd Century Limited, LLC
because, in the Merger, such Units were exchanged for common shares on a one-for-one basis and from an accounting standpoint,
they are equivalent. The Merger is being accounted for as a reverse acquisition and a recapitalization; 22nd Century Limited,
LLC is the acquirer for accounting purposes. Consequently, the assets and liabilities and the historical operations that are reflected
in the financial statements prior to the Merger are those of 22nd Century Limited, LLC and are recorded at the historical cost
basis of 22nd Century Limited, LLC, and the consolidated financial statements since completion of the Merger include the assets
and liabilities of 22nd Century Limited, LLC, historical operations of 22nd Century Limited, LLC and operations of 22nd Century
Group, Inc. from the closing date of the Merger. </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><I>References
to the &ldquo;Company,&rdquo; &ldquo;we,&rdquo; us&rdquo; or &ldquo;our&rdquo; </I></FONT><I>refer to the operations of 22nd Century
Group, Inc. and its direct and indirect subsidiaries for the periods described herein.<FONT STYLE="color: black"> </FONT></I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Background</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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. We changed our name to 22nd Century Group, Inc. on
November 23, 2010 in anticipation of the Merger with 22nd Century Limited, LLC. After the Merger, we succeeded to the business
of 22nd Century Limited, LLC as our sole line of business.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">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. Since inception, 22nd Century
Limited, LLC has used biotechnology to regulate the nicotine content in tobacco plants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Overview</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">22nd Century Limited, LLC, our wholly-owned
subsidiary,<FONT STYLE="color: black"> is a plant biotechnology company focused on tobacco harm reduction and smoking cessation
products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding. The Company
exclusively controls 107 issued patents and exclusively controls an additional 38 patent applications; of these, we own 12 issued
patents plus 23 patent applications and we license on an exclusive basis, 95 issued patents and 15 patent applications. </FONT>Hercules
Pharmaceuticals LLC and Goodrich Tobacco Company, LLC are subsidiaries of 22nd Century Limited, LLC and are business units for
our (i) smoking cessation product and (ii) premium cigarettes and modified risk tobacco products, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in; background-color: white">Our Investigational
New Drug Application for <I>X-22</I>, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our <I>X-22
</I>Phase II-B clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference
in quitting between <I>X-22 </I>and the active control, a cigarette containing conventional nicotine levels. In evaluating the
results of this trial, we believe we may have gone too far in reducing the nicotine content of <I>X-22</I>, which was less than
half the nicotine content of VLN cigarettes used in various independent smoking-cessation clinical trials that have demonstrated
that use of VLN cigarettes increases smoking quit rates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in; background-color: white">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in; background-color: white"><FONT STYLE="color: black">We
continue to believe that VLN cigarettes are effective as a smoking cessation aid. However, we have suspended sponsoring further
<I>X-22 </I>clinical trials pending the results of two independent smoking-cessation trials (ClinicalTrials.gov Identifiers NCT01050569
and NCT01250301) utilizing a different version of our VLN cigarett</FONT>e with a nicotine content similar to those used in previous
successful smoking-cessation trials and higher than that used in our own sponsored Phase II-B trial. Both of these two independent
clinical trials were completed in 2012. The results of these trials will be compared to our Phase II-B trial to determine which
variables optimize cessation. After evaluating the results of those two independent clinical trials, we will request a meeting
with the U.S. Food and Drug Administration (FDA) and may then resume our own sponsored <I>X-22 </I>clinical trials.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The <I>X-22 </I>therapy protocol calls
for the patient to smoke our VLN cigarettes over a six-week treatment period to facilitate the goal of the patient quitting smoking
by the end of the treatment period. We believe this therapy protocol has been successful in independent clinical trials because
VLN cigarettes made from our proprietary tobacco satisfy smokers&rsquo; cravings for cigarettes while (i) greatly reducing nicotine
exposure and nicotine dependence and (ii) extinguishing the association between the act of smoking and the rapid delivery of nicotine.
<I>X-22</I> involves the same smoking behavior as conventional cigarettes and because patients are simply switching to VLN cigarettes
for 6 weeks, <I>X-22</I> does not expose the smoker to any new drugs or new side effects.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In contrast to the results of the Company&rsquo;s
Phase II-B trial results, independent studies have demonstrated that VLN cigarettes made whether used alone or in conjunction
with nicotine replacement therapy (NRT), increased quitting. Due to the limited effectiveness and/or serious side effects of existing
FDA-approved smoking cessation products, we believe that <I>X-22</I>, upon the completion of additional clinical trials that demonstrate
efficacy, can capture a significant share of this market by replacing sales and market share from existing smoking cessation aids
and expanding the smoking cessation market by encouraging more smokers to attempt to quit smoking.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The 2009 Family
Smoking Prevention and Tobacco Control Act (&ldquo;Tobacco Control Act&rdquo;) granted the FDA authority over the regulation of
all tobacco products. While it prohibits the FDA from banning cigarettes outright, it allows the FDA to require the reduction
of nicotine or any other compound in tobacco and cigarette smoke. The Tobacco Control Act also banned all sales in the U.S. of
cigarettes with </FONT>characterizing flavors <FONT STYLE="color: black">(other than menthol). As of June 2010, all cigarette
companies were required to cease the use of the terms &ldquo;low tar,&rdquo; &ldquo;light&rdquo; and &ldquo;ultra light&rdquo;
in describing cigarettes sold in the U.S. Besides numerous other regulations, including certain marketing restrictions, for the
first time in history, a U.S. regulatory agency will scientifically evaluate cigarettes that may pose lower health risks as compared
to conventional cigarettes. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Tobacco
Control Act establishes procedures for the FDA to regulate the labeling and marketing of </FONT>modified risk tobacco products,
which includes cigarettes that (i) <FONT STYLE="color: black">reduce exposure to tobacco toxins and (ii) are reasonably likely
to </FONT>pose lower health risks as compared to conventional cigarettes<FONT STYLE="color: black"> (&ldquo;Modified Risk Cigarettes&rdquo;).
The Tobacco Control Act requires the FDA to issue specific regulations or guidance regarding applications that must be submitted
to the FDA for the authorization to label and market Modified Risk Cigarettes. On March 30, 2012, the FDA issued </FONT><I>Modified
Risk Tobacco Product Applications Draft Guidance.</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We believe that two types of our cigarettes
in development which we refer to as <I>BRAND A</I> and <I>BRAND B</I>, may qualify as Modified Risk Cigarettes. Compared to other
commercial cigarettes, the tobacco in <I>BRAND A</I> has approximately 95% less nicotine than tobacco in cigarettes previously
marketed as &ldquo;light&rdquo; cigarettes, and <I>BRAND B</I>&rsquo;s smoke contains the lowest amount of &ldquo;tar&rdquo; per
milligram of nicotine.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Within our two product categories, the
Tobacco Control Act offers us the following specific advantages:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Smoking Cessation Aids</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">FDA approval must be obtained, as has been
the case for decades, before a product can be marketed for quitting smoking. The Tobacco Control Act provides that products for
quitting smoking or smoking cessation, such as <I>X-22</I>, be considered for &ldquo;Fast Track&rdquo; designation by the FDA.
The &ldquo;Fast Track&rdquo; programs of the FDA are intended to facilitate development and expedite review of drugs to treat
serious and life-threatening conditions so that an approved product can reach the market expeditiously. We believe that upon completion
of a company-sponsored clinical trial demonstrating efficacy, <I>X-22</I> will qualify for &ldquo;Fast Track&rdquo; designation
by the FDA.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Modified Risk Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We intend to seek FDA authorization to
market <I>BRAND A</I> and <I>BRAND B</I> as Modified Risk Cigarettes. We believe that <I>BRAND A</I> and <I>BRAND B</I> will achieve
significant market share in the global cigarette market among smokers who will not quit but are interested in reducing the harmful
effects of smoking. We believe this new regulatory environment represents a paradigm shift for the tobacco industry. The Tobacco
Control Act allows the FDA to mandate the use of reduced-risk technologies across all conventional tobacco products or cigarettes.
We believe the Tobacco Control Act may create opportunities for us to license our proprietary technology and/or tobaccos to larger
competitors.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>SPECTRUM Government Research Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">As a subcontractor
to RTI International (&ldquo;RTI&rdquo;) in RTI&rsquo;s contract with the National Institute on Drug Abuse for the Research Cigarette
Option, we supply modified nicotine (from very low to high) cigarettes to NIDA.</FONT> These research cigarettes are distributed
under the mark <I>SPECTRUM</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">&nbsp;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Tar, Nicotine, and Smoking Behavior</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The dependence of many smokers on tobacco
is largely due to the properties of nicotine, but the adverse effects of smoking on health are mainly due to other components
present in tobacco smoke, including &ldquo;tar&rdquo; and carbon monoxide. &ldquo;Tar&rdquo; is the common name for the (resinous)
total particulate matter minus nicotine and water produced by the burning of tobacco (or other plant material) during the act
of smoking. &ldquo;Tar&rdquo; and nicotine are commonly measured in milligrams per cigarette trapped on a Cambridge filter pad
under standardized conditions using smoking machines. These results are referred to as &ldquo;yields&rdquo; or, more specifically,
&ldquo;tar&rdquo; yield and nicotine yield.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Individual smokers
generally seek a certain amount of nicotine per cigarette and can easily adjust how intensely each cigarette is smoked to obtain
a satisfactory amount of nicotine. Smoking of low yield (&ldquo;light&rdquo; or &ldquo;ultra light&rdquo;) cigarettes compared
to high yield (&ldquo;full flavor&rdquo;) cigarettes often results in taking more puffs per cigarette, larger puffs and/or smoking
more cigarettes per day to obtain a satisfactory amount of nicotine, a phenomenon known as &ldquo;compensation&rdquo; or &ldquo;compensatory
smoking.&rdquo; A report by the National Cancer Institute in 2001 stated that due to compensatory smoking, low yield cigarettes
are not safer than full flavor cigarettes, which is the reason that the Tobacco Control Act has banned the use of the terms &ldquo;low
tar,&rdquo; &ldquo;light&rdquo; and &ldquo;ultra light&rdquo; in the U.S. market. Studies have shown, however, that smokers generally
do not compensate when smoking cigarettes made with our VLN tobacco, and that smoking VLN cigarettes, such as <I>BRAND A,</I>
actually assist smokers to smoke fewer cigarettes per day and reduce their exposure to &ldquo;tar&rdquo; and nicotine. Other studies
have demonstrated that compensatory smoking (e.g., more and/or larger puffs per cigarette) of low-tar research cigarettes, similar
to <I>BRAND B</I>, is greatly curtailed</FONT> resulting in smokers inhaling less &ldquo;tar&rdquo; and carbon monoxide.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Market</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Cigarettes and Smoking Cessation Aids</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">According to the U.S. Center for Disease
Control (CDC), the U.S. cigarette market consists of approximately 45 million adult smokers who spent approximately $80 billion
in 2011 on approximately 300 billion cigarettes. Worldwide manufacturer sales in 2011 were over 5.0 trillion cigarettes, resulting
in annual retail sales of approximately $610 billion. Our products address unmet needs of smokers; for those who want to quit,
an innovative smoking cessation aid, and for those who do not quit, cigarettes that can reduce the level of exposure to tobacco
toxins. In 2010, annual manufacturer sales of smoking cessation aids in the U.S., all of which must be approved by the FDA, were
approximately $1.0 billion. Outside the United States, the smoking cessation market is in its infancy and is approximately $3.0
billion.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Approximately 50% of U.S. smokers attempt
to quit smoking each year, but only 2% to 5% actually quit smoking in a given year. It takes smokers an average of 8 to 11 &ldquo;quit
attempts&rdquo; before achieving long-term success. Approximately 95% of &ldquo;self-quitters&rdquo; (i.e., those who attempt
to quit smoking without any treatment) relapse and resume smoking. The Institute of Medicine, the health arm of the National Academy
of Sciences, in a 2007 report concludes: &ldquo;There is an enormous opportunity to increase population prevalence of smoking
cessation by reaching and motivating the 57 percent of smokers who currently make no quit attempt per year.&rdquo; We believe
that our <I>X-22</I> smoking cessation aid will be attractive to smokers who have been frustrated in their previous attempts to
quit smoking using other therapies.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Use of existing smoking cessation aids
results in relapse rates that can be as high as 90% in the first year after a smoker initially &ldquo;quits.&rdquo; Smokers currently
have the following limited choices of FDA-approved products to help them quit smoking:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 90%; border-collapse: collapse; margin-left: 0.75in">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 5%; text-align: justify"><FONT STYLE="font-size: 10pt; color: black">&bull;</FONT></TD>
    <TD STYLE="width: 95%"><FONT STYLE="font-size: 10pt; color: black">varenicline (Chantix<SUP>&reg;</SUP>/Champix<SUP>&reg;
    </SUP>outside the U.S.), manufactured by Pfizer,</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt; color: black">&bull;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">bupropion (Zyban<SUP>&reg;</SUP>), manufactured by GlaxoSmithKline, and</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt; color: black">&bull;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">nicotine replacement therapy, or &ldquo;NRT,&rdquo; which is available in
    the U.S. in several forms: gums, patches, nasal sprays, inhalers and lozenges.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Chantix<SUP>&reg;</SUP> and Zyban<SUP>&reg;
</SUP>are pills and are nicotine free. Chantix<SUP>&reg;</SUP>, Zyban<SUP>&reg;</SUP>, the nicotine nasal spray and the nicotine
inhaler are available by prescription only. Nicotine gums, nicotine patches, and lozenges are available over-the-counter.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Chantix<SUP>&reg;</SUP> was introduced
in the U.S. market in the fourth quarter 2006. Since 2007, Chantix<SUP>&reg;</SUP> has been the best-selling smoking cessation
aid in the United States, with sales, according to Pfizer Inc., of $701 million in 2007, $489 million in 2008, $386 million in
2009, $330 million in 2010 and $326 million in 2011. In July 2009, the FDA required a &ldquo;Boxed Warning,&rdquo; the most serious
type of warning in prescription drug labeling, for both Chantix<SUP>&reg;</SUP> and Zyban<SUP>&reg;</SUP> based on the potential
side effects of these drugs. Despite this Boxed Warning, worldwide sales of Chantix<SUP>&reg;</SUP> in 2009 to 2011 were approximately
$700 million, $755 million, and $720 million, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Other than Chantix<SUP>&reg;</SUP> and
Zyban<SUP>&reg;</SUP>, the only FDA-approved smoking cessation therapy in the United States is NRT. These products consist of
gums, patches, nasal sprays, inhalers and lozenges. Nicotine gums and nicotine patches have been sold in the U.S. for approximately
28 years and 20 years, respectively, and millions of smokers have already tried NRT products and failed to stop smoking due to
the limited effectiveness of these products. According to Perrigo Company, a pharmaceutical company that sells NRT products, retail
sales of NRT products in the United States were $800 million in the fiscal year ended June 30, 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Modified Risk Tobacco Products</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A substantial number of adult smokers are
unable or unwilling to quit smoking. For example, each year one-half of the adult smokers in the United States do not attempt
to quit. Nevertheless, we believe the majority of these smokers are interested in reducing the harmful effects of smoking.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In a 2005 analyst report, <I>The Third
Innovation, Potentially Reduced Exposure Cigarettes</I>, JP Morgan examined the effects of FDA regulation of tobacco, including
the market for safer cigarettes. JP Morgan&rsquo;s proprietary survey of over 600 smokers found that 90% of smokers are willing
to try a safer cigarette. Among JP Morgan&rsquo;s other conclusions, it stated: &ldquo;FDA oversight would imbue PREPS [&lsquo;potential
reduced exposure products&rsquo; which essentially equate to potential modified risk tobacco products] with a regulatory &lsquo;stamp
of approval&rsquo; and allow for more explicit comparative health claims with conventional cigarettes. Consumers should trust
the FDA more than industry health claims.&rdquo; Prior to the Tobacco Control Act becoming law in 2009, no regulatory agency or
body had the authority to assess potential modified risk tobacco products.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Some major cigarette manufacturers have
developed and marketed alternative cigarette products. For example, Philip Morris USA developed an alternative cigarette, called
Accord<SUP>&reg;</SUP>, in which the tobacco is heated rather than burned. R.J. Reynolds Tobacco Company has developed and is
marketing an alternative cigarette, called Eclipse<SUP>&reg;</SUP>, in which the tobacco is primarily heated, with only a small
amount of tobacco burned. Philip Morris and RJ Reynolds have indicated that their products may deliver fewer smoke components
compared to conventional cigarettes. Vector Tobacco Inc. (&ldquo;Vector Tobacco&rdquo;), which is our former licensee, has marketed
a cigarette offered in three brand styles with reduced levels of nicotine, called Quest<SUP>&reg;</SUP>. Both Accord<SUP>&reg;
</SUP>and Eclipse<SUP>&reg;</SUP>, which are not conventional cigarettes (e.g., they do not burn down) and have only achieved
limited sales. With the exception of Eclipse<SUP>&reg;</SUP>, the above products are no longer being manufactured.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Complete cessation from all tobacco and
medicinal nicotine products is the ultimate goal of the public health community. However, some public health officials desire
to migrate cigarette smokers en masse to medicinal nicotine (also known as NRT) or smokeless tobacco products to replace cigarettes.
We believe this is unattainable in the foreseeable future for many reasons, including because the smoking experience is much more
complex than simply seeking nicotine. In a 2009 WHO report, statistics demonstrate that approximately 90% of global tobacco users
smoke cigarettes. Worldwide cigarette sales (in U.S. dollars) are approximately 12 times greater than sales of smokeless tobacco
products and approximately 200 times greater than sales of NRT products. Although a small segment of the smoking population is
willing to use smokeless tobacco products in conjunction with cigarettes (known as dual users), a large percentage of smokers
is not interested in using smokeless tobacco products exclusively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">There are newer forms of smokeless tobacco
products that have been introduced in the market that are less messy to use than chewing tobacco or dry snuff (since spitting
is not involved). These products include Swedish-style snus and dissolvable tobacco products such as Ariva<SUP>&reg;</SUP> and
Stonewall<SUP>&reg;</SUP> tablets made by Star Scientific Inc., and Camel<SUP>&reg;</SUP> Orbs, Camel<SUP>&reg;</SUP> Strips and
Camel<SUP>&reg;</SUP> Sticks recently introduced by R.J. Reynolds Tobacco Company. Although use of such products may be more discreet
and convenient than traditional forms of smokeless tobacco, they have the same route of delivery of nicotine as nicotine gum and
nicotine lozenges, which have been available over-the-counter in the United States for approximately 28 years and 10 years, respectively,
and have not significantly replaced cigarettes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Products</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>X-22 Smoking Cessation Aid</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><I>X-22</I>
is a tobacco-based botanical medical product for use as a smoking cessation therapy. Upon FDA approval, <I>X-22</I> will be a
prescription-only kit containing VLN cigarettes made from our proprietary tobacco, which has approximately 95% less nicotine compared
to tobacco in existing &ldquo;light&rdquo; cigarettes. </FONT>The <I>X-22 </I>therapy protocol calls for the patient to smoke
our VLN cigarettes over a six-week treatment period to facilitate the goal of the patient quitting smoking by the end of the treatment
period. We believe this therapy protocol has been successful in independent clinical trials because VLN cigarettes made from our
proprietary tobacco satisfy smokers&rsquo; cravings for cigarettes while (i) greatly reducing nicotine exposure and nicotine dependence
and (ii) extinguishing the association between the act of smoking and the rapid delivery of nicotine.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our Investigational New Drug Application
for <I>X-22</I>, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our <I>X-22 </I>Phase II-B
clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference in quitting
between <I>X-22 </I>and the active control, a cigarette containing conventional nicotine levels. In evaluating the results of
this trial, we believe we may have gone too far in reducing the nicotine content of <I>X-22</I>, which was less than half the
nicotine content of VLN cigarettes used in various independent smoking-cessation clinical trials that have demonstrated that use
of VLN cigarettes increases quit rates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The results of the below
two independent clinical trials, both of which used VLN cigarettes provided by 22nd Century, were completed in 2012, are
pending. After evaluating the results of these two trials, we will request a meeting with the U.S. Food and Drug
Administration (FDA) and may then resume our own sponsored <I>X-22 </I>clinical trials.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 24pt"><FONT STYLE="color: black"><B>1.</B></FONT></TD><TD><FONT STYLE="font-family: Times New Roman, Times, Serif"><B>University
                                                                                                     of Minnesota Masonic Cancer
                                                                                                     Center </B></FONT><B><FONT STYLE="color: black">-
                                                                                                     </FONT><FONT STYLE="font-family: Times New Roman, Times, Serif">Phase
                                                                                                     II </FONT><FONT STYLE="color: black">-
                                                                                                     </FONT><FONT STYLE="font-family: Times New Roman, Times, Serif">219
                                                                                                     subjects</FONT><FONT STYLE="color: black">
                                                                                                     </FONT></B></TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 60pt; background-color: white">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Follow-up study to Hatsukami et al. 2010</TD>
</TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">ClinicalTrials.gov Identifier:&nbsp; NCT01050569</TD>
</TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>Evaluating quitting
                                                                                                           results of six-week
                                                                                                           treatment period among
                                                                                                           3 groups:</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 2in; background-color: white">(i) exclusive use of a VLN
cigarette (a  VLN cigarette with slightly higher nicotine content than those used in the 22nd Century trial);</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 2in; background-color: white">(ii) 21-mg nicotine patch;
and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 2in; background-color: white">(iii) concurrent use of VLN
cigarette and nicotine patch</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Trial included a 6-month follow-up period</TD>
</TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 81pt; background-color: white">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top">
<TD STYLE="width: 36pt"></TD><TD STYLE="width: 24pt"><FONT STYLE="color: black"><B>2.</B></FONT></TD><TD><FONT STYLE="font-family: Times New Roman, Times, Serif"><B>Queen
                                                                                                     Mary University of London,
                                                                                                     in collaboration with Pfizer
                                                                                                     </B></FONT><B><FONT STYLE="color: black">-
                                                                                                     </FONT><FONT STYLE="font-family: Times New Roman, Times, Serif">200
                                                                                                     subjects </FONT></B></TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 60pt; background-color: white">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Same VLN cigarette utilized in above study</TD>
</TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">ClinicalTrials.gov Identifier:&nbsp; NCT01250301</TD>
</TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 81pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Evaluating whether the use of a VLN cigarette in combination
with Chantix<SUP>&reg;</SUP> (or NRT)</TD>
</TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 81pt; text-indent: 27pt; background-color: white">increases
quitting over use of Chantix<SUP>&reg;</SUP> (or NRT) alone</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; background-color: white"><TR STYLE="vertical-align: top; text-align: justify">
<TD STYLE="width: 108pt"></TD><TD STYLE="width: 27pt; text-align: left"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD STYLE="text-align: justify">Chantix<SUP>&reg;</SUP> is branded as Champix<SUP>&reg;
</SUP>outside the United States</TD>
</TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 81pt; text-indent: 27pt; background-color: white">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 81pt; text-indent: 27pt; background-color: white">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Our Modified Risk Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We believe that our <I>BRAND A</I> and
<I>BRAND B</I> cigarettes will benefit smokers who are unable or unwilling to quit smoking and who may be interested in cigarettes
which reduce exposure to certain tobacco smoke toxins and/or pose a lower health risk than conventional cigarettes. This includes
the approximate one-half of the 45 million adult smokers in the United States who do not attempt to quit in a given year. Compared
to other commercial cigarettes, the tobacco in <I>BRAND A</I> has approximately 95% less nicotine than tobacco in cigarettes previously
marketed as &ldquo;light&rdquo; cigarettes and <I>BRAND B</I>&rsquo;s smoke contains the lowest amount of &ldquo;tar&rdquo; per
milligram of nicotine. We believe that <I>BRAND A</I> and <I>BRAND B</I> will qualify as Modified Risk Cigarettes and we intend
to seek FDA authorization to market <I>BRAND A</I> and <I>BRAND B</I> as Modified Risk Cigarettes. On March 30, 2012, the FDA
issued <I>Modified Risk Tobacco Product Applications Draft Guidance</I>, which we will utilize to file our two modified risk applications
with the FDA.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>BRAND A Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Compared to other commercial tobacco cigarettes,
<I>BRAND A</I> has the lowest nicotine content. The tobacco in <I>BRAND A</I> contains approximately 95% less nicotine than tobacco
in leading &ldquo;light&rdquo; cigarette brands. Clinical studies have demonstrated that smokers who smoke VLN cigarettes containing
our proprietary tobacco smoke fewer cigarettes per day resulting in significant reductions in smoke exposure, including &ldquo;tar,&rdquo;
nicotine and carbon monoxide. Due to the very low nicotine levels, compensatory smoking does not occur with VLN cigarettes containing
our proprietary tobacco (Hatsukami et al. 2010).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In a June 16, 2010 press release, Dr. David
Kessler, the former FDA Commissioner, recommended that &ldquo;[t]he FDA should quickly move to reduce nicotine levels in cigarettes
to non-addictive levels. If we reduce the level of the stimulus, we reduce the craving. It is the ultimate harm reduction strategy.&rdquo;
Shortly thereafter in a Washington Post article, Dr. Kessler said that the amount of nicotine in a cigarette should drop from
about 10 milligrams to less than 1 milligram. <I>BRAND A</I> contains approximately 0.7 milligram of nicotine per cigarette.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A Phase II smoking cessation clinical trial
at the University of Minnesota Masonic Comprehensive Cancer Center (Hatsukami et al. 2010) also measured exposure of various smoke
compounds in smokers from smoking a VLN cigarette containing our proprietary tobacco over a six (6)-week period. Smokers significantly
reduced their smoking as compared to their usual brand of cigarettes. The number of VLN cigarettes smoked per day on average decreased
from 19 (the baseline number of cigarettes of smokers&rsquo; usual brand) to 12 by the end of the six (6)-week period, even though
participants were instructed to smoke ad libitum (as many cigarettes as desired) during treatment. Furthermore, besides significant
reductions in other biomarkers, carbon monoxide (CO) levels, an indicator of smoke exposure, significantly decreased from 20 parts
per million (baseline) to 15 parts per million. Cotinine, a metabolite and biomarker of nicotine, significantly decreased from
4.2 micrograms/mL (baseline) to 0.2 micrograms/mL. All differences were statistically significant (P&lt;0.05).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We believe these and other results and
future exposure studies the FDA may require will result in a modified risk cigarette claim for <I>BRAND A</I>. We further believe
smokers who desire to smoke fewer cigarettes per day while also satisfying cravings and reducing exposure to nicotine will find
<I>BRAND A</I> beneficial.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>BRAND B Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Compared to other commercial tobacco cigarettes,
<I>BRAND B</I>&rsquo;s smoke contains the lowest amount of &ldquo;tar&rdquo; per milligram of nicotine. Using a proprietary high
nicotine tobacco blend in conjunction with specialty cigarette components, <I>BRAND B</I> allows the smoker to achieve a satisfactory
amount of nicotine per cigarette while inhaling less &ldquo;tar&rdquo; and carbon monoxide. At the same time, we do not expect
exposure to nicotine from <I>BRAND B</I> to be significantly higher than some commercially available full flavor cigarette brands.
We believe smokers who desire to reduce smoke exposure but are less concerned about nicotine will find BRAND B beneficial. <I>BRAND
B</I> has a &ldquo;tar&rdquo; yield between typical &ldquo;light&rdquo; and &ldquo;ultra-light&rdquo; cigarettes, but a nicotine
yield of typical full flavor cigarettes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In a 2001 report, entitled <I>Clearing
the Smoke, Assessing the Science Base for Tobacco Harm Reduction</I>, the Institute of Medicine notes that a low &ldquo;tar&rdquo;/moderate
nicotine cigarette is a viable strategy for reducing the harm caused by smoking. The report states: &ldquo;Retaining nicotine
at pleasurable or addictive levels while reducing the more toxic components of tobacco is another general strategy for harm reduction.&rdquo;
We believe that evaluation of <I>BRAND B</I> in short-term human exposure studies will confirm that exposure to smoke, including
certain tobacco smoke toxins and carbon monoxide, is significantly reduced when smoking <I>BRAND B</I> as compared to smoking
the leading brands of cigarettes. We believe results from these exposure studies will warrant a modified risk claim for <I>BRAND
B</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>RED SUN and MAGIC Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our subsidiary, Goodrich Tobacco, has introduced
two super-premium priced cigarette brands, <I>RED SUN </I>and <I>MAGIC</I>, into the U.S. market in the first quarter 2011. Both
brands are available in regular and menthol and all brand styles are king size and packaged in hinge-lid hard packs. In the second
quarter of 2013, we intend to focus our marketing efforts on tobacconists, smoke shops and tobacco outlets in the U.S. The ban
in 2009 by the FDA of all cigarettes with characterizing flavors (with the exception of menthol) has resulted in a product void
in these specialty tobacco channels for super-premium priced products. We believe that certain U.S. cigarette wholesalers and
retailers will carry our brands, among other reasons, to increase their margins.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Smoking Cessation Clinical Trials with VLN Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">VLN cigarettes containing our proprietary
tobacco have been the subject of various independent studies, including two Phase II clinical trials for smoking cessation which
were not funded by us. Both of these Phase II clinical trials were &ldquo;intent to treat&rdquo; trials, meaning that any patients
who dropped out of the trials for any reason at any time during treatment or during the follow-up periods were considered failures
(still smoking and not abstinent). Dropout rates during smoking cessation trials are generally high since patients either quit
smoking or resume smoking their usual brand. In either case, they may believe there is no reason to continue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">One of these two Phase II clinical trials
compared the quitting efficacy of a VLN cigarette containing our proprietary tobacco versus a low nicotine cigarette and an FDA-approved
nicotine lozenge (4 mg) in a total of 165 patients treated for six (6) weeks (Hatsukami <I>et al.</I> 2010). This clinical trial
was led by Dr. Dorothy Hatsukami at the University of Minnesota Masonic Comprehensive Cancer Center. Dr. Hatsukami was selected
in 2010 as one of the nine voting members of the 12-person Tobacco Products Scientific Advisory Committee (&ldquo;TPSAC&rdquo;),
within the FDA&rsquo;s Center for Tobacco Products created under the Tobacco Control Act. (TPSAC will make recommendations and
issue reports to the FDA Commissioner on tobacco regulatory matters, including but not limited to, the impact of the use of menthol
in cigarettes, altering levels of nicotine in tobacco products, and applications submitted to the FDA for modified risk tobacco
products.)</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Results from this Phase II trial conclude
that patients exclusively using the VLN cigarette containing our proprietary tobacco achieved a 43% quit rate (confirmed four
(4)-week continuous abstinence) as compared to a quit rate of 35% for the group exclusively using the FDA-approved nicotine lozenge
and a 21% quit rate for the group exclusively using the low nicotine cigarette. Smoking abstinence at the 6-week follow-up after
the end of treatment was 47% for the VLN cigarette group, 37% for the nicotine lozenge group and 23% for the low nicotine cigarette
group. Furthermore, the VLN cigarette was also associated with greater relief from withdrawal symptoms and cravings of usual brand
cigarettes than the nicotine lozenge. Carbon monoxide (CO) levels in patients were tested at each treatment clinic visit to verify
smoking abstinence.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Unlike Phase III clinical trials for other
FDA-approved smoking cessation aids, four (4) week continuous abstinence in the University of Minnesota Phase II trial was measured
after the treatment period, when patients were &ldquo;off&rdquo; medication, rather than during the last four weeks of the treatment
period. For example, according to the prescription Chantix<SUP>&reg;</SUP> label, four (4)-week continuous abstinence in the Chantix<SUP>&reg;
</SUP>Phase III clinical trials (the 44 percent quit rate advertised by Pfizer) was measured during the last four weeks of the
12-week treatment period, while patients were still taking Chantix<SUP>&reg;</SUP>. In one of these Chantix<SUP>&reg;</SUP> Phase
III clinical trials, approximately one-third of those who had been abstinent during the last week of treatment returned to smoking
within four weeks after they stopped taking Chantix<SUP>&reg;</SUP>, and approximately 45% returned to smoking within eight weeks
after they stopped taking Chantix<SUP>&reg;</SUP>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Patients who used the VLN cigarette over
the six (6)-week treatment period significantly reduced their smoking as compared to their usual brand of cigarettes. The number
of VLN cigarettes smoked per day on average decreased from 19 (the baseline number of cigarettes of the smoker&rsquo;s usual brand)
to 12 by the end of the six (6)-week treatment period, even though participants in this clinical trial were instructed to smoke
ad libitum (as many cigarettes as desired) during treatment. Carbon monoxide (CO) levels, an indicator of smoke exposure, significantly
decreased from 20 parts per million (baseline) to 15 parts per million. Cotinine, a metabolite and biomarker of nicotine, significantly
decreased from 4.2 micrograms/mL (baseline) to 0.2 micrograms/mL. All differences in the above three measurements were statistically
significant (P&lt;0.05).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In a separate Phase II clinical trial funded
by Vector Tobacco, our former licensee, under Investigational New Drug (&ldquo;IND&rdquo;) Application 69,185, a randomized double-blind,
active controlled, parallel group, multi-center Phase II smoking cessation clinical trial was conducted to evaluate the quitting
efficacy of Quest<SUP>&reg;</SUP> reduced-nicotine cigarettes as a smoking cessation treatment in 346 patients (Becker <I>et al</I>.
2008). Treatment consisted of smoking three reduced-nicotine cigarette styles (Quest 1<SUP>&reg;</SUP>, Quest 2<SUP>&reg;</SUP>
and Quest 3<SUP>&reg;</SUP>) for two (2) weeks each, with nicotine yields per cigarette of 0.6 mg (a low nicotine cigarette made
with a blend of regular tobacco and our proprietary VLN tobacco), 0.3 mg (an extra low nicotine cigarette made with a blend of
regular tobacco and our proprietary VLN tobacco) and 0.05 mg (a VLN cigarette made with tobacco only from our proprietary VLN
tobacco variety) either in combination with nicotine patch therapy (a nicotine replacement therapy or NRT product) or placebo
patches.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In this three-arm clinical trial in which
patients were treated over a period of sixteen (16) weeks, use of reduced-nicotine cigarettes in combination with nicotine patches
was more effective (the difference was statistically significant) in achieving four (4)-week continuous abstinence than use of
nicotine patches alone (32.8% vs. 21.9%), and use of reduced-nicotine cigarettes without nicotine patches yielded an abstinence
rate similar (the difference was not statistically significant) to that of nicotine patches (16.4% vs. 21.9%). No serious adverse
events were attributable to the investigational product.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The major differences between the Vector
Tobacco Phase II clinical trial and the University of Minnesota Phase II clinical trial is the duration of time during treatment
that VLN cigarettes are smoked and the use of nicotine replacement therapy (&ldquo;NRT&rsquo;) in combination with VLN cigarettes.
In the Vector Tobacco trial, VLN cigarettes were smoked by patients (in two arms of the study) for only two (2) weeks, either
in combination with using a nicotine patch or placebo patch, followed by continued use of nicotine patches for the subsequent
ten (10) weeks. In the University of Minnesota Phase II clinical trial, VLN cigarettes (in one arm of the study) were smoked for
six (6) weeks without any use of NRT before, during or after this 6-week treatment period. We believe that the effectiveness of
VLN cigarettes for use in smoking cessation is higher when they are used alone (without NRT or another therapy) and for a longer
time period, as in the University of Minnesota trial.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A 2008 binding arbitration award, which
was completely fulfilled in 2009 by our former licensee, Vector Tobacco, provided us with copies of all of Vector Tobacco&rsquo;s
FDA submissions relating to Vector Tobacco&rsquo;s IND for Quest<SUP>&reg;</SUP> and awarded to us a right of reference to Vector
Tobacco&rsquo;s IND for Quest<SUP>&reg;</SUP>, including all results of Vector&rsquo;s Phase II clinical trial. This arbitration
award allows us to use all such information in our IND with the FDA for our VLN cigarette that contains our same proprietary tobacco
that Vector Tobacco used in its IND submissions to the FDA. This arbitration award has been helpful to us with the FDA, since
analytical reports produced by Vector Tobacco pertaining to our proprietary tobacco and cigarettes made from our proprietary tobacco
are being utilized by us with the FDA.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A randomized controlled smoking cessation
clinical trial using VLN cigarettes was a conducted at Roswell Park Cancer Institute, Buffalo, New York, to investigate the effect
of smoking a very low nicotine cigarette (&ldquo;VLN&rdquo;) in combination with a nicotine patch for 2 weeks prior to the quit
date (Rezaishiraz <I>et al.</I> 2007). Ninety-eight adult smokers were randomized to two treatments: (i) two (2) weeks of a VLN
(Quest 3<SUP>&reg;</SUP>) and 21-mg nicotine patch before the quit date and (ii) a reduced nicotine cigarette (Quest 1<SUP>&reg;</SUP>)
during the two (2) weeks before the quit date. After the quit date, all subjects received counseling for smoking cessation and
nicotine patch therapy for up to eight (8) weeks (four (4) weeks of 21-mg patches, two (2) weeks of 14-mg patches, and two (2)
weeks of 7-mg patches). Group 1, which used the VLN cigarette and a nicotine patch before quitting, had lower combined craving
scores during the two (2) weeks before and after the quit date. Self-reported point prevalence of smoking abstinence at the three
(3)- and six (6)-month follow-up points was higher in Group 1 (43% vs. 34% and 28% vs. 21%).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A Phase III/IV two-arm smoking-cessation
clinical trial of 1,410 treatment-seeking smokers was conducted by the University of Auckland, Clinical Trials Research Unit (Walker
et al. 2012). The 705 patients who received VLN cigarettes in addition to NRT (patches and/or gum or lozenges) had significantly
higher cessation rates at all measured time points (3 weeks, 6 weeks, 3 months and 6 months) than patients treated only with NRT.
For those who failed to quit, the median time to relapse was increased to two months in the VLN + NRT group, compared to 13 days
in the NRT only group. There was no difference in the frequency of serious adverse events between the groups.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A study at Dalhousie University, Halifax,
Nova Scotia (Barrett 2010), compared the effects of low nicotine cigarettes and an FDA-approved nicotine inhaler on cravings and
smoking behavior of smokers who did not intend to quit. In separate laboratory sessions, each of twenty-two (22) participants
used a VLN cigarette (Quest 3<SUP>&reg;</SUP>), a reduced nicotine cigarette (Quest 1<SUP>&reg;</SUP>, which contains approximately
two-thirds conventional tobacco and one-third VLN tobacco), a nicotine inhaler (10 mg; 4 mg deliverable, Pharmacia), or a placebo
inhaler (identical in appearance to the nicotine inhaler, but containing no nicotine). Cravings, withdrawal and mood descriptors
were rated before and after a twenty (20)-minute treatment session during which subjects were instructed to smoke two cigarettes
or to use an inhaler every 10 seconds. The reduction in the rating of intent to smoke (usual cigarette brand) after using the
VLN cigarette (-10.0) was significantly greater than the reduction with the nicotine inhaler (-1.9). Use of the VLN cigarette
was also associated with significantly increased satisfaction and relaxation compared to the nicotine inhaler.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Technology Platform</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our proprietary technology enables us
to decrease or increase the level of nicotine (and other nicotinic alkaloids such as nornicotine, anatabine and anabasine) in
tobacco plants by decreasing or increasing the expression of gene(s) responsible for nicotine production in the tobacco plant
using genetic engineering. The basic techniques, include but are not limited to those that are used in the production of
genetically modified (GM) varieties of other crops. However, our proprietary technology can also be implemented without the
resulting plants being GM as long as no foreign DNA not inherent to a plant species such as <I>Nicotiana tabacum</I> is
present in the engineered plant. In 2009 GM crops were planted on 330 million acres in 25 countries according to the
International Service for the Acquisition of Agri-Biotech Applications. This includes approximately 85% of the corn and
soybeans grown in the United States. The only components of the technology that are distinct from those in commercialized
genetically modified varieties of major crops are segments of tobacco genes (DNA sequences) that are also present in all
conventional tobacco plants. Genetically modified or transgenic tobacco that we use in our products has been deregulated by
the USDA. Thus, plants may be grown and used in products in the United States without legal restrictions or labeling
requirements related to the genetic modification. Nevertheless, our proprietary tobacco is grown only by farmers under
contracts that require segregation and prohibit transfer of material to other parties.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the development of genetically-engineered
plant varieties, many candidate plant lines are evaluated in the field in multiple locations over several years, as in any other
variety development program. This is carried out in order to identify lines that have not only the specific desired trait, e.g.,
very low nicotine, but have overall characteristics that are suitable for commercial production of the desired product. This process
allows us to see if there are undesirable effects of the genetic modification approach or the specific genetic modification event,
regardless of whether the effects are anticipated or unanticipated. For example, since nicotine is known to be an insecticide
that is effective against a wide range of insects, reduction of nicotine content in the plants may be expected to affect susceptibility
to insect pests. While there are differences in the susceptibility of VLN tobacco to some insects, all tobacco is attacked by
a number of insects. The measures taken to control insect pests of conventional tobacco are adequate to control insect pests in
VLN tobacco.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Once a genetically-engineered tobacco plant
with the desired characteristics is obtained, each plant can produce hundreds of thousands of seeds. When each seed is germinated,
the resulting tobacco plant has identical characteristics as the parent and sibling plants and the nicotine content of these plants
generally fall within a narrow range. Tobacco products with either low or high nicotine content are easily produced through this
method. For example, one of our proprietary tobacco varieties contains the lowest nicotine content of any tobacco ever commercialized,
with approximately 95% less nicotine than tobacco in leading &ldquo;light&rdquo; cigarette brands. This proprietary tobacco grows
with virtually no nicotine without adversely affecting the other leaf constituents important to a cigarette&rsquo;s characteristics,
including taste and aroma.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Sources of Raw Materials</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We obtain a large portion of our tobacco
leaf requirements from farmers in multiple U.S. states that are under direct contracts with us. The contracts prohibit the transfer
of our proprietary seeds and plant materials to other parties. We purchase the balance of our tobacco requirements through third
parties. As we expand our sales and distribution of our current commercial brands, <I>RED SUN </I>and <I>MAGIC</I>, and proceed
to market with our <I>X-22 </I>smoking cessation aid and <I>BRAND A </I>and <I>BRAND B </I>cigarettes, we plan to continue to
scale up the amount of tobacco leaf we obtain directly from farmers under contract.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Intellectual Property</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our proprietary technology is covered by
12 patent families consisting of 107 issued patents in 78 countries, (of these, we own 12 issued patents and we license 95 issued
patents on an exclusive basis) and 38 pending patent applications (of these we own 23 patent applications and we license 15 patent
applications on an exclusive basis). A &ldquo;patent family&rdquo; is a set of patents granted in various countries to protect
a single invention. Our patent coverage in the United States and China, the two most valuable smoking cessation and cigarette
markets in the word, consists of 15 issued patents and 8 pending applications and 6 issued patents and 3 pending patent applications,
respectively. We have exclusive worldwide rights to all uses of the following genes responsible for nicotine content in tobacco
plants: QPT, A622, NBB1, MPO and genes for several transcription factors. We have exclusive rights to plants with altered nicotine
content produced from modifying expression of these genes and tobacco products produced from these plants. We also have the exclusive
right to license and sublicense these patent rights. The patents owned by or exclusively licensed to us are issued in countries
where at least 75% of the world&rsquo;s smokers reside.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">We own various
registered trademarks in the United States. We also have exclusive rights to plant variety protection, or PVP, certificates in
the United States (issued by the U.S. Department of Agriculture) and Canada. A PVP certificate prevents anyone other than the
owner/licensee from planting, propagating, selling, importing and exporting a plant variety for twenty (20) years in the U.S.
and generally for (20) years in other member countries of the </FONT>International Union for the Protection of New Varieties of
Plants, known as UPOV, an international treaty concerning plant breeders&rsquo; rights. There are currently more than 70 countries
that are members of UPOV.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Sales and Marketing</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>X-22 Smoking Cessation Aid</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We intend to enter into arrangements in
both the U.S. and international markets with pharmaceutical companies to market and sell <I>X-22</I>. We plan to seek marketing
partners in the U.S. with existing pharmaceutical sales forces that already call on medical and dental offices in their geographic
markets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">There are approximately 700,000 physicians
in the U.S., including approximately 80,000 general practitioners, many of whom are aware of new medications, even before they
achieve FDA approval. There are also approximately 170,000 dentists in the U.S. who can write prescriptions for smoking cessation
aids. Upon FDA approval, we plan to develop awareness for <I>X-22</I> by educating physicians and dentists about our <I>X-22</I>
smoking cessation aid. We intend to advertise in professional journals, use direct mail campaigns to medical professionals, and
attend trade shows and professional conferences. We also intend to use internet advertising and pharmacy circulars to reach consumers
and to encourage them to ask their physicians and dentists about our <I>X-22</I> smoking cessation aid. We expect to use public
relations to increase public awareness about <I>X-22</I>. We will seek to use federal and state-funded smoking cessation programs
and clinics to inform clinicians and patients about, and encourage the use of, <I>X-22</I> as a smoking cessation aid. We will
also seek to participate in various government-funded programs which purchase approved smoking cessation aids and then distribute
these to smokers at no charge or at greatly reduced prices.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>BRAND A and BRAND B</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The Tobacco Control Act establishes procedures for the FDA
to regulate the labeling and marketing of modified risk tobacco products, which includes cigarettes that (i) reduce exposure to
tobacco toxins and (ii) are reasonably likely to pose lower health risks as compared to conventional cigarettes (&ldquo;Modified
Risk Cigarettes&rdquo;). The Tobacco Control Act requires the FDA to issue specific regulations or guidance regarding applications
that must be submitted to the FDA for the authorization to label and market Modified Risk Cigarettes. On March 30, 2012, the FDA
issued <I>Modified Risk Tobacco Product Applications Draft Guidance. </I>We believe that two of our cigarette products, which
we refer to as <I>BRAND A </I>and <I>BRAND B</I>, will qualify as Modified Risk Cigarettes. Compared to other commercial cigarettes,
the tobacco in <I>BRAND A </I>has approximately 95% less nicotine than tobacco in cigarettes previously marketed as &ldquo;light&rdquo;
cigarettes, and <I>BRAND B</I>&rsquo;s smoke contains the lowest amount of &ldquo;tar&rdquo; per milligram of nicotine.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>RED SUN and MAGIC Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><I>&#9;</I></FONT>Our subsidiary,
Goodrich Tobacco, has introduced two super-premium priced cigarette brands, <I>RED SUN </I>and <I>MAGIC</I>, into the U.S. market
in the first quarter 2011. Both brands are available in regular and menthol and all brand styles are king size and packaged in
hinge-lid hard packs. In the second quarter of 2013, we intend to focus our marketing efforts on tobacconists, smoke shops and
tobacco outlets in the U.S. The ban in 2009 by the FDA of all cigarettes with characterizing flavors (with the exception of menthol)
has resulted in a product void in these tobacco channels for super-premium priced products. We believe that certain U.S. cigarette
wholesalers and retailers will carry our brands, among other reasons, to increase their margins.<FONT STYLE="color: black">&#9;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>SPECTRUM Government Research Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The National
Institute on Drug Abuse (&ldquo;NIDA&rdquo;), a component of the National Institutes of Health (&ldquo;NIH&rdquo;), provides the
scientific community with controlled and uncontrolled research chemicals and drug compounds in its Drug Supply Program. In 2009,
NIDA included an option to develop and produce research cigarettes with various levels of nicotine (from very low to high), or
Research Cigarette Option, in its request for proposals for a five-year contract for Preparation and Distribution of Research
and Drug Products. We have agreed, as a subcontractor to RTI International (&ldquo;RTI&rdquo;) in RTI&rsquo;s contract with NIDA
for the Research Cigarette Option, to supply modified nicotine (from very low to high) cigarettes to NIDA. In August 2010, we
met with officials from NIDA, FDA, RTI, the National Cancer Institute and the Centers for Disease Control and Prevention to finalize
certain aspects of the design of these research cigarettes. </FONT>These government research cigarettes are distributed under
the mark <I>SPECTRUM</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Healthcare Reimbursement</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Affordable Care Act enacted on March
23, 2010 and other government and private sector initiatives targeted to limit the growth of healthcare costs are continuing in
the U.S. and many other countries where we intend to sell our <I>X-22</I> smoking cessation aid. These changes are causing the
marketplace to put increased emphasis on the delivery of more cost-effective medical products.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Government healthcare programs in the United
States, including Medicare and Medicaid, private healthcare insurance and managed-care plans have attempted to control costs by
limiting the amount of reimbursement for which they will pay for particular procedures or treatments. This may create price sensitivity
among potential customers for our <I>X-22</I> smoking cessation aid, even if we obtain FDA approval for it. Some third-party payers
must also approve coverage for new or innovative devices or therapies before they will reimburse healthcare providers who use
the medical devices or therapies. Even though a new medical product may have been cleared for commercial distribution, we may
find limited demand for <I>X-22</I> until reimbursement approval has been obtained from governmental and private third-party payers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Approximately 160 million Americans have
private health insurance with prescription coverage and the majority, and an increasing number of these plans, cover pharmacologic
treatments for smoking cessation. Healthcare payers, including governmental bodies, are increasingly willing to fund smoking cessation
treatments due to the expected savings from reducing the incidence of smoking-related illnesses. Approximately 46 million Americans
were covered by Medicare in 2009. Medicare provides insurance coverage for up to two smoking cessation attempts per year and each
attempt may include four counseling sessions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Approximately
47 million Americans were covered by state Medicaid programs in 2009. Approximately 30% of Medicaid recipients are smokers. Medicaid
programs in 42 states and the District of Columbia cover at least one form of pharmacologic treatment for smoking cessation (Chantix<SUP>&reg;</SUP>,
Zyban<SUP>&reg;</SUP> or NRT). </FONT>The Affordable Care Act <FONT STYLE="color: black">expands Medicaid coverage to all 50 states
in 2014. The current retail price of the 12-week prescription of Chantix<SUP>&reg;</SUP> is over $450, which should give us great
latitude in pricing <I>X-22</I>. We expect <I>X-22</I> to be price competitive with any FDA-approved smoking cessation aid, especially
Chantix<SUP>&reg;</SUP>, which will not only encourage governmental and private third-party payers to cover <I>X-22</I>, but will
encourage smokers to attempt to quit with <I>X-22</I> since they will not have to purchase their usual brand of cigarettes over
the 6-week treatment period. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Manufacturing</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Although we have arrangements with federally
licensed cigarette manufactures to produce <I>RED SUN</I>, <I>MAGIC</I>, <I>SPECTRUM</I>, <I>BRAND A</I>, <I>BRAND B</I> and the
clinical trial cigarettes for <I>X-22</I>, Goodrich Tobacco has recently applied for its own federal tobacco product manufacturing
license with the <FONT STYLE="font-family: Times New Roman, Times, Serif">Tobacco Tax and Trade Bureau (TTB) of the U.S. Treasury
Department.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Competition</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In the market for FDA-approved smoking
cessation aids, our principal competitors include Pfizer Inc., GlaxoSmithKline 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Cigarette 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&rsquo; introduction of low-price products or innovative products, higher cigarette taxes, higher absolute
prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
Domestic competitors include Philip Morris USA, Reynolds American Inc., Lorillard Inc., Commonwealth Brands, Inc., Liggett Group
LCC, Vector Tobacco Inc., and Star Scientific Inc. International competitors include Philip Morris International, British American
Tobacco, Japan Tobacco Inc., Imperial Tobacco Group and regional and local tobacco companies; and, in some instances, government-owned
tobacco enterprises such as the China National Tobacco Corporation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Potential Smoking Cessation Aids</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Nicotine Vaccines</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Nicotine vaccines are under
development in clinical trials. However, they have not yet achieved the efficacy of other FDA-approved smoking cessation
therapies. Nicotine itself is not recognized by the body as a foreign compound since the molecule is too small. In order to
stimulate the production of antibodies, nicotine must be attached to a carrier to make the vaccine work. Different vaccine
development programs use different carriers. Six companies, Cytos Biotechnology AG, Celtic Pharmaceuticals Holdings, Nabi
Biopharmaceuticals, L.P. and Independent Pharmaceutica AB, Selecta Biosciences Inc., and Pfizer Inc. have or have had
vaccine candidates in clinical trials.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Cytos exclusively licensed its nicotine vaccine candidate to Novartis in 2007 for 35
million Swiss Francs ($30 million) and up to 565 million Swiss Francs ($492 million) in milestone payments and royalties. In
October 2009, it was announced that Cytos&rsquo; nicotine vaccine candidate failed to show efficacy in a Phase II trial.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">GlaxoSmithKline Biologicals SA exclusively
licensed Nabi&rsquo;s nicotine vaccine candidate, NicVAX<SUP>&reg;</SUP>, in an agreement which was approved by Nabi&rsquo;s shareholders
in March 2010. Together with an upfront non-refundable fee of $40 million paid by GlaxoSmithKline, Nabi is eligible to receive
over $500 million in option fees and milestones, not including potential royalties on global sales. Both of Nabi&rsquo;s Phase
III NicVAX<SUP>&reg;</SUP> clinical trials subsequently failed in 2010 and 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">These vaccine treatments entail six (6)
to seven (7) consecutive monthly injections. Increases in abstinence rates have been reported but only among a minority of trial
subjects with the highest levels of anti-nicotine antibodies. To date, not all subjects develop sufficient antibody levels despite
receiving multiple injections. Even in those who do develop sufficient antibody levels, cravings for cigarettes are not addressed
by this treatment, although the pharmacological reward of nicotine is suppressed. Expectations are that the treatment, if approved,
would need to be repeated every 12 to 18 months to assist in preventing relapse.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Selecta Biosciences initiated Phase I
trials of a nicotine vaccine in 2011, Pfizer initiated Phase I trials of a nicotine vaccine in 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Electronic or E-cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Although the FDA has not evaluated electronic
cigarettes, or e-cigarettes, for quitting smoking, and we are not aware of any published result of a controlled clinical trial
of e-cigarettes as a smoking cessation aid comparing efficacy to a placebo or approved therapeutic, e-cigarettes are included
here since there have been unconfirmed claims that these products facilitate cessation. E-cigarettes have been the subject of
much controversy for this and various other reasons, including the fact that these products are actually not cigarettes at all
but are battery-operated devices filled with nicotine, flavor and other chemicals. They turn nicotine and other chemicals into
a vapor that is inhaled. E-cigarettes have nicotine kinetics and delivery very similar to nicotine inhalers, a prescription NRT
product already approved by the FDA, which is the reason we believe that using e-cigarettes to quit smoking is not likely to be
any more effective than other nicotine replacement products.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In a September 9, 2010 press release, the
FDA issued warning letters to five e-cigarette distributors for various violations of the Federal Food, Drug, and Cosmetic Act,
including unsubstantiated claims and poor manufacturing practices. The FDA said these e-cigarette companies are illegally marketing
their products as tools to help people quit using cigarettes. The FDA believes e-cigarettes &ldquo;[m]eet the definition of a
combination drug-device product under the Federal Food, Drug and Cosmetic Act.&rdquo; In a letter to the Electronic Cigarette
Association of the same date, the FDA said the agency intends to regulate electronic cigarettes and related products in a manner
consistent with its mission of protecting the public health. Although the number of adverse event reports for tobacco products
submitted to the FDA is low, according to the Center for Tobacco Products more than half (46 of 84) of all reports submitted from
2009 through the first quarter of 2012 were for e-cigarettes (Chen, Nicotine Tob Res 15:615-6, 2013).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The FDA confiscated imports of e-cigarettes
and has been in litigation with importers of these products. A federal appeals court ruled on December 7, 2010 that the FDA can
only regulate electronic cigarettes as tobacco products rather than as a drug-delivery device. The FDA appealed this decision;
however, the U.S. Court of Appeals for the District of Columbia Circuit on January 2011 rejected the FDA&rsquo;s request to have
the court review the December 7, 2010 decision. According to the FDA Public Health Focus web page on e-cigarettes, the Center
for Tobacco Products intends to regulate electronic cigarette products that do not make a therapeutic claim as tobacco products.
The Department of Health and Humans Services regulatory calendar for 2013 states that the FDA intends to issue a proposed rule
deeming products other than cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco that meet the statutory
definition of &ldquo;tobacco product&rdquo; to be subject to the Federal Food, Drug, and Cosmetic Act by April 2013. Any e-cigarette
product marketed as a smoking cessation aid would still be regulated as a drug-device product by the Center for Drug Evaluation
and Research, and efficacy and safety must be evaluated in controlled clinical trials.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Government Regulation</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Smoking Cessation Aids</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Government authorities in the U.S. and
foreign countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution,
sampling, marketing and import and export of pharmaceutical products. FDA approval must be obtained, as has been the case for
decades, before a product can be marketed for quitting smoking or reducing withdrawal symptoms. In addition, as with all FDA-approved
prescription drugs, the FDA must approve the brand name of our <I>X-22</I> smoking cessation aid. The FDA approval process for
smoking cessation aids is similar to that required by the FDA for new drug approvals, although the cost to complete clinical trials
for a smoking cessation aid such as <I>X-22</I> are generally far less than clinical trials for drugs. The primary endpoint of
the clinical trial for smoking cessation aids is smoking abstinence, which is generally confirmed by inexpensive, noninvasive
biomarker tests. Since potential quitters are already smokers, <I>X-22</I> will not expose participants in the clinical trials
to any new compounds, unlike a new chemical entity, such as Chantix<SUP>&reg;</SUP>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The process of obtaining governmental approvals
and complying with ongoing regulatory requirements requires the expenditure of substantial time and financial resources. In addition,
statutes, rules, regulations and policies may change and new legislation or regulations may be issued that could delay such approvals.
If we fail to comply with applicable regulatory requirements at any time during the product development process, approval process,
or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA&rsquo;s
refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures,
total or partial suspension of our operations, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement
action could have a material adverse effect on us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The U.S. regulatory scheme for the development
and commercialization of new drugs can be divided into three distinct phases: an investigational phase including both preclinical
and clinical investigations leading up to the submission of a New Drug Application (&ldquo;NDA&rdquo;); a period of FDA review
culminating in the approval or refusal to approve the NDA; and the post-marketing period.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Preclinical Phase</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The preclinical phase involves the characterization,
product formulation and animal testing necessary to prepare an IND Application for submission to the FDA. The IND must be reviewed
and authorized by the FDA before the drug can be tested in humans. Once a new drug agent has been identified and selected for
further development, preclinical testing is conducted to confirm pharmacological activity, to generate safety data, to evaluate
prototype dosage forms for appropriate release and activity characteristics, and to confirm the integrity and quality of the material
to be used in clinical trials. A bulk supply of the active ingredient to support the necessary dosing in initial clinical trials
must be secured. Data from the preclinical investigations and detailed information on proposed clinical investigations are compiled
in an IND submission and submitted to the FDA before human clinical trials may begin. If the FDA does not formally communicate
an objection to the IND within 30 days, the specific clinical trials outlined in the IND may go forward.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Clinical Phase</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The clinical phase of drug development
follows an IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy, and dosage
of the substance in humans, as well as the ability to produce the substance in accordance with the FDA&rsquo;s cGMP requirements.
Data from these activities are compiled in an NDA requesting approval to market the drug for a given use, or indication. Clinical
trials must be conducted under the supervision of qualified investigators in accordance with good clinical practice, and according
to IND-approved protocols detailing, among other things, the study objectives and the parameters, or endpoints, to be used in
assessing safety and efficacy. Each trial must be reviewed, approved and conducted under the auspices of an independent Institutional
Review Board (&ldquo;IRB&rdquo;), and each trial, with limited exceptions, must include all subjects&rsquo; informed consent.
The clinical evaluation phase typically involves the following sequential process:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Phase I clinical trials are conducted in
a limited number of healthy subjects to determine the drug&rsquo;s safety, tolerability, and biological performance. The total
number of subjects in Phase I clinical trials varies, but is generally in the range of 20 to 80 people (or less in some cases,
such as drugs with significant human experience).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Phase II clinical trials involve administering
the drug to subjects suffering from the target disease or condition to evaluate the drug&rsquo;s potential efficacy and appropriate
dose. The number of subjects in Phase II trials is typically several hundred subjects or less.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Phase III clinical trials are performed
after preliminary evidence suggesting effectiveness has been obtained and safety, tolerability, and appropriate dosing have been
established. Phase III clinical trials are intended to gather additional data needed to evaluate the overall benefit-risk relationship
of the drug and to provide adequate instructions for its use. Phase III trials usually include several hundred to several thousand
subjects.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Throughout the clinical testing phase,
samples of the product made in different batches are tested for stability to establish shelf life constraints. In addition, increasingly
large-scale production protocols and written standard operating procedures must be developed for each aspect of commercial manufacturing
and testing.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The clinical trial phase is both costly
and time-consuming, and may not be completed successfully within any specified time period, if at all. The FDA closely monitors
the progress of each of the three phases of clinical trials that are conducted under an IND and may, at its discretion, reevaluate,
alter, suspend, or terminate the testing at any time for various reasons, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. The FDA can also request additional clinical testing as a condition to product approval.
Additionally, new government requirements may be established that could delay or prevent regulatory approval of our products under
development. Furthermore, institutional review boards, which are independent entities constituted to protect human subjects in
the institutions in which clinical trials are being conducted, have the authority to suspend clinical trials in their respective
institutions at any time for a variety of reasons, including safety issues.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>New Drug Application and Review</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">After the completion of Phase III clinical
trials, the sponsor of the new drug submits an NDA to the FDA requesting approval to market the product for one or more indications.
An NDA is a comprehensive, multi-volume application that includes, among other things, the results of all preclinical and clinical
studies, information about the drug&rsquo;s composition, and the sponsor&rsquo;s plans for producing, packaging, and labeling
the drug. In most cases, the NDA must be accompanied by a substantial user fee. The FDA has 60 days after submission to review
the completeness and organization of the application, and may refuse to accept it for continued review, or refuse to file, if
the application is found deficient. After filing, the FDA reviews an NDA to determine, among other things, whether a product is
safe and effective for its intended use. Drugs that successfully complete NDA review may be marketed in the United States, subject
to all conditions imposed by the FDA.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Prior to granting approval, the FDA generally
conducts an inspection of the facilities, including outsourced facilities that will be involved in the manufacture, production,
packaging, testing and control of the drug for cGMP compliance. The FDA will not approve the application unless cGMP compliance
is satisfactory. If the FDA determines that the marketing application, manufacturing process, or manufacturing facilities are
not acceptable, it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding
the submission of any requested additional information, the FDA ultimately may decide that the marketing application does not
satisfy the regulatory criteria for approval and refuse to approve the application by issuing a &ldquo;not approvable&rdquo; letter.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The length of the FDA&rsquo;s review can
range from a few months to several years or more. Once an NDA is in effect, significant changes such as the addition of one or
more new indications for use generally require prior approval of a supplemental NDA including additional clinical trials or other
data required to demonstrate that the product as modified remains safe and effective.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Fast Track Development</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Food and Drug Administration Modernization
Act of 1997 (the &ldquo;Modernization Act&rdquo;), establishes a statutory program for relatively streamlined approval of &ldquo;Fast
Track&rdquo; products, which are defined under the Modernization Act as new drugs or biologics intended for the treatment of a
serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Fast
Track status requires an official designation by the FDA. The Tobacco Control Act provides that products for smoking cessation,
such as <I>X-22</I>, be considered for &ldquo;Fast Track&rdquo; designation by the FDA.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A product that receives Fast Track designation
is eligible for (i) more frequent meetings with the FDA to discuss the drug&rsquo;s development plan and ensure collection of
appropriate data needed to support drug approval, and (ii) more frequent written correspondence from the FDA about such things
as the design of the proposed clinical trials. A Fast Track product is also eligible for Rolling Review, in which sections of
the NDA can be submitted for review by the FDA before the entire application is completed. A Fast Track product would ordinarily
meet FDA criteria for Priority Review. The FDA goal for reviewing a drug with Priority Review status is six months from the filing
of the NDA.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We submitted a request for Fast Track designation
for <I>X-22</I>, and on August 18, 2011, the FDA informed us that it would not grant the designation of <I>X-22</I> as a Fast
Track product at that time because we did not demonstrate that X-22 shows potential to address an unmet medical need. Except for
our Phase II-B clinical trial, all smoking cessation studies with very low nicotine (&ldquo;VLN&rdquo;) cigarettes containing
our proprietary tobacco were independent studies and were not sponsored by 22nd Century Limited, LLC under its own Investigational
New Drug (&ldquo;IND&rdquo;). We plan to reapply for Fast Track designation, but not until results of a clinical trial conducted
by us demonstrates an advantage (over currently approved smoking cessation products) in one of the following areas: efficacy,
safety or improvement in some other factor such as compliance (a patient using a product as directed) or convenience. There is
no guarantee that the FDA will grant Fast Track designation to <I>X-22</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Post-Approval Phase</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Once the FDA has approved a new drug for
marketing, the product becomes available for physicians to prescribe in the U.S. After approval, we must comply with post-approval
requirements, including ongoing compliance with cGMP regulations, delivering periodic reports to the FDA, submitting descriptions
of any adverse reactions reported, and complying with drug sampling and distribution requirements. We are required to maintain
and provide updated safety and efficacy information to the FDA. We must also comply with requirements concerning advertising,
product promotions, and labeling.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Company Sponsored X-22 Clinical Trials</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have met with the FDA regarding the
remaining <I>X-22</I> clinical trials and, based on the FDA&rsquo;s guidance, we developed a plan to conduct a small Phase II-B
trial and two larger and concurrent Phase III trials with the same protocols that entail measuring the quitting efficacy of the
<I>X-22</I> cigarette against a typical cigarette with conventional nicotine content that is visually indistinguishable from <I>X-22
</I>(the &ldquo;active control&rdquo;). Half of the participants smoke <I>X-22</I> for six (6) weeks and half of the participants
will smoke the active control for six (6) weeks, with all participants instructed to quit on the last day of the six (6)-week
treatment period.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Smokers who do not smoke over the four
(4)-week period immediately following the conclusion of the six (6)-week treatment period (weeks 7 through 10) are considered
abstinent. The abstinence (quit) rates of the <I>X-22</I> group and the active control group are compared for statistical significance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our Investigational New Drug Application
for <I>X-22</I>, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our <I>X-22</I> Phase II-B
clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference in quitting
between <I>X-22</I> and the active control, a cigarette containing conventional nicotine levels. In evaluating the results of
this trial, we believe we may have gone too far in reducing the nicotine content of <I>X-22</I>, which was less than half the
nicotine content of VLN cigarettes used in various independent smoking-cessation clinical trials that have demonstrated that use
of VLN cigarettes increases smoking quit rates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We continue to believe that VLN cigarettes
are effective as a smoking cessation aid. However, we have suspended sponsoring further <I>X-22</I> clinical trials pending the
results of two independent smoking-cessation trials (ClinicalTrials.gov Identifiers NCT01050569 and NCT01250301) utilizing a different
version of our VLN cigarette with a nicotine content similar to those used in previous successful smoking-cessation trials and
higher than that used in our own sponsored Phase II-B trial. Both of these two independent clinical trials were completed in 2012.
The results of these trials will be compared to our Phase II-B trial to determine which variables optimize cessation. After evaluating
the results of those two independent clinical trials, we will request a meeting with the U.S. Food and Drug Administration (FDA)
and may then resume our own sponsored <I>X-22</I> clinical trials.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Following FDA approval,
we intend to register <I>X-22</I> as a Medicinal Product (pharmacological) for smoking cessation with the European Medicines Agency
(&ldquo;EMA&rdquo;) and other international FDA-equivalent agencies in targeted countries. Regulatory approval for <I>X-22</I>
as a smoking cessation aid is not required in some international markets since, unlike the FDA, some foreign drug regulatory agencies
do not require approval to market a product as a smoking cessation aid if the product is allowed to be sold for other purposes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Modified Risk Cigarettes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Tobacco Control Act, which became law
in June 2009, prohibits the FDA from banning cigarettes outright or mandating that nicotine levels be reduced to zero. However,
among other things, it allows the FDA to require the reduction of nicotine or any other compound in cigarettes. In 2009, the Tobacco
Control Act banned all sales in the United States of cigarettes with flavored tobacco (other than menthol). As of June 2010, all
cigarette companies were required to cease using the terms &ldquo;low tar,&rdquo; &ldquo;light&rdquo; and &ldquo;ultra light&rdquo;
in describing cigarettes sold in the United States. We believe this new regulatory environment represents a paradigm shift for
the tobacco industry and will create opportunities for us in marketing <I>BRAND A</I> and <I>BRAND B</I> and in licensing our
proprietary technology and/or tobaccos to larger competitors.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">For the first
time in history, </FONT>a U.S. regulatory agency will scientifically evaluate cigarettes that may pose lower health risks as compared
to conventional cigarettes. The Tobacco Control Act establishes procedures for the FDA to regulate the labeling and marketing
of modified risk tobacco products, which includes cigarettes that (i) reduce exposure to tobacco smoke toxins and/or (ii) pose
lower health risks, as compared to conventional cigarettes (&ldquo;Modified Risk Cigarettes&rdquo;). The Tobacco Control Act requires
the FDA to issue specific regulations and guidance regarding applications that must be submitted to the FDA for the authorization
to label and market Modified Risk Cigarettes. <FONT STYLE="color: black">We believe that <I>BRAND A</I> and <I>BRAND B</I> will
qualify as Modified Risk Cigarettes. In addition, the Tobacco Control Act allows the FDA to mandate the use of reduced risk technologies
in conventional tobacco products and cigarettes (e.g., Marlboro<SUP>&reg;</SUP>) which could create opportunities for us to license
our proprietary technology and/or our tobaccos </FONT>to larger competitors<FONT STYLE="color: black">.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In addition to providing our <I>SPECTRUM
</I>cigarettes to NIDA for researchers, we have been directly supplying our cigarettes to researchers so additional studies can
be conducted to obtain additional information on our products. We expect this information will assist us, along with our own funded
studies, in obtaining the necessary FDA authorizations to market <I>BRAND A</I> and <I>BRAND B</I> as Modified Risk Cigarettes
and to obtain FDA approval for <I>X-22</I> as a prescription smoking cessation aid.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Biomass Products</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Biomass products are products such as ethanol
made from the organic material, usually plants densely grown over a given area. We have funded extensive biomass field trials conducted
by North Carolina State University (&ldquo;NCSU&rdquo;), and work on feedstock digestibility and bioconversion at the National
Renewable Energy Lab. Bioconversion is the conversion of organic matter into a source of energy, such as ethanol in our own research,
through the action of microorganisms. Tobacco has a number of advantages as a starting point for development of novel bioproduct
crop systems. Because tobacco is a widely cultivated crop, grown in over 100 countries throughout the world, tobacco agronomy is
highly understood. For decades tobacco has been used as a model system for plant biology, and recently the tobacco genome has been
mapped. Tobacco plants rapidly sprout back after each harvest and produce large amounts of leaf and total biomass. Tobacco grown
for cigarettes yields about 3,000 pounds of cured leaf per acre (~20% moisture) per year from 7,500 tobacco plants. In our field
trials in North Carolina, nicotine-free tobacco grown for biomass yields about 100,000 pounds of fresh weight per acre (which equals
10,000 pounds of dry weight) per year with multiple machine harvests from about 80,000 tobacco plants. The results of our biomass
studies have been summarized in a comprehensive feasibility study relating to our nicotine-free tobacco biomass crop (<I>Verfola</I>)
to produce a variety of bioproducts. First, protein and other plant fractions are extracted, and then biofuels and other products
are produced from the remaining cellulosic residue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In 2008, we put our biomass development
projects on hold so that our management could focus its attention and resources on our modified risk cigarette business and our
<I>X-22 </I>smoking cessation business. We do not plan to move forward with potential biomass business activities until some period
of time after FDA approval of <I>X-22 </I>or FDA authorization to market <I>Brand A </I>or <I>Brand B </I>as a Modified Risk Cigarette.
We currently are not spending any</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">capital for such potential biomass business activities nor do
we have any current plans to raise any capital for such potential biomass business activities.</P>





<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Research and Development</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Most research and development (R&amp;D)
since our inception have been outsourced to highly qualified groups in their respective fields. Since 1998, 22nd Century has had
multiple R&amp;D agreements with North Carolina State University (&ldquo;NCSU&rdquo;) resulting in exclusive worldwide licenses
to various patented technologies. We have utilized the model of many public-sector research organizations which entails obtaining
an exclusive option or license agreement to any invention arising out of the funded research. In all cases, we fund and exclusively
control all patent filings as the exclusive licensee. This model of contracting with public-sector researchers has enabled 22nd
Century to control R&amp;D costs while achieving our desired results, including obtaining exclusive intellectual property rights
relating to all of our outsourced R&amp;D.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Other R&amp;D partners with the same arrangement
have included the National Research Council of Canada, Plant Biotechnology Institute in Saskatoon, Canada (&ldquo;NRC&rdquo;),
and the Nara Institute of Science and Technology in Nara, Japan (&ldquo;NAIST&rdquo;). Our R&amp;D agreements with NCSU, NRC and
NAIST have expired in 2009 and the majority this R&amp;D has involved the biosynthesis of nicotine in plants. We did not have
any outsourced R&amp;D projects during 2010. NAIST assigned all of their worldwide patents and patent applications to us in 2010
that were previously licensed to 22nd Century on an exclusive basis. These patents and patent applications were a result of our
R&amp;D at NAIST. In November 2011, we entered into an R&amp;D agreement with the University of Virginia (UVA) relating to nicotine
biosynthesis in tobacco plants with a total budget of $500,000 for the period from November 2011 through December 2013. In 2012,
we incurred approximately $100,000 of expenses for the R&amp;D agreement at UVA. During the nine months ending September 30, 2012
and the years ended December 31, 2011 and 2010, we incurred research and development expenses of approximately $484,000, $2,098,000
and $364,000, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Other than the R&amp;D agreement at UVA,
we have no other substantial third-party R&amp;D commitments requiring funding. However, we may carry out a minimal amount of
R&amp;D in 2013, not to exceed $100,000, for additional field trials of plants from our seed lots that resulted from our R&amp;D
at NCSU, NRC, NAIST and UVA. Upon the required funding or appropriate joint venture partner, we expect to carry out additional
clinical trials for X-22 and exposure studies for our modified risk cigarette candidates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Employees</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We currently employ six (6) people, none
of whom are represented by a union, and we consider our employee relations to be good.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Description of Property</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our principal administrative offices are
located in Clarence, New York. We currently lease 3,800 square feet of office space. The lease commenced September 1, 2011 and
expires August 31, 2014. Scheduled rent remaining as of December 31, 2012 is $37,833 for 2013 and $28,000 for 2014.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Legal Proceedings</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">From time to time we may be involved in
claims arising in the ordinary course of business. To our knowledge, no 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Management&rsquo;s
Discussion and Analysis of<BR>
Financial Condition and Results of Operations</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>The following discussion highlights
the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital
resources for the periods described. This discussion contains forward-looking statements. Please see &ldquo;Cautionary Note Regarding
Forward-Looking Statements&rdquo; and &ldquo;Risk Factors&rdquo; earlier in this prospectus. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those
discussed below and elsewhere herein,</I> <I>including those discussed in the section entitled &quot;Risk Factors.&quot;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>On January 25, 2011, 22nd Century Limited,
LLC completed a reverse merger transaction (the &ldquo;Merger&rdquo;) with 22nd Century Group, Inc. 22nd Century Limited, LLC
is a wholly owned subsidiary of 22nd Century Group, Inc. which continues to operate the business of 22nd Century Limited, LLC.
All references to shareholders or common shares include the historical members and membership Units of 22nd Century Limited, LLC
because, in the Merger, such Units were exchanged for common shares on a one-for-one basis and from an accounting standpoint,
they are equivalent. The Merger is being accounted for as a reverse acquisition and a recapitalization; 22nd Century Limited,
LLC is the acquirer for accounting purposes. Consequently, the assets and liabilities and the historical operations that are reflected
in the financial statements prior to the Merger are those of 22nd Century Limited, LLC and are recorded at the historical cost
basis of 22nd Century Limited, LLC, and the consolidated financial statements since completion of the Merger include the assets
and liabilities of 22nd Century Limited, LLC, historical operations of 22nd Century Limited, LLC and operations of 22nd Century
Group, Inc. from the closing date of the Merger. <FONT STYLE="color: black">For purposes of this Management&rsquo;s Discussion
and Analysis of Financial Condition and Results of Operations, references to the &ldquo;Company,&rdquo; &ldquo;we,&rdquo; us&rdquo;
or &ldquo;our&rdquo; </FONT>refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the
periods described herein.<FONT STYLE="color: black"> </FONT></I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Overview</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">22nd Century
Limited, LLC, our wholly-owned subsidiary, is a plant biotechnology company and we believe the global leader in technology that
allows for the level of nicotine and other nicotinic alkaloids </FONT>(e.g., nornicotine, anatabine and anabasine)<FONT STYLE="color: black">
in tobacco plants to be decreased or increased through genetic engineering and plant breeding. We own or exclusively control 107
issued patents in 78 countries plus </FONT>an additional 38 pending patent applications<FONT STYLE="color: black">. Hercules Pharmaceuticals,
LLC and Goodrich Tobacco Company, LLC are subsidiaries of 22nd Century Limited, LLC and are business units for our (i) smoking
cessation product and (ii) premium cigarettes and potential modified risk tobacco products, respectively. We believe that our
proprietary technology will enable us to capture a significant share of the global market for approved smoking cessation aids
and the emerging market for modified risk tobacco products.</FONT> The Company is primarily involved in the following activities:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 48px">&nbsp;</TD>
    <TD STYLE="width: 24px; font-family: Symbol"><FONT STYLE="font: 10pt Symbol">&middot;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">The development of its botanical smoking cessation aid, <I>X-22</I>;</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 48px">&nbsp;</TD>
    <TD STYLE="width: 24px; font-family: Symbol"><FONT STYLE="font: 10pt Symbol">&middot;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">The development of its modified risk tobacco products;</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 48px">&nbsp;</TD>
    <TD STYLE="width: 24px; font-family: Symbol"><FONT STYLE="font: 10pt Symbol">&middot;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">The pursuit of necessary regulatory approvals and clearances at the U.S. Food and Drug Administration
    (the &ldquo;FDA&rdquo;) to market <I>X-22 </I>as a prescription smoking cessation aid and <I>BRAND A and BRAND B </I>as modified
    risk tobacco products in the U.S.;</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 48px">&nbsp;</TD>
    <TD STYLE="width: 24px; font-family: Symbol"><FONT STYLE="font: 10pt Symbol">&middot;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">The manufacture, marketing and distribution of <I>RED SUN </I>and<I> MAGIC</I> proprietary
    cigarettes<I> </I>in traditional tobacco market channels in the U.S. and for export through Goodrich Tobacco;</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 48px">&nbsp;</TD>
    <TD STYLE="width: 24px; font-family: Symbol"><FONT STYLE="font: 10pt Symbol">&middot;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">The international licensing of 22nd Century Limited, LLC&rsquo;s trademarks, brands, proprietary
    tobaccos, and technology; and</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 48px">&nbsp;</TD>
    <TD STYLE="width: 24px; font-family: Symbol"><FONT STYLE="font: 10pt Symbol">&middot;</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">The production of <I>SPECTRUM</I> research cigarettes for the National Institute on Drug
    Abuse (&ldquo;NIDA&rdquo;).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have operated at a loss since 2006 when
we increased our research and development expenditures. We realized revenue from our research cigarette program of $15,683 in
the first nine months of 2012, $788,601 in the year ended December 31, 2011 and $49,784 in 2010. We are in the process of transitioning
from solely developing proprietary technology and tobacco to developing and commercializing our own products.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our prospects depend on our ability to
generate and sustain revenues from sales and/or licensing of our <I>RED SUN</I> and <I>MAGIC</I> cigarettes, our <I>X-22</I> smoking
cessation aid, our potential modified risk tobacco products such as <I>BRAND A</I> and <I>BRAND B</I> and our proprietary tobacco
and technology. Our ability to generate meaningful revenue in the United States from <I>X-22</I> depends on FDA approval and our
ability to generate meaningful revenue from our potential modified risk tobacco products in the United States depends on obtaining
FDA authorization to market these products as modified risk. If these products are approved and authorized by the FDA, we must
still meet the challenges of successful marketing and distribution and consumer acceptance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>




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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Company
expects to file applications in 2013 with the FDA for two types of modified risk cigarettes in accordance with the </FONT>FDA&rsquo;s
issued <I>Modified Risk Tobacco Product Applications Draft Guidance </I>released on March 30, 2012<FONT STYLE="color: black">.
This provides the framework for applicants to submit data for modified risk product candidates. Goodrich Tobacco Company, 22nd
Century&rsquo;s subsidiary, has developed two types of potential modified risk tobacco cigarettes. The first proprietary cigarette,
referred to as <I>BRAND A</I>, is a very low nicotine (VLN) cigarette containing approximately 95 percent less nicotine than the
leading U.S. cigarette brands. 22nd Century&rsquo;s recent Phase II-B clinical trial and studies by independent researchers have
demonstrated that smoke exposure (and cigarettes per day) is significantly reduced with VLN cigarettes. The second proprietary
cigarette, referred to as <I>BRAND B</I>, is a low-tar cigarette with a relatively high nicotine content, effectively the world&rsquo;s
lowest tar-to-nicotine ratio cigarette. Unlike low-tar/low-nicotine brands currently on the market (previously labeled &ldquo;light&rdquo;
or &ldquo;ultra- light&rdquo; before these descriptors were banned in the U.S. by the Tobacco Control Act in 2010), the nicotine
yield of <I>BRAND B </I>is not reduced. Studies have demonstrated that compensatory smoking (e.g., more and/or larger puffs per
cigarette) of low-tar research cigarettes, similar to <I>BRAND B</I>, is greatly curtailed.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our Investigational New Drug Application
for <I>X-22</I>, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our <I>X-22</I> Phase II-B
clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference in quitting
between <I>X-22</I> and the active control, a cigarette containing conventional nicotine levels. In evaluating the results of
this trial, we believe we may have gone too far in reducing the nicotine content of <I>X-22</I>, which was less than half the
nicotine content of VLN cigarettes used in various independent clinical trials that were successful. We continue to believe that
VLN cigarettes are effective as a smoking cessation aid. However, we have suspended sponsoring further <I>X-22</I> clinical trials
pending the results of two independent smoking-cessation Phase II trials utilizing a different version of our VLN cigarette with
a nicotine content similar to those used in previous successful smoking-cessation trials, and higher than that used in our own
sponsored Phase II-B trial. Both of these trials have concluded and will be compared to our Phase II-B trial to determine which
variables optimize cessation. At that time we may resume our own sponsored <I>X-22</I> clinical trials.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The National Institute on Drug Abuse (&ldquo;NIDA&rdquo;),
a component of the National Institutes of Health (&ldquo;NIH&rdquo;), provides the scientific community with controlled and uncontrolled
research chemicals and drug compounds in its Drug Supply Program. In 2009, NIDA included an option to develop and produce research
cigarettes with various levels of nicotine (from very low to high), or Research Cigarette Option, in its request for proposals
for a five-year contract for Preparation and Distribution of Research and Drug Products. We have agreed, as a subcontractor to
RTI International (&ldquo;RTI&rdquo;) in RTI&rsquo;s contract with NIDA for the Research Cigarette Option, to supply modified
nicotine cigarettes to NIDA. In August 2010, we met with officials from NIDA, FDA, RTI, the National Cancer Institute and the
Centers for Disease Control and Prevention to finalize certain aspects of the design of these research cigarettes. These government
research cigarettes are distributed under the Company&rsquo;s mark <I>SPECTRUM</I>. The Company has delivered approximately 9
million <I>SPECTRUM</I> research cigarettes during the year ended December 31, 2011 and has delivered an additional 2.7 million
<I>SPECTRUM</I> research cigarettes in July 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In March 2011, our subsidiary, Goodrich
Tobacco introduced two of our products, <I>RED SUN</I> and <I>MAGIC </I>cigarettes, into the U.S. market. Goodrich Tobacco intends
to focus marketing efforts on tobacconists, smoke shops and tobacco outlets. Goodrich Tobacco has recently applied for its own
federal tobacco product manufacturing license with the Tobacco Tax and Trade Bureau (TTB) of the U.S. Treasury Department. We
are also in discussions with the National Association of Attorneys General to become a subsequent participating manufacturer (SPM)
to the &ldquo;Master Settlement Agreement&rdquo; or MSA, a settlement between the states and the tobacco industry. Although becoming
an SPM is not necessary for us selling our brands, it will facilitate distribution of our brands in the U.S. Upon being licensed
by TTB we expect to become a subsequent participating manufacturer to the MSA and start our own production of<I> RED SUN</I> and
<I>MAGIC </I>and <I>SPECTRUM </I>as early as the second quarter of 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Nine Months Ended September 30, 2012 Compared to Nine Months
Ended September 30, 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Revenue</I>.&nbsp;&nbsp;We realized
revenue of $15,683 in the nine months ended September 30, 2012 as compared to revenue of $801,636 in the nine months ended September
30, 2011. The 2011 period reflected the initial phases and stocking order for research cigarette under our subcontract agreement
with RTI and the 2012 period reflected a modest subsequent order.</P>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Other income.</I> In the nine months
ended September 30, 2011, we recognized other income of $223,540 from a therapeutic grant award we received in fourth quarter
of 2010. The revenue from this grant was completely recognized in 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Costs of goods sold</I>.&nbsp;&nbsp;In
the nine months ended September 30, 2012, costs of goods sold was $60,852 which exceeded revenue by 288% since we provided RTI
with <I>SPECTRUM</I> research cigarettes without charge. In the nine months ended September 30, 2011, costs of goods sold was
$224,146 or 28% of revenue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Research and development expense</I>.&nbsp;&nbsp;Research
and development (R&amp;D) expense was $484,316 in the nine months ended September 30, 2012, a decrease of $1,024,734, or 68%,
from $1,509,050 in the nine months ended September 30, 2011. This decrease was a result of suspending, early in the first quarter
of 2012, FDA activities related to <I>X-22. </I>In the first nine months of 2011 we executed the planning and initial stages of
our Phase II-B clinical trial and filed our IND with the FDA for <I>X-22</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>General and administrative expense</I>.&nbsp;&nbsp;
General and administrative expense was $1,732,162 in the nine months ended September 30, 2012, an increase of $350,682, or 25%,
from $1,381,480 in nine months ended September 30, 2011. The increase was mainly due to the $354,908 increase in equity based
compensation costs which were $631,366 in the first nine months of 2012 as compared to $276,458 in the first nine months of 2011.
This increase was partially offset by a reduction in professional fees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Sales and marketing
costs</I>.&nbsp;&nbsp;Sales and marketing costs were $46,045 in the nine months ended September 30, 2012, a decrease of
$221,765, or 83%, from $267,810 in nine months ended September 30, 2011. The costs in 2011 related to the domestic market
introduction of <I>RED SUN</I> and <I>MAGIC </I>and included expenses related to product testing, product and packaging
design, product branding, trade samples, trade shows and advertising. Early in 2012, we curtailed our domestic sales and
marketing activity of these brands in order to focus on reaching an agreement to have these products produced by a
participating manufacturer of the &ldquo;Master Settlement Agreement,&rdquo; a settlement between the states and the tobacco
industry. As a result, sales and marketing costs in 2012 are reduced.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Amortization and depreciation expense.&nbsp;
</I>Amortization and depreciation expense relates almost entirely to capitalized patent and trademark costs.&nbsp;&nbsp;Amortization
and depreciation expense increased 10.5% in the nine months ended September 30, 2012 to $146,374, up from $132,432 in the nine
months ended September 30, 2011. This increase of $13,942 is mainly due to additional investment in patents and trademarks.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Warrant liability change &ndash; net</I>.
In connection with the May 2012 private placement, we issued warrants which were accounted for as derivatives and upon issuance
a liability at the estimated fair value was recorded. At the date of issuance of these warrants the value was estimated to be
$1,841,000, which exceeded the total consideration received in the offering by $814,500 resulting in an immediate charge to expense
for this amount. This charge offset the gain of $1,981,916 resulting from the decrease in the estimated fair value of these warrants
and other previously issued warrants during the nine month period ending September 30, 2012 so that the net gain for this period
was $1,167,416. The market adjustment recorded in the nine month period ended September 30, 2011 was $337,500. The warrant liability
is sensitive to a number of factors including the price of our common stock on the valuation date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Interest expense and amortization of
debt discount and expense</I>.&nbsp;&nbsp;Interest expense and amortization of debt discount and debt issuance costs increased
in the nine months ended September 30, 2012 to $1,144,721 from $53,116 in the nine months ended September 30, 2011. This increase
of $1,091,605 or 2,055% was a result of the amortization of debt discount and debt issuance costs related to convertible notes
issued on December 14, 2011 and August 9, 2012, which also includes charges to write off unamortized debt discounts and the value
of warrants in excess of the note payable converted, totaling approximately $97,000 related to the partial conversions of the
December 14, 2011 convertible notes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Net loss</I>.&nbsp;&nbsp;We had a net
loss of $2,431,371 in the nine months ended September 30, 2012 as compared to a net loss of $2,205,358 in the nine months ended
September 30, 2011. This increase of $226,013 was a result of the substantial reduction in revenue and other income and the $1,091,605
increase in amortization of debt discount and expense, partially offset by the $1,167,416 warrant liability gain and the net decrease
in operating expenses mainly due to the sharp reduction in research and development expense.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>




