10-Q

UNITED STATES

SECURITIES AND EXCHANGE

COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2017

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ________  to ________

Commission File Number: 001-36338

22nd Century Group, Inc.

(Exact name of registrant as specified in its charter)

Nevada	98-0468420
(State or other jurisdiction	(IRS Employer
of incorporation)	Identification No.)

9530 Main Street, Clarence, New York 14031

(Address of principal executive offices)

(716) 270-1523

(Registrant’s telephone number, including area code)

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if smaller reporting company)
		Emerging growth company	¨

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

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

As of November 9, 2017, there were 123,564,117 shares of common stock issued and outstanding.

22nd CENTURY GROUP, INC.

INDEX

		Page Number
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	3
	Consolidated Statements of Operations for the Three Months Ended September 30, 2017 and 2016 (unaudited)	4
	Consolidated Statements of Operations for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	5
	Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Default Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES		38

2 

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2017 with Comparative Figures at December 31, 2016

	September 30,			December 31,
	2017			2016
	(unaudited)
ASSETS
Current assets:
Cash	$	15,022,570		$	13,468,188
Accounts receivable, net		126,198			40,992
Inventory, net		4,034,164			3,092,686
Prepaid expenses and other assets		542,953			195,569
Total current assets		19,725,885			16,797,435
Machinery and equipment, net		3,099,614			2,434,663
Other assets:
Intangible assets, net		7,468,932			7,389,946
Investment		1,366,493			1,020,313
Total other assets		8,835,425			8,410,259
Total assets	$	31,660,924		$	27,642,357
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of note payable	$	326,924		$	307,938
Accounts payable		1,627,971			1,340,156
Accrued expenses		1,307,684			1,401,566
Accrued severance		38,793			199,657
Deferred income		158,478			-
Total current liabilities		3,459,850			3,249,317
Warrant liability		197,494			58,681
Total liabilities		3,657,344			3,307,998
Commitments and contingencies (Note 13)		-			-
Shareholders' equity
10,000,000 preferred shares, $.00001 par value
300,000,000 common shares, $.00001 par value
Capital stock issued and outstanding:
102,888,117 common shares (90,698,113 at December 31, 2016)		1,029			907
Capital in excess of par value		115,434,541			102,471,907
Accumulated deficit		(87,431,990	)		(78,138,455	)
Total shareholders' equity		28,003,580			24,334,359
Total liabilities and shareholders' equity	$	31,660,924		$	27,642,357

See accompanying notes to consolidated financial statements.

3 

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended September 30,

(unaudited)

	2017			2016
Revenue:
Sale of products, net	$	4,530,865		$	3,097,648
Cost of goods sold (exclusive of depreciation shown separately below):
Products		4,871,234			3,282,266
Gross loss		(340,369	)		(184,618	)
Operating expenses:
Research and development (including equity based compensation of  $26,851 and $34,656, respectively)		784,587			691,970
General and administrative (including equity based compensation of $194,296 and $157,844, respectively)		1,635,226			1,230,967
Sales and marketing (including equity based compensation of $38,268 and $12,360, respectively)		279,254			277,096
Depreciation		88,711			81,354
Amortization		145,934			129,807
		2,933,712			2,411,194
Operating loss		(3,274,081	)		(2,595,812	)
Other income (expense):
Warrant liability loss - net		(55,886	)		(46,995	)
Loss on investment		-			(29,997	)
Interest income		20,317			2,131
Interest expense		(6,984	)		(9,315	)
		(42,553	)		(84,176	)
Loss before income taxes		(3,316,634	)		(2,679,988	)
Income taxes		-			-
Net loss	$	(3,316,634	)	$	(2,679,988	)
Loss per common share - basic and diluted	$	(0.03	)	$	(0.03	)
Common shares used in basic and diluted earnings per share calculation		100,673,834			80,386,519

See accompanying notes to consolidated financial statements.

4 

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Nine Months Ended September 30,

(unaudited)

	2017			2016
Revenue:
Sale of products, net	$	10,659,588		$	8,944,362
Cost of goods sold (exclusive of depreciation shown separately below):
Products		11,438,909			9,146,247
Gross loss		(779,321	)		(201,885	)
Operating expenses:
Research and development (including equity based compensation of $59,051 and $117,937, respectively)		2,148,725			1,799,289
General and administrative (including equity based compensation of $428,022 and $560,766, respectively)		5,060,823			4,799,349
Sales and marketing (including equity based compensation of $95,325 and $29,246, respectively)		842,558			1,230,816
Depreciation		265,296			243,018
Amortization		429,832			380,689
		8,747,234			8,453,161
Operating loss		(9,526,555	)		(8,655,046	)
Other income (expense):
Warrant liability (loss) gain - net		(138,813	)		14,602
Gain (loss) on investment		346,180			(172,068	)
Interest income		48,197			6,729
Interest expense		(22,544	)		(29,011	)
		233,020			(179,748	)
Loss before income taxes		(9,293,535	)		(8,834,794	)
Income taxes		-			-
Net loss	$	(9,293,535	)	$	(8,834,794	)
Loss per common share - basic and diluted	$	(0.10	)	$	(0.11	)
Common shares used in basic and diluted earnings per share calculation		94,369,953			76,826,949

See accompanying notes to consolidated financial statements.

5 

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

Nine Months Ended September 30, 2017

(unaudited)

	Common		Par Value		Capital in
	Shares		of Common		Excess of			Accumulated			Shareholders'
	Outstanding		Shares		Par Value			Deficit			Equity
Balance at December 31, 2016		90,698,113	$	907	$	102,471,907		$	(78,138,455	)	$	24,334,359
Equity based compensation		-		-		582,398			-			582,398
Stock issued in connection with warrant exercises		12,138,077		121		12,380,237			-			12,380,358
Stock issued in connection with stock option exercises		51,927		1		(1	)		-			-
Net loss		-		-		-			(9,293,535	)		(9,293,535	)
Balance at September 30, 2017		102,888,117	$	1,029	$	115,434,541		$	(87,431,990	)	$	28,003,580

See accompanying notes to consolidated financial statements.

6 

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

(unaudited)

	2017			2016
Cash flows from operating activities:
Net loss	$	(9,293,535	)	$	(8,834,794	)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation		621,612			550,191
Amortization of license fees		73,516			73,516
(Gain) loss on investment		(346,180	)		172,068
Accretion of interest on note payable and accrued severance		22,544			29,011
Warrant liability loss (gain)		138,813			(14,602	)
Equity based employee compensation expense		582,398			677,076
Equity based payments for outside services		-			30,873
Decrease in allowance for doubtful accounts		(10,000	)		-
Increase in inventory reserve		95,000			45,000
(Increase) decrease in assets:
Accounts receivable		(75,205	)		34,776
Inventory		(1,036,478	)		(386,072	)
Prepaid expenses and other assets		(347,384	)		204,641
Increase (decrease) in liabilities:
Accounts payable		53,740			(91,945	)
Accrued expenses		(93,882	)		(298,970	)
Accrued severance		(164,423	)		(173,078	)
Deferred income		158,478			-
Net cash used in operating activities		(9,620,986	)		(7,982,309	)
Cash flows from investing activities:
Acquisition of patents and trademarks		(312,804	)		(236,723	)
Acquisition of machinery and equipment		(892,186	)		(125,511	)
Net cash used in investing activities		(1,204,990	)		(362,234	)
Cash flows from financing activities:
Net proceeds from exercise of warrants		12,380,358			196
Net proceeds from February 2016 registered direct offering		-			5,091,791
Net proceeds from July 2016 registered direct offering		-			4,682,764
Net cash provided by financing activities		12,380,358			9,774,751
Net increase in cash		1,554,382			1,430,208
Cash - beginning of period		13,468,188			3,760,297
Cash - end of period	$	15,022,570		$	5,190,505
Supplemental disclosures of cash flow information:
Net cash paid for:
Cash paid during the period for interest	$	3,558		$	10,507
Cash paid during the period for income taxes	$	-		$	-
Non-cash transactions:
Patent and trademark additions included in accounts payable	$	196,014		$	180,560
Machinery and equipment additions included in accounts payable	$	38,061		$	9,749
Reclassification of warrant liability to capital in excess of par due to voiding of exchange rights clause in Crede Tranche 1A warrant	$	-		$	2,810,000

See accompanying notes to consolidated financial statements.

7 

22nd CENTURY GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(unaudited)

NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. 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.

Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the December 31, 2016 audited consolidated financial statements and the notes thereto.

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of 22nd Century Group, Inc. (“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”) (collectively, “the Company”). All intercompany accounts and transactions have been eliminated.

Nature of Business - 22nd Century Ltd is a plant biotechnology company specializing in technology that allows (i) for the level of nicotine and other nicotinic alkaloids in tobacco plants to be decreased or increased through genetic engineering and plant breeding and (ii) the levels of cannabinoids in cannabis/hemp plants to be decreased or increased through genetic engineering and plant breeding. Goodrich Tobacco and Heracles Pharma are business units for the Company’s (i) potential modified risk tobacco products and premium cigarettes and (ii) smoking cessation product, respectively. The Company acquired the membership interests of NASCO on August 29, 2014. NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA, and operates the Company’s cigarette manufacturing business in North Carolina. Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group, and was incorporated to facilitate an investment more fully described in Note 9.

Preferred stock authorized - The Company is authorized to issue “blank check” preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.

Accounts receivable - The Company periodically reviews aged account balances for collectability. At September 30, 2017 and December 31, 2016, the Company established an allowance for doubtful accounts in the amount of $0 and $10,000, respectively.

Inventory - Inventories are valued at the lower of cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory and standard cost is primarily used for finished goods inventory. 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. Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Inventory - tobacco leaf	$	1,890,477	$	1,936,039
Inventory - finished goods
Cigarettes and filtered cigars		528,925		340,523
Inventory - raw materials
Cigarette and filtered cigar components		1,965,385		1,071,747
		4,384,787		3,348,309
Less: inventory reserve		350,623		255,623
	$	4,034,164	$	3,092,686

8 

Machinery and equipment - Machinery and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives ranging from 3 to 10 years. Depreciation commences when the asset is placed in service.

Intangible Assets - Intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand. The amounts capitalized relate to intellectual property that the Company owns or to which it has exclusive rights. The Company’s intellectual property capitalized costs are amortized using the straight-line method over the remaining statutory life of the primary patent in each of the Company’s two primary groupings of patent families, which expire in 2018 and 2028 (the assets’ estimated lives, respectively). Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which patent expiration dates range from 2028 through 2035. The Company believes costs associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such, no amortization is taken. Total intangible assets at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Intangible assets, net
Patent and trademark costs	$	6,197,258	$	5,688,440
Less: accumulated amortization		2,378,241		2,021,926
Patent and trademark costs, net		3,819,017		3,666,514
License fees, net (see Note 13)		1,450,000		1,450,000
Less: accumulated amortization		302,085		228,568
License fees, net		1,147,915		1,221,432
MSA signatory costs		2,202,000		2,202,000
License fee for predicate cigarette brand		300,000		300,000
	$	7,468,932	$	7,389,946

Amortization expense relating to the above intangible assets for the three and nine months ended September 30, 2017 amounted to $145,934 and $429,832, respectively ($129,807 and $380,689 for the three and nine months ended September 30, 2016, respectively).

The estimated annual average amortization expense for the next five years is approximately $396,000 for patent costs and $98,000 for license fees.

9 

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, 2017 or 2016, respectively.

Income Taxes - The Company recognizes 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 carry-forwards.

Considering the Company’s history of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance to fully offset its net deferred tax assets as of September 30, 2017 and December 31, 2016.

The Company’s federal and state tax returns for the years ended December 31, 2014 through December 31, 2016 are currently open to audit under the statutes of limitations. There were no pending audits as of September 30, 2017.

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 or options to purchase common shares of the Company. 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.

Revenue Recognition - The Company recognizes revenue from product sales 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 and filtered cigar federal excise taxes and other regulatory fees in the approximate amount of $2,436,000 and $5,980,000 are included in net sales for the three and nine months ended September 30, 2017, respectively (approximately $1,810,000 and $5,387,000 for the three and nine months ended September 30, 2016, respectively), except on sales of SPECTRUM research cigarettes, exported cigarettes, exported filtered cigars and in-bond sales of filtered cigars to other federally licensed tobacco products manufacturers, to 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 with research cigarettes. The contract was renewed in 2015 for an additional 5 years. These government research cigarettes are distributed under the Company’s mark SPECTRUM. There were no SPECTRUM research cigarettes delivered during the nine months ended September 30, 2017. Revenue generated from the sale of SPECTRUM research cigarettes amounted to $0 and $329,321 for the nine months ended September 30, 2017 and 2016, respectively. In May 2017, the Company received a purchase order from RTI for approximately 2.4 million SPECTRUM research cigarettes that are expected to be shipped in the fourth quarter of 2017 and generate sales revenue of approximately $325,000. The Company recorded deferred income in the approximate amount of $158,000 during the third quarter of 2017 primarily resulting from a down payment from RTI on the SPECTRUM research cigarette order.

Derivatives - The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all 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 Statements of Operations. The methodology for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model, 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 on the balance sheet as current or non-current based on if the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

10 

Research and Development - Research and development costs are expensed as incurred.

Advertising - The Company expenses advertising costs as incurred. Advertising expense was approximately $6,000 and $49,000 for the three and nine months ended September 30, 2017, respectively ($24,000 and $259,000 for the three and nine months ended September 30, 2016, respectively).

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 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 U.S. 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, accounts receivable, accounts payable, accrued expenses, accrued severance, note payable and warrant liability. Other than warrant liability, fair value is assumed to approximate carrying values for these financial instruments, since they are short term in nature, they are receivable or payable on demand, or have stated interest rates that approximate the interest rates available to the Company as of the reporting date. The determination of the fair value of the warrant liability includes unobservable inputs and is therefore categorized as a Level 3 measurement, as further discussed in Note 12.

Equity Investments - The Company accounts for investments in equity securities of other entities under the equity method of accounting if the Company’s investment in the voting stock is greater than or equal to 20% and less than a majority, and the Company has the ability to have significant influence over the operating and financial policies of the investee. When the Company’s investment in equity securities falls below 20% and the Company does not have the ability to have significant influence over the operating and financial policies of the investee, the Company carries the equity investment at its cost basis.

Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The revised effective date for the ASU is for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods therein, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations,” to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing,” which clarifies the identifying performance obligations and licensing implementation guidance. The Company is continuing to evaluate the effect this guidance will have on its consolidated financial statements, including potential impacts on the amount and timing of revenue recognition and additional information that may be necessary for the required expanded disclosures. The Company has substantially completed its review of all outstanding contracts and is in the process of applying the five-step model to those contracts to evaluate the quantitative and qualitative impacts the new standard will have on its business and reported revenues.  Within this process, the Company has begun to assess when to recognize revenues related to certain manufacturing contracts to produce customers’ products and the presentation of certain federal excise taxes and other regulatory fees. At this time, the Company is unable to quantify the impact this new guidance will have on its reported revenues.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which supersedes existing lease guidance under GAAP. Under the new guidance, lessees will be required to recognize leases as right of use assets and liabilities for leases with lease terms of more than twelve months. The guidance will apply for both finance and operating leases. The effective date for the ASU is for annual periods beginning after December 15, 2018 and interim periods therein. The Company is currently evaluating the impact of the ASU on its consolidated financial statements.

11 

NOTE 2. – JUNE 2017 WARRANT EXERCISE AGREEMENTS

On June 19, 2017, the Company entered into Warrant Exercise Agreements (the “Agreements”) with all of the holders (the “Holders”) of outstanding warrants to purchase up to 7,043,211 shares of common stock of the Company at $1.00 per share and warrants to purchase up to 4,250,000 shares of common stock of the Company at $1.45 per share (collectively, the “Warrants”). These Warrants to purchase shares of the Company’s common stock were acquired by the Holders in registered direct offerings in October of 2016 and in July of 2016, respectively, as more fully described in Notes 3 and 4 below. The Company and the Holders agreed that the Holders would, subject to beneficial ownership limitations on exercise contained in the Warrants, exercise all the Warrants for cash. In June 2017, the Holders exercised 3,229,711 Warrants at $1.00 per share and 2,354,948 Warrants at $1.45 per share, resulting in net proceeds to the Company in the amount of $6,169,212, after deducting expenses associated with the transaction. In July and August of 2017, the Holders exercised 3,813,500 Warrants at $1.00 per share and 1,895,052 Warrants at $1.45 per share, resulting in net proceeds to the Company in the amount of $6,167,646, after deducting expenses associated with the transaction.

In consideration for the Holders exercising their Warrants for cash, the Company issued to each Holder a new warrant (the “New Warrants”) to purchase shares of common stock of the Company equal to the number of shares of common stock received by each Holder upon the cash exercise of the Holder’s Warrants. The terms of the New Warrants are substantially similar to the terms of the Warrants exercised, except the New Warrants (i) have an exercise price equal to $2.15 per share and (ii) are exercisable six months from the date of issuance of the New Warrants for a period of five (5) years. Accordingly, the Company issued an aggregate of 11,293,211 New Warrants to the Holders, upon exercise of the Holder’s Warrants as described above. The New Warrants had a fair value of $16,049,031 at issuance and have been recorded as an adjustment to capital in excess of par.