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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>&nbsp;</I>&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Year Ended December 31, 2011 Compared to Year Ended December
31, 2010 </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Revenue.</I>&nbsp;&nbsp;In the year
ended December 31, 2011, we realized revenue of $788,601, mainly from our research cigarette program, as compared to revenue of
$49,784 in year ended December 31, 2010. As of December 31, 2011 we had no outstanding backlog of orders for our products and
through the first quarter of 2012 we did not receive an order for any of our products.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Other income.</I> In the year ended
December 31, 2011, we recognized other income of $223,540 from a therapeutic grant award we received in fourth quarter of 2010.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Costs of goods sold</I>.&nbsp;&nbsp;In
the year ended December 31, 2011, costs of goods sold were $418,171 or 53% of revenue. Costs of goods sold in the year ended December
31, 2011 include inventories written off in the fourth quarter of 2011 of $178,670 because of changes in the Company&rsquo;s plans
that rendered these costs not recoverable. In the year ended December 31, 2010, costs of goods sold were $27,964 or 56% of revenue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Research and development expense</I>.&nbsp;&nbsp;Research
and development expense was $2,097,980 in the year ended December 31, 2011, an increase of $1,734,199, or 477%, from $363,781
in the year ended December 31, 2010. Approximately $1.6 million was for expenditures related to the filing of our Investigational
New Drug Application and our Phase II-B clinical trials for <I>X-22</I>. We initiated this effort late in the fourth quarter of
2010 so there were minimal costs related to Phase II-B activities in 2010. The balance of the increase in research and development
expense in 2011 as compared to 2010 consisted of patent expenses, including maintenance fees related to patent renewals, employee
compensation costs and travel expense.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>General and administrative expense</I>.&nbsp;&nbsp;
General and administrative expense was $1,785,543 in the year ended December 31, 2011, an increase of $1,194,717, or 202%, from
$590,826 in the year ended December 31, 2010. Approximately $570,000 of the increase was for compensation costs due to increased
administrative headcount, awards under our 2010 Equity Incentive Plan and outside directors&rsquo; fees. The balance of the year-over-year
increase was in various other expense categories such as investor relations consulting services, press release fees and stock
transfer fees (approximately $198,000 increase) legal and SEC fees (approximately $286,000 increase), accounting and audit fees
(approximately $52,000 increase), directors&rsquo; and officers&rsquo; liability insurance (approximately $38,000 increase) and
travel (approximately $35,000 increase).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Sales and marketing costs</I>.&nbsp;&nbsp;Sales
and marketing costs were $286,033 in the year ended December 31, 2011; we had no costs categorized as such in the year ended December
31, 2010. The costs in 2011 related to product testing, product and packaging, and design, product branding, trade samples, trade
shows and advertising.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Amortization and depreciation expense.&nbsp;
</I>Amortization and depreciation expense relates almost entirely to capitalized patent and trademark costs.&nbsp;&nbsp;Amortization
and depreciation expense increased 9.4% in the year ended December 31, 2011 to $179,953, up from $164,456 in the year ended December
31, 2010. This increase of $15,497 is mainly due to our additional investment in patents and trademarks in 2010 of $147,912 and
in 2011 of $98,191.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Gain warrant liability &ndash; derivative</I>.
In connection with the January 25, 2011 private placement we issued warrants which were accounted for as derivatives; a liability
at the estimated fair value was recorded and contributed capital was reduced. The gain of $2,511,750 included in the year ended
December 31, 2011 represents the decrease in the estimated fair value of the warrants since January 25, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Interest expense and debt expense</I>.&nbsp;&nbsp;Interest
expense and debt expense, which include interest amortization of debt discount and debt issuance costs, decreased in the year
ended December 31, 2011 to $103,998, from $326,404 in the year ended December 31, 2010. This decrease of $222,406 or 68% was mainly
a result of reduced borrowings during 2011 compared 2010. In January 2011, a substantial portion of our outstanding interest bearing
debt was repaid or converted into shares of our common stock which was the cause of the reduced interest and debt expense. This
was partially offset by interest on long term obligations in the amount of $587,000 which were entered into at the end of the
first quarter, $215,000 in short term obligations borrowed early in the third and fourth quarters and the convertible notes issued
on December 14, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Net loss</I>.&nbsp;&nbsp;We had a net
loss in the year ended December 31, 2011 of $1,347,787 as compared to a net loss of $1,423,647 in the year ended December 31,
2010. The decrease in the net loss of $75,860, or 5.3%, was mainly a result of increased revenue of approximately $1 million and
the unrealized gain related to warrants and reduced interest and debt expense (totaling $2.7 million) nearly offset by increases
in operating expenses (totaling $3.6 million) including clinical trial expenses, sales and marketing costs and increased compensation
costs and other administrative expenses in the year ended December 31, 2011, as compared to the year ended December 31, 2010.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Liquidity and Capital Resources</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Summary of Balances and Recent Sources and Uses </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As of September 30, 2012, we had negative
working capital of approximately $3.1 million compared to negative working capital of approximately $1.9 million at December 31,
2011. The $1.2 million increase in our negative working capital position was mainly a result of the expenditure of nearly all
our cash during the period including the proceeds of the May 2012 private placement and the August 9, 2012 convertible notes to
fund operations and acquire inventory.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Cash demands on operations </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Since January 1, 2010 we operated at a
loss and operating activities consumed more than $5.7 million in cash. Cash on hand at September 30, 2012 of $5,941 was insufficient
to fund operations and meet our obligations as they come due. As of January 22, 2013, we had cash on hand of approximately $660,000,
which should be sufficient to fund operations for approximately 5 months.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We will need to raise funds through the
issuance of debt or equity securities or through licensing our technology during the next twelve months in order to continue operations.
Failure to raise sufficient funds would significantly increase the risk that we would be unable to continue operations. Financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact
our plans to commercialize our products, our ability to continue as a going concern and our financial condition and results of
operations. Additional equity financing will be dilutive to shareholders of our common stock. To the extent that we raise additional
funds through collaboration and licensing arrangements, it will be necessary in certain countries to relinquish some rights to
our technologies or our potential products or grant licenses on terms that are not favorable to us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Net Cash used in Operating Activities. </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In the first nine months of 2012, $1,303,248
of cash was used in operating activities compared to $2,473,746 of cash used in operating activities in the first nine months
of 2011. This reduction in use of cash in operations of $1,170,498 was partially due to the reduction in the cash portion of the
net loss in the first nine months 2012 as compared to the first nine months of 2011 of approximately $624,000. The balance of
the decrease in use of cash in operations was a result of approximately $546,000 million less cash used for working capital components
related to operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In the year ended December 31, 2011, $3,449,430
of cash was used in operating activities compared to $909,939 of cash used in operating activities in the year ended December
31, 2010. This increased use of cash of $2,539,491 was mainly due to the increase of $2,269,587 in the cash portion of the net
loss in the year ended December 31, 2011 as compared to the year ended December 31, 2010. The balance of the increase was a result
of the net change in working capital components related to operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Net Cash used in Investing Activities. </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In the first nine months of 2012, we did
not use any cash related to third party costs incurred for patents and trademarks as compared to $570,641 used in the first nine
months of 2011. This decrease was mainly attributable to our payment in the first quarter of 2011 of approximately $500,000 towards
outstanding patent costs charges that were deferred in prior periods.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In the year ended December 31, 2011, we
used $607,297 of cash related to third party costs incurred for patents and trademarks and the acquisition of office furniture
and fixtures as compared to $108,116 used in the year ended December 31, 2010. This increase was attributable to our payment in
2011 of $500,000 towards outstanding patent costs charges that were deferred in prior periods.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B><I>Net Cash From Financing Activities</I>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the first nine months of 2012, we
generated approximately $1,057,000 from our financing activities mainly as a result of the $786,500 proceeds from the May 2012
private placement, the $210,000 proceeds from the August 9, 2012 convertible notes, $58,000 in advances from officers and $56,000
in proceeds from the issuance of short term secured notes partially offset by payments on borrowings of $35,000, deferred private
placement costs of $10,000 and net advances to a related party of approximately $8,000. During the first nine months of 2011,
we generated net cash of approximately $3,058,000 from our financing activities; we received approximately $3,294,000 in net cash
proceeds from the Private Placement that closed on January 25, 2011 partially offset by the payment of approximately $458,000
in shareholder notes and approximately $21,000 in net advances to officers and a related party.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the year ended December 31, 2011,
we generated approximately $4.3 million from our financing activities primarily through the issuance of shares of our common stock
and warrants to purchase our common stock in the January 25, 2011 private placement as well as notes issued to shareholders and
the issuance of convertible notes on December 14, 2011. These issuances resulted in net proceeds of approximately $4.8 million
which were partially offset by payments on note obligations to shareholders and another lender, debt issuance costs, net payments
to a related party and payment of amounts due from officers. A portion of the net proceeds from our financing activities were
directed to North Carolina State University (&ldquo;NCSU&rdquo;). During the year ended December 31, 2011 we paid NCSU approximately
$745,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company will need additional capital
to continue operations and make payments on obligations that are and become due in 2013. Our expected capital requirements over
the next 12 months without any extraordinary expenses such as exposure studies or clinical trials are approximately $1 million.
Failure to raise sufficient funds would significantly increase the risk that we would be unable to continue operations. Financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact
our plans to commercialize our products, our ability to continue as a going concern and our financial condition and results of
operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Critical Accounting Policies and Estimates</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Accounting principles generally accepted
in the United States of America, or U.S. GAAP, require estimates and assumptions to be made that affect the reported amounts in
our consolidated financial statements and accompanying notes. Some of these estimates require difficult, subjective and/or complex
judgments about matters that are inherently uncertain and, as a result, actual results could differ from those estimates. Due
to the estimation processes involved, the following summarized accounting policies and their application are considered to be
critical to understanding our business operations, financial condition and results of operations.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Revenue Recognition</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We recognize revenue at the point the product
is shipped to a customer and title has transferred. Revenue from the sale of our products is recognized net of cash discounts,
sales returns and allowances. Cigarette federal excise taxes are included in net sales and accounts receivable billed to customers,
except on sales of <I>SPECTRUM</I> and exported cigarettes in which such taxes do not apply.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We were chosen to be a subcontractor for
a 5-year government contract between RTI International (&ldquo;RTI&rdquo;) and the National Institute on Drug Abuse (&ldquo;NIDA&rdquo;)
to supply NIDA research cigarettes which includes four development stages. The company has completed the four developmental stages
and delivered approximately 9 million cigarettes during the year ended December 31, 2011 and recognized the related revenue. These
government research cigarettes are distributed under the mark <I>SPECTRUM</I>. The Company has delivered an additional 2.7 million
<I>SPECTRUM</I> research cigarettes in July 2012. Future revenue under this sub-contract arrangement is expected to be related
to the delivery of <I>SPECTRUM </I>and will be recognized at the point the product is shipped and title has transferred.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Impairment of Long-Lived Assets</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We review the carrying value of amortizing
long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may
no longer be appropriate. We also assess recoverability of the asset by estimating the future undiscounted net cash flows expected
to result from the asset, including eventual disposition. If the estimated future undiscounted net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the difference between the asset&rsquo;s carrying value and
its fair value. Non-amortizing intangibles (trademarks) are reviewed annually for impairment. We have not recognized any impairment
losses during the two years ended December 31, 2011 and 2010.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Amortization Estimates of Intangible
Assets</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We generally determine amortization based
on the estimated useful lives of the assets and record amortization expense on a straight-line method over such lives. The remaining
life of the patent is generally used to determine the estimated useful life of the related patent costs.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Valuation of our Equity Securities </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We have issued shares of our common stock
to satisfy obligations to vendors or employees that were due in cash. These shares have been valued based on the cash value of
the obligation satisfied by their issuance. We have also issued warrants to purchase shares of our stock in connection with the
issuance of debt obligations. These warrants have been valued based on the value ascribed to the underlying shares issued in cash
transactions, in settlement of cash obligations or, since the Merger on January 25, 2011, the closing price of our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Convertible Debt</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">When the convertible feature of the conventional
convertible debt is issued, the embedded conversion feature is evaluated to determine if bifurcation and derivative treatment
is required whether there is a beneficial conversion feature. When the convertible debt provides for an effective rate of conversion
that is below market value, this feature is characterized as a beneficial conversion feature (BCF&quot;). Prior to the determination
of the BCF, the proceeds from the debt instrument were first allocated between the convertible debt and any embedded or detachable
free standing instruments that are included, such as common stock warrants. We record a BCF as a debt discount pursuant to FASB
ASC Topic 470-20. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. We amortize
the discount to interest expense over the life of the debt.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">For the convertible notes issued
December 14, 2011, we recorded the OID and the BCF related to these convertible notes as a debt discount and recorded the
convertible notes net of the discount related to both the OID and the BCF. For the convertible notes issued August 9, 2012,
we recorded the OID and the warrant liability related to these convertible notes as a debt discount and recorded the
convertible notes net of the discount related to both the OID and the warrant liability debt discount is amortized to
interest expense over the life of the debt. In the case of any conversion prior to the maturity date there will be an
unamortized amount of debt discount that relates to such conversion. The prorata amount of unamortized discount at the time
of conversion will be charged to interest expense as accelerated amortization of the discount. The fair value of warrants
issued at the time of conversion is recorded as a reduction of the amount applied to the common stock issued in the
conversion and to the extent that the fair value of warrants exceeds the carrying value of the debt a charge to interest
expense results for such excess amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Income taxes</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Prior to the closing of the Merger, 22nd
Century Limited, LLC was organized as a limited liability company and treated as a partnership for income tax purposes; accordingly,
prior to the Merger, 22nd Century Limited, LLC was not directly responsible for income taxes (income and losses passed through
to its LLC members) and did not have to account for them. Following the Merger on January 25, 2011, we are subject to federal
and state income taxes. Accordingly, since the Merger date we are required to recognize deferred tax assets and liabilities for
any differences in basis in assets and liabilities between tax and GAAP reporting. The corresponding asset that resulted has been
fully offset by a valuation allowance. The Company incurred a net operating loss from the closing of the Merger to December 31,
2011 and, accordingly, has made no provision for current income taxes. The income tax asset arising from this net operating loss
has been fully reserved because it is not probable that it will be realized before its expiration.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Derivative Financial Instruments</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The warrants to purchase shares of our
stock that were issued in connection with the Merger are treated as derivative instruments for accounting purposes. Accordingly,
upon issuance, these instruments are reported as liabilities rather than equity. We do not use derivative instruments to hedge
exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments to determine if such instruments
are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting
date, with changes in fair value reported in the consolidated statement of operations. We use a lattice model approach which for
valuing our outstanding warrants classified as derivative instruments which includes probability weighted estimates of future
events including volatility of our common stock. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Off-Balance Sheet Arrangements </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We do not have any off-balance sheet arrangements
as defined by Item 303(a)(4) of Regulation S-K.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;<BR CLEAR="ALL" STYLE="page-break-before:
always"></P>



<P STYLE="margin: 0"></P>

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<P STYLE="margin: 0"></P>
<P STYLE="margin: 0"></P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Directors
and Executive Officers</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Set forth below is information regarding
our directors, executive officers and key personnel.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" ALIGN="CENTER" STYLE="font: 10pt Times New Roman, Times, Serif; width: 70%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 36%; font-weight: bold"><FONT STYLE="font-size: 10pt; color: black"><B>Name</B></FONT></TD>
    <TD STYLE="width: 2%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 11%; font-weight: bold"><FONT STYLE="font-size: 10pt; color: black"><B>Age</B></FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 50%; font-weight: bold"><FONT STYLE="font-size: 10pt; color: black"><B>Position</B></FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt; color: black">Joseph Pandolfino</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">44</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">Chief Executive Officer and Director</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt; color: black">Henry Sicignano, III</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">45</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">Chief Financial Officer, President, Secretary and Director</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt; color: black">Michael R. Moynihan, Ph.D.</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">60</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">Vice President of R&amp;D</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt; color: black">Joseph Alexander Dunn, Ph.D.</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">59</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">Director</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt; color: black">James W. Cornell</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">56</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt; color: black">Director</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our executive officers are appointed by
the board of directors and serve at the discretion of the board. There are no family relationships among our directors and executive
officers.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our bylaws provide
that the number of members of our Board of Directors shall not be less than one nor more than thirteen. The number of authorized
directors as of the date of this prospectus is four. Directors hold office for a one year term expiring at the annual meeting in
2013 (or until their respective successors are elected and qualified, or until their earlier death, resignation or removal). The
experience, qualifications, attributes and skills that led to the conclusion that the persons should serve as a Director of our
Company are described below in each Director nominee&rsquo;s biography.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Joseph Pandolfino, MBA, Chief Executive
Officer and Director</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Mr. Pandolfino, age 44, has served as our
Chief Executive Officer and as a Director since the closing of the merger in January 2011 between the Company and 22nd Century
Limited, LLC. He founded 22nd Century Limited, LLC in 1998 and has over 15 years experience in all aspects of the tobacco industry,
including 12 years with genetically-engineered tobacco. He served as President of 22nd Century Limited, LLC from its inception
until April 2010 and as Chief Executive Officer of 22nd Century Limited, LLC since April 2010. Mr. Pandolfino oversees our operations,
strategy and product development. Mr. Pandolfino holds a B.S. Degree in Business Administration from Medaille College and an M.B.A.
Degree from the State University of New York at Buffalo. Mr. Pandolfino&rsquo;s significant experience in all aspect of the tobacco
industry as well as his experience leading 22nd Century Limited, LLC led to our conclusion that he should serve as a director of
our Company. <FONT STYLE="color: black"> </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Henry Sicignano, III, MBA, Chief Financial Officer, President
and Director</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Henry Sicignano, III, MBA.</I><B> </B>Mr.
Sicignano, age 45, has served as our President and Secretary since the closing of the merger in January 2011 between the Company
and 22nd Century Limited, LLC, as a Director since March 4, 2011, and as interim Chief Financial Officer since July 6, 2012.<FONT STYLE="color: black">
From August 2005 to April 2009, Mr. Sicignano served as a General Manager and as the Director of Corporate Marketing for NOCO Energy
Corp., a petroleum products company; and from March 2003 to July 2005, as Vice President of Kittinger Furniture Company, Inc.,
a fine furniture manufacturer. From February 1997 through July 2002, he served as Vice President and Marketing Director of Santa
Fe Natural Tobacco Company, a specialty tobacco company, prior to the sale of that company to R.J. Reynolds Tobacco Company in
2002. Mr. Sicignano holds a B.A. Degree in Government from Harvard College and an M.B.A. Degree from Harvard University. Mr. Sicignano&rsquo;s
extensive experience in management, including in the tobacco industry, led to our conclusion that he should serve as a director
of our Company.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Michael R. Moynihan, Ph.D., Vice President of R&amp;D</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Dr. Moynihan, age 60,
has served as our Vice President of R&amp;D since March 2011 and served as Vice President <FONT STYLE="color: black">of </FONT>R&amp;D
for <FONT STYLE="color: black">22nd Century Limited, LLC since January, 2007.</FONT> He has also been a consultant for <FONT STYLE="color: black">22nd
Century Limited, LLC </FONT>since 1999. From 2001 to 2006 he served as Director of Biotechnology Development at Fundacion Chile
and from 1995 to 2000 as Senior Project Director at InterLink Biotechnologies LLC. Dr. Moynihan holds a Bachelor of Science Degree
in Biology from Brown University and a Master&rsquo;s Degree and Ph.D. in Biology from Harvard University. He previously served
as a Visiting Research Fellow at the Institute for Molecular and Cellular Biology, Osaka University, Japan; a Postdoctoral Associate
in the Section of Plant Biology, Cornell University; and a Postdoctoral Associate at the Center for Agricultural Molecular Biology,
Rutgers University.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B>&nbsp;</B></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Joseph Alexander Dunn, Ph.D., Director</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">Dr. Dunn, age 59, has served as a Director
since March 4, 2011. Dr. Dunn is currently Associate Dean for Research and Professor of Pharmaceutical Sciences at D&rsquo;Youville
College of Pharmacy in Buffalo, New York and has served in this capacity since April 1, 2010. Dr. Dunn has also served as Chief
Executive Officer of the National Center for Food and Agricultural Policy in Washington, D.C. since November 1, 2009 and as Chief
Executive Officer and Director of Research at OmniPharm Research International, Inc., a drug company, and affiliated entities,
Therex Technologies Inc., a drug company, and Therex LLC, a drug company, each located in Buffalo, New York since January, 1994.
From May 1, 2008, until January 20, 2009, Dr. Dunn served as Deputy Under Secretary and from August 1, 2006, until April 30, 2008
Dr. Dunn served as Senior Scientific Advisor at the United States Department of Agriculture, Research, Education and Economics
Mission Area in Washington, D.C. From December 1, 2006, until April 30, 2008 Dr. Dunn served as Executive Director of the United
States Department of Agriculture NAREEE Advisory Board. From July, 1998 until July 1, 2006, Dr. Dunn served as Research Associate
Professor in the Department of Oral Biology, School of Dental Medicine, at the State University of New York at Buffalo. Since June
1, 2010, Dr. Dunn has served as a member of the Board of Directors of Brothers of Mercy, Inc., a not-for-profit nursing and rehabilitation
concern. Dr. Dunn holds a B.S. Degree in Medical Chemistry and a Ph.D. Degree in Pharmacology, both from the State University of
New York at Buffalo School of Pharmacy. Dr. Dunn also served as a Postdoctoral Fellow in the Department of Pharmacology at Harvard
Medical School and as a Staff Fellow at the National Institutes of Health, National Cancer Institute Laboratory of Cellular Carcinogenesis
and Tumor Promotion. Dr. Dunn&rsquo;s extensive scientific and regulatory background led to our conclusion that he should serve
as a director of our Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>James W. Cornell, Director</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Mr. Cornell, age 56,
has served as a Director since March 4, 2011. Mr. Cornell is currently the President and Chief Executive Officer of Praxiis, LLC,
an enterprise that provides support for clients in organizational change, leadership development and transactional advisory services.
He has served in this capacity since October, 1988. Mr. Cornell is also the current Manager of Larkin Center Management, LLC, a
real estate development company, and has served in this capacity since October 2010. From September 2006 until September 2010,
Mr. Cornell served as Managing Director of New York New Jersey Rail, LLC, which is part of the national transportation rail system
and moves rail freight by rail barge across New York City Harbor, and he now continues to serve as principal business advisor to
that firm. From March 2005 until September 2008, Mr. Cornell served as the Chairman of the Board of Directors of New York Regional
Rail Corp., which operates as a short-haul regional trucking company. From April 2006, until February 2007, Mr. Cornell served
as Chief Restructuring Officer of Regus Industries, a waste management firm, and from January 2001 until November 2004, he served
as Special Advisor to Pinkerton Government Services, Inc. and Securitas Nuclear and Government Services Unit, security services
providers to the energy industry and government. Mr. Cornell holds a B.S. Degree in Business, Management, and Economics and an
M.B.A. Degree, both from the State University of New York, Empire College. Mr. Cornell&rsquo;s extensive business management, strategy,
and leadership experience led to our conclusion that he should serve as a director of our Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Corporate
Governance</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Board Leadership Structure</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As of the date hereof,
the Board has not appointed a chairman or a lead independent director. At this time, the Board believes that this structure is
appropriate for our Company because we have very few employees and are currently in the development phase for our products. In
the future, we expect that the Board will appoint a chairman and, if appropriate, a lead independent director.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Board Role in Risk Oversight</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Risk is inherent with
every business and we face a number of risks. Management is responsible for the day-to-day management of risks we face, while our
Board of Directors is responsible for overseeing our management and operations, including overseeing its risk assessment and risk
management functions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Compensation Policies and Practices
and Risk Management</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Board considers,
in establishing and reviewing our compensation philosophy and programs, whether such programs encourage unnecessary or excessive
risk taking. Base salaries are fixed in amount and consequently the Board does not see them as encouraging risk taking. We also
provide our executive officers and other senior managers long-term equity awards to help further align their interests with our
interests and those of our stockholders. The Board believes that these awards do not encourage unnecessary or excessive risk taking
since the awards are generally provided at the beginning of an employee's tenure or at various intervals to award achievements
or provide additional incentive to build long-term value and are subject to vesting schedules to help ensure that executives and
senior managers have significant value tied to our long-term corporate success and performance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Board believes
that our compensation philosophy and programs encourage employees to strive to achieve both short- and long-term goals that are
important to our success and building stockholder value, without promoting unnecessary or excessive risk taking. The Board has
concluded that our compensation philosophy and practices are not reasonably likely to have a material adverse effect on us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Code of Ethics</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In 2006, we adopted
a Code of Ethics that applies to all of our employees. A copy of our Code of Ethics will be provided to any person requesting same
without charge. To request a copy of our Code of Ethics, please make a written request to our Chief Executive Officer c/o 22nd
Century Group, Inc., 9530 Main Street, Clarence, New York 14031.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Number of Meetings of the Board of Directors</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Board held four
meetings during 2012. Directors are expected to attend Board meetings and to spend time needed to meet as frequently as necessary
to properly discharge their responsibilities. Each director attended at least 75% of the aggregate number of meetings of the Board
during 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Attendance at Annual Meetings of the
Stockholders</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Company has no
policy requiring Directors and Director Nominees to attend its annual meeting of stockholders; however, all Directors and Director
Nominees are encouraged to attend. All of our directors attended our 2012 annual meeting.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Director Independence</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Joseph Alexander Dunn,
Ph.D. and James W. Cornell each qualify as &ldquo;independent&rdquo; applying the NASDAQ Global Market definition of independent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Stockholder Communications</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Stockholders may send
communications to the Company's directors as a group or individually, by writing to those individuals or the group: c/o the Chief
Executive Officer c/o 22nd Century Group, Inc., 9530 Main Street, Clarence, NY 14031. The Chief Executive Officer will review all
correspondence received and will forward all correspondence that is relevant to the duties and responsibilities of the Board or
the business of the Company to the intended director(s). Examples of inappropriate communication include business solicitations,
advertising and communication that is frivolous in nature, relates to routine business matters (such as product inquiries, complaints
or suggestions), or raises grievances that are personal to the person submitting the communication. Upon request, any director
may review communication that is not forwarded to the directors pursuant to this policy.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Committees of the Board of Directors</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As of the date hereof,
the Board has not established any committees of the Board. At this time, the Board believes that this structure is appropriate
for our Company because we have very few employees and are currently in the development phase for our products. In the future,
we expect that the Board will establish Board committees.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Nominating Committee</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">At of the date hereof,
the Company does not have a nominating committee. The Company intends to adopt a nominating committee in the future.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As of the date hereof,
we do not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors.
The Company does not currently have any specific or minimum criteria for the election of nominees to the Board, and does not have
any specific process or procedure for evaluating such nominees. Our current Board assesses all candidates, whether submitted by
management or stockholders, and makes recommendations for election or appointment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Audit Committee</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">As of the date hereof,
the role of audit committee is performed by the Board.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In this capacity, the
Board is responsible for: (i) selection and oversight of our independent accountants; (ii) establishing procedures for the receipt,
retention and treatment of complaints regarding accounting, internal controls and auditing matters; (iii) establishing procedures
for the confidential, anonymous submission by our employees of concerns regarding accounting and auditing matters; (iv) engaging
outside advisors; and (v) funding for the outside auditors and any outside advisors engaged by the Board.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Company has determined
that James W. Cornell qualifies as an &ldquo;audit committee financial expert&rdquo; as defined in Item 407(d)(5)(ii) of Regulation
S-K.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">From inception to present
date, we believe that the members of our Board are collectively capable of analyzing and evaluating the Company&rsquo;s financial
statements and understanding internal controls and procedures for financial reporting.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Compensation Committee</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have determined
that the functions ordinarily handled by such a committee should be handled by our entire Board.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Director Compensation </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Directors that
are not members of management receive cash compensation of $10,000 each annually and in 2011 received restricted stock awards of
25,000 shares each which vested immediately. </FONT>The following table sets forth information regarding the compensation of our
non-executive directors for their service on our Board of Directors for fiscal year 2012:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="text-align: center"><B>Non-Qualified</B></TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Fees Earned</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Non-Equity</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Deferred</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">or paid</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Stock</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Option</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Incentive Plan</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Compensation</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">All Other</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Name</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">in cash</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Awards</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Awards(1)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Compensation</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Earnings</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Compensation</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Total</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 23%; text-align: left">James W. Cornell</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 8%; text-align: right">10,000</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 8%; text-align: right">35,400</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 8%; text-align: right">45,400</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Joseph A. Dunn, Ph.D.</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">10,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">35,400</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">45,400</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.2in"></TD><TD STYLE="width: 0.5in">(1)</TD><TD STYLE="text-align: justify">Represents the grant date fair value calculated pursuant to ASC Topic 718. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used:</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 60%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 77%; text-align: left">Risk-free interest rate</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 20%; text-align: right">1.71</TD><TD STYLE="width: 1%; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Expected dividend yield</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">0</TD><TD STYLE="text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Expected stock price volatility</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">90</TD><TD STYLE="text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Expected life of options</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">10 years</FONT></TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Section 16(a) Beneficial Ownership Reporting
Compliance</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Section 16(a) of the Exchange Act requires
our directors, executive officers, and stockholders holding more than 10% of our outstanding common stock to file with the SEC
initial reports of ownership and reports of changes in beneficial ownership of our common stock. Executive officers, directors
and greater-than-10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based on a review of the Securities and Exchange Commission filed ownership reports during 2012, the Company believes that all
Section 16(a) filing requirements were met during 2012 except as set forth below:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Joseph Pandolfino,
Henry Sicignano III, Michael Moynihan and Charles Rider each filed a late Form 4 on May&nbsp;21, 2012 reporting the acquisition
of </FONT>shares<FONT STYLE="color: black">. Michael Moynihan filed a late Form 4 on August 24, 2012 reporting the sale of shares.
Henry Sicignano III filed a late Form 4 on August 28, 2012 reporting the acquisition of shares. Joseph Pandolfino filed a late
Form 4 on August 30, 2012 reporting the sale of shares. Joseph Dunn, James Cornell, Joseph Pandolfino and Henry Sicignano III each
filed a late Form 4 on November 14, 2012 reporting the acquisition of shares.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Executive
Compensation</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table summarizes the compensation
paid by us in each of the last two completed fiscal years ended December 31, 2012 for our principal executive officer and the two
most highly compensated executive officers who received annual compensation in excess of $100,000. These officers are referred
to herein as our &ldquo;Named Executive Officers.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Summary Compensation Table for Years
Ended December 31, 2012 and 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 8pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; padding-bottom: 1pt">Name&nbsp;and&nbsp;Principal&nbsp;Position</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Year</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Salary&nbsp;<BR> ($)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Bonus&nbsp;($)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Stock<BR> Awards<BR> ($)&nbsp;(1)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Option<BR> Awards<BR> ($)(2)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Non-Equity<BR> Incentive&nbsp;Plan<BR> Compensation<BR> ($)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Nonqualified<BR> Deferred<BR> Compensation<BR> Earnings&nbsp;<BR> ($)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">All&nbsp;Other<BR> Compensation<BR> ($)&nbsp;(3)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Total&nbsp;<BR> ($)</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 10%; text-align: left">Joseph Pandolfino</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">2012</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">150,000</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">310,500</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">15,609</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; text-align: right">476,106</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Chief Executive Officer</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2011</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">150,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">102,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">6,646</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">258,646</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Henry Sicignano III,</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2012</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">150,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">69,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">59,600</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">16,286</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">294,886</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Chief Financial Officer and President</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2011</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">150,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">357,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">15,174</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">522,174</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Michael R. Moynihan, Ph.D.</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2012</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">115,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">59,600</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">9,239</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">183,839</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Vice President of R&amp;D</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2011</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">111,290</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">51,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">8,613</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">170,903</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>



<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.2in"></TD><TD STYLE="width: 0.5in">(1)</TD><TD STYLE="text-align: justify">The amounts included in this column are the aggregate grant date fair value determined in accordance
with FASB ASC 718.</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.2in"></TD><TD STYLE="width: 0.5in">(2)</TD><TD STYLE="text-align: justify">Represents the grant date fair value calculated pursuant to ASC Topic 718. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used:</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 60%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 77%; text-align: left">Risk-free interest rate</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 20%; text-align: right">1.71</TD><TD STYLE="width: 1%; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Expected dividend yield</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">0</TD><TD STYLE="text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Expected stock price volatility</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">90</TD><TD STYLE="text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Expected life of options</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 10pt">10 years</FONT></TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.2in"></TD><TD STYLE="width: 0.5in">(3)</TD><TD STYLE="text-align: justify">Represents amounts paid by Company for health insurance.</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Outstanding Equity Awards at 2012 Fiscal
Year-End</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 8pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="13" STYLE="font-weight: bold; text-align: center; padding-bottom: 1pt; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Option&nbsp;Awards</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="14" STYLE="font-weight: bold; text-align: center; padding-bottom: 1pt; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Stock&nbsp;Awards</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Name</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Number&nbsp;of</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Securities</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Underlying</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>Unexercised</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Options</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Exercisable</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>(#)</B></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Number&nbsp;of</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Securities</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Underlying</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>Unexercised</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Options&nbsp;Un-</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>exercisable</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>(#)</B></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Option&nbsp;</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Exercise</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Price</B></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Option</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Expiration</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Date</B></FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Number&nbsp;of</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Shares&nbsp;or</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Units&nbsp;of</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Stock</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>That&nbsp;Have</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>Not</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Vested</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>(#)<SUP>(2)</SUP></B></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Market</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Value&nbsp;of</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Shares&nbsp;or</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Units&nbsp;of&nbsp;Stock</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>That&nbsp;Have</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Not</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Vested</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>($)<SUP>(2)</SUP></B></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Equity</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Incentive</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Plan&nbsp;Awards:</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Number&nbsp;of</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Unearned</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>Shares,</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Units&nbsp;or</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Other&nbsp;Rights</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>That&nbsp;Have</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Not&nbsp;Vested</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>(#)</B></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt"><B>Equity</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Incentive</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Plan&nbsp;Awards:</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Market&nbsp;or</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Payout&nbsp;Value</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>of&nbsp;Unearned</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>Shares,</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>Units&nbsp;or</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>Other&nbsp;Rights</B></FONT><BR><FONT STYLE="font-size: 8pt"> <B>That&nbsp;Have</B></FONT><BR><FONT STYLE="font-size: 8pt">
    <B>Not&nbsp;Vested</B></FONT><BR>
    <FONT STYLE="font-size: 8pt"><B>($)<SUP>(</SUP></B><SUP>2)</SUP></FONT></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="text-align: center"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 12%; text-align: left"><FONT STYLE="font-size: 8pt">Mr. Sicignano</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">100,000</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">0.69</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 10%; text-align: center"><FONT STYLE="font-size: 8pt">5/18/2022</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">550,000</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">(1)</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">415,250</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 8%; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="width: 1%; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Dr. Moynihan</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">100,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">0.69</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: center"><FONT STYLE="font-size: 8pt">5/18/2022</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">(1) 450,000 of the shares are time-based
awards subject to vesting over the next 3 years on April 1 of 2013 to 2015, such that 150,000 shares shall vest on April 1 of each
such year; 100,000 of the shares are performance based, which are subject to forfeiture unless certain performance milestones are
achieved.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">(2) Market value calculated based on the
price of our common stock as of the last business day of our fiscal year.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Agreements with Executive Officers</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have entered into
employment agreements with each of Messrs. Pandolfino and Sicignano that provide for annual compensation of $150,000 and $150,000,
respectively, subject to increases as contained in such employment agreements and/or as decided by our Board of Directors. Dr.
Moynihan has an employment agreement with 22nd Century Group, Inc. that provides for annual compensation of $115,000. These employment
agreements also contain non-compete covenants and change of control provisions.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The employment agreement
of Messrs. Pandolfino and Sicignano provides that during the executive officer&rsquo;s employment by us and for a period of two
(2) years after the executive officer ceases to be employed by us, the following non-compete covenants will apply: (i) the executive
officer will not (except on behalf of us) provide or offer to provide any goods or services to any entity engaged in the United
States in the making, offering, marketing, distributing and/or selling of products made from the tobacco (<I>Nicotiana</I>) plant,
and/or providing or offering to provide the same or substantially similar services to any customer or prospective customer, (ii)
the executive officer will not interfere with our relationships with any customer, prospective customer, supplier, distributor,
farmer and/or manufacturer, and (iii) the executive will not induce or attempt to induce any persons employed by us to leave their
employment with us, nor hire or employ, or attempt to hire or employ, any persons employed by us, nor assist or facilitate in any
way any other person or entity in the hiring of any persons employed by us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">The
employment agreement of Dr. Moynihan contains the same non-compete covenants but they are in effect for a period of three (3) years
after the executive officer ceases to be employed by us. </FONT>Dr. Moynihan&rsquo;s employment agreement contains a severance
provision which provides that upon the termination of his employment without Cause (as defined in his employment agreement), Dr.
Moynihan will receive severance compensation equal to the base salary then in effect beginning on the date of termination and continuing
until the later of one year following termination or the expiration of the initial term of his employment agreement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The employment agreements
of Messrs. Pandolfino and Sicignano provide that in the event of a change in control (as defined in the employment agreements)
of our Company, then during the three (3)-year period following such change in control if certain triggering events occur as defined
in such employment agreements, such as if the executive is terminated other than for cause (as defined in each of the employment
agreements), death or disability, or if the executive officer&rsquo;s responsibilities are diminished after the change in control
as compared to the executive officer&rsquo;s responsibilities prior to the change in control, or if the executive officer&rsquo;s
base salary or benefits are reduced, or the executive is required to relocate more than twenty-five (25) miles from his current
place of employment, then in any such events the executive officer will have the option, exercisable within ninety (90) days of
the occurrence of such an event, to resign his employment with us, in which case the executive officer will be entitled to receive:
(A) the greater of either his base salary for the then remaining portion of the initial 5-year term of the agreement or his base
salary for three (3) years thereafter; (B) reimbursement for eighteen (18) months of his reasonable costs for medical, dental,
life, disability and other benefits and insurance coverage that the executive officer received during his employment; (C) outplacement
services for two (2) years; and (D) the immediate vesting of all options and/or restricted stock grants previously granted or to
be granted to the executive officer. We also provide each of these individuals with health insurance and vacation benefits.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Equity Incentive Plan</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">On
October 21, 2010, we established the EIP for o</FONT>fficers, employees, Directors, consultants and advisors to the Company and
its affiliates<FONT STYLE="color: black">, consisting of 4,250,000 shares of common stock reserved for issuance under the EIP.
The EIP has a term of ten years and is administered by our Board or a committee to be established by our Board, to determine the
various types of incentive awards that may be granted to recipients under this plan, such as stock grants, stock options, stock
appreciation rights, performance share awards, restricted stock and restricted stock units, and the number of shares of common
stock to underlie each such award under the EIP. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Certain
Relationships and Related Transactions</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Policies and Procedures for Related Party Transactions </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Our Board is in the
process of adopting a written related person transaction policy, which will set forth the policies and procedures for the review
and approval or ratification of related person transactions. This policy will be administered by our Board and covers any transaction,
arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be
a participant, where the amount involved exceeds $50,000 and a related person had or will have a direct or indirect material interest.
While the policy covers related person transactions in which the amount involved exceeds $50,000, the policy states that related
person transactions in which the amount involved exceeds $120,000 are required to be disclosed in applicable filings as required
by the Securities Act, the Exchange Act and related rules. Our Board set the $50,000 threshold for approval of related party transactions
in the policy at an amount lower than that which is required to be disclosed under the Securities Act, the Exchange Act and related
rules because we believe it is appropriate for our Board to review transactions or potential transactions in which the amount involved
exceeds $50,000, as opposed to $120,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Pursuant to this policy,
our Board will: (i) review the relevant facts and circumstances of each related person transaction, including if the transaction
is on terms comparable to those that could be obtained in arm&rsquo;s length dealings with an unrelated third party and the extent
of the related person&rsquo;s interest in the transaction, and (ii) take into account the conflicts of interest and corporate opportunity
provisions of our code of business conduct and ethics. Management will present to our Board each proposed related person transaction,
including all relevant facts and circumstances relating thereto, and will update the Board as to any material changes to any related
person transaction. All related person transactions may only be consummated if our Board has approved or ratified such transactions
in accordance with the guidelines set forth in the policy. Certain types of transactions have been pre-approved by our Board under
the policy. These pre-approved transactions include: (i) certain compensation arrangements; (ii) transactions in the ordinary course
of business where the related person&rsquo;s interest arises only (a) from his or her position as a director of another entity
that is party to the transaction, and/or (b) from an equity interest of less than 5% in another entity that is party to the transaction,
or (c) from a limited partnership interest of less than 5%, subject to certain limitations; and (iii) transactions in the ordinary
course of business where the interest of the related person arises solely from the ownership of a class of equity securities in
our Company where all holders of such class of equity securities will receive the same benefit on a pro rata basis. No director
may participate in the approval of a related person transaction for which he or she is a related person.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="color: black"><B>Related Party Transactio</B></FONT><B>ns</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Immediately prior to
the closing of the Merger in January 2011 between the Company (then known as Touchstone Mining Limited) and 22nd Century Limited,
LLC, pursuant to the terms of the Split-Off Agreement, the Company transferred all of our pre-merger operating assets and liabilities
to the Split-Off Subsidiary. We then transferred all of the outstanding capital stock of the Split-Off Subsidiary to David Rector,
our sole director and executive officer prior to the merger, in exchange for $1, such consideration was deemed to be adequate by
our Board prior to the merger. Prior to the closing of the merger, we paid Mr. Rector $1,500 in consideration for his service as
our sole director and executive officer.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">Prior
to the closing of the Merger, </FONT>Touchstone Mining Limited <FONT STYLE="color: black">utilized office space located at 11923
SW 37 Terrace, Miami, Florida 33175 that was provided to us on a rent-free basis by Nanuk Warman, a former director and executive
officer. Also, prior to the closing of the merger, we cancelled 10,015,200 shares of our common stock held by Mr. Warman and entered
into a mutual release agreement with Mr. Warman regarding such cancellation. In each of fiscal years 2009 and 2010, we paid Mr.
Warman aggregate compensation of $8,000 in consideration for his services as our sole director and executive officer during those
periods. We also paid Mr. Warman aggregate of $1,500 in consideration for his accounting services in preparation of our most recent
Form 10-K and Form 10-Q filed prior to the closing of the merger.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">We
have conducted transactions with Alternative Cigarettes, Inc. (&ldquo;AC&rdquo;), which is 95% owned by three holders of our common
stock, including Joseph Pandolfino, our Chief Executive Officer, and Angelo Tomasello, who beneficially owned approximately over
10% of our common stock. We previously shared office space and employee services with AC. AC has also advanced funds to us from
time to time. Since January 1, 2010, the largest net amount due from us to AC was approximately $127,000. No interest has been
accrued or paid on these amounts due to AC and there are no repayment terms between the parties. </FONT>In February 2011, AC was
paid $22,500 by 22nd Century Limited, LLC for AC&rsquo;s assignment of its MAGIC trademark to 22nd Century Limited, LLC and other
minor assets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In January 2008, we
issued convertible promissory notes due and payable on January 15, 2011 to Messrs. Pandolfino and Tomasello in the principal amounts
of $77,435 and $100,315, respectively, with 7% interest per annum accruing thereon. In December 2009, Mr. Pandolfino converted
the principal balance and accrued interest under his note ($88,172) into 151,760 shares of our common stock. In May 2010, Mr. Tomasello
agreed to amend his note to eliminate his right to convert the balance into shares of our common stock, and in January 2011, Mr.
Tomasello&rsquo;s note together with all accrued interest thereon was paid in full.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In November 2008, we
issued a promissory note due and payable on November 11, 2010 to Mr. Tomasello in the principal amount of $325,000, with 10% interest
per annum accruing thereon, and a warrant to purchase 371,006 shares of our common stock, which have since been exercised at a
price of $.0001 per share. The note was guaranteed by Virgil Properties, LLC, which is jointly owned by Messrs. Pandolfino and
Tomasello. Effective December 1, 2010, the $325,000 promissory note was amended to extend the maturity date until January 10, 2011
and to increase the interest rate to 15% during this extension period. On January 25, 2011, Mr. Tomasello converted the principal
amount of this promissory note into 325,000 shares of our common stock through an investment in the Private Placement Offering
and cash in the amount of $79,401, which represents the accrued interest on the original $325,000 promissory note. Mr. Tomasello
has also made funds available to us in the form of cash advances. The largest net amount outstanding since January 1, 2009 was
approximately $166,000. No interest was accrued or paid on such advances and there were no repayment terms between the parties.
In December 2009, Mr. Tomasello was issued 504,553 shares of our common stock in lieu of repayment of $135,996 of such advances,
and we issued him a promissory note in the amount of $30,054 that was exchanged for 204,639 shares of our common stock in June
2010. On December 14, 2011 Mr. Tomasello acquired $28,750 of our December 14, 2011 convertible notes for $25,000 cash.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">During the period between
January 1 and October 5, 2010, we issued Mr. Pandolfino 455,331 shares of our common stock in lieu of $103,573 due and payable
to him for his services. On October 5, 2010, we issued Mr. Pandolfino a promissory note, which was assigned to Mr. Sicignano, due
and payable on January 31, 2011 in the principal amount of $58,873, with 15% interest per annum accruing thereon. In January 2011,
we made payment in full to Mr. Sicignano on this assigned note together with all accrued interest thereon. Mr. Pandolfino acquired
$86,250 of the December 14, 2011 convertible notes for $75,000 in cash. In 2012, he converted his convertible note.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">In
September 2010, Henry Sicignano III, our President, Secretary and interim Chief Financial Officer, loaned us $35,000, which amount
was due and payable in November 2010, with 15% interest per annum accruing thereon. On December 14, 2010, Mr. Sicignano agreed
to extend the maturity date of this loan until January 25, 2011. On December&nbsp;28, 2010 we issued a promissory note to Mr. Sicignano
due and payable on January 15, 2011 in the principal amount of $100,000, with 15% interest per annum accruing thereon. From time
to time, Mr. Sicignano deferred guaranteed payments due to him by us as consideration for his services as our President with the
largest net amount of such deferred guaranteed payments outstanding since January 1, 2010 being $85,000. On January 28, 2011 we
made payment in full to Mr. Sicignano of all deferred guaranteed payments and all principal and accrued interest on all promissory
notes then outstanding. Mr. Sicignano is also the managing member of Henry Sicignano III Group, LLC (&ldquo;Sicignano Group&rdquo;).
On October 5, 2010, Sicignano Group purchased 112,396 shares of our common stock for $30,295 and, in a simultaneous related transaction,
made a loan to the Company in the principal amount of $30,295, with 15% interest per annum accruing thereon, for which we issued
Sicignano Group a promissory note due and payable on January&nbsp;31, 2011. On January 25, 2011, Sicignano Group converted the
principal amount of this promissory note and the accrued interest thereon into 31,626 shares of our common stock through an investment
in the Private Placement Offering. </FONT>From June 30, 2011 to October 18, 2011, Mr. Sicignano loaned us a total of $215,000 and
<FONT STYLE="color: black">Mr. Sicignano was </FONT>issued a promissory note with interest at 12%. Mr. Sicignano exchanged these
notes to acquire $247,250 of our December 14, 2011 convertible notes. In December 2012, Mr. Sicignano agreed to forebear on the
collection of our December 14, 2011 convertible notes. On January 22, 2013, we paid Mr. Sicignano the total amount of $250,696
in principal plus accrued but unpaid interest as payment in full of the December 14, 2011 convertible notes owned by Sicignano.
On that same date of January 22, 2013, Mr. Sicignano loaned us $150,000 and we issued a promissory note to Mr.&nbsp;Sicignano due
and payable on July&nbsp;1, 2013 in the principal amount of $150,000, with 15% interest per annum accruing thereon.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">On September 15 and
October 15, 2009, we issued promissory notes payable to Clearwater Partners, LLC (&ldquo;Clearwater&rdquo;) in the amounts of $15,000
and $10,000, respectively. In conjunction with the $15,000 promissory note, a warrant to purchase 185,503 shares of our common
stock, at a price per share of less than $.0001, was issued to Clearwater, and in conjunction with the $10,000 note, a warrant
to purchase 92,751 shares of our common stock, at a price per share of less than $.0001, was issued to Clearwater. The promissory
notes bear interest at a rate of 10%. These promissory notes had original maturity dates September 15, 2010 and October 15, 2010,
respectively. On May 27, 2010, the maturity dates of both promissory notes were extended to January 31, 2012 and subsequently paid
in June 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">On March 1, 2010, we
issued a four (4) year warrant to purchase 1,706,626 shares of our common stock to Clearwater, which was exercised in full on May
27, 2010, at a price per share of $0.0001. On May 27, 2010, we further issued to Clearwater an additional four (4) year warrant
to purchase 1,409,821 shares of our common stock, which was immediately exercised in full at a price per share of $0.0001, and
we issued to Clearwater a promissory note due and payable on January 31, 2012 in the principal amount of $45,000, with 10% interest
per annum accruing thereon. These warrants and this promissory note were issued to Clearwater in lieu of repayment of $450,000
principal, and accrued interest thereon, of funds previously advanced to us by Clearwater. On October 5, 2010, Clearwater purchased
176,358 shares of our common stock for $47,535 and, in a simultaneous related transaction, made a loan to the Company in the principal
amount of $47,535, with 15% interest per annum accruing thereon, for which we issued Clearwater a promissory note due and payable
on January 31, 2011. On January 25, 2011, Clearwater converted the principal amount of this $47,535 promissory note and the accrued
interest thereon, and the principal amount of the $45,000 promissory note and the accrued interest thereon, due and payable on
January 31, 2012, into 97,544 shares of our common stock through an investment in the Private Placement Offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">On
December 14, 2011, </FONT>Mr. Pandolfino, <FONT STYLE="color: black">our Chief Executive Officer, Mr. Sicignano, our President
and interim Chief Financial Officer, and Mr. Rider, our former Chief Financial Officer, acquired $86,250, $247,250 and $34,500,
respectively, of our December 14, 2011 convertible notes. The purchase price for the convertible notes was 85% of the face amount
of the notes. Mr. Pandolfino converted his December 14, 2011 convertible note in February 2011 into 115,000 shares of our common
stock and warrants to purchase 138,000 shares of our common stock. </FONT>In December 2012, Mr. Sicignano agreed to forebear on
the collection of our December 14, 2011 convertible notes. On January 22, 2013, we paid Mr. Sicignano the total amount of $250,696
in principal plus accrued but unpaid interest as payment in full of the December 14, 2011 convertible notes owned by Sicignano.
On that same date of January 22, 2013, Mr. Sicignano loaned us $150,000 and we issued a promissory note to Mr.&nbsp;Sicignano due
and payable on July&nbsp;1, 2013 in the principal amount of $150,000, with 15% interest per annum accruing thereon. <FONT STYLE="color: black">In
December 2012, Mr. Rider extended the maturity date of his December 14, 2011 convertible note to April 9, 2013. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">On March&nbsp;21, 2012
and April&nbsp;13, 2012, Rockledge Capital, LLC, a company of which our President, Mr.&nbsp;Sicignano, is the manager, loan us
$25,000 on each of these dates; such notes were due and payable on October&nbsp;1, 2012, with 15% interest per annum accruing thereon.
These notes were paid in full on January&nbsp;22, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">On
May 15, 2012, </FONT>Mr. Pandolfino, <FONT STYLE="color: black">our Chief Executive Officer, Mr. Sicignano, our President and interim
Chief Financial Officer, Mr. Rider, our former Chief Financial Officer, and Dr.&nbsp;Moynihan, our Vice President of Research and
Development, acquired 12,000, 20,000, 12,000, and 150,000 shares of the Company&rsquo;s common stock, $0.00001 par value, respectively,
and the same number of warrants with a 5-year term to purchase shares of our common stock at an exercise price of $1.00 per share,
which exercise price was subsequently adjusted pursuant to the terms of the warrants to be $0.60 per share as of January 22, 2013.
The purchase price was $0.60 per unit. Dr.&nbsp;Moynihan exchanged his minority interest in Goodrich Tobacco (4 units equating
to 4%) for stock and warrants valued at $90,000 in the May&nbsp;15, 2012 private placement. Dr.&nbsp;Moynihan&rsquo;s transaction
resulted in Goodrich Tobacco becoming a wholly owned subsidiary of 22nd Century, Ltd.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In October 2012, we entered into a
contractor agreement with Angelo Tomasello to provide consulting services to the Company. For consideration under the
agreement, Mr. Tomasello was issued 20,000 stock options with the exercise price of $0.26, which is equivalent to the closing
price on our common stock on October 26, 2012. The options vested on October 26, 2012 and are exercisable any time through
the expiration date ten years hence.</P>



<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in"><FONT STYLE="color: black">On
November 9, 2012, </FONT>Mr. Pandolfino, <FONT STYLE="color: black">our Chief Executive Officer, Mr. Sicignano, our President and
interim Chief Financial Officer, Mr. Cornell, our director, and Mr. Dunn, our director, participated in our private placement and
acquired 480,000, 600,000, 60,000 and 60,000 shares of our common stock, $0.00001 par value, respectively, and warrants with a
5-year term to purchase up to 240,000, 300,000, 30,000 and 30,000 shares of the Company&rsquo;s common stock, respectively, at
an exercise price of $1.00 per share, which exercise price was subsequently adjusted pursuant to the terms of the warrants to be
$0.60 per share as of January 22, 2013. The purchase price was $0.25 per unit. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Plan of
Distribution</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Each selling stockholder
(the &ldquo;Selling Stockholders&rdquo;) of the securities and any of their pledgees, assignees and successors-in-interest may,
from time to time, sell any or all of their securities covered hereby on the OTC Bulletin Board or any other stock exchange, market
or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices.
A Selling Stockholder may use any one or more of the following methods when selling securities:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">block trades in which the broker-dealer will attempt to sell the securities
as agent but may position and resell a portion of the block as principal to facilitate the transaction;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">an exchange distribution in accordance with the rules of the applicable
exchange;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">privately negotiated transactions;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">in transactions through broker-dealers that agree with the Selling Stockholders
to sell a specified number of such securities at a stipulated price per security;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">a combination of any such methods of sale; or</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.75in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol; color: black">&middot;</FONT></TD><TD STYLE="text-align: justify"><FONT STYLE="color: black">any other method permitted pursuant to applicable law.</FONT></TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
may also sell securities under Rule 144 under the Securities Act, if available, rather than under this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Broker-dealers engaged
by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser)
in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction
not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction
a markup or markdown in compliance with FINRA IM-2440.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In connection with
the sale of the securities or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions
they assume. The Selling Stockholders may also sell securities short and deliver these securities to close out their short positions,
or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter
into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities
which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which
securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Selling Stockholders
and any broker-dealers or agents that are involved in selling the securities may be deemed to be &ldquo;underwriters&rdquo; within
the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the securities. In no event shall any broker-dealer receive
fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The Company is required
to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreed
to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Because Selling Stockholders
may be deemed to be &ldquo;underwriters&rdquo; within the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus.
The Selling Stockholders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed
sale of the resale securities by the Selling Stockholders.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We agreed to keep this
prospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling Stockholders without
registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for
the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of
similar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or
any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if
required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be
sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously
engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation
M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and
sales of securities of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser
at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Description
of Securities</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>General</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our authorized capital stock consists of
300,000,000 shares of common stock and 10,000,000 shares of preferred stock, of which 35,415,139 shares of common stock are issued
and outstanding and 2,500 shares of Series A-1 Preferred Stock are issued and outstanding. We will also have reserved (i) up to
4,166,666 shares of common stock that could be initially issued as a result of the conversion of the shares of Series A-1 Preferred
Stock, which is subject to adjustment as described below, (ii) up to 2,055,000 shares of common stock for future issuance under
the EIP, (iii) up to 465,000 shares of common stock issuable upon exercise of outstanding stock options; (iv) up to 2,411,734 shares
of common stock currently issuable upon the conversion of convertible notes (subject to adjustment for anti-dilution adjustments);
(v) up to 19,700,028 shares of common stock currently issuable upon the exercise of outstanding warrants (including the Series
A Warrants and Series B Warrants) (subject to adjustment for anti-dilution adjustments); and (vi) up to 5,142,797 shares of common
stock issuable upon exercise of warrants issuable upon conversion or exercise of other instruments (including the Series C Warrants)
(subject to adjustment for anti-dilution adjustments).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following summary of certain provisions
of our capital stock does not purport to be complete and is subject to and is qualified in its entirety by our articles of incorporation,
including the Certificate of Designations thereto, and by-laws, the warrants and notes referred to below, and by the provisions
of applicable law.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Common Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Holders of common stock are entitled to
one (1) vote per share with respect to each matter presented to our stockholders on which holders of common stock are entitled
to vote. The common stock does not have cumulative voting rights. No share of common stock affords any preemptive rights or is
convertible, redeemable, assessable or entitled to the benefits of any sinking or repurchase fund.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Subject to the prior rights of holders of
preferred stock, holders of common stock are entitled to receive dividends as may be lawfully declared from time to time by our
board of directors. Upon our liquidation, dissolution or winding up, whether voluntary or involuntary, holders of common stock
will be entitled to receive such assets as are available for distribution to our shareholders after there shall have been paid,
or set aside for payment, the full amounts necessary to satisfy any preferential or participating rights to which the holders of
each outstanding series of preferred stock are entitled by the express terms of the applicable series.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The common stock is quoted on the OTC Bulletin
Board under the symbol &ldquo;XXII.OB.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Preferred Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our Board is authorized, without action
by our stockholders, to designate and issue up to an aggregate of 10,000,000 shares of preferred stock in one or more series. Our
board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">An aggregate
of 2,500 shares of our Series A-1 Preferred Stock are currently outstanding. </FONT>The shares of Series A-1 Preferred Stock are
initially convertible into a total of 4,166,666 shares of the Company&rsquo;s common stock at a conversion price of $0.60 per share
(referred to in this section as the Conversion Price), subject to future adjustments as described below. Holders of our Series
A-1 Preferred Stock may only convert the Series A-1 Preferred Stock to the extent that, after giving effect to the conversion,
such holder (together with such holder&rsquo;s affiliates) would beneficially own no more than 9.99% of number of shares of our
outstanding common stock. The Conversion Price of the Series A-1 Preferred Stock is subject to adjustment as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in">(i)</TD><TD>on the effective date of this registration statement, the Conversion Price will be reduced to the lesser of (1) the then Conversion
Price, as adjusted and taking into consideration any prior resets, (2) the greater of $0.35 (subject to adjustment for reverse
and forward stock splits and the like) and 70% of the average of the five (5) trading day volume weighted average prices, or VWAPs,
immediately prior to each such effective date or (3) $0.60 (subject to adjustment for forward and reverse stock splits and the
like);</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-indent: -0.5in">&nbsp;&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in">(ii)</TD><TD>if on the 180th day immediately following the closing date of January 11, 2013 (the &ldquo;Closing Date&rdquo;), 70% of the
average of the five (5) trading day VWAPs immediately prior to such date is less than the then Conversion Price, then on such 180th
day the Conversion Price shall be reduced, and only reduced, to the lesser of (1) the then Conversion Price, as adjusted and taking
into consideration any prior resets, (2) the greater of $0.15 (subject to adjustment for reverse and forward stock splits and the
like) and 70% of the average of the five (5) trading day VWAPs immediately prior to each such 180th day immediately following the
Closing Date or (3) $0.35 (subject to adjustment for forward and reverse stock splits and the like); and</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in">(iii)</TD><TD>if all of the shares required to be registered are not registered pursuant to an effective registration statement within the
120th day anniversary of the Closing Date, then on the 180th day and 270th day following the Closing Date, the Conversion Price
shall be reduced, and only reduced, to the lesser of (1) the then Conversion Price, as adjusted and taking into consideration any
prior resets, (2) the greater of $0.15 (subject to adjustment for reverse and forward stock splits and the like) and 70% of the
average of the five (5) trading day VWAPs immediately prior to each such date or (3) $0.35 (subject to adjustment for forward and
reverse stock splits and the like).</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series A-1 Preferred Stock will pay
a 10.0% annual cash dividend, which may be payable in shares of our common stock, and will have a liquidation preference equal
to the stated value of the Series A-1 Preferred Stock of $1,000 per share plus any accrued and unpaid dividends thereon. The Series
A-1 Preferred Stock has no voting rights.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">With respect to the payment of dividends
and amounts upon liquidation, the Series A-1 Preferred Stock will rank senior to any other future series of our preferred stock
and all classes of our common stock. Unless full dividends on the Series A-1 Preferred Stock have been paid for all past dividend
periods, no distribution may be declared or paid on our common stock or any other capital shares that rank junior to the Series
A-1 Preferred Stock as to dividends. In the event of the Company's liquidation, dissolution or winding up, the holders of the Series
A-1 Preferred Stock are entitled to be paid out of our assets legally available for distribution to its shareholders a liquidation
preference of the stated value of $1,000 per share, plus an amount equal to any accumulated and unpaid dividends to the date of
payment before any distribution of assets is made to holders of our common stock or any other capital shares that rank junior to
the Series A-1 Preferred Stock as to liquidation preference.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series A-1 Preferred Stock contains
standard anti-dilution adjustments in the event of a stock dividend, stock split or similar corporate transaction. In addition,
if, at any time while shares of Series A-1 Preferred Stock are outstanding, we sell any common stock (or securities issuable into
common stock) or grant any option to purchase any common stock at an effective price per share that is lower than the then Conversion
Price, which we refer to as a Diluting Issuance, then the Conversion Price shall be reduced to equal the effective price per share
(as determined pursuant to the Certificate of Designation) of the Diluting Issuance. No adjustments will be made for shares of
common stock or options granted to employees, officers or directors under our Equity Incentive Plan, upon conversion or exchange
of any securities outstanding as of the time of the issuance of the Series A-1 Preferred Stock or in connection with certain business
combinations. In the event we (i) declare dividends on our common stock, (ii) grant any right to acquire common stock or other
property pro rata to all of our holders of our common stock or (iii) enter into a fundamental transaction that provides for consideration
to the holders of our common stock, then the Series A-1 Preferred Stock shall have the right to participate on a pro rata as-converted
basis without regard to the 9.99% beneficial ownership limitation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Generally, we may not redeem the Series
A-1 Preferred Stock. However, upon the occurrence of certain triggering events described below, holders of Series A-1 Preferred
Stock will have the right to redeem some or all of their Series A-1 Preferred Stock for cash or shares of our common stock, or
increase the dividend rate on any of their outstanding shares of Series A-1 Preferred Stock to 18% per annum thereafter. If we
fail to pay the cash or shares of our common stock due upon such redemption, then we must pay interest thereon at a rate of 18%
per annum (or such maximum rate permitted by applicable law, whichever is lower). Triggering events for redemption of our Series
A-1 Preferred Stock by the holders thereof include the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we fail to deliver certificates representing the shares of common stock into which the Series A-1 Preferred Stock may be
converted prior to the fifth trading day after such certificates are required to be delivered;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we provide notice that we do not intent to comply with the requests of any conversion of shares of Series A-1 Preferred
Stock;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we fail to pay in full the amount of cash due pursuant to a buy-in (in the event we fail to deliver shares of common stock
upon conversion of the Series A-1 Preferred Stock and the holder of Series A-1 Preferred Stock is required by its brokerage firm
to purchase in an open market transaction or otherwise shares of common stock to deliver in satisfaction of a sale by such holder
of the shares of common stock that were to have been converted from Series A-1 Preferred Stock) within five calendar days after
notice of such buy-in;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;&nbsp;</P>


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<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we fail to pay in full all amounts owed on account of any event of default under the Registration Rights Agreement;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we fail to have a sufficient number of authorized and unreserved shares of common stock to issue upon conversion of our
Series A-1 Preferred Stock;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we fail to observe or perform any other covenant, agreement, or warranty contained in or otherwise commit any breach of
any of our Certificate of Designation for Series A-1 Preferred Stock, the Purchase Agreement, the Warrants, the Registration Rights
Agreement, the escrow agreement entered into in connection with the Purchase Agreement, or the lock-up agreements entered into
in connection with the Purchase Agreement, and such failure or breach continues past any applicable cure date;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we redeem more than a de minimis number of our common stock other than in connection with repurchases of our common stock
from departing officers and directors in an amount not to exceed, in aggregate, $100,000;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if there is a change in control of more than forty percent (40%) of the voting securities other than by means of conversion
of our Series A-1 Preferred Stock, or a merger, consolidation, or sale of assets occurs and the stockholders existing prior to
such transaction retain less than sixty percent (60%) of the voting power following such transaction, or if more than one half
of the members of the board of directors are replaced in any given year and such replacement is not approved by a majority of the
individuals who are currently on the board of directors;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if we experience certain bankruptcy related events;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if our common stock fails to be listed or quoted for trading on a trading market for more than five trading days; or</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>if any monetary judgment or write is entered or filed against us for more than $50,000 and such judgment or writ remains unvacated,
unbonded or unstayed for 45 days.</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series A-1 Preferred Stock has been
issued subject to certain negative covenants described below, which are restrictions on the Company that will remain in effect
for as long as any shares of Series A-1 Preferred Stock are outstanding, unless the holders of at least 67% in stated value of
the then outstanding shares of Series A-1 Preferred Stock have otherwise given prior written consent. These negative covenants
include the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>other than indebtedness permitted pursuant to the Certificate of Designations and until less than 1,000 shares of Series A-1
Preferred Stock remain outstanding, we may not issue, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness
for borrowed money of any kind on any of our property or assets;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>other than liens permitted pursuant to the Certificate of Designations, we may not enter into, create, incur, assume or suffer
to exist any liens of any kind on our property or assets;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>we may not amend our charter documents, including, without limitation, our certificate of incorporation and bylaws, in any
manner that materially and adversely affects any rights of the holders of our Series A-1 Preferred Stock;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>we may not repay or repurchase or otherwise acquire more than a de minimis number of shares of our common stock other than
in connection with (i) the conversion of our Series A-1 Preferred Stock or exercise of the Warrants and (ii) repurchases of common
stock of departing officers and directors, provided that such repurchases shall not exceed an aggregate of $100,000 for all officers
and directors for so long as the Series A-1 Preferred Stock is outstanding;</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>we may not pay cash dividends or distributions on our common stock; and</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>we may not enter into any transaction with any of our affiliates which would be required to be disclosed in any public filing
with the SEC, unless such transaction is made on an arm&rsquo;s-length basis and expressly approved by a majority of disinterested
members of our board of directors (even if constituting less than a quorum otherwise required for board approval).</TD></TR></TABLE>

<P STYLE="margin-top: 0pt; margin-bottom: 0pt; font: 10pt Times New Roman, Times, Serif">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">No share of Series A-1 Preferred Stock affords any
preemptive rights or is assessable or entitled to the benefits of any sinking or repurchase fund.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Warrants and Convertible Notes</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Warrants Issued in Connection with our
January 25, 2011 Private Placement Offering</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Investor Warrants.</I> We issued five-year
warrants to purchase 2,717,223 shares of our common stock, at an exercise price of $1.50 per share, in exchange for the warrants
contained in the securities purchased by investors in our January 25, 2011 Private Placement Offering. These warrants may be exercised
on a cashless basis in certain circumstances. The exercise price and number of shares of our common stock issuable upon exercise
of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization,
reorganization, merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection.
No fractional shares will be issued upon exercise of these warrants. If, upon exercise of these warrants, a holder would be entitled
to receive a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number of
shares of our common stock to be issued to the warrant holder or otherwise equitably adjust the exercise and exercise price per
share. Of the warrants described above, as of January 22, 2013, warrants to purchase 2,941,143 shares of our common stock are outstanding
and the current exercise price is $1.3859, subject to future adjustments.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Century Warrants.</I> We issued five-year
warrants to purchase 5,000,000 shares of our common stock, at an exercise price of $3.00 per share, in exchange for the warrants
held by the members of 22nd Century prior to the consummation of the January 25, 2011 Private Placement Offering. These warrants
may be exercised on a cashless basis in certain circumstances. The exercise price and number of shares of our common stock issuable
upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization,
reorganization, merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection.
No fractional shares will be issued upon exercise of these warrants. If, upon exercise of these warrants, a holder would be entitled
to receive a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number of
shares of our common stock to be issued to the warrant holder or otherwise equitably adjust the exercise and exercise price per
share. Of the warrants described above, as of January 22, 2013, warrants to purchase 5,494,304 shares of our common stock are outstanding
and the current exercise price is $2.7302, subject to future adjustments.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Conversion Warrants.</I> We issued five-year
warrants to purchase an aggregate of 434,755 shares of our common stock, at an exercise price of $1.50 per share, in exchange for
the warrants issued to the placement agent and sub-placement agent in the January 25, 2011 Private Placement Offering. These warrants
contain a cashless exercise provision. The exercise price and number of shares of our common stock issuable upon exercise of the
warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization,
merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection. No fractional
shares will be issued upon exercise of these warrants. If, upon exercise of these warrants, a holder would be entitled to receive
a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number of shares of our
common stock to be issued to the warrant holder or otherwise equitably adjust the exercise and exercise price per share. Of the
warrants described above, as of January 22, 2013, warrants to purchase 470,582 shares of our common stock are outstanding and the
current exercise price is $1.3859, subject to future adjustments.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><I>Advisor Warrants.</I> We issued five-year
warrants to purchase 500,000 shares of our common stock, at an exercise price of $1.50 per share, to the placement agent in the
January 25, 2011 Private Placement Offering. These warrants contain a cashless exercise provision. The exercise price and number
of shares of our common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the
event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. These warrants also provide holders
with weighted-average anti-dilution price protection. No fractional shares will be issued upon exercise of these warrants. If,
upon exercise of these warrants, a holder would be entitled to receive a fractional interest in a share, we may, in our discretion,
upon exercise, round up to the nearest whole number of shares of our common stock to be issued to the warrant holder or otherwise
equitably adjust the exercise and exercise price per share. Of the warrants described above, as of January 22, 2013, warrants to
purchase an aggregate of 541,204 shares of our common stock are outstanding and the current exercise price is $1.3859, subject
to future adjustments.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Convertible Notes Issued in December 2011</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On December 14, 2011, we entered into an
agreement with certain accredited investors, whereby such investors acquired approximately $1.9 million of convertible promissory
notes of the Company. The notes were issued with an original issue discount of approximately 15%.&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The notes are convertible into shares of
our common stock at any time prior to maturity of the note at a per share conversion price equal to $0.75. <FONT STYLE="color: black">These
</FONT>convertible notes <FONT STYLE="color: black">provide holders with weighted-average anti-dilution price protection. </FONT>Additionally,
upon conversion of all or a portion of the note into our common stock, each investor will receive at that time a warrant to purchase
such number of shares of common stock equal to 120% of such number of shares of common stock issuable upon conversion of the note,
with the these warrants having an exercise price of $1.50 per share. <FONT STYLE="color: black">These warrants, after issuance,
also provide holders with weighted-average anti-dilution price protection. No fractional shares will be issued upon exercise of
these warrants. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The notes initially matured on December
14, 2012, provided, however that certain of the holders elected to extend the maturity date of their respective notes to April
14, 2013. Prior to December 14, 2012, holders of $205,000 of the notes elected to convert such notes into shares of our common
stock and into warrants to purchase shares of our common stock pursuant to the terms of the notes. Holders of $1,330,000 of the
notes agreed to extend the maturity date of the notes to April 14, 2013, holders of $100,000 of the notes elected to convert into
shares of the our common stock pursuant to the terms of the notes, holders of $215,000 of the notes elected to enter into a forbearance
agreement, and holders of $30,000 of the notes agreed to be paid over time. As a result of the foregoing and pursuant to the adjustments
contained in the terms of the notes, the exercise price of the warrants issued upon conversion of the notes is $1.23 per share
as of January 22, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Of the convertible
notes described above, as of January 22, 2013, $1,429,330 of such convertible notes, including all accrued interest, remain outstanding
and may be converted into approximately 2,040,734 shares of common stock, at a conversion rate of $0.7004 per share. Upon conversion
of such convertible note described above, warrants will be issuable to purchase 2,688,771 shares of common stock. Of those warrants
issuable upon conversion of such convertible notes, warrants to purchase </FONT>239,890<FONT STYLE="color: black"> shares of common
stock were the result of inducements granted to the holders of such convertible notes to execute the lock-up agreements described
below.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company may force the conversion of
the notes under certain circumstances. The warrants, when and as issued upon conversion of the notes, have a term of five years
and are exercisable at any time on or before the fifth anniversary of the issue date of the warrants. The warrants may be exercised
on a cashless basis. To the extent an holder does not elect to convert its notes into warrants as described above, the principal
amount of the notes not so converted shall be payable in cash by the Company on the applicable maturity date. <FONT STYLE="color: black">The
exercise price and number of shares of our common stock issuable upon exercise of the warrants may be adjusted in certain circumstances,
including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. </FONT>On January
24, 2013, we sent out notices to the holders of the notes regarding our intent to repay the notes at the expiration of a 15-day
period during which time the holders may convert to common stock and warrants to purchase common stock.<FONT STYLE="color: black">
</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><I>Warrants Issued in 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On May 15, 2012, we entered into an agreement
with certain accredited investors, whereby the investors acquired warrants with a 5-year term to purchase up to 1,710,833 shares
of our common stock at an exercise price of $1.00 per share. <FONT STYLE="color: black">The exercise price and number of shares
of our common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merger or consolidation. These warrants also provide holders with weighted-average
anti-dilution price protection. No fractional shares will be issued upon exercise of these warrants. Of the warrants described
above, a</FONT>s of January 22, 2013, warrants to purchase an aggregate of 1,863,716 shares of common stock are outstanding and
the exercise price has been reduced to $0.60 per share, subject to future adjustment, due to the issuance of the convertible notes
issued on August&nbsp;9, 2012, with such amount including <FONT STYLE="color: black">warrants to purchase 140,883 shares of common
stock that were the result of inducements granted to the holders of such convertible notes to execute the lock-up agreements described
below</FONT>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On November 9, 2012, we entered into an
agreement with certain accredited investors, whereby the investors acquired warrants with a 5-year term to purchase up to 1,619,000
shares of our common stock at an exercise price of $1.00 per share. The exercise price and number of shares of our common stock
issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or
our recapitalization, reorganization, merger or consolidation. These warrants also provide holders with anti-dilution price protection.
No fractional shares will be issued upon exercise of these warrants. Of the warrants described above, as of January 22, 2013, warrants
to purchase an aggregate of 1,672,950 shares of common stock are outstanding and the exercise price has been reduced to $0.60 per
share, subject to future adjustment, due to the issuance of the Series A-1 Preferred Stock on January 11, 2013, with such amount
including <FONT STYLE="color: black">warrants to purchase 53,950 shares of common stock that were the result of inducements granted
to the holders of such convertible notes to execute the lock-up agreements described below</FONT>.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Convertible Notes Issued in August 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On August 9, 2012, we completed a private
placement of $222,600 of convertible notes, which were sold at a 6% discount. We received proceeds of $210,000. The face amount
of the notes may be converted into common stock at the rate of $0.60 per share at the option of the note holder. In the event a
holder of the convertible notes elects to convert the note into shares of common stock, then the holder shall receive 371,000 warrants
representing one-hundred percent of the number of shares of common stock into which the notes were convertible into. However, in
the event we pay the convertible notes at maturity, then the holder shall receive warrants equal to fifty percent of the number
of shares of common stock into which the notes were convertible into. The warrants have a five-year term and a $1.00 per share
exercise price. <FONT STYLE="color: black">The exercise price and number of shares of our common stock issuable upon exercise of
the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization,
merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection. </FONT>As of
January&nbsp;22, 2013, all of such convertible notes remain outstanding.&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Warrants Issued in 2013</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 11, 2013, we entered into an
agreement with certain accredited investors for Series A-1 Preferred Stock, whereby the investors each acquired a Series A Warrant,
a Series B Warrant, and a Series C Warrant (which we refer to collectively in this prospectus as the Warrants). The Series A Warrant
allows the holders the right to acquire, initially before any adjustments to the conversion price, up to an additional 4,166,666
shares of our common stock at an exercise price of approximately $0.72 per share over a period of five (5) years. The Series A
Warrant also allows for such warrant to be exercised on a cashless basis. As of January 22, 2013, Series A Warrants to purchase
an aggregate of 4,166,666 shares of our common stock are outstanding and an initial exercise price of $0.72 per share, subject
to adjustment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Series B Warrant allows the holders
a one-year period to exercise an overallotment option as contained in the Series B Warrant to purchase, initially before any adjustments
to the conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at a price of $0.60 per share. The
Series B Warrant may not be exercised on a cashless basis except only in certain limited circumstances. In the event the holders
exercise, in whole or in part the overallotment option as contained in the Series B warrant, then the holders shall have the right
to exercise on a pro rata basis the portion of the Series C Warrant issued to the holders to acquire, initially before any adjustments
to the conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at an exercise price of approximately
$0.72 per share over a period of five (5) years. The Series C Warrant allows for such warrant to be exercised on a cashless basis.
As of January 22, 2013, Series B Warrants to purchase an aggregate of 2,083,334 shares of our common stock are outstanding with
an initial exercise price of $0.60 per share, subject to adjustment, and Series C Warrants to purchase an aggregate of 2,083,334
shares of our common stock are outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Warrants contain exercise and conversion
limitations providing that a holder thereof may not exercise to the extent (but only to the extent) that, if after giving effect
to such exercise, the holder or any of its affiliates would beneficially own in excess of 9.99% of the outstanding shares of common
stock immediately after giving effect to such exercise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Each of the Warrants contain standard anti-dilution
adjustments in the event of a stock dividend, stock split or similar corporate transaction. In addition, if, at any time while
any of the Warrants are outstanding, we sell any common stock (or securities issuable into common stock) or grant any option to
purchase any common stock at an effective price per share that is lower than the then exercise price of the applicable Warrants,
then the exercise price shall be reduced to equal the effective price per share (as determined pursuant to the applicable Warrant)
of the diluting issuance. No adjustments will be made for shares of common stock or options granted to employees, officers or directors
under our Equity Incentive Plan, upon conversion or exchange of any securities outstanding as of the time of the issuance of the
Warrants or in connection with certain business combinations. In the event we (i) declare dividends on our common stock, (ii) grant
any right to acquire common stock or other property pro rata to all of our holders of our common stock or (iii) enter into a fundamental
transaction that provides for consideration to the holders of our common stock, then the Warrants shall have the right to participate
on a pro rata as-converted basis without regard to the 9.99% beneficial ownership limitation.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Options</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">October 21, 2010, the Company established
the EIP for officers, employees, directors, consultants and advisors to the Company and its affiliates, consisting of 4,250,000
shares of common stock. The EIP authorizes the grant of incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock, restricted stock units, performance shares, restricted stock and restricted stock units. As of January
22, 2013, 2,520,000 shares remained available for issuance under the EIP (including 465,000 shares subject to outstanding option
awards, with a weighted average exercise price of $0.69).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Registration Rights</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We agreed to a covenant in conjunction with
the purchase agreement executed in connection with the sale of the Series A-1 Preferred Stock and Warrants to use our commercially
reasonable efforts to file with the SEC this registration statement, within thirty (30) days following. We will use our commercially
reasonable efforts to cause this registration statement to be declared effective by the SEC within sixty (60) calendar days of
filing with the SEC (105 days if the SEC reviews such registration statement). If (i) we are late in filing this registration statement,
(ii) we fail to file with the SEC a request for acceleration in accordance with Rule 461 of the Securities Act within five trading
days of our being notified by the SEC that this registration statement will not be subject to further review by the SEC, (iii)
we fail to timely file a pre-effective amendment or otherwise respond in writing to comments made by the SEC in respect of this
registration statement, (iv) this registration statement is late in being declared effective by the SEC, or (v) following the effective
date of this registration statement, this registration statement ceases to remain continuously effective as to the registrable
securities contained herein, then the holders of registrable common stock shall be entitled to monetary damages equal to two percent
(2%) of the aggregate purchase price paid by such holder pursuant to the purchase agreement upon the occurrence of one of the foregoing
events and for each full month thereafter until the applicable event is cured.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In the event any shares of common stock
are removed from the registration statement in response to a comment from the staff of the SEC limiting the number of shares of
common stock which may be included in this registration statement or which may be resold by the holders of registrable common stock
in accordance with Rule 144 under the Securities Act, we shall give the holders at least five (5) trading days prior written notice
along with the calculations as to such holder&rsquo;s allotment. In the event we amend this registration statement in accordance
with the foregoing, we will use our best efforts to file with the SEC, as promptly as allowed by the SEC or to registrants of securities
in general, one or more registration statements on Form S-1 or such other form available to register for resale those registrable
securities that were not registered for resale on the initial registration statement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We shall keep this registration statement
effective and up to date until the earlier of (i) the date on which the securities may be resold by the selling stockholders without
registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for
us to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar
effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other
rule of similar effect.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">If, at any time there is not an effective
registration statement covering all of the common stock to be registered hereunder, the holders of the Warrants and Series A-1
Preferred Stock shall have &ldquo;piggyback&rdquo; registration rights for the shares of common stock underlying such Warrants
and Series A-1 Preferred Stock with respect to any registration statement filed by us following the effectiveness of the registration
statement described above, which would permit the inclusion of such underlying shares.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Lockup Agreements</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In connection with the issuance of the
Series A-1 Preferred Stock on January 11, 2013, all of our directors and officers and one 5% stockholder were required to sign
a lock-up agreement which restricts all such persons from selling virtually all of the securities of the Company owned by each
such person for the period of time from January 11, 2013 until the date which is two (2) months after the effective date of this
registration statement. Under such lock-up agreement, the one 5% stockholder and our officers are permitted to sell up to 50,000
shares each during the entire term of the lock-up period, at a rate of no more than 5,000 shares per trading day per each person.
Our officers were not given any inducements to agree to sign such lock-up agreements. The 5% stockholder was granted a 5-year
warrant to purchase 25,000 shares of common stock at an exercise price of $0.72 per share as an inducement to sign such lock-up
agreement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As a further requirement of the
issuance of the Series A-1 Preferred Stock on January 11, 2013, investors in the Company that purchased the December 2011
convertible notes, investors in the Company participated in the May 2012 private placement, and investors in the Company that
participated in the November 2011 private placement were required to sign a separate lock-up agreement which restrict all
such investors from selling certain securities of the Company owned by each such investor for the period of time from January
11, 2013 until the date which is two (2) months after the effective date of this registration statement. As an inducement
granted to execute lock-up the agreements, we offered investors that participated in the May 2012 private placement and
November 2011 private placement a pro rata portion of an increase of the warrants, in the aggregate, to acquire an additional
194,833 shares of common stock. As an inducement granted to execute the lock-up agreements, we also offered our December 2011
note holders a pro rata portion of an increase of the warrants, upon conversion of such notes, in the aggregate, to acquire
an additional 239,890 shares of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Liability and Indemnification of Directors and Officers</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Nevada Revised Statutes Sections 78.7502
and 78.751 provide us with the power to indemnify any of our directors and officers. The director and officer must have conducted
himself or herself in good faith and reasonably believe that his or her conduct was in, or not opposed to, out best interests.
In a criminal action, the director, officer, employee, or agent must not have had reasonable cause to believe that his or her conduct
was unlawful.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Under Nevada Revised Statutes Section 78.751,
advances for expenses may be made by agreement if the director or officer affirms in writing that he or she believes that he or
she has met the statutory standards and will personally repay the expenses if it is determined that such officer or director did
not meet the statutory standards.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our amended and restated articles of incorporation
allow for indemnification of directors and officers to the maximum extent permitted by the Nevada Revised Statutes.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Insofar as indemnification for liability
under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions,
or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Future Stock Issuances</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Except as expressly set forth herein or
pursuant to the EIP, we have no current plans to issue any additional shares of our capital stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Trading Information</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our common stock is quoted on the OTC Bulletin
Board under the symbol &ldquo;XXII.OB.&rdquo;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>Transfer Agent </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The transfer agent and registrar for our
common stock is Continental Stock Transfer &amp; Trust Company, 17 Battery Place, 8th Floor, New York, NY 10004. We will serve
as warrant agent for the outstanding warrants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Legal Matters</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The validity
of the securities offered by this prospectus will be passed upon by Foley &amp; Lardner, LLP. Foley &amp; Lardner, LLP owns 1,000,000
shares of common stock of the </FONT>Company and holds a promissory note issued by the Company to Foley &amp; Lardner LLP in the
principal amount of $175,000 which bears interest at the rate of 5% per annum and has a maturity date of July 1, 2014.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Experts</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Freed Maxick CPAs, P.C.<FONT STYLE="color: black">
(formerly Freed Maxick &amp; Battaglia CPAs, PC), an independent registered public accounting firm, has audited the financial statements
of 22nd Century Group, Inc. as of December 31, 2011 and for each of the years in the two (2)-year period ended December 31, 2011,
as stated in their report appearing herein, and have been so included in reliance upon the report of the firm given upon their
authority as experts in accounting and auditing.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>