NOTE 3. – OCTOBER 2016 REGISTERED DIRECT OFFERING

On October 19, 2016, the Company closed a registered direct offering with two institutional investors of units consisting of 8,500,000 shares of the Company’s common stock and warrants to purchase 4,250,000 shares of the Company’s common stock at an exercise price of $1.45 per share. The warrants were exercisable for a period of sixty-six (66) months after issuance, were not exercisable for a period of six months immediately following the issuance and had a fair value of approximately $3,380,000 at issuance. The holders of the warrants did not have the right to exercise any portion of the warrants if the holders, together with its respective affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock (including securities convertible into common stock) outstanding immediately after the exercise; provided, however, that the holder could increase or decrease this limitation at any time, although any increase shall not be effective until the 61st day following the notice of increase and the holder could not increase this limitation in excess of 9.99%. The common stock and warrants were sold for $1.3425 per unit, resulting in net proceeds to the Company in the amount of $10,707,823, after deducting expenses associated with the transaction. All of the warrants issued in the offering were exercised as described in Note 2 above.

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NOTE 4. – JULY 2016 REGISTERED DIRECT OFFERING

On July 27, 2016, the Company closed a registered direct offering of common stock and warrants consisting of 6,172,840 shares of the Company’s common stock and warrants to purchase 7,043,211 shares of the Company’s common stock. The warrants provided for an exercise price of $1.00 per share and 1,543,210 of the warrants were exercisable immediately and had a fair value of approximately $858,000 at issuance and 5,500,001 of the warrants were exercisable six months from the date of issuance and had a fair value of approximately $3,058,000 at issuance. All the warrants had a term of 5.5 years. The common stock and warrants were sold for $0.81 per unit, resulting in net proceeds to the Company in the amount of $4,682,764, after deducting expenses associated with the transaction. All of the warrants issued in the offering were exercised as described in Note 2 above. In addition, on July 27, 2016, the Company terminated an aggregate of 5.5 million warrants with exercise prices of $1.21 and $1.25 per share previously issued in conjunction with registered direct offerings in February of 2016 and June of 2015.

NOTE 5. - FEBRUARY 2016 REGISTERED DIRECT OFFERING

On February 5, 2016, the Company closed a registered direct offering of common stock and warrants consisting of 5,000,000 shares of the Company’s common stock and warrants to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $1.21 per share. The warrants were exercisable for a period of sixty-six (66) months after issuance, were not exercisable for a period of six months immediately following the issuance and had a fair value of approximately $1,940,000 at issuance. The common stock and warrants were sold for $1.10 per unit, resulting in net proceeds to the Company in the amount of $5,091,791, after deducting expenses associated with the transaction. The warrants associated with this transaction were terminated on July 27, 2016.

NOTE 6. - JOINT VENTURE, CONSULTING AGREEMENT AND ASSOCIATED WARRANTS

On June 22, 2015, the Company terminated its joint venture arrangement with Crede CG III, Ltd. (“Crede”) and a third-party due to non-performance and other breaches of the arrangement by Crede and its principals. The Company also notified Crede that the Company reserved and did not waive any rights that the Company may have to assert any and all claims that it may have against Crede, its employees, agents, representatives or affiliates thereof, which are allowable by law or in equity, including claims for breach of the warrant agreements entered into with Crede.

The six-month Consulting Agreement (the “Consulting Agreement”), entered into with Crede on September 29, 2014, expired on March 29, 2015. The value of the warrants issued in conjunction with the Consulting Agreement in the aggregate amount of $4,070,000 and initially recorded as prepaid consulting fees have been fully amortized. The final amortization of the prepaid consulting fees amounted to $1,978,785 for the three months ended March 31, 2015, and were included in General and administrative expenses in the Company’s Consolidated Statements of Operations.

Four tranches of warrants were issued to Crede in conjunction with the Consulting Agreement as follows: Tranche 1A warrant to purchase 1,250,000 shares of Company common stock, Tranche 1B warrant to purchase 1,000,000 shares of Company common stock, Tranche 2 warrant to purchase 1,000,000 shares of Company common stock and Tranche 3 warrant to purchase 1,000,000 shares of Company common stock. The Tranche 1A warrant contained an exchange rights clause that required derivative liability treatment under FASB ASC 480 - “Distinguishing Liabilities from Equity.” The Company valued the derivative liability associated with the Tranche 1A warrant at inception at $2,810,000 and the liability was recorded on the Company’s Consolidated Balance Sheets in Warrant liability. In March 2016, the Company provided notice to Crede that Crede repeatedly breached the activity restrictions contained in the warrant agreements and because the terms of the Tranche 1A warrant provide that the availability of the exchange feature was subject to compliance with such activity restrictions, the exchange rights clause contained in the Tranche 1A warrant was no longer available and was thereafter void (although the remaining amount of shares underlying the warrant without the exchange feature remained fully exercisable at $3.36 per share through the warrant expiration date of September 29, 2016). Accordingly, the Company reclassified the warrant liability associated with the Tranche 1A warrant to Capital in excess of par on its Consolidated Balance Sheets during March 2016. The Tranche 1A and Tranche 1B warrants all expired without exercise on September 29, 2016.

The Tranche 2 and Tranche 3 warrants were not exercisable unless and until certain revenue milestones were attained, as defined in the prior joint venture agreement between Crede and the Company. As stated above, the Company terminated the joint venture agreement on June 22, 2015. Accordingly, such revenue milestones will never be satisfied, and the Tranche 2 and Tranche 3 warrants will never be exercisable.

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NOTE 7. - MANUFACTURING FACILITY

The Company’s manufacturing operations at its North Carolina factory were not at full production capacity throughout the nine months ended September 30, 2017, and the Company significantly expanded capacity during the second and third quarters of 2017 in order to fulfill anticipated new manufacturing contracts. In mid-May of 2017, the Company began the first phase of a manufacturing contract for an existing brand of filtered cigars under a new contract manufacturing agreement (the “New Agreement”) with a third-party and continued manufacturing a third-party MSA cigarette brand and other filtered cigars on a contract basis. The New Agreement has increased revenue, has resulted in an increase in the utilization of production capacity, and has required the hiring of additional personnel. Raw material component costs, direct manufacturing costs, and an overhead allocation are included in the Cost of goods sold and Finished goods inventory. General and administrative expenses of the factory amounted to $300,824 and $635,514 for the three and nine months ended September 30, 2017, respectively ($140,690 and $422,626 for the three and nine months ended September 30, 2016, respectively).

NOTE 8. - MACHINERY AND EQUIPMENT

Machinery and equipment at September 30, 2017 and December 31, 2016 consisted of the following:

	Useful Life	September 30, 2017		December 31, 2016
Cigarette manufacturing equipment	3 - 10 years	$	4,109,559	$	3,193,580
Office furniture, fixtures and equipment	5 years		105,096		103,945
Laboratory equipment	5 years		32,193		19,076
			4,246,848		3,316,601
Less: accumulated depreciation			1,147,234		881,938
Machinery and equipment, net		$	3,099,614	$	2,434,663

Depreciation expense was $88,711 and $265,296 for the three and nine months ended September 30, 2017, respectively ($81,354 and $243,018 for the three and nine months ended September 30, 2016, respectively).

NOTE 9. - INVESTMENT IN ANANDIA

The Company (through its wholly-owned subsidiary, Botanical Genetics) used the equity method of accounting to record its 24.4% ownership interest in Anandia Laboratories, Inc., a Canadian plant biotechnology company (“Anandia”). The Company’s ownership was 25% prior to a dilutive event on September 8, 2016, that reduced the Company’s ownership in Anandia to 24.4%. On February 17, 2017, an additional dilutive event (the “Dilutive Event”) reduced the Company’s ownership in Anandia to 19.4%, an ownership percentage below the 20% threshold for use of the equity method of accounting. Accordingly, the Company discontinued applying the equity method of accounting for the investment in Anandia, effective on the date of the Dilutive Event. At September 30, 2017 and December 31, 2016, the Company’s investment balance in Anandia was $1,366,493 and $1,020,313, respectively, and is classified within Other assets on the accompanying Consolidated Balance Sheets. After the Dilutive Event, the Company accounts for its investment in Anandia under the cost method. On July 25, 2017, a third dilutive event occurred resulting in an additional reduction of the Company’s ownership in Anandia to 19.0%.

The Company recorded a gain on investment of $0 and $16,872 for the three and nine months ended September 30, 2017, respectively, and a loss of $15,585 and $128,832 for the three and nine months ended September 30, 2016, respectively (the gain for the nine months ended September 30, 2017, reflects the Company’s proportionate gain through the Dilutive Event). As of September 15, 2014, the carrying value of the Company’s investment in Anandia was approximately $1,199,000 in excess of the Company’s share of the book value of the net assets of Anandia, with such difference being attributable to intangible assets. This intangible asset was being amortized over the expected benefit period and this amortization expense amounted to $0 and $7,526 for the three and nine months ended September 30, 2017, respectively ($14,412 and $43,236 for the three and nine months ended September 30, 2016, respectively). After the Dilutive Event, the Company discontinued amortizing this intangible asset. In addition, and as a result of the Dilutive Event, the Company recorded a gain in accordance with the derecognition provisions of Accounting Standards Codification 323 (“ASC 323”). ASC 323 states that an investor (the Company) shall account for an issuance by an investee (Anandia) as if the investor had sold a proportionate share of its investment in the investee and the investor will record a gain or loss resulting from the investee share issuance. As such, the Company recorded a gain of $336,834 during the three months ended March 31, 2017, as a result of the Dilutive Event. The Company’s overall gain (loss) on the investment when aggregating the Company’s share of Anandia’s gain (loss), the intangible asset amortization and the gain recorded under ASC 323 amounted to $0 and $346,180 for the three and nine months ended September 30, 2017, respectively, and amounted to ($29,997) and ($172,068) for the three and nine months ended September 30, 2016, respectively.

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NOTE 10. - NOTES PAYABLE AND PATENT ACQUISITION

On December 22, 2014, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with the National Research Council of Canada (“NRC”) to acquire certain patent rights that the Company had previously licensed from NRC under a license agreement between the parties. The Purchase Agreement provided for payment by the Company to NRC for the NRC patent rights of a total amount of $1,213,000, of which $213,000 was paid in cash at the closing on December 23, 2014, and with the remaining $1,000,000 balance to be paid in three equal installments of $333,333 in December of 2015, 2016 and 2017, respectively, with no interest on the installment payments unless the Company defaults on any such installment payments. As such, the Company computed the present value of the note payable using the Company’s incremental borrowing rate. The resulting present value of the note payable amounted to $925,730 at December 31, 2014. After the scheduled installment payments of $333,333 made by the Company to NRC on each of December 22, 2016 and 2015, and the accretion of interest, the remaining present value of the note payable amounts to $326,924 and $307,938 at September 30, 2017 and December 31, 2016, respectively, and the amounts are reported as Current portion of note payable on the Company’s Consolidated Balance Sheets. The cost of the acquired patents in the amount of $1,138,730 (cash of $213,000 plus the original discounted notes payable in the amount of $925,730) are included in Intangible assets, net on the Company’s Consolidated Balance Sheets. All previous license agreements between NRC and the Company were terminated as a condition of the Purchase Agreement. NRC has a security interest in these patent rights acquired by the Company from NRC until the note payable has been satisfied.

NOTE 11. - SEVERANCE LIABILITY

The Company recorded an accrual for severance during the fourth quarter of 2014 in the initial amount of $624,320 in accordance with FASB ASC 712 - “Compensation - Nonretirement Postemployment Benefits.” The severance accrual relates to the October 25, 2014 termination of Joseph Pandolfino, the Company’s former Chairman of the Board and Chief Executive Officer. The prior Employment Agreement with Mr. Pandolfino provided that in certain circumstances Mr. Pandolfino would receive severance payments in the gross amount of $18,750 per month, subject to customary withholdings, over a term of 36 months. Amounts owed to Mr. Pandolfino have been discounted using the Company’s incremental borrowing rate. As a result of the severance benefit payments made through the third quarter of 2017, the discounted current balance of the severance liability amounted to $38,793 and $199,657, at September 30, 2017 and December 31, 2016, respectively. The severance liability will be fully satisfied during the fourth quarter of 2017.

NOTE 12. - WARRANTS FOR COMMON STOCK

At September 30, 2017, the Company had outstanding warrants to purchase 12,204,580 shares of common stock of the Company, of which warrants to purchase 94,721 shares contain an anti-dilution feature, and excluding 2,000,000 Tranche 2 and 3 warrants that will never become exercisable, as discussed in Note 6.

During the third quarter of 2017, warrants to purchase 240,667 shares of common stock were exercised on a cashless basis resulting in the issuance of 146,320 shares of the Company’s common stock and 5,708,552 warrants to purchase shares of common stock were exercised on a cash basis under the June 2017 Warrant Exercise Agreements discussed in Note 2.

During July and August of 2017, the Company issued warrants to purchase 5,708,552 shares of common stock with an exercise price of $2.15 per share. These warrants have a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, do not contain an anti-dilution feature and had a fair value of $9,135,223 at issuance. See Note 2 for additional details.

During the second quarter of 2017, warrants to purchase 843,110 shares of common stock were exercised on a cashless basis resulting in the issuance of 525,118 shares of the Company’s common stock and 5,657,157 warrants to purchase shares of common stock were exercised on a cash basis (including 5,584,659 warrants to purchase shares of common stock under the June 2017 Warrant Exercise Agreements discussed in Note 2). On May 15, 2017, warrants to purchase 45,834 shares of common stock expired without being exercised.

During June of 2017, the Company issued warrants to purchase 5,584,659 shares of common stock with an exercise price of $2.15 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, do not contain an anti-dilution feature and had a fair value of approximately $6,913,031 at issuance. See Note 2 for additional details.

During March of 2017, warrants to purchase 202,500 shares of common stock were exercised on a cashless basis resulting in the issuance of 100,928 shares of the Company’s common stock. On February 8, 2017, warrants to purchase 172,730 shares of common stock expired without being exercised.

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On January 25, 2016, warrants to purchase 67,042 shares of common stock were exercised, primarily on a cashless basis, resulting in the issuance of 2,618 shares of the Company’s common stock. On January 25, 2016, warrants to purchase 6,831,115 shares of common stock expired without being exercised.

Pursuant to the registered direct offering that closed on October 19, 2016, and discussed in Note 3, the Company issued warrants to purchase 4,250,000 shares of common stock with an exercise price of $1.45 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $3,380,000 at issuance. Pursuant to the June 2017 Warrant Exercise Agreements, as discussed in Note 2, warrants to purchase 4,250,000 shares of common stock were exercised on a cash basis at an exercise price of $1.45 per share (2,354,948 Warrants were exercised in June of 2017 and 1,895,052 Warrants were exercised in July and August of 2017).

Pursuant to the registered direct offering that closed on July 27, 2016, and discussed in Note 4, the Company issued warrants to purchase 7,043,211 shares of common stock. The warrants provide for an exercise price of $1.00 per share and 1,543,210 of the warrants were exercisable immediately and had a fair value of approximately $858,000 at issuance and 5,500,001 of the warrants were exercisable six months from the date of issuance and had a fair value of approximately $3,058,000 at issuance. All the warrants had a term of 5.5 years and do not contain an anti-dilution feature. In addition, on July 27, 2016, the Company terminated an aggregate of 5.5 million warrants with exercise prices of $1.21 and $1.25 per share previously issued in conjunction with registered direct offerings in February of 2016 and June of 2015. Pursuant to the June 2017 Warrant Exercise Agreements, as discussed in Note 2, warrants to purchase 7,043,211 shares of common stock were exercised on a cash basis at an exercise price of $1.00 per share (3,229,711 Warrants were exercised in June of 2017 and 3,813,500 Warrants were exercised in July and August of 2017).

Pursuant to the registered direct offering that closed on February 5, 2016, and discussed in Note 5, the Company issued warrants to purchase 2,500,000 shares of common stock with an exercise price of $1.21 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $1,940,000 at issuance. The warrants associated with this transaction were terminated on July 27, 2016 (see Note 4 – July 2016 Registered Direct Offering for additional information).

Pursuant to the registered direct offering that closed on June 2, 2015, the Company issued warrants to purchase 3,000,000 shares of common stock with an exercise price of $1.25 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $2,067,000 at issuance. The warrants associated with this transaction were terminated on July 27, 2016 (see Note 4 – July 2016 Registered Direct Offering for additional information).

Outstanding warrants at September 30, 2017 consisted of the following:

Warrant Description	Number of Warrants		Exercise Price		Expiration
December 2011 convertible NP warrants		700,148	$	1.3816	February 6, 2018
November 2012 PPO warrants		116,500	$	0.6000	November 9, 2017
August 2012 convertible NP warrants (1)		94,721	$	0.9310	August 8, 2018
June 2017 warrants pursuant to warrant exercise agreements		11,293,211	$	2.1500	December 20, 2022
Total warrants outstanding (2)		12,204,580

(1) Includes anti-dilution features.

(2) Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

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The Company estimates the value of warrant liability 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.

As a result of the previously exercisable exchange rights contained in the Tranche 1A warrants, the financial instrument was previously considered a liability in accordance with FASB Accounting Standards Codification Topic 480 - “Distinguishing Liabilities from Equity” (“ASC 480”). More specifically, ASC 480 requires a financial instrument to be classified as a liability if such financial instrument contains a conditional obligation that the issuer must or may settle by issuing a variable number of its equity securities if, at inception, the monetary value of the obligation is based on a known fixed monetary amount. As a result of the actions by Crede that caused the exchange rights feature to be voided (see Note 6 - Joint Venture, Consulting Agreement and Associated Warrants for additional information), the Company reclassified the Tranche 1A warrant liability to Capital in excess of par.

The following table is a roll-forward summary of the warrant liability:

Fair value at December 31, 2015	$	2,898,296
Reclassification of warrant liability to capital in excess of par		(2,810,000	)
Gain as a result of change in fair value		(29,615	)
Fair value at December 31, 2016		58,681
Loss as a result of change in fair value		138,813
Fair value at September 30, 2017	$	197,494

The aggregate loss as a result of the Company’s warrant liability for the three and nine months ended September 30, 2017 amounted to $55,886 and $138,813, respectively (the aggregate net (loss) gain for the three and nine months ended September 30, 2016 amounted to ($46,995) and $14,602, respectively), which are included in Other income (expense) under Warrant liability (loss) gain - net in the accompanying Consolidated Statements of Operations.

FASB ASC 820 - “Fair Value Measurements and Disclosures” 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; and

· Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

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A financial asset’s or a financial 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 that 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 Company’s warrant activity since December 31, 2015:

	Number of Warrants
Warrants outstanding at December 31, 2015		16,634,778
Warrants issued in conjunction with registered direct offering		2,500,000
Unexercisable warrants(1)		(2,000,000	)
Warrants exercised during January 2016		(67,042	)
Warrants expired during January 2016		(6,831,115	)
June 2015 registered direct offering warrants cancelled		(3,000,000	)
February 2016 registered direct offering warrants cancelled		(2,500,000	)
Warrants issued in conjunction with July 2016 registered direct offering		7,043,211
Additional warrants due to anti-dilution provisions		2,089
Warrants expired during September 2016(2)		(2,250,000	)
Warrants issued in conjunction with October 2016 registered direct offering		4,250,000
Warrants outstanding at December 31, 2016		13,781,921
Warrants expired during February 2017		(172,730	)
Warrants exercised during March 2017		(202,500	)
Warrants exercised during April 2017		(162,000	)
Warrants exercised during May 2017		(221,366	)
Warrants expired during May 2017		(45,834	)
Warrants exercised during June 2017		(6,116,903	)
Warrants issued pursuant to June 2017 warrant exercise agreements		5,584,659
Warrants exercised during July 2017		(2,000,000	)
Warrants exercised during August 2017		(3,949,219	)
Warrants issued pursuant to June 2017 warrant exercise agreements		5,708,552
Warrants outstanding at September 30, 2017		12,204,580
Composition of outstanding warrants:
Warrants containing anti-dilution feature		94,721
Warrants without anti-dilution feature		12,109,859
		12,204,580

(1) Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

(2) Tranche 1A and Tranche 1B warrants expired unexercised on September 29, 2016.

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NOTE 13. - COMMITMENTS AND CONTINGENCIES

License Agreements - Under its exclusive worldwide license agreement with North Carolina State University (“NCSU”), the Company is required to pay minimum annual royalty payments, which are credited against running royalties on sales of licensed products. The minimum annual royalty is $225,000. The license agreement continues through the life of the last-to-expire patent, which is expected to be 2022. The license agreement also requires a milestone payment of $150,000 upon FDA approval or clearance 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 three and nine months ended September 30, 2017, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $11,022 and $42,730, respectively ($62,303 and $76,299 during the three and nine months ended September 30, 2016, respectively).

On December 8, 2015, the Company entered into an additional license agreement (the “License”) with NCSU. Under the terms of the License, the Company paid NCSU a non-refundable, non-creditable lump sum license fee of $150,000. Additionally, the License calls for the Company to pay NCSU a non-refundable, non-creditable minimum annual royalty beginning on December 31, 2018 in the amount of $10,000. The minimum annual royalty payment increases to $15,000 in 2019, $25,000 in 2020 and 2021, and $50,000 per year thereafter for the remaining term of the License. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During the three and nine months ended September 30, 2017, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $236 and $30,102, respectively ($0 and $6,075 for the three and nine months ended September 30, 2016, respectively). This License continues through the life of the last-to-expire patent, expected to be in 2035.

On February 10, 2014, the Company entered into a sponsored research and development agreement (the “Agreement”) with NCSU. Under the terms of the Agreement, the Company paid NCSU $162,408 over the two-year term of the Agreement, which grants certain licensed rights to the Company. The Company had extended the Agreement through January 31, 2017 at an additional cost of $85,681. The Company is currently negotiating an additional extension to this Agreement.

All payments made under the above referenced license agreements and the sponsored research and development agreement are initially recorded as a Prepaid expense on the Company’s Consolidated Balance Sheets and subsequently expensed on a straight-line basis over the applicable period and included in Research and development costs on the Company’s Consolidated Statements of Operations. The amounts expensed during the three and nine months ended September 30, 2017 were $56,250 and $175,890, respectively ($115,170 and $345,137 for the three and nine months ended September 30, 2016, respectively).

On August 22, 2014, the Company entered into a Commercial License Agreement with Precision PlantSciences, Inc. (the “Precision License”). The Precision License grants the Company a non-exclusive, but fully paid up right and license to use technology and materials owned by Precision PlantSciences for a license fee of $1,250,000. The Precision License continues through the life of the last-to-expire patent, which is expected to be in 2028.

On August 27, 2014, the Company entered into an additional exclusive License Agreement (the “License Agreement”) with NCSU. Under the License Agreement, the Company paid NCSU a non-refundable, non-creditable lump sum license fee of $125,000, and the Company must pay to NCSU an additional non-refundable, non-creditable lump sum fee of $75,000 upon issuance of a U.S. utility patent included in the patent rights. A patent was issued during the first quarter of 2017 under this clause, and accordingly, the $75,000 was due and payable to NCSU. The $75,000 cost was included in Research and development costs on the Company’s Consolidated Statements of Operations for the three months ended March 31, 2017. Additionally, the License Agreement calls for the Company to pay NCSU three non-refundable, non-creditable license maintenance fees in the amount of $15,000 per annum in each of December 2015, 2016 and 2017. Beginning in calendar year 2018, the Company is obligated to pay to NCSU an annual minimum royalty fee of $20,000 in 2018, $30,000 in 2019, and $50,000 per year thereafter for the remaining term of the License Agreement. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During the three and nine months ended September 30, 2017, the aggregated costs incurred related to capitalized patent costs and patent maintenance expense amounted to $12,928 and $37,170, respectively ($4,056 and $37,995 for the three and nine months September 30,2016, respectively). The License Agreement continues through the life of the last-to-expire patent, which is expected to be in 2034.

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On September 15, 2014, the Company entered into a Sublicense Agreement with Anandia Laboratories, Inc. (the “Anandia Sublicense”). Under the terms of the Anandia Sublicense, the Company was granted an exclusive sublicense in the United States and a co-exclusive sublicense in the remainder of the world, excluding Canada, to the licensed intellectual property. The Anandia Sublicense required an up-front fee of $75,000, an annual license fee of $10,000, the payment of patent filing and maintenance costs, and a running royalty on future net sales. The Anandia Sublicense continues through the life of the last-to- expire patent, which is expected to be in 2035.

The Precision License, the License Agreement with NCSU and the Anandia Sublicense are included in Intangible assets, net in the Company’s Consolidated Balance Sheets and the applicable license fees will be amortized over the term of the agreements based on their last-to-expire patent date. Amortization amounted to $24,505 and $73,516 for the three months and nine months ended September 30, 2017, respectively ($24,505 and $73,516 for the three and nine months ended September 30, 2016, respectively) and was included in Amortization expense on the Company’s Consolidated Statements of Operations.

On September 28, 2015, the Company’s wholly-owned subsidiary, Botanical Genetics, entered into a Sponsored Research Agreement (the “Agreement”) with Anandia Laboratories Inc. (“Anandia”). Pursuant to the Agreement, Anandia is conducting research on behalf of the Company relating to the cannabis/hemp plant. The Agreement had an initial term of twelve (12) months from the date of the Agreement and can be extended at the sole option of the Company for two (2) additional periods of twelve (12) months each (of which the option on the first twelve (12) month period has been extended). The Company paid Anandia $379,800 over the initial term of the Agreement. On March 13, 2017, the Company entered into Amendment No. 1 to the Agreement (the “Amendment”). The Amendment has a term of twelve (12) months and calls for the Company to pay Anandia a total of $785,100 in equal monthly installments of $65,425. During the three and nine months ended September 30, 2017, expenses related to the Agreement amounted to $196,275 and $457,975, respectively ($84,200 and $263,400, for the three and nine months ended September 30, 2016, respectively) and are included in Research and development costs on the Company’s Consolidated Statements of Operations. Under the terms of the Agreement, the Company will have co-exclusive worldwide rights with Anandia to all the intellectual property resulting from the sponsored research between the Company and Anandia. The party that commercializes such intellectual property in the future will pay royalties in varying amounts to the other party, with the amount of such royalties being dependent upon the type of products that are commercialized in the future. If either party sublicenses such intellectual property to a third-party, then the Company and Anandia will share equally in such sublicensing consideration.

The Company had an R&D agreement with the University of Virginia (“UVA”) relating to nicotine biosynthesis in tobacco plants. The extended term of the R&D agreement with UVA expired on October 31, 2016. In December 2016, the Company entered into a new sponsored research agreement with UVA and an exclusive license agreement with the University of Virginia Patent Foundation d/b/a University of Virginia Licensing & Ventures Group (“UVA LVG”) pursuant to which the Company will invest approximately $1,000,000 over a three-year period with UVA to create unique industrial hemp plants with guaranteed levels of THC below the legal limits and optimize other desirable hemp plant characteristics to improve the plant’s suitability for growing in Virginia and other legacy tobacco regions of the United States. This work with UVA will also involve the development and study of medically important cannabinoids to be extracted by UVA from the Company’s hemp plants. UVA and the Company will conduct all activities in this scientific collaboration within the parameters of state and federal licenses and permits held by UVA for such work. The agreements with UVA and UVA LVG grant the Company exclusive rights to commercialize all results of the collaboration in consideration of royalty payments by the Company to UVA LVG. During the three and nine months ended September 30, 2017, expenses related to the agreements amounted to $113,942 and $225,516, respectively ($74,769 and $187,742 for the three and nine months ended September 30, 2016, respectively) and are included in Research and development costs on the Company’s Consolidated Statements of Operations.

Lease Agreements - The Company leases a manufacturing facility and warehouse located in North Carolina on a triple net lease basis. The lease commenced on January 14, 2014, and had an initial term of twelve (12) months. The lease contains four (4) additional extensions; with one lease extension for an additional one (1) year and with the other three (3) lease extensions each being for an additional two (2) years in duration, exercisable at the option of the Company. The Company is currently in the first two-year lease extension term that will expire on October 31, 2017 and intends to exercise the second two-year lease extension. The lease expense for the three and nine months ended September 30, 2017 amounted to $38,438 and $115,314, respectively, ($36,131 and $108,393, for the three and nine months ended September 30, 2016, respectively). The future minimum lease payments if the Company exercises each of the additional extensions are approximately as follows:

Year ended December 31, 2017 -	$	41,000
Year ended December 31, 2018 -	$	169,000
Year ended December 31, 2019 -	$	169,000
Year ended December 31, 2020 -	$	169,000
Year ended December 31, 2021 -	$	141,000

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The Company has a lease for its office space in Clarence, New York and extended the lease for an additional one-year renewal period that expired on August 31, 2017. The Company is currently leasing the office space on a month-to-month basis at a monthly lease payment of $5,267. On October 4, 2017, the Company entered a new lease for new office space at a new location with an initial three-year term and with a monthly lease payment of $6,375 commencing thirty (30) days after the Company occupies the new office space. The Company expects to occupy the new lease space in early 2018.

On November 1, 2015, the Company entered into a one-year lease for 25,000 square feet of warehouse space in North Carolina to store the Company’s proprietary tobacco leaf. The lease calls for a monthly lease payment of $3,750 and contains a three-year renewal option after the initial one-year term. In October of 2016, the Company exercised the three-year renewal option after the one-year initial term, but intends on terminating this lease, without further obligation, when the tobacco leaf is transferred to a new leased facility in the fourth quarter of 2017.

On May 1, 2016, the Company entered into a sublease for laboratory space in Buffalo, New York. The sublease calls for a monthly payment of $1,471 through April 30, 2018. Additionally, on February 1, 2017, the Company entered into an amendment to the initial sublease calling for the sublease of additional lab space at a cost of $1,219 per month, bringing the total monthly lease obligation to $2,690. On April 26, 2017, the Company entered into an amendment to the sublease to extend the term of the sublease for an additional twelve (12) months, commencing on May 1, 2017 at a total cost of $2,770 per month for the total lease obligation. Future minimum lease payments for the years ended December 31, 2017 and 2018 will be approximately $8,000 and $11,000, respectively.

On September 1, 2016, the Company entered into a sublease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment. The sublease calls for a monthly payment of $1,200 and expired on August 31, 2017. The Company has leased a new space in different facility in North Carolina, more fully described below, and moved the equipment to the new leased facility during the third quarter of 2017. There are no future minimum lease payments due under the sublease.

On April 20, 2017, the Company entered into a lease for warehouse space in North Carolina to store cigarette and filtered cigar raw materials. The lease calls for a monthly payment of $3,500 on a month-to-month basis. Future minimum lease payments remaining for the year ended December 31, 2017 are $10,500 and future minimum lease payments in subsequent years will be $42,000 as long as the Company continues to lease the warehouse space.

On August 14, 2017, the Company entered into a lease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment and to eventually store the Company’s proprietary tobacco leaf. The lease calls for a monthly payment of $4,665, expires on August 14, 2018 and contains twelve-month renewal options as long as the Company continues to lease the warehouse. Future minimum lease payments for the year ended December 31, 2017 are approximately $14,000 and future minimum lease payments will be approximately $56,000 per year for each subsequent year the warehouse space is leased by the Company.

Litigation - In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.

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On April 26, 2016, Crede CG III, LTD. (“Crede”) filed a complaint against the Company in the United States District Court for the Southern District of New York (the “SDNY Court”) entitled Crede CG III, LTD. v. 22nd Century Group, Inc. On May 19, 2016, Crede filed an Amended Complaint that included seven counts, alleging among other things, that the Company allegedly breached and/or interfered with certain agreements entered into with Crede, including the joint venture agreement relating to efforts to sell the Company’s proprietary tobacco into China, the Tranche 1A warrant and the prior securities purchase agreement with Crede. The Amended Complaint seeks money damages, to rescind the securities purchase agreement, to obtain declaratory and injunctive relief to require the Company to issue to Crede 2,077,555 shares of the Company’s common stock under the exchange provision of the Tranche 1A warrant, and entry of an injunction prohibiting the Company from selling tobacco into China without the joint venture’s involvement. The Amended Complaint also seeks attorney’s fees and such other relief as the Court may deem just and proper. We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims.

On May 19, 2016, Crede filed a motion for preliminary injunction, asking the SDNY Court to require the Company to issue 2,077,555 shares of its common stock to Crede under the exchange provision of the Tranche 1A warrant. After conducting an evidentiary hearing on this motion on June 14, 2016, the SDNY Court denied Crede’s motion and held, among other things, that Crede did not prove the potential for irreparable harm or a likelihood of success on its claim for such 2,077,555 shares under the Tranche 1A warrant, and that there was a likelihood that Crede had violated the activity restrictions of the Tranche 1A warrant, which would bar Crede’s claim for such shares from the Company.

Following such ruling, on July 11, 2016, the Company filed a motion to sever the Crede lawsuit into two separate cases, requesting all claims relating to the Tranche 1A warrant and the securities purchase agreement to stay in the SDNY Court and all claims relating to the China joint venture agreement to be transferred to the United States District Court for the Western District of New York (the “WDNY Court”), where the Company’s headquarters are located. On January 20, 2017, the SDNY Court granted the Company’s motion.

On February 14, 2017, Crede voluntarily dismissed its lawsuit against the Company in the WDNY Court.

On February 21, 2017, the SDNY Court granted the Company’s request to file a motion for summary judgment for the claims remaining in the SDNY Court, with all discovery in the case being deferred until after the SDNY Court issues its decision on the summary judgment motion of the Company.