<P STYLE="margin: 0"></P>
<P STYLE="margin: 0"></P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center"></P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Changes
In and Disagreements With Accountants<BR>
On Accounting and Financial Disclosure</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 27, 2011, our Board approved
the dismissal of Child, Van Wagoner &amp; Bradshaw, PLLC (&ldquo;Child&rdquo;), as our independent registered public accounting
firm and engaged Freed Maxick CPAs, PC (&ldquo;Freed&rdquo;), as our independent registered public accounting firm, both effective
as of January 27, 2011. Freed was the independent registered public accounting firm of 22nd Century Limited, LLC prior to the
Merger and, given that the business of 22nd Century Limited, LLC is now our sole line of business, our Board concluded that Freed
should serve as our independent registered public accounting firm.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Child&rsquo;s report on our financial statements
for each of 22nd Century Group, Inc.&rsquo;s past two fiscal years ended September 30, 2010 and 2009 did not contain an adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, except
that the report was qualified as to 22nd Century Group, Inc.&rsquo;s ability to continue as a going concern.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the fiscal years ended September
30, 2010 and 2009 and the subsequent interim period through January 27, 2011, there were no: (i) disagreements with Child on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure which, if not resolved
to the satisfaction of Child, would have caused Child to make reference to the matter in their report, or (ii) reportable events
as defined in Item 304(a)(1)(v) of Regulation S-K.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the fiscal years ended September
30, 2010 and 2009 and the subsequent interim period through January 27, 2011, neither 22nd Century Group, Inc. nor anyone acting
on its behalf consulted Freed regarding either: (i) the application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that
was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described
in Item 304(a)(1)(v) of Regulation S-K).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-transform: uppercase; text-align: center">Where You
Can Find More Information</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We file annual, quarterly and special reports,
proxy statements and other information with the SEC under the Exchange Act (File No. 000-54111). We have also filed with the SEC
a registration statement on Form S-1 under the Securities Act to register the shares offered by this prospectus. The term &ldquo;registration
statement&rdquo; means the original registration statement and any and all amendments thereto, including the schedules and exhibits
to the original registration statement or any amendment. This prospectus is part of that registration statement. This prospectus
does not contain all of the information set forth in the registration statement or the exhibits to the registration statement.
For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the
registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other documents
filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the SEC&rsquo;s
public reference facilities and Internet site referred to below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 24.5pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">You may read or obtain copies of these
reports and other information filed with the SEC by us at the public reference facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 for information regarding the operations of its Public Reference
Room and any copying charges assessed by the SEC. The SEC also maintains a website at <U>http://www.sec.gov</U> that contains
registration statements, reports, proxy information statements and other information regarding registrants regarding registrants
(including us) that file electronically. The information contained on the SEC&rsquo;s website is not intended to be incorporated
by reference in this prospectus and you should not consider that information a part of this prospectus.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY LIMITED, LLC AND SUBSIDIARY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">INDEX TO FINANCIAL STATEMENTS</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 5%; text-align: justify">&nbsp;</TD>
    <TD STYLE="width: 89%; text-align: justify">&nbsp;</TD>
    <TD STYLE="width: 6%; text-decoration: underline; text-align: justify"><FONT STYLE="font-size: 10pt"><U>Page</U></FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: justify"><FONT STYLE="font-size: 10pt"><B>Report of Independent Registered Public Accounting Firm</B></FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-</FONT>2</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD COLSPAN="2" STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: justify"><FONT STYLE="font-size: 10pt"><B>Consolidated Financial Statements:</B></FONT></TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Balance Sheets December 31, 2011 and 2010</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-</FONT>3</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Operations For the Years Ended December 31, 2011 and 2010</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-4</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Shareholders&rsquo; Deficit For the Years Ended December 31, 2011 and 2010</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-</FONT>5</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Cash Flows For the Years Ended December 31, 2011 and 2010</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-</FONT>6</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Notes to the December 31, 2011 Consolidated Financial Statements</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-</FONT>7</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Balance Sheets September 30, 2012 (unaudited) and December 31, 2011</FONT></TD>
    <TD STYLE="text-align: justify">F-21</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Operations For the Three Months Ended September 30, 2012 and 2011 (unaudited)</FONT></TD>
    <TD STYLE="text-align: justify">F-2<FONT STYLE="font-size: 10pt">2</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Operations For the Nine Months Ended September 30, 2012 and 2011 (unaudited)</FONT></TD>
    <TD STYLE="text-align: justify">F-23</TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2012 and 2011 (unaudited)</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-24</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Consolidated Statements of Shareholders&rsquo; Deficit For the Nine Months Ended September 30, 2012 (unaudited)</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-25</FONT></TD></TR>
<TR STYLE="vertical-align: top; background-color: White">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: justify">&nbsp;</TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">Notes to the September 30, 2012 Consolidated Financial Statements</FONT></TD>
    <TD STYLE="text-align: justify"><FONT STYLE="font-size: 10pt">F-26</FONT></TD></TR>
</TABLE>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>



<P STYLE="margin: 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The Board of Directors and Shareholders</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">22nd Century Group, Inc.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We have audited the
accompanying consolidated balance sheets of <FONT STYLE="color: black">22nd Century Group, Inc. and Subsidiaries </FONT>as of December&nbsp;31,
2011 and 2010, and the related consolidated statements of operations, shareholders&rsquo; deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company&rsquo;s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 19.85pt; color: #221E1F">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of <FONT STYLE="color: black">22nd
Century Group, Inc. </FONT>as of December 31, 2011 and 2010, and the consolidated 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.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.25in"><FONT STYLE="color: black">The
accompanying consolidated financial statements have been prepared assuming that 22nd Century Group, Inc. will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, 22nd Century Group, Inc. has suffered recurring losses
from operations and as of December 31, 2011 has negative working capital of approximately $1.9 million and a shareholders&rsquo;
deficit of approximately $1.2 million</FONT>.<FONT STYLE="color: black"> Additional financing will be required during 2012 in order
to satisfy existing current obligations and finance working capital needs, as well as additional losses from operations that are
expected in 2012. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="padding-right: 0; padding-left: 0; width: 50%">/s/ FREED MAXICK CPAs, P.C.</TD>
    <TD STYLE="width: 50%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="padding-right: 0; padding-left: 0">(Formerly Freed Maxick &amp; Battaglia, CPAs, PC)</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="padding-right: 0; padding-left: 0">&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="padding-right: 0; padding-left: 0">Buffalo, New York</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="padding-right: 0; padding-left: 0">April 16, 2012</TD>
    <TD>&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="width: 100%; font-weight: bold; text-align: center">22nd CENTURY GROUP INC. AND SUBSIDIARIES</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">CONSOLIDATED BALANCE SHEETS</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">December 31, 2011 and December 31, 2010</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; padding-bottom: 1pt; border-bottom: Black 1pt solid">&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-left: 0.25in">ASSETS</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Current assets:</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%; padding-left: 9pt">Cash</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">252,249</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">310</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Grant receivable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">223,540</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Due from related party</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">15,491</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Due from officers</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">7,714</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 9pt">Inventory</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">678,123</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">308,662</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Prepaid expenses</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">17,675</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">211,717</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Total current assets</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">971,252</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">744,229</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Other assets:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Patent and trademark costs, net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,387,104</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,467,623</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Office furniture and fixtures, net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">7,862</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">587,133</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Deferred debt isuance costs, net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">22,405</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt; padding-left: 9pt">Deposits</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,535</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt; padding-left: 0.25in">Total other assets</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,417,371</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">2,056,291</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt; padding-left: 27pt">Total assets</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,388,623</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,800,520</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">LIABILITIES AND SHAREHOLDERS' DEFICIT</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Current liabilities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Demand bank loans</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">174,925</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">174,925</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Accounts payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,064,892</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,900,684</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Accrued interest payable to shareholders</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">21,502</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">190,977</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Accrued expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">545,578</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">227,724</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Deferred grant revenue</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">223,540</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Notes payable to shareholders, net of unamortized discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">25,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,095,643</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Notes payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">400,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Convertible notes, net of unamortized discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">641,886</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Due to related party</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">6,942</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Due to officers</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">3,200</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Total current liabilities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,873,783</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">4,823,635</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Long term notes payable to shareholders, net of unamortized discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">140,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">65,557</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Long term portion of notes payables</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">37,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Warrant liability</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">550,000</TD><TD STYLE="text-align: left; padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">-</TD><TD STYLE="text-align: left; padding-bottom: 1pt">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 27pt">Total liabilities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,600,783</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">4,889,192</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Commitments and contingencies (Note 11)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Shareholders' deficit</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Capital stock authorized:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 0.25in">10,000,000 preferred shares, $.00001 par value</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 0.25in">300,000,000 common shares, $.00001 par value</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Capital stock issued and outstanding:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 0.25in">0 preferred shares</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 0.25in">27,209,646 common shares (16,000,000 at December 31, 2010)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">273</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 9pt">Capital in excess of par value</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">5,822,882</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,598,856</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Accumulated deficit</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(7,041,297</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(5,687,394</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Non-controlling interest - consolidated subsidiary</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">5,982</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(134</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt; padding-left: 0.25in">Total shareholders' deficit</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(1,212,160</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(2,088,672</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt; padding-left: 27pt">Total liabilities and shareholders' deficit</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,388,623</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,800,520</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See accompanying notes to consolidated financial
statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="width: 100%; font-weight: bold; text-align: center">22nd CENTURY GROUP INC. AND SUBSIDIARIES</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">CONSOLIDATED STATEMENTS OF OPERATIONS</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">Years Ended December 31, 2011 and December 31, 2010</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%; font-weight: bold">Revenue</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">788,601</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">49,784</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Other income - therapeutic grant</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">223,540</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.24in">Total revenue</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,012,141</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">49,784</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Operating expenses:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Costs of goods sold</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">418,171</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">27,964</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Research and development</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,097,980</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">363,781</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">General and administrative</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,785,543</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">590,826</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Sales and marketing costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">286,033</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Amortization and depreciation</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">179,953</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">164,456</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">4,767,680</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,147,027</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Operating loss</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(3,755,539</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,097,243</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Other income (expense):</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Gain warrant liability - derivative</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,511,750</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Interest expense and debt expense:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 27pt">Shareholders</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(45,932</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(265,221</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt; padding-left: 27pt">Other</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(58,066</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(61,183</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">2,407,752</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(326,404</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Net loss</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,347,787</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,423,647</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Net (income) loss attributable to non-controlling interest</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(6,116</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">15</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Net loss attributed to common shareholders</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(1,353,903</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(1,423,632</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Loss per common share - basic and diluted</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.05</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.11</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Common shares used in basic earnings per share calculation</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">26,391,204</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">12,437,983</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See accompanying notes to consolidated financial
statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

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    <TD NOWRAP STYLE="width: 100%; font-weight: bold; text-align: center">22nd CENTURY GROUP INC. AND SUBSIDIARIES</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">Years Ended December 31, 2011 and December 31, 2010</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">&nbsp;</TD></TR>
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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif">
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    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Common</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Par value</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Shares</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">of Common</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Contributed</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Accumulated</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Non-controlling</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center"><FONT STYLE="font-size: 8pt">Shareholders'</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Outstanding</FONT></TD><TD STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Shares</FONT></TD><TD STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Capital</FONT></TD><TD STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Deficit</FONT></TD><TD STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Interest</FONT></TD><TD STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 8pt">Deficit</FONT></TD><TD STYLE="padding-bottom: 1pt; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 32%; font-weight: bold"><FONT STYLE="font-size: 8pt">Balance at December 31, 2009</FONT></TD><TD STYLE="width: 1%; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 8%; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">7,089,940</FONT></TD><TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 8%; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 8%; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">2,466,138</FONT></TD><TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="width: 1%; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 8%; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(4,263,762</FONT></TD><TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="width: 1%; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 10%; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(119</FONT></TD><TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="width: 1%; font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="width: 8%; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(1,797,743</FONT></TD><TD STYLE="width: 1%; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Warrants issued</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">405,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">405,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Common Stock issued</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">3,380,908</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">549,870</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">549,870</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Common Stock issued in exchange for services</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">8,132</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">2,192</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">2,192</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Common Stock issued as compensation in lieu of cash</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">346,493</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">68,237</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">68,237</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Common Stock issued as compensation</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">204,053</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">33,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">33,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Expensed portion of warrants as compensation</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">43,108</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">43,108</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Conversion of shareholder note and accrrued interest to common stock</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">165,951</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">31,311</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">31,311</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Warrants exercised for common stock</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">4,804,523</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">Net loss</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">(1,423,632</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">(15</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">(1,423,647</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">Balance at December 31, 2010</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">16,000,000</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">3,598,856</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(5,687,394</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(134</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="font-weight: bold"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(2,088,672</FONT></TD><TD STYLE="font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD><FONT STYLE="font-size: 8pt">Distribution of 5,000,000 warrants for common stock, exercise price of $3.00 per share</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">(1,550,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">(1,550,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Common Shares issued in January 25, 2011 private placement</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">5,434,446</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">2,335,103</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">2,335,103</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Merger of 22nd Century Limited and 22nd Century Group</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">5,325,200</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">268</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">(268</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Stock based compensation</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">450,000</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">5</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">376,432</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">376,437</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">Beneficial conversion feature of convertible debt</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">1,062,759</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">1,062,759</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">Net income (loss)</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">-</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">(1,353,903</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">6,116</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="padding-bottom: 1pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right"><FONT STYLE="font-size: 8pt">(1,347,787</FONT></TD><TD STYLE="padding-bottom: 1pt; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: right"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">Balance at December 31, 2011</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">27,209,646</FONT></TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">273</FONT></TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">5,822,882</FONT></TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(7,041,297</FONT></TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">5,982</FONT></TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt"><FONT STYLE="font-size: 8pt">&nbsp;</FONT></TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">$</FONT></TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right"><FONT STYLE="font-size: 8pt">(1,212,160</FONT></TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left"><FONT STYLE="font-size: 8pt">)</FONT></TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See accompanying notes to consolidated financial
statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="width: 100%; font-weight: bold; text-align: center">22nd CENTURY GROUP INC. AND SUBSIDIARIES</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">CONSOLIDATED STATEMENTS OF CASH FLOWS</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center">Years Ended December 31, 2011 and December 31, 2010</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Cash flows from operating activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 74%; text-align: left; padding-left: 9pt">Net loss</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">(1,347,787</TD><TD STYLE="width: 1%; text-align: left">)</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">(1,423,647</TD><TD STYLE="width: 1%; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Adjustments to reconcile net loss to cash used by operating activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Amortization and depreciation</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">179,953</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">164,456</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Amortization of debt issuance costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,095</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">35,923</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Amortization of debt discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">34,087</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">126,624</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Gain warrant liability - derivative</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2,511,750</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Equity based employee compensation expense</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">376,437</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">144,345</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Equity based payments for outside services</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,192</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Note issued for employee compensation obligation</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">9,537</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Note issued for obligation for outside services</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,192</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Convertible note issued for outside services</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">60,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">(Increase) decrease in assets:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Grant receivable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">223,540</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(223,540</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 27pt">Inventory</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(369,461</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(253,639</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Prepaid expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">194,040</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(211,717</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 27pt">Deposits</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,535</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Increase (decrease) in liabilities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Accounts payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(222,660</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">190,524</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Accrued interest payable to shareholders</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(162,774</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">112,047</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Accrued expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">317,855</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">191,224</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 27pt">Deferred&nbsp; revenue</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(223,540</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">223,540</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Net cash used by operating activities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(3,449,430</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(909,939</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Cash flows from investing activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Acquisition of patents and trademarks</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(598,191</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(108,116</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Acquisition of office furniture and fixtures</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(9,106</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Net cash used by investing activities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(607,297</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(108,116</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Cash flows from financing activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Payment of deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(60,976</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Payment on demand loan</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(71,810</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Proceeds from issuance of notes and warrants to shareholders</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">215,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">723,271</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Proceeds from issuance of convertible notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,300,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Payment of debt issuance costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(23,500</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Payments on borrowings - notes payable&nbsp; to shareholders</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(393,276</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(4,390</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Payments on borrowings - notes payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(50,000</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Proceeds from issuance of common stock</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">549,870</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Net proceeds from January 25, 2011 private placement</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,293,789</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Net payments to related party</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(22,433</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(120,028</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Net (payments to) advances from officers</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(10,914</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">2,270</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt; padding-left: 0.25in">Net cash provided by financing activities</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">4,308,666</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,018,207</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Net&nbsp; increase in cash</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">251,939</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">152</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; padding-bottom: 1pt">Cash - beginning of period</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">310</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">158</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">Cash - end of period</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">252,249</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">310</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Cash paid during the period for interest</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">196,539</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">16,890</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Supplemental disclosure of noncash investing and financing activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Reduction of accounts payable not related to operating activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Payment of accounts payable for patent costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">500,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Payment of accounts payable for deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">526,127</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 27pt">Accounts payable converted to promisory notes</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">587,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">1,613,127</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Deferred private placement costs charged to contributed capital</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">587,133</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Original issue discount on convertible debt</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">251,250</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Conversion of shareholder note to convertible debt</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">215,000</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Conversion of note payable to convertible note</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">100,000</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Beneficial conversion value upon issuance of convertible debt recoded as debt discount and an increase in capital in excess of par value</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">1,062,759</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Conversion of shareholder note and accrued interest to common shares and warrants</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">614,070</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">31,311</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Issuance of warrants as derivative liability instruments and reduction of capital in excess of par value</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">3,061,750</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Patent and trademark additions included in accounts payable</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">39,796</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Deferred private placement cost additions included in accounts payable</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">526,157</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">See accompanying notes to consolidated financial
statements</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP, INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Introduction</I></B><I>
-<B> </B></I></FONT>These consolidated financial statements of 22nd Century Group, Inc. (&ldquo;22nd Century Group&rdquo;) and
its direct and indirect subsidiaries (collectively with 22nd Century Group, the &ldquo;Company&rdquo;) incorporate and reflect
the reverse acquisition of 22nd Century Limited, LLC by 22nd Century Group as described below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 25, 2011, 22nd Century Limited,
LLC (&ldquo;22nd Century Ltd&rdquo;) completed a reverse merger transaction (the &ldquo;Merger&rdquo;) with 22nd Century Group
(formerly Touchstone Mining Limited). As a result, 22nd Century Ltd became a wholly owned subsidiary of 22nd Century Group which
continues to operate the business of 22nd Century Ltd. In connection with the Merger, 22nd Century Group issued 21,434,446 shares
of its common stock to the holders of limited liability company membership interests of 22nd Century Ltd, whose share amount represented
80.1% of the outstanding shares immediately following the Merger. All references contained herein to shareholders or common shares
include the historical members and limited liability company membership interests of 22nd Century Ltd because, in the Merger, limited
liability company membership interests were exchanged for common shares on a one-for-one basis and from an accounting standpoint
they are equivalent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Merger is being accounted for as a reverse
acquisition and a recapitalization; 22nd Century Ltd is the acquirer for accounting purposes. Consequently, the assets and liabilities
and the historical operations that are reflected in the financial statements set forth herein for periods prior to the Merger are
those of 22nd Century Ltd and are recorded at the historical cost basis of 22nd Century Ltd, and the consolidated financial statements
set forth herein for periods beginning on and following completion of the Merger include the assets and liabilities of 22nd Century
Ltd, historical operations of 22nd Century Ltd, and operations of 22nd Century Group from the closing date of the Merger.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Upon the closing of the Merger, 22nd Century
Group transferred all of its operating assets and liabilities to Touchstone Split Corp. and split-off Touchstone Split Corp. through
the sale of all of the outstanding capital stock of Touchstone Split Corp. (the &ldquo;Split-Off&rdquo;). After the completion
of the Merger and Split Off, 22nd Century Group&rsquo;s consolidated financial statements include only the assets and liabilities
of 22nd Century Ltd.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Immediately prior to the Merger on
January 25, 2011, 22nd Century Ltd<FONT STYLE="color: black"> completed a private placement offering (the &ldquo;Private
Placement&rdquo;) of 5,434,446 securities (the &ldquo;PPO Securities&rdquo;) at the purchase price of $1.00 per Unit, each
such Unit consisting of one (1) limited liability company membership interest of 22nd Century Ltd and a five-year warrant to
purchase one-half of one (1/2) limited liability company membership interest of 22nd Century Ltd at an exercise price of
$1.50 per whole common share. In connection with the Private Placement, </FONT>22nd Century Ltd<FONT STYLE="color: black">
approved a prorata distribution of 5,000,000 five-year warrants to purchase one limited liability company membership interest
at an exercise price of $3.00. These warrants were valued at $1,550,000 and classified as liabilities resulting in a decrease
to contributed capital. Private Placement proceeds included $614,070 from the&nbsp;conversion of </FONT>22nd Century Ltd<FONT STYLE="color: black">
indebtedness into PPO Securities and $395,376 from the&nbsp;conversion of placement agent fees into PPO Securities, resulting
in gross cash proceeds of $4,425,000.&nbsp; Private Placement expenses incurred included cash expenses of approximately
$1,025,000 and non-cash expenses consisting of the placement agent fees of $395,376 which were converted into PPO Securities
and $390,000 for the estimated&nbsp;fair value of 934,755 placement agent and advisor warrants issued to the placement agent.
An additional $167,820 of cost was incurred in the second and third quarters of 2011 in connection with the registration
process for the common stock issued in the Private Placement. 22nd Century Ltd/Group received net cash proceeds of
approximately </FONT>$3.2 million<FONT STYLE="color: black"> from the Private Placement </FONT>and a reduction of debt and
accrued interest obligations to shareholders that were on the balance sheet at December 31, 2010 of approximately
$614,000, which was exchanged for equity interests in the offering<FONT STYLE="color: black">. A portion of the proceeds,
amounting to $1,511,750, was allocated to the warrants issued and classified as liabilities (see Note 10).</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The unaudited supplemental pro forma revenue
and net loss attributed to the shareholders of the Company if the acquisition had taken place as of January 1, 2010 are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="RIGHT" STYLE="width: 85%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%; padding-bottom: 2.5pt">Revenue</TD><TD STYLE="width: 1%; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 10%; border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">788,601</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="width: 10%; border-bottom: Black 2.5pt double; text-align: right">49,784</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt">Net loss attributed to shareholders</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">(1,353,903</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(1,473,632</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
</TABLE><BR STYLE="clear: both">

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt"><B><I>Reclassifications</I></B><I> &ndash;
</I>Certain items in the 2010 financial statements have been reclassified to conform to the 2011 classification.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Preferred
stock authorized</I></B><I> &ndash; </I>the authorization is for<I> </I>&ldquo;</FONT><FONT STYLE="font-family: Times New Roman, Times, Serif">blank
check&rdquo; preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common
stock.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Nature
of Business</I></B><I> <B>-</B> </I></FONT>22nd Century Group is a holding company and is the sole member of 22nd Century Ltd,
which is a plant biotechnology company. 22nd Century Ltd owns or exclusively licenses 101 issued patents in 78 countries predominantly
related to modifying the content of nicotinic alkaloids in plants, specifically tobacco plants, through genetic engineering and
plant breeding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The overall objectives of 22nd Century Ltd
are to reduce smoking-related disease by increasing smoking cessation with <I>X-22, </I>its botanical prescription smoking cessation
aid in development and reducing the harm to smokers with 22nd Century&rsquo;s potential modified risk tobacco products, for smokers
unwilling to quit. 22nd Century Ltd, including its subsidiaries, Goodrich Tobacco Company Ltd. (&ldquo;Goodrich Tobacco&rdquo;)
and Hercules Pharmaceuticals, LLC (&ldquo;Hercules Pharmaceuticals&rdquo;) is primarily involved in the following activities:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>The development of its botanical smoking cessation aid, <I>X-22</I>;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>The development of its modified risk tobacco products;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>The pursuit of necessary regulatory approvals at the U.S. Food and Drug Administration (the &ldquo;FDA&rdquo;) to market <I>X-22
</I>as a prescription smoking cessation aid and its proprietary cigarettes<I> </I>as modified risk tobacco products in the U.S.;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>The manufacture, marketing and distribution of <I>RED SUN </I>and<I> MAGIC</I> proprietary cigarettes<I> </I>in traditional
tobacco market channels in the U.S. and for export through its subsidiary Goodrich Tobacco;</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>The international licensing of 22nd Century Ltd&rsquo;s trademarks, brands, proprietary tobaccos, and technology; and</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.5in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>The production of <I>SPECTRUM</I> research cigarettes for the National Institute on Drug Abuse (&ldquo;NIDA&rdquo;).</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Principles
of Consolidation</I></B><I> </I>- The accompanying consolidated financial statements include the accounts of </FONT>22nd Century
Group, 22nd Century Ltd, and Goodrich Tobacco<FONT STYLE="color: black">, a subsidiary of </FONT>22nd Century Ltd<FONT STYLE="color: black">.
22nd Century </FONT>Ltd<FONT STYLE="color: black"> owns 96% of the outstanding membership units of </FONT>Goodrich Tobacco<FONT STYLE="color: black">.
All intercompany accounts and transactions have been eliminated.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Inventory</I></B> - Inventories are
valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO)&nbsp;method. Inventories are evaluated
to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved
as appropriate. The Company&rsquo;s inventory consisted of the following categories:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="width: 60%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">December 31,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">December 31,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 66%; text-align: left">Materials, mainly tobacco</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 14%; text-align: right">678,123</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 14%; text-align: right">292,480</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Finished goods</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">16,182</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt; padding-left: 9pt">Total</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">678,123</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">308,662</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Intangible Assets </I></B>- Intangible
assets are recorded at cost and consist primarily of expenditures incurred with third parties related to the processing of patent
claims and trademarks with government authorities. The Company also capitalized costs as a result of one of its exclusively licensed
patent applications being subject to an interference proceeding invoked by the U.S. Patent and Trademark Office, which favorably
resulted in the Company obtaining rights to a third party&rsquo;s issued patent. The amounts capitalized relate to patents the
Company owns or to which it has exclusive rights and its trademarks, and exclude approximately $1.8 million recovered from a former
licensee as direct reimbursements of costs incurred. These capitalized costs are amortized using the straight-line method over
the remaining statutory life of the Company&rsquo;s primary patent family, which expires in 2019 (the assets&rsquo; estimated lives).
Periodic maintenance or renewal fees, which are generally due on an annual basis, are expensed as incurred. Annual minimum license
fees are charged to expense in the year the licenses are effective. Total patent and trademark costs capitalized and accumulated
amortization amounted to $2,063,812 and $676,708 as of December 31, 2011 ($1,965,621 and $497,998 - as of December 31, 2010). The
estimated annual amortization expense for the next five years is approximately $185,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Impairment of Long-Lived Assets</I></B>&nbsp;-
The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate
that the historical cost-carrying value of an asset may no longer be recoverable.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 13.2pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company assesses recoverability of the
asset by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition. If
the estimated future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset&rsquo;s carrying value and its fair value. There was no impairment loss recorded during
the years ended December 31, 2011 and 2010.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Deferred Private Placement Costs</I></B>
- During 2010, the Company incurred costs related to the Private Placement that closed on January 25, 2011. Such costs were accumulated
on the balance sheet as of December 31, 2010 and were charged against contributed capital upon closing of the offering. Deferred
Private Placement costs were $0 as of December 31, 2011 ($587,133 &ndash; December 31, 2010).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Deferred Debt Issuance Costs</I></B>
&ndash; In the fourth quarter 2011, the Company incurred costs related to the Private Placement of Convertible Notes that closed
on December 16, 2011. These costs were recorded in the balance sheet as a deferred charge and are being amortized over the one
&ndash;year term of the notes. The unamortized balance at December 31, 2011 is $22,405.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Income Taxes</I></B><I> </I>- Prior
to the Merger, the Company was treated as a Partnership for federal and state income tax purposes. As a result, there was no entity
level income tax for periods prior to the Merger because all taxable income tax deductions and tax credits were passed through
to the members of the Company. Following the Merger on January 25, 2011, the Company is treated as a corporation, subject to Federal
and State income taxes. Accordingly, as of the Merger date the Company is required to recognize deferred tax assets and liabilities
for any basis differences in its assets and liabilities between tax and GAAP reporting, and for operating loss and credit carryforwards.
The net deferred tax asset resulting from the change in tax status was approximately $300,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In light of the Company&rsquo;s history
of cumulative losses management has determined that is it more likely than not that its net deferred tax asset will not be realized.
Accordingly the Company established a valuation allowance to fully offset its net deferred tax asset as of the Merger and December
31, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Stock Based Compensation</I></B><I>
</I>- The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and
others receive shares, options or warrants to purchase common shares of 22nd Century Group. Stock based compensation expense is
recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For
accounting purposes, the shares will be considered issued and outstanding upon vesting.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Debt Discounts </I></B>&ndash; Original
issue discount (&ldquo;OID&rdquo;) is recorded equal to the difference between the cash proceeds and the face value of the debt
when issued and amortized as interest expense during the term of the debt.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">When the convertible feature of the
conventional convertible debt is issued, the embedded conversion feature is evaluated to determine if bifurcation and
derivative treatment is required and whether there is a beneficial conversion feature. When the convertible debt provides for
an effective rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature
(&ldquo;BCF&quot;). Prior to the determination of the BCF, the proceeds from the debt instrument were first allocated between
the convertible debt and any embedded or detachable free standing instruments that are included, such as common stock
warrants. The proceeds allocated to any warrants are recorded as a debt discount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">For the Convertible Notes issued December
16, 2011, bifurcation of the embedded conversion feature was not required and the Company recorded the OID and the BCF related
to these Convertible Notes as a debt discount and recorded the Convertible Notes net of the discount related to both the OID and
the BCF. Debt discount is amortized to interest expense over the life of the debt.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Unearned Grant Revenue<FONT STYLE="color: black">
</FONT></I></B><FONT STYLE="color: black">- In 2010<B><I> </I></B>22nd Century Ltd received approval of a government grant as partial
support for its clinical trial for the FDA. All costs associated with this grant were charged to research and development expense
in 2011 and the deferred revenue balance of $223,540 at December 31, 2010 represented proceeds received in advance and was recognized
into income and included in other income on the statement of operations for the year ended December 31, 2011 as the costs were
incurred. Deferred grant revenue was $0 as of December 31, 2011 (as compared to $223,540 as of December 31, 2010). </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Revenue Recognition </I></B>- The
Company recognizes revenue at the point the product is shipped to a customer and title has transferred. Revenue from the sale of
the Company&rsquo;s products is recognized net of cash discounts, sales returns and allowances. Cigarette federal excise taxes
are included in net sales and accounts receivable billed to customers, except on sales of <I>SPECTRUM</I> and exported cigarettes
in which such taxes do not apply.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company was chosen to be a subcontractor
for a 5-year government contract between RTI International (&ldquo;RTI&rdquo;) and the National Institute on Drug Abuse (&ldquo;NIDA&rdquo;)
to supply NIDA research cigarettes which includes four development stages. The company has completed the four developmental stages
and delivered 8,779,000 cigarettes during the year ended December 31, 2011 and recognized the related revenue. These government
research cigarettes are distributed under the mark <I>SPECTRUM</I>. <FONT STYLE="color: black"> Future revenue under this sub-contract
arrangement is expected to be related to the delivery of </FONT><I>SPECTRUM </I><FONT STYLE="color: black">and will be recognized
at the point the product is shipped and title has transferred.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Derivatives -</I></B> We do not use
derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and
then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. The methodology
for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model approach which includes probability
weighted estimates of future events including volatility of our common stock. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months of the balance sheet date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Research and Development</I></B><I>
</I>-<I> </I>Research and development costs are expensed as incurred.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Loss Per Common Share</I></B><I> <B>-</B>
</I>Basic loss per common share is computed using the weighted-average number of common shares outstanding. Diluted loss per share
is computed assuming conversion of all potentially dilutive securities. Potential common shares outstanding are excluded from the
computation if their effect is anti-dilutive.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Commitment and Contingency Accounting</I></B><I>
<B>-</B> </I>The Company evaluates each commitment and/or contingency in accordance with the accounting standards, which state
that if the item is more likely than not to become a direct liability, then the Company will record the liability in the financial
statements. If not, the Company will disclose any material commitments or contingencies that may arise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Use of Estimates</I></B><I> <B>-</B>
</I>The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Recent
Accounting Pronouncements</I></B></FONT> -<FONT STYLE="color: black"> In May 2011, the FASB issued Accounting Standards Update
No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRS.&nbsp;&nbsp;This update results in common principles and requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with U.S. GAAP and IFRS.&nbsp;&nbsp;ASU 2011-04 is required to be applied
prospectively in interim and annual periods beginning after December 15, 2011.&nbsp;&nbsp;Early application is not permitted.&nbsp;&nbsp;The
adoption of ASU 2011 is not expected to have a material impact on the consolidated financial statements.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 2. - LIQUIDITY AND MANAGEMENT&rsquo;S PLANS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Since 2006, 22nd Century Ltd has incurred
substantial operating losses as it transitioned from being only a licensor of its proprietary technology and tobaccos to commercializing
its own tobacco products. At December 31, 2011, the Company had current assets of $971,252 and current liabilities of $2,873,783.
Cash on hand at December 31, 2011 of $252,249 is insufficient to sustain operations and pay outstanding current liabilities as
they become due in 2012. The Company has suspended clinical trials for <I>X-22</I> in order to reduce expenditures and is seeking
licensing agreements for its products with both domestic and international businesses. The Company&rsquo;s Board of Directors authorized
management to seek additional financing involving equity securities <FONT STYLE="color: black">which will be dilutive to 22nd Century
Group&rsquo;s existing shareholders&rsquo; respective ownership percentages. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company continues to explore the developing
distribution channels for its proprietary cigarettes, <I>RED SUN</I> and <I>MAGIC</I>, through its subsidiary, Goodrich Tobacco.
The Company currently has no distribution arrangements and no orders for these products. Although orders from RTI for <I>SPECTRUM</I>
are expected in 2012 the Company has no outstanding backlog of orders as of December 31, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company&rsquo;s ability to fund operations
and meet its obligations during 2012 will be dependent upon obtaining additional equity financing and signing one or more significant
licensing arrangements for its products. There can be no assurance that the Company will be able to raise sufficient equity financing
or obtain a significant licensing contract.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 3. - AMOUNTS OWED NORTH CAROLINA STATE UNIVERSITY (&ldquo;NCSU&rdquo;)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Pursuant to the
terms of an exclusive license agreement with NCSU, the Company owes NCSU approximately $753,000 as of December 31, 2011 for patent
costs and license fees (as compared to $1,128,000 owed as of December 31, 2010). These amounts are included in accounts payable
and accrued liabilities in the consolidated balance sheets. The Company was required to pay these amounts within thirty days of
being invoiced and they are past due. NCSU has the right to claim interest on the balance. During 2011 the Company paid NCSU a
total of approximately $745,000 for past due amounts as well as current patent costs and royalties. Management periodically communicates
its plans for commercialization of products using the technology licensed from NCSU and believes its relations with NCSU are sound.
In order to facilitate the Company&rsquo;s plans to raise capital and commercialize its products NCSU agreed, in a letter dated
November 22, 2011, not to invoke its rights to terminate for non-payment or non-performance that it may have under the agreement
until October 15, 2012. After October 15, 2012, if the Company is still delinquent as to amounts owed, NCSU may have the right
to terminate the exclusive license agreement,</FONT> but can only do so with a 60-day prior written notice, including the opportunity
to cure within this timeframe<FONT STYLE="color: black">. As of December 31, 2011, patent costs associated with the exclusive license
agreements that could potentially be terminated had a carrying value of approximately $700,000. Additionally, NCSU has not imposed
interest charges on past due amounts invoiced to the Company and as such the Company has not recorded accrued interest or interest
expense. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>NOTE</B>&nbsp;<B>4. - DEMAND BANK LOANS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The demand loan that is among the Company&rsquo;s
short term liabilities is payable to a commercial bank under a revolving credit agreement and is guaranteed by a shareholder of
the Company. This loan had a balance of $174,925 at December 31, 2011 and 2010. The Company is required to pay interest monthly
at an annual rate of 0.75% above the prime rate, or 4.00% at December 31, 2011 and December 31, 2010. The Company is current in
meeting this interest payment obligation. The terms of the demand loan includes an annual &ldquo;clean-up&rdquo; provision, which
requires the Company to repay all principal amounts outstanding for a period of 30 consecutive days every year. The Company has
not complied with this requirement; however, the bank has not demanded payment. The bank has a lien on all the Company&rsquo;s
assets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 5. - NOTES PAYABLE - SHAREHOLDERS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Notes payable to shareholders consisted
of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 31.5pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%">Note dated January 25, 2011</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 10%; font-weight: bold; text-align: right">140,000</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Notes dated September 15 and October 15, 2009, &nbsp;net of unamortized discount</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">25,000</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">20,557</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Note dated October 28, 2008</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">325,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Note dated November 11, 2008</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">325,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Note dated May 20, 2009</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">30,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Note dated January 1, 2008</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">100,014</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Note dated May 27, 2010</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">45,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Note dated September 1, 2010</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">35,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Notes dated October 4, 2010</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">150,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Note dated December 29, 2010</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">100,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Note payable to repurchase common shares</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">30,629</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right"><B>165,000</B></TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">1,161,200</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The notes payable
in the table below are shown in the balance sheet as follows:&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 31.5pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%; text-align: left">Notes payable to shareholders, net of unamortized discount</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 10%; font-weight: bold; text-align: right">25,000</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">1,095,643</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Long term notes payable to shareholders, net of unamortized discount</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">140,000</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">65,557</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated January 25, 2011(unsecured)</I></B>
- On January 25, 2011, the Company issued a note for $140,000 to a shareholder as satisfaction of the balance due for principal
and interest on matured notes that were not paid in cash or converted to common stock of 22nd Century Group and warrants to purchase
shares of common stock of 22nd Century Group. The note bears interest at 12% and is due on July 1, 2013 together with accrued interest.
As of December 31, 2011, the outstanding principal amount of this note is $140,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Notes Dated
September 15 and October 15, 2009</I> <I>(unsecured)</I></B> - On September 15, 2009 and October 15, 2009, the Company issued two
notes payable to the same third party in the amounts of $15,000 and $10,000, respectively. In conjunction with the $15,000 note,
a warrant to purchase 185,503 common shares of 22nd Century </FONT>Ltd<FONT STYLE="color: black"> at less than $.0001 per unit
was issued, and in conjunction with the $10,000 note, a warrant to purchase 92,751 common shares of 22nd Century</FONT> Ltd<FONT STYLE="color: black">
at less than $.0001 per unit was issued. The warrants were valued at $11,301 for the $15,000 note and $6,962 for the $10,000 note,
were recorded as discounts to the respective notes payable and are being amortized over the term of each note which significantly
adjusts the effective interest rate. The intrinsic value of the warrants at the time of issuance was determined to be $68,750;
the debt discount recorded was based on allocating the $25,000 in transaction proceeds proportionally between the notes and the
warrants. The notes bear interest at a rate of 10% and the outstanding principal and interest is due and payable at maturity -
January 31, 2012 in each case. As of December 31, 2011, the total outstanding principal and unamortized debt discounts for the
two notes amounted to $25,000 and $0 (as compared to $25,000 and $4,443 at December 31, 2010), respectively. The warrants were
exercised in 2010 prior to the Merger.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Following maturity on January 31, 2012 the
notes remain unpaid. The Company has attempted to negotiate an extension and the note holder has demanded payment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated October 28, 2008</I></B>
- On October 28, 2008, the Company issued a note payable to a third party in the amount of $325,000. The interest rate on the note
was 10% and the outstanding principal and interest was due and payable on October 28, 2010, the maturity date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">This note matured and remained outstanding
at December 31, 2010; however, in January and February 2011 this note together with the $30,000 note dated May 20, 2009 (described
below), and all the related accrued interest of $77,300 were satisfied by: (i) conversion of $150,000 into equity in connection
with the January 25, 2011 Private Placement; (ii) a cash payment of $142,300; and (iii) a new note dated January 25, 2011 (see
Note 6) payable in the amount of $140,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated November 11, 2008</I></B>
- On November 11, 2008, the Company issued a note payable to a shareholder in the amount of $325,000. The interest rate on the
note was 10% and the outstanding principal and interest was due and payable on November 11, 2010, the maturity date. This note
was extended as set forth below and remained outstanding at December 31, 2010.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The extended maturity date on the note was
January 10, 2011 and the interest rate during the extension period was 15%. Following the maturity of this note on January 10,
2011, the principal amount of $325,000 was converted to equity in connection with the January 25, 2011 Private Placement and the
accrued interest was paid in cash.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 31.5pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 31.5pt"><B><I>Note Dated May 20, 2009</I> <I>(unsecured)</I></B>
- On May 20, 2009, the Company issued a note payable in the amount of $30,000 to the same third party that was issued the October
28, 2008 note. The interest rate on the note was 10% and the outstanding principal and interest was due and payable on May 19,
2010, the maturity date. The $30,000 in principal and accrued interest remained outstanding as of December 31, 2010. This note
was satisfied in January and February 2011 together with the October 28, 2008 note as described previously.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated January 1, 2008 (unsecured)</I>
</B>- The Company issued a note to a shareholder on January 1, 2008 payable in the amount of $100,014. The interest rate on the
note was 7%; the interest and principal were due on January 15, 2011, the maturity date, and were paid in cash in January 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated May 27, 2010 (unsecured)
</I></B>- During 2010, the holder of the Notes dated September 15 and October 15, 2009 advanced additional funds, totaling $450,000,
to the Company and obtained conversion rights to warrants to acquire shares of common stock. In March 2010, $225,000 was converted
into warrants to acquire 1,706,626 shares of common stock and this amount was recorded as equity. Pursuant to an agreement effective
on May 27, 2010, in exchange for the remaining $225,000 advanced, the Company issued warrants to acquire 1,409,821 shares of common
stock and a note for $45,000. The note bears interest at 10%, which is due with the principal amount on January 31, 2012. The note
was satisfied in January 2011 by conversion to equity in connection with the January 25, 2011 private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated September 1, 2010 (unsecured)
</I></B>- On September 1, 2010, the Company issued a note payable to a shareholder in the amount of $35,000. The interest rate
on the note was 15%, and, pursuant to an extension, the interest and principal were due on January&nbsp;25, 2011, the extended
the maturity date. The note was paid in cash in January 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Notes Dated October 4, 2010 (unsecured)</I>
</B>- The Company issued notes payable to seven shareholders in the aggregate amount of $150,000. The interest rate on each of
these notes was 15%, and the interest and principal were due on the maturity date of January 31, 2011. These notes were satisfied
in January 2011 by conversion of $87,367 to equity in connection with the January 25, 2011 Private Placement and by payment of
$62,633 in cash.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated December 29, 2010 (unsecured)</I>
</B>&ndash; The Company issued a note payable to a shareholder in the amount of $100,000. The interest rate on this note was 15%,
and the interest and principal were due on the maturity date of January 29, 2011. The note was paid in cash in January 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Payable to Repurchase Common
Shares</I></B> <B><I>(unsecured)</I></B> - On December 31, 2010, the Company agreed to repurchase 51,637 common shares previously
issued to a shareholder in exchange for a $35,019 note, which $30,629 remained unpaid as of December 31, 2010. The interest rate
on the note was 7% and the outstanding principal and interest were due and payable on September 30, 2010, the maturity date. The
note remained unpaid at the maturity date; the outstanding principal balance and accrued interest were paid in cash in February
2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 6. - NOTES PAYABLE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Notes payable consisted of the following
as of the dates set forth below:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 31.5pt">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%">Convertible note dated March 31, 2011</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">87,000</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt">Note dated March 30, 2011</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">350,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">437,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Less long term portion of notes payable</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(37,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Notes Payable (shown in current liabilities)</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">400,000</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><FONT STYLE="text-underline-style: double">&nbsp;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Convertible Note Dated March 31, 2011(unsecured)</I></B>
- On March 31, 2011, the Company issued a note to a vendor in the original amount of $237,000 as satisfaction of past due invoices
previously recorded by the Company in accounts payable. The note bears interest at an annual rate of 9%. In December 2011 the note
was amended and the principal was reduced by a cash payment of $50,000 and $100,000 exchanged for $115,000 of the Convertible Notes
issued December 16, 2011 so that the remaining principal balance under the note is $87,000 as of December 31, 2011. The note amendment
also provided for principal payments together with accrued interest to be due as follows: $50,000, May 1, 2012 and $37,000 January
1, 2013, the maturity date. The note is convertible into common stock of the Company at the option of the holder after December
18, 2011. The conversion rate will be determined at the time of conversion based on the average of the closing price of the Company&rsquo;s
common stock on the day of and day after the conversion date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated March 30, 2011(unsecured)</I></B>
- On March 30, 2011, the Company issued a note to a vendor in the amount of $350,000 as satisfaction of past due invoices previously
recorded by the Company in accounts payable. The note bears interest at an annual rate of 4%. Principal and accrued interest are
due on July 1, 2012. This maturity date is automatically accelerated if the Company receives funding of $5,000,000 or more prior
to July 1, 2012. As of December 31, 2011, the outstanding principal on this note is $350,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 7. - CONVERTIBLE NOTES ISSUED DECEMBER 16, 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Company issued
Convertible Notes on December 16, 2011 in a negotiated sale with 24 investors in the total face amount of $1,926,250. The notes
were sold for $1,675,000 - an original issue discount of $251,250. The notes do not bear interest and the total face amount of
$1,926,250 is due December 16, 2012. The notes can be converted, at the option of each holder, in whole or in part, into shares
of the Company&rsquo;s common stock at $0.75 per share at which time the holder shall also receive </FONT>warrants equal to 120%
of the number of shares of Company common stock into which such Notes have been then converted<FONT STYLE="color: black">. Such
warrants will have a term of five years and an exercise price of $1.50 per share of common stock. </FONT>In the event the Company
engages in a subsequent financing transaction of at least $5,000,000 in shares of Company&rsquo;s common stock with a sale price
equal to or greater than $0.80 per share or debt securities which are convertible into shares of Company common stock with a conversion
price equal to or greater than $0.80 per share of common stock, then the Company will have the right to mandatorily require the
conversion of the Notes. Also, in the event of subsequent financing transaction of at least $5,000,000, the note holders have &ldquo;piggyback&rsquo;
registration rights of the common shares and warrants underlying the conversion of the notes. The notes contain &ldquo;down round&rdquo;
provisions which provide for adjustments to the conversion price if the Company issues shares of common stock of 22nd Century Group
at a price that is less than the exercise price. The conversion feature was not considered to be a derivative because it does not
have a net cash settlement provision as a result of the limited market and trading activity for the underlying stock. If the notes
are converted the warrants issued at conversion have a &ldquo;down round provision&rdquo; and will be classified as derivatives
for accounting purposes, which (similarly to the January 25, 2011 Warrants) means they are reported as a liability and marked to
market at each balance sheet date. &nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company&rsquo;s common stock closed
at $0.90 per share on December 16, 2011, which is greater than the portion of the conversion price under the notes allocated to
the underlying common shares. This difference is a beneficial conversion feature which was valued at $1,062,759 at the issue date
and recorded as debt discount and additional paid in capital.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Three officers of the Company acquired a
portion of these Convertible Notes - with a face value of $368,000 for cash of $105,000 and conversion of $215,000 short term unsecured
12% notes issued by the Company earlier in 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table summarizes the notes
and related discount as of December 31, 2011:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 87%; text-align: left">Face value of Convertible Notes payable upon issuance and through maturity</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">1,926,250</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Less original issue discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(251,250</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Less discount related to BCF</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,062,759</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Plus amount of discount amortized to interest and debt expense in 2011</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">29,645</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt">Convertible notes, net of unamortized debt discount as of December, 31, 2011</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right"><B>641,886</B></TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Subsequent to December 31, 2011, notes amounting to
$86,250 were converted into 115,000 shares of common stock resulting in the issuance of 138,000 common stock warrants.&nbsp;
This conversion triggered the &ldquo;down round&rdquo;&nbsp; provision of the January 25, 2011 warrants resulting in an
adjustment to the exercise price, as well as number of shares issuable under the warrants.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 8. - DUE FROM or TO RELATED PARTY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Company has
conducted transactions with a related party, </FONT>Alternative Cigarettes, Inc. (&ldquo;AC&rdquo;). AC is entirely owned by certain
shareholders of the Company, including the CEO. AC shares office space and employee services with the Company. During the year
ended December 31, 2011 the Company acquired its <I>MAGIC</I> trademark from AC for a purchase price of $22,500; other activity
during 2011 and 2010 consisted mainly of repayments and advances. The net amount due from AC amounted to $15,491 as of December
31, 2011 (as compared with the Company owing AC $6,942 as of December 31, 2010). No interest has been accrued or paid on amount
due from or to AC and there are no repayment terms.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 9. - DUE FROM or DUE TO OFFICERS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The amount due from officers of $7,714 at
December 31, 2011 (as compared with $0 due from officers as of December 31, 2010) is primarily related to employee portion of FICA
on restricted stock awards to be recovered from the employee.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Amount due to officers is a result of advances
to the Company for working capital purposes and Company expenses paid directly by the officers net of advances or reimbursements.
As of December 31, 2011, the net amount due to officers was $0 (as compared with $3,200 due to officers as of December 31, 2010).
No interest has been accrued or paid on any amount due to officers and there are no repayment terms.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 10. - WARRANTS FOR COMMON STOCK</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Prior to December 31, 2010, 22nd Century
Ltd granted warrants to purchase common shares of 22nd Century Group in connection with borrowings as an additional incentive for
providing financing to the Company and as additional compensation to officers, consultants and advisors. The warrants were granted
with a conversion price of less than $.0001, and the number of warrants issued was negotiated based on the agreement at the time
of the grant. These warrants had been issued for terms of two to five years. All of these warrants were exercised prior to December
31, 2010.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In connection with the January 25, 2011
Private Placement and Merger, the Company issued 8,651,978 five year warrants (&ldquo;January 25, 2011 Warrants&rdquo;) to purchase
shares of common stock of 22nd Century Group as follows: 5,000,000 with an exercise price of $3.00 per share, and 3,651,978 with
an exercise price of $1.50 per share. These warrants contain &ldquo;down round&rdquo; provisions which provide for adjustments
to the exercise price if the Company issues common shares of stock of 22nd Century Group at a price that is less than the respective
warrant exercise prices. This provision is a guarantee of value which requires that these warrants be classified as derivatives
for accounting purposes which means they are reported as a liability and marked to market at each balance sheet date. &nbsp;The
original amount of the warrant liability related to the 5,000,000 $3.00 warrants was $1,550,000 and was recorded as a reduction
of equity on January 25, 2011; the original amount of the warrant liability related to the 3,651,978 $1.50 warrants is $1,511,750,
and, because it was recorded as a liability, the portion of proceeds from the Private Placement that was recorded as contributed
capital was reduced accordingly. As of December 31, 2011 there are 3,651,978 January 25, 2011 Warrants with an exercise price of
$1.50 and 5,000,000 January 25, 2011 Warrants with an exercise price of $3.00.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company estimated the initial value
of the warrant liability at January 25, 2011 using the binomial lattice model to allocate total enterprise value to the warrants
and other securities in the Company&rsquo;s capital structure based upon the enterprise value implied in the January 25, 2011 <FONT STYLE="color: black">Private
Placement</FONT>. Consideration was also given to the impact of expected future capital raises and issuances of securities under
the Company&rsquo;s 2010 Equity Investment Plan (&ldquo;EIP&rdquo;). Volatility was estimated based on historical observed equity
volatilities and implied (forward) or expected volatilities for a sample group of guideline companies and consideration of recent
market trends.<FONT STYLE="color: black"> </FONT>The fair value of this warrant liability as of December 31, 2011 was estimated
to be $550,000 which was determined using the binomial lattice model with updated for the factors used in the initial valuation
performed as of January 25, 2011, principally: the equity value of the Company, the remaining exercise period and the decrease
in the risk free interest rate. &nbsp;As a result a gain of $2,511,750 was recorded as other income in the statement of operations
during 2011. The following table is a roll-forward of the warrant liability from the initial valuation:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 70%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 83%">Fair value of warrant liability as of January 25, 2011</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 14%; text-align: right">3,061,750</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Gain as a result of change in fair value</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(2,511,750</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt; padding-left: 9pt">Fair value at December 31, 2011</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">550,000</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B>&nbsp;</B>&nbsp;</P>

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    <!-- Field: /Page -->
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">ASC 820 establishes a valuation hierarchy
for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels
as follows.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.25in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.25in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the
asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial
instrument.</TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.25in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>Level 3 inputs are unobservable inputs based on the Company&rsquo;s own assumptions used to measure assets and liabilities
at fair value.</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">A financial asset or liability&rsquo;s classification within
the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The warrant liability
is measured at fair value using certain estimated factors such as volatility and probability and are classified within Level 3
of the valuation hierarchy.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The following table summarizes the warrant activity since December
31, 2009:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 90%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number of Warrants</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 82%; font-weight: bold">Warrants outstanding at December 31, 2009</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 15%; font-weight: bold; text-align: right">1,688,076</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Warrants issued during 2010</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,116,447</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Warrants exercised during 2010</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(4,804,523</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">Warrants outstanding at December 31, 2010</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>January 25, 2011 Warrants issued</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">8,651,978</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Warrants exercised during 2011</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: right; padding-bottom: 1pt"></TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">Warrants outstanding at December 31, 2011</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">8,651,978</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">Warrants exercisable at December 31, 2011</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">8,651,978</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><FONT STYLE="text-underline-style: double"><B>&nbsp;</B></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 11. - COMMITMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>License Agreements</I></B><FONT STYLE="color: black">&nbsp;-
Under its exclusive license agreement with NCSU, the Company is required to pay minimum annual royalty payments, which are credited
against running royalties on sales of licensed products. The annual minimum royalty for each of the calendar years 2010 through
2013 is $75,000, and in 2014 the annual minimum royalty increases to $200,000. The license agreement continues through the life
of the last-to-expire patent, which is expected to be 2022. These minimum royalty payments are due each February following the
end of the applicable calendar year and are reduced by any running royalties paid or payable for that year. The agreement also
requires a milestone payment of $150,000 upon FDA approval of a product that uses the NCSU licensed technology. The Company is
also responsible for reimbursing NCSU for actual third-party patent costs incurred. These costs vary from year to year and the
Company has certain rights to direct the activities that result in these costs. During the year ended December 31, 2011, the costs
incurred related to patent costs and patent maintenance amounted to $93,343 (as compared to $125,956 during the year ended December
31, 2010).</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company has two other exclusive license
agreements which require aggregate annual license fees of approximately $55,000, which are credited against running royalties on
sales of licensed products. Each license agreement continues through the life of the last-to-expire patent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company entered into a three year lease
for approximately 3,800 square feet of office space in Clarence, NY, which commenced September 1, 2011. Scheduled rent remaining
as of December 31, 2011 is as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<TABLE CELLSPACING="0" CELLPADDING="0" ALIGN="CENTER" STYLE="font: 10pt Times New Roman, Times, Serif; width: 18%">
<TR STYLE="vertical-align: bottom; background-color: #CCFFCC">
    <TD STYLE="width: 52%">2012</TD>
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%">$</TD>
    <TD STYLE="width: 44%; text-align: right">32,667</TD>
    <TD STYLE="width: 1%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: white">
    <TD>2013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>$</TD>
    <TD STYLE="text-align: right">37,833</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: #CCFFCC">
    <TD>2014</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>$</TD>
    <TD STYLE="text-align: right">28,000</TD>
    <TD>&nbsp;</TD></TR>
</TABLE>


<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

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    <!-- Field: /Page -->
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 12. - EARNINGS PER COMMON SHARE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table sets forth the computation
of basic and diluted earnings per common share for the year ended December 31, 2011 and 2010:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 1in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 74%; text-align: left; padding-bottom: 2.5pt">Net loss attributed to common shareholders</TD><TD STYLE="width: 1%; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 10%; border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">(1,353,903</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; font-weight: bold; text-align: left">)</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="width: 10%; border-bottom: Black 2.5pt double; text-align: right">(1,423,632</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -9.35pt; padding-left: 9.35pt">Denominator for basic earnings per&nbsp;share-weighted average shares outstanding</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">26,391,204</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">12,437,983</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Effect of dilutive securities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Warrants, restricted stock and options outstanding</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; font-weight: bold; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; text-indent: -9.35pt; padding-left: 9.35pt">Denominator for diluted earnings per common share - weighted average shares adjusted for dilutive securities</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">26,391,204</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">12,437,983</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt">Loss per common share - basic</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">(0.05</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.11</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt">Loss per common share- diluted</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">(0.05</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.11</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Securities outstanding
that were excluded from the computation because they would have been anti-dilutive are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2010</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 68%">Warrants</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 13%; text-align: right">8,651,978</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 13%; text-align: right">-</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; text-indent: -9.35pt; padding-left: 9.35pt">Convertible Debt Issued December 16, 2011(number of shares including related warrants upon conversion of&nbsp; 3,082,000)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">5,650,333</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Restricted Stock</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">700,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Convertible Note</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">246,707</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt">Options</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">35,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">15,284,018</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 13. - STOCK BASED COMPENSATION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">On October 21,
2010, the Company established the 2010 Equity Incentive Plan (&ldquo;EIP&rdquo;) for </FONT>officers, employees, directors, consultants
and advisors to the Company and its affiliates<FONT STYLE="color: black">, consisting of 4,250,000 shares of common stock. The
EIP has a term of ten years and is administered by our Board of Directors (&ldquo;Board&rdquo;) or a committee to be established
by our Board (the &ldquo;Administrator&rdquo;), to determine the various types of incentive awards that may be granted to recipients
under this plan and the number of shares of common stock to underlie each such award under the EIP. The EIP also contains a provision
which restricts the plan to granting awards relating to no more than 1,600,000 shares of common stock of 22nd Century Group during
the first twelve months following the effective date of the Merger.</FONT> <FONT STYLE="color: black">On March 31, 2011, the Company
filed a Form S-8 registration statement with the SEC to register all of the shares of common stock of 22nd Century Group that it
may issue under the EIP. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">The number of shares
of common stock of 22nd Century Group subject to the EIP, any number of shares subject to any numerical limit in the EIP, and the
number of shares and terms of any incentive award will be adjusted in the event of any change in outstanding common stock of 22nd
Century Group by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification,
merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The EIP authorizes the grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares,
restricted stock and restricted stock units.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">All awards made under the EIP may be subject
to vesting and other contingencies as determined by the Administrator and will be evidenced by agreements approved by the Administrator
which set forth the terms and conditions of each award.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company accounts for stock-based compensation
under the provisions of ASC Topic 718, &ldquo;<I>Compensation &mdash; Stock Compensation.</I>&rdquo; The Company recognizes compensation
cost in its financial statements for all share based payments granted, modified, or settled during the period. For awards with
graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period, generally the related
vesting period.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On April 1, 2011, under our EIP, the Board
granted an aggregate of 1,150,000 shares of common stock of 22nd Century Group to officers and directors of which 450,000 shares
vested immediately and incentive stock options to key employees to purchase an aggregate of 35,000 shares of 22nd Century Group&rsquo;s
common stock. The Company has non-vested awards for 700,000 restricted shares outstanding; 600,000 of the outstanding restricted
shares vest at the rate of 150,000 shares annually over the four-year period ending April 1, 2015 and the remaining 100,000 restricted
shares vest based on achieving a performance milestone which is annual sales of $3 million in cigarettes (not <I>SPECTRUM</I> or
<I>X-22</I>) by December 31, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">For the year ended December 31, 2011, the
Company recorded compensation expense $376,437 ($51,000 included in research and development expense and $325,437 included in general
and administrative expense).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On February 1, 2009, the Company granted
an award for service<FONT STYLE="color: black"> to an executive officer of 445,207 warrants to purchase common shares, vesting
over a one year service period ending February 1, 2010. The related compensation cost of $258,662 was determined by the intrinsic
value of the underlying common shares at the time of the award of $0.58 per unit and was charged to expense on a straight line
basis over the service period. The cost was fully amortized in the first quarter of 2010 with a charge of $43,090. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As of December 31, 2011, unrecognized compensation
expense related to non-vested restricted shares with annual vesting amounted to $186,469 and non-vested stock options amounted
to $9,135. No expense was recorded for restricted stock grants with milestone vesting not considered probable, which had a fair
value at grant date of $51,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the year ended December
31, 2011:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="width: 50%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 83%; text-align: left">Risk-free interest rate</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 14%; text-align: right">3.5</TD><TD STYLE="width: 1%; text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Expected dividend yield</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">0</TD><TD STYLE="text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Expected stock price volatility</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">90</TD><TD STYLE="text-align: left">%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Expected life of options</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD NOWRAP STYLE="text-align: right">10 years</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company estimated the expected volatility
based on data used by peer group of public companies. The expected term was estimated using the contract life of the option. The
risk-free interest rate assumption was determined using the equivalent U.S. Treasury bonds yield over the expected term. The Company
has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company
assumed an expected dividend yield of zero.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A summary of all stock option activity for
the year ended December 31, 2011 is as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="padding-bottom: 1pt"><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><FONT STYLE="font-weight: normal">&nbsp;</FONT></P></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Number
                                                                                                                                                                                                                                                                              of
                                                                                                                                                                                                                                                                              <BR>
                                                                                                                                                                                                                                                                              Options</P></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Weighted
                                                                                                                                                                        <BR>
                                                                                                                                                                        Average
                                                                                                                                                                        <BR>
                                                                                                                                                                        Exercise
                                                                                                                                                                        <BR>
                                                                                                                                                                        Price</P></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Weighted <BR>
    Average <BR>
    Remaining<BR>
    Contractual <BR>
    Term</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Aggregate
                                                                                                                                                                                                                                                                              <BR>
                                                                                                                                                                                                                                                                              Intrinsic
                                                                                                                                                                                                                                                                              <BR>
                                                                                                                                                                                                                                                                              Value</P></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: normal; text-align: justify">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: normal; text-align: justify">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: normal; text-align: center">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: normal; text-align: center">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: normal; text-align: left">Outstanding at December 31, 2010</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">-</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">$</TD><TD STYLE="font-weight: normal; text-align: right">-</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 48%; font-weight: normal; text-align: left; padding-bottom: 1pt; padding-left: 9pt">Granted in 2011</TD><TD STYLE="width: 1%; font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 1pt solid; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; border-bottom: Black 1pt solid; font-weight: normal; text-align: right">35,000</TD><TD STYLE="width: 1%; padding-bottom: 1pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">1.20</TD><TD STYLE="width: 1%; padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="width: 1%; padding-bottom: 1pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 10%; font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="width: 1%; padding-bottom: 1pt; font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: normal; text-align: left; padding-bottom: 2.5pt">Outstanding at December 31, 2011</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: right">35,000</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">$</TD><TD STYLE="font-weight: normal; text-align: right">1.20</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: center">9.67 years</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">$</TD><TD STYLE="font-weight: normal; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: normal; text-align: left; padding-bottom: 2.5pt">Exercisable at December 31, 2011</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">$</TD><TD STYLE="font-weight: normal; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: center">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">$</TD><TD STYLE="font-weight: normal; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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    <!-- Field: /Page -->
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The weighted average grant date fair value of options granted
during the year ended December 31, 2011 was $1.04.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 14 - INCOME TAXES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following is a summary of the components
giving rise to the income tax provision (benefit) for the years ended December 31, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The provision (benefit) for income taxes consists of the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 70%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Current:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 9pt">Federal</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt; padding-left: 9pt">State</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Total current</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Deferred:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 82%; padding-left: 9pt">Federal</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 15%; text-align: right">(1,284,145</TD><TD STYLE="width: 1%; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt; padding-left: 9pt">State</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(288,654</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Total deferred</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,572,799</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Change in valuation allowance</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,572,799</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The provision (benefit) for income tax varies from that which
would be expected based on applying the statutory federal rate to pre-tax accounting loss as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 70%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: right">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 82%; text-align: left">Statutory federal rate</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 15%; text-align: right">(34.0</TD><TD STYLE="width: 1%; text-align: left">)%</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Permanent items</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">0.2</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Change in tax status</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(20.8</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">State tax provision, net of federal benefit</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(4.7</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Valuation allowance</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">59.3</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt">Effective tax rate</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">0.0</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">%</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Individual components of deferred taxes consist of the following:&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 70%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Deferred tax assets:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 82%; text-align: left; padding-left: 9pt">Net operating loss carryforwards</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 15%; text-align: right">2,033,122</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Derivative liability</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">212,773</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,245,895</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Deferred tax liabilities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Prepaid expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(6,838</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Patents and trademarks</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(180,795</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 9pt">Stock-based compensation</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(81,265</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Beneficial conversion feature of convertible debt</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(404,198</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(673,096</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Valuation allowance</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(1,572,799</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 9pt">Net deferred taxes</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As of December 31, 2011 the Company has
a deferred tax liability of $404,198, which is based on the tax effect of the difference in basis between GAAP and tax purposes
for the beneficial conversion feature on the convertible notes issued December 16, 2011. The Company&rsquo;s valuation allowance
was also offset to account for the deferred tax liability. This deferred tax liability will decrease as the as the beneficial conversion
feature is amortized over the term of the notes. When the Company determines that the valuation allowance can be eliminated in
its entirety, the tax effect of the beneficial conversion feature of $411,139 will reverse into contributed capital.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="color: black">&nbsp;</FONT>&#9;<FONT STYLE="color: black">&nbsp;</FONT>&#9;<FONT STYLE="color: black">&nbsp;</FONT>&#9;<FONT STYLE="color: black">&nbsp;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company incurred a net operating loss
of approximately $5,300,000 from the Merger to December 31, 2011 and this amount is being carried forward to future years and expires
on December 31, 2031. Due to the uncertainty of the Company&rsquo;s ability to generate sufficient taxable income in the future
before they expire, the company has recorded a valuation allowance to reduce the net deferred tax asset to zero. This NOL is included
in the net deferred tax asset that has been fully offset by the valuation allowance</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">ASC 740 provides guidance on the financial
statement recognition and measurement for uncertain income tax positions that are taken or expected to be taken in a company&rsquo;s
income tax return. The Company has no uncertain tax positions as of December 31, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The Company&rsquo;s federal and state tax returns for the years
ended December 31, 2009 to December 31, 2011, including the pre-Merger short period from January 1, 2011 through January 25, 2011,
are currently open to audit under the statutes of limitations. There are no pending audits as of December 31, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 15. - SUBSEQUENT EVENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In January 2012, the Company entered into an Agreement (the
&ldquo;Agreement&rdquo;) with one of its vendors to resolve payables of approximately $259,000. Pursuant to the terms of the Agreement,
the Company paid $50,000 and issued 1,000,000 shares of its common stock to the vendor which satisfied the outstanding amount payable
and established a credit for the Company for future services of approximately $172,000. The shares of common stock issued were
valued at the average of the closing sale prices of such common stock on the Over-The-Counter Bulletin Board (OTCBB) for a ten
(10) trading day period (resulting in an approximate value of $381,000).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 1.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 1.5in">&nbsp;&nbsp;</P>



<P STYLE="margin: 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CONSOLIDATED BALANCE SHEETS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>September 30, 2012 with Comparative
Figures at December 31, 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<!-- Field: Rule-Page --><DIV ALIGN="LEFT" STYLE="margin-top: 3pt; margin-bottom: 3pt"><DIV STYLE="font-size: 1pt; border-top: Black 1pt solid; border-bottom: Black 1pt solid; width: 100%">&nbsp;</DIV></DIV><!-- Field: /Rule-Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">December&nbsp;31,</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">(unaudited)</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-left: 0.25in">ASSETS</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Current assets:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; padding-left: 9pt">Cash</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">5,941</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">252,249</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Due from related party</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">23,969</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">15,491</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Due from officers</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">7,714</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 9pt">Inventory</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,154,190</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">678,123</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Prepaid expenses</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">26,342</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">17,675</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Total current assets</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,210,442</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">971,252</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Other assets:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Patent and trademark costs, net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,366,184</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,387,104</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Office furniture and fixtures, net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">6,488</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">7,862</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">46,875</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Deferred debt issuance costs, net</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">8,464</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">22,405</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt; padding-left: 0.25in">Total other assets</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,428,011</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,417,371</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt; padding-left: 27pt">Total assets</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,638,453</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,388,623</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">LIABILITIES AND SHAREHOLDERS' DEFICIT</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Current liabilities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Demand bank loans</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">174,925</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">174,925</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Accounts payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,308,138</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,064,892</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Accrued interest payable to related parties</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,719</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">21,502</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Accrued expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">554,412</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">545,578</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Due to officers</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">50,206</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Notes payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">623,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">425,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Convertible notes, net of unamortized discount</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,551,054</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">641,886</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Total current liabilities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">4,265,454</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2,873,783</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Long term portion of notes payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">177,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Convertible notes, net of unamortized discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">77,720</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Warrant liability</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">653,933</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">550,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 27pt">Total liabilities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">4,997,107</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,600,783</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Commitments and contingencies (Note 10)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Shareholders' deficit</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Capital stock authorized:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 0.25in">10,000,000 preferred shares, $.00001 par value</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 0.25in">300,000,000 common shares, $.00001 par value</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">&nbsp;&nbsp;Capital stock issued and outstanding:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 0.25in">0 preferred shares</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 0.25in">31,048,979 common shares (27,209,646 at December 31, 2011)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">312</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">273</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-left: 9pt">Capital in excess of par value</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">7,112,246</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">5,822,882</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Accumulated deficit</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(9,471,212</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(7,041,297</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Non-controlling interest - consolidated subsidiary</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">5,982</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt; padding-left: 0.25in">Total shareholders' deficit</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(2,358,654</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(1,212,160</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt; padding-left: 27pt">Total liabilities and shareholders' deficit</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,638,453</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">2,388,623</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See accompany notes to consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CONSOLIDATED STATEMENTS OF OPERATIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Three Months Ended September 30, 2012
and 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(unaudited)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<!-- Field: Rule-Page --><DIV ALIGN="LEFT" STYLE="margin-top: 3pt; margin-bottom: 3pt"><DIV STYLE="font-size: 1pt; border-top: Black 1pt solid; border-bottom: Black 1pt solid; width: 100%">&nbsp;</DIV></DIV><!-- Field: /Rule-Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">September&nbsp;30,&nbsp;2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">September&nbsp;30,&nbsp;2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; font-weight: bold">Revenue</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">15,683</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">529,370</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Other income - therapeutic grant</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">80,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 9pt">Total revenue</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">15,683</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">609,370</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Operating expenses:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Costs of goods sold</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">60,852</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">130,495</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Research and development</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">155,318</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">711,996</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">General and administrative</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">370,240</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">451,087</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Sales and marketing costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">11,363</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">37,106</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Amortization and depreciation</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">50,458</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">44,630</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">648,231</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,375,314</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Operating loss</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(632,548</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(765,944</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Other income (expense)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Warrant liability change - net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">535,017</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">337,500</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Interest expense and amortization of debt discount and expense:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Related parties</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(55,793</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(9,401</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt; padding-left: 0.25in">Other</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(295,601</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(12,526</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">183,623</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">315,573</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Net loss</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(448,925</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(450,371</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Net income attributable to non-controlling interest</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(14,711</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Net loss attributed to common shareholders</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(448,925</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(465,082</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Loss per common share - basic and diluted</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.01</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.02</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Common shares used in basic earnings per share calculation</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">31,048,979</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">27,209,646</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See accompany notes to consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