On March 20, 2017, the Company filed its motion for summary judgment for the claims remaining in the SDNY Court. The response by Crede to the Company’s summary judgment motion was filed by Crede on May 1, 2017. On May 15, 2017, the Company filed its response to Crede’s filing. The parties are now awaiting the SDNY Court to issue its decision on such summary judgment motion.

We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims. The Company has defended and intends to continue to defend against these claims vigorously.

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NOTE 14. - 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, 2017 and 2016:

	September 30, 2017			September 30, 2016
Net loss attributed to common shareholders	$	(3,316,634	)	$	(2,679,988	)
Denominator for basic earnings per share-weighted average shares outstanding		100,673,834			80,386,519
Effect of dilutive securities:
Warrants, restricted stock and options outstanding		-			-
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities		100,673,834			80,386,519
Loss per common share - basic and diluted	$	(0.03	)	$	(0.03	)

The following table sets forth the computation of basic and diluted earnings per common share for the nine month periods ended September 30, 2017 and 2016:

	September 30, 2017			September 30, 2016
Net loss attributed to common shareholders	$	(9,293,535	)	$	(8,834,794	)
Denominator for basic earnings per share-weighted average shares outstanding		94,369,953			76,826,949
Effect of dilutive securities:
Warrants, restricted stock and options outstanding		-			-
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities		94,369,953			76,826,949
Loss per common share - basic and diluted	$	(0.10	)	$	(0.11	)

Securities outstanding that were excluded from the computation because they would have been anti-dilutive are as follows:

	September 30, 2017		September 30, 2016
Warrants		12,204,580		9,531,921
Options		6,856,691		5,650,679
		19,061,271		15,182,600

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NOTE 15. – EQUITY BASED COMPENSATION

On April 12, 2014, the stockholders of the Company approved the 22nd Century Group, Inc. 2014 Omnibus Incentive Plan (the “OIP”) and on April 29, 2017, the stockholders approved an amendment to the OIP to increase the number of shares available for issuance by 5,000,000 shares. The OIP allows for the granting of equity and cash incentive awards to eligible individuals over the life of the OIP, including the issuance of up to an aggregate of 10,000,000 shares of the Company’s common stock pursuant to awards under the OIP. The OIP has a term of ten years and is administered by the Compensation Committee of the Company’s Board of Directors 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 OIP. As of September 30, 2017, we had available 3,929,765 shares remaining for future awards under the OIP.

During the three and nine months ended September 30, 2017, the Company issued stock option awards from the OIP for 20,000 and 1,392,000 shares, respectively, to eligible individuals having vesting periods ranging from one to three years from the date of the award. During the three and nine months ended September 30, 2016, the Company issued stock option awards from the OIP for 665,000 shares and 2,389,037 shares, respectively. All stock option awards were valued using the Black-Scholes option-pricing model on the date of the award.

For the three and nine months ended September 30, 2017, the Company recorded compensation expense related to restricted stock and stock option awards granted under the OIP of $259,415 and $582,398, respectively ($204,860 and $677,076 for the three and nine months ended September 30, 2016, respectively).

During the three and nine months ended September 30, 2017, there were no issuances of stock or stock options to third-party service providers. During the three and nine months ended September 30, 2016, the Company issued stock to third-party service providers in the amount of 0 and 15,811 shares, respectively, and during the three and nine months ended September 30, 2016, the Company issued stock options in the amount of 0 and 100,000 shares, respectively, to third-party service providers. The Company had no equity based compensation expense related to third-party providers for the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recorded equity based compensation expense related to third-party providers in the amount of $0 and $30,873, respectively.

As of September 30, 2017, unrecognized compensation expense related to non-vested restricted shares and stock options amounted to approximately $2,165,000, which is expected to be recognized approximately as follows: $262,000, $848,000, $448,000 and $140,000 during 2017, 2018, 2019 and 2020, respectively. Approximately $467,000 of the unrecognized compensation expense relates to previously issued stock options, with the vesting of such stock options being based on the achievement of a certain milestone, and the attainment of such milestone cannot be determined at this time.

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 nine months ended September 30, 2017 and 2016:

	2017			2016
Risk-free interest rate (weighted average)		2.12	%		1.31	%
Expected dividend yield		0	%		0	%
Expected stock price volatility		90	%		90	%
Expected life of options (weighted average)		5.14 years			4.87 years

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The Company estimated the expected volatility based on data used by a 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 yield of the equivalent U.S. Treasury bonds 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 since December 31, 2015 is as follows:

						Weighted
						Average
				Weighted		Remaining		Aggregate
	Number of			Average		Contractual		Intrinsic
	Options			Exercise Price		Term		Value
Outstanding at December 31, 2015		3,161,642		$	1.10
Granted in 2016		2,489,037		$	0.97
Outstanding at December 31, 2016		5,650,679		$	1.04
Granted in 2017		1,392,000		$	1.40
Exercised in 2017		(85,988	)	$	0.79
Expired in 2017		(100,000)		$	1.43
Outstanding at September 30, 2017		6,856, 691		$	1.12		7.1 years	$	11,347,700
Exercisable at September 30, 2017		3,617,670		$	1.10		6.1 years	$	6,042,860

There were stock options granted during the nine months ended September 30, 2017 and 2016, to purchase a total of 1,392,000 shares and 2,489,037 shares, respectively. The weighted average grant date fair value of options issued during the nine months ended September 30, 2017 was $0.98 ($0.66 for the nine months ended September 30, 2016). The total fair value of options that vested during the nine months ended September 30, 2017 amounted to $750,265 ($1,242,110 for the nine months ended September 30, 2016). There were 85,988 options exercised on a cashless basis during the nine months ended September 30, 2017 resulting in the issuance of 51,927 shares of the Company’s common stock, and during the nine months ended September 30, 2016 no options were exercised.

NOTE 16. - SUBSEQUENT EVENTS

On October 10, 2017, the Company closed a registered direct offering (the “Offering”) with institutional investors purchasing an aggregate of 20,570,000 shares of the Company’s common stock at a price of $2.6250 per share generating net cash proceeds for the Company of approximately $50,700,000, after deducting expenses associated with the transaction. The securities purchase agreement entered into with the institutional investors provides that, subject to certain exceptions, for a period of one year following the closing of the Offering, the Company will be prohibited from effecting or entering into an agreement to effect any issuance by the Company or any of its subsidiaries of common stock or common stock equivalents (or a combination of units thereof) involving a variable rate transaction, which generally includes any transaction in which the Company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of common stock either (A) at a conversion price or exchange rate that is based upon and/or varies with the trading prices of or quotations for the shares of common stock at any time after the initial issuance of such securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock or (ii) enters into any agreement, whereby the Company may issue securities at a future determined price. The securities purchase agreement also provides that, subject to certain exceptions, the Company will not enter into any agreement to sell common stock for a period of ninety (90) days.

Effective on October 31, 2017, the Company appointed James E. Swauger, Ph.D., as our Senior Vice President of Science and Regulatory Affairs. Dr. Swauger entered into an employment agreement with the Company containing customary terms and conditions with an initial three-year term. In connection with his appointment, Dr. Swauger was awarded a time vesting stock option to purchase nine hundred thousand (900,000) shares of the Company’s common stock at an exercise price of $2.12 per share. One-third of this time vesting stock option vests over each of the next three years and such stock option had a fair value upon issuance of approximately $1,400,000. In addition, Dr. Swauger was awarded a performance vesting stock option to purchase three hundred thousand (300,000) shares of the Company’s common stock at an exercise price of $2.12 per share that vests on the attainment of various performance based milestones and had a fair value upon issuance of approximately $480,000.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” that reflect, when made, the Company’s expectations or beliefs concerning future events that involve risks and uncertainties. Forward-looking statements frequently are identified by the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “will be,” “will continue,” “will likely result,” or other similar words and phrases. Similarly, statements herein that describe the Company’s objectives, plans or goals also are forward-looking statements. Actual results could differ materially from those projected, implied or anticipated by the Company’s forward-looking statements. Some of the factors that could cause actual results to differ include: our ability to continue to monetize the licensing of our technology and products; our ability to achieve profitability; our ability to manage our growth effectively; our ability to have a Modified Risk Tobacco Product approved by the FDA; our ability to obtain FDA clearance for our Modified Risk Cigarettes; our ability to obtain FDA approval for our X-22 smoking cessation product; our ability to gain market acceptance for our products, our ability to prevail in litigation and our ability to maintain our rights to our intellectual property licenses. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which is available on the SEC’s website at www.sec.gov. All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.

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

We are a plant biotechnology company focused on (i) potentially reduced risk tobacco cigarettes and smoking cessation products produced from modifying the nicotine content in tobacco plants through genetic engineering and plant breeding, and (ii) research and development of unique cannabis/hemp plants through genetic engineering and plant breeding to alter levels of cannabinoids for new medicines and improved agricultural uses. We have an extensive intellectual property portfolio of issued patents and patent applications relating to the tobacco and cannabis plants. Our management team is focused on monetizing our intellectual property portfolio, obtaining regulatory approval to market both our reduced exposure cigarettes and our smoking cessation product in development, establishing international strategic partnerships to sell and distribute our proprietary tobacco and products, and developing and commercializing high value products derived from our unique cannabis/hemp plants. Additional information about our business and operations is contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

Strategic Objectives

Our strategic objectives include the following:

· Pursuit of the implementation of the planned mandate announced by the U.S. Food and Drug Administration (“FDA”) on July 28, 2017, that all cigarettes sold in the United States will be required to contain minimally or non-addictive nicotine levels pursuant to the FDA’s authority under the Family Smoking Prevention and Tobacco Control Act of 2009. The planned FDA mandate is based on numerous independent studies that utilized 22nd Century’s proprietary Very Low Nicotine tobacco. We believe that the implementation of the FDA mandate will result in both (i) third-party tobacco companies in the United States licensing our unique Very Low Nicotine tobacco to comply with the FDA mandate and (ii) our Company being able to independently comply with the FDA mandate with our own Very Low Nicotine products;

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· Pursuit of reduced exposure authorization from the FDA for our BRAND A Very Low Nicotine cigarettes in development that have 95% less nicotine than conventional tobacco cigarettes, and therefore drastically reduce smokers’ exposure to nicotine. In response to the FDA’s requests, and in conjunction with additional clarifying guidance, we intend to bifurcate 22nd Century’s combined Modified Risk Tobacco Product application (“MRTP application”) into a separate Premarket Tobacco Product application (“PMT application”) and a separate MRTP application for BRAND A to enjoy the benefit of the FDA’s shorter review timing for PMT applications as compared to MRTP applications;

· Pursuit of authorization from the FDA and regulatory agencies in other countries to introduce our X-22 smoking cessation aid in development into commerce as a prescription-based smoking cessation product;

· Establishment of substantial multi-year sales contracts around the world for our proprietary high nicotine tobacco leaf and Very Low Nicotine tobacco leaf;

· Research and development of industrial hemp plants with: (i) guaranteed levels of THC below the legal limits and (ii) improved suitability for optimized growing in various regions of North America, which we have already commenced in Virginia with the University of Virginia (“UVA”). This alliance with UVA will also involve the development and study of medically important cannabinoids to be extracted from our unique hemp plants;

· Pursuit of FDA reduced exposure authorization for our low tar-to-nicotine BRAND B modified risk cigarette in development;

· Commercialization of our proprietary super-premium cigarette brands; and

· Expansion of our growing base of contract manufacturing business at our manufacturing facility in Mocksville, North Carolina.

For the third quarter of 2017, our accomplishments and notable events include:

On July 28, 2017, the FDA announced it plans to mandate the lowering of nicotine levels in all combustible cigarettes sold in the United States to minimally or non-addictive levels. The FDA announcement stated that “lowering nicotine levels could decrease the likelihood that future generations become addicted to cigarettes and allow more currently addicted smokers to quit smoking.” On July 31, 2017, we announced that we are already capable of achieving the FDA’s new reduced nicotine standard. Our proprietary Very Low Nicotine tobacco, with up to 95% less nicotine than tobacco contained in conventional cigarettes, is grown on independently-owned farms in the United States – without any artificial extraction or chemical processes. 22nd Century’s proprietary Very Low Nicotine cigarettes have demonstrated that the FDA’s planned mandate for cigarettes with non-addictive levels of nicotine is both achievable and realistic. The Company believes that the implementation of an FDA mandate that lowers nicotine levels in all combustible cigarettes sold in the United States will save millions of lives and billions of dollars in healthcare costs per year. Matthew Myers, the president of anti-smoking group Campaign for Tobacco-Free Kids, asserted in an August 9, 2017 Bloomberg News article that the new FDA plan could lead to “the most fundamental change the tobacco industry has ever seen.”

On August 23, 2017, we also announced that, over the last 6 years, agencies of the U.S. federal government have invested more than $100 million in independent clinical research with our proprietary SPECTRUM cigarettes, with the results of these independent studies supporting the conclusion that lowering nicotine levels in combustible tobacco cigarettes would drastically improve public health. There are at least 17 completed independent clinical trials using our proprietary Very Low Nicotine tobacco and at least 25 on-going clinical trials using our proprietary Very Low Nicotine cigarettes. We have also previously publicly announced that we stand ready to partner with the FDA and with any companies that are committed to improving the health of American smokers.

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In July and August of 2017, certain of the holders of warrants exercised warrants for cash to purchase an aggregate of 3,813,500 shares of our common stock at an exercise price of $1.00 per share and exercised for cash warrants to purchase an aggregate of 1,895,052 shares of our common stock at an exercise price of $1.45 per share, resulting in net cash proceeds to us of $6,167,646, after deducting expenses associated with the exercise. In consideration for these holders exercising their warrants for cash, we issued those holders new warrants to purchase shares of our common stock equal to the number of shares of common stock received by each such holder upon cash exercise of the holder’s warrants. The terms of the new warrants are substantially similar to the terms of the warrants exercised, except the new warrants (i) have an exercise price equal to $2.15 per share and (ii) are exercisable beginning December 20, 2017 for a period of five (5) years. Accordingly, we issued new warrants in July and August of 2017 to such exercising warrant holders to purchase an aggregate of 5,708,552 shares of our common stock upon exercise of the existing warrants of such holders.

On September 25, 2017, we announced that the 2013 Research License and Commercial Option Agreement between 22nd Century and British American Tobacco had ended. With the end of this agreement, 22nd Century is once again in sole control of our extensive intellectual property portfolio. As a result, we have since recommenced discussions with global tobacco companies and international pharmaceutical companies that have expressed interest in developing a business relationship with 22nd Century.

Subsequent to the close of the third quarter of 2017, we also announced:

On October 5, 2017, Dr. Dorothy Hatsukami publicly revealed at The Vermont Center on Behavior and Health’s Tobacco Regulatory Science Conference the findings of a highly anticipated Phase III clinical study conducted with 1,250-patients over a 20-week study period that investigated which application of Very Low Nicotine cigarettes is best: (i) an immediate reduction in nicotine to non-addictive levels or (ii) a gradual reduction in nicotine to non-addictive levels. Though the Phase III study is still under peer review prior to publication, Dr. Hatsukami indicated at the Vermont conference that an immediate reduction in nicotine poses a “greater likelihood of more rapid smoking cessation.” We provided all the research cigarettes used in such Phase III study.

On October 10, 2017, we closed a registered direct common stock offering with institutional investors to receive approximately $54 million in gross proceeds through the sale of 20.57 million shares of common stock at a price of $2.625 per share. This no-warrant financing is the largest capital raise – at the highest offering price per share – in the history of 22nd Century. The net proceeds of the financing will be used for general corporate purposes, including working capital as we enter licensing and strategic partnership discussions with major companies around the world.

On October 19, 2017, we announced that we had successfully completed our hemp field trials with the University of Virginia (“UVA”) in which we used multiple oil and fiber varieties of hemp and UVA identified proprietary varieties of our unique hemp plants that have excellent agronomic properties for growth in the Commonwealth of Virginia. 22nd Century and UVA are currently working on expanded plantings of the most promising varieties of our proprietary hemp plants to optimize plant growth in the legacy tobacco growing region of the United States. 22nd Century is also working with UVA on the development of high-value medicinal cannabinoid varieties and specialized cannabinoid extraction processes for use in human therapeutics, as well as the use of our unique hemp plants for phytoremediation to clean up and reclaim polluted soils in Virginia. We also announced at that same time that we are expanding our hemp activities in our home State of New York after the announcement by New York Governor Andrew Cuomo that New York State intends to become a leading grower and producer of hemp and hemp-derived products. To take advantage of the favorable hemp climate in New York, 22nd Century has obtained a New York hemp research and grower license and looks forward to expanding its Buffalo, NY-based laboratory to include important new hemp research.

Effective on October 31, 2017, the Company appointed James E. Swauger, Ph.D., as our Senior Vice President of Science and Regulatory Affairs. Dr. Swauger was previously the leader of the scientific and regulatory functions at Reynolds American Inc. Dr. Swauger’s primary responsibility at 22nd Century will be to lead and oversee the scientific and regulatory activities of the Company, including the re-submission to the FDA of the Company’s Modified Risk Tobacco Product (“MRTP”) application for BRAND A Very Low Nicotine Content cigarettes. Dr. Swauger will also work with the Company in support of the FDA’s plan to mandate the reduction of nicotine levels in cigarettes to minimally or non-addictive levels.

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Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

Revenue - Sale of products

In the three months ended September 30, 2017, we realized net sales revenue from the sale of products in the amount of $4,530,865, an increase of $1,433,217, or 46.3%, from net sales revenue of $3,097,648 for the three months ended September 30, 2016. The increase in net sales revenue for the third quarter of 2017 was primarily the result of additional net sales revenue generated from a new contract to manufacture an existing brand of filtered cigars as compared to net sales revenue for the second quarter of 2016. Production under that new contract began in mid-May of 2017.

Cost of goods sold - Products

During the three months ended September 30, 2017, cost of goods sold were $4,871,234, or 107.5%, of net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $2,436,000 are included in the cost of goods sold for the three months ended September 30, 2017. We were not yet operating our factory at full production capacity throughout the third quarter of 2017, but we began utilizing a portion of the excess capacity as a result of the new filtered cigar contract manufacturing agreement that commenced in mid-May of 2017. As a result, the cost of goods sold relating to product sales, which included the cost of raw material components, direct manufacturing costs and an overhead allocation, exceeded net sales revenue.

During the three months ended September 30, 2016, cost of goods sold were $3,282,266, or 106.0%, of net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $1,810,000 are included in the cost of goods sold for the three months ended September 30, 2016. We were not operating our factory at full production capacity during the third quarter of 2016. As a result, the cost of goods sold relating to product sales, which included the cost of raw material components, direct manufacturing costs and an overhead allocation, was in excess of net sales revenue.

Research and development expense

Research and development (“R&D”) expense was $784,587 in the three months ended September 30, 2017, an increase of $92,617, or 13.4%, from $691,970 in the three months ended September 30, 2016. This increase was primarily a result of an increase in R&D sponsored research costs in the approximate amount of $127,000, an increase patent maintenance expenses of approximately $37,000 and an increase in payroll and related benefits of approximately $14,000, partially offset by a decrease in research license fees of approximately $38,000 and a decrease in costs associated with our modified risk tobacco products of approximately $55,000.

General and administrative expense

General and administrative expense was $1,635,226 in the three months ended September 30, 2017, an increase of $404,259, or 32.8%, from $1,230,967 in the three months ended September 30, 2016. The increase was mainly due to an increase in investor relations expenses of approximately $173,000, an increase in payroll and related benefit costs of approximately $147,000, an increase in equity based compensation of approximately $36,000, an increase in industry conferences and related travel expenses of approximately $38,000 and a net increase in other general and administrative expenses of approximately $40,000, partially offset by a decrease in legal and accounting expenses of approximately $30,000.

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Sales and marketing expense

During the three months ended September 30, 2017, we incurred sales and marketing expenses of $279,254 an increase of $2,158, or 0.8%, from $277,096 in the three months ended September 30, 2016. The increase in sales and marketing expenses were primarily the result of an increase in payroll and related benefit costs of approximately $23,000, increase in equity based compensation of approximately $26,000 and an increase in industry trade show costs of approximately $36,000, partially offset by a decrease in advertising and promotional costs of approximately $42,000 and a decrease in travel related expenses of approximately $41,000.

Depreciation expense

Depreciation expense for the three months ended September 30, 2017 amounted to $88,711, an increase of $7,357, or 9.0%, from $81,354 for the three months ended September 30, 2016. The increase is due to depreciable additions to machinery and equipment over the last year in the approximate amount of $210,000, primarily consisting of equipment additions in our NASCO operations in North Carolina and our laboratory in Buffalo, New York. During the third quarter of 2017, we acquired approximately $916,000 in additional packaging equipment for our NASCO operations in North Carolina. This equipment was not placed in service during the third quarter of 2017 and accordingly, no depreciation expense was recorded.

Amortization expense

Amortization expense for the three months ended September 30, 2017 amounted to $145,934, an increase of $16,127, or 12.4%, from $129,807 for the three months ended September 30, 2016. The amortization expense relates to amortization taken on capitalized patent costs and license fees. The increase is primarily due to amortization taken on additional patent costs incurred during the nine months ended September 30, 2017 and the year ended December 31, 2016 in the amounts of $457,385 and $541,882, respectively.

Warrant liability loss - net

The warrant liability loss of $55,886 for the third quarter of 2017 was due to an increase in the estimated fair value of the warrants during the period. The increase in the estimated fair value of the warrants was primarily attributable to an increase in our underlying stock price from $1.75 per share at June 30, 2017 as compared to $2.77 per share at September 30, 2017.

The warrant liability loss of $46,995 for the third quarter of 2016 was due to an increase in the estimated fair value of the warrants during the period. The increase in the estimated fair value of the warrants was primarily attributable to an increase in our underlying stock price from $0.81 per share at June 30, 2016 as compared to $1.45 per share at September 30, 2016.

30 

Loss on investment

On February 17, 2017, a dilutive event reduced our ownership in Anandia to 19.4%, an ownership percentage below the 20% ownership threshold for the use of the equity method of accounting. Accordingly, we discontinued applying the equity method of accounting for our equity investment in Anandia, effective on the date of the dilutive event, and as a result, there is no gain or loss recorded on the investment in Anandia during the three months ended September 30, 2017. On July 25, 2017, another dilutive event occurred resulting in an additional reduction in our ownership in Anandia to 19.0%.

The loss on investment of $29,997 for the three months ended September 30, 2016 consisted of (i) our 24.4% (25.0% ownership prior to a dilutive event on September 8, 2016) share of Anandia’s net loss for the three months ending September 30, 2016 in the amount of $15,585 plus (ii) amortization of the intangible asset represented by the difference between our equity investment in Anandia and our portion of the net assets of Anandia in the amount of $14,412.

Interest income

Interest income for the three months ended September 30, 2017 was $20,317, an increase of $18,186 from interest income of $2,131 for the three months ended September 30, 2016. The interest income earned in the three months ended September 30, 2017 and 2016 was generated from excess cash invested in a money market account, with the average cash balance being greater during the third quarter of 2017 as compared to the third quarter of 2016.

Interest expense

Interest expense decreased by $2,331, or 25.0%, in the three months ended September 30, 2017 to $6,984 from $9,315 in the three months ended September 30, 2016 and is derived from the interest component of severance payments made on accrued severance that had previously been recorded on a discounted basis using our incremental borrowing rate and the accretion of interest on the NRC note payable.

Net loss

We had a net loss in the three months ended September 30, 2017 of $3,316,634 as compared to a net loss of $2,679,988 in the three months ended September 30, 2016. The increase in the net loss of $636,646, or 23.8%, was primarily the result of an increase in the gross loss of approximately $156,000, an increase in operating expenses of approximately $523,000, partially offset by a decrease in other income (expense) in the approximate amount of $42,000.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Revenue - Sale of products

In the nine months ended September 30, 2017, we realized net sales revenue from the sale of products in the amount of $10,659,588, an increase of $1,715,226, or 19.2%, over net sales revenue of $8,944,362 for the nine months ended September 30, 2016. The increase in net sales revenue for the nine months ended September 30, 2017 was primarily the result of additional net sales revenue generated from a new contract to manufacture an existing brand of filtered cigars that began in mid-May of 2017, partially offset by a decrease in net sales revenue from the sale of SPECTRUM research cigarettes in the amount of $329,321 during the first quarter of 2016, as compared to net sales revenue for the nine months ended September 30, 2016.

31 

Cost of goods sold - Products

During the nine months ended September 30, 2017, cost of goods sold were $11,438,909, or 107.3%, of net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $5,980,000 are included in the cost of goods sold for the nine months ended September 30, 2017. We were not yet operating our factory at full production capacity throughout the nine months ended September 30, 2017, but we began utilizing a portion of the excess capacity as a result of the new filtered cigar contract manufacturing agreement that commenced in mid-May of 2017. As a result, the cost of goods sold relating to product sales, which included the cost of raw material components, direct manufacturing costs and an overhead allocation, exceeded net sales revenue. We also recorded an increase in our inventory reserve by $95,000 during the second quarter of 2017 that resulted in an increase in the cost of goods sold by the same amount.

During the nine months ended September 30, 2016, cost of goods sold were $9,146,247, or 102.3%, of net sales revenue. Cost of goods sold relating to the sales SPECTRUM research cigarettes were $55,019, or 16.7%, of related net sales revenue and the remaining cost of goods sold was $9,091,228, or 105.5%, of related net sales revenue. Excise taxes and certain regulatory fees in the approximate amount of $5,387,000 are included in the cost of goods sold for the nine months ended September 30, 2016. We were not operating the factory at full production capacity during the first three quarters of 2016. As a result, the cost of goods sold relating to product sales (exclusive of SPECTRUM research cigarettes), which included the cost of raw material components, direct manufacturing costs and an overhead allocation, was in excess of net sales revenue.

Research and development expense

R&D expense was $2,148,725 in the nine months ended September 30, 2017, an increase of $349,289, or 19.4%, from $1,799,289 in the nine months ended September 30, 2016. This increase was primarily a result of increases in sponsored research contract costs of approximately $216,000, an increase of approximately $98,000 in costs related to our modified risk tobacco product, an increase in testing fees of approximately $60,000, an increase in patent maintenance fees of approximately $37,000 and an increase in costs associated with our laboratory in the approximate amount of $91,000, partially offset by a decrease in travel related expenses of approximately $50,000, a decrease in equity based compensation expense of approximately $59,000 and a decrease in research license fees of approximately $38,000.

General and administrative expense

General and administrative expense was $5,060,823 in the nine months ended September 30, 2017, an increase of $261,474, or 5.5%, from $4,799,349 in the nine months ended September 30, 2016. The increase was mainly due to an increase of approximately $346,000 in payroll and related benefits, an increase in investor relations expenses of approximately $141,000, an increase in industry conferences and related travel expenses of approximately $75,000, an increase of approximately $46,000 for costs relating to our annual shareholders meeting, and a net increase in other general and administrative expenses of approximately $8,000, partially offset by a decrease in equity based compensation in the approximate amount of $133,000, a decrease in legal and accounting fees of approximately $142,000, and a decrease in consulting fees of approximately $80,000.

Sales and marketing expense

During the nine months ended September 30, 2017, we incurred sales and marketing expenses of $842,558, a decrease of $388,258, or 31.5%, from $1,230,816 in the nine months ended September 30, 2016. The decrease in sales and marketing expenses were mainly the result of a decrease in advertising and promotional costs, primarily relating to our proprietary cigarette brand, RED SUN, in the approximate amount of $498,000 and a decrease in travel related expenses of approximately $68,000, partially offset by an increase in payroll and related benefit costs of approximately $76,000, an increase in equity based compensation of approximately $66,000 and an increase in industry trade show costs of approximately $38,000.

Depreciation expense

Depreciation expense for the nine months ended September 30, 2017 amounted to $265,296, an increase of 22,278, or 9.2%, from $243,018 for the nine months ended September 30, 2016. The increase is due to additions to machinery and equipment over the last year in the approximate amount of $217,000, primarily consisting of equipment additions in our NASCO operations in North Carolina and our laboratory in Buffalo, New York. During the third quarter of 2017, we acquired approximately $916,000 in additional packaging equipment for our NASCO operations in North Carolina. This equipment was not placed in service during the third quarter of 2017 and accordingly, no depreciation expense was recorded.

32 

Amortization expense.

Amortization expense for the nine months ended September 30, 2017 amounted to $429,832, an increase of $49,143, or 12.9%, from $380,689 for the nine months ended September 30, 2016. The amortization expense relates to amortization taken on capitalized patent costs and license fees. The increase was primarily due to amortization taken on additional patent costs incurred during the nine months ended September 30, 2017 and the year ended December 31, 2016 in the amounts of $457,385 and $541,882, respectively.

Warrant liability (loss) gain - net

The warrant liability loss of $138,813 for the nine months ended September 30, 2017 was due to an increase in the estimated fair value of the warrants during the period. The increase in the estimated fair value of the warrants was primarily attributable to an increase in our underlying stock price from $1.09 per share at December 31, 2016 as compared to $2.77 per share at September 30, 2017.

The warrant liability gain of $14,602 for the nine months ended September 30, 2016 was due to the decrease in the estimated fair value of the warrants during the period. The decrease in the estimated fair value of the warrants was primarily attributable to the expiration of certain warrants and the remaining outstanding warrants aging closer to their expiration date with the passage of time, partially offset by an increase in our underlying stock price from $1.40 per share at December 31, 2015 as compared to $1.45 per share at September 30, 2016.

Gain (loss) on investment

On February 17, 2017, a dilutive event reduced our ownership in Anandia to 19.4%, an ownership percentage below the 20% ownership threshold for the use of the equity method of accounting. Accordingly, we discontinued applying the equity method of accounting for our equity investment in Anandia, effective on the date of the dilutive event, and as a result, there is no gain or loss recorded on the investment in Anandia during the three months ended June 30, 2017. We recorded a gain on investment of $16,872 for three months ended March 31, 2017 (the equity gain for the three months ended March 31, 2017, reflects our proportionate gain through February 16, 2017). In addition, and as a result of the February 17, 2017 dilutive event, we recorded a gain in accordance with the derecognition provisions of Accounting Standards Codification 323 (“ASC 323”) in the amount of $336,834. We recorded a total gain on the equity investment in the amount of $346,180 for the nine months ended September 30, 2017 (pertaining to the period up to February 17, 2017) by aggregating the Company’s share of Anandia’s gain (loss), the gain recorded under ASC 323 and the amortization of the intangible asset represented by the difference between our equity investment in Anandia and our portion of the net assets of Anandia in the amount of $7,526. On July 25, 2017, another dilutive event occurred resulting in an additional reduction in our ownership in Anandia to 19.0%.

The loss on investment of $172,068 for the nine months ended September 30, 2016 consisted of (i) our 24.4% (25.0% ownership prior to a dilutive event on September 8, 2016) share of Anandia’s net loss for the nine months ending September 30, 2016 in the amount of $128,832, plus (ii) amortization of the intangible asset represented by the difference between our equity investment in Anandia and our portion of the net assets of Anandia in the amount of $43,236.

Interest income

Interest income for the nine months ended September 30, 2017 was $48,197, an increase of $41,468 from interest income of $6,729 for the nine months ended September 30, 2016. The interest income earned in the nine months ended September 30, 2017 and 2016 was generated from excess cash invested in a money market account, with the average cash balance being greater during the nine months ending September 30, 2017 as compared to the nine months ended September 30, 2016.

33 

Interest expense

Interest expense decreased by $6,467, or 22.3%, in the nine months ended September 30, 2017 to $22,544 from $29,011 in the nine months ended September 30, 2016 and is derived from the interest component of severance payments made on accrued severance that had previously been recorded on a discounted basis using our incremental borrowing rate and the accretion of interest on the NRC note payable.

Net loss

We had a net loss in the nine months ended September 30, 2017 of $9,293,535 as compared to a net loss of $8,834,794 in the nine months ended September 30, 2016. The increase in the net loss of $458,741, or 5.2%, was primarily the result of an increase in the gross loss of approximately $577,000, an increase in operating expenses of approximately $294,000, partially offset by a decrease in other income (expense) in the approximate amount of $412,000.

Liquidity and Capital Resources

Working Capital

As of September 30, 2017, we had positive working capital of approximately $16.3 million compared to positive working capital of approximately $13.5 million at December 31, 2016, an increase of approximately $2.7 million. The increase in our working capital for the nine months ended September 30, 2017 was primarily due to a net increase in non-cash working capital in the approximate amount of $1.2 million plus cash raised through warrant exercises in the approximate amount of $12.4 million, partially offset by cash used in operating activities of approximately $9.6 million and cash used to acquire machinery and equipment and intangible assets of approximately $1.2 million.

We must successfully execute our business plan to increase revenue in order to achieve positive cash flows from operations to sustain adequate liquidity without requiring additional funds from capital raises and other external sources to meet minimum operating requirements. On December 30, 2016, we filed a Form S-3, universal shelf registration statement, with the U.S. Securities and Exchange Commission (“SEC”) that was declared effective by the SEC on January 17, 2017. The universal shelf registration statement will allow, but not compel, the Company to raise up to $100 million of capital over a three-year period ending on January 17, 2020 through a wide array of securities at times and in amounts to be determined by the Company. On October 10, 2017, we closed a registered direct common stock offering with institutional investors to receive approximately $54 million in gross proceeds through the sale of 20.57 million shares of common stock at a price of $2.625 per share (net proceeds of approximately $50.7 million). The net proceeds of the financing will be used for general corporate purposes, including working capital as we enter licensing and strategic partnership discussions with major companies around the world. Following the offering, the universal shelf statement has approximately $46 million of remaining capacity. If required, there can be no assurance that additional capital will be available on acceptable terms or at all.