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    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CONSOLIDATED STATEMENTS OF OPERATIONS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Nine Months Ended September 30, 2012
and 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(unaudited)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<!-- Field: Rule-Page --><DIV ALIGN="LEFT" STYLE="margin-top: 3pt; margin-bottom: 3pt"><DIV STYLE="font-size: 1pt; border-top: Black 1pt solid; border-bottom: Black 1pt solid; width: 100%">&nbsp;</DIV></DIV><!-- Field: /Rule-Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">September&nbsp;30,&nbsp;2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">September&nbsp;30,&nbsp;2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; font-weight: bold">Revenue</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">15,683</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">801,636</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Other income - therapeutic grant</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">223,540</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 9pt">Total revenue</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">15,683</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,025,176</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Operating expenses:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Costs of goods sold</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">60,852</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">224,146</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Research and development</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">484,316</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,509,050</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">General and administrative</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,732,162</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,381,480</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Sales and marketing costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">46,045</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">267,810</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Amortization and depreciation</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">146,374</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">132,432</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">2,469,749</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">3,514,918</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Operating loss</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2,454,066</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2,489,742</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Other income (expense)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Warrant liability change - net</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,167,416</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">337,500</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Interest expense and amortization of debt discount and expense:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Related parties</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(194,074</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(28,177</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 1pt; padding-left: 0.25in">Other</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(950,647</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(24,939</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">22,695</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">284,384</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Net loss</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2,431,371</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2,205,358</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt">Net loss (income) attributable to non-controlling interest</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,456</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(13,004</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Net loss attributed to common shareholders</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(2,429,915</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(2,218,362</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Loss per common share - basic and diluted</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.08</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">(0.08</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Common shares used in basic earnings per share calculation</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">29,477,387</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">26,263,743</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">See accompany notes to consolidated financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<!-- Field: Page; Sequence: 100; Value: 1 -->
    <DIV STYLE="margin-top: 12pt; margin-bottom: 6pt; border-bottom: Black 1pt solid"><TABLE CELLPADDING="0" CELLSPACING="0" STYLE="width: 100%; font: 10pt Times New Roman, Times, Serif"><TR><TD STYLE="text-align: center; width: 100%">F-<!-- Field: Sequence; Type: Arabic; Name: PageNo -->23<!-- Field: /Sequence --></TD></TR></TABLE></DIV>
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    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CONSOLIDATED STATEMENTS OF CASH FLOWS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>Nine Months Ended September 30, 2012
and 2011</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(unaudited)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<!-- Field: Rule-Page --><DIV ALIGN="LEFT" STYLE="margin-top: 3pt; margin-bottom: 3pt"><DIV STYLE="font-size: 1pt; border-top: Black 1pt solid; border-bottom: Black 1pt solid; width: 100%">&nbsp;</DIV></DIV><!-- Field: /Rule-Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">September&nbsp;30,&nbsp;2012</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">September&nbsp;30,&nbsp;2011</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Cash flows from operating activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 76%; text-align: left; padding-left: 9pt">Net loss</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">(2,431,371</TD><TD STYLE="width: 1%; text-align: left">)</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">(2,205,358</TD><TD STYLE="width: 1%; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Adjustments to reconcile net loss to cash used by operating activities:</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Amortization and depreciation</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">146,374</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">132,432</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Amortization of debt issuance costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">18,954</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Amortization of debt discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,053,987</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,999</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Interest due to debt conversion</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">31,350</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Gain warrant liability - derivative</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,167,416</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(337,500</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Equity based employee compensation expense</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">776,441</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">327,458</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 0.25in">Equity based payments for outside services</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">116,940</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">(Increase) decrease in assets:</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Accounts receivable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(86,682</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Grant receivable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">223,540</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 27pt">Inventory</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(476,067</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(524,734</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Prepaid expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">162,579</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">129,294</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-left: 27pt">Deposits</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,535</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Increase (decrease) in liabilities:</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Accounts payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">473,920</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(65,811</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Accrued interest payable to related parties</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(17,783</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(163,101</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Accrued expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">8,842</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">314,722</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 27pt">Deferred&nbsp; revenue</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(223,540</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Net cash used by operating activities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(1,303,248</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2,473,746</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Cash flows from investing activities:</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Acquisition of patents and trademarks</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(570,641</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Acquisition of office furniture and fixtures</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(9,106</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-left: 0.25in">Net cash used by investing activities</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(579,747</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Cash flows from financing activities:</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Proceeds from issuance of notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">56,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">215,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Payments on borrowings - notes payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(35,000</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(458,275</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Net proceeds from January 25, 2011 private placement</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">3,293,888</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Net proceeds from May 2012 private placement</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">786,500</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Proceeds from issuance of convertible notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">210,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 9pt">Deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(10,000</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 9pt">Net payments to related party</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(8,478</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(21,272</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 9pt">Net advances from officers</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">57,920</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">28,217</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 1pt; padding-left: 0.25in">Net cash provided by financing activities</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">1,056,942</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">3,057,558</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left">Net (decrease)&nbsp; increase in cash</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(246,308</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">4,065</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; padding-bottom: 1pt">Cash - beginning of period</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">252,249</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">310</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">Cash - end of period</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">5,941</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">4,375</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Cash paid during the period for interest</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">13,529</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">191,524</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Cash paid during the period for income taxes</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; text-align: left">Supplemental disclosure of noncash investing and financing activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 0.25in">Reduction of accounts payable not related to operating activities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Common stock issued as payment of accounts payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">359,754</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Common stock issued as payment of deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">36,875</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-left: 27pt">Payment of accounts payable for patent costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">500,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-left: 27pt">Payment of accounts payable for deferred private placement costs</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">526,127</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; padding-left: 27pt">Accounts payable converted to promissory notes</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">587,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">396,629</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">1,613,127</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Common stock issued for prepaid services</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">171,246</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Non controlling interest acquired for common stock</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">4,526</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Deferred private placement costs charged to contributed capital</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">587,133</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Notes payable converted to common shares</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">120,750</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Conversion of shareholder note and accrued interest to common shares and warrants</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">614,070</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Original issue discount on convertible debt</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">12,600</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Beneficial conversion value upon issuance of convertible debt recoded as debt discount and an increase in capital in excess of par value</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">63,600</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Issuance of warrants as derivative liability instruments upon conversion of note payable</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">152,100</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Issuance of warrants as derivative liability instruments</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">92,750</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">3,061,750</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Patent and trademark additions included in accounts payable</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">124,080</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; padding-left: 0.25in">Deferred debt issuance costs included in accounts payable</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">5,000</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: left">See accompanying notes to consolidated financial
statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>CONSOLIDATED STATEMENT OF SHAREHOLDERS'
DEFICIT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center"><B>Nine Months Ended September 30, 2012</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>(unaudited)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<!-- Field: Rule-Page --><DIV ALIGN="LEFT" STYLE="margin-top: 3pt; margin-bottom: 3pt"><DIV STYLE="font-size: 1pt; border-top: Black 1pt solid; border-bottom: Black 1pt solid; width: 100%">&nbsp;</DIV></DIV><!-- Field: /Rule-Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Common</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Par&nbsp;value</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="text-align: center">&nbsp;</TD><TD NOWRAP>&nbsp;</TD><TD NOWRAP>&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="text-align: center">&nbsp;</TD><TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Non-</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Shares</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">of&nbsp;Common</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Contributed</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Accumulated</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">controlling</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">Shareholders'</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Outstanding</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Shares</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Capital</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Deficit</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Interest</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Deficit</TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 34%; font-weight: bold">Balance at December 31, 2011</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 8%; font-weight: bold; text-align: right">27,209,646</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 8%; font-weight: bold; text-align: right">273</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 8%; font-weight: bold; text-align: right">5,822,882</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 8%; font-weight: bold; text-align: right">(7,041,297</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">)</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 8%; font-weight: bold; text-align: right">5,982</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 8%; font-weight: bold; text-align: right">(1,212,160</TD><TD STYLE="width: 1%; font-weight: bold; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Stock based compensation under Equity Incentive Plan</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">700,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">7</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">690,968</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">690,975</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Common stock issued as payment of services and accounts payable</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,267,500</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">13</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">534,815</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">534,828</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Common stock issued upon exercise of Convertible Notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">161,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">2</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(2</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Common stock issued in May 2012 private placement</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,710,833</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">17</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(17</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(4,526</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(4,526</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Beneficial conversion feature of convertible debt</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">63,600</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">63,600</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Net loss</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">-</TD><TD STYLE="text-align: left; padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">-</TD><TD STYLE="text-align: left; padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">-</TD><TD STYLE="text-align: left; padding-bottom: 1pt">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">(2,429,915</TD><TD STYLE="text-align: left; padding-bottom: 1pt">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">(1,456</TD><TD STYLE="text-align: left; padding-bottom: 1pt">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="text-align: left; border-bottom: Black 1pt solid">&nbsp;</TD><TD STYLE="text-align: right; border-bottom: Black 1pt solid">(2,431,371</TD><TD STYLE="text-align: left; padding-bottom: 1pt">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">Balance at September 30, 2012</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">31,048,979</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">312</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">7,112,246</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">(9,471,212</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">)</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">(2,358,654</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: left">See accompanying notes to consolidated financial
statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP, INC. AND SUBSIDIARIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Introduction</I></B><I>
-<B> </B></I></FONT>These unaudited consolidated financial statements of 22nd Century Group, Inc. (&ldquo;22nd Century Group&rdquo;)
and its direct and indirect subsidiaries (collectively with 22nd Century Group, the &ldquo;Company&rdquo;) incorporate and reflect
the reverse acquisition of 22nd Century Limited, LLC by 22nd Century Group as described below.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 25, 2011, 22nd Century Limited,
LLC (&ldquo;22nd Century Ltd&rdquo;) completed a reverse merger transaction (the &ldquo;Merger&rdquo;) with 22nd Century Group
(formerly Touchstone Mining Limited). As a result, 22nd Century Ltd became a wholly owned subsidiary of 22nd Century Group which
continues to operate the business of 22nd Century Ltd. In connection with the Merger, 22nd Century Group issued 21,434,446 shares
of its common stock to the holders of limited liability company membership interests of 22nd Century Ltd, whose share amount represented
80.1% of the outstanding shares immediately following the Merger. All references contained herein to shareholders or common shares
include the historical members and limited liability company membership interests of 22nd Century Ltd because, in the Merger, limited
liability company membership interests were exchanged for common shares on a one-for-one basis and from an accounting standpoint
they are equivalent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Merger is being accounted for as a reverse
acquisition and a recapitalization; 22nd Century Ltd is the acquirer for accounting purposes. Consequently, the assets and liabilities
and the historical operations that are reflected in the financial statements set forth herein for periods prior to the Merger are
those of 22nd Century Ltd and are recorded at the historical cost basis of 22nd Century Ltd, and the consolidated financial statements
set forth herein for periods beginning on and following completion of the Merger include the assets and liabilities of 22nd Century
Ltd, historical operations of 22nd Century Ltd, and operations of 22nd Century Group from the closing date of the Merger.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Upon the closing of the Merger, 22nd Century
Group transferred all of its operating assets and liabilities to Touchstone Split Corp. and split-off Touchstone Split Corp. through
the sale of all of the outstanding capital stock of Touchstone Split Corp. (the &ldquo;Split-Off&rdquo;). After the completion
of the Merger and Split Off, 22nd Century Group&rsquo;s consolidated financial statements include only the assets and liabilities
of 22nd Century Ltd.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Immediately prior to the Merger on January
25, 2011, 22nd Century Ltd<FONT STYLE="color: black"> completed a private placement offering (the &ldquo;Private Placement&rdquo;)
of 5,434,446 securities (the &ldquo;PPO Securities&rdquo;) at the purchase price of $1.00 per Unit, each such Unit consisting of
one (1) limited liability company membership interest of 22nd Century Ltd and a five-year warrant to purchase one-half of one (1/2)
limited liability company membership interest of 22nd Century Ltd at an exercise price of $1.50 per whole common share. In connection
with the Private Placement, </FONT>22nd Century Ltd<FONT STYLE="color: black"> approved a prorata distribution of 5,016,722 five-year
warrants to purchase one limited liability company membership interest at an exercise price of $3.00. These warrants
were valued at $1,550,000 and classified as liabilities resulting in a decrease to contributed capital. Private Placement proceeds
included $614,070 from the&nbsp;conversion of </FONT>22nd Century Ltd<FONT STYLE="color: black"> indebtedness into PPO Securities
and $395,376 from the&nbsp;conversion of placement agent fees into PPO Securities, resulting in gross cash proceeds of $4,425,000.&nbsp;
Private Placement expenses incurred included cash expenses of approximately $1,025,000 and non-cash expenses consisting of the
placement agent fees of $395,376 which were converted into PPO Securities and $390,000 for the estimated&nbsp;fair value of 934,755
placement agent and advisor warrants issued to the placement agent. An additional $167,820 of cost was incurred in the second and
third quarters of 2011 in connection with the registration process for the common stock issued in the Private Placement. 22nd Century
Ltd/Group received net cash proceeds of approximately </FONT>$3.2 million<FONT STYLE="color: black"> from the Private Placement
</FONT>and a reduction of debt and accrued interest obligations to shareholders that were on the balance sheet at December 31,
2010 of approximately $614,000, which was exchanged for equity interests in the offering<FONT STYLE="color: black">. A portion
of the proceeds, amounting to $1,511,750, was allocated to the warrants issued and classified as derivative liabilities.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt"><B><I>Basis of Presentation</I></B><I>
- </I>The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair and non-misleading presentation of the financial statements have been included.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt">The results of operations for any interim
period are not necessarily indicative of results for the full year. Operating results for the nine months ended September 30, 2012
are not necessarily indicative of the results that may be expected for the year ending December&nbsp;31, 2012. The balance sheet
at December&nbsp;31, 2011 has been derived from the audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial statements.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Nature
of Business</I></B><I> - </I>22nd Century Ltd, 22nd Century Group&rsquo;s wholly-owned subsidiary, is a plant biotechnology company
specializing in technology that allows for the level of nicotine and other nicotinic alkaloids </FONT>(e.g., nornicotine, anatabine
and anabasine)<FONT STYLE="color: black"> in tobacco plants to be decreased or increased through genetic engineering and plant
breeding. The Company owns or exclusively controls 105 issued patents in 78 countries plus </FONT>an additional 38 pending patent
applications<FONT STYLE="color: black">. Hercules Pharmaceuticals, LLC (&ldquo;Hercules Pharmaceuticals&rdquo;) and Goodrich Tobacco
Company, LLC (&ldquo;Goodrich Tobacco&rdquo;) are subsidiaries of 22nd Century Ltd and are business units for the Company&rsquo;s
(i) smoking cessation product and (ii) premium cigarettes and potential modified risk tobacco products, respectively.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Principles
of Consolidation</I></B><I> -</I> The accompanying consolidated financial statements include the accounts of </FONT>22nd Century
Group, its wholly owned subsidiary, 22nd Century Ltd, and 22nd Century Ltd&rsquo;s wholly owned subsidiaries, Hercules Pharmaceuticals
and Goodrich Tobacco<FONT STYLE="color: black">. In May 2012, 22nd Century </FONT>Ltd<FONT STYLE="color: black"> acquired </FONT>from
an employee<FONT STYLE="color: black"> the non-controlling membership units of </FONT>Goodrich Tobacco that it did not own so that
Goodrich Tobacco became a wholly owned subsidiary<FONT STYLE="color: black">. All intercompany accounts and transactions have been
eliminated.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 36.3pt"><B><I>Reclassifications</I></B><I> - </I>Certain
items in the 2011 financial statements have been reclassified to conform to the 2012 classification.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black"><B><I>Preferred
stock authorized</I></B><I> - </I>the authorization is for<I> </I>&ldquo;</FONT>blank check&rdquo; preferred stock, which could
be issued with voting, liquidation, dividend and other rights superior to our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Inventory</I></B> <I>-</I> Inventories
are valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO)&nbsp;method. Inventories are evaluated
to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved
as appropriate. The Company&rsquo;s inventory consisted of the following categories:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 65%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">December&nbsp;31,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 64%; text-align: left">Materials, mainly tobacco</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 15%; text-align: right">1,154,190</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 15%; text-align: right">678,123</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Finished goods</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt; padding-left: 9pt">Total</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">1,154,190</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">678,123</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Intangible Assets </I>-</B> Intangible
assets are recorded at cost and consist primarily of expenditures incurred with third parties related to the processing of patent
claims and trademarks with government authorities. The Company also capitalized costs as a result of one of its exclusively licensed
patent applications being subject to an interference proceeding invoked by the U.S. Patent and Trademark Office, which favorably
resulted in the Company obtaining rights to a third party&rsquo;s issued patent. The amounts capitalized relate to patents the
Company owns or to which it has exclusive rights and its trademarks, and exclude approximately $1.8 million recovered from a former
licensee as direct reimbursements of costs incurred. These capitalized costs are amortized using the straight-line method over
the remaining statutory life of the Company&rsquo;s primary patent family, which expires in 2019 (the assets&rsquo; estimated lives).
Periodic maintenance or renewal fees, which are generally due on an annual basis, are expensed as incurred. Annual minimum license
fees are charged to expense in the year the licenses are effective. Total patent and trademark costs capitalized and accumulated
amortization amounted to $2,187,892 and $821,708, respectively, as of September 30, 2012 ($2,063,812 and $676,708, respectively,
as of December 31, 2011). The estimated annual amortization expense for the next five years is approximately $203,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Impairment of Long-Lived Assets</I></B>&nbsp;<B>-</B>
The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate
that the historical cost-carrying value of an asset may no longer be recoverable.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 13.2pt">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company assesses recoverability of the
asset by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition. If
the estimated future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset&rsquo;s carrying value and its fair value. There was no impairment loss recorded during
the nine months ended September 30, 2012 or 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Deferred Debt Issuance Costs</I></B>
<B>-</B> The Company incurred costs related to a private placement of convertible notes that closed on December 16, 2011 (&ldquo;Convertible
Notes&rdquo;). These costs were recorded in the balance sheet as a deferred charge and are being amortized over the one-year term
of the Convertible Notes. The unamortized balance at September 30, 2012 is $8,464 ($22,405 as of December 31, 2011), which is expected
to be fully amortized in the fourth quarter of 2012. Amortization expense for the three and nine months ended September 30, 2012
amounted to $5,859 and $18,954, respectively.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Income Taxes</I></B><I> </I><B>-</B>
Prior to the Merger, the Company was treated as a partnership for federal and state income tax purposes. As a result, there was
no entity level income tax for periods prior to the Merger because all taxable income tax deductions and tax credits were passed
through to the members of the Company. Following the Merger on January 25, 2011, the Company is treated as a corporation, subject
to federal and state income taxes. Accordingly, as of the Merger date the Company is required to recognize deferred tax assets
and liabilities for any basis differences in its assets and liabilities between tax and GAAP reporting, and for operating loss
and credit carryforwards.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In light of the Company&rsquo;s history
of cumulative losses management has determined that is it more likely than not that its net deferred tax asset will not be realized.
Accordingly the Company established a valuation allowance to fully offset its net deferred tax asset as of September 30, 2012 and
December 31, 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company&rsquo;s federal and state tax
returns for the years ended December 31, 2010 to December 31, 2011, including the pre-Merger short period from January 1, 2011
through January 25, 2011, are currently open to audit under the statutes of limitations. There are no pending audits as of September
30, 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Stock Based Compensation -</I></B><I>
</I>The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and
others receive shares, options or warrants to purchase common shares of 22nd Century Group. Stock based compensation expense is
recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For
accounting purposes, the shares will be considered issued and outstanding upon vesting.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Debt Discounts </I></B>- Original
issue discount (&ldquo;OID&rdquo;) is recorded equal to the difference between the cash proceeds, after allocation to warrants
issued or issuable upon payment of the debt, and the face value of the debt when issued and amortized as interest expense during
the term of the debt.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">When the convertible feature of the conventional
convertible debt is issued, the embedded conversion feature is evaluated to determine if bifurcation and derivative treatment is
required and whether there is a beneficial conversion feature. When the convertible debt provides for an effective rate of conversion
that is below market value, this feature is characterized as a beneficial conversion feature (&ldquo;BCF&quot;). Prior to the determination
of the BCF, the proceeds from the debt instrument were first allocated between the convertible debt and any embedded or detachable
free standing instruments that are included, such as common stock warrants. The proceeds allocated to any warrants are recorded
as a debt discount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">For the Convertible Notes, bifurcation of
the embedded conversion feature was not required and the Company recorded the OID and the BCF related to these Convertible Notes
as a debt discount and recorded the Convertible Notes net of the discount related to both the OID and the BCF. Debt discount is
amortized to interest expense over the life of the debt. In the case of any conversion prior to the maturity date there will be
an unamortized amount of debt discount that relates to such conversion. The prorata amount of unamortized discount at the time
of such conversion is charged to interest expense as accelerated amortization of the discount. The fair value of warrants issued
at the time of conversion is recorded as a reduction of the amount applied to the common stock issued in the conversion and to
the extent that the fair value of warrants exceeds the carrying value of the debt a charge to interest expense results for such
excess amount.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Other income </I></B><I>-<B> therapeutic
grant<FONT STYLE="color: black"> </FONT></B></I><B><FONT STYLE="color: black">-</FONT></B><FONT STYLE="color: black"> In 2010,<B><I>
</I></B>22nd Century Ltd received approval of a government grant as partial support for its clinical trial for the U.S. Food and
Drug Administration (&ldquo;FDA&rdquo;). All costs associated with this grant were charged to research and development expense
and the grant income was fully recognized in 2011. During the three and nine month periods ending September 30, 2011 $80,000 and
$223,540, respectively, was recognized into income and included in other income on the statement of operations. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Revenue Recognition </I>-</B> The
Company recognizes revenue at the point the product is shipped to a customer and title has transferred. Revenue from the sale of
the Company&rsquo;s products is recognized net of cash discounts, sales returns and allowances. Cigarette federal excise taxes
are included in net sales and accounts receivable billed to customers, except on sales of <I>SPECTRUM</I> research cigarettes and
exported cigarettes in which such taxes do not apply.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company was chosen to be a subcontractor
for a 5-year government contract between RTI International (&ldquo;RTI&rdquo;) and the National Institute on Drug Abuse (&ldquo;NIDA&rdquo;)
to supply NIDA research cigarettes which includes four development stages. These government research cigarettes are distributed
under the Company&rsquo;s mark <I>SPECTRUM</I>. The Company completed the four developmental stages and delivered approximately
9 million <I>SPECTRUM</I> research cigarettes during the year ended December 31, 2011 and recognized the related revenue ($529,370
and $801,636 in the three and nine month periods ending September 30, 2011, respectively). The Company has delivered an additional
2.7 million <I>SPECTRUM</I> research cigarettes in July 2012 and recognized the related revenue ($15,683 in the three and nine
month periods ending September 30, 2012). Future revenue under this sub-contract arrangement is expected to be related to the delivery
of <I>SPECTRUM </I>and will be recognized at the point the product is shipped and title has transferred.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Derivatives </I>-</B> We do not use
derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and
then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. The methodology
for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model approach which includes probability
weighted estimates of future events including volatility of our common stock. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months of the balance sheet date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Research and Development</I></B><I>
</I><B>-</B><I> </I>Research and development costs are expensed as incurred.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Loss Per Common Share</I></B><I> <B>-</B>
</I>Basic loss per common share is computed using the weighted-average number of common shares outstanding. Diluted loss per share
is computed assuming conversion of all potentially dilutive securities. Potential common shares outstanding are excluded from the
computation if their effect is anti-dilutive.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Commitment and Contingency Accounting</I></B><I>
</I><B>- </B>The Company evaluates each commitment and/or contingency in accordance with the accounting standards, which state
that if the item is more likely than not to become a direct liability, then the Company will record the liability in the financial
statements. If not, the Company will disclose any material commitments or contingencies that may arise.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Use of Estimates</I></B><I> </I><B>-</B><I>
</I>The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Fair Value of Financial Instruments</I></B><I>-<B>&nbsp;</B></I>Financial
instruments include cash, receivables, accounts payable, accrued expenses, notes payable, convertible notes payable and warrant
liability.&nbsp;&nbsp;Fair value for everything except for the warrant liability is assumed to approximate carrying values for
these financial instruments, since they are short term in nature or they are receivable or payable on demand. The determination
of the fair value of the warrant liability is disclosed in Note 9.&nbsp;&nbsp;<FONT STYLE="color: black"><B><I> </I></B></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="font-size: 10pt; color: black"><B><I>Recent
Accounting Pronouncements</I></B></FONT> <FONT STYLE="color: black"><B>-</B><FONT STYLE="font-size: 10pt"> In May 2011, the FASB
issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRS.&nbsp;&nbsp;This update results in common principles and requirements for measuring
fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.&nbsp;&nbsp;ASU 2011-04
is required to be applied prospectively in interim and annual periods beginning after December 15, 2011.&nbsp;&nbsp;Early application
was not permitted.&nbsp;&nbsp;The adoption of ASU 2011 did not have a material impact on the consolidated financial statements.</FONT></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 2. - LIQUIDITY AND MANAGEMENT&rsquo;S PLANS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Since 2006, 22nd Century Ltd has incurred
substantial operating losses as it transitioned from being solely a licensor of its proprietary technology and tobaccos to commercializing
its own tobacco products. At September 30, 2012, the Company had current assets of $1,210,442 and current liabilities of $4,265,454.
Cash on hand at September 30, 2012 of $5,941 is insufficient to sustain operations and pay outstanding current liabilities as they
become due. The Company has suspended clinical trials for <I>X-22</I> in order to reduce expenditures and is seeking licensing
agreements for its products with both domestic and international businesses. The Company&rsquo;s Board of Directors authorized
management to seek additional financing involving equity securities <FONT STYLE="color: black">which will be dilutive to 22nd Century
Group&rsquo;s existing shareholders&rsquo; respective ownership percentages. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company continues to explore an alternative
manufacturer while exploring distribution channels for its proprietary cigarettes, <I>RED SUN</I> and <I>MAGIC</I>, through its
subsidiary, Goodrich Tobacco. Until certain benchmarks are achieved, the Company is currently not taking orders for these products
for the U.S. market.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company&rsquo;s ability to fund operations
and meet its obligations during 2012 will be dependent upon obtaining additional equity financing and signing one or more significant
licensing arrangements for its products. There can be no assurance that the Company will be able to raise sufficient equity financing
or obtain a significant licensing contract.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 3. - MAY 2012 PRIVATE PLACEMENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">On May 15, 2012
the Company issued 1,710,833 shares of its common stock and warrants to purchase up to 1,710,833 shares of its common stock for
total consideration of $1,026,500 consisting of: $786,500 in cash, cancellation by a vendor of $150,000 in accounts payable and
the exchange by an employee of his 4% minority interest in Goodrich Tobacco for stock and warrants valued at $90,000 in the offering.
</FONT>The warrants issued have an exercise price of $1.00 per share, a five year term and a &ldquo;down round provision&rdquo;
so they will be classified as derivatives for accounting purposes, which (similarly to the January 25, 2011 Warrants) means they
are reported as a liability and marked to market at each balance sheet date. At the date of issuance of these warrants the value
was estimated to be $1,841,000 which exceeded the total consideration received in the offering by $814,500 resulting in an immediate
charge to other income and expense - warrant liability - net for this amount. This private placement constituted a &ldquo;down
round&rdquo; for purposes of all previously issued warrants and the December 16, 2011 convertible notes and resulted in adjustments
to the exercise price, conversion price and the number of shares issuable upon exercise or conversion of these previously issued
securities.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 4. - AMOUNTS OWED NORTH CAROLINA STATE UNIVERSITY (&ldquo;NCSU&rdquo;)</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">Pursuant to the
terms of an exclusive license agreement with NCSU, the Company owes NCSU approximately $865,000 as of September 30, 2012 for patent
costs and license fees (as compared to $753,000 owed as of December 31, 2011). These amounts are included in accounts payable and
accrued liabilities in the consolidated balance sheets. The Company was required to pay these amounts within thirty days of being
invoiced and they are past due. NCSU has the right to claim interest on the balance. Management periodically communicates its plans
for commercialization of products using the technology licensed from NCSU and believes its relations with NCSU are sound. In order
to facilitate the Company&rsquo;s plans to raise capital and commercialize its products NCSU agreed, in a letter dated November
22, 2011, not to invoke its rights to terminate for non-payment or non-performance that it may have under the agreement until October
15, 2012. Currently, NCSU may have the right to terminate the exclusive license agreement,</FONT> but can only do so with a 60-day
prior written notice, including the opportunity to cure within this timeframe<FONT STYLE="color: black">. As of September 30, 2012,
patent costs associated with the exclusive license agreements that could potentially be terminated had a carrying value of approximately
$700,000. Additionally, NCSU has not imposed interest charges on past due amounts invoiced to the Company and as such the Company
has not recorded accrued interest or interest expense. </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>NOTE</B>&nbsp;<B>5. - DEMAND BANK LOAN</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The demand loan that is among the Company&rsquo;s
short term liabilities is payable to a commercial bank under a revolving credit agreement and is guaranteed by a shareholder of
the Company. This loan had a balance of $174,925 at September 30, 2012 and December 31, 2011. The Company is required to pay interest
monthly at an annual rate of 0.75% above the prime rate, or 4.00% at September 30, 2012 and December 31, 2011. The Company is current
in meeting this interest payment obligation. The terms of the demand loan includes an annual &ldquo;clean-up&rdquo; provision,
which requires the Company to repay all principal amounts outstanding for a period of 30 consecutive days every year. The Company
has not complied with this requirement; however, the bank has not demanded payment. The bank has a lien on all the Company&rsquo;s
assets.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 6. - NOTES PAYABLE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Notes payable consisted of the following
as of the dates set forth below:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP>&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">December&nbsp;31,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%">Notes date September 15 and October 15, 2009</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 1%; color: black; text-align: left">$</TD><TD STYLE="width: 9%; color: black; text-align: right">-</TD><TD STYLE="width: 1%; color: black; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; color: black">&nbsp;</TD>
    <TD STYLE="width: 1%; color: black; text-align: left">$</TD><TD STYLE="width: 9%; color: black; text-align: right">25,000</TD><TD STYLE="width: 1%; color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Convertible Note dated March 31, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">77,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">87,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Note dated January 25, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">140,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">140,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Note dated March 30, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">350,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">350,000</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Note dated March 22, 2012 and April 13, 2012</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">50,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt">Note dated June 20, 2012</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">6,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="color: black; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; color: black; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; color: black; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">623,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">602,000</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Less long term portion of notes payable</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(177,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold; text-align: left; padding-bottom: 2.5pt">Notes Payable (shown in current liabilities)</TD><TD STYLE="color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">623,000</TD><TD STYLE="padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">425,000</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Notes Dated September 15 and October
15, 2009</I> <I>(unsecured)</I></B> <B>-</B> On September 15, 2009 and October 15, 2009, the Company issued two notes payable to
the same third party in the amounts of $15,000 and $10,000, respectively. The notes were fully paid in June 2012 together with
accrued interest at 10% since issuance.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated January 25, 2011(unsecured)</I></B>
<B>-</B> On January 25, 2011, the Company issued a note for $140,000 to a shareholder as satisfaction of the balance due for principal
and interest on matured notes that were not paid in cash or converted to common stock of 22nd Century Group and warrants to purchase
shares of common stock of 22nd Century Group. The note bears interest at 12% and is due on July 1, 2013 together with accrued interest.
As of September 30, 2012 and December 31, 2011, the outstanding principal amount of this note is $140,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Convertible Note Dated March 31, 2011(unsecured)</I></B>
<B>-</B> On March 31, 2011, the Company issued a note to a vendor in the original amount of $237,000 as satisfaction of past due
invoices previously recorded by the Company in accounts payable. The note bears interest at an annual rate of 9%. In December 2011
the note was amended and the principal was reduced by a cash payment of $50,000 and $100,000 of the note was exchanged for $115,000
of a portion of the Convertible Notes issued December 16, 2011 so that the remaining principal balance under the note is $87,000
as of December 31, 2011. The note amendment also provided for principal payments together with accrued interest to be due as follows:
$50,000 on May 1, 2012 and $37,000 on January 1, 2013, the maturity date. The Company made only $10,000 of the May 1, 2012 principal
installment, leaving a remaining balance of $77,000 as of September 30, 2012, and the note is callable by the holder because of
this payment default. The note is convertible into common stock of the Company at the option of the holder. The conversion rate
will be determined at the time of conversion based on the average of the closing price of the Company&rsquo;s common stock on the
day of and day after the conversion date.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>&nbsp;</I></B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated March 30, 2011(unsecured)</I></B>
<B>-</B> On March 30, 2011, the Company issued a note to a vendor in the amount of $350,000 as satisfaction of past due invoices
previously recorded by the Company in accounts payable. The note bears interest at an annual rate of 4%. Principal and accrued
interest, which were due on July 1, 2012 have not been paid. As of September 30, 2012 and December 31, 2011, the outstanding principal
on this note is $350,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Notes Dated March 22, 2012 and April
13, 2012(secured)</I></B> <B>-</B> On March 22, 2012 and April 13, 2012, the Company issued two notes in the amount of $25,000
each. The notes bear interest at an annual rate of 15%. Principal and accrued interest were due on October 1, 2012 and have not
been paid. As of September 30, 2012, the outstanding principal on these notes is $50,000. The notes are secured by all assets of
the Company and its subsidiaries. An officer of the Company is the managing member of the lender.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>Note Dated June 20, 2012 (unsecured)</I></B>
<B>-</B> On June 20, 2012, the Company issued a note in the amount of $6,000 to an officer of the Company. The note bears interest
at an annual rate of 15%. Principal and accrued interest were due on October 1, 2012 and have not been paid. As of September 30,
2012, the outstanding principal on this note is $6,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 7. - CONVERTIBLE NOTES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0"><I>ISSUED DECEMBER 16, 2011 </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Company issued
Convertible Notes on December 16, 2011 in a negotiated sale with 24 investors in the total face amount of $1,926,250. The Convertible
Notes were sold for $1,675,000 - an original issue discount (OID) of $251,250. The Convertible Notes do not bear interest and the
total face amount is due December 16, 2012. The Convertible Notes can be converted, at the option of each holder, in whole or in
part, into shares of the Company&rsquo;s common stock at $0.75 per share at which time the holder shall also receive </FONT>warrants
equal to 120% of the number of shares of Company common stock into which such Convertible Notes have been then converted<FONT STYLE="color: black">.
The Company can also force the investors to decide whether to convert by sending a 15-day written notice in which each investor
is forced to decide whether to convert or get repaid. Such warrants will have a term of five years and an exercise price of $1.50
per share of common stock. T</FONT>he Company will have the right to mandatorily require the conversion of the Convertible Notes
in the event the Company engages in a subsequent financing transaction of at least $5,000,000 in shares of Company&rsquo;s common
stock with a sale price equal to or greater than $0.80 per share or debt securities which are convertible into shares of Company
common stock with a conversion price equal to or greater than $0.80 per share of common stock. Also, in the event of a subsequent
financing transaction of at least $5,000,000, the note holders have &ldquo;piggyback&rsquo; registration rights of the common shares
and warrants underlying the conversion of the Convertible Notes. The Convertible Notes contain &ldquo;down round&rdquo; provisions
which provide for adjustments to the conversion price if the Company issues shares of common stock of 22nd Century Group at a price
that is less than the exercise price. As a result of the May private placement the conversion price was reduced to $0.7417 and another minor
adjustment will result from the August 2012 convertible notes issued. The conversion feature was not considered to be a derivative because it does not have a net
cash settlement provision as a result of the limited market and trading activity for the underlying stock. To the extent the Convertible
Notes are converted, the warrants issued at conversion have a &ldquo;down round provision&rdquo; and will be classified as derivatives
for accounting purposes, which (similarly to the January 25, 2011 Warrants) means they are reported as a liability and marked to
market at each balance sheet date. &nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company&rsquo;s common stock closed
at $0.90 per share on December 16, 2011, which is greater than the portion of the conversion price under the Convertible Notes
allocated to the underlying common shares. This difference is a beneficial conversion feature (BCF) which was valued at $1,062,759
at the issue date and recorded as debt discount and additional paid in capital. This BCF is being amortized over the one year life
of the Convertible Notes.&nbsp; During the three and nine month period ended September 30, 2012, $308,011 and $1,029,917, respectively,
of the debt discount was amortized and recorded as interest expense related to the OID and BCF discounts, leaving $254,446<FONT STYLE="color: navy">
</FONT>of unamortized debt discount as of September 30, 2012 ($1,284,363 as of December 31, 2011).</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Three of the Company&rsquo;s officers at
the time of issuance acquired a portion of the Convertible Notes - with a face value of $368,000 for cash of $105,000 and conversion
of $215,000 short term unsecured 12% notes issued by the Company earlier in 2011.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the nine month period ended September
30, 2012 notes with a face amount of $120,750 (carrying value at time of conversion of approximately $68,000, net of unamortized
discount) were converted into 161,000 shares of common stock and warrants to purchase 193,200 shares of common stock. As a result
of the conversion, the unamortized portion of the debt discount amounting to approximately $66,000<FONT STYLE="color: navy"> </FONT>was
immediately charged to interest and a derivative warrant liability valued at approximately $152,000 was recorded.&nbsp; The difference
in the warrant value and debt relieved amounting to approximately $31,000 was also charged to interest expense. Included in note
conversions during the nine months ended September 30, 2012 were a note converted by an officer with a face amount of $86,250 converted
into 115,000 shares of common stock and warrants to purchase 138,000 shares of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>ISSUED AUGUST 9, 2012 </I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Company issued
Convertible Notes on August 9, 2012 in a negotiated sale with 4 investors in the total face amount of $222,600. The Convertible
Notes were sold for $210,000 - an original issue discount (OID) of $12,600. The Convertible Notes do not bear interest and the
total face amount is due August 9, 2013 together with warrants equal to 50% </FONT>of the number of shares of Company common stock
into which such Convertible Notes could have been converted<FONT STYLE="color: black">. These warrants were valued at $92,750 and
represent additional debt discount and warrant liability. The Convertible Notes can be converted, at the option of each holder,
in whole or in part, into shares of the Company&rsquo;s common stock at $0.60 per share at which time the holder shall also receive
</FONT>warrants equal to 100% of the number of shares of Company common stock into which such Convertible Notes have been then
converted<FONT STYLE="color: black">. Additional warrants required as a result of conversion will be valued and recorded as a warrant
liability at that time and will reduce the equity recorded as a result of the conversion. In the event the warrant value exceeds
the amount of equity, an immediate charge to other expense will be recorded. The Company can also force the investors to decide
whether to convert by sending a 15-day written notice in which each investor is forced to decide whether to convert or get paid
off. The warrants issued upon conversion or maturity will have a term of five years and an exercise price of $1.00 per share of
common stock. </FONT> The conversion feature was not considered to be a derivative because it does not have a net cash settlement
provision as a result of the limited market and trading activity for the underlying stock. The warrants to be issued at conversion
or maturity have a &ldquo;down round provision&rdquo; and will be classified as derivatives for accounting purposes, which (similarly
to previously issued Warrants) means they are reported as a liability and marked to market at each balance sheet date. (See Note
9) &nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company&rsquo;s common stock closed
at $0.45 per share on August 9, 2012, which is greater than the portion of the conversion price under the Convertible Notes allocated
to the underlying common shares. This difference is a beneficial conversion feature (BCF) which was valued at $63,600 at the issue
date and recorded as debt discount and additional paid in capital. This BCF is being amortized over the one year life of the Convertible
Notes.&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">During the three and nine month period ended
September 30, 2012, $24,070 of debt discount was amortized and recorded as interest expense related to the OID, warrant and BCF
discounts, leaving $144,880 of unamortized debt discount as of September 30, 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">The following table summarizes convertible notes and related
discount.</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">December&nbsp;31,</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; text-align: left">Face value of Convertible Notes payable through maturity</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">2,028,100</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 9%; text-align: right">1,926,250</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Less unamortized original issue discount</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(138,993</TD><TD STYLE="text-align: left">)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">(245,582</TD><TD STYLE="text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Less unamortized discount related to BCF</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(260,333</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(1,038,782</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt">Convertible Notes, net of unamortized debt discount</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">1,628,774</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">641,886</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>Carrying value of December 16, 2011 notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">1,551,054</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">641,886</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Carrying value of August 9, 2012 notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">77,720</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 8. - DUE FROM OR TO RELATED PARTY</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">The Company has
conducted transactions with a related party, </FONT>Alternative Cigarettes, Inc. (&ldquo;AC&rdquo;). AC is entirely owned by certain
shareholders of the Company, including the CEO. AC shares office space and employee services with the Company. During the year
ended December 31, 2011 the Company acquired its <I>MAGIC</I> trademark from AC for a purchase price of $22,500; other activity
during the nine months ended September 30, 2012 and the year ended December 31, 2011 consisted mainly of repayments and advances.
The net amount due from AC amounted to $23,969 as of September 30, 2012 ($15,491 as of December 31, 2011). No interest has been
accrued or paid on the amount due from or to AC and there are no repayment terms.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As of September 30, 2012, the Company has
a liability to certain officers in the amount of $50,206 related to amounts they have paid on the Company&rsquo;s behalf. These
amounts do not bear interest and have no stated repayment terms.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 9. - WARRANTS FOR COMMON STOCK</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In connection with the January 25, 2011
Private Placement and Merger, the Company issued five year warrants (&ldquo;January 25, 2011 Warrants&rdquo;) to purchase shares
of common stock of 22nd Century Group. These warrants contain &ldquo;down round&rdquo; provisions which provide for adjustments
to the exercise price if the Company issues common shares of stock of 22nd Century Group at a price that is less than the respective
warrant exercise prices. This provision is a guarantee of value which requires that these warrants be classified as derivatives
for accounting purposes which means they are reported as a liability and marked to market at each balance sheet date. &nbsp;As
a result of partial conversion of the Convertible Notes and the May 2012 private placement, the &ldquo;down round provision&rdquo;
of the January 25, 2011 Warrants was triggered and the adjusted warrants now outstanding are: 5,319,150 with an exercise price
of $2.82 per share and 3,777,905 with an exercise price of $1.45 per share. The original amount of the warrant liability related
to the 5,016,722 warrants was $1,550,000 and was recorded as a reduction of equity on January 25, 2011; the original amount of
the warrant liability related to the 3,651,978 warrants is $1,511,750, and, because it was recorded as a liability, the portion
of proceeds from the Private Placement that was recorded as contributed capital was reduced accordingly. As of September 30, 2012
there are 3,777,905 with an exercise price of $1.45 per share and 5,319,150 with an exercise price of $2.82 per share outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As a result of the May 2012
Private Placement, 193,200 warrants issued upon partial conversion of the Convertible Notes now amount to 199,862 five year
warrants with an exercise price of $1.45 per share as a result of the &ldquo;down round
provisions&rdquo;. All 199,862 of these warrants are outstanding as of September 30, 2012. As a result of the August 2012
convertible notes, another minor adjustment to those warrants will be required.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">All 1,710,833 warrants to purchase common
stock issued in the May 2012 private placement ($1.00 per share five year term) are outstanding as of September 30, 2012.
As a result of the August 2012 convertible notes issued, the exercise price of those warrants was reduced accordingly.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The convertible notes issued in August 2012
require the Company to issue at least 185,500 warrants ($1.00 per share five year term) and resulted in a derivative liability
upon issuance of the notes of approximately $92,750.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company estimates the value of warrant
liability at upon issuance of the warrants and at each balance sheet date using the binomial lattice model to allocate total enterprise
value to the warrants and other securities in the Company&rsquo;s capital structure. Volatility was estimated based on historical
observed equity volatilities and implied (forward) or expected volatilities for a sample group of guideline companies and consideration
of recent market trends.<FONT STYLE="color: black"> </FONT>The following table is a roll-forward of the warrant liability:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 80%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 85%">Fair value of warrant liability upon issuance - January 25, 2011</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 12%; text-align: right">3,061,750</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Gain as a result of change in fair value</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">(2,511,750</TD><TD STYLE="padding-bottom: 1pt; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Fair value at December 31, 2011</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">550,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Fair value of warrant liability upon partial conversion of</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>December 16, 2011 Notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">152,100</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD>Fair value of warrant liability upon issuance &ndash; May 15, 2012</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,841,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Fair value of warrant liability related to minimum warrants issuable upon maturity of August 9, 2012 convertible notes</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">92,750</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Gain as a result of change in fair value</TD><TD STYLE="color: black; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; color: black; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; color: black; text-align: right">(1,981,917</TD><TD STYLE="padding-bottom: 1pt; color: black; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt">Fair value at September 30, 2012</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">653,933</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="text-underline-style: double"><B>&nbsp;</B></FONT></P>

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    <!-- Field: /Page -->

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="text-underline-style: double"><B>&nbsp;</B></FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The aggregate net gain on warrant
liabilities for the three and nine month periods ended September 30, 2012 amounted to $535,017 and $1,981,917 and are included
in other income and expense as &ldquo;warrant liability-net&rdquo; in the accompanying consolidated statement of operations. The
amount for the nine month period ended September 30, 2012 has been offset by a charge to other expense as a result of warrant liabilities
issued in connection with the May private placement (See Note 3) in excess of the proceeds raised in the amount of $814,500.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">ASC 820 establishes a valuation hierarchy
for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels
as follows.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.25in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD><FONT STYLE="font-family: Times New Roman, Times, Serif">Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities.</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.25in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD><FONT STYLE="font-family: Times New Roman, Times, Serif">Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration,
for substantially the full term of the financial instrument.</FONT></TD></TR></TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0.25in"></TD><TD STYLE="width: 0.25in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD><FONT STYLE="font-family: Times New Roman, Times, Serif">Level 3 inputs are unobservable inputs based on the Company&rsquo;s
own assumptions used to measure assets and liabilities at fair value.</FONT></TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">A financial asset or liability&rsquo;s
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The warrant liability is measured at fair value using certain estimated factors such as volatility and probability which are classified
within Level 3 of the valuation hierarchy. Significant unobservable inputs are used in the fair value measurement of the Company&rsquo;s
derivative warrant liabilities include volatility. Significant increases (decreases) in the volatility input would result in a
significantly higher (lower) fair value measurement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.25in">The following table summarizes the warrant
activity since December 31, 2010:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 80%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.4in">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">Number&nbsp;of&nbsp;Warrants</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">Warrants outstanding at December 31, 2010</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">-</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 88%">January 25, 2011 Warrants issued</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 9%; text-align: right">8,668,701</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Warrants exercised during 2011</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold">Warrants outstanding at December 31, 2011</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">8,668,701</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Warrants issued</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">1,904,033</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Additional warrants due to anti-dilution provisions</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">435,020</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; padding-bottom: 1pt">Warrants exercised during 2012</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: bold; padding-bottom: 2.5pt">Warrants outstanding and exercisable at September 30, 2012</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">11,007,754</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 10. - COMMITMENTS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>&nbsp;</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><B><I>License Agreements</I></B><FONT STYLE="color: black">&nbsp;-
Under its exclusive license agreement with NCSU, the Company is required to pay minimum annual royalty payments, which are credited
against running royalties on sales of licensed products. The annual minimum royalty for each of the calendar years 2012 and 2013
is $75,000, and in 2014 the annual minimum royalty increases to $200,000. The license agreement continues through the life of the
last-to-expire patent, which is expected to be 2022. These minimum royalty payments are due each February following the end of
the applicable calendar year and are reduced by any running royalties paid or payable for that year. The agreement also requires
a milestone payment of $150,000 upon FDA approval of a product that uses the NCSU licensed technology. The Company is also responsible
for reimbursing NCSU for actual third-party patent costs incurred. These costs vary from year to year and the Company has certain
rights to direct the activities that result in these costs. During the nine month period ended September 30, 2012, the costs incurred
related to patent costs and patent maintenance amounted to </FONT>$55,853<FONT STYLE="color: black"> ($93,343 during the year ended
December 31, 2011).</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company has two other exclusive license
agreements which require aggregate annual license fees of approximately $65,000, which are credited against running royalties on
sales of licensed products. Each license agreement continues through the life of the last-to-expire patent.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The Company entered into a three year lease
for approximately 3,800 square feet of office space in Clarence, NY, which commenced September 1, 2011. Scheduled rent remaining
as of September 30, 2012 is as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" ALIGN="CENTER" STYLE="border-collapse: collapse; width: 30%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 67%; text-align: left">2012</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 30%; text-align: right">8,750</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">2013</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">37,833</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">2014</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">28,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 11. - EARNINGS PER COMMON SHARE</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table sets forth the computation
of basic and diluted earnings per common share for the three month periods ended September 30, 2012 and 2011:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Net loss attributed to common shareholders</TD><TD STYLE="width: 1%; color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 9%; border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">(448,925</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">)</TD><TD STYLE="width: 1%; color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="width: 9%; border-bottom: Black 2.5pt double; color: black; text-align: right">(465,082</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; color: black; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Denominator for basic earnings per share-weighted average shares outstanding</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">31,048,979</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">27,209,646</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Effect of dilutive securities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; text-indent: -0.1in; padding-left: 16.2pt">Warrants, restricted stock and options outstanding</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; font-weight: bold; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Denominator for diluted earnings per common share - weighted average shares adjusted for dilutive securities</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">31,048,979</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">27,209,646</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Income (loss) per common share - basic</TD><TD STYLE="color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">(0.01</TD><TD STYLE="padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">)</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">(0.02</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Income (loss) per common share- diluted</TD><TD STYLE="color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">(0.01</TD><TD STYLE="padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">)</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">(0.02</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The following table sets forth the computation
of basic and diluted earnings per common share for the nine month periods ended September 30, 2012 and 2011:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Net loss attributed to common shareholders</TD><TD STYLE="width: 1%; color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="width: 9%; border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">(2,429,915</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">)</TD><TD STYLE="width: 1%; color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="width: 1%; border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="width: 9%; border-bottom: Black 2.5pt double; color: black; text-align: right">(2,218,362</TD><TD STYLE="width: 1%; padding-bottom: 2.5pt; color: black; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Denominator for basic earnings per share-weighted average shares outstanding</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="font-weight: bold; text-align: right">29,477,387</TD><TD STYLE="font-weight: bold; text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">26,263,743</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Effect of dilutive securities:</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 1pt; text-indent: -0.1in; padding-left: 16.2pt">Warrants, restricted stock and options outstanding</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; font-weight: bold; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">-</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Denominator for diluted earnings per common share - weighted average shares adjusted for dilutive securities</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">29,477,387</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">26,263,743</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Loss per common share - basic</TD><TD STYLE="color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">(0.08</TD><TD STYLE="padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">)</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">(0.08</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">)</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">Loss per common share- diluted</TD><TD STYLE="color: black; font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; font-weight: bold; text-align: right">(0.08</TD><TD STYLE="padding-bottom: 2.5pt; color: black; font-weight: bold; text-align: left">)</TD><TD STYLE="color: black; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: left">$</TD><TD STYLE="border-bottom: Black 2.5pt double; color: black; text-align: right">(0.08</TD><TD STYLE="padding-bottom: 2.5pt; color: black; text-align: left">)</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">Securities outstanding
that were excluded from the computation of earnings per share for the nine month periods because they would have been anti-dilutive
are as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 92%; font: 10pt Times New Roman, Times, Serif; margin-left: 0.5in">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center">September&nbsp;30,</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD STYLE="font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2012</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid">2011</TD><TD STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD COLSPAN="2" STYLE="text-align: center">&nbsp;</TD><TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 76%; text-indent: -0.1in; padding-left: 0.1in">Warrants</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 9%; text-align: right">11,007,754</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">&nbsp;</TD><TD STYLE="width: 9%; text-align: right">8,651,978</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Convertible Debt Issued December 16, 2011 (number of shares including related warrants upon conversion of 2,888,800)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">5,296,133</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Convertible Debt Issued August 9, 2012 (number of shares including related warrants upon conversion of 371,000)</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">742,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="color: black">&nbsp;</TD>
    <TD STYLE="color: black; text-align: left">&nbsp;</TD><TD STYLE="color: black; text-align: right">-</TD><TD STYLE="color: black; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Restricted Stock</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">550,000</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">700,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left; text-indent: -0.1in; padding-left: 0.1in">Convertible Note</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">290,566</TD><TD STYLE="text-align: left">&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">-</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="padding-bottom: 1pt; text-indent: -0.1in; padding-left: 0.1in">Options</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">450,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; text-align: right">35,000</TD><TD STYLE="padding-bottom: 1pt; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="padding-bottom: 2.5pt; text-indent: -0.1in; padding-left: 0.1in">&nbsp;</TD><TD STYLE="font-weight: bold; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: bold; text-align: right">18,336,453</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: bold; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; text-align: right">9,386,978</TD><TD STYLE="padding-bottom: 2.5pt; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="text-underline-style: double">&nbsp;</FONT></P>

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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><FONT STYLE="text-underline-style: double">&nbsp;</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 12. - STOCK BASED COMPENSATION</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"><FONT STYLE="color: black">On October 21,
2010, the Company established the 2010 Equity Incentive Plan (&ldquo;EIP&rdquo;) for </FONT>officers, employees, directors, consultants
and advisors to the Company and its affiliates<FONT STYLE="color: black">, consisting of 4,250,000 shares of common stock. The
EIP has a term of ten years and is administered by our Board of Directors (&ldquo;Board&rdquo;) or a committee to be established
by our Board (the &ldquo;Administrator&rdquo;), to determine the various types of incentive awards that may be granted to recipients
under this plan and the number of shares of common stock to underlie each such award under the EIP. On June 30, 2011, the Company
filed a Form S-8 registration statement with the SEC to register all of the shares of common stock of 22nd Century Group that it
may issue under the EIP </FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">For the three and nine months ended September
30, 2012, the Company recorded compensation expense related to awards under the EIP of $31,241 and $690,975, respectively ($48,979
and $327,458 for the three and nine months ended September 30, 2011, respectively), <FONT STYLE="color: black">which included the
award of 550,000 restricted shares that vested immediately and were valued at the closing price on the award date.</FONT></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">As of September 30, 2012, unrecognized compensation
expense related to non-vested restricted shares and stock options amounted to $131,563, which is expected to be substantially recognized
during 2013. No expense was recorded for restricted stock grants with milestone vesting not considered probable, which had a fair
value at grant date of $51,000.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model. No options were issued during the three months ended September
30, 2012.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">A summary of all stock option activity since
December 31, 2011 is as follows:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 95%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD NOWRAP STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Number&nbsp;of</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Options</P></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Weighted</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Average</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Exercise</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Price</P></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Weighted</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Average</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Remaining</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Contractual</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Term</P></TD><TD NOWRAP STYLE="font-weight: bold; padding-bottom: 1pt">&nbsp;</TD>
    <TD COLSPAN="2" NOWRAP STYLE="font-weight: bold; text-align: center; border-bottom: Black 1pt solid"><P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Aggregate</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Intrinsic</P> <P STYLE="font: bold 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">Value</P></TD><TD NOWRAP STYLE="padding-bottom: 1pt; font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="width: 52%; font-weight: normal; text-align: left">Outstanding at December 31, 2011</TD><TD STYLE="width: 1%; font-weight: normal">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 9%; font-weight: normal; text-align: right">35,000</TD><TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: normal">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: normal; text-align: left">$</TD><TD STYLE="width: 9%; font-weight: normal; text-align: right">1.20</TD><TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 1%; font-weight: normal">&nbsp;</TD>
    <TD STYLE="width: 11%; font-weight: normal; text-align: center">&nbsp;</TD><TD STYLE="width: 1%; font-weight: normal">&nbsp;</TD>
    <TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="width: 9%; font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="width: 1%; font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: normal; text-align: left; padding-bottom: 1pt; padding-left: 9pt">Granted in 2012</TD><TD STYLE="font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 1pt solid; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 1pt solid; font-weight: normal; text-align: right">415,000</TD><TD STYLE="padding-bottom: 1pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="color: windowtext; font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 1pt; color: windowtext; font-weight: normal; text-align: left">$</TD><TD STYLE="padding-bottom: 1pt; color: windowtext; font-weight: normal; text-align: right">0.69</TD><TD STYLE="padding-bottom: 1pt; color: windowtext; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: center; padding-bottom: 1pt">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 1pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 1pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="padding-bottom: 1pt; font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="padding-bottom: 1pt; font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: normal; text-align: left; padding-bottom: 2.5pt">Outstanding at September 30, 2012</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: right">450,000</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">$</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: right">0.73</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: center; padding-bottom: 2.5pt">9.54 years</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">$</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: center">&nbsp;</TD><TD STYLE="font-weight: normal">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: right">&nbsp;</TD><TD STYLE="font-weight: normal; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: normal; text-align: left; padding-bottom: 2.5pt">Exercisable at September 30, 2012</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="border-bottom: Black 2.5pt double; font-weight: normal; text-align: right">380,000</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">$</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: right">0.74</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="font-weight: normal; text-align: center; padding-bottom: 2.5pt">9.72 years</TD><TD STYLE="font-weight: normal; padding-bottom: 2.5pt">&nbsp;</TD>
    <TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">$</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: right">-</TD><TD STYLE="padding-bottom: 2.5pt; font-weight: normal; text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>NOTE 13. &ndash; SUBSEQUENT EVENT</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Subsequent to September 30, 2012, the Company
raised approximately $750,000 in a private placement offering.&nbsp; Each unit in the offering was sold for $0.25 and consisted
of one share of common stock and one-half of a warrant to purchase common stock.&nbsp; Each full warrant issued has an exercise
price of $1.00 per share, a five year term and a &ldquo;down round provision&rdquo; so the warrants will be classified as derivatives
for accounting purposes, which means they are reported as a liability and marked to market at each balance sheet date.&nbsp; This
private placement will constitute a &ldquo;down round&rdquo; for purposes of certain previously issued warrants and convertible
notes and will result in adjustments to the exercise price, conversion price and the number of shares issuable upon exercise or
conversion of these previously issued securities.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>27,500,000 Shares of Common Stock</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 24pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>22nd CENTURY GROUP, INC.</B></P>

<P STYLE="font: 24pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PROSPECTUS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt; text-align: center">______________________________<B>, 2013</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>PART II</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>INFORMATION NOT REQUIRED IN PROSPECTUS</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Item 13. Other Expenses of Issuance and Distribution.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Set forth below is an estimate (except
for registration fees, which are actual) of the approximate amount of the fees and expenses payable by us in connection with the
issuance and distribution of the shares of our common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" STYLE="border-collapse: collapse; width: 100%; font: 10pt Times New Roman, Times, Serif">
<TR STYLE="vertical-align: bottom">
    <TD>&nbsp;</TD><TD STYLE="font-weight: bold">&nbsp;</TD>
    <TD COLSPAN="2" STYLE="font-weight: bold">AMOUNT</TD><TD STYLE="font-weight: bold">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">EXPENSE <BR></TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="width: 87%; text-align: left">Registration Fees</TD><TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 1%; text-align: left">$</TD><TD STYLE="width: 10%; text-align: right">2,680</TD><TD STYLE="width: 1%; text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Legal Fees and Expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">85,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD STYLE="text-align: left">Accounting Fees and Expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">15,000</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="text-align: left">Miscellaneous Fees and Expenses</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">3,500</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: White">
    <TD>&nbsp;</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">&nbsp;</TD><TD STYLE="text-align: right">&nbsp;</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
<TR STYLE="vertical-align: bottom; background-color: rgb(204,255,204)">
    <TD STYLE="font-weight: bold">Total</TD><TD>&nbsp;</TD>
    <TD STYLE="text-align: left">$</TD><TD STYLE="text-align: right">106,180</TD><TD STYLE="text-align: left">&nbsp;</TD></TR>
</TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>&nbsp;</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Item 14. Indemnification of Directors and Officers.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Nevada Revised Statutes (NRS) Sections
78.7502 and 78.751 provide us with the power to indemnify any of our directors, officers, employees and agents. The person entitled
to indemnification must have conducted himself in good faith, and must reasonably believe that his conduct was in, or not opposed
to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe
that his conduct was unlawful.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Under NRS Section 78.751, advances for
expenses may be made by agreement if the director or officer affirms in writing that he has met the standards for indemnification
and will personally repay the expenses if it is determined that such officer or director did not meet those standards.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our bylaws include an indemnification provision
under which we have the power to indemnify, to the extent permitted under Nevada law, our current and former directors and officers,
or any person who serves or served at our request for our benefit as a director or officer of another corporation or our representative
in a partnership, joint venture, trust or other enterprise, against all expenses, liability and loss reasonably incurred by reason
of being or having been a director, officer or representative of ours or any of our subsidiaries. We may make advances for expenses
upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by
a court of competent jurisdiction that he, she or it is not entitled to be indemnified by us.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Our articles of incorporation provide a
limitation of liability such that no director or officer shall be personally liable to us or any of our stockholders for damages
for breach of fiduciary duty as a director or officer, involving any act or omission of any such director or officer, provided
there was no intentional misconduct, fraud or a knowing violation of the law, or payment of dividends in violation of NRS Section
78.300.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and controlling persons of ours under Nevada law or otherwise,
we have been advised the opinion of the SEC is that such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by
us for expenses incurred or paid by a director, officer or controlling person of ours in successful defense of any action, suit,
or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act and will be governed
by the final adjudication of such issue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Item 15. Recent Sales of Unregistered Securities.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">There have been no sales of unregistered
securities within the last three years which would be required to be disclosed pursuant to Item 701 of Regulation S-K, except
for the following:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Sales by the Company</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>Merger</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 25, 2011, we entered into an
Agreement and Plan of Merger and Reorganization with Acquisition Sub, and 22nd Century. On that date, in consummation of the Merger
contemplated under the Agreement and Plan of Merger and Reorganization, Acquisition Sub merged with and into 22nd Century, and
22nd Century, as the surviving entity, became our wholly-owned subsidiary.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Prior to the closing of the Merger, we
transferred all of our pre-Merger operating assets and liabilities pursuant to the terms of a split-off agreement, to our wholly-owned
subsidiary, Touchstone Split Corp., a Delaware corporation, or the Split-Off Subsidiary. Thereafter, pursuant to the split-off
agreement, we transferred all of the outstanding capital stock of the Split-Off Subsidiary to our then-sole director in exchange
for $1.00, such consideration being deemed to be adequate by our pre-Merger board of directors.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">At the closing of the Merger, each membership
interest of 22nd Century issued and outstanding immediately prior to the closing of the Merger was exchanged for one (1) share
of our common stock, and each warrant to purchase limited liability company membership interests of 22nd Century was exchanged
for one warrant of like tenor and term to purchase shares of our common stock. An aggregate of 21,434,446 shares of common stock
and warrants to purchase an aggregate of 8,151,980 shares of common stock were issued to the holders of limited liability company
membership interests and warrants, respectively, of 22nd Century, in the Merger. Immediately following the closing of the Merger,
an aggregate of 26,759,646 shares of common stock were issued and outstanding and an aggregate of 8,651,980 shares of our common
stock were reserved for issuance pursuant to the exercise of warrants to purchase shares of common stock. Of the 26,759,646 shares
of common stock issued and outstanding after the closing of the Merger, approximately 59.8% of such issued and outstanding shares
were held by individuals and entities that were holders of limited liability company membership interests of 22nd Century prior
to consummation of the Private Placement Offering, approximately 20.3% were held by the investors in the Private Placement Offering,
and approximately 19.9% were held by the pre-Merger stockholders of the Company.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The issuance of the securities in the Merger
was not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions
of state securities laws.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>December 14, 2011</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On December 14, 2011, we entered into a
Securities Purchase Agreement with certain accredited investors, whereby the purchasers acquired approximately $1.9 million of
convertible promissory notes for an aggregate purchase price of approximately $1.7 million in a private placement. The notes were
issued with an original issue discount of approximately 15% and the original maturity date of the notes was December 14, 2012
(which was extended as set forth below). The notes are convertible into shares of our common stock at any time prior to maturity
at an initial per share conversion price equal to $0.75, subject to adjustment pursuant to the terms of the notes. Upon conversion
of all or a portion of the note into common stock, the holder will receive at that time a warrant to purchase such number of shares
of common stock equal to 120% of such number of shares of common stock issuable upon conversion of the note, with the warrants
having an exercise price of $1.50 per share.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Between December 14, 2012 and January 2,
2013, we entered into agreements with holders of $1,675,000 of the 15% notes. Holders of $1,330,000 of the notes agreed to extend
the maturity date of the notes to April 14, 2013. Holders of $100,000 of the notes elected to convert into shares of the common
stock pursuant to the terms of the notes. Holders of $215,000 of the notes elected to enter into a forbearance agreement. Holders
of $30,000 of the notes agreed to be paid over time. As of January&nbsp;22, 2013, the holders of the $215,000 convertible note
and the $30,000 note were paid in full, including all accrued interest.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The notes and warrants were offered and
sold to accredited investors pursuant to an exemption from the registration requirements under Sections 4(2), Section 4(6) and
Regulation S of the Securities Act and Rule 506 of Regulation D promulgated thereunder.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>January 24, 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 24, 2012, we entered into an
agreement with Foley &amp; Lardner LLP to resolve an outstanding debt of approximately $260,000.&nbsp; A portion of the outstanding
debt was satisfied by the issuance to Foley &amp; Lardner LLP of 1,000,000 shares of common stock that were valued at the average
of the closing prices on the OTC Bulletin Board for a 10-day trading period. The shares were sold pursuant to an exemption from
the registration requirements under Sections 4(2) and Section 4(6) of the Securities Act</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>January 25, 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We understand issued an aggregate of 25,000
shares of common stock pursuant to an Agreement between the Company and ProActive Capital Resources Group, LLC for investor relations
services. The shares were sold pursuant to an exemption from the registration requirements under Sections 4(2) and Section 4(6)
of the Securities Act.&nbsp;&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>May 15, 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On May 15, 2012, we entered into a Securities
Purchase Agreement with certain accredited investors whereby the investors acquired approximately 1,709,167 shares of our common
stock and warrants with a 5-year term to purchase up to 1,709,167 shares of our common stock at an initial exercise price of $1.00
per share, subject to adjustment pursuant to the terms of the warrants, for an aggregate purchase price of approximately $1,025,500
in a private placement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The common stock and warrants were offered
and sold pursuant to an exemption from the registration requirements under Sections 4(2), Section 4(6) and Regulation S of the
Securities Act and Rule 506 of Regulation D promulgated thereunder.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>June 19, 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On June 19, 2012, we issued an aggregate
of 62,500 shares of common stock pursuant to an Agreement between the Company and Maxim Group, LLC for placement agent services.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On June 19, 2012, we issued an aggregate
of 150,000 shares of common stock pursuant to an Agreement between the Company and Chardan Capital Markets, LLC for investor relation
services.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On June 19, 2012, we issued an aggregate
of 30,000 shares of common stock pursuant to an Agreement between the Company and Michael Pisani for investor relation services.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Each of the sales were offered and sold
in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>August 9, 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On August 9, 2012, we completed a private
placement of $222,600 of convertible notes, which were sold at a 6% discount. We received proceeds of $210,000. The face amount
of the notes may be converted into common stock at the rate of $0.60 per share at the option of the note holder. In the event
a holder of the convertible notes elects to convert the note into shares of common stock, then the holder shall receive warrants
equal to one-hundred percent of the number of shares of common stock into which the notes were convertible into. However, in the
event we pay the convertible notes at maturity, then the holder shall receive warrants equal to fifty percent of the number of
shares of common stock into which the notes were convertible into. The warrants have a five-year term and an initial exercise
price of $1.00 per share, subject to adjustment pursuant to the terms of the warrants. As of January&nbsp;22, 2013, all of such
convertible notes remain outstanding.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>November 9, 2012</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On November 9, 2012, we entered into a
Securities Purchase Agreement with certain accredited investors whereby the investors acquired approximately 3,238,000 shares
of common stock and warrants with a 5-year term to purchase up to 1,619,000 shares of our common stock at an initial exercise
price of $1.00 per share, subject to adjustment pursuant to the terms of the warrants, for an aggregate purchase price of approximately
$809,500.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The common stock and warrants were offered
and sold pursuant to an exemption from the registration requirements under Sections 4 (2), Section 4(6) and Regulation S of the
Securities Act and Rule 506 of Regulation D promulgated thereunder.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><I>January 11, 2013</I></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">On January 11, 2013, we entered into and
closed the transactions described in a Securities Purchase Agreement with certain accredited investors indentified therein whereby
we sold 2,500 shares of newly created Series A-1 10% Convertible Preferred Stock, or the Series A-1 Preferred Stock and Warrants
(as defined below) for an aggregate purchase price of $2,500,000. The shares of Series A-1 Preferred Stock are initially convertible
into a total of 4,166,666 shares of the Company&rsquo;s common stock at a conversion price of $0.60 per share, subject to future
adjustments. The Series A-1 Preferred Stock will pay a 10.0% annual cash dividend, which may be payable in shares of our common
stock, and will have a liquidation preference equal to the stated value of the Series A-1 Preferred Stock of $1,000 per share
plus any accrued and unpaid dividends thereon.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We also issued to the purchasers a Series
A Warrant, a Series B Warrant, and a Series C Warrant, collectively referred to as the Warrants. The Series A Warrant allows the
purchasers the right to acquire, initially before any adjustments to the conversion price, up to an additional 4,166,666 shares
of our common stock at an exercise price of approximately $0.72 per share over a period of five (5) years. The Series A Warrant
also allows for such warrant to be exercised on a cashless basis. The Series B Warrant allows the purchasers a one-year period
to exercise an overallotment option as contained in the Series B Warrant to purchase, initially before any adjustments to the
conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at a price of $0.60 per share. The Series
B Warrant may not be exercised on a cashless basis except only in certain limited circumstances. In the event the purchasers exercise,
in whole or in part the overallotment option as contained in the Series B warrant, then the purchasers shall have the right to
exercise on a pro rata basis the portion of the Series C Warrant issued to the purchasers to acquire, initially before any adjustments
to the conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at an exercise price of approximately
$0.72 per share over a period of five (5) years. The Series C Warrant allows for such warrant to be exercised on a cashless basis.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">We paid Chardan Capital Markets LLC a commission
equal to (i) ten percent (10%) of the cash received by us and (ii) 416,666 shares of common stock.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The shares were offered and sold pursuant
to an exemption from the registration requirements under Sections 4(2), Section 4(6) and Regulation S of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Item 16. Exhibits and Financial Statement Schedules. </B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify">(b) Exhibits</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 0.5in; text-align: justify">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">In reviewing the agreements included as
exhibits to this registration statement, please remember they are included to provide you with information regarding their terms
and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties
to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These
representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: justify">&nbsp;</P>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>should not in all
                                                                                                         instances be treated
                                                                                                         as categorical statements
                                                                                                         of fact, but rather as
                                                                                                         a way of allocating the
                                                                                                         risk to one of the parties
                                                                                                         if those statements prove
                                                                                                         to be inaccurate;</TD></TR>                                                                                                                                    <TR STYLE="vertical-align: top">
<TD>&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD></TR>
</TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>have been qualified
                                                                                                         by disclosures that were
                                                                                                         made to the other party
                                                                                                         in connection with the
                                                                                                         negotiation of the applicable
                                                                                                         agreement, which disclosures
                                                                                                         are not necessarily reflected
                                                                                                         in the agreement;</TD></TR>                                                                                                                                    <TR STYLE="vertical-align: top">
<TD>&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD></TR>
</TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>may apply standards
                                                                                                         of materiality in a way
                                                                                                         that is different from
                                                                                                         what may be viewed as
                                                                                                         material to you or other
                                                                                                         investors; and</TD></TR>                                                                                                                                 <TR STYLE="vertical-align: top">
<TD>&nbsp;</TD><TD>&nbsp;</TD><TD>&nbsp;</TD></TR>
</TABLE>

<TABLE CELLPADDING="0" CELLSPACING="0" WIDTH="100%" STYLE="font: 10pt Times New Roman, Times, Serif; margin-top: 0pt; margin-bottom: 0pt"><TR STYLE="vertical-align: top">
<TD STYLE="width: 0"></TD><TD STYLE="width: 0.5in"><FONT STYLE="font-family: Symbol">&middot;</FONT></TD><TD>were made only as
                                                                                                         of the date of the applicable
                                                                                                         agreement or such other
                                                                                                         date or dates as may
                                                                                                         be specified in the agreement
                                                                                                         and are subject to more
                                                                                                         recent developments.</TD></TR></TABLE>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Accordingly, these representations
and warranties may not describe the actual state of affairs as of the date they were made or at any other time. We acknowledge
that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional
specific disclosures of material information regarding material contractual provisions are required to make the statements in
this registration statement not misleading. Additional information about the Company may be found elsewhere in this registration
statement and the Company&rsquo;s other public files, which are available without charge through the SEC&rsquo;s website at http://www.sec.gov.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0 0pt 1.5in">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 13%; font-weight: bold"><FONT STYLE="font-size: 10pt"><B>Exhibit No.</B></FONT></TD>
    <TD STYLE="width: 2%; font-weight: bold">&nbsp;</TD>
    <TD STYLE="width: 85%; font-weight: bold"><FONT STYLE="font-size: 10pt"><B>Description</B></FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">2.1</P></TD>
    <TD>&nbsp;</TD>
    <TD><P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>
        <P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">Agreement and Plan of Merger and Reorganization dated
        as of January 25, 2011 by and among the Company, 22nd Century, and Acquisition Sub (incorporated herein by reference to
        Exhibit 2.1 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on February 1, 2011).</P></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">3.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Amended and Restated Certificate of Incorporation of the Company (incorporated herein by
    reference to Exhibit 3.2 of the Company&rsquo;s Annual Report on Form 10-K for the year ended September 30, 2010 filed with
    the Commission on December 3, 2010).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">3.1.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Certificate of Designation of Preferences, Rights and Limitations of Series A-1 10% Convertible
    Preferred Stock (incorporated herein by reference to Exhibit 3.1 of the Company&rsquo;s Current Report on Form 8-K filed with
    the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">3.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Bylaws of the Company (incorporated herein by reference to Exhibit 4.2 to the Company&rsquo;s
    Form S-8 filed with the SEC on March 30, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Convertible Promissory Note (incorporated by reference to Exhibit 4.1 of the Company&rsquo;s
    Current Report on Form 8-K filed with the Commission on December 16, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.1.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Amendment dated November 29, 2012 to the Company&rsquo;s December 2011 Convertible Notes
    (incorporated herein by reference to Exhibit 10.1 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission
    on January 2, 2013). </FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Warrant dated as of January 25, 2011 issued to LLC members of 22nd Century prior
    to the consummation of the Private Placement Offering upon consummation of the Merger (incorporated herein by reference to
    Exhibit 10.4 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Warrant dated as of January 25, 2011 issued to investors in the Private Placement
    Offering upon consummation of the Merger (Incorporated herein by reference to Exhibit 10.5 of the Company&rsquo;s Current
    Report on Form 8-K filed with the Commission on February 1, 2011).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 13%"><FONT STYLE="font-size: 10pt">4.4</FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 85%"><FONT STYLE="font-size: 10pt">Form of Warrant dated as of January 25, 2011 issued to the Placement
    Agent and Sub-Agent upon consummation of the Merger (incorporated herein by reference to Exhibit 10.6 of the Company&rsquo;s
    Current Report on Form 8-K filed with the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Advisor Warrant dated as of January 25, 2011 issued to the Placement Agent in connection
    with that certain Advisory Agreement dated as of January 25, 2011 by and between the Company and the Placement Agent (incorporated
    herein by reference to Exhibit 10.7 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on February
    1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.2 of
    the Company&rsquo;s Current Report on Form 8-K filed with the Commission on December 16, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.7</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.1 of
    the Company&rsquo;s Current Report on Form 8-K filed with the Commission on May 18, 2012).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.1 of
    the Company&rsquo;s Current Report on Form 8-K filed with the Commission on November 13, 2012).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Series A Common Stock Purchase Warrant (incorporated herein by reference to Exhibit
    4.1 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Series B Common Stock Purchase Warrant (incorporated herein by reference to Exhibit
    4.2 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">4.11</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Series C Common Stock Purchase Warrant (incorporated herein by reference to Exhibit
    4.3 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">5.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Opinion of Foley &amp; Lardner LLP as to the legality of the securities being registered.</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Company&rsquo;s
    Form S-8 filed with the SEC on March 30, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.2</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Securities Purchase Agreement dated as of January 25, 2011 by and among 22nd Century,
    the purchaser(s) identified on the signature pages thereto and Parent, solely for the purposes of Section E and Section G
    thereof, as amended (incorporated herein by reference to Exhibit 10.2 of the Company&rsquo;s Current Report on Form 8-K filed
    with the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.3</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Conversion Agreement (incorporated herein by reference to Exhibit 10.3 of the Company&rsquo;s
    Current Report on Form 8-K filed with the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.4</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Advisory Agreement dated as of January 25, 2011 by and between the Company and the Placement
    Agent (incorporated herein by reference to Exhibit 10.8 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission
    on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.5</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Placement Agency Agreement dated as of December 1, 2010 by and between 22nd Century and
    the Placement Agent (incorporated herein by reference to Exhibit 10.9 of the Company&rsquo;s Current Report on Form 8-K filed
    with the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.6</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Escrow Agreement dated as of December 2, 2010 by and among 22nd Century,&nbsp;&nbsp;the
    Placement Agent and Bank of America, National Association (incorporated herein by reference to Exhibit 10.10 of the Company&rsquo;s
    Current Report on Form 8-K filed with the Commission on February 1, 2011).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 13%"><FONT STYLE="font-size: 10pt">10.7</FONT></TD>
    <TD STYLE="width: 2%">&nbsp;</TD>
    <TD STYLE="width: 85%"><FONT STYLE="font-size: 10pt">Split-Off Agreement dated as of January 25, 2011 by and among the Company,
    Touchstone Split. Corp and David Rector (incorporated herein by reference to Exhibit 10.11 of the Company&rsquo;s Current
    Report on Form 8-K filed with the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.8</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Letter from Paramount Strategy Corp dated as of December 21, 2010 regarding loan forgiveness
    (incorporated herein by reference to Exhibit 10.12 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission
    on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.9</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Letter from Milestone Enhanced Fund Ltd. dated as of December 28, 2010 regarding loan forgiveness
    (incorporated herein by reference to Exhibit 10.13 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission
    on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.10</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Letter from Mark Tompkins dated as of January 25, 2011 regarding loan forgiveness (incorporated
    herein by reference to Exhibit 10.14 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on February
    1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.11&dagger;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Employment Agreement dated as of January 25, 2011 by and between the Company and Joseph
    Pandolfino (incorporated herein by reference to Exhibit 10.15 of the Company&rsquo;s Current Report on Form 8-K filed with
    the Commission on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.12&dagger;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Employment Agreement dated as of January 25, 2011 by and between the Company and Henry Sicignano
    III (incorporated herein by reference to Exhibit 10.16 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission
    on February 1, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.13&dagger;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Employment Agreement dated as of March 15, 2011 by and between the Company and Michael R.
    Moynihan (incorporated by reference to Exhibit 10.18 to the Company&rsquo;s Form S-1 registration statement filed with the
    Commission on June 6, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.14</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Restated Promissory Note dated June 30, 2011, payable by the Company to Henry Sicignano
    III in the principal amount of $150,000 (incorporated by reference to Exhibit 10.20 to the Company&rsquo;s Form S-1 registration
    statement filed with the Commission on July 20, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.15&dagger;&dagger;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">License Agreement dated March 6, 2009 between North Carolina State University and 22nd Century
    Limited, LLC (incorporated by reference to Exhibit 10.21 to the Company&rsquo;s Form S-1 registration statement filed with
    the Commission on August 26, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.15.1</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Amendment dated August 9, 2012 to License Agreement dated March 6, 2009 between North Carolina
    State University and 22nd Century Limited, LLC (incorporated by reference to Exhibit 10.1 to the Company&rsquo;s Current Report
    on Form 8-K filed with the Commission on August 20, 2012).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.16&dagger;&dagger;</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">License Agreement dated May 1, 2009 between The National Research Council of Canada and
    22nd Century Limited, LLC (incorporated by reference to Exhibit 10.22 to the Company&rsquo;s Form S-1 registration statement
    filed with the Commission on August 26, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.17</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Letter Agreement between the Company and NCSU dated November 22, 2011 (incorporated by reference
    to Exhibit 10.1 to the Company&rsquo;s Form 8-K filed with the Commission on November 23, 2011).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.18</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Securities Purchase Agreement, dated as of December 14, 2011, by and between 22nd
    Century Group, Inc. and the purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company&rsquo;s Form 8-K
    filed with the Commission on December 16, 2011).</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 11%"><FONT STYLE="font-size: 10pt">10.19</FONT></TD>
    <TD STYLE="width: 4%">&nbsp;</TD>
    <TD STYLE="width: 85%"><FONT STYLE="font-size: 10pt">Form of Securities Purchase Agreement, dated as of January 11, 2013,
    by and between 22nd Century Group, Inc. and the purchasers thereto (incorporated herein by reference to Exhibit 10.1 of the
    Company&rsquo;s Current Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.20</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Registration Rights Agreement, dated as of January 11, 2013, by and between 22nd
    Century Group, Inc. and the parties thereto (incorporated herein by reference to Exhibit 10.2 of the Company&rsquo;s Current
    Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.21</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Insiders Lock-Up Agreement (incorporated herein by reference to Exhibit 10.3 of
    the Company&rsquo;s Current Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">10.22</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Form of Specified Investors Lock-Up Agreement (incorporated herein by reference to Exhibit
    10.4 of the Company&rsquo;s Current Report on Form 8-K filed with the Commission on January 17, 2013).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">21.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Subsidiaries of the Company</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">23.1*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Consent of Foley &amp; Lardner LLP (included in Exhibit 5.1 filed herewith).</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">23.2*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Consent of Freed Maxick CPAs, P.C.</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">101*</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the
    Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows,
    and (iv) the Notes to the Consolidated Financial Statements.</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD STYLE="width: 15%"><FONT STYLE="font-size: 10pt">101.INS</FONT></TD>
    <TD STYLE="width: 85%"><FONT STYLE="font-size: 10pt">XBRL Instance Document*</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">101.SCH</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">XBRL Taxonomy Extension Schema Document*</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">101.CAL</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">XBRL Taxonomy Extension Calculation Linkbase Document*</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">101.DEF</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">XBRL Taxonomy Extension Definition Linkbase Document*</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">101.LAB</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">XBRL Taxonomy Extension Label Linkbase Document*</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">101.PRE</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">XBRL Taxonomy Extension Presentation Linkbase Document*</FONT></TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">*Filed herewith.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;&dagger;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Management contract
or compensatory plan, contract or arrangement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&dagger;&dagger;&nbsp;&nbsp; &nbsp;Certain portions of the
exhibit have been omitted pursuant to a confidential treatment order. An unredacted</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">copy of the exhibit has been filed separately with the United
States Securities and Exchange Commission pursuant to the request for confidential treatment.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"><B>Item 17. Undertakings.</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">The undersigned registrant hereby undertakes:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(A)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The undersigned registrant hereby undertakes:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1in">(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1in">(ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the &ldquo;Calculation
of Registration Fee&rdquo; table in the effective registration statement; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1in">(iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To include any material information with respect
to the plan of distribution not previously disclosed in the registration statement or any material change to such information
in the registration statement.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">(2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating
to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide
offering thereof.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">(3)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To remove from registration by means of a post&minus;effective
amendment any of the securities being registered which remain unsold at the termination of the offering.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0"></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">(4)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1in">(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the registrant is relying on Rule 430B:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1.5in">(A)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each prospectus filed by the registrant pursuant
to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part
of and included in the registration statement; and</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1.5in">(B)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant
to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act
of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus
is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus.
As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall
be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to
which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering
thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date,
supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date; or</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 1in">(ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included
in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in
a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to
a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date
of first use.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(B)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">(C)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The undersigned registrant hereby undertakes that:</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">(1)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">(2)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>


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<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center"><B>SIGNATURES</B></P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: center">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, in the
City of Clarence, State of New York on February 4, 2013.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: top">
    <TD COLSPAN="3" STYLE="font-weight: bold"><FONT STYLE="font-size: 10pt"><B>22nd CENTURY GROUP, INC.</B></FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD COLSPAN="2">&nbsp;</TD></TR>
<TR>
    <TD STYLE="width: 13%"><FONT STYLE="font-size: 10pt">By:</FONT></TD>
    <TD STYLE="width: 32%; border-bottom: Black 1pt solid"><FONT STYLE="font-size: 10pt">/s/ Joseph Pandolfino</FONT></TD>
    <TD STYLE="width: 55%">&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">Name:</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">Joseph Pandolfino</FONT></TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">Title:</FONT></TD>
    <TD><FONT STYLE="font-size: 10pt">Chief Executive Officer</FONT></TD>
    <TD>&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-indent: 0.5in">Pursuant to the requirements of the Securities
Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the dates
set forth below. Each person whose signature appears below constitutes and appoints Joseph Pandolfino and Henry Sicignano, III,
and each of them individually, his or her true and lawful attorney-in-fact and agent, with full power of substitution and revocation,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any additional registration statement to be filed pursuant to Rule 462(b) under
the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents,
or either of them, may lawfully do or cause to be done by virtue hereof.</P>

<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0">&nbsp;</P>

<TABLE CELLSPACING="0" CELLPADDING="0" STYLE="font: 10pt Times New Roman, Times, Serif; width: 100%; border-collapse: collapse">
<TR STYLE="vertical-align: bottom">
    <TD STYLE="width: 35%; font-weight: bold"><FONT STYLE="font-size: 10pt"><B>Signature</B></FONT></TD>
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 37%; font-weight: bold"><FONT STYLE="font-size: 10pt"><B>Title</B></FONT></TD>
    <TD STYLE="width: 1%">&nbsp;</TD>
    <TD STYLE="width: 26%; font-weight: bold"><FONT STYLE="font-size: 10pt"><B>Date</B></FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="border-bottom: windowtext 1pt solid"><FONT STYLE="font-size: 10pt">/s/ Joseph Pandolfino</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">Joseph Pandolfino</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Chief Executive Officer and Director (Principal Executive Officer)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">February 4, 2013</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="border-bottom: windowtext 1pt solid"><FONT STYLE="font-size: 10pt">/s/ Henry Sicignano, III</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">Henry Sicignano, III</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">February 4, 2013</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="border-bottom: windowtext 1pt solid"><FONT STYLE="font-size: 10pt">/s/ Joseph A. Dunn, Ph.D.</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">Joseph A. Dunn, Ph.D.</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">February 4, 2013</FONT></TD></TR>
<TR STYLE="vertical-align: top">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD STYLE="border-bottom: windowtext 1pt solid"> &nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
<TR STYLE="vertical-align: top">
    <TD><FONT STYLE="font-size: 10pt">James W. Cornell</FONT></TD>
    <TD>&nbsp;</TD>
    <TD><FONT STYLE="font-size: 10pt">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD></TR>
</TABLE>
<P STYLE="font: 10pt Times New Roman, Times, Serif; margin: 0pt 0; text-align: right"><B>&nbsp;</B></P>