Cash demands on operations

With the net cash proceeds from our October 2017 offering plus cash on hand at September 30, 2017 of $15,022,570, we believe resulting cash balances will be adequate to sustain normal operating expenses and meet all current obligations as they come due for a period of at least five years. During the nine months ended September 30, 2017, we experienced an operating loss of approximately $9,527,000 and used cash in operations of approximately $9,621,000. Excluding discretionary expenses related to R&D, patent and trademark costs, contract growing of our proprietary tobacco, and certain nonrecurring expenses relating to factory capital expenses, investor relations, and marketing costs, our monthly cash expenditures are approximately $900,000.

Net Cash used in operating activities

In the nine months ended September 30, 2017, $9,620,986 of cash was used in operating activities as compared to $7,982,309 of cash used in operating activities in the nine months ended September 30, 2016, an increase of $1,638,677. The increase in use of cash in operations was primarily due to an increase in the cash portion of the net loss in the amount of $844,171 and an increase in the use of cash used for working capital components related to operations in the amount of $794,506 for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

34 

Net Cash used in investing activities

In the nine months ended September 30, 2017, net cash used in investing activities was $1,204,990, as compared to $362,234 of cash used in investing activities during the nine months ended September 30, 2016, an increase of $842,756. The increase was primarily the result of an increase in cash used for the acquisition of patents and trademarks in the amount of $76,081 and an increase in the acquisition of machinery and equipment in the amount of $766,675.

Net Cash provided by financing activities

During the nine months ended September 30, 2017, $12,380,358 of cash was provided by financing activities, as compared to $9,774,751 of cash provided by financing activities during the nine months ended September 30, 2016. The net cash provided by financing activities for the nine months ended September 30, 2017 was the result of net cash raised from the exercise of warrants, and the net cash provided by financing activities during the nine months ended September 30, 2016, was primarily generated by net proceeds received from registered direct offering in February and July of 2016.

Critical Accounting Policies and Estimates

There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.

Inflation

Inflation did not have a material effect on our operating results for the nine months ended September 30, 2017 and 2016, respectively.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure information required to be disclosed is recorded, processed, summarized and reported within the time period specified by SEC rules, based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) Changes in Internal Control over Financial Reporting:

There were no changes in the Company’s internal controls over financial reporting during the third quarter of 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

35 

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various claims and legal proceedings arising in the ordinary course of business. As of the date hereof, we are unable to currently assess whether the final resolution of any of such claims or legal proceedings may have a material adverse effect on us.

On April 26, 2016, Crede CG III, LTD. (“Crede”) filed a complaint against the Company in the United States District Court for the Southern District of New York (the “SDNY Court”) entitled Crede CG III, LTD. v. 22nd Century Group, Inc. On May 19, 2016, Crede filed an Amended Complaint that included seven counts, alleging among other things, that the Company allegedly breached and/or interfered with certain agreements entered into with Crede, including the joint venture agreement relating to efforts to sell the Company’s proprietary tobacco into China, the Tranche 1A warrant and the prior securities purchase agreement with Crede. The Amended Complaint seeks money damages, to rescind the securities purchase agreement, to obtain declaratory and injunctive relief to require the Company to issue to Crede 2,077,555 shares of the Company’s common stock under the exchange provision of the Tranche 1A warrant, and entry of an injunction prohibiting the Company from selling tobacco into China without the joint venture’s involvement. The Amended Complaint also seeks attorney’s fees and such other relief as the Court may deem just and proper. We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims.

On May 19, 2016, Crede filed a motion for preliminary injunction, asking the SDNY Court to require the Company to issue 2,077,555 shares of its common stock to Crede under the exchange provision of the Tranche 1A warrant. After conducting an evidentiary hearing on this motion on June 14, 2016, the SDNY Court denied Crede’s motion and held, among other things, that Crede did not prove the potential for irreparable harm or a likelihood of success on its claim for such 2,077,555 shares under the Tranche 1A warrant, and that there was a likelihood that Crede had violated the activity restrictions of the Tranche 1A warrant, which would bar Crede’s claim for such shares from the Company.

Following such ruling, on July 11, 2016, the Company filed a motion to sever the Crede lawsuit into two separate cases, requesting all claims relating to the Tranche 1A warrant and the securities purchase agreement to stay in the SDNY Court and all claims relating to the China joint venture agreement to be transferred to the United States District Court for the Western District of New York (the “WDNY Court”), where the Company’s headquarters are located. On January 20, 2017, the SDNY Court granted the Company’s motion.

On February 14, 2017, Crede voluntarily dismissed its lawsuit against the Company in the WDNY Court.

On February 21, 2017, the SDNY Court granted the Company’s request to file a motion for summary judgment for the claims remaining in the SDNY Court, with all discovery in the case being deferred until after the SDNY Court issues its decision on the summary judgment motion of the Company.

On March 20, 2017, the Company filed its motion for summary judgment for the claims remaining in the SDNY Court. The response by Crede to the Company’s summary judgment motion was filed by Crede on May 1, 2017. On May 15, 2017, the Company filed its response to Crede’s filing. The parties are now awaiting the SDNY Court to issue its decision on such summary judgment motion.

We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims. The Company has defended and intends to continue to defend against these claims vigorously.

36 

Item 1A. Risk Factors

Our risk factors have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 8, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the third quarter of 2017, we issued 146,320 shares of common stock to various investors from the cashless exercise of 240,667 warrants to purchase shares of our common stock.

During October of 2017, we issued 103,500 shares of common stock to investors that exercised 103,500 warrants for cash to purchase shares of our common stock.

The shares were offered and sold pursuant to exemptions from the registration requirements under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.

Item 3. Default Upon Senior Securities.

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit 31.1	Section 302 Certification - Chief Executive Officer
Exhibit 31.2	Section 302 Certification - Chief Financial Officer
Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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

37 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

	22nd CENTURY GROUP, INC.
Date: November 9, 2017	/s/ Henry Sicignano III
	Henry Sicignano III
	President, Chief Executive Officer and Director
	(Principal Executive Officer)
Date: November 9, 2017	/s/ John T. Brodfuehrer
	John T. Brodfuehrer
	Chief Financial Officer
	(Principal Accounting and Financial Officer)

38 

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Henry Sicignano III, Chief Executive Officer of 22nd CENTURY GROUP, INC., certify that:

1. I have reviewed this quarterly report on Form 10-Q of 22nd CENTURY GROUP, INC.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15 (f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2017
	/s/ Henry Sicignano III
	Henry Sicignano III
	President, Chief Executive Officer and Director
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, John T. Brodfuehrer, Chief Financial Officer of 22nd CENTURY GROUP, INC., certify that:

1. I have reviewed this quarterly report on Form 10-Q of 22nd CENTURY GROUP, INC.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15 (f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2017
	/s/ John T. Brodfuehrer
	John T. Brodfuehrer
	Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350

Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Chief Executive Officer of 22nd CENTURY GROUP, INC. (the “Company”), and I, the undersigned Chief Financial Officer of the Company, hereby certify, to the best of my knowledge, that the quarterly report on Form 10-Q of the Company for the quarter ended September 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification is being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Date: November 9, 2017
	/s/ Henry Sicignano III
	Henry Sicignano III
	President and Chief Executive Officer
Date: November 9, 2017
	/s/ John T. Brodfuehrer
	John T. Brodfuehrer
	Chief Financial Officer

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 09, 2017
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Entity Registrant Name	22nd Century Group, Inc.
Entity Central Index Key	0001347858
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Trading Symbol	XXII
Entity Common Stock, Shares Outstanding		123,564,117

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash	$ 15,022,570	$ 13,468,188
Accounts receivable, net	126,198	40,992
Inventory, net	4,034,164	3,092,686
Prepaid expenses and other assets	542,953	195,569
Total current assets	19,725,885	16,797,435
Machinery and equipment, net	3,099,614	2,434,663
Other assets:
Intangible assets, net	7,468,932	7,389,946
Investment	1,366,493	1,020,313
Total other assets	8,835,425	8,410,259
Total assets	31,660,924	27,642,357
Current liabilities:
Current portion of note payable	326,924	307,938
Accounts payable	1,627,971	1,340,156
Accrued expenses	1,307,684	1,401,566
Accrued severance	38,793	199,657
Deferred income	158,478	0
Total current liabilities	3,459,850	3,249,317
Warrant liability	197,494	58,681
Total liabilities	3,657,344	3,307,998
Commitments and contingencies (Note 13)
Shareholders' equity
Common stock value	1,029	907
Capital in excess of par value	115,434,541	102,471,907
Accumulated deficit	(87,431,990)	(78,138,455)
Total shareholders' equity	28,003,580	24,334,359
Total liabilities and shareholders' equity	$ 31,660,924	$ 27,642,357

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2017	Dec. 31, 2016
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, par value	$ 0.00001	$ 0.00001
Common stock, shares authorized	300,000,000	300,000,000
Common stock, par value	$ 0.00001	$ 0.00001
Common stock, shares issued	102,888,117	90,698,113
Common stock, shares outstanding	102,888,117	90,698,113

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revenue:
Sale of products, net	$ 4,530,865	$ 3,097,648	$ 10,659,588	$ 8,944,362
Cost of goods sold (exclusive of depreciation shown separately below):
Products	4,871,234	3,282,266	11,438,909	9,146,247
Gross loss	(340,369)	(184,618)	(779,321)	(201,885)
Operating expenses:
Research and development (including equity based compensation)	784,587	691,970	2,148,725	1,799,289
General and administrative (including equity based compensation)	1,635,226	1,230,967	5,060,823	4,799,349
Sales and marketing (including equity based compensation)	279,254	277,096	842,558	1,230,816
Depreciation	88,711	81,354	265,296	243,018
Amortization	145,934	129,807	429,832	380,689
Total operating expenses	2,933,712	2,411,194	8,747,234	8,453,161
Operating loss	(3,274,081)	(2,595,812)	(9,526,555)	(8,655,046)
Other income (expense):
Warrant liability (loss) gain - net	(55,886)	(46,995)	(138,813)	14,602
Gain (loss) on investment	0	(29,997)	346,180	(172,068)
Interest income	20,317	2,131	48,197	6,729
Interest expense	(6,984)	(9,315)	(22,544)	(29,011)
Total other income (expense)	(42,553)	(84,176)	233,020	(179,748)
Loss before income taxes	(3,316,634)	(2,679,988)	(9,293,535)	(8,834,794)
Income taxes	0	0	0	0
Net loss	$ (3,316,634)	$ (2,679,988)	$ (9,293,535)	$ (8,834,794)
Loss per common share - basic and diluted (in dollars per share)	$ (0.03)	$ (0.03)	$ (0.10)	$ (0.11)
Common shares used in basic and diluted earnings per share calculation (in shares)	100,673,834	80,386,519	94,369,953	76,826,949

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CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Research and Development Expense [Member]
Allocated Share-based Compensation Expense	$ 26,851	$ 34,656	$ 59,051	$ 117,937
General and Administrative Expense [Member]
Allocated Share-based Compensation Expense	194,296	157,844	428,022	560,766
Sales and Marketing Costs Expense [Member]
Allocated Share-based Compensation Expense	$ 38,268	$ 12,360	$ 95,325	$ 29,246

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - 9 months ended Sep. 30, 2017 - USD ($)	Total	Common Stock [Member]	Capital in Excess of Par Value [Member]	Accumulated Deficit [Member]
Beginning balance at Dec. 31, 2016	$ 24,334,359	$ 907	$ 102,471,907	$ (78,138,455)
Beginning balance (in shares) at Dec. 31, 2016		90,698,113
Equity based compensation	582,398	$ 0	582,398	0
Equity based compensation (in shares)		0
Stock issued in connection with warrant exercises	12,380,358	$ 121	12,380,237	0
Stock issued in connection with warrant exercises (in shares)		12,138,077
Stock issued in connection with stock option exercises	0	$ 1	(1)	0
Stock issued in connection with stock option exercises (in shares)		51,927
Net loss	(9,293,535)	$ 0	0	(9,293,535)
Ending balance at Sep. 30, 2017	$ 28,003,580	$ 1,029	$ 115,434,541	$ (87,431,990)
Ending balance (in shares) at Sep. 30, 2017		102,888,117

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net loss	$ (9,293,535)	$ (8,834,794)
Adjustments to reconcile net loss to cash used in operating activities:
Amortization and depreciation	621,612	550,191
Amortization of license fees	73,516	73,516
(Gain) loss on investment	(346,180)	172,068
Accretion of interest on note payable and accrued severance	22,544	29,011
Warrant liability loss (gain)	138,813	(14,602)
Equity based employee compensation expense	582,398	677,076
Equity based payments for outside services	0	30,873
Decrease in allowance for doubtful accounts	(10,000)	0
Increase in inventory reserve	95,000	45,000
(Increase) decrease in assets:
Accounts receivable	(75,205)	34,776
Inventory	(1,036,478)	(386,072)
Prepaid expenses and other assets	(347,384)	204,641
Increase (decrease) in liabilities:
Accounts payable	53,740	(91,945)
Accrued expenses	(93,882)	(298,970)
Accrued severance	(164,423)	(173,078)
Deferred income	158,478	0
Net cash used in operating activities	(9,620,986)	(7,982,309)
Cash flows from investing activities:
Acquisition of patents and trademarks	(312,804)	(236,723)
Acquisition of machinery and equipment	(892,186)	(125,511)
Net cash used in investing activities	(1,204,990)	(362,234)
Cash flows from financing activities:
Net proceeds from exercise of warrants	12,380,358	196
Net proceeds from February 2016 registered direct offering	0	5,091,791
Net proceeds from July 2016 registered direct offering	0	4,682,764
Net cash provided by financing activities	12,380,358	9,774,751
Net increase in cash	1,554,382	1,430,208
Cash - beginning of period	13,468,188	3,760,297
Cash - end of period	15,022,570	5,190,505
Net cash paid for:
Cash paid during the period for interest	3,558	10,507
Cash paid during the period for income taxes	0	0
Non-cash transactions:
Patent and trademark additions included in accounts payable	196,014	180,560
Machinery and equipment additions included in accounts payable	38,061	9,749
Reclassification of warrant liability to capital in excess of par due to voiding of exchange rights clause in Crede Tranche 1A warrant	$ 0	$ 2,810,000

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1. - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. 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.

Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the December 31, 2016 audited consolidated financial statements and the notes thereto.

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of 22nd Century Group, Inc. (“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”) (collectively, “the Company”). All intercompany accounts and transactions have been eliminated.

Nature of Business - 22nd Century Ltd is a plant biotechnology company specializing in technology that allows (i) for the level of nicotine and other nicotinic alkaloids in tobacco plants to be decreased or increased through genetic engineering and plant breeding and (ii) the levels of cannabinoids in cannabis/hemp plants to be decreased or increased through genetic engineering and plant breeding. Goodrich Tobacco and Heracles Pharma are business units for the Company’s (i) potential modified risk tobacco products and premium cigarettes and (ii) smoking cessation product, respectively. The Company acquired the membership interests of NASCO on August 29, 2014. NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA, and operates the Company’s cigarette manufacturing business in North Carolina. Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group, and was incorporated to facilitate an investment more fully described in Note 9.

Preferred stock authorized - The Company is authorized to issue “blank check” preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.

Accounts receivable - The Company periodically reviews aged account balances for collectability. At September 30, 2017 and December 31, 2016, the Company established an allowance for doubtful accounts in the amount of $0 and $10,000, respectively.

 

Inventory - Inventories are valued at the lower of cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory and standard cost is primarily used for finished goods inventory. 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. Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Inventory - tobacco leaf	$	1,890,477	$	1,936,039
Inventory - finished goods
Cigarettes and filtered cigars		528,925		340,523
Inventory - raw materials
Cigarette and filtered cigar components		1,965,385		1,071,747
		4,384,787		3,348,309
Less: inventory reserve		350,623		255,623
	$	4,034,164	$	3,092,686

Machinery and equipment - Machinery and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives ranging from 3 to 10 years. Depreciation commences when the asset is placed in service.

 

Intangible Assets - Intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand. The amounts capitalized relate to intellectual property that the Company owns or to which it has exclusive rights. The Company’s intellectual property capitalized costs are amortized using the straight-line method over the remaining statutory life of the primary patent in each of the Company’s two primary groupings of patent families, which expire in 2018 and 2028 (the assets’ estimated lives, respectively). Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which patent expiration dates range from 2028 through 2035. The Company believes costs associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such, no amortization is taken. Total intangible assets at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Intangible assets, net
Patent and trademark costs	$	6,197,258	$	5,688,440
Less: accumulated amortization		2,378,241		2,021,926
Patent and trademark costs, net		3,819,017		3,666,514
License fees, net (see Note 13)		1,450,000		1,450,000
Less: accumulated amortization		302,085		228,568
License fees, net		1,147,915		1,221,432
MSA signatory costs		2,202,000		2,202,000
License fee for predicate cigarette brand		300,000		300,000
	$	7,468,932	$	7,389,946

Amortization expense relating to the above intangible assets for the three and nine months ended September 30, 2017 amounted to $145,934 and $429,832, respectively ($129,807 and $380,689 for the three and nine months ended September 30, 2016, respectively).

The estimated annual average amortization expense for the next five years is approximately $396,000 for patent costs and $98,000 for license fees.

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, 2017 or 2016, respectively.

Income Taxes - The Company recognizes 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 carry-forwards.