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{"company-data": {"conformed-name": "22nd Century Group, Inc.", "cik": "0001347858", "assigned-sic": "2111", "irs-number": "980468420", "state-of-incorporation": "NV", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-186449", "film-number": "13571108"}, "business-address": {"street1": "9530 MAIN STREET", "city": "CLARENCE,", "state": "NY", "zip": "14031", "phone": "(716) 270-1523"}, "mail-address": {"street1": "9530 MAIN STREET", "city": "CLARENCE,", "state": "NY", "zip": "14031"}, "former-company": {"former-conformed-name": "Touchstone Mining LTD", "date-changed": "20051222"}}
As filed with
the Securities and Exchange Commission on February 4, 2013
Registration
No.
333-______
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES
ACT OF 1933
22nd
CENTURY GROUP, INC.
(Exact name of
registrant as specified in its charter)
Nevada
(State or other jurisdiction
        of
Incorporation or organization)
5194
(Primary Standard Industrial
Classification Code Number)
98-0468420
(I.R.S. Employer
Identification No.)
9530 Main Street
Clarence, New York 14031
(716) 270-1523
(Address, including zip code, and telephone
number, including area code, of registrant's principal executive offices)
Henry Sicignano
III
President
22nd Century Group, Inc.
9530 Main Street
Clarence, New York 14031
(716) 270-1523
(Address, including
zip code, and telephone number, including area code, of agent for service)
Copies to:
Michael B. Kirwan,
Esq.
Thomas L. James, Esq.
Foley & Lardner LLP
One Independent Drive, Suite 1300
Jacksonville, Florida 32202
(904) 359-2000
Approximate date of commencement of proposed
sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered
on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box.
x
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
x
CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
Amount to be
Registered (1)
Proposed
maximum
offering
price
per share
Proposed maximum
aggregate offering
price
Amount of
registration fee
Common stock, par value $0.00001 per share, underlying Series A-1 10% Convertible Preferred Stock, par value $0.00001 per share
10,833,332
(2)
$
0.71
(3)
$
7,691,665.72
(3)
$
1,049.14
Common stock underlying outstanding Series A Warrants
8,333,332
(4)
$
0.72
(5)
$
5,999,999.04
(5)
$
818.40
Common stock underlying outstanding Series B Warrants
4,166,668
(6)
$
0.71
(5)
$
2,958,334.28
(5)
$
403.52
Common stock underlying outstanding Series C Warrants
4,166,668
(4)
$
0.72
(5)
$
3,000,000.96
(5)
$
409.20
Total
27,500,000
$
19,650,000.00
$
2,680.26
(7)
(1)
Pursuant to Rule 416 under the
    Securities Act of 1933, as amended (the "Securities Act"), the number of shares of common stock registered hereby
    is subject to adjustment to prevent dilution resulting from stock splits, stock dividends or similar transactions.
(2)
For purposes of calculating the number of shares
    of common stock included in this registration statement (due to potential adjustments to the conversion price and anti-dilution
    provisions), we have included 200% of the aggregate number of shares currently issuable (i) upon conversion of issued and
    outstanding shares of Series A-1 10% Convertible Preferred Stock at an initial conversion price of $0.60 per share and (ii)
    issuable as dividends in lieu of cash over a three (3) year period on issued and outstanding shares of Series A-1 10% Convertible
    Preferred Stock (at an assumed price of $0.60 per share). The shares of common stock are being registered for resale by the
    selling stockholders named in this registration statement.
(3)
Estimated solely for the purpose of calculating
    the registration fee pursuant to Rule 457(c) under the Securities Act based on the average of the high and low sale prices
    of the common stock reported on the OTC Bulletin Board on January 31, 2013, which was $0.71 per share.
(4)
For purposes of calculating the number of shares
    of common stock included in this registration statement (due to potential adjustments to the exercise price and anti-dilution
    provisions), we have included 200% of the aggregate number of shares currently issuable upon exercise of warrants to purchase
    shares of common stock held by the selling stockholders named in this registration statement, at an initial exercise price
    of $0.72 per share.
(5)
Represents the higher of: (i) the exercise
    price of the convertible security and (ii) the offering price of securities of the same class as the common stock underlying
    the convertible security calculated in accordance with Rule 457(c) under the Securities Act, for the purpose of calculating
    the registration fee pursuant to 457(g) under the Securities Act.
(6)
For purposes of calculating the number of shares
    of common stock included in this registration statement (due to potential adjustments to the exercise price and anti-dilution
    provisions), we have included 200% of the aggregate number of shares currently issuable upon exercise of warrants to purchase
    shares of common stock held by the selling stockholders named in this registration statement, at an exercise price of $0.60
    per share.
(7)
The Registrant previously filed
    Form S-1 (333-173420) on April 8, 2011, and paid a filing fee of $788.68. The Registrant did not sell an aggregate of 4,632,534
    securities pursuant to that Form S-1, and that Form S-1 was terminated on May 18, 2012. Pursuant to Rule 457(p), the Registrant
    hereby applies $672 of the previously paid filing fee against amounts due herewith.
The Registrant hereby amends this Registration Statement
on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in
        this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration
        statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these
        securities and the selling stockholders are not soliciting an offer to buy these securities in any jurisdiction where
        the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED
FEBRUARY 4, 2013
PRELIMINARY PROSPECTUS
22nd CENTURY GROUP, INC.
Up to 27,500,000 Shares of Common Stock
This prospectus relates to the resale at
various times by the selling stockholders indentified in this prospectus of up to 27,500,000 shares of common stock, par value
$0.00001 per share, issuable (i) upon conversion of our Series A-1 Preferred Stock, (ii) as dividend payments on our Series A-1
Preferred Stock (at our option) and (iii) upon the exercise of Series A Warrants, Series B Warrants and Series C Warrants. These
shares were privately issued to the selling stockholders in connection with a private placement transaction. We will not receive
any proceeds from the sale of common stock by the selling stockholders, but we will receive funds from the exercise of the Series
A Warrants, Series B Warrants and Series C Warrants, if exercised for cash.
The
selling stockholders have advised us that they will sell the shares of common stock from time to time in broker's transactions,
in the open market, on the OTC Bulletin Board, in privately negotiated transactions or a combination of these methods, at market
prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices. We will pay
the expenses incurred to register the shares for resale, but the selling stockholders will pay any
underwriting
discounts, commissions or agent's commissions related to the sale of their shares of common stock.
Our common stock is traded on the OTC Bulletin
Board under the symbol "XXII.OB". On January 29, 2013, the closing sale price of our common stock was $0.90 per share.
Investing in our common stock involves
risks. Before making any investment in our securities, you should read and carefully consider risks described in the "Risk
Factors" section beginning on page 7 of this prospectus.
You should rely only on the information
contained in this prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with
different information. This prospectus may only be used where it is legal to sell these securities. The information in this prospectus
is only accurate on the date of this prospectus, regardless of the time of any sale of securities.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal offense.
This date of this prospectus is
,
2013
You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with information that is different from that contained in this prospectus.
If anyone provides you with different or inconsistent information, you should not rely on it. The selling stockholders are offering
to sell and seeking offers to buy these securities only in jurisdictions where offers and sales are permitted. You should assume
that the information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock. Our business, financial condition, results of operations and prospects
may have changed since that date.
TABLE OF CONTENTS
Prospectus Summary
1
Recent Developments
3
The Offering
5
Cautionary Note Regarding Forward-Looking Statements
6
Risk Factors
7
Principal Stockholders
21
Selling Stockholders
23
Use of Proceeds
25
Dividend Policy
25
Determination of Offering Price
25
Market for Common Equity and Related Stockholder Matters
25
Shares Authorized for Issuance Under Equity Compensation Plans
26
Business
27
Management's Discussion and Analysis of Financial Condition and Results of Operations
44
Directors and Executive Officers
52
Corporate Governance
54
Executive Compensation
57
Certain Relationships and Related Transactions
59
Plan of Distribution
62
Description of Securities
64
Legal Matters
71
Experts
71
Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
71
Where You Can Find More Information
72
Index to Financial Statements
F-1
i
Prospectus
Summary
This summary highlights information contained elsewhere
in this prospectus. This summary is not complete and does not contain all the information that should be considered before investing
in our common stock. Investors should read the entire prospectus carefully, including the more detailed information contained
herein under the "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" sections and
our consolidated financial statements and the notes to those financial statements.
As used in this prospectus, unless the context otherwise
requires, the "Company," "we," "us" and "our" refer to 22nd Century Group, Inc.,
a Nevada corporation, as well as its subsidiaries, 22nd Century Limited, LLC, a Delaware limited liability company, Goodrich Tobacco
Company, LLC, a Delaware limited liability company, and Hercules Pharmaceuticals, LLC, a Delaware limited liability company, taken
as a whole, and also refer to the operations of 22nd Century Limited, LLC, as discussed below.
Our Company
Background
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. We changed our name to 22nd Century Group, Inc. on
November 23, 2010 in anticipation of the Merger with 22nd Century Limited, LLC. 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. Since inception, 22nd Century
Limited, LLC has used biotechnology to regulate the nicotine content in tobacco plants.
Overview
22nd Century Limited, LLC, our wholly-owned
subsidiary,
is a plant biotechnology company focused on tobacco harm reduction and smoking cessation
products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding. We exclusively
control 107 issued patents and exclusively control an additional 38 patent applications; of these, we own 12 issued patents plus
23 patent applications and we license on an exclusive basis, 95 issued patents and 15 patent applications.
Hercules Pharmaceuticals,
LLC and Goodrich Tobacco Company, LLC are subsidiaries of 22nd Century Limited, LLC and are business units for our (i) smoking
cessation product and (ii) premium cigarettes and modified risk tobacco products, respectively.
We are in the process of transitioning
from solely developing proprietary technology and tobacco to developing and commercializing our own products. In March 2011, our
subsidiary, Goodrich Tobacco Company, LLC introduced two of our products,
RED SUN
and
MAGIC
cigarettes into the
U.S. market.
For more information about our business,
see "Business" and "Management's Discussion and Analysis of Financial Condition" in this prospectus.
Current Financial Condition
We have operated at a loss since 2006
when we increased our research and development expenditures. We had net losses of $2.4 million, $1.3 million and $1.4
million, respectively, in the nine months ended September 30, 2012 and years ended December 31, 2011 and 2010. We realized
revenue of $15,683 in the nine months ended September 30, 2012 from the sale of research cigarettes. In the year ended
December 31, 2011, we realized revenue of $788,601 mainly from our research cigarette program and in 2010, we realized
revenue of $49,784 from this program. As of January 22, 2013, we had cash on hand of approximately $660,000 due to the
capital raises described under "Recent Developments," which should be sufficient to fund operations for
approximately 5 months.
1
We will need additional capital to continue
operations and make payments on obligations that are and become due in 2013. Our expected capital requirements over the next 12
months without any extraordinary expenses such as exposure studies or clinical trials are approximately $1 million. We will need
to raise funds through the issuance of debt or equity securities or through licensing our technology during the next twelve months
in order to continue operations. Failure to raise sufficient funds would significantly increase the risk that we would be unable
to continue operations. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed
could materially adversely impact our plans to commercialize our products, our ability to continue as a going concern and our
financial condition and results of operations. Additional equity financing will be dilutive to shareholders of our common stock.
To the extent that we raise additional funds through collaboration and licensing arrangements, it will be necessary in certain
countries to relinquish some rights to our technologies or our potential products or grant licenses on terms that are not favorable
to us.
Corporate Information
Our principal executive offices are located
at 9530 Main Street, Clarence, New York 14031. The telephone number at our principal executive offices is (716) 270-1523. Our
website address is www.xxiicentury.com. Information contained on our website is not deemed part of this prospectus.
2
Recent
Developments
Private Placement of Preferred Stock and Warrants
On January 11, 2013, we entered into and
closed the transactions described in a Securities Purchase Agreement with certain accredited investors indentified therein (collectively,
the "Purchasers"), whereby we sold 2,500 shares of newly created Series A-1 10% Convertible Preferred Stock (the "Series
A-1 Preferred Stock") and Warrants (as defined below) for an aggregate purchase price of $2,500,000. We also entered into
a Registration Rights Agreement whereby we agreed to file a registration statement to register the resale of the shares of our
common stock that are potentially issuable under each of the securities described below.
The shares of Series A-1 Preferred Stock
are initially convertible into a total of 4,166,666 shares of the Company's common stock at a conversion price of $0.60
per share (the "Conversion Price"), subject to future adjustments. The Series A-1 Preferred Stock will pay a 10.0%
annual cash dividend, which may be payable in shares of our common stock in certain circumstances, and will have a liquidation
preference equal to the stated value of the Series A-1 Preferred Stock of $1,000 per share plus any accrued and unpaid dividends
thereon. The Series A-1 Preferred Stock has no voting rights. The Conversion Price of the Series A-1 Preferred Stock is subject
to adjustment as follows:
(i)
on the effective date of this registration statement, the Conversion
                                                           Price will be reduced to the lesser of (1) the then Conversion Price,
                                                           as adjusted and taking into consideration any prior resets, (2) the
                                                           greater of $0.35 (subject to adjustment for reverse and forward stock
                                                           splits and the like) and 70% of the average of the five (5) trading
                                                           day volume weighted average prices, or VWAPs, immediately prior to
                                                           each such effective date or (3) $0.60 (subject to adjustment for forward
                                                           and reverse stock splits and the like);
(ii)
if on the 180th day immediately following the closing date of
                                                            January 11, 2013 (the "Closing Date"), 70% of the average
                                                            of the five (5) trading day VWAPs immediately prior to such date is
                                                            less than the then Conversion Price, then on such 180th day the Conversion
                                                            Price shall be reduced, and only reduced, to the lesser of (1) the
                                                            then Conversion Price, as adjusted and taking into consideration any
                                                            prior resets, (2) the greater of $0.15 (subject to adjustment for
                                                            reverse and forward stock splits and the like) and 70% of the average
                                                            of the five (5) trading day VWAPs immediately prior to each such 180th
                                                            day immediately following the Closing Date or (3) $0.35 (subject to
                                                            adjustment for forward and reverse stock splits and the like); and
(iii)
if all of the shares required to be registered are not registered
                                                             pursuant to an effective registration statement within the 120th
                                                             day anniversary of the Closing Date, then on the 180th day and 270th
                                                             day following the Closing Date, the Conversion Price shall be reduced,
                                                             and only reduced, to the lesser of (1) the then Conversion Price,
                                                             as adjusted and taking into consideration any prior resets, (2) the
                                                             greater of $0.15 (subject to adjustment for reverse and forward stock
                                                             splits and the like) and 70% of the average of the five (5) trading
                                                             day VWAPs immediately prior to each such date or (3) $0.35 (subject
                                                             to adjustment for forward and reverse stock splits and the like).
The foregoing description of the Series
A-1 Preferred Stock is only a summary and is not complete. For additional information about the terms of the Series A-1 Preferred
Stock, including the anti-dilution features, liquidated damages provisions for certain events and negative covenants, see the
section entitled "Description of Securities – Preferred Stock" in this prospectus.
We also issued to the Purchasers a Series
A warrant (the "Series A Warrant"), a Series B warrant (the "Series B Warrant"), and a Series C warrant
(the "Series C Warrant") (with the Series A Warrant, Series B Warrant and Series C Warrant being collectively referred
to herein as the "Warrants"). The Series A Warrant allows the Purchasers the right to acquire, initially before any
adjustments to the conversion price, up to an additional 4,166,666 shares of the Company's common stock at an exercise price
of approximately $0.72 per share over a period of five (5) years. The Series A Warrant also allows for such warrant to be exercised
on a cashless basis. The Series B Warrant allows the Purchasers a one-year period to exercise an overallotment option as contained
in the Series B Warrant to purchase, initially before any adjustments to the conversion price, up to an additional aggregate of
2,083,334 shares of the Company's common stock at a price of $0.60 per share. The Series B Warrant may not be exercised
on a cashless basis except only in certain limited circumstances. In the event the Purchasers exercise, in whole or in part the
overallotment option as contained in the Series B warrant, then the Purchasers shall have the right to exercise on a pro rata
basis the portion of the Series C Warrant issued to the Purchasers to acquire, initially before any adjustments to the conversion
price, up to an additional aggregate of 2,083,334 shares of the Company's common stock at an exercise price of approximately
$0.72 per share over a period of five (5) years. The Series C Warrant allows for such warrant to be exercised on a cashless basis.
3
The foregoing description of the Warrants
is only a summary and is not complete. For additional information about the terms of the Warrants, including the anti-dilution
features, see the section entitled "Description of Securities – Warrants and Convertible Notes" in this prospectus.
The Series A-1 Preferred Stock and the
Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the case
may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any of its
affiliates would beneficially own in excess of 9.99% of the outstanding shares of common stock immediately after giving effect
to such conversion or exercise (as the case may be).
The Series A-1 Preferred Stock and the
Warrants were offered and sold pursuant to an exemption from the registration requirements under Sections 4(2), Section 4(6) and
Regulation S of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
We paid Chardan Capital Markets LLC a commission
equal to (i) ten percent (10%) of the cash received by us and (ii) 416,666 shares of common stock. In the event the Purchasers
exercise for cash any of the Warrants, then we will also pay an additional cash commission to Chardan Capital Markets LLC equal
to eight percent (8%) (with no additional equity) of any such additional cash amounts received by us. After deducting fees and
expenses, the aggregate net proceeds from the sale of the Series A-1 Preferred Shares and the Warrants were approximately $2.125
million. We intend to use the net proceeds for the payment of certain financial obligations and for working capital and other
general corporate purposes.
Modification of Convertible Notes Due December 14, 2012
On December 14, 2011, we sold approximately
$1.9 million of convertible promissory notes for an aggregate purchase price of approximately $1.7 million in a private placement.
The notes were issued with an original issue discount of approximately 15% and the original maturity date of the notes was December
14, 2012 (which was extended as set forth below). The notes were initially convertible into shares of our common stock at any
time prior to maturity at a per share conversion price equal to $0.75, which conversion price was subsequently adjusted pursuant
to its terms to be equal to $0.7004 per share as of January 22, 2013. Upon conversion of all or a portion of the notes into common
stock, the holder will receive at that time a warrant to purchase an exercise price of $1.50 per share (i) such number of shares
of common stock from such warrant equal to 120% of such number of shares of common stock issuable upon conversion of the note
and (ii) a pro rata portion of an increase of such warrant in the aggregate of an additional 239,890 shares of common stock that
were the result of inducements granted to holders of such notes to execute lock-up agreements, which restrict the note holders
from selling the underlying shares of common stock issuable upon conversions of the notes or exercising the warrants for a period
from January 11, 2013 until the date which is 2 months after the effective date of this registration statement.
Between December 14, 2012 and January 2,
2013, we entered into agreements with holders of $1,675,000 of the notes. Holders of $1,330,000 of the notes agreed to extend
the maturity date of the notes to April 14, 2013. Holders of $100,000 of the notes elected to convert into shares of the common
stock pursuant to the terms of the notes. Holders of $215,000 of the notes elected to enter into a forbearance agreement and were
subsequently paid in full. Holders of $30,000 of the notes agreed to be paid over time. On January 24, 2013, we sent out notices
to the holders of the notes regarding our intent to repay the notes at the expiration of a 15-day period during which time the
holders may convert to common stock and warrants to purchase common stock.
The foregoing description of the notes
is only a summary and is not complete. For additional information about the terms of the notes, see the section entitled "Description
of Securities" in this prospectus.
Private Placement of Common Stock and Warrants
On November 9, 2012, we sold for an aggregate
purchase price of approximately $809,500 in a private placement of approximately 3,238,000 shares of our common stock and warrants
with a 5-year term to purchase up to 1,619,000 shares of our common stock at an initial exercise price of $1.00 per share, which
warrant exercise price was subsequently adjusted pursuant to its terms to be equal to $0.60 per share as of January 22, 2013.
We used the proceeds from such private placement for licensing expenses, tobacco leaf purchases, working capital and other general
corporate purposes. For additional information about these warrants, see the section entitled "Description of Securities
– Warrants and Convertible Notes – Warrants issued in 2012" in this prospectus.
4
The Offering
Common stock currently outstanding
35,415,139
shares (1) (2)
Common stock offered by us
None.
Common stock offered by the selling stockholders
Up to 27,500,000
shares
        issuable (i) upon conversion of our Series A-1 Preferred Stock, (ii) as dividend payments on our Series A-1 Preferred
        Stock and (iii) upon the exercise of the Warrants.
Use of Proceeds
We will not receive any proceeds from the sale of common
        stock by the selling stockholders, but we will receive funds from the exercise of the Warrants, if exercised for cash.
Risk Factors
See "Risk Factors" and other information
        included in this prospectus for a discussion of factors that you should consider before deciding to invest in shares of
        our common stock.
OTC Bulletin Board Symbol
XXII.OB
(1) As of January 22, 2013.
(2) Unless otherwise indicated, the number of shares in this
prospectus does not give effect to:
·
up to 4,166,666
                                                                                                             shares of common
                                                                                                             stock that could
                                                                                                             be issued as a result
                                                                                                             of the conversion
                                                                                                             of the shares of
                                                                                                             Series A-1 Preferred
                                                                                                             Stock, which is subject
                                                                                                             to adjustment as
                                                                                                             described under "Description
                                                                                                             of Securities –
                                                                                                             Preferred Stock";
·
up to 2,055,000
                                                                                                             shares of common
                                                                                                             stock reserved for
                                                                                                             future issuance under
                                                                                                             the Equity Incentive
                                                                                                             Plan;
·
up to 465,000
                                                                                                             shares of common
                                                                                                             stock issuable upon
                                                                                                             exercise of outstanding
                                                                                                             stock options;
·
up to 2,411,734
                                                                                                             shares of common
                                                                                                             stock currently issuable
                                                                                                             upon the conversion
                                                                                                             of convertible notes
                                                                                                             (subject to adjustment
                                                                                                             for anti-dilution
                                                                                                             adjustments);
·
up to 19,700028
                                                                                                             shares of common
                                                                                                             stock currently issuable
                                                                                                             upon the exercise
                                                                                                             of outstanding warrants
                                                                                                             (including the Series
                                                                                                             A Warrants and Series
                                                                                                             B Warrants) (subject
                                                                                                             to adjustment for
                                                                                                             anti-dilution adjustments);
                                                                                                             and
·
up to 5,142,797
                                                                                                             shares of common
                                                                                                             stock issuable upon
                                                                                                             exercise of warrants
                                                                                                             issuable upon conversion
                                                                                                             or exercise of other
                                                                                                             instruments (including
                                                                                                             the Series C Warrants)
                                                                                                             (subject to adjustment
                                                                                                             for anti-dilution
                                                                                                             adjustments).
5
Cautionary
Note Regarding Forward-Looking Statements
This prospectus contains forward-looking
statements.  This prospectus includes statements regarding our plans, goals, strategies, intentions, beliefs or current
expectations.  These statements are expressed in good faith and based upon a reasonable basis when made, but there can
be no assurance that these expectations will be achieved or accomplished.  These forward looking statements can be identified
by the use of terms and phrases such as "believe," "plan," "intend," "anticipate,"
"target," "estimate," and "expect." Items contemplating or making assumptions about, actual
or potential future sales, market size, collaborations, and trends or operating results also constitute forward-looking statements.
These forward-looking statements are only
predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our
(or our industry's) actual results, levels of activity or performance to be materially different from any future results,
levels of activity or performance expressed or implied by these forward-looking statements.  The "Risk Factors"
section of this prospectus sets forth detailed risks, uncertainties and cautionary statements regarding our business and these
forward-looking statements.
Since our common stock is considered a
"penny stock," we are ineligible to rely on the safe harbor for forward-looking statements provided in Section 27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act.
We cannot guarantee future results, levels
of activity or performance.  You should not place undue reliance on these forward-looking statements, which speak only
as of the date that they were made.  These cautionary statements should be considered with any written or oral forward-looking
statements that we may issue in the future.  Except as required by applicable law, including the securities laws of
the United States, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual
results, later events or circumstances or to reflect the occurrence of unanticipated events.  You should carefully review
and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt
to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation
and cash flows.  If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove
incorrect, our actual results may vary materially from those expected or projected.
6
Risk Factors
An investment in shares of our common stock is highly speculative
and involves a high degree of risk. We face a variety of risks that may affect our operations or financial results and many of
those risks are driven by factors that we cannot control or predict. The following discussion addresses those risks that management
believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than
expected, that may affect our operations or financial results. Only those investors who can bear the risk of loss of their entire
investment should participate in this offering. Prospective investors should carefully consider the following risk factors in
evaluating an investment in our common stock.
Risks Related to Our Business and Operations
We may not be able to continue as a going concern unless
we obtain additional capital and future sales of equity securities will cause stockholders to experience substantial dilution.
Recurring losses from operations, our negative
working capital of approximately $3.1 million and $1.9 million as of September 30, 2012 and December 31, 2011, respectively,
shareholders' deficit of $2.4 million and $1.2 million as of September 30, 2012 and December 31, 2011, respectively, and
the uncertainty of obtaining additional capital on a timely basis, raise doubt about our ability to continue as a going concern.
It is highly probable that any sales of equity securities will cause our stockholders to experience substantial dilution. It is
also possible that such equity securities will have rights, preferences or privileges senior to those of existing stockholders.
The report of our independent registered public accounting firm on our financial statements for the year ended December 31, 2011
expressed substantial doubt regarding whether we can continue as a going concern. We cannot guarantee our ability to continue
as a going concern.
We have had a history of losses, and we may be unable
to achieve or sustain profitability.
We experienced
net losses of approximately $2.4 million, $1.3 million and $1.4 million during the nine months ended September 30, 2012 and the
years ended December 31, 2011 and 2010, respectively. We expect to continue to incur net losses and negative operating cash flows
in the foreseeable future and cannot be certain that we will ever achieve profitability. Since 2007, we
have
received only limited licensing revenue from a former licensee and our only significant revenue has been from research cigarettes
for which the market is limited. We will need to spend significant capital to fulfill planned operating goals and conduct clinical
studies, achieve regulatory approvals and, subject to such approvals, successfully produce products for commercialization.
We have a history of negative cash flow, and our ability
to generate positive cash flow is uncertain.
We had negative cash flow before financing
activities of approximately $1,303,000, $4,057,000 and $1,018,000 during the nine months ended September 30, 2012 and the years
ended December 31, 2011 and 2010, respectively. We anticipate that we will continue to have negative cash flow for the foreseeable
future even though we have suspended clinical trials for
X-22
because we have significant liabilities that are due or that
will become due in 2013 and we will continue to incur expenses for sales and marketing, and general and administrative expenses.
Our business will also require significant amounts of working capital to support our growth. Therefore, we will likely need to
raise additional investment capital to achieve growth, and we may not achieve sufficient revenue growth to generate positive future
cash flow. An inability to generate positive cash flow for the foreseeable future or raise additional capital on reasonable terms
may decrease our long-term viability.
Our ability to obtain future debt financing is limited
while shares of our Series A-1 Preferred Stock is outstanding.
Our Certificate of Designations regarding
our Series A-1 Preferred Stock contains restrictive covenants that limit our ability to, among other things, incur or assume additional
debt or provide guarantees in respect of obligations of other persons (in each case, so long as 1,000 or more shares of our Series
A-1 Preferred Stock are outstanding, and other than with respect to lease obligations and purchase money indebtedness in an amount
up to $200,000 in the aggregate), or create, assume, or suffer to exist any liens (other than liens for taxes not yet due, liens
contested in good faith, and liens imposed in the ordinary course of business that do not materially impair the operation of the
business) without, in each instance, the prior written consent of at least 67% in stated value of the then-outstanding shares
of Series A-1 Preferred Stock. A breach of these covenants would trigger the ability of the holders of the Series A-1 Preferred
Stock to redeem their shares of Series A-1 Preferred Stock for cash or shares of our common stock or elect to increase the dividend
payments to be made on their shares of Series A-1 Preferred Stock to 18% per annum.
7
Our limited operating history makes it difficult to evaluate
our current business and future prospects.
We have been
in existence since 1998, but our activities have been limited primarily to licensing and funding research and development activities.
Our limited operating history may make it difficult to evaluate our current business and our future prospects. We have
encountered
and will continue to encounter risks and difficulties frequently experienced by growing companies in
rapidly changing industries, including increasing expenses as we continue to grow our business. If we do not manage these risks
successfully, our business will be harmed.
We have no experience in managing growth. If we fail
to manage our growth effectively, we may be unable to execute our business plan or address competitive challenges adequately.
We currently
have six employees. Any growth in our business will place a significant strain on our managerial, administrative, operational,
financial, information technology and other resources. We intend to further expand our overall business, customer
base
,
employees and operations, which will require substantial management effort and significant additional investment in our infrastructure.
We will be required to continue to improve our operational, financial and management controls and our reporting procedures and
we may not be able to do so effectively. As such, we may be unable to manage our growth effectively.
Our working capital requirements involve estimates based
on demand expectations and may increase beyond those currently anticipated, which could harm our operating results and financial
condition.
We have no experience in selling smoking
cessation products or Modified Risk Cigarettes on a commercial basis. As a result, we intend to base our funding and inventory
decisions on estimates of future demand. If demand for our products does not increase as quickly as we have estimated, our inventory
and expenses could rise, and our business and operating results could suffer. Alternatively, if we experience sales in excess
of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet any demand for
our products may depend on our ability to arrange for additional financing for any ongoing working capital shortages, since it
is likely that cash flow from sales will lag behind our investment requirements.
We have suspended further clinical trials for FDA approval
of our X-22 smoking cessation product and will not resume this process until additional capital is raised and we will need additional
capital before we can complete the FDA authorization process for our Modified Risk Cigarettes.
We will require
additional capital in the future before we can resume our own clinical trials for FDA approval of our
X-22
smoking cessation
product
and complete the FDA authorization process for our Modified Risk Cigarettes. We do not
expect to undertake a capital raise for the purpose of funding further
X-22
clinical trials until the results of two independent
Phase II trials are released later in 2013. If we resume our own clinical trials for our
X-22
smoking cessation product,
we estimate the cost of completing a Phase II trial will be approximately $2 million and the cost of completing two Phase III
trials to be approximately $12 million. We estimate that the cost of completing the FDA authorization process for each of our
potential Modified Risk Cigarettes to be at least $2 million. If we raise additional funds through the issuance of equity securities
for these activities, our stockholders may experience substantial dilution, or the equity securities may have rights, preferences
or privileges senior to those of existing stockholders. If we raise additional funds through debt financings, these financings
may involve significant cash payment obligations and covenants that restrict our ability to operate our business and make distributions
to our stockholders. However, our ability to raise funds through debt financing is limited while any shares of our Series A-1
Preferred Stock is outstanding. We also could elect to seek funds through arrangements with collaborators or licensees. To the
extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some
rights to our technologies or our potential products or grant licenses on terms that are not favorable to us.
If we choose to resume our own clinical
trials for FDA approval of our
X-22
smoking cessation product and we cannot raise additional capital on acceptable terms,
we may not be able to, among other things:
• complete clinical trials
of our
X-22
smoking cessation aid;
• undertake the steps necessary
to seek FDA authorization of our Modified Risk Cigarettes;
• develop or enhance our
potential products or introduce new products;
• expand our development,
sales and marketing and general and administrative activities;
• attract tobacco growers,
customers or manufacturing and distribution partners;
8
• acquire complementary
technologies, products or businesses;
• expand our operations
in the United States or internationally;
• hire, train and retain
employees; or
• respond to competitive
pressures or unanticipated working capital requirements.
We currently are not in compliance with annual "clean-up"
provisions under a revolving line of credit.
Included in
current liabilities at September 30, 2012 is a demand loan under a revolving credit agreement with a balance outstanding of $174,925,
which is payable to a commercial bank and guaranteed by one of our shareholders. This exact same principal amount has been outstanding
for over four years on a continuous basis, notwithstanding the fact that we have not complied with annual "clean-up"
provisions which require that we repay all amounts outstanding for a period of 30 consecutive days each
year
.
There are no additional amounts available to us under this credit agreement. We have paid interest only since 2008 (currently
at the bank's annual prime rate plus 0.75% or 4%) on a monthly basis according to the bank's monthly payment statements.
Our plans contemplate that this balance remains outstanding while we continue to pay interest only on a monthly basis. We may
incur disruptions in our operations in the event the bank were to demand repayment in full, close the revolving credit agreement,
and not allow us sufficient time to locate additional capital.
We will depend on third parties to manufacture our products.
We currently
do not manufacture any of our products and depend on contract manufacturers to produce our products according to our
specifications
,
in sufficient quantities, on time, in compliance with appropriate regulatory standards and at competitive prices. We currently
do not have an arrangement with any contract manufacturer to produce our final version of
X-22
smoking cessation aid once
it is approved by the FDA.
Manufacturers
supplying our potential products must comply with FDA regulations which require, among other things, compliance with the FDA's
evolving regulations on Current Good Manufacturing Practices ("cGMP(s)"), which are enforced by the FDA through its
facilities inspection program. The manufacture of products at any facility will be subject to strict quality control, testing
and record keeping requirements, and continuing obligations regarding the submission of safety reports and other
post
-market
information. We cannot guarantee that our current contract manufacturers will pass FDA and/or similar inspections in foreign countries
to produce the final version of our
X-22
smoking cessation aid, or that future changes to cGMP manufacturing standards
will not also affect the manufactures of our other products. Therefore, we may have to build our own manufacturing facility which
would require additional capital.
We will mainly depend on third parties to market, sell
and distribute our products, and we currently have no commercial arrangements for the marketing, sale or distribution of our X-22
smoking cessation aid.
We expect to
depend on third parties to a great extent to market, sell and distribute our products and we currently have no arrangements with
third
parties
in place to provide such services for our
X-22
smoking cessation aid. We
cannot be sure that we will be able to enter into such arrangements on acceptable terms, or at all.
If we are unable
to enter into marketing, sales and distribution arrangements with third parties for our
X-22
smoking cessation aid, we
would
need
to incur significant sales, marketing and distribution expenses in connection with
the commercialization of
X-22
and any future potential products. We do not currently have a dedicated sales force, and
we have no experience in the sales, marketing and distribution of pharmaceutical products. Developing a sales force is expensive
and time-consuming, and we may not be able to develop this capacity. If we are unable to establish adequate sales, marketing and
distribution capabilities, independently or with others, we may not be able to generate significant revenue and may not become
profitable.
If our X-22 smoking cessation aid does not gain market
acceptance among physicians, patients, third-party payers and the medical community, we may be unable to generate significant
revenue.
Our
X-22
smoking cessation aid may not achieve market acceptance among physicians, patients, third-party payers and others in the medical
community
. If we receive FDA approval for the marketing of
X-22
as a smoking cessation
aid in the U.S., the degree of market acceptance could depend upon a number of factors, including:
•	limitations on the indications for use
for which
X-22
may be marketed;
9
•
the establishment and demonstration in the medical community
                                                               of the clinical efficacy and safety of our potential products and
                                                               their potential advantages over existing products;
•
the prevalence and severity of any side effects;
•
the strength of marketing and distribution support; and
•
sufficient third-party coverage or reimbursement.
The market may
not accept our
X-22
smoking cessation aid, based on any number of the above factors. Even if the FDA approves the marketing
of
X-22
as a smoking cessation aid, there are other FDA-approved products available and there will also be future
competitive
products which directly compete with
X-22
. The market may prefer such existing or future competitive
products for any number of reasons, including familiarity with or pricing of such products. The failure of any of our potential
products to gain market acceptance could impair our ability to generate revenue, which could have a material adverse effect on
our future business, financial condition, results of operations and cash flows.
Our principal competitors in the smoking cessation market
have, and any future competitors may have, greater financial and marketing resources 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 have no experience
in selling smoking cessation products. Competition in the smoking cessation aid products industry is intense, and we may not be
able to successfully compete in the market. In the market for FDA-approved smoking cessation aids, our principal competitors include
Pfizer Inc., GlaxoSmithKline PLC, Perrigo Company, 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
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. In addition, we expect new competitors
will enter the markets for our products in the future. Potential customers may choose to do business with our more established
competitors, because of their perception that our competitors are more stable, are more likely to complete various projects, can
scale operations more quickly, have greater manufacturing capacity, are more likely to continue as a going concern and lend greater
credibility to any joint venture. If we are unable to compete successfully against manufacturers of other smoking cessation products,
our business could suffer, and we could lose or be unable to obtain market share.
We face intense competition in the market for our RED
SUN and MAGIC cigarettes and our BRAND A and BRAND B cigarettes, and our failure to compete effectively could have a material
adverse effect on our profitability and results of operations.
Cigarette companies
compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing,
advertising, retail shelf space and price. We are subject to highly competitive conditions in all aspects of our business and
we may not be able to effectively market and sell our
RED SUN and MAGIC
cigarettes or other cigarettes we may
introduce
to the market such as our
BRAND A
and
BRAND B
cigarettes as Modified Risk Cigarettes,
upon FDA authorization. The competitive environment and our competitive position can be significantly influenced by weak economic
conditions, erosion of consumer confidence, competitors' introduction of low-price products or innovative products, higher
cigarette taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability
to differentiate tobacco products. Domestic competitors include Philip Morris USA Inc., Reynolds American Inc., Lorillard Inc.,
Commonwealth Brands, Inc., Liggett Group LLC, Vector Tobacco Inc. and Star Scientific Inc. International competitors include Philip
Morris International Inc., British American Tobacco, JT International SA, Imperial Tobacco Group PLC and regional and local tobacco
companies; and in some instances, government-owned tobacco enterprises such as the China National Tobacco Corporation.
Our competitors may develop products that are less expensive,
safer or more effective, which may diminish or eliminate the commercial success of any potential product that we may commercialize.
If our competitors market products that
are less expensive, safer or more effective than our potential products, or that reach the market before our potential products,
we may not achieve commercial success. The market may choose to continue utilizing existing products for any number of reasons,
including familiarity with or pricing of these existing products. The failure of our
X
-22 smoking cessation aid or our
cigarette brands to compete with products marketed by our competitors would impair our ability to generate revenue, which would
have a material adverse effect on our future business, financial condition, results of operations and cash flows. Our competitors
may:
• develop and market products that
are less expensive or more effective than our products;
10
• commercialize competing products
before we or our partners can launch our products; and
• initiate or withstand substantial
price competition more successfully than we can.
If we fail to stay at the forefront of technological
change, we may be unable to compete effectively.
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:
• operate larger research and development
programs or have substantially greater financial resources than we do;
• have greater success in
recruiting skilled technical and scientific workers from the limited pool of available talent;
• more effectively negotiate third-party
licenses and strategic relationships; and
• take advantage of acquisition or
other opportunities more readily than we can.
Government mandated prices, production control programs,
shifts in crops driven by economic conditions and adverse weather patterns may increase the cost or reduce the quality of the
tobacco and other agricultural products used to manufacture our products.
We depend upon
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. 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,
quality and quantity could affect our profitability and our business.
Our future success depends on our ability to retain key
personnel.
Our success will depend to a significant
extent on the continued services of our senior management team, and in particular Joseph Pandolfino, our Chief Executive Officer,
Henry Sicignano III, our Chief Financial Officer and President, and Michael Moynihan, Ph.D., our Vice President of R&D. The
loss or unavailability of any of these individuals may significantly delay or prevent the development of our potential products
and other business objectives by diverting management's attention to transition matters. While each of these individuals
is party to employment agreements with us, they could terminate their relationships with us at any time, and we may be unable
to enforce any applicable employment or non-compete agreements.
We also rely on consultants and advisors
to assist us in formulating our research and development, manufacturing, distribution, marketing and sales strategies. All of
our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest
or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute
to us.
Product liability claims, product recalls or other claims
could cause us to incur losses or damage our reputation.
The risk of product liability claims or
product recalls, and associated adverse publicity, is inherent in the development, manufacturing, marketing and sale of tobacco
and smoking cessation products. We do not currently have product liability insurance for our products or our potential products
and do not expect to be able to obtain product liability insurance at reasonable commercial rates for these 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. We cannot assure you that
such claims will not be made in the future.
11
Risks Related to Regulatory Approvals and Insurance Reimbursement
If we fail to obtain FDA and foreign regulatory approvals
of X-22 as a smoking cessation aid and FDA authorization to market BRAND A and BRAND B as Modified Risk Cigarettes, we will be
unable to commercialize these potential products in and outside the U.S., other than the sale of our BRAND A and BRAND B cigarettes
as conventional cigarettes.
There can be
no assurance that our
X-22
smoking cessation aid will be approved by the FDA, European Medicines Agency, or any other
governmental
body. In addition, there can be no assurance that all necessary approvals will be granted for our potential
products or that review or actions will not involve delays caused by requests for additional information or testing that could
adversely affect the time to market for and sale of our potential products. Our ability to complete the FDA-approval process in
a timely manner is dependent, in part, on our ability to obtain "Fast Track" designation for
X-22
by the FDA.
We submitted
a request for Fast Track designation for
X-22
, and on August 18, 2011, the FDA informed us that it would not grant the
designation of
X-22
as a Fast Track product at this time because we did not demonstrate that
X-22
shows potential
to address an unmet medical need.
Except for our Phase II-B clinical trial, all smoking cessation studies with very low
nicotine ("VLN") cigarettes containing our proprietary tobacco were independent studies and were not sponsored by
22nd Century Limited, LLC under its own Investigational New Drug ("IND"). We plan to reapply for Fast Track designation,
but not until results of a clinical trial conducted by us demonstrates an advantage (over currently approved smoking cessation
products) in one of the following areas: efficacy, safety or improvement in some other factor such as compliance (a patient
using a product as directed) or convenience. There is no guarantee that the FDA will grant Fast Track designation to
X-22
.
We may also not obtain Priority Review of our
X-22
New Drug Application (NDA), which would further delay FDA approval of
X-22
.
The length of the FDA's review of a New Drug Application without a Priority Review
designation is normally ten months from the date of filing of the New Drug Application, although it is possible in certain cases
for such review time to be longer. However, the FDA's goal for reviewing a product with Priority Review status is normally
six months from the date of the filing of a NDA. If we do not obtain Priority Review of our New Drug Application, we would then
expect the timing of FDA approval of
X-22
to be extended several additional months. Even if
X-22
is approved by
the FDA, the FDA may require the product to only be prescribed to patients who have already failed to quit smoking with another
approved therapy. Further, failure to comply with applicable regulatory requirements can, among other things, result in the suspension
of regulatory approval as well as possible civil and criminal sanctions.
The development,
testing, manufacturing and marketing of our potential products are subject to extensive regulation by governmental authorities
in the United States and throughout the world. In particular, the process of obtaining approvals by the FDA, European Medicines
Agency and other international FDA equivalent agencies in targeted countries is costly and time consuming, and the time required
for such approval is uncertain. Our
X-22
smoking cessation aid must undergo rigorous clinical testing and an extensive
regulatory approval process mandated by the FDA or EMEA. Such regulatory review includes the
determination
of manufacturing capability and product performance. Generally, only a small percentage of pharmaceutical products are ultimately
approved for commercial sale.
The scope of review, including product
testing and exposure studies, to be required by the FDA under the Tobacco Control Act in order for cigarettes such as
BRAND
A
and
BRAND B
to be marketed as Modified Risk Cigarettes has not yet been fully established. We may be unsuccessful
in establishing that
BRAND A
or
BRAND B
are Modified Risk Cigarettes, and we may fail to demonstrate that either
BRAND A
or
BRAND B
significantly reduces exposure to certain tobacco smoke toxins. Even upon demonstrating significant
reduced exposure to certain tobacco smoke toxins, the FDA may decide that allowing a modified risk claim is not in the best interest
of the public health, and the FDA may not allow us to market our
BRAND A
and/or
BRAND B
cigarettes as Modified Risk
Cigarettes. Furthermore, the FDA could force us to remove from the U.S. market our other tobacco products such as RED SUN or MAGIC
and even
BRAND A
and/or
BRAND B
after FDA authorization to market
BRAND A
and
BRAND B
as Modified
Risk Cigarettes.
In the future, we intend to distribute and sell our potential
products outside of the United States, which will subject us to further regulatory risk.
In addition
to seeking approval from the FDA for our
X-22
smoking cessation aid in the United States, we intend to seek governmental
approvals required to market
X-22
and our other potential products in other countries. Marketing of our
X-22
smoking
cessation aid is not permitted in certain countries until we have obtained required approvals or exemptions in the individual
country. The regulatory review process varies from country to country, and approval 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 approvals or clearances. We anticipate commencing
the
applications required in some or all of these countries following approval by the FDA; however, we may decide to file applications
in advance of the FDA approval if we determine such filings to be both time and cost effective. If we export any of our potential
products or products that have not yet been cleared for commercial distribution in the United States, such products may be subject
to FDA export restrictions. Failure to obtain necessary regulatory approvals could impair our ability to generate revenue from
international sources.
12
Market acceptance of our X-22 smoking cessation aid could
be limited if users are unable to obtain adequate reimbursement from third-party payers.
Government health
administration
authorities, private health insurers and other organizations generally provide
reimbursement for FDA-approved smoking cessation products, and our commercial success could depend in part on these third-party
payers agreeing to reimburse patients for the costs of our
X-22
smoking cessation aid. Even if we succeed in bringing our
X-22
smoking cessation aid to market, there is no assurance that third-party payers will consider
X-22
cost effective
or provide reimbursement in whole or in part for its use.
Significant
uncertainty exists as to the reimbursement status of newly approved health care products. Our
X-22
smoking cessation aid
is intended to replace or alter existing therapies or procedures. These third-party payers may conclude that our
X-22
smoking
cessation
aid is less safe, effective or cost-effective than these existing therapies or procedures.
Therefore, third-party payers may not approve
X-22
for reimbursement.
If third-party
payers do not approve our potential products for reimbursement or fail to reimburse for them adequately, sales could suffer as
some
physicians or their patients could opt for a competing product that is approved for reimbursement
or is adequately reimbursed. Even if third-party payers make reimbursement available, these payers' reimbursement policies
may adversely affect our ability and the ability of our potential collaborators to sell our potential products on a profitable
basis.
The trend toward
managed healthcare in the United States and, the Affordable Care Act
enacted
on March 23, 2010, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for
our potential products which could adversely affect our business, financial condition, results of operations and cash flows.
In addition, legislation and regulations
affecting the pricing of our potential products may change in ways adverse to us before or after the FDA or other regulatory agencies
approve any of our potential products for marketing. While we cannot predict the likelihood of any of these legislative or regulatory
proposals, if any government or regulatory agency adopts these proposals, they could materially adversely affect our business,
financial condition, results of operations and cash flows.
Our clinical trials for any of our potential products
may produce negative or inconclusive results and we may decide, or regulators may require us, to conduct additional clinical and/or
preclinical testing for these potential products or cease our trials.
We do not know
whether clinical trials of our potential products will demonstrate safety and efficacy sufficiently to result in marketable products.
Because our clinical trials for our
X-22
smoking cessation aid and any other potential products may produce negative or
inconclusive results, we may decide, or regulators may require us, to conduct additional clinical and/or preclinical
testing
for these potential products or cease our clinical trials. If this occurs, we may not be able to obtain
approval or marketing authorization for these potential products or our anticipated time of bringing these potential products
to the market may be substantially delayed and we may also experience significant additional development costs. We may also be
required to undertake additional clinical testing if we change or expand the indications for our potential products.
Risks Related to the Tobacco Industry
Our business faces significant governmental action aimed
at increasing regulatory requirements with the goal of preventing the use of tobacco products.
Cigarette companies face significant governmental
action, especially in the United States pursuant to the Tobacco Control Act, including efforts aimed at reducing the incidence
of tobacco use, restricting marketing and advertising, imposing regulations on packaging, warnings and disclosure of flavors or
other ingredients, prohibiting the sale of tobacco products with certain flavors or other characteristics, 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. Governmental actions, combined with the diminishing social acceptance of smoking and private actions
to restrict smoking, have resulted in reduced industry volume in the United States and certain other countries, and we expect
that these factors will continue to reduce consumption levels in these countries.
13
Certain of such actions may have a favorable
impact on our
X-22
smoking cessation aid, or on our
BRAND A
and
BRAND B
cigarettes if we are able to market
them as Modified Risk Cigarettes. However, there is no assurance of such favorable impact and such actions may have a negative
impact on our ability to market
RED SUN
and
MAGIC
.
Significant regulatory developments will
take place over the next few years in many 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. Partly because of some or a combination of these efforts, unit sales of tobacco products
in certain markets, principally Western Europe and Japan, have been in general decline and we expect this trend to continue. Our
operating results could be significantly affected by any significant decrease in demand for cigarettes, any significant increase
in the cost of complying with new regulatory requirements and requirements that lead to a commoditization of tobacco products
such as the 2012 implementation of plain packaging in Australia.
The FDA requirement regarding graphic health warnings
on cigarette packaging and in cigarette advertising in September 2012 is likely to have a negative impact on sales of our products.
In November 2010, as required by the Tobacco
Control Act, the FDA issued a proposed rule to modify the required warnings that appear on cigarette packages and in cigarette
advertisements. These warning were finalized on June 21, 2011 and consist of nine new textual warning statements accompanied by
color graphics depicting the negative health consequences of smoking. The FDA selected nine images from the originally proposed
36 images after reviewing the relevant scientific literature, analyzing the results from an 18,000 person study and considering
more than 1,700 comments from a variety of groups. The graphic health warnings will be located beneath the cellophane wrapping
on cigarette packages, and will comprise the top 50 percent of the front and rear panels of cigarette packages. The graphic health
warnings will occupy 20 percent of a cigarette advertisement and will be located at the top of the advertisement. Each warning
is accompanied by a smoking cessation phone number, 1-800-QUIT-NOW. Although these graphic health warnings were supposed to be
implemented in September 2012, a federal judge ruled that these warnings are unconstitutional. If and when these graphic health
warnings are implemented, all cigarettes manufactured for sale or distribution in the United States will need to include these
new graphic health warnings on their packages. Any reduction in the number of smokers will probably reduce the demand for MAGIC
and RED SUN, as well as
X-22
,
BRAND A
and
BRAND B
, if and when approved/authorized by the FDA.
MAGIC
,
RED SUN
,
BRAND A
and
BRAND B
will be subject to these new packaging and advertising regulations
.
It
is unclear at this time whether the FDA may require
X-22 and SPECTRUM
to be subject to these new packaging and advertising
regulations.
We may become subject to litigation related to cigarette
smoking and 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, we may become subject to litigation related to the sale of our
RED SUN
and
MAGIC
cigarettes and,
upon FDA authorization, our
BRAND A
and
BRAND B
cigarettes. 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.
14
Damages claimed in some tobacco-related
litigation 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.
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 our sales and profitability and make us less competitive versus certain of our competitors.
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
RED SUN
and
MAGIC
cigarettes and, upon FDA authorization,
our
BRAND A
and
BRAND B
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.
We may become subject to governmental investigations
on a range of matters.
Cigarette 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 to which we may
become subject, and we may be materially affected by an unfavorable outcome of future investigations.
Risks Related to Intellectual Property
Our proprietary rights may not adequately protect our
intellectual property, products and potential products, and if we cannot obtain adequate protection of our intellectual property,
products and potential products, we may not be able to successfully market our products and potential products.
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 other market exclusionary rights apply.
The patent positions of life sciences companies,
like ours, can be highly uncertain and involve complex legal and factual questions for which important legal principles remain
unresolved. No consistent policy regarding the breadth of claims allowed in such companies' patents has emerged to date
in the United States. The general patent environment outside the United States also involves significant uncertainty. 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, life science 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.
Although there are currently no challenges
to any portion of our intellectual property, our issued patents may be subject to challenge and possibly invalidated by third
parties. Changes in either the patent laws or in the interpretations of patent laws in the United States or 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 obtain patent rights to similar
products or technology, this may have an adverse effect on our business.
We also rely on 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 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.
15
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 potential products will
depend on our ability to sell such products without infringing the patent or proprietary rights of third parties. If we are sued
for infringing intellectual property rights of third parties, such litigation could be costly and time consuming and an unfavorable
outcome could have a significant adverse effect on our business.
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:
•
infringement claims that, with or without merit, can be costly
                                                               and time consuming to litigate, can delay the regulatory approval
                                                               process and can divert management's attention from our core
                                                               business strategy;
•
substantial damages for past infringement which we may have
                                                               to pay if a court determines that our products or technologies
                                                               infringe upon a competitor's patent or other proprietary
                                                               rights;
•
a court order prohibiting us from commercializing our potential
                                                               products or technologies unless the holder licenses the patent
                                                               or other proprietary rights to us, which such holder is not required
                                                               to do;
•
if a license is available from a holder, we may have to pay
                                                               substantial royalties or grant cross licenses to our patents or
                                                               other proprietary rights; and
•
redesigning our process so that it does not infringe the third-party
                                                               intellectual property, which may not be possible, or which may
                                                               require substantial time and expense including delays in bringing
                                                               our potential products to market.
Such actions could harm our competitive
position and our ability to generate revenue and could result in increased costs.
16
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 12 issued patents and we have the
exclusive license to an additional 95 issued patents in an aggregate of 78 countries. In addition, we own or exclusively license
approximately 38 pending patent applications, of which we own 23 such patent applications and have an exclusive license to 15
such patent applications. We cannot assure you 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 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. 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 two worldwide exclusive licenses, one
from North Carolina State University ("NCSU") and the other from National Research Council of Canada, Plant Biotechnology
Institute in Saskatoon, Canada ("NRC"), each involve multiple patent families.  The exclusive rights under the
NCSU agreement expires 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
license relates predominately to issued patents, and the NCSU license will expire in 2023.  The exclusive
rights under the NRC agreement expires on the date on which the last patent or covered by the subject license expires in the country
or countries where such patents are in effect. The NRC license relates predominately to patent applications, and the NRC license
will expire in 2028.
Risks Related to Ownership of Our Common Stock
An active trading market for our common stock may not
develop or 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 never develop or 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 quoted on the OTC Bulletin Board, an over-the-counter quotation system, on which the shares of
our common stock are currently quoted. However, even if our common stock continues to be quoted on the OTC Bulletin Board, it
is unlikely that an active market for our common stock will develop in the foreseeable future. It may be more difficult to dispose
of shares or obtain accurate quotations as to the market value of our common stock compared to securities of companies whose shares
are traded on the NASDAQ Stock Market or other stock exchanges.
Trading in our common stock is currently limited and
our stock price may be highly volatile and could decline in value.
Our common stock is currently traded on
the OTC Bulletin Board, and, therefore, the trading volume is currently more limited and sporadic than if our common stock were
traded on a national stock exchange such as the NASDAQ Stock Market or the NYSE. 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:
17
• results from and any delays in any
clinical trials programs;
• failure or delays in entering potential
products into clinical trials;
• failure or discontinuation of any
of our research programs;
• delays in establishing new strategic
relationships;
• delays in the development
of our potential products and commercialization of our potential products;
• market conditions in our
sector and issuance of new or changed securities analysts' reports or recommendations;
• general economic conditions,
including recent adverse changes in the global financial markets;
• actual and anticipated fluctuations
in our quarterly financial and operating results;
• developments or disputes concerning
our intellectual property or other proprietary rights;
• introduction of technological
innovations or new commercial products by us or our competitors;
• issues in manufacturing or distributing
our products or potential products;
• market acceptance of our products
or potential products;
• third-party healthcare reimbursement
policies;
• FDA or other United States or foreign
regulatory actions affecting us or our industry;
• litigation or public concern about
the safety of our products or potential products;
• additions or departures of key personnel;
• third-party sales of large blocks
of our common stock;
• sales of our common stock
by our executive officers, directors or significant stockholders; and
• equity sales by us of our
common stock or securities convertible into common stock to fund our operations.
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. If any of our stockholders brought a lawsuit against us, we could incur substantial
costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
The conversion of our Series A-1 Preferred Stock and
exercise of outstanding warrants, convertible notes and options may depress our stock price and will likely result in significant
dilution to our common stockholders.
There are a significant number of outstanding
warrants, convertible notes and options to purchase shares of our stock and we have issued shares of Series A-1 Preferred Stock
that are convertible into our common stock. If the market price of our common stock
exceeds
the exercise price of outstanding warrants and options or the conversion price of our convertible notes and shares of Series A-1
Preferred Stock, holders of those securities may be likely to exercise or convert such shares and sell the common stock acquired
in the open market. Sales of a substantial number of shares of our common stock in the public market by holders of warrants, convertible
notes, options or preferred shares 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, if the holders of outstanding options, convertible
notes, warrants or preferred shares exercise or convert those shares, as applicable, our common stockholders will incur dilution
in their relative percentage ownership.  The prospect of this possible dilution may also impact the price of our common
stock.
In addition, our Series A-1 Preferred Stock
and the majority of our outstanding warrants contain anti-dilution provisions, which may, under
certain
circumstances, reduce the exercise or conversion price or increase the number of shares issuable, or both.
Any downward adjustment to the conversion price of our
Series A-1 Preferred Stock may depress our stock price and will result in significant dilution to our common stockholders.
The conversion price of the Series A-1
Preferred Stock is subject to adjustment in certain events. See "Description of Securities – Preferred Stock"
for a
description
of the events that could cause an adjustment of the conversion price of such
shares. This potential reduction in conversion price could significantly increase the number of shares that could be issued upon
conversion of the Series A-1 Preferred Stock and would result in substantial dilution to the other holders of common stock.
18
Our common stock is a "penny stock," which
is likely to limit its liquidity.
The market price of our common stock is,
and will likely remain for the foreseeable future, less than $5.00 per share, and therefore will be a "penny stock"
according to SEC rules, unless our common stock is listed on a national securities exchange. The OTC Bulletin Board is not a national
securities exchange. Designation as a "penny stock" requires any broker or dealer selling these securities to disclose
certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser
is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common
stock and may affect the ability of current holders of our common stock to sell their shares. Such rules may also deter broker-dealers
from recommending or selling our common stock, which may further limit its liquidity. This may also make it more difficult for
us to raise additional capital in the future. Because of such expected illiquidity, it will likely be difficult to re-sell shares
of our common stock as desired.
We are controlled by our current officers and directors.
As of January 22, 2013, our directors and
executive officers as a group beneficially owned approximately 38% of the shares of our common stock. Accordingly, our directors
and executive officers will have substantial influence over, and may have the ability to control, the election of our board of
directors and the outcome of issues submitted to a vote of our stockholders.
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,
and we do not anticipate paying any cash dividends on our common stock for the foreseeable future. In addition, the terms of the
Series A-1 Preferred Stock prevent the payment of dividends on our common stock unless holders of at least 67% in stated value
of the then-outstanding shares of Series A-1 Preferred Stock consent to such dividend. 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.
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:
• authorizing blank check
preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock; and
• limiting the liability of, and providing
indemnification to, our directors and officers.
These provisions, alone or together, could
delay hostile takeovers and changes in control of us or changes in our management.
As a Nevada corporation, we also may become
subject to the provisions 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.
19
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.
20
Principal
Stockholders
The following table sets forth information
regarding the beneficial ownership of our common stock as of January 22, 2013,
by
(i) each
person who, to our knowledge, owns more than 5% of our common stock, (ii) each of our current directors and executive officers,
and (iii) all of our current directors and executive officers as a group. Derivative securities exercisable or convertible into
shares of our common stock within sixty (60) days of January 22, 2013 are deemed to be beneficially owned and outstanding for
computing the share ownership and percentage of the person holding securities, but are not deemed outstanding for computing the
percentage of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*). The address of
named beneficial owners that are officers and/or directors is: c/o 22nd Century Group, Inc., 9530 Main Street, Clarence, New York
14031. The following table is based upon information supplied by officers and directors, and with respect to 5% or greater stockholders
who are not officers or directors, information filed with the SEC.
Name of Beneficial Owner
Number of
Shares
Beneficially
Owned
Percent of Class
Beneficially Owned (1)
Management & Directors
Joseph Pandolfino (2)
7,207,296
19.4
%
Henry Sicignano III (3)
5,859,927
16.0
%
Michael R. Moynihan, Ph.D. (4)
1,457,645
4.1
%
Joseph Alexander Dunn, Ph.D.(5)
175,000
*
James W. Cornell (6)
175,000
*
All directors and executive officers as a group (5 persons) (2)-(6)
14,874,868
37.9
%
Other 5% Owners
Clearwater Partners, LLC (7)
5,144,279
14.0
%
Angelo J. Tomasello (8)
4,385,214
12.0
%
Sabby Volatility Warrant Master Fund, Ltd. (9)
2,500,000
7.1
%
Sabby Heathcare Volatility Master Fund, Ltd. (10)
3,506,098
9.9
%
(1) Based on 35,415,139 shares of common
stock issued and outstanding (including outstanding restricted stock), as of January 22, 2013.
(2) Includes (a) 1,831,761 shares of common stock issuable
to Mr. Pandolfino upon exercise of warrants and (b) 5,375,535 shares of common stock.
(3) Consists of (a) 2,027,603 shares of common stock
held by Henry Sicignano III (including 550,000 restricted shares issued as equity incentive awards under the
Company's Equity Incentive Plan), (b) 2,542,347 shares of common stock held by Henry Sicignano III Group, LLC, (c)
389,564 shares of common stock issuable to Mr. Sicignano upon exercise of warrants, (d) 100,000 shares of common stock
issuable to Mr. Sicignano upon exercise of stock options and (e) 800,413 shares of common stock issuable to Henry Sicignano
III Group, LLC upon exercise of warrants. Mr. Sicignano is Managing Member of Henry Sicignano III Group, LLC and,
accordingly, exercises voting and investment power with respect to the shares held by Henry Sicignano III Group, LLC. 450,000
of the shares issued to Mr. Sicignano under the Company's Equity Incentive Plan are time-based awards subject to
vesting on April 1 of 2013, 2014 and 2015, such that 150,000 shares shall vest on April 1 of each such
year. Mr. Sicignano also holds 100,000 performance based shares of restricted stock issued as equity incentive awards under
the Company's Equity Incentive Plan, which are subject to forfeiture unless certain performance milestones are
achieved.
(4) Includes (a) 963,934 shares of common stock, (b) 393,711
shares of common stock issuable upon exercise of warrants and (c) 100,000 shares issuable upon the exercise of stock options.
(5) Includes (a) 85,000 shares of common stock, (b) 30,000
shares of common stock issuable upon exercise of warrants and (c) 60,000 shares issuable upon the exercise of stock options.
21
(6) Includes (a) 85,000 shares of common stock, (b) 30,000
shares of common stock issuable upon exercise of warrants and (c) 60,000 shares issuable upon the exercise of stock options.
(7) Includes (a) 3,905,515 shares of common stock and (b) 1,238,764
shares of common stock issuable upon exercise of warrants. Richard G. Saffire, Managing Member of Clearwater Partners, LLC exercises
voting and investment power with respect to shares owned by Clearwater Partners, LLC. The address of Clearwater Partners, LLC
is 34 Sunburst Circle, East Amherst, New York 14051.
(8) Includes (a) 3,301,909 shares of common stock, (b) 1,044,972
shares of common stock issuable upon exercise of warrants and (c) 38,333 shares of common stock issuable upon conversion of convertible
notes. The address of Angelo Tomasello is 4720 Spaulding Drive, Clarence, New York 14031.
(9) Consists of shares of common stock issuable upon the conversion
of an aggregate of 500 shares of Series A-1 Preferred Stock and upon the exercise of Warrants. The Series A-1 Preferred Stock
and the Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the
case may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any
of its affiliates would beneficially own in excess of 9.99% of our outstanding shares of common stock immediately after giving
effect to such conversion or exercise (as the case may be). However, the 9.99% limitation would not prevent a selling stockholder
from acquiring and selling in excess of 9.99% of our common stock through a series of acquisitions and sales while never beneficially
owning more than 9.99% in aggregate. Sabby Management, LLC serves as the investment manager of Sabby Volatility Warrant Master
Fund, Ltd. and, as such, Sabby Management, LLC shares voting and investment powers with respect to these shares on behalf of Sabby
Volatility Warrant Master Fund, Ltd. The address for Sabby Volatility Warrant Master Fund, Ltd. is c/o Ogier Fiduciary Services
(Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman KY1-9007, Cayman Islands. As manager of Sabby Management, LLC, Hal Mintz
also shares voting and investment power on behalf of Sabby Volatility Warrant Master Fund, Ltd. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.
(10) Consists of shares of common stock issuable upon the conversion
of an aggregate of 2,000 shares of Series A-1 Preferred Stock and upon the exercise of Warrants. The Series A-1 Preferred Stock
and the Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the
case may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any
of its affiliates would beneficially own in excess of 9.99% of our outstanding shares of common stock immediately after giving
effect to such conversion or exercise (as the case may be). However, the 9.99% limitation would not prevent a selling stockholder
from acquiring and selling in excess of 9.99% of our common stock through a series of acquisitions and sales while never beneficially
owning more than 9.99% in aggregate. Sabby Management, LLC serves as the investment manager of Sabby Healthcare Volatility Master
Fund, Ltd. and, as such, Sabby Management, LLC shares voting and investment powers with respect to these shares on behalf of Sabby
Healthcare Volatility Master Fund, Ltd. The address for Sabby Healthcare Volatility Master Fund, Ltd. is c/o Ogier Fiduciary Services
(Cayman) Limited, 89 Nexus Way, Camana Bay, Grand Cayman KY1-9007, Cayman Islands. As manager of Sabby Management, LLC, Hal Mintz
also shares voting and investment power on behalf of Sabby Healthcare Volatility Master Fund, Ltd. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.
22
Selling
Stockholders
On January 11, 2013, Sabby Volatility Warrant
Master Fund Ltd. and Sabby Healthcare Volatility Master Fund, Ltd., collectively referred to as the selling stockholders, acquired
an aggregate of 2,500 shares of newly created Series A-1 Preferred Stock and Warrants for an aggregate purchase price of $2,500,000.
The Series A-1 Preferred Stock and the
Warrants contain exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the case
may be) to the extent that, if after giving effect to such conversion or exercise (as the case may be), the holder or any of its
affiliates would beneficially own in excess of 9.99% of the outstanding shares of common stock immediately after giving effect
to such conversion or exercise (as the case may be). However, the 9.99% limitation would not prevent a selling stockholder from
acquiring and selling in excess of 9.99% of our common stock through a series of acquisitions and sales while never beneficially
owning more than 9.99% in aggregate.
This prospectus
relates to the resale by the selling stockholders from time to time of up to an aggregate of 27,500,000 shares that are issuable
to the selling stockholders.
Pursuant to a Registration Rights Agreement between
us and
the selling stockholders, this prospectus covers the resale of 200% of the number of shares currently issuable
(i) upon conversion of our Series A-1 Preferred Stock, (ii) as dividend payments on our Series A-1 Preferred Stock (at our option),
and (iii) upon the exercise of Series A Warrants, Series B Warrants, and Series C Warrants. We agreed to register 200% of the
number of shares initially issuable due to the potential adjustments to the conversion price and certain anti-dilution features
that are described in the section entitled "Description of Securities." We will not receive any proceeds from the
sale of common stock by the selling stockholders, but we will receive funds from the exercise of the Series A Warrants, Series
B Warrants, and Series C Warrants, if exercised for cash.
The table below, which was prepared based
on information supplied to us by the selling stockholders, sets forth information regarding the beneficial ownership of outstanding
shares of our common stock owned by the selling stockholders and the shares that they may sell or otherwise dispose of from time
to time under this prospectus. Each of the selling stockholders, or their respective affiliates, transferees, donees or their
successors, may resell, from time to time, all, some or none of the shares of our common stock covered by this prospectus, as
provided in this prospectus under the section entitled "Plan of Distribution" and in any applicable prospectus supplement.
However, we do not know when, in what amount, or at what specific prices the selling stockholders may offer their shares for sale
under this prospectus, if any. Each selling stockholder's percentage of ownership in the following table is based upon 35,415,139
shares of our common stock outstanding as of January 22, 2013.
Information concerning any of the selling
stockholders may change from time to time, and any changed information will be presented in a prospectus supplement as necessary.
Please carefully read the footnotes located below the table in conjunction with the information presented in the table.
Beneficially Owned Prior to
Offering
Beneficially Owned
After Offering
Selling Stockholder Name
Number of
Shares of
Common Stock
(1), (2)
Percentage
Shares of Common Stock
that may be
Offered and Sold Hereby (3)
Number of
Shares
Percent
Sabby Volatility Warrant Master Fund, Ltd.
2,500,000
7.1
%
5,500,000
(4)
0
0
Sabby Healthcare Volatility Master Fund, Ltd.
3,506,098
9.9
%
22,000,000
(5)
0
0
(1) Includes all shares beneficially owned by the selling stockholders
as of January 22, 2013.
(2) The Series A-1 Preferred Stock and the Warrants contain
exercise and conversion limitations providing that a holder thereof may not convert or exercise (as the case may be) to the extent
that, if after giving effect to such conversion or exercise (as the case may be), the holder or any of its affiliates would beneficially
own in excess of 9.99% of the outstanding shares of common stock immediately after giving effect to such conversion or exercise
(as the case may be). Accordingly, the number of shares of common stock set forth in the table as being registered for a selling
stockholder exceeds the number of shares of common stock that the selling stockholder could own beneficially at any given time
through its ownership of the Series A-1 Preferred Stock and the Warrants.
23
(3) We have assumed (i) that each share of Series
A-1 Preferred Stock is convertible into shares of common stock at a conversion price of $0.60 per share of common stock and
(ii) that each Warrant is exercisable at its initial exercise price, without adjustment. We have also assumed the payment
of dividends on the Series A-1 Preferred Stock is paid in shares of common stock instead of cash, which is at our option, at an
assumed price of $0.60 per share for a period of three years, resulting in the issuance of 1,250,000 shares. In order
to adequately cover the
number of shares required due to adjustments and
anti-dilution features and pursuant to a Registration Rights Agreement between
us and the
selling stockholders, this prospectus covers the resale of 200% of such shares.
(4) Includes 200% of (i) the 833,333 shares of common stock
currently issuable upon conversion of the 500 shares of the Series A-1 Preferred Stock held by this selling stockholder, (ii)
833,333 shares of common stock currently issuable upon exercise of the Series A Warrant at $0.72 per share, (iii) 416,667 shares
currently issuable upon exercise of the Series B Warrant at $0.60 per share, (iv) 416,667 shares of common stock currently issuable
upon exercise of the Series C Warrant at $0.72 per share (1,666,667 in the aggregate for all three Warrants), and (v) 250,000
shares of common stock currently issuable as dividends. The Series A-1 Preferred Stock and the Warrants contain exercise and conversion
limitations providing that a holder thereof may not convert or exercise (as the case may be) to the extent that, if after giving
effect to such conversion or exercise (as the case may be), the holder or any of its affiliates would beneficially own in excess
of 9.99% of our outstanding shares of common stock immediately after giving effect to such conversion or exercise (as the case
may be). However, the 9.99% limitation would not prevent a selling stockholder from acquiring and selling in excess of 9.99% of
our common stock through a series of acquisitions and sales while never beneficially owning more than 9.99% in aggregate. Sabby
Management, LLC shares voting and investment power with respect to these shares on behalf of this stockholder. As manager of Sabby
Management, LLC, Hal Mintz also shares voting and investment power on behalf of this stockholder. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.
(5) Includes 200% of (i) 3,333,333 shares of common stock currently
issuable upon conversion of the 2,000 shares of the Series A-1 Preferred Stock held by this selling stockholder, (ii) 3,333,333
shares of common stock currently issuable upon exercise of the Series A Warrant at $0.72 per share, (iii) 1,666,667 shares currently
issuable upon exercise of the Series B Warrant at $0.60 per share, (iv) 1,666,667 shares of common stock currently issuable upon
exercise of the Series C Warrant at $0.72 per share (6,666,667 in the aggregate for all three Warrants), and (v) 1,000,000 shares
of common stock currently issuable as dividends. The Series A-1 Preferred Stock and the Warrants contain exercise and conversion
limitations providing that a holder thereof may not convert or exercise (as the case may be) to the extent that, if after giving
effect to such conversion or exercise (as the case may be), the holder or any of its affiliates would beneficially own in excess
of 9.99% of our outstanding shares of common stock immediately after giving effect to such conversion or exercise (as the case
may be). However, the 9.99% limitation would not prevent a selling stockholder from acquiring and selling in excess of 9.99% of
our common stock through a series of acquisitions and sales while never beneficially owning more than 9.99% in aggregate. Sabby
Management, LLC shares voting and investment power with respect to these shares on behalf of this stockholder. As manager of Sabby
Management, LLC, Hal Mintz also shares voting and investment power on behalf of this stockholder. Each of Sabby Management, LLC
and Hal Mintz disclaim beneficial ownership over the securities covered by this prospectus except to the extent of their pecuniary
interest therein.
24
Use of
Proceeds
We will not receive any proceeds from the
sale of common stock by the selling stockholders, but we will receive funds from the exercise of the Warrants, if exercised for
cash. We have agreed to bear the expenses (other than any underwriting discounts or commissions or agent's commissions)
in connection with the registration of the common stock being offered hereby by the selling stockholders.
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 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.
In addition,
the terms of the Series A-1 Preferred Stock prevent the payment of dividends on our common stock unless holders of at least 67%
in stated value of the then-outstanding shares of Series A-1 Preferred Stock consent to such dividend.
In the event we
do declare a dividend, the holders of the Series A-1 Preferred Stock and Warrants will participate in such dividend payment on
an as-converted basis to common stock (without regard to the 9.99% beneficial ownership limitation).
Determination
of Offering Price
All shares of our common stock being offered
will be sold by the selling stockholders without our involvement. As a result, the selling stockholders will determine at what
prices they may sell the offered shares, and these sales may be made at prevailing market prices or at privately negotiated prices.
Market
for Common Equity and Related Stockholder Matters
Our common stock
is quoted on the OTC Bulletin Board under the symbol "XXII.OB."
As of January 22, 2013, there were 63 holders
of record of shares of our common stock. The following table sets forth, for the quarters indicated, the high and low bid prices
per share of our common stock, as derived from quotations provided by the OTC Bulletin Board Information Center.
Quarter Ended
High Bid
Low Bid
December 31, 2012
$
0.95
$
0.15
September 30, 2012
$
0.88
$
0.20
June 30, 2012
$
1.13
$
0.35
March 31, 2012
$
0.75
$
0.25
December 31, 2011
$
1.34
$
0.25
September 30, 2011
$
1.30
$
0.60
June 30, 2011
$
1.30
$
1.10
March 31, 2011*
$
1.41
$
1.01
*From January 25, 2011, the date of the
Merger.
Trades in our common stock may be subject
to Rule 15g-9 of the Exchange Act, which imposes requirements on broker/dealers who sell securities subject to the rule to persons
other than established customers and accredited investors. For transactions covered by the rule, broker/dealers must make a special
suitability determination for purchasers of the securities and receive the purchaser's written agreement to the transaction
before the sale.
The SEC also has rules that regulate broker/dealer
practices in connection with transactions in "penny stocks." Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities listed on some national exchanges, provided that the current price and volume information
with respect to transactions in that security is provided by the applicable exchange or system). The penny stock rules require
a broker/dealer, before effecting a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in
the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market
value of each penny stock held in the customer's account. The bid and offer quotations, and the broker/dealer and salesperson
compensation information, must be given to the customer orally or in writing before effecting the transaction, and must be given
to the customer in writing before or with the customer's confirmation. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for shares of common stock. As a result of these rules, investors
may find it difficult to sell their shares.
25
Shares
Authorized for Issuance Under Equity Compensation Plans
October 21,
2010, the Company established the 2010 Equity Incentive Plan, or EIP, for
officers, employees, directors, consultants and
advisors to the Company and its affiliates
, consisting of 4,250,000 shares of common stock.
The
EIP authorizes the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares, restricted stock and restricted stock units.
The following table summarizes the number
of stock options issued and shares of restricted stock granted, net of forfeitures and sales, the weighted-average exercise price
of such stock options and the number of securities remaining to be issued under all outstanding equity compensation plans as of
December 31, 2012:
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders
1,015,000
(1)
$
0.69
(2)
2,055,000
Equity compensation plans not approved by security holders
0
N/A
0
Total
1,015,000
2,055,000
(1)
Includes 550,000 restricted stock awards that are issued but not
                                                            vested as of December 31, 2012.
(2)
Weighted average exercise price only applies to the 465,000 shares
                                                            issuable upon exercise of outstanding stock options.
26
Business
On January 25, 2011, 22nd Century Limited
LLC completed a reverse merger transaction (the "Merger") with 22nd Century Group, Inc. 22nd Century Limited, LLC
is a wholly owned subsidiary of 22nd Century Group, Inc. which continues to operate the business of 22nd Century Limited, LLC.
All references to shareholders or common shares include the historical members and membership Units of 22nd Century Limited, LLC
because, in the Merger, such Units were exchanged for common shares on a one-for-one basis and from an accounting standpoint,
they are equivalent. The Merger is being accounted for as a reverse acquisition and a recapitalization; 22nd Century Limited,
LLC is the acquirer for accounting purposes. Consequently, the assets and liabilities and the historical operations that are reflected
in the financial statements prior to the Merger are those of 22nd Century Limited, LLC and are recorded at the historical cost
basis of 22nd Century Limited, LLC, and the consolidated financial statements since completion of the Merger include the assets
and liabilities of 22nd Century Limited, LLC, historical operations of 22nd Century Limited, LLC and operations of 22nd Century
Group, Inc. from the closing date of the Merger.
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.
Background
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. We changed our name to 22nd Century Group, Inc. on
November 23, 2010 in anticipation of the Merger with 22nd Century Limited, LLC. 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. Since inception, 22nd Century
Limited, LLC has used biotechnology to regulate the nicotine content in tobacco plants.
Overview
22nd Century Limited, LLC, our wholly-owned
subsidiary,
is a plant biotechnology company focused on tobacco harm reduction and smoking cessation
products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding. The Company
exclusively controls 107 issued patents and exclusively controls an additional 38 patent applications; of these, we own 12 issued
patents plus 23 patent applications and we license on an exclusive basis, 95 issued patents and 15 patent applications.
Hercules
Pharmaceuticals LLC and Goodrich Tobacco Company, LLC are subsidiaries of 22nd Century Limited, LLC and are business units for
our (i) smoking cessation product and (ii) premium cigarettes and modified risk tobacco products, respectively.
Our Investigational
New Drug Application for
X-22
, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our
X-22
Phase II-B clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference
in quitting between
X-22
and the active control, a cigarette containing conventional nicotine levels. In evaluating the
results of this trial, we believe we may have gone too far in reducing the nicotine content of
X-22
, which was less than
half the nicotine content of VLN cigarettes used in various independent smoking-cessation clinical trials that have demonstrated
that use of VLN cigarettes increases smoking quit rates.
We
continue to believe that VLN cigarettes are effective as a smoking cessation aid. However, we have suspended sponsoring further
X-22
clinical trials pending the results of two independent smoking-cessation trials (ClinicalTrials.gov Identifiers NCT01050569
and NCT01250301) utilizing a different version of our VLN cigarett
e with a nicotine content similar to those used in previous
successful smoking-cessation trials and higher than that used in our own sponsored Phase II-B trial. Both of these two independent
clinical trials were completed in 2012. The results of these trials will be compared to our Phase II-B trial to determine which
variables optimize cessation. After evaluating the results of those two independent clinical trials, we will request a meeting
with the U.S. Food and Drug Administration (FDA) and may then resume our own sponsored
X-22
clinical trials.
27
The
X-22
therapy protocol calls
for the patient to smoke our VLN cigarettes over a six-week treatment period to facilitate the goal of the patient quitting smoking
by the end of the treatment period. We believe this therapy protocol has been successful in independent clinical trials because
VLN cigarettes made from our proprietary tobacco satisfy smokers' cravings for cigarettes while (i) greatly reducing nicotine
exposure and nicotine dependence and (ii) extinguishing the association between the act of smoking and the rapid delivery of nicotine.
X-22
involves the same smoking behavior as conventional cigarettes and because patients are simply switching to VLN cigarettes
for 6 weeks,
X-22
does not expose the smoker to any new drugs or new side effects.
In contrast to the results of the Company's
Phase II-B trial results, independent studies have demonstrated that VLN cigarettes made whether used alone or in conjunction
with nicotine replacement therapy (NRT), increased quitting. Due to the limited effectiveness and/or serious side effects of existing
FDA-approved smoking cessation products, we believe that
X-22
, upon the completion of additional clinical trials that demonstrate
efficacy, can capture a significant share of this market by replacing sales and market share from existing smoking cessation aids
and expanding the smoking cessation market by encouraging more smokers to attempt to quit smoking.
The 2009 Family
Smoking Prevention and Tobacco Control Act ("Tobacco Control Act") granted the FDA authority over the regulation of
all tobacco products. While it prohibits the FDA from banning cigarettes outright, it allows the FDA to require the reduction
of nicotine or any other compound in tobacco and cigarette smoke. The Tobacco Control Act also banned all sales in the U.S. of
cigarettes with
characterizing flavors
(other than menthol). As of June 2010, all cigarette
companies were required to cease the use of the terms "low tar," "light" and "ultra light"
in describing cigarettes sold in the U.S. Besides numerous other regulations, including certain marketing restrictions, for the
first time in history, a U.S. regulatory agency will scientifically evaluate cigarettes that may pose lower health risks as compared
to conventional cigarettes.
The Tobacco
Control Act establishes procedures for the FDA to regulate the labeling and marketing of
modified risk tobacco products,
which includes cigarettes that (i)
reduce exposure to tobacco toxins and (ii) are reasonably likely
to
pose lower health risks as compared to conventional cigarettes
("Modified Risk Cigarettes").
The Tobacco Control Act requires the FDA to issue specific regulations or guidance regarding applications that must be submitted
to the FDA for the authorization to label and market Modified Risk Cigarettes. On March 30, 2012, the FDA issued
Modified
Risk Tobacco Product Applications Draft Guidance.
We believe that two types of our cigarettes
in development which we refer to as
BRAND A
and
BRAND B
, may qualify as Modified Risk Cigarettes. Compared to other
commercial cigarettes, the tobacco in
BRAND A
has approximately 95% less nicotine than tobacco in cigarettes previously
marketed as "light" cigarettes, and
BRAND B
's smoke contains the lowest amount of "tar" per
milligram of nicotine.
Within our two product categories, the
Tobacco Control Act offers us the following specific advantages:
Smoking Cessation Aids
FDA approval must be obtained, as has been
the case for decades, before a product can be marketed for quitting smoking. The Tobacco Control Act provides that products for
quitting smoking or smoking cessation, such as
X-22
, be considered for "Fast Track" designation by the FDA.
The "Fast Track" programs of the FDA are intended to facilitate development and expedite review of drugs to treat
serious and life-threatening conditions so that an approved product can reach the market expeditiously. We believe that upon completion
of a company-sponsored clinical trial demonstrating efficacy,
X-22
will qualify for "Fast Track" designation
by the FDA.
Modified Risk Cigarettes
We intend to seek FDA authorization to
market
BRAND A
and
BRAND B
as Modified Risk Cigarettes. We believe that
BRAND A
and
BRAND B
will achieve
significant market share in the global cigarette market among smokers who will not quit but are interested in reducing the harmful
effects of smoking. We believe this new regulatory environment represents a paradigm shift for the tobacco industry. The Tobacco
Control Act allows the FDA to mandate the use of reduced-risk technologies across all conventional tobacco products or cigarettes.
We believe the Tobacco Control Act may create opportunities for us to license our proprietary technology and/or tobaccos to larger
competitors.
28
SPECTRUM Government Research Cigarettes
As a subcontractor
to RTI International ("RTI") in RTI's contract with the National Institute on Drug Abuse for the Research Cigarette
Option, we supply modified nicotine (from very low to high) cigarettes to NIDA.
These research cigarettes are distributed
under the mark
SPECTRUM
.
Tar, Nicotine, and Smoking Behavior
The dependence of many smokers on tobacco
is largely due to the properties of nicotine, but the adverse effects of smoking on health are mainly due to other components
present in tobacco smoke, including "tar" and carbon monoxide. "Tar" is the common name for the (resinous)
total particulate matter minus nicotine and water produced by the burning of tobacco (or other plant material) during the act
of smoking. "Tar" and nicotine are commonly measured in milligrams per cigarette trapped on a Cambridge filter pad
under standardized conditions using smoking machines. These results are referred to as "yields" or, more specifically,
"tar" yield and nicotine yield.
Individual smokers
generally seek a certain amount of nicotine per cigarette and can easily adjust how intensely each cigarette is smoked to obtain
a satisfactory amount of nicotine. Smoking of low yield ("light" or "ultra light") cigarettes compared
to high yield ("full flavor") cigarettes often results in taking more puffs per cigarette, larger puffs and/or smoking
more cigarettes per day to obtain a satisfactory amount of nicotine, a phenomenon known as "compensation" or "compensatory
smoking." A report by the National Cancer Institute in 2001 stated that due to compensatory smoking, low yield cigarettes
are not safer than full flavor cigarettes, which is the reason that the Tobacco Control Act has banned the use of the terms "low
tar," "light" and "ultra light" in the U.S. market. Studies have shown, however, that smokers generally
do not compensate when smoking cigarettes made with our VLN tobacco, and that smoking VLN cigarettes, such as
BRAND A,
actually assist smokers to smoke fewer cigarettes per day and reduce their exposure to "tar" and nicotine. Other studies
have demonstrated that compensatory smoking (e.g., more and/or larger puffs per cigarette) of low-tar research cigarettes, similar
to
BRAND B
, is greatly curtailed
resulting in smokers inhaling less "tar" and carbon monoxide.
Market
Cigarettes and Smoking Cessation Aids
According to the U.S. Center for Disease
Control (CDC), the U.S. cigarette market consists of approximately 45 million adult smokers who spent approximately $80 billion
in 2011 on approximately 300 billion cigarettes. Worldwide manufacturer sales in 2011 were over 5.0 trillion cigarettes, resulting
in annual retail sales of approximately $610 billion. Our products address unmet needs of smokers; for those who want to quit,
an innovative smoking cessation aid, and for those who do not quit, cigarettes that can reduce the level of exposure to tobacco
toxins. In 2010, annual manufacturer sales of smoking cessation aids in the U.S., all of which must be approved by the FDA, were
approximately $1.0 billion. Outside the United States, the smoking cessation market is in its infancy and is approximately $3.0
billion.
Approximately 50% of U.S. smokers attempt
to quit smoking each year, but only 2% to 5% actually quit smoking in a given year. It takes smokers an average of 8 to 11 "quit
attempts" before achieving long-term success. Approximately 95% of "self-quitters" (i.e., those who attempt
to quit smoking without any treatment) relapse and resume smoking. The Institute of Medicine, the health arm of the National Academy
of Sciences, in a 2007 report concludes: "There is an enormous opportunity to increase population prevalence of smoking
cessation by reaching and motivating the 57 percent of smokers who currently make no quit attempt per year." We believe
that our
X-22
smoking cessation aid will be attractive to smokers who have been frustrated in their previous attempts to
quit smoking using other therapies.
29
Use of existing smoking cessation aids
results in relapse rates that can be as high as 90% in the first year after a smoker initially "quits." Smokers currently
have the following limited choices of FDA-approved products to help them quit smoking:
•
varenicline (Chantix
®
/Champix
®
outside the U.S.), manufactured by Pfizer,
•
bupropion (Zyban
®
), manufactured by GlaxoSmithKline, and
•
nicotine replacement therapy, or "NRT," which is available in
    the U.S. in several forms: gums, patches, nasal sprays, inhalers and lozenges.
Chantix
®
and Zyban
®
are pills and are nicotine free. Chantix
®
, Zyban
®
, the nicotine nasal spray and the nicotine
inhaler are available by prescription only. Nicotine gums, nicotine patches, and lozenges are available over-the-counter.
Chantix
®
was introduced
in the U.S. market in the fourth quarter 2006. Since 2007, Chantix
®
has been the best-selling smoking cessation
aid in the United States, with sales, according to Pfizer Inc., of $701 million in 2007, $489 million in 2008, $386 million in
2009, $330 million in 2010 and $326 million in 2011. In July 2009, the FDA required a "Boxed Warning," the most serious
type of warning in prescription drug labeling, for both Chantix
®
and Zyban
®
based on the potential
side effects of these drugs. Despite this Boxed Warning, worldwide sales of Chantix
®
in 2009 to 2011 were approximately
$700 million, $755 million, and $720 million, respectively.
Other than Chantix
®
and
Zyban
®
, the only FDA-approved smoking cessation therapy in the United States is NRT. These products consist of
gums, patches, nasal sprays, inhalers and lozenges. Nicotine gums and nicotine patches have been sold in the U.S. for approximately
28 years and 20 years, respectively, and millions of smokers have already tried NRT products and failed to stop smoking due to
the limited effectiveness of these products. According to Perrigo Company, a pharmaceutical company that sells NRT products, retail
sales of NRT products in the United States were $800 million in the fiscal year ended June 30, 2012.
Modified Risk Tobacco Products
A substantial number of adult smokers are
unable or unwilling to quit smoking. For example, each year one-half of the adult smokers in the United States do not attempt
to quit. Nevertheless, we believe the majority of these smokers are interested in reducing the harmful effects of smoking.
In a 2005 analyst report,
The Third
Innovation, Potentially Reduced Exposure Cigarettes
, JP Morgan examined the effects of FDA regulation of tobacco, including
the market for safer cigarettes. JP Morgan's proprietary survey of over 600 smokers found that 90% of smokers are willing
to try a safer cigarette. Among JP Morgan's other conclusions, it stated: "FDA oversight would imbue PREPS ['potential
reduced exposure products' which essentially equate to potential modified risk tobacco products] with a regulatory 'stamp
of approval' and allow for more explicit comparative health claims with conventional cigarettes. Consumers should trust
the FDA more than industry health claims." Prior to the Tobacco Control Act becoming law in 2009, no regulatory agency or
body had the authority to assess potential modified risk tobacco products.
Some major cigarette manufacturers have
developed and marketed alternative cigarette products. For example, Philip Morris USA developed an alternative cigarette, called
Accord
®
, in which the tobacco is heated rather than burned. R.J. Reynolds Tobacco Company has developed and is
marketing an alternative cigarette, called Eclipse
®
, in which the tobacco is primarily heated, with only a small
amount of tobacco burned. Philip Morris and RJ Reynolds have indicated that their products may deliver fewer smoke components
compared to conventional cigarettes. Vector Tobacco Inc. ("Vector Tobacco"), which is our former licensee, has marketed
a cigarette offered in three brand styles with reduced levels of nicotine, called Quest
®
. Both Accord
®
and Eclipse
®
, which are not conventional cigarettes (e.g., they do not burn down) and have only achieved
limited sales. With the exception of Eclipse
®
, the above products are no longer being manufactured.
30
Complete cessation from all tobacco and
medicinal nicotine products is the ultimate goal of the public health community. However, some public health officials desire
to migrate cigarette smokers en masse to medicinal nicotine (also known as NRT) or smokeless tobacco products to replace cigarettes.
We believe this is unattainable in the foreseeable future for many reasons, including because the smoking experience is much more
complex than simply seeking nicotine. In a 2009 WHO report, statistics demonstrate that approximately 90% of global tobacco users
smoke cigarettes. Worldwide cigarette sales (in U.S. dollars) are approximately 12 times greater than sales of smokeless tobacco
products and approximately 200 times greater than sales of NRT products. Although a small segment of the smoking population is
willing to use smokeless tobacco products in conjunction with cigarettes (known as dual users), a large percentage of smokers
is not interested in using smokeless tobacco products exclusively.
There are newer forms of smokeless tobacco
products that have been introduced in the market that are less messy to use than chewing tobacco or dry snuff (since spitting
is not involved). These products include Swedish-style snus and dissolvable tobacco products such as Ariva
®
and
Stonewall
®
tablets made by Star Scientific Inc., and Camel
®
Orbs, Camel
®
Strips and
Camel
®
Sticks recently introduced by R.J. Reynolds Tobacco Company. Although use of such products may be more discreet
and convenient than traditional forms of smokeless tobacco, they have the same route of delivery of nicotine as nicotine gum and
nicotine lozenges, which have been available over-the-counter in the United States for approximately 28 years and 10 years, respectively,
and have not significantly replaced cigarettes.
Products
X-22 Smoking Cessation Aid
X-22
is a tobacco-based botanical medical product for use as a smoking cessation therapy. Upon FDA approval,
X-22
will be a
prescription-only kit containing VLN cigarettes made from our proprietary tobacco, which has approximately 95% less nicotine compared
to tobacco in existing "light" cigarettes.
The
X-22
therapy protocol calls for the patient to smoke
our VLN cigarettes over a six-week treatment period to facilitate the goal of the patient quitting smoking by the end of the treatment
period. We believe this therapy protocol has been successful in independent clinical trials because VLN cigarettes made from our
proprietary tobacco satisfy smokers' cravings for cigarettes while (i) greatly reducing nicotine exposure and nicotine dependence
and (ii) extinguishing the association between the act of smoking and the rapid delivery of nicotine.
Our Investigational New Drug Application
for
X-22
, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our
X-22
Phase II-B
clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference in quitting
between
X-22
and the active control, a cigarette containing conventional nicotine levels. In evaluating the results of
this trial, we believe we may have gone too far in reducing the nicotine content of
X-22
, which was less than half the
nicotine content of VLN cigarettes used in various independent smoking-cessation clinical trials that have demonstrated that use
of VLN cigarettes increases quit rates.
The results of the below
two independent clinical trials, both of which used VLN cigarettes provided by 22nd Century, were completed in 2012, are
pending. After evaluating the results of these two trials, we will request a meeting with the U.S. Food and Drug
Administration (FDA) and may then resume our own sponsored
X-22
clinical trials.
1.
University
                                                                                                     of Minnesota Masonic Cancer
                                                                                                     Center
-
Phase
                                                                                                     II
-
219
                                                                                                     subjects
·
Follow-up study to Hatsukami et al. 2010
·
ClinicalTrials.gov Identifier:  NCT01050569
·
Evaluating quitting
                                                                                                           results of six-week
                                                                                                           treatment period among
                                                                                                           3 groups:
(i) exclusive use of a VLN
cigarette (a  VLN cigarette with slightly higher nicotine content than those used in the 22nd Century trial);
(ii) 21-mg nicotine patch;
and
(iii) concurrent use of VLN
cigarette and nicotine patch
·
Trial included a 6-month follow-up period
2.
Queen
                                                                                                     Mary University of London,
                                                                                                     in collaboration with Pfizer
-
200
                                                                                                     subjects
·
Same VLN cigarette utilized in above study
·
ClinicalTrials.gov Identifier:  NCT01250301
·
Evaluating whether the use of a VLN cigarette in combination
with Chantix
®
(or NRT)
increases
quitting over use of Chantix
®
(or NRT) alone
·
Chantix
®
is branded as Champix
®
outside the United States
31
Our Modified Risk Cigarettes
We believe that our
BRAND A
and
BRAND B
cigarettes will benefit smokers who are unable or unwilling to quit smoking and who may be interested in cigarettes
which reduce exposure to certain tobacco smoke toxins and/or pose a lower health risk than conventional cigarettes. This includes
the approximate one-half of the 45 million adult smokers in the United States who do not attempt to quit in a given year. Compared
to other commercial cigarettes, the tobacco in
BRAND A
has approximately 95% less nicotine than tobacco in cigarettes previously
marketed as "light" cigarettes and
BRAND B
's smoke contains the lowest amount of "tar" per
milligram of nicotine. We believe that
BRAND A
and
BRAND B
will qualify as Modified Risk Cigarettes and we intend
to seek FDA authorization to market
BRAND A
and
BRAND B
as Modified Risk Cigarettes. On March 30, 2012, the FDA
issued
Modified Risk Tobacco Product Applications Draft Guidance
, which we will utilize to file our two modified risk applications
with the FDA.
BRAND A Cigarettes
Compared to other commercial tobacco cigarettes,
BRAND A
has the lowest nicotine content. The tobacco in
BRAND A
contains approximately 95% less nicotine than tobacco
in leading "light" cigarette brands. Clinical studies have demonstrated that smokers who smoke VLN cigarettes containing
our proprietary tobacco smoke fewer cigarettes per day resulting in significant reductions in smoke exposure, including "tar,"
nicotine and carbon monoxide. Due to the very low nicotine levels, compensatory smoking does not occur with VLN cigarettes containing
our proprietary tobacco (Hatsukami et al. 2010).
In a June 16, 2010 press release, Dr. David
Kessler, the former FDA Commissioner, recommended that "[t]he FDA should quickly move to reduce nicotine levels in cigarettes
to non-addictive levels. If we reduce the level of the stimulus, we reduce the craving. It is the ultimate harm reduction strategy."
Shortly thereafter in a Washington Post article, Dr. Kessler said that the amount of nicotine in a cigarette should drop from
about 10 milligrams to less than 1 milligram.
BRAND A
contains approximately 0.7 milligram of nicotine per cigarette.
A Phase II smoking cessation clinical trial
at the University of Minnesota Masonic Comprehensive Cancer Center (Hatsukami et al. 2010) also measured exposure of various smoke
compounds in smokers from smoking a VLN cigarette containing our proprietary tobacco over a six (6)-week period. Smokers significantly
reduced their smoking as compared to their usual brand of cigarettes. The number of VLN cigarettes smoked per day on average decreased
from 19 (the baseline number of cigarettes of smokers' usual brand) to 12 by the end of the six (6)-week period, even though
participants were instructed to smoke ad libitum (as many cigarettes as desired) during treatment. Furthermore, besides significant
reductions in other biomarkers, carbon monoxide (CO) levels, an indicator of smoke exposure, significantly decreased from 20 parts
per million (baseline) to 15 parts per million. Cotinine, a metabolite and biomarker of nicotine, significantly decreased from
4.2 micrograms/mL (baseline) to 0.2 micrograms/mL. All differences were statistically significant (P<0.05).
We believe these and other results and
future exposure studies the FDA may require will result in a modified risk cigarette claim for
BRAND A
. We further believe
smokers who desire to smoke fewer cigarettes per day while also satisfying cravings and reducing exposure to nicotine will find
BRAND A
beneficial.
BRAND B Cigarettes
Compared to other commercial tobacco cigarettes,
BRAND B
's smoke contains the lowest amount of "tar" per milligram of nicotine. Using a proprietary high
nicotine tobacco blend in conjunction with specialty cigarette components,
BRAND B
allows the smoker to achieve a satisfactory
amount of nicotine per cigarette while inhaling less "tar" and carbon monoxide. At the same time, we do not expect
exposure to nicotine from
BRAND B
to be significantly higher than some commercially available full flavor cigarette brands.
We believe smokers who desire to reduce smoke exposure but are less concerned about nicotine will find BRAND B beneficial.
BRAND
B
has a "tar" yield between typical "light" and "ultra-light" cigarettes, but a nicotine
yield of typical full flavor cigarettes.
In a 2001 report, entitled
Clearing
the Smoke, Assessing the Science Base for Tobacco Harm Reduction
, the Institute of Medicine notes that a low "tar"/moderate
nicotine cigarette is a viable strategy for reducing the harm caused by smoking. The report states: "Retaining nicotine
at pleasurable or addictive levels while reducing the more toxic components of tobacco is another general strategy for harm reduction."
We believe that evaluation of
BRAND B
in short-term human exposure studies will confirm that exposure to smoke, including
certain tobacco smoke toxins and carbon monoxide, is significantly reduced when smoking
BRAND B
as compared to smoking
the leading brands of cigarettes. We believe results from these exposure studies will warrant a modified risk claim for
BRAND
B
.
32
RED SUN and MAGIC Cigarettes
Our subsidiary, Goodrich Tobacco, has introduced
two super-premium priced cigarette brands,
RED SUN
and
MAGIC
, into the U.S. market in the first quarter 2011. Both
brands are available in regular and menthol and all brand styles are king size and packaged in hinge-lid hard packs. In the second
quarter of 2013, we intend to focus our marketing efforts on tobacconists, smoke shops and tobacco outlets in the U.S. The ban
in 2009 by the FDA of all cigarettes with characterizing flavors (with the exception of menthol) has resulted in a product void
in these specialty tobacco channels for super-premium priced products. We believe that certain U.S. cigarette wholesalers and
retailers will carry our brands, among other reasons, to increase their margins.
Smoking Cessation Clinical Trials with VLN Cigarettes
VLN cigarettes containing our proprietary
tobacco have been the subject of various independent studies, including two Phase II clinical trials for smoking cessation which
were not funded by us. Both of these Phase II clinical trials were "intent to treat" trials, meaning that any patients
who dropped out of the trials for any reason at any time during treatment or during the follow-up periods were considered failures
(still smoking and not abstinent). Dropout rates during smoking cessation trials are generally high since patients either quit
smoking or resume smoking their usual brand. In either case, they may believe there is no reason to continue.
One of these two Phase II clinical trials
compared the quitting efficacy of a VLN cigarette containing our proprietary tobacco versus a low nicotine cigarette and an FDA-approved
nicotine lozenge (4 mg) in a total of 165 patients treated for six (6) weeks (Hatsukami
et al.
2010). This clinical trial
was led by Dr. Dorothy Hatsukami at the University of Minnesota Masonic Comprehensive Cancer Center. Dr. Hatsukami was selected
in 2010 as one of the nine voting members of the 12-person Tobacco Products Scientific Advisory Committee ("TPSAC"),
within the FDA's Center for Tobacco Products created under the Tobacco Control Act. (TPSAC will make recommendations and
issue reports to the FDA Commissioner on tobacco regulatory matters, including but not limited to, the impact of the use of menthol
in cigarettes, altering levels of nicotine in tobacco products, and applications submitted to the FDA for modified risk tobacco
products.)
Results from this Phase II trial conclude
that patients exclusively using the VLN cigarette containing our proprietary tobacco achieved a 43% quit rate (confirmed four
(4)-week continuous abstinence) as compared to a quit rate of 35% for the group exclusively using the FDA-approved nicotine lozenge
and a 21% quit rate for the group exclusively using the low nicotine cigarette. Smoking abstinence at the 6-week follow-up after
the end of treatment was 47% for the VLN cigarette group, 37% for the nicotine lozenge group and 23% for the low nicotine cigarette
group. Furthermore, the VLN cigarette was also associated with greater relief from withdrawal symptoms and cravings of usual brand
cigarettes than the nicotine lozenge. Carbon monoxide (CO) levels in patients were tested at each treatment clinic visit to verify
smoking abstinence.
Unlike Phase III clinical trials for other
FDA-approved smoking cessation aids, four (4) week continuous abstinence in the University of Minnesota Phase II trial was measured
after the treatment period, when patients were "off" medication, rather than during the last four weeks of the treatment
period. For example, according to the prescription Chantix
®
label, four (4)-week continuous abstinence in the Chantix
®
Phase III clinical trials (the 44 percent quit rate advertised by Pfizer) was measured during the last four weeks of the
12-week treatment period, while patients were still taking Chantix
®
. In one of these Chantix
®
Phase
III clinical trials, approximately one-third of those who had been abstinent during the last week of treatment returned to smoking
within four weeks after they stopped taking Chantix
®
, and approximately 45% returned to smoking within eight weeks
after they stopped taking Chantix
®
.
Patients who used the VLN cigarette over
the six (6)-week treatment period significantly reduced their smoking as compared to their usual brand of cigarettes. The number
of VLN cigarettes smoked per day on average decreased from 19 (the baseline number of cigarettes of the smoker's usual brand)
to 12 by the end of the six (6)-week treatment period, even though participants in this clinical trial were instructed to smoke
ad libitum (as many cigarettes as desired) during treatment. Carbon monoxide (CO) levels, an indicator of smoke exposure, significantly
decreased from 20 parts per million (baseline) to 15 parts per million. Cotinine, a metabolite and biomarker of nicotine, significantly
decreased from 4.2 micrograms/mL (baseline) to 0.2 micrograms/mL. All differences in the above three measurements were statistically
significant (P<0.05).
33
In a separate Phase II clinical trial funded
by Vector Tobacco, our former licensee, under Investigational New Drug ("IND") Application 69,185, a randomized double-blind,
active controlled, parallel group, multi-center Phase II smoking cessation clinical trial was conducted to evaluate the quitting
efficacy of Quest
®
reduced-nicotine cigarettes as a smoking cessation treatment in 346 patients (Becker
et al
.
2008). Treatment consisted of smoking three reduced-nicotine cigarette styles (Quest 1
®
, Quest 2
®
and Quest 3
®
) for two (2) weeks each, with nicotine yields per cigarette of 0.6 mg (a low nicotine cigarette made
with a blend of regular tobacco and our proprietary VLN tobacco), 0.3 mg (an extra low nicotine cigarette made with a blend of
regular tobacco and our proprietary VLN tobacco) and 0.05 mg (a VLN cigarette made with tobacco only from our proprietary VLN
tobacco variety) either in combination with nicotine patch therapy (a nicotine replacement therapy or NRT product) or placebo
patches.
In this three-arm clinical trial in which
patients were treated over a period of sixteen (16) weeks, use of reduced-nicotine cigarettes in combination with nicotine patches
was more effective (the difference was statistically significant) in achieving four (4)-week continuous abstinence than use of
nicotine patches alone (32.8% vs. 21.9%), and use of reduced-nicotine cigarettes without nicotine patches yielded an abstinence
rate similar (the difference was not statistically significant) to that of nicotine patches (16.4% vs. 21.9%). No serious adverse
events were attributable to the investigational product.
The major differences between the Vector
Tobacco Phase II clinical trial and the University of Minnesota Phase II clinical trial is the duration of time during treatment
that VLN cigarettes are smoked and the use of nicotine replacement therapy ("NRT') in combination with VLN cigarettes.
In the Vector Tobacco trial, VLN cigarettes were smoked by patients (in two arms of the study) for only two (2) weeks, either
in combination with using a nicotine patch or placebo patch, followed by continued use of nicotine patches for the subsequent
ten (10) weeks. In the University of Minnesota Phase II clinical trial, VLN cigarettes (in one arm of the study) were smoked for
six (6) weeks without any use of NRT before, during or after this 6-week treatment period. We believe that the effectiveness of
VLN cigarettes for use in smoking cessation is higher when they are used alone (without NRT or another therapy) and for a longer
time period, as in the University of Minnesota trial.
A 2008 binding arbitration award, which
was completely fulfilled in 2009 by our former licensee, Vector Tobacco, provided us with copies of all of Vector Tobacco's
FDA submissions relating to Vector Tobacco's IND for Quest
®
and awarded to us a right of reference to Vector
Tobacco's IND for Quest
®
, including all results of Vector's Phase II clinical trial. This arbitration
award allows us to use all such information in our IND with the FDA for our VLN cigarette that contains our same proprietary tobacco
that Vector Tobacco used in its IND submissions to the FDA. This arbitration award has been helpful to us with the FDA, since
analytical reports produced by Vector Tobacco pertaining to our proprietary tobacco and cigarettes made from our proprietary tobacco
are being utilized by us with the FDA.
A randomized controlled smoking cessation
clinical trial using VLN cigarettes was a conducted at Roswell Park Cancer Institute, Buffalo, New York, to investigate the effect
of smoking a very low nicotine cigarette ("VLN") in combination with a nicotine patch for 2 weeks prior to the quit
date (Rezaishiraz
et al.
2007). Ninety-eight adult smokers were randomized to two treatments: (i) two (2) weeks of a VLN
(Quest 3
®
) and 21-mg nicotine patch before the quit date and (ii) a reduced nicotine cigarette (Quest 1
®
)
during the two (2) weeks before the quit date. After the quit date, all subjects received counseling for smoking cessation and
nicotine patch therapy for up to eight (8) weeks (four (4) weeks of 21-mg patches, two (2) weeks of 14-mg patches, and two (2)
weeks of 7-mg patches). Group 1, which used the VLN cigarette and a nicotine patch before quitting, had lower combined craving
scores during the two (2) weeks before and after the quit date. Self-reported point prevalence of smoking abstinence at the three
(3)- and six (6)-month follow-up points was higher in Group 1 (43% vs. 34% and 28% vs. 21%).
A Phase III/IV two-arm smoking-cessation
clinical trial of 1,410 treatment-seeking smokers was conducted by the University of Auckland, Clinical Trials Research Unit (Walker
et al. 2012). The 705 patients who received VLN cigarettes in addition to NRT (patches and/or gum or lozenges) had significantly
higher cessation rates at all measured time points (3 weeks, 6 weeks, 3 months and 6 months) than patients treated only with NRT.
For those who failed to quit, the median time to relapse was increased to two months in the VLN + NRT group, compared to 13 days
in the NRT only group. There was no difference in the frequency of serious adverse events between the groups.
A study at Dalhousie University, Halifax,
Nova Scotia (Barrett 2010), compared the effects of low nicotine cigarettes and an FDA-approved nicotine inhaler on cravings and
smoking behavior of smokers who did not intend to quit. In separate laboratory sessions, each of twenty-two (22) participants
used a VLN cigarette (Quest 3
®
), a reduced nicotine cigarette (Quest 1
®
, which contains approximately
two-thirds conventional tobacco and one-third VLN tobacco), a nicotine inhaler (10 mg; 4 mg deliverable, Pharmacia), or a placebo
inhaler (identical in appearance to the nicotine inhaler, but containing no nicotine). Cravings, withdrawal and mood descriptors
were rated before and after a twenty (20)-minute treatment session during which subjects were instructed to smoke two cigarettes
or to use an inhaler every 10 seconds. The reduction in the rating of intent to smoke (usual cigarette brand) after using the
VLN cigarette (-10.0) was significantly greater than the reduction with the nicotine inhaler (-1.9). Use of the VLN cigarette
was also associated with significantly increased satisfaction and relaxation compared to the nicotine inhaler.
34
Technology Platform
Our proprietary technology enables us
to decrease or increase the level of nicotine (and other nicotinic alkaloids such as nornicotine, anatabine and anabasine) in
tobacco plants by decreasing or increasing the expression of gene(s) responsible for nicotine production in the tobacco plant
using genetic engineering. The basic techniques, include but are not limited to those that are used in the production of
genetically modified (GM) varieties of other crops. However, our proprietary technology can also be implemented without the
resulting plants being GM as long as no foreign DNA not inherent to a plant species such as
Nicotiana tabacum
is
present in the engineered plant. In 2009 GM crops were planted on 330 million acres in 25 countries according to the
International Service for the Acquisition of Agri-Biotech Applications. This includes approximately 85% of the corn and
soybeans grown in the United States. The only components of the technology that are distinct from those in commercialized
genetically modified varieties of major crops are segments of tobacco genes (DNA sequences) that are also present in all
conventional tobacco plants. Genetically modified or transgenic tobacco that we use in our products has been deregulated by
the USDA. Thus, plants may be grown and used in products in the United States without legal restrictions or labeling
requirements related to the genetic modification. Nevertheless, our proprietary tobacco is grown only by farmers under
contracts that require segregation and prohibit transfer of material to other parties.
During the development of genetically-engineered
plant varieties, many candidate plant lines are evaluated in the field in multiple locations over several years, as in any other
variety development program. This is carried out in order to identify lines that have not only the specific desired trait, e.g.,
very low nicotine, but have overall characteristics that are suitable for commercial production of the desired product. This process
allows us to see if there are undesirable effects of the genetic modification approach or the specific genetic modification event,
regardless of whether the effects are anticipated or unanticipated. For example, since nicotine is known to be an insecticide
that is effective against a wide range of insects, reduction of nicotine content in the plants may be expected to affect susceptibility
to insect pests. While there are differences in the susceptibility of VLN tobacco to some insects, all tobacco is attacked by
a number of insects. The measures taken to control insect pests of conventional tobacco are adequate to control insect pests in
VLN tobacco.
Once a genetically-engineered tobacco plant
with the desired characteristics is obtained, each plant can produce hundreds of thousands of seeds. When each seed is germinated,
the resulting tobacco plant has identical characteristics as the parent and sibling plants and the nicotine content of these plants
generally fall within a narrow range. Tobacco products with either low or high nicotine content are easily produced through this
method. For example, one of our proprietary tobacco varieties contains the lowest nicotine content of any tobacco ever commercialized,
with approximately 95% less nicotine than tobacco in leading "light" cigarette brands. This proprietary tobacco grows
with virtually no nicotine without adversely affecting the other leaf constituents important to a cigarette's characteristics,
including taste and aroma.
Sources of Raw Materials
We obtain a large portion of our tobacco
leaf requirements from farmers in multiple U.S. states that are under direct contracts with us. The contracts prohibit the transfer
of our proprietary seeds and plant materials to other parties. We purchase the balance of our tobacco requirements through third
parties. As we expand our sales and distribution of our current commercial brands,
RED SUN
and
MAGIC
, and proceed
to market with our
X-22
smoking cessation aid and
BRAND A
and
BRAND B
cigarettes, we plan to continue to
scale up the amount of tobacco leaf we obtain directly from farmers under contract.
Intellectual Property
Our proprietary technology is covered by
12 patent families consisting of 107 issued patents in 78 countries, (of these, we own 12 issued patents and we license 95 issued
patents on an exclusive basis) and 38 pending patent applications (of these we own 23 patent applications and we license 15 patent
applications on an exclusive basis). A "patent family" is a set of patents granted in various countries to protect
a single invention. Our patent coverage in the United States and China, the two most valuable smoking cessation and cigarette
markets in the word, consists of 15 issued patents and 8 pending applications and 6 issued patents and 3 pending patent applications,
respectively. We have exclusive worldwide rights to all uses of the following genes responsible for nicotine content in tobacco
plants: QPT, A622, NBB1, MPO and genes for several transcription factors. We have exclusive rights to plants with altered nicotine
content produced from modifying expression of these genes and tobacco products produced from these plants. We also have the exclusive
right to license and sublicense these patent rights. The patents owned by or exclusively licensed to us are issued in countries
where at least 75% of the world's smokers reside.
35
We own various
registered trademarks in the United States. We also have exclusive rights to plant variety protection, or PVP, certificates in
the United States (issued by the U.S. Department of Agriculture) and Canada. A PVP certificate prevents anyone other than the
owner/licensee from planting, propagating, selling, importing and exporting a plant variety for twenty (20) years in the U.S.
and generally for (20) years in other member countries of the
International Union for the Protection of New Varieties of
Plants, known as UPOV, an international treaty concerning plant breeders' rights. There are currently more than 70 countries
that are members of UPOV.
Sales and Marketing
X-22 Smoking Cessation Aid
We intend to enter into arrangements in
both the U.S. and international markets with pharmaceutical companies to market and sell
X-22
. We plan to seek marketing
partners in the U.S. with existing pharmaceutical sales forces that already call on medical and dental offices in their geographic
markets.
There are approximately 700,000 physicians
in the U.S., including approximately 80,000 general practitioners, many of whom are aware of new medications, even before they
achieve FDA approval. There are also approximately 170,000 dentists in the U.S. who can write prescriptions for smoking cessation
aids. Upon FDA approval, we plan to develop awareness for
X-22
by educating physicians and dentists about our
X-22
smoking cessation aid. We intend to advertise in professional journals, use direct mail campaigns to medical professionals, and
attend trade shows and professional conferences. We also intend to use internet advertising and pharmacy circulars to reach consumers
and to encourage them to ask their physicians and dentists about our
X-22
smoking cessation aid. We expect to use public
relations to increase public awareness about
X-22
. We will seek to use federal and state-funded smoking cessation programs
and clinics to inform clinicians and patients about, and encourage the use of,
X-22
as a smoking cessation aid. We will
also seek to participate in various government-funded programs which purchase approved smoking cessation aids and then distribute
these to smokers at no charge or at greatly reduced prices.
BRAND A and BRAND B
The Tobacco Control Act establishes procedures for the FDA
to regulate the labeling and marketing of modified risk tobacco products, which includes cigarettes that (i) reduce exposure to
tobacco toxins and (ii) are reasonably likely to pose lower health risks as compared to conventional cigarettes ("Modified
Risk Cigarettes"). The Tobacco Control Act requires the FDA to issue specific regulations or guidance regarding applications
that must be submitted to the FDA for the authorization to label and market Modified Risk Cigarettes. On March 30, 2012, the FDA
issued
Modified Risk Tobacco Product Applications Draft Guidance.
We believe that two of our cigarette products, which
we refer to as
BRAND A
and
BRAND B
, will qualify as Modified Risk Cigarettes. Compared to other commercial cigarettes,
the tobacco in
BRAND A
has approximately 95% less nicotine than tobacco in cigarettes previously marketed as "light"
cigarettes, and
BRAND B
's smoke contains the lowest amount of "tar" per milligram of nicotine.
RED SUN and MAGIC Cigarettes
Our subsidiary,
Goodrich Tobacco, has introduced two super-premium priced cigarette brands,
RED SUN
and
MAGIC
, into the U.S. market
in the first quarter 2011. Both brands are available in regular and menthol and all brand styles are king size and packaged in
hinge-lid hard packs. In the second quarter of 2013, we intend to focus our marketing efforts on tobacconists, smoke shops and
tobacco outlets in the U.S. The ban in 2009 by the FDA of all cigarettes with characterizing flavors (with the exception of menthol)
has resulted in a product void in these tobacco channels for super-premium priced products. We believe that certain U.S. cigarette
wholesalers and retailers will carry our brands, among other reasons, to increase their margins.
36
SPECTRUM Government Research Cigarettes
The National
Institute on Drug Abuse ("NIDA"), a component of the National Institutes of Health ("NIH"), provides the
scientific community with controlled and uncontrolled research chemicals and drug compounds in its Drug Supply Program. In 2009,
NIDA included an option to develop and produce research cigarettes with various levels of nicotine (from very low to high), or
Research Cigarette Option, in its request for proposals for a five-year contract for Preparation and Distribution of Research
and Drug Products. We have agreed, as a subcontractor to RTI International ("RTI") in RTI's contract with NIDA
for the Research Cigarette Option, to supply modified nicotine (from very low to high) cigarettes to NIDA. In August 2010, we
met with officials from NIDA, FDA, RTI, the National Cancer Institute and the Centers for Disease Control and Prevention to finalize
certain aspects of the design of these research cigarettes.
These government research cigarettes are distributed under
the mark
SPECTRUM
.
Healthcare Reimbursement
The Affordable Care Act enacted on March
23, 2010 and other government and private sector initiatives targeted to limit the growth of healthcare costs are continuing in
the U.S. and many other countries where we intend to sell our
X-22
smoking cessation aid. These changes are causing the
marketplace to put increased emphasis on the delivery of more cost-effective medical products.
Government healthcare programs in the United
States, including Medicare and Medicaid, private healthcare insurance and managed-care plans have attempted to control costs by
limiting the amount of reimbursement for which they will pay for particular procedures or treatments. This may create price sensitivity
among potential customers for our
X-22
smoking cessation aid, even if we obtain FDA approval for it. Some third-party payers
must also approve coverage for new or innovative devices or therapies before they will reimburse healthcare providers who use
the medical devices or therapies. Even though a new medical product may have been cleared for commercial distribution, we may
find limited demand for
X-22
until reimbursement approval has been obtained from governmental and private third-party payers.
Approximately 160 million Americans have
private health insurance with prescription coverage and the majority, and an increasing number of these plans, cover pharmacologic
treatments for smoking cessation. Healthcare payers, including governmental bodies, are increasingly willing to fund smoking cessation
treatments due to the expected savings from reducing the incidence of smoking-related illnesses. Approximately 46 million Americans
were covered by Medicare in 2009. Medicare provides insurance coverage for up to two smoking cessation attempts per year and each
attempt may include four counseling sessions.
Approximately
47 million Americans were covered by state Medicaid programs in 2009. Approximately 30% of Medicaid recipients are smokers. Medicaid
programs in 42 states and the District of Columbia cover at least one form of pharmacologic treatment for smoking cessation (Chantix
®
,
Zyban
®
or NRT).
The Affordable Care Act
expands Medicaid coverage to all 50 states
in 2014. The current retail price of the 12-week prescription of Chantix
®
is over $450, which should give us great
latitude in pricing
X-22
. We expect
X-22
to be price competitive with any FDA-approved smoking cessation aid, especially
Chantix
®
, which will not only encourage governmental and private third-party payers to cover
X-22
, but will
encourage smokers to attempt to quit with
X-22
since they will not have to purchase their usual brand of cigarettes over
the 6-week treatment period.
Manufacturing
Although we have arrangements with federally
licensed cigarette manufactures to produce
RED SUN
,
MAGIC
,
SPECTRUM
,
BRAND A
,
BRAND B
and the
clinical trial cigarettes for
X-22
, Goodrich Tobacco has recently applied for its own federal tobacco product manufacturing
license with the
Tobacco Tax and Trade Bureau (TTB) of the U.S. Treasury
Department.
Competition
In the market for FDA-approved smoking
cessation aids, our principal competitors include Pfizer Inc., GlaxoSmithKline 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.
37
Cigarette 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 cigarette taxes, higher absolute
prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
Domestic competitors include Philip Morris USA, Reynolds American Inc., Lorillard Inc., Commonwealth Brands, Inc., Liggett Group
LCC, Vector Tobacco Inc., and Star Scientific Inc. International competitors include Philip Morris International, British American
Tobacco, Japan Tobacco Inc., Imperial Tobacco Group and regional and local tobacco companies; and, in some instances, government-owned
tobacco enterprises such as the China National Tobacco Corporation.
Potential Smoking Cessation Aids
Nicotine Vaccines
Nicotine vaccines are under
development in clinical trials. However, they have not yet achieved the efficacy of other FDA-approved smoking cessation
therapies. Nicotine itself is not recognized by the body as a foreign compound since the molecule is too small. In order to
stimulate the production of antibodies, nicotine must be attached to a carrier to make the vaccine work. Different vaccine
development programs use different carriers. Six companies, Cytos Biotechnology AG, Celtic Pharmaceuticals Holdings, Nabi
Biopharmaceuticals, L.P. and Independent Pharmaceutica AB, Selecta Biosciences Inc., and Pfizer Inc. have or have had
vaccine candidates in clinical trials.
Cytos exclusively licensed its nicotine vaccine candidate to Novartis in 2007 for 35
million Swiss Francs ($30 million) and up to 565 million Swiss Francs ($492 million) in milestone payments and royalties. In
October 2009, it was announced that Cytos' nicotine vaccine candidate failed to show efficacy in a Phase II trial.
GlaxoSmithKline Biologicals SA exclusively
licensed Nabi's nicotine vaccine candidate, NicVAX
®
, in an agreement which was approved by Nabi's shareholders
in March 2010. Together with an upfront non-refundable fee of $40 million paid by GlaxoSmithKline, Nabi is eligible to receive
over $500 million in option fees and milestones, not including potential royalties on global sales. Both of Nabi's Phase
III NicVAX
®
clinical trials subsequently failed in 2010 and 2012.
These vaccine treatments entail six (6)
to seven (7) consecutive monthly injections. Increases in abstinence rates have been reported but only among a minority of trial
subjects with the highest levels of anti-nicotine antibodies. To date, not all subjects develop sufficient antibody levels despite
receiving multiple injections. Even in those who do develop sufficient antibody levels, cravings for cigarettes are not addressed
by this treatment, although the pharmacological reward of nicotine is suppressed. Expectations are that the treatment, if approved,
would need to be repeated every 12 to 18 months to assist in preventing relapse.
Selecta Biosciences initiated Phase I
trials of a nicotine vaccine in 2011, Pfizer initiated Phase I trials of a nicotine vaccine in 2012.
Electronic or E-cigarettes
Although the FDA has not evaluated electronic
cigarettes, or e-cigarettes, for quitting smoking, and we are not aware of any published result of a controlled clinical trial
of e-cigarettes as a smoking cessation aid comparing efficacy to a placebo or approved therapeutic, e-cigarettes are included
here since there have been unconfirmed claims that these products facilitate cessation. E-cigarettes have been the subject of
much controversy for this and various other reasons, including the fact that these products are actually not cigarettes at all
but are battery-operated devices filled with nicotine, flavor and other chemicals. They turn nicotine and other chemicals into
a vapor that is inhaled. E-cigarettes have nicotine kinetics and delivery very similar to nicotine inhalers, a prescription NRT
product already approved by the FDA, which is the reason we believe that using e-cigarettes to quit smoking is not likely to be
any more effective than other nicotine replacement products.
In a September 9, 2010 press release, the
FDA issued warning letters to five e-cigarette distributors for various violations of the Federal Food, Drug, and Cosmetic Act,
including unsubstantiated claims and poor manufacturing practices. The FDA said these e-cigarette companies are illegally marketing
their products as tools to help people quit using cigarettes. The FDA believes e-cigarettes "[m]eet the definition of a
combination drug-device product under the Federal Food, Drug and Cosmetic Act." In a letter to the Electronic Cigarette
Association of the same date, the FDA said the agency intends to regulate electronic cigarettes and related products in a manner
consistent with its mission of protecting the public health. Although the number of adverse event reports for tobacco products
submitted to the FDA is low, according to the Center for Tobacco Products more than half (46 of 84) of all reports submitted from
2009 through the first quarter of 2012 were for e-cigarettes (Chen, Nicotine Tob Res 15:615-6, 2013).
38
The FDA confiscated imports of e-cigarettes
and has been in litigation with importers of these products. A federal appeals court ruled on December 7, 2010 that the FDA can
only regulate electronic cigarettes as tobacco products rather than as a drug-delivery device. The FDA appealed this decision;
however, the U.S. Court of Appeals for the District of Columbia Circuit on January 2011 rejected the FDA's request to have
the court review the December 7, 2010 decision. According to the FDA Public Health Focus web page on e-cigarettes, the Center
for Tobacco Products intends to regulate electronic cigarette products that do not make a therapeutic claim as tobacco products.
The Department of Health and Humans Services regulatory calendar for 2013 states that the FDA intends to issue a proposed rule
deeming products other than cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco that meet the statutory
definition of "tobacco product" to be subject to the Federal Food, Drug, and Cosmetic Act by April 2013. Any e-cigarette
product marketed as a smoking cessation aid would still be regulated as a drug-device product by the Center for Drug Evaluation
and Research, and efficacy and safety must be evaluated in controlled clinical trials.
Government Regulation
Smoking Cessation Aids
Government authorities in the U.S. and
foreign countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution,
sampling, marketing and import and export of pharmaceutical products. FDA approval must be obtained, as has been the case for
decades, before a product can be marketed for quitting smoking or reducing withdrawal symptoms. In addition, as with all FDA-approved
prescription drugs, the FDA must approve the brand name of our
X-22
smoking cessation aid. The FDA approval process for
smoking cessation aids is similar to that required by the FDA for new drug approvals, although the cost to complete clinical trials
for a smoking cessation aid such as
X-22
are generally far less than clinical trials for drugs. The primary endpoint of
the clinical trial for smoking cessation aids is smoking abstinence, which is generally confirmed by inexpensive, noninvasive
biomarker tests. Since potential quitters are already smokers,
X-22
will not expose participants in the clinical trials
to any new compounds, unlike a new chemical entity, such as Chantix
®
.
The process of obtaining governmental approvals
and complying with ongoing regulatory requirements requires the expenditure of substantial time and financial resources. In addition,
statutes, rules, regulations and policies may change and new legislation or regulations may be issued that could delay such approvals.
If we fail to comply with applicable regulatory requirements at any time during the product development process, approval process,
or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA's
refusal to approve pending applications, withdrawals of approvals, clinical holds, warning letters, product recalls, product seizures,
total or partial suspension of our operations, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement
action could have a material adverse effect on us.
The U.S. regulatory scheme for the development
and commercialization of new drugs can be divided into three distinct phases: an investigational phase including both preclinical
and clinical investigations leading up to the submission of a New Drug Application ("NDA"); a period of FDA review
culminating in the approval or refusal to approve the NDA; and the post-marketing period.
Preclinical Phase
The preclinical phase involves the characterization,
product formulation and animal testing necessary to prepare an IND Application for submission to the FDA. The IND must be reviewed
and authorized by the FDA before the drug can be tested in humans. Once a new drug agent has been identified and selected for
further development, preclinical testing is conducted to confirm pharmacological activity, to generate safety data, to evaluate
prototype dosage forms for appropriate release and activity characteristics, and to confirm the integrity and quality of the material
to be used in clinical trials. A bulk supply of the active ingredient to support the necessary dosing in initial clinical trials
must be secured. Data from the preclinical investigations and detailed information on proposed clinical investigations are compiled
in an IND submission and submitted to the FDA before human clinical trials may begin. If the FDA does not formally communicate
an objection to the IND within 30 days, the specific clinical trials outlined in the IND may go forward.
39
Clinical Phase
The clinical phase of drug development
follows an IND submission and involves the activities necessary to demonstrate the safety, tolerability, efficacy, and dosage
of the substance in humans, as well as the ability to produce the substance in accordance with the FDA's cGMP requirements.
Data from these activities are compiled in an NDA requesting approval to market the drug for a given use, or indication. Clinical
trials must be conducted under the supervision of qualified investigators in accordance with good clinical practice, and according
to IND-approved protocols detailing, among other things, the study objectives and the parameters, or endpoints, to be used in
assessing safety and efficacy. Each trial must be reviewed, approved and conducted under the auspices of an independent Institutional
Review Board ("IRB"), and each trial, with limited exceptions, must include all subjects' informed consent.
The clinical evaluation phase typically involves the following sequential process:
Phase I clinical trials are conducted in
a limited number of healthy subjects to determine the drug's safety, tolerability, and biological performance. The total
number of subjects in Phase I clinical trials varies, but is generally in the range of 20 to 80 people (or less in some cases,
such as drugs with significant human experience).
Phase II clinical trials involve administering
the drug to subjects suffering from the target disease or condition to evaluate the drug's potential efficacy and appropriate
dose. The number of subjects in Phase II trials is typically several hundred subjects or less.
Phase III clinical trials are performed
after preliminary evidence suggesting effectiveness has been obtained and safety, tolerability, and appropriate dosing have been
established. Phase III clinical trials are intended to gather additional data needed to evaluate the overall benefit-risk relationship
of the drug and to provide adequate instructions for its use. Phase III trials usually include several hundred to several thousand
subjects.
Throughout the clinical testing phase,
samples of the product made in different batches are tested for stability to establish shelf life constraints. In addition, increasingly
large-scale production protocols and written standard operating procedures must be developed for each aspect of commercial manufacturing
and testing.
The clinical trial phase is both costly
and time-consuming, and may not be completed successfully within any specified time period, if at all. The FDA closely monitors
the progress of each of the three phases of clinical trials that are conducted under an IND and may, at its discretion, reevaluate,
alter, suspend, or terminate the testing at any time for various reasons, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. The FDA can also request additional clinical testing as a condition to product approval.
Additionally, new government requirements may be established that could delay or prevent regulatory approval of our products under
development. Furthermore, institutional review boards, which are independent entities constituted to protect human subjects in
the institutions in which clinical trials are being conducted, have the authority to suspend clinical trials in their respective
institutions at any time for a variety of reasons, including safety issues.
New Drug Application and Review
After the completion of Phase III clinical
trials, the sponsor of the new drug submits an NDA to the FDA requesting approval to market the product for one or more indications.
An NDA is a comprehensive, multi-volume application that includes, among other things, the results of all preclinical and clinical
studies, information about the drug's composition, and the sponsor's plans for producing, packaging, and labeling
the drug. In most cases, the NDA must be accompanied by a substantial user fee. The FDA has 60 days after submission to review
the completeness and organization of the application, and may refuse to accept it for continued review, or refuse to file, if
the application is found deficient. After filing, the FDA reviews an NDA to determine, among other things, whether a product is
safe and effective for its intended use. Drugs that successfully complete NDA review may be marketed in the United States, subject
to all conditions imposed by the FDA.
Prior to granting approval, the FDA generally
conducts an inspection of the facilities, including outsourced facilities that will be involved in the manufacture, production,
packaging, testing and control of the drug for cGMP compliance. The FDA will not approve the application unless cGMP compliance
is satisfactory. If the FDA determines that the marketing application, manufacturing process, or manufacturing facilities are
not acceptable, it will outline the deficiencies in the submission and will often request additional testing or information. Notwithstanding
the submission of any requested additional information, the FDA ultimately may decide that the marketing application does not
satisfy the regulatory criteria for approval and refuse to approve the application by issuing a "not approvable" letter.
The length of the FDA's review can
range from a few months to several years or more. Once an NDA is in effect, significant changes such as the addition of one or
more new indications for use generally require prior approval of a supplemental NDA including additional clinical trials or other
data required to demonstrate that the product as modified remains safe and effective.
40
Fast Track Development
The Food and Drug Administration Modernization
Act of 1997 (the "Modernization Act"), establishes a statutory program for relatively streamlined approval of "Fast
Track" products, which are defined under the Modernization Act as new drugs or biologics intended for the treatment of a
serious or life-threatening condition that demonstrates the potential to address unmet medical needs for this condition. Fast
Track status requires an official designation by the FDA. The Tobacco Control Act provides that products for smoking cessation,
such as
X-22
, be considered for "Fast Track" designation by the FDA.
A product that receives Fast Track designation
is eligible for (i) more frequent meetings with the FDA to discuss the drug's development plan and ensure collection of
appropriate data needed to support drug approval, and (ii) more frequent written correspondence from the FDA about such things
as the design of the proposed clinical trials. A Fast Track product is also eligible for Rolling Review, in which sections of
the NDA can be submitted for review by the FDA before the entire application is completed. A Fast Track product would ordinarily
meet FDA criteria for Priority Review. The FDA goal for reviewing a drug with Priority Review status is six months from the filing
of the NDA.
We submitted a request for Fast Track designation
for
X-22
, and on August 18, 2011, the FDA informed us that it would not grant the designation of
X-22
as a Fast
Track product at that time because we did not demonstrate that X-22 shows potential to address an unmet medical need. Except for
our Phase II-B clinical trial, all smoking cessation studies with very low nicotine ("VLN") cigarettes containing
our proprietary tobacco were independent studies and were not sponsored by 22nd Century Limited, LLC under its own Investigational
New Drug ("IND"). We plan to reapply for Fast Track designation, but not until results of a clinical trial conducted
by us demonstrates an advantage (over currently approved smoking cessation products) in one of the following areas: efficacy,
safety or improvement in some other factor such as compliance (a patient using a product as directed) or convenience. There is
no guarantee that the FDA will grant Fast Track designation to
X-22
.
Post-Approval Phase
Once the FDA has approved a new drug for
marketing, the product becomes available for physicians to prescribe in the U.S. After approval, we must comply with post-approval
requirements, including ongoing compliance with cGMP regulations, delivering periodic reports to the FDA, submitting descriptions
of any adverse reactions reported, and complying with drug sampling and distribution requirements. We are required to maintain
and provide updated safety and efficacy information to the FDA. We must also comply with requirements concerning advertising,
product promotions, and labeling.
Company Sponsored X-22 Clinical Trials
We have met with the FDA regarding the
remaining
X-22
clinical trials and, based on the FDA's guidance, we developed a plan to conduct a small Phase II-B
trial and two larger and concurrent Phase III trials with the same protocols that entail measuring the quitting efficacy of the
X-22
cigarette against a typical cigarette with conventional nicotine content that is visually indistinguishable from
X-22
(the "active control"). Half of the participants smoke
X-22
for six (6) weeks and half of the participants
will smoke the active control for six (6) weeks, with all participants instructed to quit on the last day of the six (6)-week
treatment period.
Smokers who do not smoke over the four
(4)-week period immediately following the conclusion of the six (6)-week treatment period (weeks 7 through 10) are considered
abstinent. The abstinence (quit) rates of the
X-22
group and the active control group are compared for statistical significance.
Our Investigational New Drug Application
for
X-22
, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our
X-22
Phase II-B
clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference in quitting
between
X-22
and the active control, a cigarette containing conventional nicotine levels. In evaluating the results of
this trial, we believe we may have gone too far in reducing the nicotine content of
X-22
, which was less than half the
nicotine content of VLN cigarettes used in various independent smoking-cessation clinical trials that have demonstrated that use
of VLN cigarettes increases smoking quit rates.
41
We continue to believe that VLN cigarettes
are effective as a smoking cessation aid. However, we have suspended sponsoring further
X-22
clinical trials pending the
results of two independent smoking-cessation trials (ClinicalTrials.gov Identifiers NCT01050569 and NCT01250301) utilizing a different
version of our VLN cigarette with a nicotine content similar to those used in previous successful smoking-cessation trials and
higher than that used in our own sponsored Phase II-B trial. Both of these two independent clinical trials were completed in 2012.
The results of these trials will be compared to our Phase II-B trial to determine which variables optimize cessation. After evaluating
the results of those two independent clinical trials, we will request a meeting with the U.S. Food and Drug Administration (FDA)
and may then resume our own sponsored
X-22
clinical trials.
Following FDA approval,
we intend to register
X-22
as a Medicinal Product (pharmacological) for smoking cessation with the European Medicines Agency
("EMA") and other international FDA-equivalent agencies in targeted countries. Regulatory approval for
X-22
as a smoking cessation aid is not required in some international markets since, unlike the FDA, some foreign drug regulatory agencies
do not require approval to market a product as a smoking cessation aid if the product is allowed to be sold for other purposes.
Modified Risk Cigarettes
The Tobacco Control Act, which became law
in June 2009, prohibits the FDA from banning cigarettes outright or mandating that nicotine levels be reduced to zero. However,
among other things, it allows the FDA to require the reduction of nicotine or any other compound in cigarettes. In 2009, the Tobacco
Control Act banned all sales in the United States of cigarettes with flavored tobacco (other than menthol). As of June 2010, all
cigarette companies were required to cease using the terms "low tar," "light" and "ultra light"
in describing cigarettes sold in the United States. We believe this new regulatory environment represents a paradigm shift for
the tobacco industry and will create opportunities for us in marketing
BRAND A
and
BRAND B
and in licensing our
proprietary technology and/or tobaccos to larger competitors.
For the first
time in history,
a U.S. regulatory agency will scientifically evaluate cigarettes that may pose lower health risks as compared
to conventional cigarettes. The Tobacco Control Act establishes procedures for the FDA to regulate the labeling and marketing
of modified risk tobacco products, which includes cigarettes that (i) reduce exposure to tobacco smoke toxins and/or (ii) pose
lower health risks, as compared to conventional cigarettes ("Modified Risk Cigarettes"). The Tobacco Control Act requires
the FDA to issue specific regulations and guidance regarding applications that must be submitted to the FDA for the authorization
to label and market Modified Risk Cigarettes.
We believe that
BRAND A
and
BRAND B
will
qualify as Modified Risk Cigarettes. In addition, the Tobacco Control Act allows the FDA to mandate the use of reduced risk technologies
in conventional tobacco products and cigarettes (e.g., Marlboro
®
) which could create opportunities for us to license
our proprietary technology and/or our tobaccos
to larger competitors
.
In addition to providing our
SPECTRUM
cigarettes to NIDA for researchers, we have been directly supplying our cigarettes to researchers so additional studies can
be conducted to obtain additional information on our products. We expect this information will assist us, along with our own funded
studies, in obtaining the necessary FDA authorizations to market
BRAND A
and
BRAND B
as Modified Risk Cigarettes
and to obtain FDA approval for
X-22
as a prescription smoking cessation aid.
Biomass Products
Biomass products are products such as ethanol
made from the organic material, usually plants densely grown over a given area. We have funded extensive biomass field trials conducted
by North Carolina State University ("NCSU"), and work on feedstock digestibility and bioconversion at the National
Renewable Energy Lab. Bioconversion is the conversion of organic matter into a source of energy, such as ethanol in our own research,
through the action of microorganisms. Tobacco has a number of advantages as a starting point for development of novel bioproduct
crop systems. Because tobacco is a widely cultivated crop, grown in over 100 countries throughout the world, tobacco agronomy is
highly understood. For decades tobacco has been used as a model system for plant biology, and recently the tobacco genome has been
mapped. Tobacco plants rapidly sprout back after each harvest and produce large amounts of leaf and total biomass. Tobacco grown
for cigarettes yields about 3,000 pounds of cured leaf per acre (~20% moisture) per year from 7,500 tobacco plants. In our field
trials in North Carolina, nicotine-free tobacco grown for biomass yields about 100,000 pounds of fresh weight per acre (which equals
10,000 pounds of dry weight) per year with multiple machine harvests from about 80,000 tobacco plants. The results of our biomass
studies have been summarized in a comprehensive feasibility study relating to our nicotine-free tobacco biomass crop (
Verfola
)
to produce a variety of bioproducts. First, protein and other plant fractions are extracted, and then biofuels and other products
are produced from the remaining cellulosic residue.
42
In 2008, we put our biomass development
projects on hold so that our management could focus its attention and resources on our modified risk cigarette business and our
X-22
smoking cessation business. We do not plan to move forward with potential biomass business activities until some period
of time after FDA approval of
X-22
or FDA authorization to market
Brand A
or
Brand B
as a Modified Risk Cigarette.
We currently are not spending any
capital for such potential biomass business activities nor do
we have any current plans to raise any capital for such potential biomass business activities.
Research and Development
Most research and development (R&D)
since our inception have been outsourced to highly qualified groups in their respective fields. Since 1998, 22nd Century has had
multiple R&D agreements with North Carolina State University ("NCSU") resulting in exclusive worldwide licenses
to various patented technologies. We have utilized the model of many public-sector research organizations which entails obtaining
an exclusive option or license agreement to any invention arising out of the funded research. In all cases, we fund and exclusively
control all patent filings as the exclusive licensee. This model of contracting with public-sector researchers has enabled 22nd
Century to control R&D costs while achieving our desired results, including obtaining exclusive intellectual property rights
relating to all of our outsourced R&D.
Other R&D partners with the same arrangement
have included the National Research Council of Canada, Plant Biotechnology Institute in Saskatoon, Canada ("NRC"),
and the Nara Institute of Science and Technology in Nara, Japan ("NAIST"). Our R&D agreements with NCSU, NRC and
NAIST have expired in 2009 and the majority this R&D has involved the biosynthesis of nicotine in plants. We did not have
any outsourced R&D projects during 2010. NAIST assigned all of their worldwide patents and patent applications to us in 2010
that were previously licensed to 22nd Century on an exclusive basis. These patents and patent applications were a result of our
R&D at NAIST. In November 2011, we entered into an R&D agreement with the University of Virginia (UVA) relating to nicotine
biosynthesis in tobacco plants with a total budget of $500,000 for the period from November 2011 through December 2013. In 2012,
we incurred approximately $100,000 of expenses for the R&D agreement at UVA. During the nine months ending September 30, 2012
and the years ended December 31, 2011 and 2010, we incurred research and development expenses of approximately $484,000, $2,098,000
and $364,000, respectively.
Other than the R&D agreement at UVA,
we have no other substantial third-party R&D commitments requiring funding. However, we may carry out a minimal amount of
R&D in 2013, not to exceed $100,000, for additional field trials of plants from our seed lots that resulted from our R&D
at NCSU, NRC, NAIST and UVA. Upon the required funding or appropriate joint venture partner, we expect to carry out additional
clinical trials for X-22 and exposure studies for our modified risk cigarette candidates.
Employees
We currently employ six (6) people, none
of whom are represented by a union, and we consider our employee relations to be good.
Description of Property
Our principal administrative offices are
located in Clarence, New York. We currently lease 3,800 square feet of office space. The lease commenced September 1, 2011 and
expires August 31, 2014. Scheduled rent remaining as of December 31, 2012 is $37,833 for 2013 and $28,000 for 2014.
Legal Proceedings
From time to time we may be involved in
claims arising in the ordinary course of business. To our knowledge, no 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.
43
Management's
Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion highlights
the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital
resources for the periods described. This discussion contains forward-looking statements. Please see "Cautionary Note Regarding
Forward-Looking Statements" and "Risk Factors" earlier in this prospectus. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those
discussed below and elsewhere herein,
including those discussed in the section entitled "Risk Factors."
On January 25, 2011, 22nd Century Limited,
LLC completed a reverse merger transaction (the "Merger") with 22nd Century Group, Inc. 22nd Century Limited, LLC
is a wholly owned subsidiary of 22nd Century Group, Inc. which continues to operate the business of 22nd Century Limited, LLC.
All references to shareholders or common shares include the historical members and membership Units of 22nd Century Limited, LLC
because, in the Merger, such Units were exchanged for common shares on a one-for-one basis and from an accounting standpoint,
they are equivalent. The Merger is being accounted for as a reverse acquisition and a recapitalization; 22nd Century Limited,
LLC is the acquirer for accounting purposes. Consequently, the assets and liabilities and the historical operations that are reflected
in the financial statements prior to the Merger are those of 22nd Century Limited, LLC and are recorded at the historical cost
basis of 22nd Century Limited, LLC, and the consolidated financial statements since completion of the Merger include the assets
and liabilities of 22nd Century Limited, LLC, historical operations of 22nd Century Limited, LLC and operations of 22nd Century
Group, Inc. from the closing date of the Merger.
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.
Overview
22nd Century
Limited, LLC, our wholly-owned subsidiary, is a plant biotechnology company and we believe the global leader in technology that
allows for the level of nicotine and other nicotinic alkaloids
(e.g., nornicotine, anatabine and anabasine)
in tobacco plants to be decreased or increased through genetic engineering and plant breeding. We own or exclusively control 107
issued patents in 78 countries plus
an additional 38 pending patent applications
. Hercules Pharmaceuticals,
LLC and Goodrich Tobacco Company, LLC are subsidiaries of 22nd Century Limited, LLC and are business units for our (i) smoking
cessation product and (ii) premium cigarettes and potential modified risk tobacco products, respectively. We believe that our
proprietary technology will enable us to capture a significant share of the global market for approved smoking cessation aids
and the emerging market for modified risk tobacco products.
The Company is primarily involved in the following activities:
·
The development of its botanical smoking cessation aid,
X-22
;
·
The development of its modified risk tobacco products;
·
The pursuit of necessary regulatory approvals and clearances at the U.S. Food and Drug Administration
    (the "FDA") to market
X-22
as a prescription smoking cessation aid and
BRAND A and BRAND B
as modified
    risk tobacco products in the U.S.;
·
The manufacture, marketing and distribution of
RED SUN
and
MAGIC
proprietary
    cigarettes
in traditional tobacco market channels in the U.S. and for export through Goodrich Tobacco;
·
The international licensing of 22nd Century Limited, LLC's trademarks, brands, proprietary
    tobaccos, and technology; and
·
The production of
SPECTRUM
research cigarettes for the National Institute on Drug
    Abuse ("NIDA").
We have operated at a loss since 2006 when
we increased our research and development expenditures. We realized revenue from our research cigarette program of $15,683 in
the first nine months of 2012, $788,601 in the year ended December 31, 2011 and $49,784 in 2010. We are in the process of transitioning
from solely developing proprietary technology and tobacco to developing and commercializing our own products.
Our prospects depend on our ability to
generate and sustain revenues from sales and/or licensing of our
RED SUN
and
MAGIC
cigarettes, our
X-22
smoking
cessation aid, our potential modified risk tobacco products such as
BRAND A
and
BRAND B
and our proprietary tobacco
and technology. Our ability to generate meaningful revenue in the United States from
X-22
depends on FDA approval and our
ability to generate meaningful revenue from our potential modified risk tobacco products in the United States depends on obtaining
FDA authorization to market these products as modified risk. If these products are approved and authorized by the FDA, we must
still meet the challenges of successful marketing and distribution and consumer acceptance.
44
The Company
expects to file applications in 2013 with the FDA for two types of modified risk cigarettes in accordance with the
FDA's
issued
Modified Risk Tobacco Product Applications Draft Guidance
released on March 30, 2012
.
This provides the framework for applicants to submit data for modified risk product candidates. Goodrich Tobacco Company, 22nd
Century's subsidiary, has developed two types of potential modified risk tobacco cigarettes. The first proprietary cigarette,
referred to as
BRAND A
, is a very low nicotine (VLN) cigarette containing approximately 95 percent less nicotine than the
leading U.S. cigarette brands. 22nd Century's recent Phase II-B clinical trial and studies by independent researchers have
demonstrated that smoke exposure (and cigarettes per day) is significantly reduced with VLN cigarettes. The second proprietary
cigarette, referred to as
BRAND B
, is a low-tar cigarette with a relatively high nicotine content, effectively the world's
lowest tar-to-nicotine ratio cigarette. Unlike low-tar/low-nicotine brands currently on the market (previously labeled "light"
or "ultra- light" before these descriptors were banned in the U.S. by the Tobacco Control Act in 2010), the nicotine
yield of
BRAND B
is not reduced. Studies have demonstrated that compensatory smoking (e.g., more and/or larger puffs per
cigarette) of low-tar research cigarettes, similar to
BRAND B
, is greatly curtailed.
Our Investigational New Drug Application
for
X-22
, a kit of very low nicotine (VLN) cigarettes, was cleared by the FDA in July 2011. Our
X-22
Phase II-B
clinical trial was completed in the first quarter of 2012 and did not demonstrate a statistically significant difference in quitting
between
X-22
and the active control, a cigarette containing conventional nicotine levels. In evaluating the results of
this trial, we believe we may have gone too far in reducing the nicotine content of
X-22
, which was less than half the
nicotine content of VLN cigarettes used in various independent clinical trials that were successful. We continue to believe that
VLN cigarettes are effective as a smoking cessation aid. However, we have suspended sponsoring further
X-22
clinical trials
pending the results of two independent smoking-cessation Phase II trials utilizing a different version of our VLN cigarette with
a nicotine content similar to those used in previous successful smoking-cessation trials, and higher than that used in our own
sponsored Phase II-B trial. Both of these trials have concluded and will be compared to our Phase II-B trial to determine which
variables optimize cessation. At that time we may resume our own sponsored
X-22
clinical trials.
The National Institute on Drug Abuse ("NIDA"),
a component of the National Institutes of Health ("NIH"), provides the scientific community with controlled and uncontrolled
research chemicals and drug compounds in its Drug Supply Program. In 2009, NIDA included an option to develop and produce research
cigarettes with various levels of nicotine (from very low to high), or Research Cigarette Option, in its request for proposals
for a five-year contract for Preparation and Distribution of Research and Drug Products. We have agreed, as a subcontractor to
RTI International ("RTI") in RTI's contract with NIDA for the Research Cigarette Option, to supply modified
nicotine cigarettes to NIDA. In August 2010, we met with officials from NIDA, FDA, RTI, the National Cancer Institute and the
Centers for Disease Control and Prevention to finalize certain aspects of the design of these research cigarettes. These government
research cigarettes are distributed under the Company's mark
SPECTRUM
. The Company has delivered approximately 9
million
SPECTRUM
research cigarettes during the year ended December 31, 2011 and has delivered an additional 2.7 million
SPECTRUM
research cigarettes in July 2012.
In March 2011, our subsidiary, Goodrich
Tobacco introduced two of our products,
RED SUN
and
MAGIC
cigarettes, into the U.S. market. Goodrich Tobacco intends
to focus marketing efforts on tobacconists, smoke shops and tobacco outlets. Goodrich Tobacco has recently applied for its own
federal tobacco product manufacturing license with the Tobacco Tax and Trade Bureau (TTB) of the U.S. Treasury Department. We
are also in discussions with the National Association of Attorneys General to become a subsequent participating manufacturer (SPM)
to the "Master Settlement Agreement" or MSA, a settlement between the states and the tobacco industry. Although becoming
an SPM is not necessary for us selling our brands, it will facilitate distribution of our brands in the U.S. Upon being licensed
by TTB we expect to become a subsequent participating manufacturer to the MSA and start our own production of
RED SUN
and
MAGIC
and
SPECTRUM
as early as the second quarter of 2013.
Nine Months Ended September 30, 2012 Compared to Nine Months
Ended September 30, 2011
Revenue
.  We realized
revenue of $15,683 in the nine months ended September 30, 2012 as compared to revenue of $801,636 in the nine months ended September
30, 2011. The 2011 period reflected the initial phases and stocking order for research cigarette under our subcontract agreement
with RTI and the 2012 period reflected a modest subsequent order.
45
Other income.
In the nine months
ended September 30, 2011, we recognized other income of $223,540 from a therapeutic grant award we received in fourth quarter
of 2010. The revenue from this grant was completely recognized in 2011.
Costs of goods sold
.  In
the nine months ended September 30, 2012, costs of goods sold was $60,852 which exceeded revenue by 288% since we provided RTI
with
SPECTRUM
research cigarettes without charge. In the nine months ended September 30, 2011, costs of goods sold was
$224,146 or 28% of revenue.
Research and development expense
.  Research
and development (R&D) expense was $484,316 in the nine months ended September 30, 2012, a decrease of $1,024,734, or 68%,
from $1,509,050 in the nine months ended September 30, 2011. This decrease was a result of suspending, early in the first quarter
of 2012, FDA activities related to
X-22.
In the first nine months of 2011 we executed the planning and initial stages of
our Phase II-B clinical trial and filed our IND with the FDA for
X-22
.
General and administrative expense
.  
General and administrative expense was $1,732,162 in the nine months ended September 30, 2012, an increase of $350,682, or 25%,
from $1,381,480 in nine months ended September 30, 2011. The increase was mainly due to the $354,908 increase in equity based
compensation costs which were $631,366 in the first nine months of 2012 as compared to $276,458 in the first nine months of 2011.
This increase was partially offset by a reduction in professional fees.
Sales and marketing
costs
.  Sales and marketing costs were $46,045 in the nine months ended September 30, 2012, a decrease of
$221,765, or 83%, from $267,810 in nine months ended September 30, 2011. The costs in 2011 related to the domestic market
introduction of
RED SUN
and
MAGIC
and included expenses related to product testing, product and packaging
design, product branding, trade samples, trade shows and advertising. Early in 2012, we curtailed our domestic sales and
marketing activity of these brands in order to focus on reaching an agreement to have these products produced by a
participating manufacturer of the "Master Settlement Agreement," a settlement between the states and the tobacco
industry. As a result, sales and marketing costs in 2012 are reduced.
Amortization and depreciation expense.
Amortization and depreciation expense relates almost entirely to capitalized patent and trademark costs.  Amortization
and depreciation expense increased 10.5% in the nine months ended September 30, 2012 to $146,374, up from $132,432 in the nine
months ended September 30, 2011. This increase of $13,942 is mainly due to additional investment in patents and trademarks.
Warrant liability change – net
.
In connection with the May 2012 private placement, we issued warrants which were accounted for as derivatives and upon issuance
a liability at the estimated fair value was recorded. At the date of issuance of these warrants the value was estimated to be
$1,841,000, which exceeded the total consideration received in the offering by $814,500 resulting in an immediate charge to expense
for this amount. This charge offset the gain of $1,981,916 resulting from the decrease in the estimated fair value of these warrants
and other previously issued warrants during the nine month period ending September 30, 2012 so that the net gain for this period
was $1,167,416. The market adjustment recorded in the nine month period ended September 30, 2011 was $337,500. The warrant liability
is sensitive to a number of factors including the price of our common stock on the valuation date.
Interest expense and amortization of
debt discount and expense
.  Interest expense and amortization of debt discount and debt issuance costs increased
in the nine months ended September 30, 2012 to $1,144,721 from $53,116 in the nine months ended September 30, 2011. This increase
of $1,091,605 or 2,055% was a result of the amortization of debt discount and debt issuance costs related to convertible notes
issued on December 14, 2011 and August 9, 2012, which also includes charges to write off unamortized debt discounts and the value
of warrants in excess of the note payable converted, totaling approximately $97,000 related to the partial conversions of the
December 14, 2011 convertible notes.
Net loss
.  We had a net
loss of $2,431,371 in the nine months ended September 30, 2012 as compared to a net loss of $2,205,358 in the nine months ended
September 30, 2011. This increase of $226,013 was a result of the substantial reduction in revenue and other income and the $1,091,605
increase in amortization of debt discount and expense, partially offset by the $1,167,416 warrant liability gain and the net decrease
in operating expenses mainly due to the sharp reduction in research and development expense.
46
Year Ended December 31, 2011 Compared to Year Ended December
31, 2010
Revenue.
In the year
ended December 31, 2011, we realized revenue of $788,601, mainly from our research cigarette program, as compared to revenue of
$49,784 in year ended December 31, 2010. As of December 31, 2011 we had no outstanding backlog of orders for our products and
through the first quarter of 2012 we did not receive an order for any of our products.
Other income.
In the year ended
December 31, 2011, we recognized other income of $223,540 from a therapeutic grant award we received in fourth quarter of 2010.
Costs of goods sold
.  In
the year ended December 31, 2011, costs of goods sold were $418,171 or 53% of revenue. Costs of goods sold in the year ended December
31, 2011 include inventories written off in the fourth quarter of 2011 of $178,670 because of changes in the Company's plans
that rendered these costs not recoverable. In the year ended December 31, 2010, costs of goods sold were $27,964 or 56% of revenue.
Research and development expense
.  Research
and development expense was $2,097,980 in the year ended December 31, 2011, an increase of $1,734,199, or 477%, from $363,781
in the year ended December 31, 2010. Approximately $1.6 million was for expenditures related to the filing of our Investigational
New Drug Application and our Phase II-B clinical trials for
X-22
. We initiated this effort late in the fourth quarter of
2010 so there were minimal costs related to Phase II-B activities in 2010. The balance of the increase in research and development
expense in 2011 as compared to 2010 consisted of patent expenses, including maintenance fees related to patent renewals, employee
compensation costs and travel expense.
General and administrative expense
.  
General and administrative expense was $1,785,543 in the year ended December 31, 2011, an increase of $1,194,717, or 202%, from
$590,826 in the year ended December 31, 2010. Approximately $570,000 of the increase was for compensation costs due to increased
administrative headcount, awards under our 2010 Equity Incentive Plan and outside directors' fees. The balance of the year-over-year
increase was in various other expense categories such as investor relations consulting services, press release fees and stock
transfer fees (approximately $198,000 increase) legal and SEC fees (approximately $286,000 increase), accounting and audit fees
(approximately $52,000 increase), directors' and officers' liability insurance (approximately $38,000 increase) and
travel (approximately $35,000 increase).
Sales and marketing costs
.  Sales
and marketing costs were $286,033 in the year ended December 31, 2011; we had no costs categorized as such in the year ended December
31, 2010. The costs in 2011 related to product testing, product and packaging, and design, product branding, trade samples, trade
shows and advertising.
Amortization and depreciation expense.
Amortization and depreciation expense relates almost entirely to capitalized patent and trademark costs.  Amortization
and depreciation expense increased 9.4% in the year ended December 31, 2011 to $179,953, up from $164,456 in the year ended December
31, 2010. This increase of $15,497 is mainly due to our additional investment in patents and trademarks in 2010 of $147,912 and
in 2011 of $98,191.
Gain warrant liability – derivative
.
In connection with the January 25, 2011 private placement we issued warrants which were accounted for as derivatives; a liability
at the estimated fair value was recorded and contributed capital was reduced. The gain of $2,511,750 included in the year ended
December 31, 2011 represents the decrease in the estimated fair value of the warrants since January 25, 2011.
Interest expense and debt expense
.  Interest
expense and debt expense, which include interest amortization of debt discount and debt issuance costs, decreased in the year
ended December 31, 2011 to $103,998, from $326,404 in the year ended December 31, 2010. This decrease of $222,406 or 68% was mainly
a result of reduced borrowings during 2011 compared 2010. In January 2011, a substantial portion of our outstanding interest bearing
debt was repaid or converted into shares of our common stock which was the cause of the reduced interest and debt expense. This
was partially offset by interest on long term obligations in the amount of $587,000 which were entered into at the end of the
first quarter, $215,000 in short term obligations borrowed early in the third and fourth quarters and the convertible notes issued
on December 14, 2011.
47
Net loss
.  We had a net
loss in the year ended December 31, 2011 of $1,347,787 as compared to a net loss of $1,423,647 in the year ended December 31,
2010. The decrease in the net loss of $75,860, or 5.3%, was mainly a result of increased revenue of approximately $1 million and
the unrealized gain related to warrants and reduced interest and debt expense (totaling $2.7 million) nearly offset by increases
in operating expenses (totaling $3.6 million) including clinical trial expenses, sales and marketing costs and increased compensation
costs and other administrative expenses in the year ended December 31, 2011, as compared to the year ended December 31, 2010.
Liquidity and Capital Resources
Summary of Balances and Recent Sources and Uses
As of September 30, 2012, we had negative
working capital of approximately $3.1 million compared to negative working capital of approximately $1.9 million at December 31,
2011. The $1.2 million increase in our negative working capital position was mainly a result of the expenditure of nearly all
our cash during the period including the proceeds of the May 2012 private placement and the August 9, 2012 convertible notes to
fund operations and acquire inventory.
Cash demands on operations
Since January 1, 2010 we operated at a
loss and operating activities consumed more than $5.7 million in cash. Cash on hand at September 30, 2012 of $5,941 was insufficient
to fund operations and meet our obligations as they come due. As of January 22, 2013, we had cash on hand of approximately $660,000,
which should be sufficient to fund operations for approximately 5 months.
We will need to raise funds through the
issuance of debt or equity securities or through licensing our technology during the next twelve months in order to continue operations.
Failure to raise sufficient funds would significantly increase the risk that we would be unable to continue operations. Financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact
our plans to commercialize our products, our ability to continue as a going concern and our financial condition and results of
operations. Additional equity financing will be dilutive to shareholders of our common stock. To the extent that we raise additional
funds through collaboration and licensing arrangements, it will be necessary in certain countries to relinquish some rights to
our technologies or our potential products or grant licenses on terms that are not favorable to us.
Net Cash used in Operating Activities.
In the first nine months of 2012, $1,303,248
of cash was used in operating activities compared to $2,473,746 of cash used in operating activities in the first nine months
of 2011. This reduction in use of cash in operations of $1,170,498 was partially due to the reduction in the cash portion of the
net loss in the first nine months 2012 as compared to the first nine months of 2011 of approximately $624,000. The balance of
the decrease in use of cash in operations was a result of approximately $546,000 million less cash used for working capital components
related to operations.
In the year ended December 31, 2011, $3,449,430
of cash was used in operating activities compared to $909,939 of cash used in operating activities in the year ended December
31, 2010. This increased use of cash of $2,539,491 was mainly due to the increase of $2,269,587 in the cash portion of the net
loss in the year ended December 31, 2011 as compared to the year ended December 31, 2010. The balance of the increase was a result
of the net change in working capital components related to operations.
Net Cash used in Investing Activities.
In the first nine months of 2012, we did
not use any cash related to third party costs incurred for patents and trademarks as compared to $570,641 used in the first nine
months of 2011. This decrease was mainly attributable to our payment in the first quarter of 2011 of approximately $500,000 towards
outstanding patent costs charges that were deferred in prior periods.
In the year ended December 31, 2011, we
used $607,297 of cash related to third party costs incurred for patents and trademarks and the acquisition of office furniture
and fixtures as compared to $108,116 used in the year ended December 31, 2010. This increase was attributable to our payment in
2011 of $500,000 towards outstanding patent costs charges that were deferred in prior periods.
48
Net Cash From Financing Activities
.
During the first nine months of 2012, we
generated approximately $1,057,000 from our financing activities mainly as a result of the $786,500 proceeds from the May 2012
private placement, the $210,000 proceeds from the August 9, 2012 convertible notes, $58,000 in advances from officers and $56,000
in proceeds from the issuance of short term secured notes partially offset by payments on borrowings of $35,000, deferred private
placement costs of $10,000 and net advances to a related party of approximately $8,000. During the first nine months of 2011,
we generated net cash of approximately $3,058,000 from our financing activities; we received approximately $3,294,000 in net cash
proceeds from the Private Placement that closed on January 25, 2011 partially offset by the payment of approximately $458,000
in shareholder notes and approximately $21,000 in net advances to officers and a related party.
During the year ended December 31, 2011,
we generated approximately $4.3 million from our financing activities primarily through the issuance of shares of our common stock
and warrants to purchase our common stock in the January 25, 2011 private placement as well as notes issued to shareholders and
the issuance of convertible notes on December 14, 2011. These issuances resulted in net proceeds of approximately $4.8 million
which were partially offset by payments on note obligations to shareholders and another lender, debt issuance costs, net payments
to a related party and payment of amounts due from officers. A portion of the net proceeds from our financing activities were
directed to North Carolina State University ("NCSU"). During the year ended December 31, 2011 we paid NCSU approximately
$745,000.
The Company will need additional capital
to continue operations and make payments on obligations that are and become due in 2013. Our expected capital requirements over
the next 12 months without any extraordinary expenses such as exposure studies or clinical trials are approximately $1 million.
Failure to raise sufficient funds would significantly increase the risk that we would be unable to continue operations. Financing
may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact
our plans to commercialize our products, our ability to continue as a going concern and our financial condition and results of
operations.
Critical Accounting Policies and Estimates
Accounting principles generally accepted
in the United States of America, or U.S. GAAP, require estimates and assumptions to be made that affect the reported amounts in
our consolidated financial statements and accompanying notes. Some of these estimates require difficult, subjective and/or complex
judgments about matters that are inherently uncertain and, as a result, actual results could differ from those estimates. Due
to the estimation processes involved, the following summarized accounting policies and their application are considered to be
critical to understanding our business operations, financial condition and results of operations.
Revenue Recognition
We recognize revenue at the point the product
is shipped to a customer and title has transferred. Revenue from the sale of our products is recognized net of cash discounts,
sales returns and allowances. Cigarette federal excise taxes are included in net sales and accounts receivable billed to customers,
except on sales of
SPECTRUM
and exported cigarettes in which such taxes do not apply.
We were chosen to be a subcontractor for
a 5-year government contract between RTI International ("RTI") and the National Institute on Drug Abuse ("NIDA")
to supply NIDA research cigarettes which includes four development stages. The company has completed the four developmental stages
and delivered approximately 9 million cigarettes during the year ended December 31, 2011 and recognized the related revenue. These
government research cigarettes are distributed under the mark
SPECTRUM
. The Company has delivered an additional 2.7 million
SPECTRUM
research cigarettes in July 2012. Future revenue under this sub-contract arrangement is expected to be related
to the delivery of
SPECTRUM
and will be recognized at the point the product is shipped and title has transferred.
49
Impairment of Long-Lived Assets
We review the carrying value of amortizing
long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may
no longer be appropriate. We also assess recoverability of the asset by estimating the future undiscounted net cash flows expected
to result from the asset, including eventual disposition. If the estimated future undiscounted net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and
its fair value. Non-amortizing intangibles (trademarks) are reviewed annually for impairment. We have not recognized any impairment
losses during the two years ended December 31, 2011 and 2010.
Amortization Estimates of Intangible
Assets
We generally determine amortization based
on the estimated useful lives of the assets and record amortization expense on a straight-line method over such lives. The remaining
life of the patent is generally used to determine the estimated useful life of the related patent costs.
Valuation of our Equity Securities
We have issued shares of our common stock
to satisfy obligations to vendors or employees that were due in cash. These shares have been valued based on the cash value of
the obligation satisfied by their issuance. We have also issued warrants to purchase shares of our stock in connection with the
issuance of debt obligations. These warrants have been valued based on the value ascribed to the underlying shares issued in cash
transactions, in settlement of cash obligations or, since the Merger on January 25, 2011, the closing price of our common stock.
Convertible Debt
When the convertible feature of the conventional
convertible debt is issued, the embedded conversion feature is evaluated to determine if bifurcation and derivative treatment
is required whether there is a beneficial conversion feature. When the convertible debt provides for an effective rate of conversion
that is below market value, this feature is characterized as a beneficial conversion feature (BCF"). Prior to the determination
of the BCF, the proceeds from the debt instrument were first allocated between the convertible debt and any embedded or detachable
free standing instruments that are included, such as common stock warrants. We record a BCF as a debt discount pursuant to FASB
ASC Topic 470-20. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. We amortize
the discount to interest expense over the life of the debt.
For the convertible notes issued
December 14, 2011, we recorded the OID and the BCF related to these convertible notes as a debt discount and recorded the
convertible notes net of the discount related to both the OID and the BCF. For the convertible notes issued August 9, 2012,
we recorded the OID and the warrant liability related to these convertible notes as a debt discount and recorded the
convertible notes net of the discount related to both the OID and the warrant liability debt discount is amortized to
interest expense over the life of the debt. In the case of any conversion prior to the maturity date there will be an
unamortized amount of debt discount that relates to such conversion. The prorata amount of unamortized discount at the time
of conversion will be charged to interest expense as accelerated amortization of the discount. The fair value of warrants
issued at the time of conversion is recorded as a reduction of the amount applied to the common stock issued in the
conversion and to the extent that the fair value of warrants exceeds the carrying value of the debt a charge to interest
expense results for such excess amount.
Income taxes
Prior to the closing of the Merger, 22nd
Century Limited, LLC was organized as a limited liability company and treated as a partnership for income tax purposes; accordingly,
prior to the Merger, 22nd Century Limited, LLC was not directly responsible for income taxes (income and losses passed through
to its LLC members) and did not have to account for them. Following the Merger on January 25, 2011, we are subject to federal
and state income taxes. Accordingly, since the Merger date we are required to recognize deferred tax assets and liabilities for
any differences in basis in assets and liabilities between tax and GAAP reporting. The corresponding asset that resulted has been
fully offset by a valuation allowance. The Company incurred a net operating loss from the closing of the Merger to December 31,
2011 and, accordingly, has made no provision for current income taxes. The income tax asset arising from this net operating loss
has been fully reserved because it is not probable that it will be realized before its expiration.
50
Derivative Financial Instruments
The warrants to purchase shares of our
stock that were issued in connection with the Merger are treated as derivative instruments for accounting purposes. Accordingly,
upon issuance, these instruments are reported as liabilities rather than equity. We do not use derivative instruments to hedge
exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments to determine if such instruments
are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted
for as liabilities, the derivative instrument is initially recorded at its fair market value and then is revalued at each reporting
date, with changes in fair value reported in the consolidated statement of operations. We use a lattice model approach which for
valuing our outstanding warrants classified as derivative instruments which includes probability weighted estimates of future
events including volatility of our common stock. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the balance sheet date.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
as defined by Item 303(a)(4) of Regulation S-K.
51
Directors
and Executive Officers
Set forth below is information regarding
our directors, executive officers and key personnel.
Name
Age
Position
Joseph Pandolfino
44
Chief Executive Officer and Director
Henry Sicignano, III
45
Chief Financial Officer, President, Secretary and Director
Michael R. Moynihan, Ph.D.
60
Vice President of R&D
Joseph Alexander Dunn, Ph.D.
59
Director
James W. Cornell
56
Director
Our executive officers are appointed by
the board of directors and serve at the discretion of the board. There are no family relationships among our directors and executive
officers.
Our bylaws provide
that the number of members of our Board of Directors shall not be less than one nor more than thirteen. The number of authorized
directors as of the date of this prospectus is four. Directors hold office for a one year term expiring at the annual meeting in
2013 (or until their respective successors are elected and qualified, or until their earlier death, resignation or removal). The
experience, qualifications, attributes and skills that led to the conclusion that the persons should serve as a Director of our
Company are described below in each Director nominee's biography.
Joseph Pandolfino, MBA, Chief Executive
Officer and Director
Mr. Pandolfino, age 44, has served as our
Chief Executive Officer and as a Director since the closing of the merger in January 2011 between the Company and 22nd Century
Limited, LLC. He founded 22nd Century Limited, LLC in 1998 and has over 15 years experience in all aspects of the tobacco industry,
including 12 years with genetically-engineered tobacco. He served as President of 22nd Century Limited, LLC from its inception
until April 2010 and as Chief Executive Officer of 22nd Century Limited, LLC since April 2010. Mr. Pandolfino oversees our operations,
strategy and product development. Mr. Pandolfino holds a B.S. Degree in Business Administration from Medaille College and an M.B.A.
Degree from the State University of New York at Buffalo. Mr. Pandolfino's significant experience in all aspect of the tobacco
industry as well as his experience leading 22nd Century Limited, LLC led to our conclusion that he should serve as a director of
our Company.
Henry Sicignano, III, MBA, Chief Financial Officer, President
and Director
Henry Sicignano, III, MBA.
Mr.
Sicignano, age 45, has served as our President and Secretary since the closing of the merger in January 2011 between the Company
and 22nd Century Limited, LLC, as a Director since March 4, 2011, and as interim Chief Financial Officer since July 6, 2012.
From August 2005 to April 2009, Mr. Sicignano served as a General Manager and as the Director of Corporate Marketing for NOCO Energy
Corp., a petroleum products company; and from March 2003 to July 2005, as Vice President of Kittinger Furniture Company, Inc.,
a fine furniture manufacturer. From February 1997 through July 2002, he served as Vice President and Marketing Director of Santa
Fe Natural Tobacco Company, a specialty tobacco company, prior to the sale of that company to R.J. Reynolds Tobacco Company in
2002. Mr. Sicignano holds a B.A. Degree in Government from Harvard College and an M.B.A. Degree from Harvard University. Mr. Sicignano's
extensive experience in management, including in the tobacco industry, led to our conclusion that he should serve as a director
of our Company.
Michael R. Moynihan, Ph.D., Vice President of R&D
Dr. Moynihan, age 60,
has served as our Vice President of R&D since March 2011 and served as Vice President
of
R&D
for
22nd Century Limited, LLC since January, 2007.
He has also been a consultant for
22nd
Century Limited, LLC
since 1999. From 2001 to 2006 he served as Director of Biotechnology Development at Fundacion Chile
and from 1995 to 2000 as Senior Project Director at InterLink Biotechnologies LLC. Dr. Moynihan holds a Bachelor of Science Degree
in Biology from Brown University and a Master's Degree and Ph.D. in Biology from Harvard University. He previously served
as a Visiting Research Fellow at the Institute for Molecular and Cellular Biology, Osaka University, Japan; a Postdoctoral Associate
in the Section of Plant Biology, Cornell University; and a Postdoctoral Associate at the Center for Agricultural Molecular Biology,
Rutgers University.
52
Joseph Alexander Dunn, Ph.D., Director
Dr. Dunn, age 59, has served as a Director
since March 4, 2011. Dr. Dunn is currently Associate Dean for Research and Professor of Pharmaceutical Sciences at D'Youville
College of Pharmacy in Buffalo, New York and has served in this capacity since April 1, 2010. Dr. Dunn has also served as Chief
Executive Officer of the National Center for Food and Agricultural Policy in Washington, D.C. since November 1, 2009 and as Chief
Executive Officer and Director of Research at OmniPharm Research International, Inc., a drug company, and affiliated entities,
Therex Technologies Inc., a drug company, and Therex LLC, a drug company, each located in Buffalo, New York since January, 1994.
From May 1, 2008, until January 20, 2009, Dr. Dunn served as Deputy Under Secretary and from August 1, 2006, until April 30, 2008
Dr. Dunn served as Senior Scientific Advisor at the United States Department of Agriculture, Research, Education and Economics
Mission Area in Washington, D.C. From December 1, 2006, until April 30, 2008 Dr. Dunn served as Executive Director of the United
States Department of Agriculture NAREEE Advisory Board. From July, 1998 until July 1, 2006, Dr. Dunn served as Research Associate
Professor in the Department of Oral Biology, School of Dental Medicine, at the State University of New York at Buffalo. Since June
1, 2010, Dr. Dunn has served as a member of the Board of Directors of Brothers of Mercy, Inc., a not-for-profit nursing and rehabilitation
concern. Dr. Dunn holds a B.S. Degree in Medical Chemistry and a Ph.D. Degree in Pharmacology, both from the State University of
New York at Buffalo School of Pharmacy. Dr. Dunn also served as a Postdoctoral Fellow in the Department of Pharmacology at Harvard
Medical School and as a Staff Fellow at the National Institutes of Health, National Cancer Institute Laboratory of Cellular Carcinogenesis
and Tumor Promotion. Dr. Dunn's extensive scientific and regulatory background led to our conclusion that he should serve
as a director of our Company.
James W. Cornell, Director
Mr. Cornell, age 56,
has served as a Director since March 4, 2011. Mr. Cornell is currently the President and Chief Executive Officer of Praxiis, LLC,
an enterprise that provides support for clients in organizational change, leadership development and transactional advisory services.
He has served in this capacity since October, 1988. Mr. Cornell is also the current Manager of Larkin Center Management, LLC, a
real estate development company, and has served in this capacity since October 2010. From September 2006 until September 2010,
Mr. Cornell served as Managing Director of New York New Jersey Rail, LLC, which is part of the national transportation rail system
and moves rail freight by rail barge across New York City Harbor, and he now continues to serve as principal business advisor to
that firm. From March 2005 until September 2008, Mr. Cornell served as the Chairman of the Board of Directors of New York Regional
Rail Corp., which operates as a short-haul regional trucking company. From April 2006, until February 2007, Mr. Cornell served