Considering the Company’s history of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance to fully offset its net deferred tax assets as of September 30, 2017 and December 31, 2016.

The Company’s federal and state tax returns for the years ended December 31, 2014 through December 31, 2016 are currently open to audit under the statutes of limitations. There were no pending audits as of September 30, 2017.

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 or options to purchase common shares of the Company. 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.

Revenue Recognition - The Company recognizes revenue from product sales 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 and filtered cigar federal excise taxes and other regulatory fees in the approximate amount of $2,436,000 and $5,980,000 are included in net sales for the three and nine months ended September 30, 2017, respectively (approximately $1,810,000 and $5,387,000 for the three and nine months ended September 30, 2016, respectively), except on sales of SPECTRUM research cigarettes, exported cigarettes, exported filtered cigars and in-bond sales of filtered cigars to other federally licensed tobacco products manufacturers, to 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 with research cigarettes. The contract was renewed in 2015 for an additional 5 years. These government research cigarettes are distributed under the Company’s mark SPECTRUM. There were no SPECTRUM research cigarettes delivered during the nine months ended September 30, 2017. Revenue generated from the sale of SPECTRUM research cigarettes amounted to $0 and $329,321 for the nine months ended September 30, 2017 and 2016, respectively. In May 2017, the Company received a purchase order from RTI for approximately 2.4 million SPECTRUM research cigarettes that are expected to be shipped in the fourth quarter of 2017 and generate sales revenue of approximately $325,000. The Company recorded deferred income in the approximate amount of $158,000 during the third quarter of 2017 primarily resulting from a down payment from RTI on the SPECTRUM research cigarette order.  

Derivatives - The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all 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 Statements of Operations. The methodology for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model, 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 on the balance sheet as current or non-current based on if the 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.

Advertising - The Company expenses advertising costs as incurred. Advertising expense was approximately $6,000 and $49,000 for the three and nine months ended September 30, 2017, respectively ($24,000 and $259,000 for the three and nine months ended September 30, 2016, respectively).

 

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 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 U.S. 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, accounts receivable, accounts payable, accrued expenses, accrued severance, note payable and warrant liability. Other than warrant liability, fair value is assumed to approximate carrying values for these financial instruments, since they are short term in nature, they are receivable or payable on demand, or have stated interest rates that approximate the interest rates available to the Company as of the reporting date. The determination of the fair value of the warrant liability includes unobservable inputs and is therefore categorized as a Level 3 measurement, as further discussed in Note 12.

Equity Investments - The Company accounts for investments in equity securities of other entities under the equity method of accounting if the Company’s investment in the voting stock is greater than or equal to 20% and less than a majority, and the Company has the ability to have significant influence over the operating and financial policies of the investee. When the Company’s investment in equity securities falls below 20% and the Company does not have the ability to have significant influence over the operating and financial policies of the investee, the Company carries the equity investment at its cost basis.

Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The revised effective date for the ASU is for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods therein, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations,” to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing,” which clarifies the identifying performance obligations and licensing implementation guidance. The Company is continuing to evaluate the effect this guidance will have on its consolidated financial statements, including potential impacts on the amount and timing of revenue recognition and additional information that may be necessary for the required expanded disclosures. The Company has substantially completed its review of all outstanding contracts and is in the process of applying the five-step model to those contracts to evaluate the quantitative and qualitative impacts the new standard will have on its business and reported revenues.  Within this process, the Company has begun to assess when to recognize revenues related to certain manufacturing contracts to produce customers’ products and the presentation of certain federal excise taxes and other regulatory fees. At this time, the Company is unable to quantify the impact this new guidance will have on its reported revenues.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which supersedes existing lease guidance under GAAP. Under the new guidance, lessees will be required to recognize leases as right of use assets and liabilities for leases with lease terms of more than twelve months. The guidance will apply for both finance and operating leases. The effective date for the ASU is for annual periods beginning after December 15, 2018 and interim periods therein. The Company is currently evaluating the impact of the ASU on its consolidated financial statements.

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JUNE 2017 WARRANT EXERCISE AGREEMENTS

9 Months Ended

Sep. 30, 2017

Equity [Abstract]

June Two Thousand Seventeen Warrant Exercise Agreements Disclosure

NOTE 2. – JUNE 2017 WARRANT EXERCISE AGREEMENTS

On June 19, 2017, the Company entered into Warrant Exercise Agreements (the “Agreements”) with all of the holders (the “Holders”) of outstanding warrants to purchase up to 7,043,211 shares of common stock of the Company at $1.00 per share and warrants to purchase up to 4,250,000 shares of common stock of the Company at $1.45 per share (collectively, the “Warrants”). These Warrants to purchase shares of the Company’s common stock were acquired by the Holders in registered direct offerings in October of 2016 and in July of 2016, respectively, as more fully described in Notes 3 and 4 below. The Company and the Holders agreed that the Holders would, subject to beneficial ownership limitations on exercise contained in the Warrants, exercise all the Warrants for cash. In June 2017, the Holders exercised 3,229,711 Warrants at $1.00 per share and 2,354,948 Warrants at $1.45 per share, resulting in net proceeds to the Company in the amount of $6,169,212, after deducting expenses associated with the transaction. In July and August of 2017, the Holders exercised 3,813,500 Warrants at $1.00 per share and 1,895,052 Warrants at $1.45 per share, resulting in net proceeds to the Company in the amount of $6,167,646, after deducting expenses associated with the transaction.

In consideration for the Holders exercising their Warrants for cash, the Company issued to each Holder a new warrant (the “New Warrants”) to purchase shares of common stock of the Company equal to the number of shares of common stock received by each Holder upon the cash exercise of the Holder’s Warrants. The terms of the New Warrants are substantially similar to the terms of the Warrants exercised, except the New Warrants (i) have an exercise price equal to $2.15 per share and (ii) are exercisable six months from the date of issuance of the New Warrants for a period of five (5) years. Accordingly, the Company issued an aggregate of 11,293,211 New Warrants to the Holders, upon exercise of the Holder’s Warrants as described above. The New Warrants had a fair value of $16,049,031 at issuance and have been recorded as an adjustment to capital in excess of par.

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OCTOBER 2016 REGISTERED DIRECT OFFERING

9 Months Ended

Sep. 30, 2017

October 2016 [Member]

Subsidiary, Sale of Stock [Line Items]

OCTOBER 2016 REGISTERED DIRECT OFFERING

NOTE 3. – OCTOBER 2016 REGISTERED DIRECT OFFERING

On October 19, 2016, the Company closed a registered direct offering with two institutional investors of units consisting of 8,500,000 shares of the Company’s common stock and warrants to purchase 4,250,000 shares of the Company’s common stock at an exercise price of $1.45 per share. The warrants were exercisable for a period of sixty-six (66) months after issuance, were not exercisable for a period of six months immediately following the issuance and had a fair value of approximately $3,380,000 at issuance. The holders of the warrants did not have the right to exercise any portion of the warrants if the holders, together with its respective affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock (including securities convertible into common stock) outstanding immediately after the exercise; provided, however, that the holder could increase or decrease this limitation at any time, although any increase shall not be effective until the 61st day following the notice of increase and the holder could not increase this limitation in excess of 9.99%. The common stock and warrants were sold for $1.3425 per unit, resulting in net proceeds to the Company in the amount of $10,707,823, after deducting expenses associated with the transaction. All of the warrants issued in the offering were exercised as described in Note 2 above.

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JULY 2016 REGISTERED DIRECT OFFERING

9 Months Ended

Sep. 30, 2017

JULY 2016 [Member]

Subsidiary, Sale of Stock [Line Items]

JULY 2016 REGISTERED DIRECT OFFERING

NOTE 4. – JULY 2016 REGISTERED DIRECT OFFERING

On July 27, 2016, the Company closed a registered direct offering of common stock and warrants consisting of 6,172,840 shares of the Company’s common stock and warrants to purchase 7,043,211 shares of the Company’s common stock. The warrants provided for an exercise price of $1.00 per share and 1,543,210 of the warrants were exercisable immediately and had a fair value of approximately $858,000 at issuance and 5,500,001 of the warrants were exercisable six months from the date of issuance and had a fair value of approximately $3,058,000 at issuance. All the warrants had a term of 5.5 years. The common stock and warrants were sold for $0.81 per unit, resulting in net proceeds to the Company in the amount of $4,682,764, after deducting expenses associated with the transaction. All of the warrants issued in the offering were exercised as described in Note 2 above. In addition, on July 27, 2016, the Company terminated an aggregate of 5.5 million warrants with exercise prices of $1.21 and $1.25 per share previously issued in conjunction with registered direct offerings in February of 2016 and June of 2015.

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FEBRUARY 2016 REGISTERED DIRECT OFFERING

9 Months Ended

Sep. 30, 2017

FEBRUARY 2016 [Member]

Subsidiary, Sale of Stock [Line Items]

FEBRUARY 2016 REGISTERED DIRECT OFFERING

NOTE 5. - FEBRUARY 2016 REGISTERED DIRECT OFFERING

On February 5, 2016, the Company closed a registered direct offering of common stock and warrants consisting of 5,000,000 shares of the Company’s common stock and warrants to purchase 2,500,000 shares of the Company’s common stock at an exercise price of $1.21 per share. The warrants were exercisable for a period of sixty-six (66) months after issuance, were not exercisable for a period of six months immediately following the issuance and had a fair value of approximately $1,940,000 at issuance. The common stock and warrants were sold for $1.10 per unit, resulting in net proceeds to the Company in the amount of $5,091,791, after deducting expenses associated with the transaction. The warrants associated with this transaction were terminated on July 27, 2016.

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JOINT VENTURE, CONSULTING AGREEMENT AND ASSOCIATED WARRANTS

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

JOINT VENTURE, CONSULTING AGREEMENT AND ASSOCIATED WARRANTS

NOTE 6. - JOINT VENTURE, CONSULTING AGREEMENT AND ASSOCIATED WARRANTS

On June 22, 2015, the Company terminated its joint venture arrangement with Crede CG III, Ltd. (“Crede”) and a third-party due to non-performance and other breaches of the arrangement by Crede and its principals. The Company also notified Crede that the Company reserved and did not waive any rights that the Company may have to assert any and all claims that it may have against Crede, its employees, agents, representatives or affiliates thereof, which are allowable by law or in equity, including claims for breach of the warrant agreements entered into with Crede.

The six-month Consulting Agreement (the “Consulting Agreement”), entered into with Crede on September 29, 2014, expired on March 29, 2015. The value of the warrants issued in conjunction with the Consulting Agreement in the aggregate amount of $4,070,000 and initially recorded as prepaid consulting fees have been fully amortized. The final amortization of the prepaid consulting fees amounted to $1,978,785 for the three months ended March 31, 2015, and were included in General and administrative expenses in the Company’s Consolidated Statements of Operations.

Four tranches of warrants were issued to Crede in conjunction with the Consulting Agreement as follows: Tranche 1A warrant to purchase 1,250,000 shares of Company common stock, Tranche 1B warrant to purchase 1,000,000 shares of Company common stock, Tranche 2 warrant to purchase 1,000,000 shares of Company common stock and Tranche 3 warrant to purchase 1,000,000 shares of Company common stock. The Tranche 1A warrant contained an exchange rights clause that required derivative liability treatment under FASB ASC 480 - “Distinguishing Liabilities from Equity.” The Company valued the derivative liability associated with the Tranche 1A warrant at inception at $2,810,000 and the liability was recorded on the Company’s Consolidated Balance Sheets in Warrant liability. In March 2016, the Company provided notice to Crede that Crede repeatedly breached the activity restrictions contained in the warrant agreements and because the terms of the Tranche 1A warrant provide that the availability of the exchange feature was subject to compliance with such activity restrictions, the exchange rights clause contained in the Tranche 1A warrant was no longer available and was thereafter void (although the remaining amount of shares underlying the warrant without the exchange feature remained fully exercisable at $3.36 per share through the warrant expiration date of September 29, 2016). Accordingly, the Company reclassified the warrant liability associated with the Tranche 1A warrant to Capital in excess of par on its Consolidated Balance Sheets during March 2016. The Tranche 1A and Tranche 1B warrants all expired without exercise on September 29, 2016.

The Tranche 2 and Tranche 3 warrants were not exercisable unless and until certain revenue milestones were attained, as defined in the prior joint venture agreement between Crede and the Company. As stated above, the Company terminated the joint venture agreement on June 22, 2015. Accordingly, such revenue milestones will never be satisfied, and the Tranche 2 and Tranche 3 warrants will never be exercisable.

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MANUFACTURING FACILITY

9 Months Ended

Sep. 30, 2017

Manufacturing Facility [Member]

Other Operating Income And Expense [Line Items]

MANUFACTURING FACILITY

NOTE 7. - MANUFACTURING FACILITY

The Company’s manufacturing operations at its North Carolina factory were not at full production capacity throughout the nine months ended September 30, 2017, and the Company significantly expanded capacity during the second and third quarters of 2017 in order to fulfill anticipated new manufacturing contracts. In mid-May of 2017, the Company began the first phase of a manufacturing contract for an existing brand of filtered cigars under a new contract manufacturing agreement (the “New Agreement”) with a third-party and continued manufacturing a third-party MSA cigarette brand and other filtered cigars on a contract basis. The New Agreement has increased revenue, has resulted in an increase in the utilization of production capacity, and has required the hiring of additional personnel. Raw material component costs, direct manufacturing costs, and an overhead allocation are included in the Cost of goods sold and Finished goods inventory. General and administrative expenses of the factory amounted to $300,824 and $635,514 for the three and nine months ended September 30, 2017, respectively ($140,690 and $422,626 for the three and nine months ended September 30, 2016, respectively).

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MACHINERY AND EQUIPMENT

9 Months Ended

Sep. 30, 2017

Property, Plant and Equipment [Abstract]

MACHINERY AND EQUIPMENT

NOTE 8. - MACHINERY AND EQUIPMENT

Machinery and equipment at September 30, 2017 and December 31, 2016 consisted of the following:

		September 30,		December 31,
	Useful Life	2017		2016
Cigarette manufacturing equipment	3 - 10 years	$	4,109,559	$	3,193,580
Office furniture, fixtures and equipment	5 years		105,096		103,945
Laboratory equipment	5 years		32,193		19,076
			4,246,848		3,316,601
Less: accumulated depreciation			1,147,234		881,938
Machinery and equipment, net		$	3,099,614	$	2,434,663

Depreciation expense was $88,711 and $265,296 for the three and nine months ended September 30, 2017, respectively ($81,354 and $243,018 for the three and nine months ended September 30, 2016, respectively).

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INVESTMENT IN ANANDIA

9 Months Ended

Sep. 30, 2017

Equity Method Investments and Joint Ventures [Abstract]

INVESTMENT IN ANANDIA

NOTE 9. - INVESTMENT IN ANANDIA

The Company (through its wholly-owned subsidiary, Botanical Genetics) used the equity method of accounting to record its 24.4% ownership interest in Anandia Laboratories, Inc., a Canadian plant biotechnology company (“Anandia”). The Company’s ownership was 25% prior to a dilutive event on September 8, 2016, that reduced the Company’s ownership in Anandia to 24.4%. On February 17, 2017, an additional dilutive event (the “Dilutive Event”) reduced the Company’s ownership in Anandia to 19.4%, an ownership percentage below the 20% threshold for use of the equity method of accounting. Accordingly, the Company discontinued applying the equity method of accounting for the investment in Anandia, effective on the date of the Dilutive Event. At September 30, 2017 and December 31, 2016, the Company’s investment balance in Anandia was $1,366,493 and $1,020,313, respectively, and is classified within Other assets on the accompanying Consolidated Balance Sheets. After the Dilutive Event, the Company accounts for its investment in Anandia under the cost method. On July 25, 2017, a third dilutive event occurred resulting in an additional reduction of the Company’s ownership in Anandia to 19.0%.

The Company recorded a gain on investment of $0 and $16,872 for the three and nine months ended September 30, 2017, respectively, and a loss of $15,585 and $128,832 for the three and nine months ended September 30, 2016, respectively (the gain for the nine months ended September 30, 2017, reflects the Company’s proportionate gain through the Dilutive Event). As of September 15, 2014, the carrying value of the Company’s investment in Anandia was approximately $1,199,000 in excess of the Company’s share of the book value of the net assets of Anandia, with such difference being attributable to intangible assets. This intangible asset was being amortized over the expected benefit period and this amortization expense amounted to $0 and $7,526 for the three and nine months ended September 30, 2017, respectively ($14,412 and $43,236 for the three and nine months ended September 30, 2016, respectively). After the Dilutive Event, the Company discontinued amortizing this intangible asset. In addition, and as a result of the Dilutive Event, the Company recorded a gain in accordance with the derecognition provisions of Accounting Standards Codification 323 (“ASC 323”). ASC 323 states that an investor (the Company) shall account for an issuance by an investee (Anandia) as if the investor had sold a proportionate share of its investment in the investee and the investor will record a gain or loss resulting from the investee share issuance. As such, the Company recorded a gain of $336,834 during the three months ended March 31, 2017, as a result of the Dilutive Event. The Company’s overall gain (loss) on the investment when aggregating the Company’s share of Anandia’s gain (loss), the intangible asset amortization and the gain recorded under ASC 323 amounted to $0 and $346,180 for the three and nine months ended September 30, 2017, respectively, and amounted to ($29,997) and ($172,068) for the three and nine months ended September 30, 2016, respectively.