as Chief Restructuring Officer of Regus Industries, a waste management firm, and from January 2001 until November 2004, he served
as Special Advisor to Pinkerton Government Services, Inc. and Securitas Nuclear and Government Services Unit, security services
providers to the energy industry and government. Mr. Cornell holds a B.S. Degree in Business, Management, and Economics and an
M.B.A. Degree, both from the State University of New York, Empire College. Mr. Cornell's extensive business management, strategy,
and leadership experience led to our conclusion that he should serve as a director of our Company.
53
Corporate
Governance
Board Leadership Structure
As of the date hereof,
the Board has not appointed a chairman or a lead independent director. At this time, the Board believes that this structure is
appropriate for our Company because we have very few employees and are currently in the development phase for our products. In
the future, we expect that the Board will appoint a chairman and, if appropriate, a lead independent director.
Board Role in Risk Oversight
Risk is inherent with
every business and we face a number of risks. Management is responsible for the day-to-day management of risks we face, while our
Board of Directors is responsible for overseeing our management and operations, including overseeing its risk assessment and risk
management functions.
Compensation Policies and Practices
and Risk Management
The Board considers,
in establishing and reviewing our compensation philosophy and programs, whether such programs encourage unnecessary or excessive
risk taking. Base salaries are fixed in amount and consequently the Board does not see them as encouraging risk taking. We also
provide our executive officers and other senior managers long-term equity awards to help further align their interests with our
interests and those of our stockholders. The Board believes that these awards do not encourage unnecessary or excessive risk taking
since the awards are generally provided at the beginning of an employee's tenure or at various intervals to award achievements
or provide additional incentive to build long-term value and are subject to vesting schedules to help ensure that executives and
senior managers have significant value tied to our long-term corporate success and performance.
The Board believes
that our compensation philosophy and programs encourage employees to strive to achieve both short- and long-term goals that are
important to our success and building stockholder value, without promoting unnecessary or excessive risk taking. The Board has
concluded that our compensation philosophy and practices are not reasonably likely to have a material adverse effect on us.
Code of Ethics
In 2006, we adopted
a Code of Ethics that applies to all of our employees. A copy of our Code of Ethics will be provided to any person requesting same
without charge. To request a copy of our Code of Ethics, please make a written request to our Chief Executive Officer c/o 22nd
Century Group, Inc., 9530 Main Street, Clarence, New York 14031.
Number of Meetings of the Board of Directors
The Board held four
meetings during 2012. Directors are expected to attend Board meetings and to spend time needed to meet as frequently as necessary
to properly discharge their responsibilities. Each director attended at least 75% of the aggregate number of meetings of the Board
during 2012.
Attendance at Annual Meetings of the
Stockholders
The Company has no
policy requiring Directors and Director Nominees to attend its annual meeting of stockholders; however, all Directors and Director
Nominees are encouraged to attend. All of our directors attended our 2012 annual meeting.
Director Independence
Joseph Alexander Dunn,
Ph.D. and James W. Cornell each qualify as "independent" applying the NASDAQ Global Market definition of independent.
54
Stockholder Communications
Stockholders may send
communications to the Company's directors as a group or individually, by writing to those individuals or the group: c/o the Chief
Executive Officer c/o 22nd Century Group, Inc., 9530 Main Street, Clarence, NY 14031. The Chief Executive Officer will review all
correspondence received and will forward all correspondence that is relevant to the duties and responsibilities of the Board or
the business of the Company to the intended director(s). Examples of inappropriate communication include business solicitations,
advertising and communication that is frivolous in nature, relates to routine business matters (such as product inquiries, complaints
or suggestions), or raises grievances that are personal to the person submitting the communication. Upon request, any director
may review communication that is not forwarded to the directors pursuant to this policy.
Committees of the Board of Directors
As of the date hereof,
the Board has not established any committees of the Board. At this time, the Board believes that this structure is appropriate
for our Company because we have very few employees and are currently in the development phase for our products. In the future,
we expect that the Board will establish Board committees.
Nominating Committee
At of the date hereof,
the Company does not have a nominating committee. The Company intends to adopt a nominating committee in the future.
As of the date hereof,
we do not have any defined policy or procedure requirements for stockholders to submit recommendations or nominations for directors.
The Company does not currently have any specific or minimum criteria for the election of nominees to the Board, and does not have
any specific process or procedure for evaluating such nominees. Our current Board assesses all candidates, whether submitted by
management or stockholders, and makes recommendations for election or appointment.
Audit Committee
As of the date hereof,
the role of audit committee is performed by the Board.
In this capacity, the
Board is responsible for: (i) selection and oversight of our independent accountants; (ii) establishing procedures for the receipt,
retention and treatment of complaints regarding accounting, internal controls and auditing matters; (iii) establishing procedures
for the confidential, anonymous submission by our employees of concerns regarding accounting and auditing matters; (iv) engaging
outside advisors; and (v) funding for the outside auditors and any outside advisors engaged by the Board.
The Company has determined
that James W. Cornell qualifies as an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation
S-K.
From inception to present
date, we believe that the members of our Board are collectively capable of analyzing and evaluating the Company's financial
statements and understanding internal controls and procedures for financial reporting.
Compensation Committee
We have determined
that the functions ordinarily handled by such a committee should be handled by our entire Board.
Director Compensation
Directors that
are not members of management receive cash compensation of $10,000 each annually and in 2011 received restricted stock awards of
25,000 shares each which vested immediately.
The following table sets forth information regarding the compensation of our
non-executive directors for their service on our Board of Directors for fiscal year 2012:
55
Non-Qualified
Fees Earned
Non-Equity
Deferred
or paid
Stock
Option
Incentive Plan
Compensation
All Other
Name
in cash
Awards
Awards(1)
Compensation
Earnings
Compensation
Total
James W. Cornell
$
10,000
-
$
35,400
-
-
-
$
45,400
Joseph A. Dunn, Ph.D.
$
10,000
-
$
35,400
-
-
-
$
45,400
(1)
Represents the grant date fair value calculated pursuant to ASC Topic 718. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used:
Risk-free interest rate
1.71
%
Expected dividend yield
0
%
Expected stock price volatility
90
%
Expected life of options
10 years
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires
our directors, executive officers, and stockholders holding more than 10% of our outstanding common stock to file with the SEC
initial reports of ownership and reports of changes in beneficial ownership of our common stock. Executive officers, directors
and greater-than-10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file.
Based on a review of the Securities and Exchange Commission filed ownership reports during 2012, the Company believes that all
Section 16(a) filing requirements were met during 2012 except as set forth below:
Joseph Pandolfino,
Henry Sicignano III, Michael Moynihan and Charles Rider each filed a late Form 4 on May 21, 2012 reporting the acquisition
of
shares
. Michael Moynihan filed a late Form 4 on August 24, 2012 reporting the sale of shares.
Henry Sicignano III filed a late Form 4 on August 28, 2012 reporting the acquisition of shares. Joseph Pandolfino filed a late
Form 4 on August 30, 2012 reporting the sale of shares. Joseph Dunn, James Cornell, Joseph Pandolfino and Henry Sicignano III each
filed a late Form 4 on November 14, 2012 reporting the acquisition of shares.
56
Executive
Compensation
The following table summarizes the compensation
paid by us in each of the last two completed fiscal years ended December 31, 2012 for our principal executive officer and the two
most highly compensated executive officers who received annual compensation in excess of $100,000. These officers are referred
to herein as our "Named Executive Officers."
Summary Compensation Table for Years
Ended December 31, 2012 and 2011
Name and Principal Position
Year
Salary
($)
Bonus ($)
Stock
Awards
($) (1)
Option
Awards
($)(2)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($) (3)
Total
($)
Joseph Pandolfino
2012
150,000
-
310,500
-
-
-
15,609
476,106
Chief Executive Officer
2011
150,000
-
102,000
-
-
-
6,646
258,646
Henry Sicignano III,
2012
150,000
-
69,000
59,600
-
-
16,286
294,886
Chief Financial Officer and President
2011
150,000
-
357,000
-
-
-
15,174
522,174
Michael R. Moynihan, Ph.D.
2012
115,000
-
-
59,600
-
-
9,239
183,839
Vice President of R&D
2011
111,290
-
51,000
-
-
-
8,613
170,903
(1)
The amounts included in this column are the aggregate grant date fair value determined in accordance
with FASB ASC 718.
(2)
Represents the grant date fair value calculated pursuant to ASC Topic 718. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used:
Risk-free interest rate
1.71
%
Expected dividend yield
0
%
Expected stock price volatility
90
%
Expected life of options
10 years
(3)
Represents amounts paid by Company for health insurance.
Outstanding Equity Awards at 2012 Fiscal
Year-End
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options Un-
exercisable
(#)
Option
Exercise
Price
Option
Expiration
Date
Number of
Shares or
Units of
Stock
That Have
Not
Vested
(#)
(2)
Market
Value of
Shares or
Units of Stock
That Have
Not
Vested
($)
(2)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($)
(
2)
Mr. Sicignano
100,000
-
$
0.69
5/18/2022
550,000
(1)
$
415,250
-
-
Dr. Moynihan
100,000
-
$
0.69
5/18/2022
-
-
-
-
(1) 450,000 of the shares are time-based
awards subject to vesting over the next 3 years on April 1 of 2013 to 2015, such that 150,000 shares shall vest on April 1 of each
such year; 100,000 of the shares are performance based, which are subject to forfeiture unless certain performance milestones are
achieved.
(2) Market value calculated based on the
price of our common stock as of the last business day of our fiscal year.
57
Agreements with Executive Officers
We have entered into
employment agreements with each of Messrs. Pandolfino and Sicignano that provide for annual compensation of $150,000 and $150,000,
respectively, subject to increases as contained in such employment agreements and/or as decided by our Board of Directors. Dr.
Moynihan has an employment agreement with 22nd Century Group, Inc. that provides for annual compensation of $115,000. These employment
agreements also contain non-compete covenants and change of control provisions.
The employment agreement
of Messrs. Pandolfino and Sicignano provides that during the executive officer's employment by us and for a period of two
(2) years after the executive officer ceases to be employed by us, the following non-compete covenants will apply: (i) the executive
officer will not (except on behalf of us) provide or offer to provide any goods or services to any entity engaged in the United
States in the making, offering, marketing, distributing and/or selling of products made from the tobacco (
Nicotiana
) plant,
and/or providing or offering to provide the same or substantially similar services to any customer or prospective customer, (ii)
the executive officer will not interfere with our relationships with any customer, prospective customer, supplier, distributor,
farmer and/or manufacturer, and (iii) the executive will not induce or attempt to induce any persons employed by us to leave their
employment with us, nor hire or employ, or attempt to hire or employ, any persons employed by us, nor assist or facilitate in any
way any other person or entity in the hiring of any persons employed by us.
The
employment agreement of Dr. Moynihan contains the same non-compete covenants but they are in effect for a period of three (3) years
after the executive officer ceases to be employed by us.
Dr. Moynihan's employment agreement contains a severance
provision which provides that upon the termination of his employment without Cause (as defined in his employment agreement), Dr.
Moynihan will receive severance compensation equal to the base salary then in effect beginning on the date of termination and continuing
until the later of one year following termination or the expiration of the initial term of his employment agreement.
The employment agreements
of Messrs. Pandolfino and Sicignano provide that in the event of a change in control (as defined in the employment agreements)
of our Company, then during the three (3)-year period following such change in control if certain triggering events occur as defined
in such employment agreements, such as if the executive is terminated other than for cause (as defined in each of the employment
agreements), death or disability, or if the executive officer's responsibilities are diminished after the change in control
as compared to the executive officer's responsibilities prior to the change in control, or if the executive officer's
base salary or benefits are reduced, or the executive is required to relocate more than twenty-five (25) miles from his current
place of employment, then in any such events the executive officer will have the option, exercisable within ninety (90) days of
the occurrence of such an event, to resign his employment with us, in which case the executive officer will be entitled to receive:
(A) the greater of either his base salary for the then remaining portion of the initial 5-year term of the agreement or his base
salary for three (3) years thereafter; (B) reimbursement for eighteen (18) months of his reasonable costs for medical, dental,
life, disability and other benefits and insurance coverage that the executive officer received during his employment; (C) outplacement
services for two (2) years; and (D) the immediate vesting of all options and/or restricted stock grants previously granted or to
be granted to the executive officer. We also provide each of these individuals with health insurance and vacation benefits.
Equity Incentive Plan
On
October 21, 2010, we established the EIP for o
fficers, employees, Directors, consultants and advisors to the Company and
its affiliates
, consisting of 4,250,000 shares of common stock reserved for issuance under the EIP.
The EIP has a term of ten years and is administered by our Board or a committee to be established by our Board, to determine the
various types of incentive awards that may be granted to recipients under this plan, such as stock grants, stock options, stock
appreciation rights, performance share awards, restricted stock and restricted stock units, and the number of shares of common
stock to underlie each such award under the EIP.
58
Certain
Relationships and Related Transactions
Policies and Procedures for Related Party Transactions
Our Board is in the
process of adopting a written related person transaction policy, which will set forth the policies and procedures for the review
and approval or ratification of related person transactions. This policy will be administered by our Board and covers any transaction,
arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be
a participant, where the amount involved exceeds $50,000 and a related person had or will have a direct or indirect material interest.
While the policy covers related person transactions in which the amount involved exceeds $50,000, the policy states that related
person transactions in which the amount involved exceeds $120,000 are required to be disclosed in applicable filings as required
by the Securities Act, the Exchange Act and related rules. Our Board set the $50,000 threshold for approval of related party transactions
in the policy at an amount lower than that which is required to be disclosed under the Securities Act, the Exchange Act and related
rules because we believe it is appropriate for our Board to review transactions or potential transactions in which the amount involved
exceeds $50,000, as opposed to $120,000.
Pursuant to this policy,
our Board will: (i) review the relevant facts and circumstances of each related person transaction, including if the transaction
is on terms comparable to those that could be obtained in arm's length dealings with an unrelated third party and the extent
of the related person's interest in the transaction, and (ii) take into account the conflicts of interest and corporate opportunity
provisions of our code of business conduct and ethics. Management will present to our Board each proposed related person transaction,
including all relevant facts and circumstances relating thereto, and will update the Board as to any material changes to any related
person transaction. All related person transactions may only be consummated if our Board has approved or ratified such transactions
in accordance with the guidelines set forth in the policy. Certain types of transactions have been pre-approved by our Board under
the policy. These pre-approved transactions include: (i) certain compensation arrangements; (ii) transactions in the ordinary course
of business where the related person's interest arises only (a) from his or her position as a director of another entity
that is party to the transaction, and/or (b) from an equity interest of less than 5% in another entity that is party to the transaction,
or (c) from a limited partnership interest of less than 5%, subject to certain limitations; and (iii) transactions in the ordinary
course of business where the interest of the related person arises solely from the ownership of a class of equity securities in
our Company where all holders of such class of equity securities will receive the same benefit on a pro rata basis. No director
may participate in the approval of a related person transaction for which he or she is a related person.
Related Party Transactio
ns
Immediately prior to
the closing of the Merger in January 2011 between the Company (then known as Touchstone Mining Limited) and 22nd Century Limited,
LLC, pursuant to the terms of the Split-Off Agreement, the Company transferred all of our pre-merger operating assets and liabilities
to the Split-Off Subsidiary. We then transferred all of the outstanding capital stock of the Split-Off Subsidiary to David Rector,
our sole director and executive officer prior to the merger, in exchange for $1, such consideration was deemed to be adequate by
our Board prior to the merger. Prior to the closing of the merger, we paid Mr. Rector $1,500 in consideration for his service as
our sole director and executive officer.
Prior
to the closing of the Merger,
Touchstone Mining Limited
utilized office space located at 11923
SW 37 Terrace, Miami, Florida 33175 that was provided to us on a rent-free basis by Nanuk Warman, a former director and executive
officer. Also, prior to the closing of the merger, we cancelled 10,015,200 shares of our common stock held by Mr. Warman and entered
into a mutual release agreement with Mr. Warman regarding such cancellation. In each of fiscal years 2009 and 2010, we paid Mr.
Warman aggregate compensation of $8,000 in consideration for his services as our sole director and executive officer during those
periods. We also paid Mr. Warman aggregate of $1,500 in consideration for his accounting services in preparation of our most recent
Form 10-K and Form 10-Q filed prior to the closing of the merger.
We
have conducted transactions with Alternative Cigarettes, Inc. ("AC"), which is 95% owned by three holders of our common
stock, including Joseph Pandolfino, our Chief Executive Officer, and Angelo Tomasello, who beneficially owned approximately over
10% of our common stock. We previously shared office space and employee services with AC. AC has also advanced funds to us from
time to time. Since January 1, 2010, the largest net amount due from us to AC was approximately $127,000. No interest has been
accrued or paid on these amounts due to AC and there are no repayment terms between the parties.
In February 2011, AC was
paid $22,500 by 22nd Century Limited, LLC for AC's assignment of its MAGIC trademark to 22nd Century Limited, LLC and other
minor assets.
59
In January 2008, we
issued convertible promissory notes due and payable on January 15, 2011 to Messrs. Pandolfino and Tomasello in the principal amounts
of $77,435 and $100,315, respectively, with 7% interest per annum accruing thereon. In December 2009, Mr. Pandolfino converted
the principal balance and accrued interest under his note ($88,172) into 151,760 shares of our common stock. In May 2010, Mr. Tomasello
agreed to amend his note to eliminate his right to convert the balance into shares of our common stock, and in January 2011, Mr.
Tomasello's note together with all accrued interest thereon was paid in full.
In November 2008, we
issued a promissory note due and payable on November 11, 2010 to Mr. Tomasello in the principal amount of $325,000, with 10% interest
per annum accruing thereon, and a warrant to purchase 371,006 shares of our common stock, which have since been exercised at a
price of $.0001 per share. The note was guaranteed by Virgil Properties, LLC, which is jointly owned by Messrs. Pandolfino and
Tomasello. Effective December 1, 2010, the $325,000 promissory note was amended to extend the maturity date until January 10, 2011
and to increase the interest rate to 15% during this extension period. On January 25, 2011, Mr. Tomasello converted the principal
amount of this promissory note into 325,000 shares of our common stock through an investment in the Private Placement Offering
and cash in the amount of $79,401, which represents the accrued interest on the original $325,000 promissory note. Mr. Tomasello
has also made funds available to us in the form of cash advances. The largest net amount outstanding since January 1, 2009 was
approximately $166,000. No interest was accrued or paid on such advances and there were no repayment terms between the parties.
In December 2009, Mr. Tomasello was issued 504,553 shares of our common stock in lieu of repayment of $135,996 of such advances,
and we issued him a promissory note in the amount of $30,054 that was exchanged for 204,639 shares of our common stock in June
2010. On December 14, 2011 Mr. Tomasello acquired $28,750 of our December 14, 2011 convertible notes for $25,000 cash.
During the period between
January 1 and October 5, 2010, we issued Mr. Pandolfino 455,331 shares of our common stock in lieu of $103,573 due and payable
to him for his services. On October 5, 2010, we issued Mr. Pandolfino a promissory note, which was assigned to Mr. Sicignano, due
and payable on January 31, 2011 in the principal amount of $58,873, with 15% interest per annum accruing thereon. In January 2011,
we made payment in full to Mr. Sicignano on this assigned note together with all accrued interest thereon. Mr. Pandolfino acquired
$86,250 of the December 14, 2011 convertible notes for $75,000 in cash. In 2012, he converted his convertible note.
In
September 2010, Henry Sicignano III, our President, Secretary and interim Chief Financial Officer, loaned us $35,000, which amount
was due and payable in November 2010, with 15% interest per annum accruing thereon. On December 14, 2010, Mr. Sicignano agreed
to extend the maturity date of this loan until January 25, 2011. On December 28, 2010 we issued a promissory note to Mr. Sicignano
due and payable on January 15, 2011 in the principal amount of $100,000, with 15% interest per annum accruing thereon. From time
to time, Mr. Sicignano deferred guaranteed payments due to him by us as consideration for his services as our President with the
largest net amount of such deferred guaranteed payments outstanding since January 1, 2010 being $85,000. On January 28, 2011 we
made payment in full to Mr. Sicignano of all deferred guaranteed payments and all principal and accrued interest on all promissory
notes then outstanding. Mr. Sicignano is also the managing member of Henry Sicignano III Group, LLC ("Sicignano Group").
On October 5, 2010, Sicignano Group purchased 112,396 shares of our common stock for $30,295 and, in a simultaneous related transaction,
made a loan to the Company in the principal amount of $30,295, with 15% interest per annum accruing thereon, for which we issued
Sicignano Group a promissory note due and payable on January 31, 2011. On January 25, 2011, Sicignano Group converted the
principal amount of this promissory note and the accrued interest thereon into 31,626 shares of our common stock through an investment
in the Private Placement Offering.
From June 30, 2011 to October 18, 2011, Mr. Sicignano loaned us a total of $215,000 and
Mr. Sicignano was
issued a promissory note with interest at 12%. Mr. Sicignano exchanged these
notes to acquire $247,250 of our December 14, 2011 convertible notes. In December 2012, Mr. Sicignano agreed to forebear on the
collection of our December 14, 2011 convertible notes. On January 22, 2013, we paid Mr. Sicignano the total amount of $250,696
in principal plus accrued but unpaid interest as payment in full of the December 14, 2011 convertible notes owned by Sicignano.
On that same date of January 22, 2013, Mr. Sicignano loaned us $150,000 and we issued a promissory note to Mr. Sicignano due
and payable on July 1, 2013 in the principal amount of $150,000, with 15% interest per annum accruing thereon.
60
On September 15 and
October 15, 2009, we issued promissory notes payable to Clearwater Partners, LLC ("Clearwater") in the amounts of $15,000
and $10,000, respectively. In conjunction with the $15,000 promissory note, a warrant to purchase 185,503 shares of our common
stock, at a price per share of less than $.0001, was issued to Clearwater, and in conjunction with the $10,000 note, a warrant
to purchase 92,751 shares of our common stock, at a price per share of less than $.0001, was issued to Clearwater. The promissory
notes bear interest at a rate of 10%. These promissory notes had original maturity dates September 15, 2010 and October 15, 2010,
respectively. On May 27, 2010, the maturity dates of both promissory notes were extended to January 31, 2012 and subsequently paid
in June 2012.
On March 1, 2010, we
issued a four (4) year warrant to purchase 1,706,626 shares of our common stock to Clearwater, which was exercised in full on May
27, 2010, at a price per share of $0.0001. On May 27, 2010, we further issued to Clearwater an additional four (4) year warrant
to purchase 1,409,821 shares of our common stock, which was immediately exercised in full at a price per share of $0.0001, and
we issued to Clearwater a promissory note due and payable on January 31, 2012 in the principal amount of $45,000, with 10% interest
per annum accruing thereon. These warrants and this promissory note were issued to Clearwater in lieu of repayment of $450,000
principal, and accrued interest thereon, of funds previously advanced to us by Clearwater. On October 5, 2010, Clearwater purchased
176,358 shares of our common stock for $47,535 and, in a simultaneous related transaction, made a loan to the Company in the principal
amount of $47,535, with 15% interest per annum accruing thereon, for which we issued Clearwater a promissory note due and payable
on January 31, 2011. On January 25, 2011, Clearwater converted the principal amount of this $47,535 promissory note and the accrued
interest thereon, and the principal amount of the $45,000 promissory note and the accrued interest thereon, due and payable on
January 31, 2012, into 97,544 shares of our common stock through an investment in the Private Placement Offering.
On
December 14, 2011,
Mr. Pandolfino,
our Chief Executive Officer, Mr. Sicignano, our President
and interim Chief Financial Officer, and Mr. Rider, our former Chief Financial Officer, acquired $86,250, $247,250 and $34,500,
respectively, of our December 14, 2011 convertible notes. The purchase price for the convertible notes was 85% of the face amount
of the notes. Mr. Pandolfino converted his December 14, 2011 convertible note in February 2011 into 115,000 shares of our common
stock and warrants to purchase 138,000 shares of our common stock.
In December 2012, Mr. Sicignano agreed to forebear on
the collection of our December 14, 2011 convertible notes. On January 22, 2013, we paid Mr. Sicignano the total amount of $250,696
in principal plus accrued but unpaid interest as payment in full of the December 14, 2011 convertible notes owned by Sicignano.
On that same date of January 22, 2013, Mr. Sicignano loaned us $150,000 and we issued a promissory note to Mr. Sicignano due
and payable on July 1, 2013 in the principal amount of $150,000, with 15% interest per annum accruing thereon.
In
December 2012, Mr. Rider extended the maturity date of his December 14, 2011 convertible note to April 9, 2013.
On March 21, 2012
and April 13, 2012, Rockledge Capital, LLC, a company of which our President, Mr. Sicignano, is the manager, loan us
$25,000 on each of these dates; such notes were due and payable on October 1, 2012, with 15% interest per annum accruing thereon.
These notes were paid in full on January 22, 2013.
On
May 15, 2012,
Mr. Pandolfino,
our Chief Executive Officer, Mr. Sicignano, our President and interim
Chief Financial Officer, Mr. Rider, our former Chief Financial Officer, and Dr. Moynihan, our Vice President of Research and
Development, acquired 12,000, 20,000, 12,000, and 150,000 shares of the Company's common stock, $0.00001 par value, respectively,
and the same number of warrants with a 5-year term to purchase shares of our common stock at an exercise price of $1.00 per share,
which exercise price was subsequently adjusted pursuant to the terms of the warrants to be $0.60 per share as of January 22, 2013.
The purchase price was $0.60 per unit. Dr. Moynihan exchanged his minority interest in Goodrich Tobacco (4 units equating
to 4%) for stock and warrants valued at $90,000 in the May 15, 2012 private placement. Dr. Moynihan's transaction
resulted in Goodrich Tobacco becoming a wholly owned subsidiary of 22nd Century, Ltd.
In October 2012, we entered into a
contractor agreement with Angelo Tomasello to provide consulting services to the Company. For consideration under the
agreement, Mr. Tomasello was issued 20,000 stock options with the exercise price of $0.26, which is equivalent to the closing
price on our common stock on October 26, 2012. The options vested on October 26, 2012 and are exercisable any time through
the expiration date ten years hence.
On
November 9, 2012,
Mr. Pandolfino,
our Chief Executive Officer, Mr. Sicignano, our President and
interim Chief Financial Officer, Mr. Cornell, our director, and Mr. Dunn, our director, participated in our private placement and
acquired 480,000, 600,000, 60,000 and 60,000 shares of our common stock, $0.00001 par value, respectively, and warrants with a
5-year term to purchase up to 240,000, 300,000, 30,000 and 30,000 shares of the Company's common stock, respectively, at
an exercise price of $1.00 per share, which exercise price was subsequently adjusted pursuant to the terms of the warrants to be
$0.60 per share as of January 22, 2013. The purchase price was $0.25 per unit.
61
Plan of
Distribution
Each selling stockholder
(the "Selling Stockholders") of the securities and any of their pledgees, assignees and successors-in-interest may,
from time to time, sell any or all of their securities covered hereby on the OTC Bulletin Board or any other stock exchange, market
or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices.
A Selling Stockholder may use any one or more of the following methods when selling securities:
·
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
·
block trades in which the broker-dealer will attempt to sell the securities
as agent but may position and resell a portion of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
·
an exchange distribution in accordance with the rules of the applicable
exchange;
·
privately negotiated transactions;
·
settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;
·
in transactions through broker-dealers that agree with the Selling Stockholders
to sell a specified number of such securities at a stipulated price per security;
·
through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
·
a combination of any such methods of sale; or
·
any other method permitted pursuant to applicable law.
The Selling Stockholders
may also sell securities under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged
by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser)
in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction
not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction
a markup or markdown in compliance with FINRA IM-2440.
In connection with
the sale of the securities or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions
they assume. The Selling Stockholders may also sell securities short and deliver these securities to close out their short positions,
or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter
into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities
which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which
securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The Selling Stockholders
and any broker-dealers or agents that are involved in selling the securities may be deemed to be "underwriters" within
the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the securities. In no event shall any broker-dealer receive
fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).
The Company is required
to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreed
to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.
Because Selling Stockholders
may be deemed to be "underwriters" within the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus.
The Selling Stockholders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed
sale of the resale securities by the Selling Stockholders.
62
We agreed to keep this
prospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling Stockholders without
registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for
the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of
similar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or
any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if
required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be
sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously
engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation
M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and
sales of securities of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser
at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
63
Description
of Securities
General
Our authorized capital stock consists of
300,000,000 shares of common stock and 10,000,000 shares of preferred stock, of which 35,415,139 shares of common stock are issued
and outstanding and 2,500 shares of Series A-1 Preferred Stock are issued and outstanding. We will also have reserved (i) up to
4,166,666 shares of common stock that could be initially issued as a result of the conversion of the shares of Series A-1 Preferred
Stock, which is subject to adjustment as described below, (ii) up to 2,055,000 shares of common stock for future issuance under
the EIP, (iii) up to 465,000 shares of common stock issuable upon exercise of outstanding stock options; (iv) up to 2,411,734 shares
of common stock currently issuable upon the conversion of convertible notes (subject to adjustment for anti-dilution adjustments);
(v) up to 19,700,028 shares of common stock currently issuable upon the exercise of outstanding warrants (including the Series
A Warrants and Series B Warrants) (subject to adjustment for anti-dilution adjustments); and (vi) up to 5,142,797 shares of common
stock issuable upon exercise of warrants issuable upon conversion or exercise of other instruments (including the Series C Warrants)
(subject to adjustment for anti-dilution adjustments).
The following summary of certain provisions
of our capital stock does not purport to be complete and is subject to and is qualified in its entirety by our articles of incorporation,
including the Certificate of Designations thereto, and by-laws, the warrants and notes referred to below, and by the provisions
of applicable law.
Common Stock
Holders of common stock are entitled to
one (1) vote per share with respect to each matter presented to our stockholders on which holders of common stock are entitled
to vote. The common stock does not have cumulative voting rights. No share of common stock affords any preemptive rights or is
convertible, redeemable, assessable or entitled to the benefits of any sinking or repurchase fund.
Subject to the prior rights of holders of
preferred stock, holders of common stock are entitled to receive dividends as may be lawfully declared from time to time by our
board of directors. Upon our liquidation, dissolution or winding up, whether voluntary or involuntary, holders of common stock
will be entitled to receive such assets as are available for distribution to our shareholders after there shall have been paid,
or set aside for payment, the full amounts necessary to satisfy any preferential or participating rights to which the holders of
each outstanding series of preferred stock are entitled by the express terms of the applicable series.
The common stock is quoted on the OTC Bulletin
Board under the symbol "XXII.OB."
Preferred Stock
Our Board is authorized, without action
by our stockholders, to designate and issue up to an aggregate of 10,000,000 shares of preferred stock in one or more series. Our
board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
An aggregate
of 2,500 shares of our Series A-1 Preferred Stock are currently outstanding.
The shares of Series A-1 Preferred Stock are
initially convertible into a total of 4,166,666 shares of the Company's common stock at a conversion price of $0.60 per share
(referred to in this section as the Conversion Price), subject to future adjustments as described below. Holders of our Series
A-1 Preferred Stock may only convert the Series A-1 Preferred Stock to the extent that, after giving effect to the conversion,
such holder (together with such holder's affiliates) would beneficially own no more than 9.99% of number of shares of our
outstanding common stock. The Conversion Price of the Series A-1 Preferred Stock is subject to adjustment as follows:
(i)
on the effective date of this registration statement, the Conversion Price will be reduced to the lesser of (1) the then Conversion
Price, as adjusted and taking into consideration any prior resets, (2) the greater of $0.35 (subject to adjustment for reverse
and forward stock splits and the like) and 70% of the average of the five (5) trading day volume weighted average prices, or VWAPs,
immediately prior to each such effective date or (3) $0.60 (subject to adjustment for forward and reverse stock splits and the
like);
64
(ii)
if on the 180th day immediately following the closing date of January 11, 2013 (the "Closing Date"), 70% of the
average of the five (5) trading day VWAPs immediately prior to such date is less than the then Conversion Price, then on such 180th
day the Conversion Price shall be reduced, and only reduced, to the lesser of (1) the then Conversion Price, as adjusted and taking
into consideration any prior resets, (2) the greater of $0.15 (subject to adjustment for reverse and forward stock splits and the
like) and 70% of the average of the five (5) trading day VWAPs immediately prior to each such 180th day immediately following the
Closing Date or (3) $0.35 (subject to adjustment for forward and reverse stock splits and the like); and
(iii)
if all of the shares required to be registered are not registered pursuant to an effective registration statement within the
120th day anniversary of the Closing Date, then on the 180th day and 270th day following the Closing Date, the Conversion Price
shall be reduced, and only reduced, to the lesser of (1) the then Conversion Price, as adjusted and taking into consideration any
prior resets, (2) the greater of $0.15 (subject to adjustment for reverse and forward stock splits and the like) and 70% of the
average of the five (5) trading day VWAPs immediately prior to each such date or (3) $0.35 (subject to adjustment for forward and
reverse stock splits and the like).
The Series A-1 Preferred Stock will pay
a 10.0% annual cash dividend, which may be payable in shares of our common stock, and will have a liquidation preference equal
to the stated value of the Series A-1 Preferred Stock of $1,000 per share plus any accrued and unpaid dividends thereon. The Series
A-1 Preferred Stock has no voting rights.
With respect to the payment of dividends
and amounts upon liquidation, the Series A-1 Preferred Stock will rank senior to any other future series of our preferred stock
and all classes of our common stock. Unless full dividends on the Series A-1 Preferred Stock have been paid for all past dividend
periods, no distribution may be declared or paid on our common stock or any other capital shares that rank junior to the Series
A-1 Preferred Stock as to dividends. In the event of the Company's liquidation, dissolution or winding up, the holders of the Series
A-1 Preferred Stock are entitled to be paid out of our assets legally available for distribution to its shareholders a liquidation
preference of the stated value of $1,000 per share, plus an amount equal to any accumulated and unpaid dividends to the date of
payment before any distribution of assets is made to holders of our common stock or any other capital shares that rank junior to
the Series A-1 Preferred Stock as to liquidation preference.
The Series A-1 Preferred Stock contains
standard anti-dilution adjustments in the event of a stock dividend, stock split or similar corporate transaction. In addition,
if, at any time while shares of Series A-1 Preferred Stock are outstanding, we sell any common stock (or securities issuable into
common stock) or grant any option to purchase any common stock at an effective price per share that is lower than the then Conversion
Price, which we refer to as a Diluting Issuance, then the Conversion Price shall be reduced to equal the effective price per share
(as determined pursuant to the Certificate of Designation) of the Diluting Issuance. No adjustments will be made for shares of
common stock or options granted to employees, officers or directors under our Equity Incentive Plan, upon conversion or exchange
of any securities outstanding as of the time of the issuance of the Series A-1 Preferred Stock or in connection with certain business
combinations. In the event we (i) declare dividends on our common stock, (ii) grant any right to acquire common stock or other
property pro rata to all of our holders of our common stock or (iii) enter into a fundamental transaction that provides for consideration
to the holders of our common stock, then the Series A-1 Preferred Stock shall have the right to participate on a pro rata as-converted
basis without regard to the 9.99% beneficial ownership limitation.
Generally, we may not redeem the Series
A-1 Preferred Stock. However, upon the occurrence of certain triggering events described below, holders of Series A-1 Preferred
Stock will have the right to redeem some or all of their Series A-1 Preferred Stock for cash or shares of our common stock, or
increase the dividend rate on any of their outstanding shares of Series A-1 Preferred Stock to 18% per annum thereafter. If we
fail to pay the cash or shares of our common stock due upon such redemption, then we must pay interest thereon at a rate of 18%
per annum (or such maximum rate permitted by applicable law, whichever is lower). Triggering events for redemption of our Series
A-1 Preferred Stock by the holders thereof include the following:
·
if we fail to deliver certificates representing the shares of common stock into which the Series A-1 Preferred Stock may be
converted prior to the fifth trading day after such certificates are required to be delivered;
·
if we provide notice that we do not intent to comply with the requests of any conversion of shares of Series A-1 Preferred
Stock;
·
if we fail to pay in full the amount of cash due pursuant to a buy-in (in the event we fail to deliver shares of common stock
upon conversion of the Series A-1 Preferred Stock and the holder of Series A-1 Preferred Stock is required by its brokerage firm
to purchase in an open market transaction or otherwise shares of common stock to deliver in satisfaction of a sale by such holder
of the shares of common stock that were to have been converted from Series A-1 Preferred Stock) within five calendar days after
notice of such buy-in;
65
·
if we fail to pay in full all amounts owed on account of any event of default under the Registration Rights Agreement;
·
if we fail to have a sufficient number of authorized and unreserved shares of common stock to issue upon conversion of our
Series A-1 Preferred Stock;
·
if we fail to observe or perform any other covenant, agreement, or warranty contained in or otherwise commit any breach of
any of our Certificate of Designation for Series A-1 Preferred Stock, the Purchase Agreement, the Warrants, the Registration Rights
Agreement, the escrow agreement entered into in connection with the Purchase Agreement, or the lock-up agreements entered into
in connection with the Purchase Agreement, and such failure or breach continues past any applicable cure date;
·
if we redeem more than a de minimis number of our common stock other than in connection with repurchases of our common stock
from departing officers and directors in an amount not to exceed, in aggregate, $100,000;
·
if there is a change in control of more than forty percent (40%) of the voting securities other than by means of conversion
of our Series A-1 Preferred Stock, or a merger, consolidation, or sale of assets occurs and the stockholders existing prior to
such transaction retain less than sixty percent (60%) of the voting power following such transaction, or if more than one half
of the members of the board of directors are replaced in any given year and such replacement is not approved by a majority of the
individuals who are currently on the board of directors;
·
if we experience certain bankruptcy related events;
·
if our common stock fails to be listed or quoted for trading on a trading market for more than five trading days; or
·
if any monetary judgment or write is entered or filed against us for more than $50,000 and such judgment or writ remains unvacated,
unbonded or unstayed for 45 days.
The Series A-1 Preferred Stock has been
issued subject to certain negative covenants described below, which are restrictions on the Company that will remain in effect
for as long as any shares of Series A-1 Preferred Stock are outstanding, unless the holders of at least 67% in stated value of
the then outstanding shares of Series A-1 Preferred Stock have otherwise given prior written consent. These negative covenants
include the following:
·
other than indebtedness permitted pursuant to the Certificate of Designations and until less than 1,000 shares of Series A-1
Preferred Stock remain outstanding, we may not issue, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness
for borrowed money of any kind on any of our property or assets;
·
other than liens permitted pursuant to the Certificate of Designations, we may not enter into, create, incur, assume or suffer
to exist any liens of any kind on our property or assets;
·
we may not amend our charter documents, including, without limitation, our certificate of incorporation and bylaws, in any
manner that materially and adversely affects any rights of the holders of our Series A-1 Preferred Stock;
·
we may not repay or repurchase or otherwise acquire more than a de minimis number of shares of our common stock other than
in connection with (i) the conversion of our Series A-1 Preferred Stock or exercise of the Warrants and (ii) repurchases of common
stock of departing officers and directors, provided that such repurchases shall not exceed an aggregate of $100,000 for all officers
and directors for so long as the Series A-1 Preferred Stock is outstanding;
·
we may not pay cash dividends or distributions on our common stock; and
·
we may not enter into any transaction with any of our affiliates which would be required to be disclosed in any public filing
with the SEC, unless such transaction is made on an arm's-length basis and expressly approved by a majority of disinterested
members of our board of directors (even if constituting less than a quorum otherwise required for board approval).
No share of Series A-1 Preferred Stock affords any
preemptive rights or is assessable or entitled to the benefits of any sinking or repurchase fund.
66
Warrants and Convertible Notes
Warrants Issued in Connection with our
January 25, 2011 Private Placement Offering
Investor Warrants.
We issued five-year
warrants to purchase 2,717,223 shares of our common stock, at an exercise price of $1.50 per share, in exchange for the warrants
contained in the securities purchased by investors in our January 25, 2011 Private Placement Offering. These warrants may be exercised
on a cashless basis in certain circumstances. The exercise price and number of shares of our common stock issuable upon exercise
of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization,
reorganization, merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection.
No fractional shares will be issued upon exercise of these warrants. If, upon exercise of these warrants, a holder would be entitled
to receive a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number of
shares of our common stock to be issued to the warrant holder or otherwise equitably adjust the exercise and exercise price per
share. Of the warrants described above, as of January 22, 2013, warrants to purchase 2,941,143 shares of our common stock are outstanding
and the current exercise price is $1.3859, subject to future adjustments.
Century Warrants.
We issued five-year
warrants to purchase 5,000,000 shares of our common stock, at an exercise price of $3.00 per share, in exchange for the warrants
held by the members of 22nd Century prior to the consummation of the January 25, 2011 Private Placement Offering. These warrants
may be exercised on a cashless basis in certain circumstances. The exercise price and number of shares of our common stock issuable
upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization,
reorganization, merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection.
No fractional shares will be issued upon exercise of these warrants. If, upon exercise of these warrants, a holder would be entitled
to receive a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number of
shares of our common stock to be issued to the warrant holder or otherwise equitably adjust the exercise and exercise price per
share. Of the warrants described above, as of January 22, 2013, warrants to purchase 5,494,304 shares of our common stock are outstanding
and the current exercise price is $2.7302, subject to future adjustments.
Conversion Warrants.
We issued five-year
warrants to purchase an aggregate of 434,755 shares of our common stock, at an exercise price of $1.50 per share, in exchange for
the warrants issued to the placement agent and sub-placement agent in the January 25, 2011 Private Placement Offering. These warrants
contain a cashless exercise provision. The exercise price and number of shares of our common stock issuable upon exercise of the
warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization,
merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection. No fractional
shares will be issued upon exercise of these warrants. If, upon exercise of these warrants, a holder would be entitled to receive
a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number of shares of our
common stock to be issued to the warrant holder or otherwise equitably adjust the exercise and exercise price per share. Of the
warrants described above, as of January 22, 2013, warrants to purchase 470,582 shares of our common stock are outstanding and the
current exercise price is $1.3859, subject to future adjustments.
Advisor Warrants.
We issued five-year
warrants to purchase 500,000 shares of our common stock, at an exercise price of $1.50 per share, to the placement agent in the
January 25, 2011 Private Placement Offering. These warrants contain a cashless exercise provision. The exercise price and number
of shares of our common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the
event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. These warrants also provide holders
with weighted-average anti-dilution price protection. No fractional shares will be issued upon exercise of these warrants. If,
upon exercise of these warrants, a holder would be entitled to receive a fractional interest in a share, we may, in our discretion,
upon exercise, round up to the nearest whole number of shares of our common stock to be issued to the warrant holder or otherwise
equitably adjust the exercise and exercise price per share. Of the warrants described above, as of January 22, 2013, warrants to
purchase an aggregate of 541,204 shares of our common stock are outstanding and the current exercise price is $1.3859, subject
to future adjustments.
Convertible Notes Issued in December 2011
On December 14, 2011, we entered into an
agreement with certain accredited investors, whereby such investors acquired approximately $1.9 million of convertible promissory
notes of the Company. The notes were issued with an original issue discount of approximately 15%.
67
The notes are convertible into shares of
our common stock at any time prior to maturity of the note at a per share conversion price equal to $0.75.
These
convertible notes
provide holders with weighted-average anti-dilution price protection.
Additionally,
upon conversion of all or a portion of the note into our common stock, each investor will receive at that time a warrant to purchase
such number of shares of common stock equal to 120% of such number of shares of common stock issuable upon conversion of the note,
with the these warrants having an exercise price of $1.50 per share.
These warrants, after issuance,
also provide holders with weighted-average anti-dilution price protection. No fractional shares will be issued upon exercise of
these warrants.
The notes initially matured on December
14, 2012, provided, however that certain of the holders elected to extend the maturity date of their respective notes to April
14, 2013. Prior to December 14, 2012, holders of $205,000 of the notes elected to convert such notes into shares of our common
stock and into warrants to purchase shares of our common stock pursuant to the terms of the notes. Holders of $1,330,000 of the
notes agreed to extend the maturity date of the notes to April 14, 2013, holders of $100,000 of the notes elected to convert into
shares of the our common stock pursuant to the terms of the notes, holders of $215,000 of the notes elected to enter into a forbearance
agreement, and holders of $30,000 of the notes agreed to be paid over time. As a result of the foregoing and pursuant to the adjustments
contained in the terms of the notes, the exercise price of the warrants issued upon conversion of the notes is $1.23 per share
as of January 22, 2013.
Of the convertible
notes described above, as of January 22, 2013, $1,429,330 of such convertible notes, including all accrued interest, remain outstanding
and may be converted into approximately 2,040,734 shares of common stock, at a conversion rate of $0.7004 per share. Upon conversion
of such convertible note described above, warrants will be issuable to purchase 2,688,771 shares of common stock. Of those warrants
issuable upon conversion of such convertible notes, warrants to purchase
239,890
shares of common
stock were the result of inducements granted to the holders of such convertible notes to execute the lock-up agreements described
below.
The Company may force the conversion of
the notes under certain circumstances. The warrants, when and as issued upon conversion of the notes, have a term of five years
and are exercisable at any time on or before the fifth anniversary of the issue date of the warrants. The warrants may be exercised
on a cashless basis. To the extent an holder does not elect to convert its notes into warrants as described above, the principal
amount of the notes not so converted shall be payable in cash by the Company on the applicable maturity date.
The
exercise price and number of shares of our common stock issuable upon exercise of the warrants may be adjusted in certain circumstances,
including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.
On January
24, 2013, we sent out notices to the holders of the notes regarding our intent to repay the notes at the expiration of a 15-day
period during which time the holders may convert to common stock and warrants to purchase common stock.
Warrants Issued in 2012
On May 15, 2012, we entered into an agreement
with certain accredited investors, whereby the investors acquired warrants with a 5-year term to purchase up to 1,710,833 shares
of our common stock at an exercise price of $1.00 per share.
The exercise price and number of shares
of our common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merger or consolidation. These warrants also provide holders with weighted-average
anti-dilution price protection. No fractional shares will be issued upon exercise of these warrants. Of the warrants described
above, a
s of January 22, 2013, warrants to purchase an aggregate of 1,863,716 shares of common stock are outstanding and
the exercise price has been reduced to $0.60 per share, subject to future adjustment, due to the issuance of the convertible notes
issued on August 9, 2012, with such amount including
warrants to purchase 140,883 shares of common
stock that were the result of inducements granted to the holders of such convertible notes to execute the lock-up agreements described
below
.
On November 9, 2012, we entered into an
agreement with certain accredited investors, whereby the investors acquired warrants with a 5-year term to purchase up to 1,619,000
shares of our common stock at an exercise price of $1.00 per share. The exercise price and number of shares of our common stock
issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or
our recapitalization, reorganization, merger or consolidation. These warrants also provide holders with anti-dilution price protection.
No fractional shares will be issued upon exercise of these warrants. Of the warrants described above, as of January 22, 2013, warrants
to purchase an aggregate of 1,672,950 shares of common stock are outstanding and the exercise price has been reduced to $0.60 per
share, subject to future adjustment, due to the issuance of the Series A-1 Preferred Stock on January 11, 2013, with such amount
including
warrants to purchase 53,950 shares of common stock that were the result of inducements granted
to the holders of such convertible notes to execute the lock-up agreements described below
.
68
Convertible Notes Issued in August 2012
On August 9, 2012, we completed a private
placement of $222,600 of convertible notes, which were sold at a 6% discount. We received proceeds of $210,000. The face amount
of the notes may be converted into common stock at the rate of $0.60 per share at the option of the note holder. In the event a
holder of the convertible notes elects to convert the note into shares of common stock, then the holder shall receive 371,000 warrants
representing one-hundred percent of the number of shares of common stock into which the notes were convertible into. However, in
the event we pay the convertible notes at maturity, then the holder shall receive warrants equal to fifty percent of the number
of shares of common stock into which the notes were convertible into. The warrants have a five-year term and a $1.00 per share
exercise price.
The exercise price and number of shares of our common stock issuable upon exercise of
the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization,
merger or consolidation. These warrants also provide holders with weighted-average anti-dilution price protection.
As of
January 22, 2013, all of such convertible notes remain outstanding.
Warrants Issued in 2013
On January 11, 2013, we entered into an
agreement with certain accredited investors for Series A-1 Preferred Stock, whereby the investors each acquired a Series A Warrant,
a Series B Warrant, and a Series C Warrant (which we refer to collectively in this prospectus as the Warrants). The Series A Warrant
allows the holders the right to acquire, initially before any adjustments to the conversion price, up to an additional 4,166,666
shares of our common stock at an exercise price of approximately $0.72 per share over a period of five (5) years. The Series A
Warrant also allows for such warrant to be exercised on a cashless basis. As of January 22, 2013, Series A Warrants to purchase
an aggregate of 4,166,666 shares of our common stock are outstanding and an initial exercise price of $0.72 per share, subject
to adjustment.
The Series B Warrant allows the holders
a one-year period to exercise an overallotment option as contained in the Series B Warrant to purchase, initially before any adjustments
to the conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at a price of $0.60 per share. The
Series B Warrant may not be exercised on a cashless basis except only in certain limited circumstances. In the event the holders
exercise, in whole or in part the overallotment option as contained in the Series B warrant, then the holders shall have the right
to exercise on a pro rata basis the portion of the Series C Warrant issued to the holders to acquire, initially before any adjustments
to the conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at an exercise price of approximately
$0.72 per share over a period of five (5) years. The Series C Warrant allows for such warrant to be exercised on a cashless basis.
As of January 22, 2013, Series B Warrants to purchase an aggregate of 2,083,334 shares of our common stock are outstanding with
an initial exercise price of $0.60 per share, subject to adjustment, and Series C Warrants to purchase an aggregate of 2,083,334
shares of our common stock are outstanding.
The Warrants contain exercise and conversion
limitations providing that a holder thereof may not exercise to the extent (but only to the extent) that, if after giving effect
to such exercise, the holder or any of its affiliates would beneficially own in excess of 9.99% of the outstanding shares of common
stock immediately after giving effect to such exercise.
Each of the Warrants contain standard anti-dilution
adjustments in the event of a stock dividend, stock split or similar corporate transaction. In addition, if, at any time while
any of the Warrants are outstanding, we sell any common stock (or securities issuable into common stock) or grant any option to
purchase any common stock at an effective price per share that is lower than the then exercise price of the applicable Warrants,
then the exercise price shall be reduced to equal the effective price per share (as determined pursuant to the applicable Warrant)
of the diluting issuance. No adjustments will be made for shares of common stock or options granted to employees, officers or directors
under our Equity Incentive Plan, upon conversion or exchange of any securities outstanding as of the time of the issuance of the
Warrants or in connection with certain business combinations. In the event we (i) declare dividends on our common stock, (ii) grant
any right to acquire common stock or other property pro rata to all of our holders of our common stock or (iii) enter into a fundamental
transaction that provides for consideration to the holders of our common stock, then the Warrants shall have the right to participate
on a pro rata as-converted basis without regard to the 9.99% beneficial ownership limitation.
69
Options
October 21, 2010, the Company established
the EIP for officers, employees, directors, consultants and advisors to the Company and its affiliates, consisting of 4,250,000
shares of common stock. The EIP authorizes the grant of incentive stock options, nonqualified stock options, stock appreciation
rights, restricted stock, restricted stock units, performance shares, restricted stock and restricted stock units. As of January
22, 2013, 2,520,000 shares remained available for issuance under the EIP (including 465,000 shares subject to outstanding option
awards, with a weighted average exercise price of $0.69).
Registration Rights
We agreed to a covenant in conjunction with
the purchase agreement executed in connection with the sale of the Series A-1 Preferred Stock and Warrants to use our commercially
reasonable efforts to file with the SEC this registration statement, within thirty (30) days following. We will use our commercially
reasonable efforts to cause this registration statement to be declared effective by the SEC within sixty (60) calendar days of
filing with the SEC (105 days if the SEC reviews such registration statement). If (i) we are late in filing this registration statement,
(ii) we fail to file with the SEC a request for acceleration in accordance with Rule 461 of the Securities Act within five trading
days of our being notified by the SEC that this registration statement will not be subject to further review by the SEC, (iii)
we fail to timely file a pre-effective amendment or otherwise respond in writing to comments made by the SEC in respect of this
registration statement, (iv) this registration statement is late in being declared effective by the SEC, or (v) following the effective
date of this registration statement, this registration statement ceases to remain continuously effective as to the registrable
securities contained herein, then the holders of registrable common stock shall be entitled to monetary damages equal to two percent
(2%) of the aggregate purchase price paid by such holder pursuant to the purchase agreement upon the occurrence of one of the foregoing
events and for each full month thereafter until the applicable event is cured.
In the event any shares of common stock
are removed from the registration statement in response to a comment from the staff of the SEC limiting the number of shares of
common stock which may be included in this registration statement or which may be resold by the holders of registrable common stock
in accordance with Rule 144 under the Securities Act, we shall give the holders at least five (5) trading days prior written notice
along with the calculations as to such holder's allotment. In the event we amend this registration statement in accordance
with the foregoing, we will use our best efforts to file with the SEC, as promptly as allowed by the SEC or to registrants of securities
in general, one or more registration statements on Form S-1 or such other form available to register for resale those registrable
securities that were not registered for resale on the initial registration statement.
We shall keep this registration statement
effective and up to date until the earlier of (i) the date on which the securities may be resold by the selling stockholders without
registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for
us to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar
effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other
rule of similar effect.
If, at any time there is not an effective
registration statement covering all of the common stock to be registered hereunder, the holders of the Warrants and Series A-1
Preferred Stock shall have "piggyback" registration rights for the shares of common stock underlying such Warrants
and Series A-1 Preferred Stock with respect to any registration statement filed by us following the effectiveness of the registration
statement described above, which would permit the inclusion of such underlying shares.
Lockup Agreements
In connection with the issuance of the
Series A-1 Preferred Stock on January 11, 2013, all of our directors and officers and one 5% stockholder were required to sign
a lock-up agreement which restricts all such persons from selling virtually all of the securities of the Company owned by each
such person for the period of time from January 11, 2013 until the date which is two (2) months after the effective date of this
registration statement. Under such lock-up agreement, the one 5% stockholder and our officers are permitted to sell up to 50,000
shares each during the entire term of the lock-up period, at a rate of no more than 5,000 shares per trading day per each person.
Our officers were not given any inducements to agree to sign such lock-up agreements. The 5% stockholder was granted a 5-year
warrant to purchase 25,000 shares of common stock at an exercise price of $0.72 per share as an inducement to sign such lock-up
agreement.
70
As a further requirement of the
issuance of the Series A-1 Preferred Stock on January 11, 2013, investors in the Company that purchased the December 2011
convertible notes, investors in the Company participated in the May 2012 private placement, and investors in the Company that
participated in the November 2011 private placement were required to sign a separate lock-up agreement which restrict all
such investors from selling certain securities of the Company owned by each such investor for the period of time from January
11, 2013 until the date which is two (2) months after the effective date of this registration statement. As an inducement
granted to execute lock-up the agreements, we offered investors that participated in the May 2012 private placement and
November 2011 private placement a pro rata portion of an increase of the warrants, in the aggregate, to acquire an additional
194,833 shares of common stock. As an inducement granted to execute the lock-up agreements, we also offered our December 2011
note holders a pro rata portion of an increase of the warrants, upon conversion of such notes, in the aggregate, to acquire
an additional 239,890 shares of common stock.
Liability and Indemnification of Directors and Officers
Nevada Revised Statutes Sections 78.7502
and 78.751 provide us with the power to indemnify any of our directors and officers. The director and officer must have conducted
himself or herself in good faith and reasonably believe that his or her conduct was in, or not opposed to, out best interests.
In a criminal action, the director, officer, employee, or agent must not have had reasonable cause to believe that his or her conduct
was unlawful.
Under Nevada Revised Statutes Section 78.751,
advances for expenses may be made by agreement if the director or officer affirms in writing that he or she believes that he or
she has met the statutory standards and will personally repay the expenses if it is determined that such officer or director did
not meet the statutory standards.
Our amended and restated articles of incorporation
allow for indemnification of directors and officers to the maximum extent permitted by the Nevada Revised Statutes.
Insofar as indemnification for liability
under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions,
or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Future Stock Issuances
Except as expressly set forth herein or
pursuant to the EIP, we have no current plans to issue any additional shares of our capital stock.
Trading Information
Our common stock is quoted on the OTC Bulletin
Board under the symbol "XXII.OB."
Transfer Agent
The transfer agent and registrar for our
common stock is Continental Stock Transfer & Trust Company, 17 Battery Place, 8th Floor, New York, NY 10004. We will serve
as warrant agent for the outstanding warrants.
Legal Matters
The validity
of the securities offered by this prospectus will be passed upon by Foley & Lardner, LLP. Foley & Lardner, LLP owns 1,000,000
shares of common stock of the
Company and holds a promissory note issued by the Company to Foley & Lardner LLP in the
principal amount of $175,000 which bears interest at the rate of 5% per annum and has a maturity date of July 1, 2014.
Experts
Freed Maxick CPAs, P.C.
(formerly Freed Maxick & Battaglia CPAs, PC), an independent registered public accounting firm, has audited the financial statements
of 22nd Century Group, Inc. as of December 31, 2011 and for each of the years in the two (2)-year period ended December 31, 2011,
as stated in their report appearing herein, and have been so included in reliance upon the report of the firm given upon their
authority as experts in accounting and auditing.
71
Changes
In and Disagreements With Accountants
On Accounting and Financial Disclosure
On January 27, 2011, our Board approved
the dismissal of Child, Van Wagoner & Bradshaw, PLLC ("Child"), as our independent registered public accounting
firm and engaged Freed Maxick CPAs, PC ("Freed"), as our independent registered public accounting firm, both effective
as of January 27, 2011. Freed was the independent registered public accounting firm of 22nd Century Limited, LLC prior to the
Merger and, given that the business of 22nd Century Limited, LLC is now our sole line of business, our Board concluded that Freed
should serve as our independent registered public accounting firm.
Child's report on our financial statements
for each of 22nd Century Group, Inc.'s past two fiscal years ended September 30, 2010 and 2009 did not contain an adverse
opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, except
that the report was qualified as to 22nd Century Group, Inc.'s ability to continue as a going concern.
During the fiscal years ended September
30, 2010 and 2009 and the subsequent interim period through January 27, 2011, there were no: (i) disagreements with Child on any
matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure which, if not resolved
to the satisfaction of Child, would have caused Child to make reference to the matter in their report, or (ii) reportable events
as defined in Item 304(a)(1)(v) of Regulation S-K.
During the fiscal years ended September
30, 2010 and 2009 and the subsequent interim period through January 27, 2011, neither 22nd Century Group, Inc. nor anyone acting
on its behalf consulted Freed regarding either: (i) the application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that might be rendered on our financial statements; or (ii) any matter that
was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as described
in Item 304(a)(1)(v) of Regulation S-K).
Where You
Can Find More Information
We file annual, quarterly and special reports,
proxy statements and other information with the SEC under the Exchange Act (File No. 000-54111). We have also filed with the SEC
a registration statement on Form S-1 under the Securities Act to register the shares offered by this prospectus. The term "registration
statement" means the original registration statement and any and all amendments thereto, including the schedules and exhibits
to the original registration statement or any amendment. This prospectus is part of that registration statement. This prospectus
does not contain all of the information set forth in the registration statement or the exhibits to the registration statement.
For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the
registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other documents
filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the SEC's
public reference facilities and Internet site referred to below.
You may read or obtain copies of these
reports and other information filed with the SEC by us at the public reference facilities maintained by the SEC at 100 F Street,
N.E., Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 for information regarding the operations of its Public Reference
Room and any copying charges assessed by the SEC. The SEC also maintains a website at
http://www.sec.gov
that contains
registration statements, reports, proxy information statements and other information regarding registrants regarding registrants
(including us) that file electronically. The information contained on the SEC's website is not intended to be incorporated
by reference in this prospectus and you should not consider that information a part of this prospectus.
72
22nd CENTURY LIMITED, LLC AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm
F-
2
Consolidated Financial Statements:
Consolidated Balance Sheets December 31, 2011 and 2010
F-
3
Consolidated Statements of Operations For the Years Ended December 31, 2011 and 2010
F-4
Consolidated Statements of Shareholders' Deficit For the Years Ended December 31, 2011 and 2010
F-
5
Consolidated Statements of Cash Flows For the Years Ended December 31, 2011 and 2010
F-
6
Notes to the December 31, 2011 Consolidated Financial Statements
F-
7
Consolidated Balance Sheets September 30, 2012 (unaudited) and December 31, 2011
F-21
Consolidated Statements of Operations For the Three Months Ended September 30, 2012 and 2011 (unaudited)
F-2
2
Consolidated Statements of Operations For the Nine Months Ended September 30, 2012 and 2011 (unaudited)
F-23
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2012 and 2011 (unaudited)
F-24
Consolidated Statements of Shareholders' Deficit For the Nine Months Ended September 30, 2012 (unaudited)
F-25
Notes to the September 30, 2012 Consolidated Financial Statements
F-26
F-
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
22nd Century Group, Inc.
We have audited the
accompanying consolidated balance sheets of
22nd Century Group, Inc. and Subsidiaries
as of December 31,
2011 and 2010, and the related consolidated statements of operations, shareholders' deficit, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of
22nd
Century Group, Inc.
as of December 31, 2011 and 2010, and the consolidated 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.
The
accompanying consolidated financial statements have been prepared assuming that 22nd Century Group, Inc. will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, 22nd Century Group, Inc. has suffered recurring losses
from operations and as of December 31, 2011 has negative working capital of approximately $1.9 million and a shareholders'
deficit of approximately $1.2 million
.
Additional financing will be required during 2012 in order
to satisfy existing current obligations and finance working capital needs, as well as additional losses from operations that are
expected in 2012. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ FREED MAXICK CPAs, P.C.
(Formerly Freed Maxick & Battaglia, CPAs, PC)
Buffalo, New York
April 16, 2012
F-
2
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and December 31, 2010
2011
2010
ASSETS
Current assets:
Cash
$
252,249
$
310
Grant receivable
-
223,540
Due from related party
15,491
-
Due from officers
7,714
-
Inventory
678,123
308,662
Prepaid expenses
17,675
211,717
Total current assets
971,252
744,229
Other assets:
Patent and trademark costs, net
1,387,104
1,467,623
Office furniture and fixtures, net
7,862
-
Deferred private placement costs
-
587,133
Deferred debt isuance costs, net
22,405
-
Deposits
-
1,535
Total other assets
1,417,371
2,056,291
Total assets
$
2,388,623
$
2,800,520
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Demand bank loans
$
174,925
$
174,925
Accounts payable
1,064,892
2,900,684
Accrued interest payable to shareholders
21,502
190,977
Accrued expenses
545,578
227,724
Deferred grant revenue
-
223,540
Notes payable to shareholders, net of unamortized discount
25,000
1,095,643
Notes payable
400,000
-
Convertible notes, net of unamortized discount
641,886
-
Due to related party
-
6,942
Due to officers
-
3,200
Total current liabilities
2,873,783
4,823,635
Long term notes payable to shareholders, net of unamortized discount
140,000
65,557
Long term portion of notes payables
37,000
-
Warrant liability
550,000
-
Total liabilities
3,600,783
4,889,192
Commitments and contingencies (Note 11)
-
-
Shareholders' deficit
Capital stock authorized:
10,000,000 preferred shares, $.00001 par value
300,000,000 common shares, $.00001 par value
Capital stock issued and outstanding:
0 preferred shares
-
-
27,209,646 common shares (16,000,000 at December 31, 2010)
273
-
Capital in excess of par value
5,822,882
3,598,856
Accumulated deficit
(7,041,297
)
(5,687,394
)
Non-controlling interest - consolidated subsidiary
5,982
(134
)
Total shareholders' deficit
(1,212,160
)
(2,088,672
)
Total liabilities and shareholders' deficit
$
2,388,623
$
2,800,520
See accompanying notes to consolidated financial
statements
F-
3
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2011 and December 31, 2010
2011
2010
Revenue
$
788,601
$
49,784
Other income - therapeutic grant
223,540
-
Total revenue
1,012,141
49,784
Operating expenses:
Costs of goods sold
418,171
27,964
Research and development
2,097,980
363,781
General and administrative
1,785,543
590,826
Sales and marketing costs
286,033
-
Amortization and depreciation
179,953
164,456
4,767,680
1,147,027
Operating loss
(3,755,539
)
(1,097,243
)
Other income (expense):
Gain warrant liability - derivative
2,511,750
-
Interest expense and debt expense:
Shareholders
(45,932
)
(265,221
)
Other
(58,066
)
(61,183
)
2,407,752
(326,404
)
Net loss
(1,347,787
)
(1,423,647
)
Net (income) loss attributable to non-controlling interest
(6,116
)
15
Net loss attributed to common shareholders
$
(1,353,903
)
$
(1,423,632
)
Loss per common share - basic and diluted
$
(0.05
)
$
(0.11
)
Common shares used in basic earnings per share calculation
26,391,204
12,437,983
See accompanying notes to consolidated financial
statements
F-
4
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
Years Ended December 31, 2011 and December 31, 2010
Common
Par value
Shares
of Common
Contributed
Accumulated
Non-controlling
Shareholders'
Outstanding
Shares
Capital
Deficit
Interest
Deficit
Balance at December 31, 2009
7,089,940
$
-
$
2,466,138
$
(4,263,762
)
$
(119
)
$
(1,797,743
)
Warrants issued
-
-
405,000
-
-
405,000
Common Stock issued
3,380,908
-
549,870
-
-
549,870
Common Stock issued in exchange for services
8,132
-
2,192
-
-
2,192
Common Stock issued as compensation in lieu of cash
346,493
-
68,237
-
-
68,237
Common Stock issued as compensation
204,053
-
33,000
-
-
33,000
Expensed portion of warrants as compensation
-
-
43,108
-
-
43,108
Conversion of shareholder note and accrrued interest to common stock
165,951
-
31,311
-
-
31,311
Warrants exercised for common stock
4,804,523
-
-
-
-
-
Net loss
-
-
-
(1,423,632
)
(15
)
(1,423,647
)
Balance at December 31, 2010
16,000,000
$
-
$
3,598,856
$
(5,687,394
)
$
(134
)
$
(2,088,672
)
Distribution of 5,000,000 warrants for common stock, exercise price of $3.00 per share
-
-
(1,550,000
)
-
-
(1,550,000
)
Common Shares issued in January 25, 2011 private placement
5,434,446
-
2,335,103
-
-
2,335,103
Merger of 22nd Century Limited and 22nd Century Group
5,325,200
268
(268
)
-
-
-
Stock based compensation
450,000
5
376,432
-
-
376,437
Beneficial conversion feature of convertible debt
-
-
1,062,759
-
-
1,062,759
Net income (loss)
-
-
-
(1,353,903
)
6,116
(1,347,787
)
Balance at December 31, 2011
27,209,646
$
273
$
5,822,882
$
(7,041,297
)
$
5,982
$
(1,212,160
)
See accompanying notes to consolidated financial
statements
F-
5
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2011 and December 31, 2010
2011
2010
Cash flows from operating activities:
Net loss
$
(1,347,787
)
$
(1,423,647
)
Adjustments to reconcile net loss to cash used by operating activities:
Amortization and depreciation
179,953
164,456
Amortization of debt issuance costs
1,095
35,923
Amortization of debt discount
34,087
126,624
Gain warrant liability - derivative
(2,511,750
)
-
Equity based employee compensation expense
376,437
144,345
Equity based payments for outside services
-
2,192
Note issued for employee compensation obligation
-
9,537
Note issued for obligation for outside services
-
2,192
Convertible note issued for outside services
60,000
-
(Increase) decrease in assets:
Grant receivable
223,540
(223,540
)
Inventory
(369,461
)
(253,639
)
Prepaid expenses
194,040
(211,717
)
Deposits
1,535
-
Increase (decrease) in liabilities:
Accounts payable
(222,660
)
190,524
Accrued interest payable to shareholders
(162,774
)
112,047
Accrued expenses
317,855
191,224
Deferred  revenue
(223,540
)
223,540
Net cash used by operating activities
(3,449,430
)
(909,939
)
Cash flows from investing activities:
Acquisition of patents and trademarks
(598,191
)
(108,116
)
Acquisition of office furniture and fixtures
(9,106
)
-
Net cash used by investing activities
(607,297
)
(108,116
)
Cash flows from financing activities:
Payment of deferred private placement costs
-
(60,976
)
Payment on demand loan
-
(71,810
)
Proceeds from issuance of notes and warrants to shareholders
215,000
723,271
Proceeds from issuance of convertible notes
1,300,000
-
Payment of debt issuance costs
(23,500
)
-
Payments on borrowings - notes payable  to shareholders
(393,276
)
(4,390
)
Payments on borrowings - notes payable
(50,000
)
Proceeds from issuance of common stock
-
549,870
Net proceeds from January 25, 2011 private placement
3,293,789
-
Net payments to related party
(22,433
)
(120,028
)
Net (payments to) advances from officers
(10,914
)
2,270
Net cash provided by financing activities
4,308,666
1,018,207
Net  increase in cash
251,939
152
Cash - beginning of period
310
158
Cash - end of period
$
252,249
$
310
Cash paid during the period for interest
$
196,539
$
16,890
Supplemental disclosure of noncash investing and financing activities:
Reduction of accounts payable not related to operating activities:
Payment of accounts payable for patent costs
$
500,000
$
-
Payment of accounts payable for deferred private placement costs
526,127
-
Accounts payable converted to promisory notes
587,000
-
$
1,613,127
$
-
Deferred private placement costs charged to contributed capital
$
587,133
$
-
Original issue discount on convertible debt
$
251,250
$
-
Conversion of shareholder note to convertible debt
$
215,000
$
-
Conversion of note payable to convertible note
$
100,000
$
-
Beneficial conversion value upon issuance of convertible debt recoded as debt discount and an increase in capital in excess of par value
$
1,062,759
$
-
Conversion of shareholder note and accrued interest to common shares and warrants
$
614,070
$
31,311
Issuance of warrants as derivative liability instruments and reduction of capital in excess of par value
$
3,061,750
$
-
Patent and trademark additions included in accounts payable
$
-
$
39,796
Deferred private placement cost additions included in accounts payable
$
-
$
526,157
See accompanying notes to consolidated financial
statements
F-
6
22nd CENTURY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Introduction
-
These consolidated financial statements of 22nd Century Group, Inc. ("22nd Century Group") and
its direct and indirect subsidiaries (collectively with 22nd Century Group, the "Company") incorporate and reflect
the reverse acquisition of 22nd Century Limited, LLC by 22nd Century Group as described below.
On January 25, 2011, 22nd Century Limited,
LLC ("22nd Century Ltd") completed a reverse merger transaction (the "Merger") with 22nd Century Group
(formerly Touchstone Mining Limited). As a result, 22nd Century Ltd became a wholly owned subsidiary of 22nd Century Group which
continues to operate the business of 22nd Century Ltd. In connection with the Merger, 22nd Century Group issued 21,434,446 shares
of its common stock to the holders of limited liability company membership interests of 22nd Century Ltd, whose share amount represented
80.1% of the outstanding shares immediately following the Merger. All references contained herein to shareholders or common shares
include the historical members and limited liability company membership interests of 22nd Century Ltd because, in the Merger, limited
liability company membership interests were exchanged for common shares on a one-for-one basis and from an accounting standpoint
they are equivalent.
The Merger is being accounted for as a reverse
acquisition and a recapitalization; 22nd Century Ltd is the acquirer for accounting purposes. Consequently, the assets and liabilities
and the historical operations that are reflected in the financial statements set forth herein for periods prior to the Merger are
those of 22nd Century Ltd and are recorded at the historical cost basis of 22nd Century Ltd, and the consolidated financial statements
set forth herein for periods beginning on and following completion of the Merger include the assets and liabilities of 22nd Century
Ltd, historical operations of 22nd Century Ltd, and operations of 22nd Century Group from the closing date of the Merger.
Upon the closing of the Merger, 22nd Century
Group transferred all of its operating assets and liabilities to Touchstone Split Corp. and split-off Touchstone Split Corp. through
the sale of all of the outstanding capital stock of Touchstone Split Corp. (the "Split-Off"). After the completion
of the Merger and Split Off, 22nd Century Group's consolidated financial statements include only the assets and liabilities
of 22nd Century Ltd.
Immediately prior to the Merger on
January 25, 2011, 22nd Century Ltd
completed a private placement offering (the "Private
Placement") of 5,434,446 securities (the "PPO Securities") at the purchase price of $1.00 per Unit, each
such Unit consisting of one (1) limited liability company membership interest of 22nd Century Ltd and a five-year warrant to
purchase one-half of one (1/2) limited liability company membership interest of 22nd Century Ltd at an exercise price of
$1.50 per whole common share. In connection with the Private Placement,
22nd Century Ltd
approved a prorata distribution of 5,000,000 five-year warrants to purchase one limited liability company membership interest
at an exercise price of $3.00. These warrants were valued at $1,550,000 and classified as liabilities resulting in a decrease
to contributed capital. Private Placement proceeds included $614,070 from the conversion of
22nd Century Ltd
indebtedness into PPO Securities and $395,376 from the conversion of placement agent fees into PPO Securities, resulting
in gross cash proceeds of $4,425,000.  Private Placement expenses incurred included cash expenses of approximately
$1,025,000 and non-cash expenses consisting of the placement agent fees of $395,376 which were converted into PPO Securities
and $390,000 for the estimated fair value of 934,755 placement agent and advisor warrants issued to the placement agent.
An additional $167,820 of cost was incurred in the second and third quarters of 2011 in connection with the registration
process for the common stock issued in the Private Placement. 22nd Century Ltd/Group received net cash proceeds of
approximately
$3.2 million
from the Private Placement
and a reduction of debt and
accrued interest obligations to shareholders that were on the balance sheet at December 31, 2010 of approximately
$614,000, which was exchanged for equity interests in the offering
. A portion of the proceeds,
amounting to $1,511,750, was allocated to the warrants issued and classified as liabilities (see Note 10).
F-
7
The unaudited supplemental pro forma revenue
and net loss attributed to the shareholders of the Company if the acquisition had taken place as of January 1, 2010 are as follows:
2011
2010
Revenue
$
788,601
$
49,784
Net loss attributed to shareholders
$
(1,353,903
)
$
(1,473,632
)
Reclassifications
–
Certain items in the 2010 financial statements have been reclassified to conform to the 2011 classification.
Preferred
stock authorized
–
the authorization is for
"
blank
check" preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common
stock.
Nature
of Business
-
22nd Century Group is a holding company and is the sole member of 22nd Century Ltd,
which is a plant biotechnology company. 22nd Century Ltd owns or exclusively licenses 101 issued patents in 78 countries predominantly
related to modifying the content of nicotinic alkaloids in plants, specifically tobacco plants, through genetic engineering and
plant breeding.
The overall objectives of 22nd Century Ltd
are to reduce smoking-related disease by increasing smoking cessation with
X-22,
its botanical prescription smoking cessation
aid in development and reducing the harm to smokers with 22nd Century's potential modified risk tobacco products, for smokers
unwilling to quit. 22nd Century Ltd, including its subsidiaries, Goodrich Tobacco Company Ltd. ("Goodrich Tobacco")
and Hercules Pharmaceuticals, LLC ("Hercules Pharmaceuticals") is primarily involved in the following activities:
·
The development of its botanical smoking cessation aid,
X-22
;
·
The development of its modified risk tobacco products;
·
The pursuit of necessary regulatory approvals at the U.S. Food and Drug Administration (the "FDA") to market
X-22
as a prescription smoking cessation aid and its proprietary cigarettes
as modified risk tobacco products in the U.S.;
·
The manufacture, marketing and distribution of
RED SUN
and
MAGIC
proprietary cigarettes
in traditional
tobacco market channels in the U.S. and for export through its subsidiary Goodrich Tobacco;
·
The international licensing of 22nd Century Ltd's trademarks, brands, proprietary tobaccos, and technology; and
·
The production of
SPECTRUM
research cigarettes for the National Institute on Drug Abuse ("NIDA").
Principles
of Consolidation
- The accompanying consolidated financial statements include the accounts of
22nd Century
Group, 22nd Century Ltd, and Goodrich Tobacco
, a subsidiary of
22nd Century Ltd
.
22nd Century
Ltd
owns 96% of the outstanding membership units of
Goodrich Tobacco
.
All intercompany accounts and transactions have been eliminated.
Inventory
- Inventories are
valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Inventories are evaluated
to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved
as appropriate. The Company's inventory consisted of the following categories:
December 31,
December 31,
2011
2010
Materials, mainly tobacco
$
678,123
$
292,480
Finished goods
-
16,182
Total
$
678,123
$
308,662
Intangible Assets
- Intangible
assets are recorded at cost and consist primarily of expenditures incurred with third parties related to the processing of patent
claims and trademarks with government authorities. The Company also capitalized costs as a result of one of its exclusively licensed
patent applications being subject to an interference proceeding invoked by the U.S. Patent and Trademark Office, which favorably
resulted in the Company obtaining rights to a third party's issued patent. The amounts capitalized relate to patents the
Company owns or to which it has exclusive rights and its trademarks, and exclude approximately $1.8 million recovered from a former
licensee as direct reimbursements of costs incurred. These capitalized costs are amortized using the straight-line method over
the remaining statutory life of the Company's primary patent family, which expires in 2019 (the assets' estimated lives).
Periodic maintenance or renewal fees, which are generally due on an annual basis, are expensed as incurred. Annual minimum license
fees are charged to expense in the year the licenses are effective. Total patent and trademark costs capitalized and accumulated
amortization amounted to $2,063,812 and $676,708 as of December 31, 2011 ($1,965,621 and $497,998 - as of December 31, 2010). The
estimated annual amortization expense for the next five years is approximately $185,000.
F-
8
Impairment of Long-Lived Assets
-
The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate
that the historical cost-carrying value of an asset may no longer be recoverable.
The Company assesses recoverability of the
asset by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition. If
the estimated future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset's carrying value and its fair value. There was no impairment loss recorded during
the years ended December 31, 2011 and 2010.
Deferred Private Placement Costs
- During 2010, the Company incurred costs related to the Private Placement that closed on January 25, 2011. Such costs were accumulated
on the balance sheet as of December 31, 2010 and were charged against contributed capital upon closing of the offering. Deferred
Private Placement costs were $0 as of December 31, 2011 ($587,133 – December 31, 2010).
Deferred Debt Issuance Costs
– In the fourth quarter 2011, the Company incurred costs related to the Private Placement of Convertible Notes that closed
on December 16, 2011. These costs were recorded in the balance sheet as a deferred charge and are being amortized over the one
–year term of the notes. The unamortized balance at December 31, 2011 is $22,405.
Income Taxes
- Prior
to the Merger, the Company was treated as a Partnership for federal and state income tax purposes. As a result, there was no entity
level income tax for periods prior to the Merger because all taxable income tax deductions and tax credits were passed through
to the members of the Company. Following the Merger on January 25, 2011, the Company is treated as a corporation, subject to Federal
and State income taxes. Accordingly, as of the Merger date the Company is required to recognize deferred tax assets and liabilities
for any basis differences in its assets and liabilities between tax and GAAP reporting, and for operating loss and credit carryforwards.
The net deferred tax asset resulting from the change in tax status was approximately $300,000.
In light of the Company's history
of cumulative losses management has determined that is it more likely than not that its net deferred tax asset will not be realized.
Accordingly the Company established a valuation allowance to fully offset its net deferred tax asset as of the Merger and December
31, 2011.
Stock Based Compensation
- The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and
others receive shares, options or warrants to purchase common shares of 22nd Century Group. Stock based compensation expense is
recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For
accounting purposes, the shares will be considered issued and outstanding upon vesting.
Debt Discounts
– Original
issue discount ("OID") is recorded equal to the difference between the cash proceeds and the face value of the debt
when issued and amortized as interest expense during the term of the debt.
When the convertible feature of the
conventional convertible debt is issued, the embedded conversion feature is evaluated to determine if bifurcation and
derivative treatment is required and whether there is a beneficial conversion feature. When the convertible debt provides for
an effective rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature
("BCF"). Prior to the determination of the BCF, the proceeds from the debt instrument were first allocated between
the convertible debt and any embedded or detachable free standing instruments that are included, such as common stock
warrants. The proceeds allocated to any warrants are recorded as a debt discount.
For the Convertible Notes issued December
16, 2011, bifurcation of the embedded conversion feature was not required and the Company recorded the OID and the BCF related
to these Convertible Notes as a debt discount and recorded the Convertible Notes net of the discount related to both the OID and
the BCF. Debt discount is amortized to interest expense over the life of the debt.
F-
9
Unearned Grant Revenue
- In 2010
22nd Century Ltd received approval of a government grant as partial
support for its clinical trial for the FDA. All costs associated with this grant were charged to research and development expense
in 2011 and the deferred revenue balance of $223,540 at December 31, 2010 represented proceeds received in advance and was recognized
into income and included in other income on the statement of operations for the year ended December 31, 2011 as the costs were
incurred. Deferred grant revenue was $0 as of December 31, 2011 (as compared to $223,540 as of December 31, 2010).
Revenue Recognition
- The
Company recognizes revenue at the point the product is shipped to a customer and title has transferred. Revenue from the sale of
the Company's products is recognized net of cash discounts, sales returns and allowances. Cigarette federal excise taxes
are included in net sales and accounts receivable billed to customers, except on sales of
SPECTRUM
and exported cigarettes
in which such taxes do not apply.
The Company was chosen to be a subcontractor
for a 5-year government contract between RTI International ("RTI") and the National Institute on Drug Abuse ("NIDA")
to supply NIDA research cigarettes which includes four development stages. The company has completed the four developmental stages
and delivered 8,779,000 cigarettes during the year ended December 31, 2011 and recognized the related revenue. These government
research cigarettes are distributed under the mark
SPECTRUM
.
Future revenue under this sub-contract
arrangement is expected to be related to the delivery of
SPECTRUM
and will be recognized
at the point the product is shipped and title has transferred.
Derivatives -
We do not use
derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and
then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. The methodology
for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model approach which includes probability
weighted estimates of future events including volatility of our common stock. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months of the balance sheet date.
Research and Development
-
Research and development costs are expensed as incurred.
Loss Per Common Share
-
Basic loss per common share is computed using the weighted-average number of common shares outstanding. Diluted loss per share
is computed assuming conversion of all potentially dilutive securities. Potential common shares outstanding are excluded from the
computation if their effect is anti-dilutive.
Commitment and Contingency Accounting
-
The Company evaluates each commitment and/or contingency in accordance with the accounting standards, which state
that if the item is more likely than not to become a direct liability, then the Company will record the liability in the financial
statements. If not, the Company will disclose any material commitments or contingencies that may arise.
Use of Estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Recent
Accounting Pronouncements
-
In May 2011, the FASB issued Accounting Standards Update
No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRS.  This update results in common principles and requirements for measuring fair value and for disclosing
information about fair value measurements in accordance with U.S. GAAP and IFRS.  ASU 2011-04 is required to be applied
prospectively in interim and annual periods beginning after December 15, 2011.  Early application is not permitted.  The
adoption of ASU 2011 is not expected to have a material impact on the consolidated financial statements.
F-
10
NOTE 2. - LIQUIDITY AND MANAGEMENT'S PLANS
Since 2006, 22nd Century Ltd has incurred
substantial operating losses as it transitioned from being only a licensor of its proprietary technology and tobaccos to commercializing
its own tobacco products. At December 31, 2011, the Company had current assets of $971,252 and current liabilities of $2,873,783.
Cash on hand at December 31, 2011 of $252,249 is insufficient to sustain operations and pay outstanding current liabilities as
they become due in 2012. The Company has suspended clinical trials for
X-22
in order to reduce expenditures and is seeking
licensing agreements for its products with both domestic and international businesses. The Company's Board of Directors authorized
management to seek additional financing involving equity securities
which will be dilutive to 22nd Century
Group's existing shareholders' respective ownership percentages.
The Company continues to explore the developing
distribution channels for its proprietary cigarettes,
RED SUN
and
MAGIC
, through its subsidiary, Goodrich Tobacco.
The Company currently has no distribution arrangements and no orders for these products. Although orders from RTI for
SPECTRUM
are expected in 2012 the Company has no outstanding backlog of orders as of December 31, 2011.
The Company's ability to fund operations
and meet its obligations during 2012 will be dependent upon obtaining additional equity financing and signing one or more significant
licensing arrangements for its products. There can be no assurance that the Company will be able to raise sufficient equity financing
or obtain a significant licensing contract.
NOTE 3. - AMOUNTS OWED NORTH CAROLINA STATE UNIVERSITY ("NCSU")
Pursuant to the
terms of an exclusive license agreement with NCSU, the Company owes NCSU approximately $753,000 as of December 31, 2011 for patent
costs and license fees (as compared to $1,128,000 owed as of December 31, 2010). These amounts are included in accounts payable
and accrued liabilities in the consolidated balance sheets. The Company was required to pay these amounts within thirty days of
being invoiced and they are past due. NCSU has the right to claim interest on the balance. During 2011 the Company paid NCSU a
total of approximately $745,000 for past due amounts as well as current patent costs and royalties. Management periodically communicates
its plans for commercialization of products using the technology licensed from NCSU and believes its relations with NCSU are sound.
In order to facilitate the Company's plans to raise capital and commercialize its products NCSU agreed, in a letter dated
November 22, 2011, not to invoke its rights to terminate for non-payment or non-performance that it may have under the agreement
until October 15, 2012. After October 15, 2012, if the Company is still delinquent as to amounts owed, NCSU may have the right
to terminate the exclusive license agreement,
but can only do so with a 60-day prior written notice, including the opportunity
to cure within this timeframe
. As of December 31, 2011, patent costs associated with the exclusive license
agreements that could potentially be terminated had a carrying value of approximately $700,000. Additionally, NCSU has not imposed
interest charges on past due amounts invoiced to the Company and as such the Company has not recorded accrued interest or interest
expense.
NOTE
4. - DEMAND BANK LOANS
The demand loan that is among the Company's
short term liabilities is payable to a commercial bank under a revolving credit agreement and is guaranteed by a shareholder of
the Company. This loan had a balance of $174,925 at December 31, 2011 and 2010. The Company is required to pay interest monthly
at an annual rate of 0.75% above the prime rate, or 4.00% at December 31, 2011 and December 31, 2010. The Company is current in
meeting this interest payment obligation. The terms of the demand loan includes an annual "clean-up" provision, which
requires the Company to repay all principal amounts outstanding for a period of 30 consecutive days every year. The Company has
not complied with this requirement; however, the bank has not demanded payment. The bank has a lien on all the Company's
assets.
F-
11
NOTE 5. - NOTES PAYABLE - SHAREHOLDERS
Notes payable to shareholders consisted
of the following:
2011
2010
Note dated January 25, 2011
$
140,000
$
-
Notes dated September 15 and October 15, 2009,  net of unamortized discount
25,000
20,557
Note dated October 28, 2008
-
325,000
Note dated November 11, 2008
-
325,000
Note dated May 20, 2009
-
30,000
Note dated January 1, 2008
-
100,014
Note dated May 27, 2010
-
45,000
Note dated September 1, 2010
-
35,000
Notes dated October 4, 2010
-
150,000
Note dated December 29, 2010
-
100,000
Note payable to repurchase common shares
-
30,629
$
165,000
$
1,161,200
The notes payable
in the table below are shown in the balance sheet as follows:
2011
2010
Notes payable to shareholders, net of unamortized discount
$
25,000
$
1,095,643
Long term notes payable to shareholders, net of unamortized discount
140,000
65,557
Note Dated January 25, 2011(unsecured)
- On January 25, 2011, the Company issued a note for $140,000 to a shareholder as satisfaction of the balance due for principal
and interest on matured notes that were not paid in cash or converted to common stock of 22nd Century Group and warrants to purchase
shares of common stock of 22nd Century Group. The note bears interest at 12% and is due on July 1, 2013 together with accrued interest.
As of December 31, 2011, the outstanding principal amount of this note is $140,000.
Notes Dated
September 15 and October 15, 2009
(unsecured)
- On September 15, 2009 and October 15, 2009, the Company issued two
notes payable to the same third party in the amounts of $15,000 and $10,000, respectively. In conjunction with the $15,000 note,
a warrant to purchase 185,503 common shares of 22nd Century
Ltd
at less than $.0001 per unit
was issued, and in conjunction with the $10,000 note, a warrant to purchase 92,751 common shares of 22nd Century
Ltd
at less than $.0001 per unit was issued. The warrants were valued at $11,301 for the $15,000 note and $6,962 for the $10,000 note,
were recorded as discounts to the respective notes payable and are being amortized over the term of each note which significantly
adjusts the effective interest rate. The intrinsic value of the warrants at the time of issuance was determined to be $68,750;
the debt discount recorded was based on allocating the $25,000 in transaction proceeds proportionally between the notes and the
warrants. The notes bear interest at a rate of 10% and the outstanding principal and interest is due and payable at maturity -
January 31, 2012 in each case. As of December 31, 2011, the total outstanding principal and unamortized debt discounts for the
two notes amounted to $25,000 and $0 (as compared to $25,000 and $4,443 at December 31, 2010), respectively. The warrants were
exercised in 2010 prior to the Merger.
Following maturity on January 31, 2012 the
notes remain unpaid. The Company has attempted to negotiate an extension and the note holder has demanded payment.
Note Dated October 28, 2008
- On October 28, 2008, the Company issued a note payable to a third party in the amount of $325,000. The interest rate on the note
was 10% and the outstanding principal and interest was due and payable on October 28, 2010, the maturity date.
This note matured and remained outstanding
at December 31, 2010; however, in January and February 2011 this note together with the $30,000 note dated May 20, 2009 (described
below), and all the related accrued interest of $77,300 were satisfied by: (i) conversion of $150,000 into equity in connection
with the January 25, 2011 Private Placement; (ii) a cash payment of $142,300; and (iii) a new note dated January 25, 2011 (see
Note 6) payable in the amount of $140,000.
Note Dated November 11, 2008
- On November 11, 2008, the Company issued a note payable to a shareholder in the amount of $325,000. The interest rate on the
note was 10% and the outstanding principal and interest was due and payable on November 11, 2010, the maturity date. This note
was extended as set forth below and remained outstanding at December 31, 2010.
F-
12
The extended maturity date on the note was
January 10, 2011 and the interest rate during the extension period was 15%. Following the maturity of this note on January 10,
2011, the principal amount of $325,000 was converted to equity in connection with the January 25, 2011 Private Placement and the
accrued interest was paid in cash.
Note Dated May 20, 2009
(unsecured)
- On May 20, 2009, the Company issued a note payable in the amount of $30,000 to the same third party that was issued the October
28, 2008 note. The interest rate on the note was 10% and the outstanding principal and interest was due and payable on May 19,
2010, the maturity date. The $30,000 in principal and accrued interest remained outstanding as of December 31, 2010. This note
was satisfied in January and February 2011 together with the October 28, 2008 note as described previously.
Note Dated January 1, 2008 (unsecured)
- The Company issued a note to a shareholder on January 1, 2008 payable in the amount of $100,014. The interest rate on the
note was 7%; the interest and principal were due on January 15, 2011, the maturity date, and were paid in cash in January 2011.
Note Dated May 27, 2010 (unsecured)
- During 2010, the holder of the Notes dated September 15 and October 15, 2009 advanced additional funds, totaling $450,000,
to the Company and obtained conversion rights to warrants to acquire shares of common stock. In March 2010, $225,000 was converted
into warrants to acquire 1,706,626 shares of common stock and this amount was recorded as equity. Pursuant to an agreement effective
on May 27, 2010, in exchange for the remaining $225,000 advanced, the Company issued warrants to acquire 1,409,821 shares of common
stock and a note for $45,000. The note bears interest at 10%, which is due with the principal amount on January 31, 2012. The note
was satisfied in January 2011 by conversion to equity in connection with the January 25, 2011 private placement.
Note Dated September 1, 2010 (unsecured)
- On September 1, 2010, the Company issued a note payable to a shareholder in the amount of $35,000. The interest rate
on the note was 15%, and, pursuant to an extension, the interest and principal were due on January 25, 2011, the extended
the maturity date. The note was paid in cash in January 2011.
Notes Dated October 4, 2010 (unsecured)
- The Company issued notes payable to seven shareholders in the aggregate amount of $150,000. The interest rate on each of
these notes was 15%, and the interest and principal were due on the maturity date of January 31, 2011. These notes were satisfied
in January 2011 by conversion of $87,367 to equity in connection with the January 25, 2011 Private Placement and by payment of
$62,633 in cash.
Note Dated December 29, 2010 (unsecured)
– The Company issued a note payable to a shareholder in the amount of $100,000. The interest rate on this note was 15%,
and the interest and principal were due on the maturity date of January 29, 2011. The note was paid in cash in January 2011.
Note Payable to Repurchase Common
Shares
(unsecured)
- On December 31, 2010, the Company agreed to repurchase 51,637 common shares previously
issued to a shareholder in exchange for a $35,019 note, which $30,629 remained unpaid as of December 31, 2010. The interest rate
on the note was 7% and the outstanding principal and interest were due and payable on September 30, 2010, the maturity date. The
note remained unpaid at the maturity date; the outstanding principal balance and accrued interest were paid in cash in February
2011.
NOTE 6. - NOTES PAYABLE
Notes payable consisted of the following
as of the dates set forth below:
2011
2010
Convertible note dated March 31, 2011
$
87,000
$
-
Note dated March 30, 2011
350,000
-
437,000
-
Less long term portion of notes payable
(37,000
)
-
Notes Payable (shown in current liabilities)
$
400,000
$
-
F-
13
Convertible Note Dated March 31, 2011(unsecured)
- On March 31, 2011, the Company issued a note to a vendor in the original amount of $237,000 as satisfaction of past due invoices
previously recorded by the Company in accounts payable. The note bears interest at an annual rate of 9%. In December 2011 the note
was amended and the principal was reduced by a cash payment of $50,000 and $100,000 exchanged for $115,000 of the Convertible Notes
issued December 16, 2011 so that the remaining principal balance under the note is $87,000 as of December 31, 2011. The note amendment
also provided for principal payments together with accrued interest to be due as follows: $50,000, May 1, 2012 and $37,000 January
1, 2013, the maturity date. The note is convertible into common stock of the Company at the option of the holder after December
18, 2011. The conversion rate will be determined at the time of conversion based on the average of the closing price of the Company's
common stock on the day of and day after the conversion date.
Note Dated March 30, 2011(unsecured)
- On March 30, 2011, the Company issued a note to a vendor in the amount of $350,000 as satisfaction of past due invoices previously
recorded by the Company in accounts payable. The note bears interest at an annual rate of 4%. Principal and accrued interest are
due on July 1, 2012. This maturity date is automatically accelerated if the Company receives funding of $5,000,000 or more prior
to July 1, 2012. As of December 31, 2011, the outstanding principal on this note is $350,000.
NOTE 7. - CONVERTIBLE NOTES ISSUED DECEMBER 16, 2011
The Company issued
Convertible Notes on December 16, 2011 in a negotiated sale with 24 investors in the total face amount of $1,926,250. The notes
were sold for $1,675,000 - an original issue discount of $251,250. The notes do not bear interest and the total face amount of
$1,926,250 is due December 16, 2012. The notes can be converted, at the option of each holder, in whole or in part, into shares
of the Company's common stock at $0.75 per share at which time the holder shall also receive
warrants equal to 120%
of the number of shares of Company common stock into which such Notes have been then converted
. Such
warrants will have a term of five years and an exercise price of $1.50 per share of common stock.
In the event the Company
engages in a subsequent financing transaction of at least $5,000,000 in shares of Company's common stock with a sale price
equal to or greater than $0.80 per share or debt securities which are convertible into shares of Company common stock with a conversion
price equal to or greater than $0.80 per share of common stock, then the Company will have the right to mandatorily require the
conversion of the Notes. Also, in the event of subsequent financing transaction of at least $5,000,000, the note holders have "piggyback'
registration rights of the common shares and warrants underlying the conversion of the notes. The notes contain "down round"
provisions which provide for adjustments to the conversion price if the Company issues shares of common stock of 22nd Century Group
at a price that is less than the exercise price. The conversion feature was not considered to be a derivative because it does not
have a net cash settlement provision as a result of the limited market and trading activity for the underlying stock. If the notes
are converted the warrants issued at conversion have a "down round provision" and will be classified as derivatives
for accounting purposes, which (similarly to the January 25, 2011 Warrants) means they are reported as a liability and marked to
market at each balance sheet date.
The Company's common stock closed
at $0.90 per share on December 16, 2011, which is greater than the portion of the conversion price under the notes allocated to
the underlying common shares. This difference is a beneficial conversion feature which was valued at $1,062,759 at the issue date
and recorded as debt discount and additional paid in capital.
Three officers of the Company acquired a
portion of these Convertible Notes - with a face value of $368,000 for cash of $105,000 and conversion of $215,000 short term unsecured
12% notes issued by the Company earlier in 2011.
The following table summarizes the notes
and related discount as of December 31, 2011:
Face value of Convertible Notes payable upon issuance and through maturity
$
1,926,250
Less original issue discount
(251,250
)
Less discount related to BCF
(1,062,759
)
Plus amount of discount amortized to interest and debt expense in 2011
29,645
Convertible notes, net of unamortized debt discount as of December, 31, 2011
$
641,886
Subsequent to December 31, 2011, notes amounting to
$86,250 were converted into 115,000 shares of common stock resulting in the issuance of 138,000 common stock warrants. 
This conversion triggered the "down round"  provision of the January 25, 2011 warrants resulting in an
adjustment to the exercise price, as well as number of shares issuable under the warrants.
F-
14
NOTE 8. - DUE FROM or TO RELATED PARTY
The Company has
conducted transactions with a related party,
Alternative Cigarettes, Inc. ("AC"). AC is entirely owned by certain
shareholders of the Company, including the CEO. AC shares office space and employee services with the Company. During the year
ended December 31, 2011 the Company acquired its
MAGIC
trademark from AC for a purchase price of $22,500; other activity
during 2011 and 2010 consisted mainly of repayments and advances. The net amount due from AC amounted to $15,491 as of December
31, 2011 (as compared with the Company owing AC $6,942 as of December 31, 2010). No interest has been accrued or paid on amount
due from or to AC and there are no repayment terms.
NOTE 9. - DUE FROM or DUE TO OFFICERS
The amount due from officers of $7,714 at
December 31, 2011 (as compared with $0 due from officers as of December 31, 2010) is primarily related to employee portion of FICA
on restricted stock awards to be recovered from the employee.
Amount due to officers is a result of advances
to the Company for working capital purposes and Company expenses paid directly by the officers net of advances or reimbursements.
As of December 31, 2011, the net amount due to officers was $0 (as compared with $3,200 due to officers as of December 31, 2010).
No interest has been accrued or paid on any amount due to officers and there are no repayment terms.
NOTE 10. - WARRANTS FOR COMMON STOCK
Prior to December 31, 2010, 22nd Century
Ltd granted warrants to purchase common shares of 22nd Century Group in connection with borrowings as an additional incentive for
providing financing to the Company and as additional compensation to officers, consultants and advisors. The warrants were granted
with a conversion price of less than $.0001, and the number of warrants issued was negotiated based on the agreement at the time
of the grant. These warrants had been issued for terms of two to five years. All of these warrants were exercised prior to December
31, 2010.
In connection with the January 25, 2011
Private Placement and Merger, the Company issued 8,651,978 five year warrants ("January 25, 2011 Warrants") to purchase
shares of common stock of 22nd Century Group as follows: 5,000,000 with an exercise price of $3.00 per share, and 3,651,978 with
an exercise price of $1.50 per share. These warrants contain "down round" provisions which provide for adjustments
to the exercise price if the Company issues common shares of stock of 22nd Century Group at a price that is less than the respective
warrant exercise prices. This provision is a guarantee of value which requires that these warrants be classified as derivatives
for accounting purposes which means they are reported as a liability and marked to market at each balance sheet date.  The
original amount of the warrant liability related to the 5,000,000 $3.00 warrants was $1,550,000 and was recorded as a reduction
of equity on January 25, 2011; the original amount of the warrant liability related to the 3,651,978 $1.50 warrants is $1,511,750,
and, because it was recorded as a liability, the portion of proceeds from the Private Placement that was recorded as contributed
capital was reduced accordingly. As of December 31, 2011 there are 3,651,978 January 25, 2011 Warrants with an exercise price of
$1.50 and 5,000,000 January 25, 2011 Warrants with an exercise price of $3.00.
The Company estimated the initial value
of the warrant liability at January 25, 2011 using the binomial lattice model to allocate total enterprise value to the warrants
and other securities in the Company's capital structure based upon the enterprise value implied in the January 25, 2011
Private
Placement
. Consideration was also given to the impact of expected future capital raises and issuances of securities under
the Company's 2010 Equity Investment Plan ("EIP"). Volatility was estimated based on historical observed equity
volatilities and implied (forward) or expected volatilities for a sample group of guideline companies and consideration of recent
market trends.
The fair value of this warrant liability as of December 31, 2011 was estimated
to be $550,000 which was determined using the binomial lattice model with updated for the factors used in the initial valuation
performed as of January 25, 2011, principally: the equity value of the Company, the remaining exercise period and the decrease
in the risk free interest rate.  As a result a gain of $2,511,750 was recorded as other income in the statement of operations
during 2011. The following table is a roll-forward of the warrant liability from the initial valuation:
Fair value of warrant liability as of January 25, 2011
$
3,061,750
Gain as a result of change in fair value
(2,511,750
)
Fair value at December 31, 2011
$
550,000
F-
15
ASC 820 establishes a valuation hierarchy
for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels
as follows.
·
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
·
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the
asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial
instrument.
·
Level 3 inputs are unobservable inputs based on the Company's own assumptions used to measure assets and liabilities
at fair value.
A financial asset or liability's classification within
the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The warrant liability
is measured at fair value using certain estimated factors such as volatility and probability and are classified within Level 3
of the valuation hierarchy.
The following table summarizes the warrant activity since December
31, 2009:
Number of Warrants
Warrants outstanding at December 31, 2009
1,688,076
Warrants issued during 2010
3,116,447
Warrants exercised during 2010
(4,804,523
)
Warrants outstanding at December 31, 2010
-
January 25, 2011 Warrants issued
8,651,978
Warrants exercised during 2011
-
Warrants outstanding at December 31, 2011
8,651,978
Warrants exercisable at December 31, 2011
8,651,978
NOTE 11. - COMMITMENTS
License Agreements
-
Under its exclusive license agreement with NCSU, the Company is required to pay minimum annual royalty payments, which are credited
against running royalties on sales of licensed products. The annual minimum royalty for each of the calendar years 2010 through
2013 is $75,000, and in 2014 the annual minimum royalty increases to $200,000. The license agreement continues through the life
of the last-to-expire patent, which is expected to be 2022. These minimum royalty payments are due each February following the
end of the applicable calendar year and are reduced by any running royalties paid or payable for that year. The agreement also
requires a milestone payment of $150,000 upon FDA approval of a product that uses the NCSU licensed technology. The Company is
also responsible for reimbursing NCSU for actual third-party patent costs incurred. These costs vary from year to year and the
Company has certain rights to direct the activities that result in these costs. During the year ended December 31, 2011, the costs
incurred related to patent costs and patent maintenance amounted to $93,343 (as compared to $125,956 during the year ended December
31, 2010).
The Company has two other exclusive license
agreements which require aggregate annual license fees of approximately $55,000, which are credited against running royalties on
sales of licensed products. Each license agreement continues through the life of the last-to-expire patent.
The Company entered into a three year lease
for approximately 3,800 square feet of office space in Clarence, NY, which commenced September 1, 2011. Scheduled rent remaining
as of December 31, 2011 is as follows:
2012
$
32,667
2013
$
37,833
2014
$
28,000
F-
16
NOTE 12. - EARNINGS PER COMMON SHARE
The following table sets forth the computation
of basic and diluted earnings per common share for the year ended December 31, 2011 and 2010:
2011
2011
Net loss attributed to common shareholders
$
(1,353,903
)
$
(1,423,632
)
Denominator for basic earnings per share-weighted average shares outstanding
26,391,204
12,437,983
Effect of dilutive securities:
Warrants, restricted stock and options outstanding
-
-
Denominator for diluted earnings per common share - weighted average shares adjusted for dilutive securities
26,391,204
12,437,983
Loss per common share - basic
$
(0.05
)
$
(0.11
)
Loss per common share- diluted
$
(0.05
)
$
(0.11
)
Securities outstanding
that were excluded from the computation because they would have been anti-dilutive are as follows:
2011
2010
Warrants
8,651,978
-
Convertible Debt Issued December 16, 2011(number of shares including related warrants upon conversion of  3,082,000)
5,650,333
-
Restricted Stock
700,000
-
Convertible Note
246,707
-
Options
35,000
-
15,284,018
-
NOTE 13. - STOCK BASED COMPENSATION
On October 21,
2010, the Company established the 2010 Equity Incentive Plan ("EIP") for
officers, employees, directors, consultants
and advisors to the Company and its affiliates
, consisting of 4,250,000 shares of common stock. The
EIP has a term of ten years and is administered by our Board of Directors ("Board") or a committee to be established
by our Board (the "Administrator"), to determine the various types of incentive awards that may be granted to recipients
under this plan and the number of shares of common stock to underlie each such award under the EIP. The EIP also contains a provision
which restricts the plan to granting awards relating to no more than 1,600,000 shares of common stock of 22nd Century Group during
the first twelve months following the effective date of the Merger.
On March 31, 2011, the Company
filed a Form S-8 registration statement with the SEC to register all of the shares of common stock of 22nd Century Group that it
may issue under the EIP.
The number of shares
of common stock of 22nd Century Group subject to the EIP, any number of shares subject to any numerical limit in the EIP, and the
number of shares and terms of any incentive award will be adjusted in the event of any change in outstanding common stock of 22nd
Century Group by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification,
merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
The EIP authorizes the grant of incentive
stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares,
restricted stock and restricted stock units.
All awards made under the EIP may be subject
to vesting and other contingencies as determined by the Administrator and will be evidenced by agreements approved by the Administrator
which set forth the terms and conditions of each award.
F-
17
The Company accounts for stock-based compensation
under the provisions of ASC Topic 718, "
Compensation — Stock Compensation.
" The Company recognizes compensation
cost in its financial statements for all share based payments granted, modified, or settled during the period. For awards with
graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period, generally the related
vesting period.
On April 1, 2011, under our EIP, the Board
granted an aggregate of 1,150,000 shares of common stock of 22nd Century Group to officers and directors of which 450,000 shares
vested immediately and incentive stock options to key employees to purchase an aggregate of 35,000 shares of 22nd Century Group's
common stock. The Company has non-vested awards for 700,000 restricted shares outstanding; 600,000 of the outstanding restricted
shares vest at the rate of 150,000 shares annually over the four-year period ending April 1, 2015 and the remaining 100,000 restricted
shares vest based on achieving a performance milestone which is annual sales of $3 million in cigarettes (not
SPECTRUM
or
X-22
) by December 31, 2013.
For the year ended December 31, 2011, the
Company recorded compensation expense $376,437 ($51,000 included in research and development expense and $325,437 included in general
and administrative expense).
On February 1, 2009, the Company granted
an award for service
to an executive officer of 445,207 warrants to purchase common shares, vesting
over a one year service period ending February 1, 2010. The related compensation cost of $258,662 was determined by the intrinsic
value of the underlying common shares at the time of the award of $0.58 per unit and was charged to expense on a straight line
basis over the service period. The cost was fully amortized in the first quarter of 2010 with a charge of $43,090.
As of December 31, 2011, unrecognized compensation
expense related to non-vested restricted shares with annual vesting amounted to $186,469 and non-vested stock options amounted
to $9,135. No expense was recorded for restricted stock grants with milestone vesting not considered probable, which had a fair
value at grant date of $51,000.
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the year ended December
31, 2011:
2011
Risk-free interest rate
3.5
%
Expected dividend yield
0
%
Expected stock price volatility
90
%
Expected life of options
10 years
The Company estimated the expected volatility
based on data used by peer group of public companies. The expected term was estimated using the contract life of the option. The
risk-free interest rate assumption was determined using the equivalent U.S. Treasury bonds yield over the expected term. The Company
has never paid any cash dividends and does not anticipate paying any cash dividends in the foreseeable future. Therefore, the Company
assumed an expected dividend yield of zero.
A summary of all stock option activity for
the year ended December 31, 2011 is as follows:
Number
                                                                                                                                                                                                                                                                              of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at December 31, 2010
-
$
-
Granted in 2011
35,000
$
1.20
Outstanding at December 31, 2011
35,000
$
1.20
9.67 years
$
-
Exercisable at December 31, 2011
-
$
-
-
$
-
F-
18
The weighted average grant date fair value of options granted
during the year ended December 31, 2011 was $1.04.
NOTE 14 - INCOME TAXES
The following is a summary of the components
giving rise to the income tax provision (benefit) for the years ended December 31, 2011.
The provision (benefit) for income taxes consists of the following:
2011
Current:
Federal
$
-
State
-
Total current
-
Deferred:
Federal
(1,284,145
)
State
(288,654
)
Total deferred
(1,572,799
)
Change in valuation allowance
1,572,799
$
-
The provision (benefit) for income tax varies from that which
would be expected based on applying the statutory federal rate to pre-tax accounting loss as follows:
2011
Statutory federal rate
(34.0
)%
Permanent items
0.2
Change in tax status
(20.8
)
State tax provision, net of federal benefit
(4.7
)
Valuation allowance
59.3
Effective tax rate
0.0
%
Individual components of deferred taxes consist of the following:
Deferred tax assets:
Net operating loss carryforwards
$
2,033,122
Derivative liability
212,773
2,245,895
Deferred tax liabilities:
Prepaid expenses
(6,838
)
Patents and trademarks
(180,795
)
Stock-based compensation
(81,265
)
Beneficial conversion feature of convertible debt
(404,198
)
(673,096
)
Valuation allowance
(1,572,799
)
Net deferred taxes
$
-
As of December 31, 2011 the Company has
a deferred tax liability of $404,198, which is based on the tax effect of the difference in basis between GAAP and tax purposes
for the beneficial conversion feature on the convertible notes issued December 16, 2011. The Company's valuation allowance
was also offset to account for the deferred tax liability. This deferred tax liability will decrease as the as the beneficial conversion
feature is amortized over the term of the notes. When the Company determines that the valuation allowance can be eliminated in
its entirety, the tax effect of the beneficial conversion feature of $411,139 will reverse into contributed capital.
F-
19
The Company incurred a net operating loss
of approximately $5,300,000 from the Merger to December 31, 2011 and this amount is being carried forward to future years and expires
on December 31, 2031. Due to the uncertainty of the Company's ability to generate sufficient taxable income in the future
before they expire, the company has recorded a valuation allowance to reduce the net deferred tax asset to zero. This NOL is included
in the net deferred tax asset that has been fully offset by the valuation allowance
ASC 740 provides guidance on the financial
statement recognition and measurement for uncertain income tax positions that are taken or expected to be taken in a company's
income tax return. The Company has no uncertain tax positions as of December 31, 2011.
The Company's federal and state tax returns for the years
ended December 31, 2009 to December 31, 2011, including the pre-Merger short period from January 1, 2011 through January 25, 2011,
are currently open to audit under the statutes of limitations. There are no pending audits as of December 31, 2011.
NOTE 15. - SUBSEQUENT EVENT
In January 2012, the Company entered into an Agreement (the
"Agreement") with one of its vendors to resolve payables of approximately $259,000. Pursuant to the terms of the Agreement,
the Company paid $50,000 and issued 1,000,000 shares of its common stock to the vendor which satisfied the outstanding amount payable
and established a credit for the Company for future services of approximately $172,000. The shares of common stock issued were
valued at the average of the closing sale prices of such common stock on the Over-The-Counter Bulletin Board (OTCBB) for a ten
(10) trading day period (resulting in an approximate value of $381,000).
F-
20
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2012 with Comparative
Figures at December 31, 2011
September 30,
December 31,
2012
2011
(unaudited)
ASSETS
Current assets:
Cash
$
5,941
$
252,249
Due from related party
23,969
15,491
Due from officers
-
7,714
Inventory
1,154,190
678,123
Prepaid expenses
26,342
17,675
Total current assets
1,210,442
971,252
Other assets:
Patent and trademark costs, net
1,366,184
1,387,104
Office furniture and fixtures, net
6,488
7,862
Deferred private placement costs
46,875
-
Deferred debt issuance costs, net
8,464
22,405
Total other assets
1,428,011
1,417,371
Total assets
$
2,638,453
$
2,388,623
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Demand bank loans
$
174,925
$
174,925
Accounts payable
1,308,138
1,064,892
Accrued interest payable to related parties
3,719
21,502
Accrued expenses
554,412
545,578
Due to officers
50,206
-
Notes payable
623,000
425,000
Convertible notes, net of unamortized discount
1,551,054
641,886
Total current liabilities
4,265,454
2,873,783
Long term portion of notes payable
-
177,000
Convertible notes, net of unamortized discount
77,720
-
Warrant liability
653,933
550,000
Total liabilities
4,997,107
3,600,783
Commitments and contingencies (Note 10)
-
-
Shareholders' deficit
Capital stock authorized:
10,000,000 preferred shares, $.00001 par value
300,000,000 common shares, $.00001 par value
Capital stock issued and outstanding:
0 preferred shares
-
-
31,048,979 common shares (27,209,646 at December 31, 2011)
312
273
Capital in excess of par value
7,112,246
5,822,882
Accumulated deficit
(9,471,212
)
(7,041,297
)
Non-controlling interest - consolidated subsidiary
-
5,982
Total shareholders' deficit
(2,358,654
)
(1,212,160
)
Total liabilities and shareholders' deficit
$
2,638,453
$
2,388,623
See accompany notes to consolidated financial statements.
F-
21
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2012
and 2011
(unaudited)
September 30, 2012
September 30, 2011
Revenue
$
15,683
$
529,370
Other income - therapeutic grant
-
80,000
Total revenue
15,683
609,370
Operating expenses:
Costs of goods sold
60,852
130,495
Research and development
155,318
711,996
General and administrative
370,240
451,087
Sales and marketing costs
11,363
37,106
Amortization and depreciation
50,458
44,630
648,231
1,375,314
Operating loss
(632,548
)
(765,944
)
Other income (expense)
Warrant liability change - net
535,017
337,500
Interest expense and amortization of debt discount and expense:
Related parties
(55,793
)
(9,401
)
Other
(295,601
)
(12,526
)
183,623
315,573
Net loss
(448,925
)
(450,371
)
Net income attributable to non-controlling interest
-
(14,711
)
Net loss attributed to common shareholders
$
(448,925
)
$
(465,082
)
Loss per common share - basic and diluted
$
(0.01
)
$
(0.02
)
Common shares used in basic earnings per share calculation
31,048,979
27,209,646
See accompany notes to consolidated financial statements.
F-
22
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2012
and 2011
(unaudited)
September 30, 2012
September 30, 2011
Revenue
$
15,683
$
801,636
Other income - therapeutic grant
-
223,540
Total revenue
15,683
1,025,176
Operating expenses:
Costs of goods sold
60,852
224,146
Research and development
484,316
1,509,050
General and administrative
1,732,162
1,381,480
Sales and marketing costs
46,045
267,810
Amortization and depreciation
146,374
132,432
2,469,749
3,514,918
Operating loss
(2,454,066
)
(2,489,742
)
Other income (expense)
Warrant liability change - net
1,167,416
337,500
Interest expense and amortization of debt discount and expense:
Related parties
(194,074
)
(28,177
)
Other
(950,647
)
(24,939
)
22,695
284,384
Net loss
(2,431,371
)
(2,205,358
)
Net loss (income) attributable to non-controlling interest
1,456
(13,004
)
Net loss attributed to common shareholders
$
(2,429,915
)
$
(2,218,362
)
Loss per common share - basic and diluted
$
(0.08
)
$
(0.08
)
Common shares used in basic earnings per share calculation
29,477,387
26,263,743
See accompany notes to consolidated financial statements.
F-
23
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2012
and 2011
(unaudited)
September 30, 2012
September 30, 2011
Cash flows from operating activities:
Net loss
$
(2,431,371
)
$
(2,205,358
)
Adjustments to reconcile net loss to cash used by operating activities:
Amortization and depreciation
146,374
132,432
Amortization of debt issuance costs
18,954
-
Amortization of debt discount
1,053,987
3,999
Interest due to debt conversion
31,350
-
Gain warrant liability - derivative
(1,167,416
)
(337,500
)
Equity based employee compensation expense
776,441
327,458
Equity based payments for outside services
116,940
-
(Increase) decrease in assets:
Accounts receivable
-
(86,682
)
Grant receivable
-
223,540
Inventory
(476,067
)
(524,734
)
Prepaid expenses
162,579
129,294
Deposits
-
1,535
Increase (decrease) in liabilities:
Accounts payable
473,920
(65,811
)
Accrued interest payable to related parties
(17,783
)
(163,101
)
Accrued expenses
8,842
314,722
Deferred  revenue
-
(223,540
)
Net cash used by operating activities
(1,303,248
)
(2,473,746
)
Cash flows from investing activities:
Acquisition of patents and trademarks
-
(570,641
)
Acquisition of office furniture and fixtures
-
(9,106
)
Net cash used by investing activities
-
(579,747
)
Cash flows from financing activities:
Proceeds from issuance of notes
56,000
215,000
Payments on borrowings - notes payable
(35,000
)
(458,275
)
Net proceeds from January 25, 2011 private placement
-
3,293,888
Net proceeds from May 2012 private placement
786,500
-
Proceeds from issuance of convertible notes
210,000
-
Deferred private placement costs
(10,000
)
-
Net payments to related party
(8,478
)
(21,272
)
Net advances from officers
57,920
28,217
Net cash provided by financing activities
1,056,942
3,057,558
Net (decrease)  increase in cash
(246,308
)
4,065
Cash - beginning of period
252,249
310
Cash - end of period
$
5,941
$
4,375
Cash paid during the period for interest
$
13,529
$
191,524
Cash paid during the period for income taxes
$
-
$
-
Supplemental disclosure of noncash investing and financing activities:
Reduction of accounts payable not related to operating activities:
Common stock issued as payment of accounts payable
$
359,754
$
-
Common stock issued as payment of deferred private placement costs
36,875
-
Payment of accounts payable for patent costs
-
500,000
Payment of accounts payable for deferred private placement costs
-
526,127
Accounts payable converted to promissory notes
-
587,000
$
396,629
$
1,613,127
Common stock issued for prepaid services
$
171,246
$
-
Non controlling interest acquired for common stock
$
4,526
$
-
Deferred private placement costs charged to contributed capital
$
-
$
587,133
Notes payable converted to common shares
$
120,750
$
-
Conversion of shareholder note and accrued interest to common shares and warrants
$
-
$
614,070
Original issue discount on convertible debt
$
12,600
$
-
Beneficial conversion value upon issuance of convertible debt recoded as debt discount and an increase in capital in excess of par value
$
63,600
$
-
Issuance of warrants as derivative liability instruments upon conversion of note payable
$
152,100
$
-
Issuance of warrants as derivative liability instruments
$
92,750
$
3,061,750
Patent and trademark additions included in accounts payable
$
124,080
$
-
Deferred debt issuance costs included in accounts payable
$
5,000
$
-
See accompanying notes to consolidated financial
statements.
F-
24
22nd CENTURY GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS'
DEFICIT
Nine Months Ended September 30, 2012
(unaudited)
Common
Par value
Non-
Shares
of Common
Contributed
Accumulated
controlling
Shareholders'
Outstanding
Shares
Capital
Deficit
Interest
Deficit
Balance at December 31, 2011
27,209,646
$
273
$
5,822,882
$
(7,041,297
)
$
5,982
$
(1,212,160
)
Stock based compensation under Equity Incentive Plan
700,000
7
690,968
-
-
690,975
Common stock issued as payment of services and accounts payable
1,267,500
13
534,815
-
-
534,828
Common stock issued upon exercise of Convertible Notes
161,000
2
(2
)
-
-
-
Common stock issued in May 2012 private placement
1,710,833
17
(17
)
-
(4,526
)
(4,526
)
Beneficial conversion feature of convertible debt
-
-
63,600
-
-
63,600
Net loss
-
-
-
(2,429,915
)
(1,456
)
(2,431,371
)
Balance at September 30, 2012
31,048,979
$
312
$
7,112,246
$
(9,471,212
)
$
-
$
(2,358,654
)
See accompanying notes to consolidated financial
statements.
F-
25
22nd CENTURY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Introduction
-
These unaudited consolidated financial statements of 22nd Century Group, Inc. ("22nd Century Group")
and its direct and indirect subsidiaries (collectively with 22nd Century Group, the "Company") incorporate and reflect
the reverse acquisition of 22nd Century Limited, LLC by 22nd Century Group as described below.
On January 25, 2011, 22nd Century Limited,
LLC ("22nd Century Ltd") completed a reverse merger transaction (the "Merger") with 22nd Century Group
(formerly Touchstone Mining Limited). As a result, 22nd Century Ltd became a wholly owned subsidiary of 22nd Century Group which
continues to operate the business of 22nd Century Ltd. In connection with the Merger, 22nd Century Group issued 21,434,446 shares
of its common stock to the holders of limited liability company membership interests of 22nd Century Ltd, whose share amount represented
80.1% of the outstanding shares immediately following the Merger. All references contained herein to shareholders or common shares
include the historical members and limited liability company membership interests of 22nd Century Ltd because, in the Merger, limited
liability company membership interests were exchanged for common shares on a one-for-one basis and from an accounting standpoint
they are equivalent.
The Merger is being accounted for as a reverse
acquisition and a recapitalization; 22nd Century Ltd is the acquirer for accounting purposes. Consequently, the assets and liabilities
and the historical operations that are reflected in the financial statements set forth herein for periods prior to the Merger are
those of 22nd Century Ltd and are recorded at the historical cost basis of 22nd Century Ltd, and the consolidated financial statements
set forth herein for periods beginning on and following completion of the Merger include the assets and liabilities of 22nd Century
Ltd, historical operations of 22nd Century Ltd, and operations of 22nd Century Group from the closing date of the Merger.
Upon the closing of the Merger, 22nd Century
Group transferred all of its operating assets and liabilities to Touchstone Split Corp. and split-off Touchstone Split Corp. through
the sale of all of the outstanding capital stock of Touchstone Split Corp. (the "Split-Off"). After the completion
of the Merger and Split Off, 22nd Century Group's consolidated financial statements include only the assets and liabilities
of 22nd Century Ltd.
Immediately prior to the Merger on January
25, 2011, 22nd Century Ltd
completed a private placement offering (the "Private Placement")
of 5,434,446 securities (the "PPO Securities") at the purchase price of $1.00 per Unit, each such Unit consisting of
one (1) limited liability company membership interest of 22nd Century Ltd and a five-year warrant to purchase one-half of one (1/2)
limited liability company membership interest of 22nd Century Ltd at an exercise price of $1.50 per whole common share. In connection
with the Private Placement,
22nd Century Ltd
approved a prorata distribution of 5,016,722 five-year
warrants to purchase one limited liability company membership interest at an exercise price of $3.00. These warrants
were valued at $1,550,000 and classified as liabilities resulting in a decrease to contributed capital. Private Placement proceeds
included $614,070 from the conversion of
22nd Century Ltd
indebtedness into PPO Securities
and $395,376 from the conversion of placement agent fees into PPO Securities, resulting in gross cash proceeds of $4,425,000. 
Private Placement expenses incurred included cash expenses of approximately $1,025,000 and non-cash expenses consisting of the
placement agent fees of $395,376 which were converted into PPO Securities and $390,000 for the estimated fair value of 934,755
placement agent and advisor warrants issued to the placement agent. An additional $167,820 of cost was incurred in the second and
third quarters of 2011 in connection with the registration process for the common stock issued in the Private Placement. 22nd Century
Ltd/Group received net cash proceeds of approximately
$3.2 million
from the Private Placement
and a reduction of debt and accrued interest obligations to shareholders that were on the balance sheet at December 31,
2010 of approximately $614,000, which was exchanged for equity interests in the offering
. A portion
of the proceeds, amounting to $1,511,750, was allocated to the warrants issued and classified as derivative liabilities.
Basis of Presentation
-
The accompanying unaudited statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair and non-misleading presentation of the financial statements have been included.
The results of operations for any interim
period are not necessarily indicative of results for the full year. Operating results for the nine months ended September 30, 2012
are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The balance sheet
at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial statements.
F-
26
Nature
of Business
-
22nd Century Ltd, 22nd Century Group's wholly-owned subsidiary, is a plant biotechnology company
specializing in technology that allows for the level of nicotine and other nicotinic alkaloids
(e.g., nornicotine, anatabine
and anabasine)
in tobacco plants to be decreased or increased through genetic engineering and plant
breeding. The Company owns or exclusively controls 105 issued patents in 78 countries plus
an additional 38 pending patent
applications
. Hercules Pharmaceuticals, LLC ("Hercules Pharmaceuticals") and Goodrich Tobacco
Company, LLC ("Goodrich Tobacco") are subsidiaries of 22nd Century Ltd and are business units for the Company's
(i) smoking cessation product and (ii) premium cigarettes and potential modified risk tobacco products, respectively.
Principles
of Consolidation
-
The accompanying consolidated financial statements include the accounts of
22nd Century
Group, its wholly owned subsidiary, 22nd Century Ltd, and 22nd Century Ltd's wholly owned subsidiaries, Hercules Pharmaceuticals
and Goodrich Tobacco
. In May 2012, 22nd Century
Ltd
acquired
from
an employee
the non-controlling membership units of
Goodrich Tobacco that it did not own so that
Goodrich Tobacco became a wholly owned subsidiary
. All intercompany accounts and transactions have been
eliminated.
Reclassifications
-
Certain
items in the 2011 financial statements have been reclassified to conform to the 2012 classification.
Preferred
stock authorized
-
the authorization is for
"
blank check" preferred stock, which could
be issued with voting, liquidation, dividend and other rights superior to our common stock.
Inventory
-
Inventories
are valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. Inventories are evaluated
to determine whether any amounts are not recoverable based on slow moving or obsolete condition and are written off or reserved
as appropriate. The Company's inventory consisted of the following categories:
September 30,
December 31,
2012
2011
Materials, mainly tobacco
$
1,154,190
$
678,123
Finished goods
-
-
Total
$
1,154,190
$
678,123
Intangible Assets
-
Intangible
assets are recorded at cost and consist primarily of expenditures incurred with third parties related to the processing of patent
claims and trademarks with government authorities. The Company also capitalized costs as a result of one of its exclusively licensed
patent applications being subject to an interference proceeding invoked by the U.S. Patent and Trademark Office, which favorably
resulted in the Company obtaining rights to a third party's issued patent. The amounts capitalized relate to patents the
Company owns or to which it has exclusive rights and its trademarks, and exclude approximately $1.8 million recovered from a former
licensee as direct reimbursements of costs incurred. These capitalized costs are amortized using the straight-line method over
the remaining statutory life of the Company's primary patent family, which expires in 2019 (the assets' estimated lives).
Periodic maintenance or renewal fees, which are generally due on an annual basis, are expensed as incurred. Annual minimum license
fees are charged to expense in the year the licenses are effective. Total patent and trademark costs capitalized and accumulated
amortization amounted to $2,187,892 and $821,708, respectively, as of September 30, 2012 ($2,063,812 and $676,708, respectively,
as of December 31, 2011). The estimated annual amortization expense for the next five years is approximately $203,000.
Impairment of Long-Lived Assets
-
The Company reviews the carrying value of its amortizing long-lived assets whenever events or changes in circumstances indicate
that the historical cost-carrying value of an asset may no longer be recoverable.
The Company assesses recoverability of the
asset by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition. If
the estimated future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset's carrying value and its fair value. There was no impairment loss recorded during
the nine months ended September 30, 2012 or 2011.
Deferred Debt Issuance Costs
-
The Company incurred costs related to a private placement of convertible notes that closed on December 16, 2011 ("Convertible
Notes"). These costs were recorded in the balance sheet as a deferred charge and are being amortized over the one-year term
of the Convertible Notes. The unamortized balance at September 30, 2012 is $8,464 ($22,405 as of December 31, 2011), which is expected
to be fully amortized in the fourth quarter of 2012. Amortization expense for the three and nine months ended September 30, 2012
amounted to $5,859 and $18,954, respectively.
F-
27
Income Taxes
-
Prior to the Merger, the Company was treated as a partnership for federal and state income tax purposes. As a result, there was
no entity level income tax for periods prior to the Merger because all taxable income tax deductions and tax credits were passed
through to the members of the Company. Following the Merger on January 25, 2011, the Company is treated as a corporation, subject
to federal and state income taxes. Accordingly, as of the Merger date the Company is required to recognize deferred tax assets
and liabilities for any basis differences in its assets and liabilities between tax and GAAP reporting, and for operating loss
and credit carryforwards.
In light of the Company's history
of cumulative losses management has determined that is it more likely than not that its net deferred tax asset will not be realized.
Accordingly the Company established a valuation allowance to fully offset its net deferred tax asset as of September 30, 2012 and
December 31, 2011.
The Company's federal and state tax
returns for the years ended December 31, 2010 to December 31, 2011, including the pre-Merger short period from January 1, 2011
through January 25, 2011, are currently open to audit under the statutes of limitations. There are no pending audits as of September
30, 2012.
Stock Based Compensation -
The Company uses a fair-value based method to determine compensation for all arrangements under which Company employees and
others receive shares, options or warrants to purchase common shares of 22nd Century Group. Stock based compensation expense is
recorded over the requisite service period based on estimates of probability and time of achieving milestones and vesting. For
accounting purposes, the shares will be considered issued and outstanding upon vesting.
Debt Discounts
- Original
issue discount ("OID") is recorded equal to the difference between the cash proceeds, after allocation to warrants
issued or issuable upon payment of the debt, and the face value of the debt when issued and amortized as interest expense during
the term of the debt.
When the convertible feature of the conventional
convertible debt is issued, the embedded conversion feature is evaluated to determine if bifurcation and derivative treatment is
required and whether there is a beneficial conversion feature. When the convertible debt provides for an effective rate of conversion
that is below market value, this feature is characterized as a beneficial conversion feature ("BCF"). Prior to the determination
of the BCF, the proceeds from the debt instrument were first allocated between the convertible debt and any embedded or detachable
free standing instruments that are included, such as common stock warrants. The proceeds allocated to any warrants are recorded
as a debt discount.
For the Convertible Notes, bifurcation of
the embedded conversion feature was not required and the Company recorded the OID and the BCF related to these Convertible Notes
as a debt discount and recorded the Convertible Notes net of the discount related to both the OID and the BCF. Debt discount is
amortized to interest expense over the life of the debt. In the case of any conversion prior to the maturity date there will be
an unamortized amount of debt discount that relates to such conversion. The prorata amount of unamortized discount at the time
of such conversion is charged to interest expense as accelerated amortization of the discount. The fair value of warrants issued
at the time of conversion is recorded as a reduction of the amount applied to the common stock issued in the conversion and to
the extent that the fair value of warrants exceeds the carrying value of the debt a charge to interest expense results for such
excess amount.
Other income
-
therapeutic
grant
-
In 2010,
22nd Century Ltd received approval of a government grant as partial support for its clinical trial for the U.S. Food and
Drug Administration ("FDA"). All costs associated with this grant were charged to research and development expense
and the grant income was fully recognized in 2011. During the three and nine month periods ending September 30, 2011 $80,000 and
$223,540, respectively, was recognized into income and included in other income on the statement of operations.
Revenue Recognition
-
The
Company recognizes revenue at the point the product is shipped to a customer and title has transferred. Revenue from the sale of
the Company's products is recognized net of cash discounts, sales returns and allowances. Cigarette federal excise taxes
are included in net sales and accounts receivable billed to customers, except on sales of
SPECTRUM
research cigarettes and
exported cigarettes in which such taxes do not apply.
F-
28
The Company was chosen to be a subcontractor
for a 5-year government contract between RTI International ("RTI") and the National Institute on Drug Abuse ("NIDA")
to supply NIDA research cigarettes which includes four development stages. These government research cigarettes are distributed
under the Company's mark
SPECTRUM
. The Company completed the four developmental stages and delivered approximately
9 million
SPECTRUM
research cigarettes during the year ended December 31, 2011 and recognized the related revenue ($529,370
and $801,636 in the three and nine month periods ending September 30, 2011, respectively). The Company has delivered an additional
2.7 million
SPECTRUM
research cigarettes in July 2012 and recognized the related revenue ($15,683 in the three and nine
month periods ending September 30, 2012). Future revenue under this sub-contract arrangement is expected to be related to the delivery
of
SPECTRUM
and will be recognized at the point the product is shipped and title has transferred.
Derivatives
-
We do not use
derivative instruments to hedge exposures to cash flow, market or foreign currency risks. We evaluate all of our financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair market value and
then is revalued at each reporting date, with changes in fair value reported in the consolidated statement of operations. The methodology
for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model approach which includes probability
weighted estimates of future events including volatility of our common stock. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or equity, is evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument could be required within twelve months of the balance sheet date.
Research and Development
-
Research and development costs are expensed as incurred.
Loss Per Common Share
-
Basic loss per common share is computed using the weighted-average number of common shares outstanding. Diluted loss per share
is computed assuming conversion of all potentially dilutive securities. Potential common shares outstanding are excluded from the
computation if their effect is anti-dilutive.
Commitment and Contingency Accounting
-
The Company evaluates each commitment and/or contingency in accordance with the accounting standards, which state
that if the item is more likely than not to become a direct liability, then the Company will record the liability in the financial
statements. If not, the Company will disclose any material commitments or contingencies that may arise.
Use of Estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
-
Financial
instruments include cash, receivables, accounts payable, accrued expenses, notes payable, convertible notes payable and warrant
liability.  Fair value for everything except for the warrant liability is assumed to approximate carrying values for
these financial instruments, since they are short term in nature or they are receivable or payable on demand. The determination
of the fair value of the warrant liability is disclosed in Note 9.
Recent
Accounting Pronouncements
-
In May 2011, the FASB
issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRS.  This update results in common principles and requirements for measuring
fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS.  ASU 2011-04
is required to be applied prospectively in interim and annual periods beginning after December 15, 2011.  Early application
was not permitted.  The adoption of ASU 2011 did not have a material impact on the consolidated financial statements.
NOTE 2. - LIQUIDITY AND MANAGEMENT'S PLANS
Since 2006, 22nd Century Ltd has incurred
substantial operating losses as it transitioned from being solely a licensor of its proprietary technology and tobaccos to commercializing
its own tobacco products. At September 30, 2012, the Company had current assets of $1,210,442 and current liabilities of $4,265,454.
Cash on hand at September 30, 2012 of $5,941 is insufficient to sustain operations and pay outstanding current liabilities as they
become due. The Company has suspended clinical trials for
X-22
in order to reduce expenditures and is seeking licensing
agreements for its products with both domestic and international businesses. The Company's Board of Directors authorized
management to seek additional financing involving equity securities
which will be dilutive to 22nd Century
Group's existing shareholders' respective ownership percentages.
F-
29
The Company continues to explore an alternative
manufacturer while exploring distribution channels for its proprietary cigarettes,
RED SUN
and
MAGIC
, through its
subsidiary, Goodrich Tobacco. Until certain benchmarks are achieved, the Company is currently not taking orders for these products
for the U.S. market.
The Company's ability to fund operations
and meet its obligations during 2012 will be dependent upon obtaining additional equity financing and signing one or more significant
licensing arrangements for its products. There can be no assurance that the Company will be able to raise sufficient equity financing
or obtain a significant licensing contract.
NOTE 3. - MAY 2012 PRIVATE PLACEMENT
On May 15, 2012
the Company issued 1,710,833 shares of its common stock and warrants to purchase up to 1,710,833 shares of its common stock for
total consideration of $1,026,500 consisting of: $786,500 in cash, cancellation by a vendor of $150,000 in accounts payable and
the exchange by an employee of his 4% minority interest in Goodrich Tobacco for stock and warrants valued at $90,000 in the offering.
The warrants issued have an exercise price of $1.00 per share, a five year term and a "down round provision"
so they will be classified as derivatives for accounting purposes, which (similarly to the January 25, 2011 Warrants) means they
are reported as a liability and marked to market at each balance sheet date. At the date of issuance of these warrants the value
was estimated to be $1,841,000 which exceeded the total consideration received in the offering by $814,500 resulting in an immediate
charge to other income and expense - warrant liability - net for this amount. This private placement constituted a "down
round" for purposes of all previously issued warrants and the December 16, 2011 convertible notes and resulted in adjustments
to the exercise price, conversion price and the number of shares issuable upon exercise or conversion of these previously issued
securities.
NOTE 4. - AMOUNTS OWED NORTH CAROLINA STATE UNIVERSITY ("NCSU")
Pursuant to the
terms of an exclusive license agreement with NCSU, the Company owes NCSU approximately $865,000 as of September 30, 2012 for patent
costs and license fees (as compared to $753,000 owed as of December 31, 2011). These amounts are included in accounts payable and
accrued liabilities in the consolidated balance sheets. The Company was required to pay these amounts within thirty days of being
invoiced and they are past due. NCSU has the right to claim interest on the balance. Management periodically communicates its plans
for commercialization of products using the technology licensed from NCSU and believes its relations with NCSU are sound. In order
to facilitate the Company's plans to raise capital and commercialize its products NCSU agreed, in a letter dated November
22, 2011, not to invoke its rights to terminate for non-payment or non-performance that it may have under the agreement until October
15, 2012. Currently, NCSU may have the right to terminate the exclusive license agreement,
but can only do so with a 60-day
prior written notice, including the opportunity to cure within this timeframe
. As of September 30, 2012,
patent costs associated with the exclusive license agreements that could potentially be terminated had a carrying value of approximately
$700,000. Additionally, NCSU has not imposed interest charges on past due amounts invoiced to the Company and as such the Company
has not recorded accrued interest or interest expense.
NOTE
5. - DEMAND BANK LOAN
The demand loan that is among the Company's
short term liabilities is payable to a commercial bank under a revolving credit agreement and is guaranteed by a shareholder of
the Company. This loan had a balance of $174,925 at September 30, 2012 and December 31, 2011. The Company is required to pay interest
monthly at an annual rate of 0.75% above the prime rate, or 4.00% at September 30, 2012 and December 31, 2011. The Company is current
in meeting this interest payment obligation. The terms of the demand loan includes an annual "clean-up" provision,
which requires the Company to repay all principal amounts outstanding for a period of 30 consecutive days every year. The Company
has not complied with this requirement; however, the bank has not demanded payment. The bank has a lien on all the Company's
assets.
NOTE 6. - NOTES PAYABLE
Notes payable consisted of the following
as of the dates set forth below:
September 30,
December 31,
2012
2011
Notes date September 15 and October 15, 2009
$
-
$
25,000
Convertible Note dated March 31, 2011
77,000
87,000
Note dated January 25, 2011
140,000
140,000
Note dated March 30, 2011
350,000
350,000
Note dated March 22, 2012 and April 13, 2012
50,000
-
Note dated June 20, 2012
6,000
-
623,000
602,000
Less long term portion of notes payable
-
(177,000
)
Notes Payable (shown in current liabilities)
$
623,000
$
425,000
F-
30
Notes Dated September 15 and October
15, 2009
(unsecured)
-
On September 15, 2009 and October 15, 2009, the Company issued two notes payable to
the same third party in the amounts of $15,000 and $10,000, respectively. The notes were fully paid in June 2012 together with
accrued interest at 10% since issuance.
Note Dated January 25, 2011(unsecured)
-
On January 25, 2011, the Company issued a note for $140,000 to a shareholder as satisfaction of the balance due for principal
and interest on matured notes that were not paid in cash or converted to common stock of 22nd Century Group and warrants to purchase
shares of common stock of 22nd Century Group. The note bears interest at 12% and is due on July 1, 2013 together with accrued interest.
As of September 30, 2012 and December 31, 2011, the outstanding principal amount of this note is $140,000.
Convertible Note Dated March 31, 2011(unsecured)
-
On March 31, 2011, the Company issued a note to a vendor in the original amount of $237,000 as satisfaction of past due
invoices previously recorded by the Company in accounts payable. The note bears interest at an annual rate of 9%. In December 2011
the note was amended and the principal was reduced by a cash payment of $50,000 and $100,000 of the note was exchanged for $115,000
of a portion of the Convertible Notes issued December 16, 2011 so that the remaining principal balance under the note is $87,000
as of December 31, 2011. The note amendment also provided for principal payments together with accrued interest to be due as follows:
$50,000 on May 1, 2012 and $37,000 on January 1, 2013, the maturity date. The Company made only $10,000 of the May 1, 2012 principal
installment, leaving a remaining balance of $77,000 as of September 30, 2012, and the note is callable by the holder because of
this payment default. The note is convertible into common stock of the Company at the option of the holder. The conversion rate
will be determined at the time of conversion based on the average of the closing price of the Company's common stock on the
day of and day after the conversion date.
Note Dated March 30, 2011(unsecured)
-
On March 30, 2011, the Company issued a note to a vendor in the amount of $350,000 as satisfaction of past due invoices
previously recorded by the Company in accounts payable. The note bears interest at an annual rate of 4%. Principal and accrued
interest, which were due on July 1, 2012 have not been paid. As of September 30, 2012 and December 31, 2011, the outstanding principal
on this note is $350,000.
Notes Dated March 22, 2012 and April
13, 2012(secured)
-
On March 22, 2012 and April 13, 2012, the Company issued two notes in the amount of $25,000
each. The notes bear interest at an annual rate of 15%. Principal and accrued interest were due on October 1, 2012 and have not
been paid. As of September 30, 2012, the outstanding principal on these notes is $50,000. The notes are secured by all assets of
the Company and its subsidiaries. An officer of the Company is the managing member of the lender.
Note Dated June 20, 2012 (unsecured)
-
On June 20, 2012, the Company issued a note in the amount of $6,000 to an officer of the Company. The note bears interest
at an annual rate of 15%. Principal and accrued interest were due on October 1, 2012 and have not been paid. As of September 30,
2012, the outstanding principal on this note is $6,000.
NOTE 7. - CONVERTIBLE NOTES
ISSUED DECEMBER 16, 2011
The Company issued
Convertible Notes on December 16, 2011 in a negotiated sale with 24 investors in the total face amount of $1,926,250. The Convertible
Notes were sold for $1,675,000 - an original issue discount (OID) of $251,250. The Convertible Notes do not bear interest and the
total face amount is due December 16, 2012. The Convertible Notes can be converted, at the option of each holder, in whole or in
part, into shares of the Company's common stock at $0.75 per share at which time the holder shall also receive
warrants
equal to 120% of the number of shares of Company common stock into which such Convertible Notes have been then converted
.
The Company can also force the investors to decide whether to convert by sending a 15-day written notice in which each investor
is forced to decide whether to convert or get repaid. Such warrants will have a term of five years and an exercise price of $1.50
per share of common stock. T
he Company will have the right to mandatorily require the conversion of the Convertible Notes
in the event the Company engages in a subsequent financing transaction of at least $5,000,000 in shares of Company's common
stock with a sale price equal to or greater than $0.80 per share or debt securities which are convertible into shares of Company
common stock with a conversion price equal to or greater than $0.80 per share of common stock. Also, in the event of a subsequent
financing transaction of at least $5,000,000, the note holders have "piggyback' registration rights of the common shares
and warrants underlying the conversion of the Convertible Notes. The Convertible Notes contain "down round" provisions
which provide for adjustments to the conversion price if the Company issues shares of common stock of 22nd Century Group at a price
that is less than the exercise price. As a result of the May private placement the conversion price was reduced to $0.7417 and another minor
adjustment will result from the August 2012 convertible notes issued. The conversion feature was not considered to be a derivative because it does not have a net
cash settlement provision as a result of the limited market and trading activity for the underlying stock. To the extent the Convertible
Notes are converted, the warrants issued at conversion have a "down round provision" and will be classified as derivatives
for accounting purposes, which (similarly to the January 25, 2011 Warrants) means they are reported as a liability and marked to
market at each balance sheet date.
F-
31
The Company's common stock closed
at $0.90 per share on December 16, 2011, which is greater than the portion of the conversion price under the Convertible Notes
allocated to the underlying common shares. This difference is a beneficial conversion feature (BCF) which was valued at $1,062,759
at the issue date and recorded as debt discount and additional paid in capital. This BCF is being amortized over the one year life
of the Convertible Notes.  During the three and nine month period ended September 30, 2012, $308,011 and $1,029,917, respectively,
of the debt discount was amortized and recorded as interest expense related to the OID and BCF discounts, leaving $254,446
of unamortized debt discount as of September 30, 2012 ($1,284,363 as of December 31, 2011).
Three of the Company's officers at
the time of issuance acquired a portion of the Convertible Notes - with a face value of $368,000 for cash of $105,000 and conversion
of $215,000 short term unsecured 12% notes issued by the Company earlier in 2011.
During the nine month period ended September
30, 2012 notes with a face amount of $120,750 (carrying value at time of conversion of approximately $68,000, net of unamortized
discount) were converted into 161,000 shares of common stock and warrants to purchase 193,200 shares of common stock. As a result
of the conversion, the unamortized portion of the debt discount amounting to approximately $66,000
was
immediately charged to interest and a derivative warrant liability valued at approximately $152,000 was recorded.  The difference
in the warrant value and debt relieved amounting to approximately $31,000 was also charged to interest expense. Included in note
conversions during the nine months ended September 30, 2012 were a note converted by an officer with a face amount of $86,250 converted
into 115,000 shares of common stock and warrants to purchase 138,000 shares of common stock.
ISSUED AUGUST 9, 2012
The Company issued
Convertible Notes on August 9, 2012 in a negotiated sale with 4 investors in the total face amount of $222,600. The Convertible
Notes were sold for $210,000 - an original issue discount (OID) of $12,600. The Convertible Notes do not bear interest and the
total face amount is due August 9, 2013 together with warrants equal to 50%
of the number of shares of Company common stock
into which such Convertible Notes could have been converted
. These warrants were valued at $92,750 and
represent additional debt discount and warrant liability. The Convertible Notes can be converted, at the option of each holder,
in whole or in part, into shares of the Company's common stock at $0.60 per share at which time the holder shall also receive
warrants equal to 100% of the number of shares of Company common stock into which such Convertible Notes have been then
converted
. Additional warrants required as a result of conversion will be valued and recorded as a warrant
liability at that time and will reduce the equity recorded as a result of the conversion. In the event the warrant value exceeds
the amount of equity, an immediate charge to other expense will be recorded. The Company can also force the investors to decide
whether to convert by sending a 15-day written notice in which each investor is forced to decide whether to convert or get paid
off. The warrants issued upon conversion or maturity will have a term of five years and an exercise price of $1.00 per share of
common stock.
The conversion feature was not considered to be a derivative because it does not have a net cash settlement
provision as a result of the limited market and trading activity for the underlying stock. The warrants to be issued at conversion
or maturity have a "down round provision" and will be classified as derivatives for accounting purposes, which (similarly
to previously issued Warrants) means they are reported as a liability and marked to market at each balance sheet date. (See Note
9)
The Company's common stock closed
at $0.45 per share on August 9, 2012, which is greater than the portion of the conversion price under the Convertible Notes allocated
to the underlying common shares. This difference is a beneficial conversion feature (BCF) which was valued at $63,600 at the issue
date and recorded as debt discount and additional paid in capital. This BCF is being amortized over the one year life of the Convertible
Notes.
During the three and nine month period ended
September 30, 2012, $24,070 of debt discount was amortized and recorded as interest expense related to the OID, warrant and BCF
discounts, leaving $144,880 of unamortized debt discount as of September 30, 2012.
F-
32
The following table summarizes convertible notes and related
discount.
September 30,
December 31,
2012
2011
Face value of Convertible Notes payable through maturity
$
2,028,100
$
1,926,250
Less unamortized original issue discount
(138,993
)
(245,582
)
Less unamortized discount related to BCF
(260,333
)
(1,038,782
)
Convertible Notes, net of unamortized debt discount
$
1,628,774
$
641,886
Carrying value of December 16, 2011 notes
$
1,551,054
$
641,886
Carrying value of August 9, 2012 notes
$
77,720
$
-
NOTE 8. - DUE FROM OR TO RELATED PARTY
The Company has
conducted transactions with a related party,
Alternative Cigarettes, Inc. ("AC"). AC is entirely owned by certain
shareholders of the Company, including the CEO. AC shares office space and employee services with the Company. During the year
ended December 31, 2011 the Company acquired its
MAGIC
trademark from AC for a purchase price of $22,500; other activity
during the nine months ended September 30, 2012 and the year ended December 31, 2011 consisted mainly of repayments and advances.
The net amount due from AC amounted to $23,969 as of September 30, 2012 ($15,491 as of December 31, 2011). No interest has been
accrued or paid on the amount due from or to AC and there are no repayment terms.
As of September 30, 2012, the Company has
a liability to certain officers in the amount of $50,206 related to amounts they have paid on the Company's behalf. These
amounts do not bear interest and have no stated repayment terms.
NOTE 9. - WARRANTS FOR COMMON STOCK
In connection with the January 25, 2011
Private Placement and Merger, the Company issued five year warrants ("January 25, 2011 Warrants") to purchase shares
of common stock of 22nd Century Group. These warrants contain "down round" provisions which provide for adjustments
to the exercise price if the Company issues common shares of stock of 22nd Century Group at a price that is less than the respective
warrant exercise prices. This provision is a guarantee of value which requires that these warrants be classified as derivatives
for accounting purposes which means they are reported as a liability and marked to market at each balance sheet date.  As
a result of partial conversion of the Convertible Notes and the May 2012 private placement, the "down round provision"
of the January 25, 2011 Warrants was triggered and the adjusted warrants now outstanding are: 5,319,150 with an exercise price
of $2.82 per share and 3,777,905 with an exercise price of $1.45 per share. The original amount of the warrant liability related
to the 5,016,722 warrants was $1,550,000 and was recorded as a reduction of equity on January 25, 2011; the original amount of
the warrant liability related to the 3,651,978 warrants is $1,511,750, and, because it was recorded as a liability, the portion
of proceeds from the Private Placement that was recorded as contributed capital was reduced accordingly. As of September 30, 2012
there are 3,777,905 with an exercise price of $1.45 per share and 5,319,150 with an exercise price of $2.82 per share outstanding.
As a result of the May 2012
Private Placement, 193,200 warrants issued upon partial conversion of the Convertible Notes now amount to 199,862 five year
warrants with an exercise price of $1.45 per share as a result of the "down round
provisions". All 199,862 of these warrants are outstanding as of September 30, 2012. As a result of the August 2012
convertible notes, another minor adjustment to those warrants will be required.
All 1,710,833 warrants to purchase common
stock issued in the May 2012 private placement ($1.00 per share five year term) are outstanding as of September 30, 2012.
As a result of the August 2012 convertible notes issued, the exercise price of those warrants was reduced accordingly.
The convertible notes issued in August 2012
require the Company to issue at least 185,500 warrants ($1.00 per share five year term) and resulted in a derivative liability
upon issuance of the notes of approximately $92,750.
The Company estimates the value of warrant
liability at upon issuance of the warrants and at each balance sheet date using the binomial lattice model to allocate total enterprise
value to the warrants and other securities in the Company's capital structure. Volatility was estimated based on historical
observed equity volatilities and implied (forward) or expected volatilities for a sample group of guideline companies and consideration
of recent market trends.
The following table is a roll-forward of the warrant liability:
Fair value of warrant liability upon issuance - January 25, 2011
$
3,061,750
Gain as a result of change in fair value
(2,511,750
)
Fair value at December 31, 2011
550,000
Fair value of warrant liability upon partial conversion of
December 16, 2011 Notes
152,100
Fair value of warrant liability upon issuance – May 15, 2012
1,841,000
Fair value of warrant liability related to minimum warrants issuable upon maturity of August 9, 2012 convertible notes
92,750
Gain as a result of change in fair value
(1,981,917
)
Fair value at September 30, 2012
$
653,933
F-
33
The aggregate net gain on warrant
liabilities for the three and nine month periods ended September 30, 2012 amounted to $535,017 and $1,981,917 and are included
in other income and expense as "warrant liability-net" in the accompanying consolidated statement of operations. The
amount for the nine month period ended September 30, 2012 has been offset by a charge to other expense as a result of warrant liabilities
issued in connection with the May private placement (See Note 3) in excess of the proceeds raised in the amount of $814,500.
ASC 820 establishes a valuation hierarchy
for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels
as follows.
·
Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities.
·
Level 2 inputs are quoted prices for similar assets and liabilities
in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration,
for substantially the full term of the financial instrument.
·
Level 3 inputs are unobservable inputs based on the Company's
own assumptions used to measure assets and liabilities at fair value.
A financial asset or liability's
classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The warrant liability is measured at fair value using certain estimated factors such as volatility and probability which are classified
within Level 3 of the valuation hierarchy. Significant unobservable inputs are used in the fair value measurement of the Company's
derivative warrant liabilities include volatility. Significant increases (decreases) in the volatility input would result in a
significantly higher (lower) fair value measurement.
The following table summarizes the warrant
activity since December 31, 2010:
Number of Warrants
Warrants outstanding at December 31, 2010
-
January 25, 2011 Warrants issued
8,668,701
Warrants exercised during 2011
-
Warrants outstanding at December 31, 2011
8,668,701
Warrants issued
1,904,033
Additional warrants due to anti-dilution provisions
435,020
Warrants exercised during 2012
-
Warrants outstanding and exercisable at September 30, 2012
11,007,754
NOTE 10. - COMMITMENTS
License Agreements
-
Under its exclusive license agreement with NCSU, the Company is required to pay minimum annual royalty payments, which are credited
against running royalties on sales of licensed products. The annual minimum royalty for each of the calendar years 2012 and 2013
is $75,000, and in 2014 the annual minimum royalty increases to $200,000. The license agreement continues through the life of the
last-to-expire patent, which is expected to be 2022. These minimum royalty payments are due each February following the end of
the applicable calendar year and are reduced by any running royalties paid or payable for that year. The agreement also requires
a milestone payment of $150,000 upon FDA approval of a product that uses the NCSU licensed technology. The Company is also responsible
for reimbursing NCSU for actual third-party patent costs incurred. These costs vary from year to year and the Company has certain
rights to direct the activities that result in these costs. During the nine month period ended September 30, 2012, the costs incurred
related to patent costs and patent maintenance amounted to
$55,853
($93,343 during the year ended
December 31, 2011).
The Company has two other exclusive license
agreements which require aggregate annual license fees of approximately $65,000, which are credited against running royalties on
sales of licensed products. Each license agreement continues through the life of the last-to-expire patent.
The Company entered into a three year lease
for approximately 3,800 square feet of office space in Clarence, NY, which commenced September 1, 2011. Scheduled rent remaining
as of September 30, 2012 is as follows:
2012
$
8,750
2013
$
37,833
2014
$
28,000
F-
34
NOTE 11. - EARNINGS PER COMMON SHARE
The following table sets forth the computation
of basic and diluted earnings per common share for the three month periods ended September 30, 2012 and 2011:
September 30,
September 30,
2012
2011
Net loss attributed to common shareholders
$
(448,925
)
$
(465,082
)
Denominator for basic earnings per share-weighted average shares outstanding
31,048,979
27,209,646
Effect of dilutive securities:
Warrants, restricted stock and options outstanding
-
-
Denominator for diluted earnings per common share - weighted average shares adjusted for dilutive securities
31,048,979
27,209,646
Income (loss) per common share - basic
$
(0.01
)
$
(0.02
)
Income (loss) per common share- diluted
$
(0.01
)
$
(0.02
)
The following table sets forth the computation
of basic and diluted earnings per common share for the nine month periods ended September 30, 2012 and 2011:
September 30,
September 30,
2012
2011
Net loss attributed to common shareholders
$
(2,429,915
)
$
(2,218,362
)
Denominator for basic earnings per share-weighted average shares outstanding
29,477,387
26,263,743
Effect of dilutive securities:
Warrants, restricted stock and options outstanding
-
-
Denominator for diluted earnings per common share - weighted average shares adjusted for dilutive securities
29,477,387
26,263,743
Loss per common share - basic
$
(0.08
)
$
(0.08
)
Loss per common share- diluted
$
(0.08
)
$
(0.08
)
Securities outstanding
that were excluded from the computation of earnings per share for the nine month periods because they would have been anti-dilutive
are as follows:
September 30,
September 30,
2012
2011
Warrants
11,007,754
8,651,978
Convertible Debt Issued December 16, 2011 (number of shares including related warrants upon conversion of 2,888,800)
5,296,133
-
Convertible Debt Issued August 9, 2012 (number of shares including related warrants upon conversion of 371,000)
742,000
-
Restricted Stock
550,000
700,000
Convertible Note
290,566
-
Options
450,000
35,000
18,336,453
9,386,978
F-
35
NOTE 12. - STOCK BASED COMPENSATION
On October 21,
2010, the Company established the 2010 Equity Incentive Plan ("EIP") for
officers, employees, directors, consultants
and advisors to the Company and its affiliates
, consisting of 4,250,000 shares of common stock. The
EIP has a term of ten years and is administered by our Board of Directors ("Board") or a committee to be established
by our Board (the "Administrator"), to determine the various types of incentive awards that may be granted to recipients
under this plan and the number of shares of common stock to underlie each such award under the EIP. On June 30, 2011, the Company
filed a Form S-8 registration statement with the SEC to register all of the shares of common stock of 22nd Century Group that it
may issue under the EIP
For the three and nine months ended September
30, 2012, the Company recorded compensation expense related to awards under the EIP of $31,241 and $690,975, respectively ($48,979
and $327,458 for the three and nine months ended September 30, 2011, respectively),
which included the
award of 550,000 restricted shares that vested immediately and were valued at the closing price on the award date.
As of September 30, 2012, unrecognized compensation
expense related to non-vested restricted shares and stock options amounted to $131,563, which is expected to be substantially recognized
during 2013. No expense was recorded for restricted stock grants with milestone vesting not considered probable, which had a fair
value at grant date of $51,000.
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model. No options were issued during the three months ended September
30, 2012.
A summary of all stock option activity since
December 31, 2011 is as follows:
Number of
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at December 31, 2011
35,000
$
1.20
Granted in 2012
415,000
$
0.69
Outstanding at September 30, 2012
450,000
$
0.73
9.54 years
$
-
Exercisable at September 30, 2012
380,000
$
0.74
9.72 years
$
-
NOTE 13. – SUBSEQUENT EVENT
Subsequent to September 30, 2012, the Company
raised approximately $750,000 in a private placement offering.  Each unit in the offering was sold for $0.25 and consisted
of one share of common stock and one-half of a warrant to purchase common stock.  Each full warrant issued has an exercise
price of $1.00 per share, a five year term and a "down round provision" so the warrants will be classified as derivatives
for accounting purposes, which means they are reported as a liability and marked to market at each balance sheet date.  This
private placement will constitute a "down round" for purposes of certain previously issued warrants and convertible
notes and will result in adjustments to the exercise price, conversion price and the number of shares issuable upon exercise or
conversion of these previously issued securities.
F-
36
27,500,000 Shares of Common Stock
22nd CENTURY GROUP, INC.
PROSPECTUS
______________________________
, 2013
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below is an estimate (except
for registration fees, which are actual) of the approximate amount of the fees and expenses payable by us in connection with the
issuance and distribution of the shares of our common stock.
AMOUNT
EXPENSE
Registration Fees
$
2,680
Legal Fees and Expenses
$
85,000
Accounting Fees and Expenses
$
15,000
Miscellaneous Fees and Expenses
$
3,500
Total
$
106,180
Item 14. Indemnification of Directors and Officers.
Nevada Revised Statutes (NRS) Sections
78.7502 and 78.751 provide us with the power to indemnify any of our directors, officers, employees and agents. The person entitled
to indemnification must have conducted himself in good faith, and must reasonably believe that his conduct was in, or not opposed
to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe
that his conduct was unlawful.
Under NRS Section 78.751, advances for
expenses may be made by agreement if the director or officer affirms in writing that he has met the standards for indemnification
and will personally repay the expenses if it is determined that such officer or director did not meet those standards.
Our bylaws include an indemnification provision
under which we have the power to indemnify, to the extent permitted under Nevada law, our current and former directors and officers,
or any person who serves or served at our request for our benefit as a director or officer of another corporation or our representative
in a partnership, joint venture, trust or other enterprise, against all expenses, liability and loss reasonably incurred by reason
of being or having been a director, officer or representative of ours or any of our subsidiaries. We may make advances for expenses
upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by
a court of competent jurisdiction that he, she or it is not entitled to be indemnified by us.
Our articles of incorporation provide a
limitation of liability such that no director or officer shall be personally liable to us or any of our stockholders for damages
for breach of fiduciary duty as a director or officer, involving any act or omission of any such director or officer, provided
there was no intentional misconduct, fraud or a knowing violation of the law, or payment of dividends in violation of NRS Section
78.300.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and controlling persons of ours under Nevada law or otherwise,
we have been advised the opinion of the SEC is that such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than payment by
us for expenses incurred or paid by a director, officer or controlling person of ours in successful defense of any action, suit,
or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, we
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question of whether such indemnification by it is against public policy in the Securities Act and will be governed
by the final adjudication of such issue.
II-
1
Item 15. Recent Sales of Unregistered Securities.
There have been no sales of unregistered
securities within the last three years which would be required to be disclosed pursuant to Item 701 of Regulation S-K, except
for the following:
Sales by the Company
Merger
On January 25, 2011, we entered into an
Agreement and Plan of Merger and Reorganization with Acquisition Sub, and 22nd Century. On that date, in consummation of the Merger
contemplated under the Agreement and Plan of Merger and Reorganization, Acquisition Sub merged with and into 22nd Century, and
22nd Century, as the surviving entity, became our wholly-owned subsidiary.
Prior to the closing of the Merger, we
transferred all of our pre-Merger operating assets and liabilities pursuant to the terms of a split-off agreement, to our wholly-owned
subsidiary, Touchstone Split Corp., a Delaware corporation, or the Split-Off Subsidiary. Thereafter, pursuant to the split-off
agreement, we transferred all of the outstanding capital stock of the Split-Off Subsidiary to our then-sole director in exchange
for $1.00, such consideration being deemed to be adequate by our pre-Merger board of directors.
At the closing of the Merger, each membership
interest of 22nd Century issued and outstanding immediately prior to the closing of the Merger was exchanged for one (1) share
of our common stock, and each warrant to purchase limited liability company membership interests of 22nd Century was exchanged
for one warrant of like tenor and term to purchase shares of our common stock. An aggregate of 21,434,446 shares of common stock
and warrants to purchase an aggregate of 8,151,980 shares of common stock were issued to the holders of limited liability company
membership interests and warrants, respectively, of 22nd Century, in the Merger. Immediately following the closing of the Merger,
an aggregate of 26,759,646 shares of common stock were issued and outstanding and an aggregate of 8,651,980 shares of our common
stock were reserved for issuance pursuant to the exercise of warrants to purchase shares of common stock. Of the 26,759,646 shares
of common stock issued and outstanding after the closing of the Merger, approximately 59.8% of such issued and outstanding shares
were held by individuals and entities that were holders of limited liability company membership interests of 22nd Century prior
to consummation of the Private Placement Offering, approximately 20.3% were held by the investors in the Private Placement Offering,
and approximately 19.9% were held by the pre-Merger stockholders of the Company.
The issuance of the securities in the Merger
was not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act and corresponding provisions
of state securities laws.
December 14, 2011
On December 14, 2011, we entered into a
Securities Purchase Agreement with certain accredited investors, whereby the purchasers acquired approximately $1.9 million of
convertible promissory notes for an aggregate purchase price of approximately $1.7 million in a private placement. The notes were
issued with an original issue discount of approximately 15% and the original maturity date of the notes was December 14, 2012
(which was extended as set forth below). The notes are convertible into shares of our common stock at any time prior to maturity
at an initial per share conversion price equal to $0.75, subject to adjustment pursuant to the terms of the notes. Upon conversion
of all or a portion of the note into common stock, the holder will receive at that time a warrant to purchase such number of shares
of common stock equal to 120% of such number of shares of common stock issuable upon conversion of the note, with the warrants
having an exercise price of $1.50 per share.
II-
2
Between December 14, 2012 and January 2,
2013, we entered into agreements with holders of $1,675,000 of the 15% notes. Holders of $1,330,000 of the notes agreed to extend
the maturity date of the notes to April 14, 2013. Holders of $100,000 of the notes elected to convert into shares of the common
stock pursuant to the terms of the notes. Holders of $215,000 of the notes elected to enter into a forbearance agreement. Holders
of $30,000 of the notes agreed to be paid over time. As of January 22, 2013, the holders of the $215,000 convertible note
and the $30,000 note were paid in full, including all accrued interest.
The notes and warrants were offered and
sold to accredited investors pursuant to an exemption from the registration requirements under Sections 4(2), Section 4(6) and
Regulation S of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
January 24, 2012
On January 24, 2012, we entered into an
agreement with Foley & Lardner LLP to resolve an outstanding debt of approximately $260,000.  A portion of the outstanding
debt was satisfied by the issuance to Foley & Lardner LLP of 1,000,000 shares of common stock that were valued at the average
of the closing prices on the OTC Bulletin Board for a 10-day trading period. The shares were sold pursuant to an exemption from
the registration requirements under Sections 4(2) and Section 4(6) of the Securities Act
January 25, 2012
We understand issued an aggregate of 25,000
shares of common stock pursuant to an Agreement between the Company and ProActive Capital Resources Group, LLC for investor relations
services. The shares were sold pursuant to an exemption from the registration requirements under Sections 4(2) and Section 4(6)
of the Securities Act.
May 15, 2012
On May 15, 2012, we entered into a Securities
Purchase Agreement with certain accredited investors whereby the investors acquired approximately 1,709,167 shares of our common
stock and warrants with a 5-year term to purchase up to 1,709,167 shares of our common stock at an initial exercise price of $1.00
per share, subject to adjustment pursuant to the terms of the warrants, for an aggregate purchase price of approximately $1,025,500
in a private placement.
The common stock and warrants were offered
and sold pursuant to an exemption from the registration requirements under Sections 4(2), Section 4(6) and Regulation S of the
Securities Act and Rule 506 of Regulation D promulgated thereunder.
June 19, 2012
On June 19, 2012, we issued an aggregate
of 62,500 shares of common stock pursuant to an Agreement between the Company and Maxim Group, LLC for placement agent services.
On June 19, 2012, we issued an aggregate
of 150,000 shares of common stock pursuant to an Agreement between the Company and Chardan Capital Markets, LLC for investor relation
services.
On June 19, 2012, we issued an aggregate
of 30,000 shares of common stock pursuant to an Agreement between the Company and Michael Pisani for investor relation services.
Each of the sales were offered and sold
in reliance on the exemption from registration afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act.
II-
3
August 9, 2012
On August 9, 2012, we completed a private
placement of $222,600 of convertible notes, which were sold at a 6% discount. We received proceeds of $210,000. The face amount
of the notes may be converted into common stock at the rate of $0.60 per share at the option of the note holder. In the event
a holder of the convertible notes elects to convert the note into shares of common stock, then the holder shall receive warrants
equal to one-hundred percent of the number of shares of common stock into which the notes were convertible into. However, in the
event we pay the convertible notes at maturity, then the holder shall receive warrants equal to fifty percent of the number of
shares of common stock into which the notes were convertible into. The warrants have a five-year term and an initial exercise
price of $1.00 per share, subject to adjustment pursuant to the terms of the warrants. As of January 22, 2013, all of such
convertible notes remain outstanding.
November 9, 2012
On November 9, 2012, we entered into a
Securities Purchase Agreement with certain accredited investors whereby the investors acquired approximately 3,238,000 shares
of common stock and warrants with a 5-year term to purchase up to 1,619,000 shares of our common stock at an initial exercise
price of $1.00 per share, subject to adjustment pursuant to the terms of the warrants, for an aggregate purchase price of approximately
$809,500.
The common stock and warrants were offered
and sold pursuant to an exemption from the registration requirements under Sections 4 (2), Section 4(6) and Regulation S of the
Securities Act and Rule 506 of Regulation D promulgated thereunder.
January 11, 2013
On January 11, 2013, we entered into and
closed the transactions described in a Securities Purchase Agreement with certain accredited investors indentified therein whereby
we sold 2,500 shares of newly created Series A-1 10% Convertible Preferred Stock, or the Series A-1 Preferred Stock and Warrants
(as defined below) for an aggregate purchase price of $2,500,000. The shares of Series A-1 Preferred Stock are initially convertible
into a total of 4,166,666 shares of the Company's common stock at a conversion price of $0.60 per share, subject to future
adjustments. The Series A-1 Preferred Stock will pay a 10.0% annual cash dividend, which may be payable in shares of our common
stock, and will have a liquidation preference equal to the stated value of the Series A-1 Preferred Stock of $1,000 per share
plus any accrued and unpaid dividends thereon.
We also issued to the purchasers a Series
A Warrant, a Series B Warrant, and a Series C Warrant, collectively referred to as the Warrants. The Series A Warrant allows the
purchasers the right to acquire, initially before any adjustments to the conversion price, up to an additional 4,166,666 shares
of our common stock at an exercise price of approximately $0.72 per share over a period of five (5) years. The Series A Warrant
also allows for such warrant to be exercised on a cashless basis. The Series B Warrant allows the purchasers a one-year period
to exercise an overallotment option as contained in the Series B Warrant to purchase, initially before any adjustments to the
conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at a price of $0.60 per share. The Series
B Warrant may not be exercised on a cashless basis except only in certain limited circumstances. In the event the purchasers exercise,
in whole or in part the overallotment option as contained in the Series B warrant, then the purchasers shall have the right to
exercise on a pro rata basis the portion of the Series C Warrant issued to the purchasers to acquire, initially before any adjustments
to the conversion price, up to an additional aggregate of 2,083,334 shares of our common stock at an exercise price of approximately
$0.72 per share over a period of five (5) years. The Series C Warrant allows for such warrant to be exercised on a cashless basis.
We paid Chardan Capital Markets LLC a commission
equal to (i) ten percent (10%) of the cash received by us and (ii) 416,666 shares of common stock.
The shares were offered and sold pursuant
to an exemption from the registration requirements under Sections 4(2), Section 4(6) and Regulation S of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder.
Item 16. Exhibits and Financial Statement Schedules.
(b) Exhibits
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In reviewing the agreements included as
exhibits to this registration statement, please remember they are included to provide you with information regarding their terms
and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties
to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These
representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
·
should not in all
                                                                                                         instances be treated
                                                                                                         as categorical statements
                                                                                                         of fact, but rather as
                                                                                                         a way of allocating the
                                                                                                         risk to one of the parties
                                                                                                         if those statements prove
                                                                                                         to be inaccurate;
·
have been qualified
                                                                                                         by disclosures that were
                                                                                                         made to the other party
                                                                                                         in connection with the
                                                                                                         negotiation of the applicable
                                                                                                         agreement, which disclosures
                                                                                                         are not necessarily reflected
                                                                                                         in the agreement;
·
may apply standards
                                                                                                         of materiality in a way
                                                                                                         that is different from
                                                                                                         what may be viewed as
                                                                                                         material to you or other
                                                                                                         investors; and
·
were made only as
                                                                                                         of the date of the applicable
                                                                                                         agreement or such other
                                                                                                         date or dates as may
                                                                                                         be specified in the agreement
                                                                                                         and are subject to more
                                                                                                         recent developments.
Accordingly, these representations
and warranties may not describe the actual state of affairs as of the date they were made or at any other time. We acknowledge
that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional
specific disclosures of material information regarding material contractual provisions are required to make the statements in
this registration statement not misleading. Additional information about the Company may be found elsewhere in this registration
statement and the Company's other public files, which are available without charge through the SEC's website at http://www.sec.gov.
Exhibit No.
Description
2.1
Agreement and Plan of Merger and Reorganization dated
        as of January 25, 2011 by and among the Company, 22nd Century, and Acquisition Sub (incorporated herein by reference to
        Exhibit 2.1 of the Company's Current Report on Form 8-K filed with the Commission on February 1, 2011).
3.1
Amended and Restated Certificate of Incorporation of the Company (incorporated herein by
    reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended September 30, 2010 filed with
    the Commission on December 3, 2010).
3.1.1
Certificate of Designation of Preferences, Rights and Limitations of Series A-1 10% Convertible
    Preferred Stock (incorporated herein by reference to Exhibit 3.1 of the Company's Current Report on Form 8-K filed with
    the Commission on January 17, 2013).
3.2
Bylaws of the Company (incorporated herein by reference to Exhibit 4.2 to the Company's
    Form S-8 filed with the SEC on March 30, 2011).
4.1
Form of Convertible Promissory Note (incorporated by reference to Exhibit 4.1 of the Company's
    Current Report on Form 8-K filed with the Commission on December 16, 2011).
4.1.1
Amendment dated November 29, 2012 to the Company's December 2011 Convertible Notes
    (incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed with the Commission
    on January 2, 2013).
4.2
Form of Warrant dated as of January 25, 2011 issued to LLC members of 22nd Century prior
    to the consummation of the Private Placement Offering upon consummation of the Merger (incorporated herein by reference to
    Exhibit 10.4 of the Company's Current Report on Form 8-K filed with the Commission on February 1, 2011).
4.3
Form of Warrant dated as of January 25, 2011 issued to investors in the Private Placement
    Offering upon consummation of the Merger (Incorporated herein by reference to Exhibit 10.5 of the Company's Current
    Report on Form 8-K filed with the Commission on February 1, 2011).
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4.4
Form of Warrant dated as of January 25, 2011 issued to the Placement
    Agent and Sub-Agent upon consummation of the Merger (incorporated herein by reference to Exhibit 10.6 of the Company's
    Current Report on Form 8-K filed with the Commission on February 1, 2011).
4.5
Advisor Warrant dated as of January 25, 2011 issued to the Placement Agent in connection
    with that certain Advisory Agreement dated as of January 25, 2011 by and between the Company and the Placement Agent (incorporated
    herein by reference to Exhibit 10.7 of the Company's Current Report on Form 8-K filed with the Commission on February
    1, 2011).
4.6
Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.2 of
    the Company's Current Report on Form 8-K filed with the Commission on December 16, 2011).
4.7
Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.1 of
    the Company's Current Report on Form 8-K filed with the Commission on May 18, 2012).
4.8
Form of Common Stock Purchase Warrant (incorporated herein by reference to Exhibit 4.1 of
    the Company's Current Report on Form 8-K filed with the Commission on November 13, 2012).
4.9
Form of Series A Common Stock Purchase Warrant (incorporated herein by reference to Exhibit
    4.1 of the Company's Current Report on Form 8-K filed with the Commission on January 17, 2013).
4.10
Form of Series B Common Stock Purchase Warrant (incorporated herein by reference to Exhibit
    4.2 of the Company's Current Report on Form 8-K filed with the Commission on January 17, 2013).
4.11
Form of Series C Common Stock Purchase Warrant (incorporated herein by reference to Exhibit
    4.3 of the Company's Current Report on Form 8-K filed with the Commission on January 17, 2013).
5.1*
Opinion of Foley & Lardner LLP as to the legality of the securities being registered.
10.1
2010 Equity Incentive Plan (incorporated herein by reference to Exhibit 4.3 to the Company's
    Form S-8 filed with the SEC on March 30, 2011).
10.2
Form of Securities Purchase Agreement dated as of January 25, 2011 by and among 22nd Century,
    the purchaser(s) identified on the signature pages thereto and Parent, solely for the purposes of Section E and Section G
    thereof, as amended (incorporated herein by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K filed
    with the Commission on February 1, 2011).
10.3
Form of Conversion Agreement (incorporated herein by reference to Exhibit 10.3 of the Company's
    Current Report on Form 8-K filed with the Commission on February 1, 2011).
10.4
Advisory Agreement dated as of January 25, 2011 by and between the Company and the Placement
    Agent (incorporated herein by reference to Exhibit 10.8 of the Company's Current Report on Form 8-K filed with the Commission
    on February 1, 2011).
10.5
Placement Agency Agreement dated as of December 1, 2010 by and between 22nd Century and
    the Placement Agent (incorporated herein by reference to Exhibit 10.9 of the Company's Current Report on Form 8-K filed
    with the Commission on February 1, 2011).
10.6
Escrow Agreement dated as of December 2, 2010 by and among 22nd Century,  the
    Placement Agent and Bank of America, National Association (incorporated herein by reference to Exhibit 10.10 of the Company's
    Current Report on Form 8-K filed with the Commission on February 1, 2011).
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10.7
Split-Off Agreement dated as of January 25, 2011 by and among the Company,
    Touchstone Split. Corp and David Rector (incorporated herein by reference to Exhibit 10.11 of the Company's Current
    Report on Form 8-K filed with the Commission on February 1, 2011).
10.8
Letter from Paramount Strategy Corp dated as of December 21, 2010 regarding loan forgiveness
    (incorporated herein by reference to Exhibit 10.12 of the Company's Current Report on Form 8-K filed with the Commission
    on February 1, 2011).
10.9
Letter from Milestone Enhanced Fund Ltd. dated as of December 28, 2010 regarding loan forgiveness
    (incorporated herein by reference to Exhibit 10.13 of the Company's Current Report on Form 8-K filed with the Commission
    on February 1, 2011).
10.10
Letter from Mark Tompkins dated as of January 25, 2011 regarding loan forgiveness (incorporated
    herein by reference to Exhibit 10.14 of the Company's Current Report on Form 8-K filed with the Commission on February
    1, 2011).
10.11†
Employment Agreement dated as of January 25, 2011 by and between the Company and Joseph
    Pandolfino (incorporated herein by reference to Exhibit 10.15 of the Company's Current Report on Form 8-K filed with
    the Commission on February 1, 2011).
10.12†
Employment Agreement dated as of January 25, 2011 by and between the Company and Henry Sicignano
    III (incorporated herein by reference to Exhibit 10.16 of the Company's Current Report on Form 8-K filed with the Commission
    on February 1, 2011).
10.13†
Employment Agreement dated as of March 15, 2011 by and between the Company and Michael R.
    Moynihan (incorporated by reference to Exhibit 10.18 to the Company's Form S-1 registration statement filed with the
    Commission on June 6, 2011).
10.14
Restated Promissory Note dated June 30, 2011, payable by the Company to Henry Sicignano
    III in the principal amount of $150,000 (incorporated by reference to Exhibit 10.20 to the Company's Form S-1 registration
    statement filed with the Commission on July 20, 2011).
10.15††
License Agreement dated March 6, 2009 between North Carolina State University and 22nd Century
    Limited, LLC (incorporated by reference to Exhibit 10.21 to the Company's Form S-1 registration statement filed with
    the Commission on August 26, 2011).
10.15.1
Amendment dated August 9, 2012 to License Agreement dated March 6, 2009 between North Carolina
    State University and 22nd Century Limited, LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report
    on Form 8-K filed with the Commission on August 20, 2012).
10.16††
License Agreement dated May 1, 2009 between The National Research Council of Canada and
    22nd Century Limited, LLC (incorporated by reference to Exhibit 10.22 to the Company's Form S-1 registration statement
    filed with the Commission on August 26, 2011).
10.17
Letter Agreement between the Company and NCSU dated November 22, 2011 (incorporated by reference
    to Exhibit 10.1 to the Company's Form 8-K filed with the Commission on November 23, 2011).
10.18
Form of Securities Purchase Agreement, dated as of December 14, 2011, by and between 22nd
    Century Group, Inc. and the purchasers thereto (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K
    filed with the Commission on December 16, 2011).
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10.19
Form of Securities Purchase Agreement, dated as of January 11, 2013,
    by and between 22nd Century Group, Inc. and the purchasers thereto (incorporated herein by reference to Exhibit 10.1 of the
    Company's Current Report on Form 8-K filed with the Commission on January 17, 2013).
10.20
Form of Registration Rights Agreement, dated as of January 11, 2013, by and between 22nd
    Century Group, Inc. and the parties thereto (incorporated herein by reference to Exhibit 10.2 of the Company's Current
    Report on Form 8-K filed with the Commission on January 17, 2013).
10.21
Form of Insiders Lock-Up Agreement (incorporated herein by reference to Exhibit 10.3 of
    the Company's Current Report on Form 8-K filed with the Commission on January 17, 2013).
10.22
Form of Specified Investors Lock-Up Agreement (incorporated herein by reference to Exhibit
    10.4 of the Company's Current Report on Form 8-K filed with the Commission on January 17, 2013).
21.1*
Subsidiaries of the Company
23.1*
Consent of Foley & Lardner LLP (included in Exhibit 5.1 filed herewith).
23.2*
Consent of Freed Maxick CPAs, P.C.
101*
Interactive data files formatted in XBRL (eXtensible Business Reporting Language): (i) the
    Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows,
    and (iv) the Notes to the Consolidated Financial Statements.
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*Filed herewith.
†     Management contract
or compensatory plan, contract or arrangement.
††    Certain portions of the
exhibit have been omitted pursuant to a confidential treatment order. An unredacted
copy of the exhibit has been filed separately with the United
States Securities and Exchange Commission pursuant to the request for confidential treatment.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(A)          The undersigned registrant hereby undertakes:
(1)          To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
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8
(i)          To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii)          To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and
(iii)          To include any material information with respect
to the plan of distribution not previously disclosed in the registration statement or any material change to such information
in the registration statement.
(2)          That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating
to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3)          To remove from registration by means of a post−effective
amendment any of the securities being registered which remain unsold at the termination of the offering.
(4)          That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:
(i)          If the registrant is relying on Rule 430B:
(A)          Each prospectus filed by the registrant pursuant
to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part
of and included in the registration statement; and
(B)          Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant
to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by Section 10(a) of the Securities Act
of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus
is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus.
As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall
be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to
which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering
thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date,
supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date; or
(ii)          If the registrant is subject to Rule 430C, each
prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included
in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in
a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to
a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date
of first use.
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(B)          Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(C)          The undersigned registrant hereby undertakes that:
(1)          For purposes of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2)          For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, in the
City of Clarence, State of New York on February 4, 2013.
22nd CENTURY GROUP, INC.
By:
/s/ Joseph Pandolfino
Name:
Joseph Pandolfino
Title:
Chief Executive Officer
Pursuant to the requirements of the Securities
Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the dates
set forth below. Each person whose signature appears below constitutes and appoints Joseph Pandolfino and Henry Sicignano, III,
and each of them individually, his or her true and lawful attorney-in-fact and agent, with full power of substitution and revocation,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any additional registration statement to be filed pursuant to Rule 462(b) under
the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents
and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents,
or either of them, may lawfully do or cause to be done by virtue hereof.
Signature
Title
Date
/s/ Joseph Pandolfino
Joseph Pandolfino
Chief Executive Officer and Director (Principal Executive Officer)
February 4, 2013
/s/ Henry Sicignano, III
Henry Sicignano, III
President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)
February 4, 2013
/s/ Joseph A. Dunn, Ph.D.
Joseph A. Dunn, Ph.D.
Director
February 4, 2013
James W. Cornell
Director