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NOTES PAYABLE AND PATENT ACQUISITION

9 Months Ended

Sep. 30, 2017

Notes Payable And Patent Acquisition [Abstract]

NOTES PAYABLE AND PATENT ACQUISITION

NOTE 10. - NOTES PAYABLE AND PATENT ACQUISITION

On December 22, 2014, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with the National Research Council of Canada (“NRC”) to acquire certain patent rights that the Company had previously licensed from NRC under a license agreement between the parties. The Purchase Agreement provided for payment by the Company to NRC for the NRC patent rights of a total amount of $1,213,000, of which $213,000 was paid in cash at the closing on December 23, 2014, and with the remaining $1,000,000 balance to be paid in three equal installments of $333,333 in December of 2015, 2016 and 2017, respectively, with no interest on the installment payments unless the Company defaults on any such installment payments. As such, the Company computed the present value of the note payable using the Company’s incremental borrowing rate. The resulting present value of the note payable amounted to $925,730 at December 31, 2014. After the scheduled installment payments of $333,333 made by the Company to NRC on each of December 22, 2016 and 2015, and the accretion of interest, the remaining present value of the note payable amounts to $326,924 and $307,938 at September 30, 2017 and December 31, 2016, respectively, and the amounts are reported as Current portion of note payable on the Company’s Consolidated Balance Sheets. The cost of the acquired patents in the amount of $1,138,730 (cash of $213,000 plus the original discounted notes payable in the amount of $925,730) are included in Intangible assets, net on the Company’s Consolidated Balance Sheets. All previous license agreements between NRC and the Company were terminated as a condition of the Purchase Agreement. NRC has a security interest in these patent rights acquired by the Company from NRC until the note payable has been satisfied.

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SEVERANCE LIABILITY

9 Months Ended

Sep. 30, 2017

Severance Liability [Abstract]

SEVERANCE LIABILITY

NOTE 11. - SEVERANCE LIABILITY

The Company recorded an accrual for severance during the fourth quarter of 2014 in the initial amount of $624,320 in accordance with FASB ASC 712 - “Compensation - Nonretirement Postemployment Benefits.” The severance accrual relates to the October 25, 2014 termination of Joseph Pandolfino, the Company’s former Chairman of the Board and Chief Executive Officer. The prior Employment Agreement with Mr. Pandolfino provided that in certain circumstances Mr. Pandolfino would receive severance payments in the gross amount of $18,750 per month, subject to customary withholdings, over a term of 36 months. Amounts owed to Mr. Pandolfino have been discounted using the Company’s incremental borrowing rate. As a result of the severance benefit payments made through the third quarter of 2017, the discounted current balance of the severance liability amounted to $38,793 and $199,657, at September 30, 2017 and December 31, 2016, respectively. The severance liability will be fully satisfied during the fourth quarter of 2017.

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WARRANTS FOR COMMON STOCK

9 Months Ended

Sep. 30, 2017

Warrants For Common Stock [Abstract]

WARRANTS FOR COMMON STOCK

NOTE 12. - WARRANTS FOR COMMON STOCK

At September 30, 2017, the Company had outstanding warrants to purchase 12,204,580 shares of common stock of the Company, of which warrants to purchase 94,721 shares contain an anti-dilution feature, and excluding 2,000,000 Tranche 2 and 3 warrants that will never become exercisable, as discussed in Note 6.

During the third quarter of 2017, warrants to purchase 240,667 shares of common stock were exercised on a cashless basis resulting in the issuance of 146,320 shares of the Company’s common stock and 5,708,552 warrants to purchase shares of common stock were exercised on a cash basis under the June 2017 Warrant Exercise Agreements discussed in Note 2.

During July and August of 2017, the Company issued warrants to purchase 5,708,552 shares of common stock with an exercise price of $2.15 per share. These warrants have a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, do not contain an anti-dilution feature and had a fair value of $9,135,223 at issuance. See Note 2 for additional details.

During the second quarter of 2017, warrants to purchase 843,110 shares of common stock were exercised on a cashless basis resulting in the issuance of 525,118 shares of the Company’s common stock and 5,657,157 warrants to purchase shares of common stock were exercised on a cash basis (including 5,584,659 warrants to purchase shares of common stock under the June 2017 Warrant Exercise Agreements discussed in Note 2). On May 15, 2017, warrants to purchase 45,834 shares of common stock expired without being exercised.

During June of 2017, the Company issued warrants to purchase 5,584,659 shares of common stock with an exercise price of $2.15 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, do not contain an anti-dilution feature and had a fair value of approximately $6,913,031 at issuance. See Note 2 for additional details.

During March of 2017, warrants to purchase 202,500 shares of common stock were exercised on a cashless basis resulting in the issuance of 100,928 shares of the Company’s common stock. On February 8, 2017, warrants to purchase 172,730 shares of common stock expired without being exercised.

On January 25, 2016, warrants to purchase 67,042 shares of common stock were exercised, primarily on a cashless basis, resulting in the issuance of 2,618 shares of the Company’s common stock. On January 25, 2016, warrants to purchase 6,831,115 shares of common stock expired without being exercised.

Pursuant to the registered direct offering that closed on October 19, 2016, and discussed in Note 3, the Company issued warrants to purchase 4,250,000 shares of common stock with an exercise price of $1.45 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $3,380,000 at issuance. Pursuant to the June 2017 Warrant Exercise Agreements, as discussed in Note 2, warrants to purchase 4,250,000 shares of common stock were exercised on a cash basis at an exercise price of $1.45 per share (2,354,948 Warrants were exercised in June of 2017 and 1,895,052 Warrants were exercised in July and August of 2017).

Pursuant to the registered direct offering that closed on July 27, 2016, and discussed in Note 4, the Company issued warrants to purchase 7,043,211 shares of common stock. The warrants provide for an exercise price of $1.00 per share and 1,543,210 of the warrants were exercisable immediately and had a fair value of approximately $858,000 at issuance and 5,500,001 of the warrants were exercisable six months from the date of issuance and had a fair value of approximately $3,058,000 at issuance. All the warrants had a term of 5.5 years and do not contain an anti-dilution feature. In addition, on July 27, 2016, the Company terminated an aggregate of 5.5 million warrants with exercise prices of $1.21 and $1.25 per share previously issued in conjunction with registered direct offerings in February of 2016 and June of 2015. Pursuant to the June 2017 Warrant Exercise Agreements, as discussed in Note 2, warrants to purchase 7,043,211 shares of common stock were exercised on a cash basis at an exercise price of $1.00 per share (3,229,711 Warrants were exercised in June of 2017 and 3,813,500 Warrants were exercised in July and August of 2017).

Pursuant to the registered direct offering that closed on February 5, 2016, and discussed in Note 5, the Company issued warrants to purchase 2,500,000 shares of common stock with an exercise price of $1.21 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $1,940,000 at issuance. The warrants associated with this transaction were terminated on July 27, 2016 (see Note 4 – July 2016 Registered Direct Offering for additional information).

Pursuant to the registered direct offering that closed on June 2, 2015, the Company issued warrants to purchase 3,000,000 shares of common stock with an exercise price of $1.25 per share. These warrants had a term of sixty-six (66) months, were not exercisable for six months immediately following the date of issuance, did not contain an anti-dilution feature, and had a fair value of approximately $2,067,000 at issuance. The warrants associated with this transaction were terminated on July 27, 2016 (see Note 4 – July 2016 Registered Direct Offering for additional information).

Outstanding warrants at September 30, 2017 consisted of the following:

	Number of		Exercise
Warrant Description	Warrants		Price		Expiration
December 2011 convertible NP warrants		700,148	$	1.3816	February 6, 2018
November 2012 PPO warrants		116,500	$	0.6000	November 9, 2017
August 2012 convertible NP warrants (1)		94,721	$	0.9310	August 8, 2018
June 2017 warrants pursuant to warrant exercise agreements		11,293,211	$	2.1500	December 20, 2022
Total warrants outstanding (2)		12,204,580

(1) Includes anti-dilution features.

(2) Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

The Company estimates the value of warrant liability 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.

As a result of the previously exercisable exchange rights contained in the Tranche 1A warrants, the financial instrument was previously considered a liability in accordance with FASB Accounting Standards Codification Topic 480 - “Distinguishing Liabilities from Equity” (“ASC 480”). More specifically, ASC 480 requires a financial instrument to be classified as a liability if such financial instrument contains a conditional obligation that the issuer must or may settle by issuing a variable number of its equity securities if, at inception, the monetary value of the obligation is based on a known fixed monetary amount. As a result of the actions by Crede that caused the exchange rights feature to be voided (see Note 6 - Joint Venture, Consulting Agreement and Associated Warrants for additional information), the Company reclassified the Tranche 1A warrant liability to Capital in excess of par.

The following table is a roll-forward summary of the warrant liability:

Fair value at December 31, 2015	$	2,898,296
Reclassification of warrant liability to capital in excess of par		(2,810,000)
Gain as a result of change in fair value		(29,615)
Fair value at December 31, 2016		58,681
Loss as a result of change in fair value		138,813
Fair value at September 30, 2017	$	197,494

The aggregate loss as a result of the Company’s warrant liability for the three and nine months ended September 30, 2017 amounted to $55,886 and $138,813, respectively (the aggregate net (loss) gain for the three and nine months ended September 30, 2016 amounted to ($46,995) and $14,602, respectively), which are included in Other income (expense) under Warrant liability (loss) gain - net in the accompanying Consolidated Statements of Operations.

FASB ASC 820 - “Fair Value Measurements and Disclosures” 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; and

⋅ 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’s or a financial 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 that 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 Company’s warrant activity since December 31, 2015:

	Number of
	Warrants
Warrants outstanding at December 31, 2015		16,634,778
Warrants issued in conjunction with registered direct offering		2,500,000
Unexercisable warrants(1)		(2,000,000)
Warrants exercised during January 2016		(67,042)
Warrants expired during January 2016		(6,831,115)
June 2015 registered direct offering warrants cancelled		(3,000,000)
February 2016 registered direct offering warrants cancelled		(2,500,000)
Warrants issued in conjunction with July 2016 registered direct offering		7,043,211
Additional warrants due to anti-dilution provisions		2,089
Warrants expired during September 2016(2)		(2,250,000)
Warrants issued in conjunction with October 2016 registered direct offering		4,250,000
Warrants outstanding at December 31, 2016		13,781,921
Warrants expired during February 2017		(172,730)
Warrants exercised during March 2017		(202,500)
Warrants exercised during April 2017		(162,000)
Warrants exercised during May 2017		(221,366)
Warrants expired during May 2017		(45,834)
Warrants exercised during June 2017		(6,116,903)
Warrants issued pursuant to June 2017 warrant exercise agreements		5,584,659
Warrants exercised during July 2017		(2,000,000)
Warrants exercised during August 2017		(3,949,219)
Warrants issued pursuant to June 2017 warrant exercise agreements		5,708,552
Warrants outstanding at September 30, 2017		12,204,580
Composition of outstanding warrants:
Warrants containing anti-dilution feature		94,721
Warrants without anti-dilution feature		12,109,859
		12,204,580

(1) Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

(2) Tranche 1A and Tranche 1B warrants expired unexercised on September 29, 2016.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 13. - COMMITMENTS AND CONTINGENCIES

License Agreements - Under its exclusive worldwide license agreement with North Carolina State University (“NCSU”), the Company is required to pay minimum annual royalty payments, which are credited against running royalties on sales of licensed products. The minimum annual royalty is $225,000. The license agreement continues through the life of the last-to-expire patent, which is expected to be 2022. The license agreement also requires a milestone payment of $150,000 upon FDA approval or clearance 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 three and nine months ended September 30, 2017, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $11,022 and $42,730, respectively ($62,303 and $76,299 during the three and nine months ended September 30, 2016, respectively).

On December 8, 2015, the Company entered into an additional license agreement (the “License”) with NCSU. Under the terms of the License, the Company paid NCSU a non-refundable, non-creditable lump sum license fee of $150,000. Additionally, the License calls for the Company to pay NCSU a non-refundable, non-creditable minimum annual royalty beginning on December 31, 2018 in the amount of $10,000. The minimum annual royalty payment increases to $15,000 in 2019, $25,000 in 2020 and 2021, and $50,000 per year thereafter for the remaining term of the License. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During the three and nine months ended September 30, 2017, the aggregate costs incurred related to capitalized patent costs and patent maintenance expense amounted to $236 and $30,102, respectively ($0 and $6,075 for the three and nine months ended September 30, 2016, respectively). This License continues through the life of the last-to-expire patent, expected to be in 2035.

On February 10, 2014, the Company entered into a sponsored research and development agreement (the “Agreement”) with NCSU. Under the terms of the Agreement, the Company paid NCSU $162,408 over the two-year term of the Agreement, which grants certain licensed rights to the Company. The Company had extended the Agreement through January 31, 2017 at an additional cost of $85,681. The Company is currently negotiating an additional extension to this Agreement.

All payments made under the above referenced license agreements and the sponsored research and development agreement are initially recorded as a Prepaid expense on the Company’s Consolidated Balance Sheets and subsequently expensed on a straight-line basis over the applicable period and included in Research and development costs on the Company’s Consolidated Statements of Operations. The amounts expensed during the three and nine months ended September 30, 2017 were $56,250 and $175,890, respectively ($115,170 and $345,137 for the three and nine months ended September 30, 2016, respectively).

On August 22, 2014, the Company entered into a Commercial License Agreement with Precision PlantSciences, Inc. (the “Precision License”). The Precision License grants the Company a non-exclusive, but fully paid up right and license to use technology and materials owned by Precision PlantSciences for a license fee of $1,250,000. The Precision License continues through the life of the last-to-expire patent, which is expected to be in 2028.

On August 27, 2014, the Company entered into an additional exclusive License Agreement (the “License Agreement”) with NCSU. Under the License Agreement, the Company paid NCSU a non-refundable, non-creditable lump sum license fee of $125,000, and the Company must pay to NCSU an additional non-refundable, non-creditable lump sum fee of $75,000 upon issuance of a U.S. utility patent included in the patent rights. A patent was issued during the first quarter of 2017 under this clause, and accordingly, the $75,000 was due and payable to NCSU. The $75,000 cost was included in Research and development costs on the Company’s Consolidated Statements of Operations for the three months ended March 31, 2017. Additionally, the License Agreement calls for the Company to pay NCSU three non-refundable, non-creditable license maintenance fees in the amount of $15,000 per annum in each of December 2015, 2016 and 2017. Beginning in calendar year 2018, the Company is obligated to pay to NCSU an annual minimum royalty fee of $20,000 in 2018, $30,000 in 2019, and $50,000 per year thereafter for the remaining term of the License Agreement. The Company is also responsible for reimbursing NCSU for actual third-party patent costs incurred. During the three and nine months ended September 30, 2017, the aggregated costs incurred related to capitalized patent costs and patent maintenance expense amounted to $12,928 and $37,170, respectively ($4,056 and $37,995 for the three and nine months September 30,2016, respectively). The License Agreement continues through the life of the last-to-expire patent, which is expected to be in 2034.

On September 15, 2014, the Company entered into a Sublicense Agreement with Anandia Laboratories, Inc. (the “Anandia Sublicense”). Under the terms of the Anandia Sublicense, the Company was granted an exclusive sublicense in the United States and a co-exclusive sublicense in the remainder of the world, excluding Canada, to the licensed intellectual property. The Anandia Sublicense required an up-front fee of $75,000, an annual license fee of $10,000, the payment of patent filing and maintenance costs, and a running royalty on future net sales. The Anandia Sublicense continues through the life of the last-to- expire patent, which is expected to be in 2035.

The Precision License, the License Agreement with NCSU and the Anandia Sublicense are included in Intangible assets, net in the Company’s Consolidated Balance Sheets and the applicable license fees will be amortized over the term of the agreements based on their last-to-expire patent date. Amortization amounted to $24,505 and $73,516 for the three months and nine months ended September 30, 2017, respectively ($24,505 and $73,516 for the three and nine months ended September 30, 2016, respectively) and was included in Amortization expense on the Company’s Consolidated Statements of Operations.

On September 28, 2015, the Company’s wholly-owned subsidiary, Botanical Genetics, entered into a Sponsored Research Agreement (the “Agreement”) with Anandia Laboratories Inc. (“Anandia”). Pursuant to the Agreement, Anandia is conducting research on behalf of the Company relating to the cannabis/hemp plant. The Agreement had an initial term of twelve (12) months from the date of the Agreement and can be extended at the sole option of the Company for two (2) additional periods of twelve (12) months each (of which the option on the first twelve (12) month period has been extended). The Company paid Anandia $379,800 over the initial term of the Agreement. On March 13, 2017, the Company entered into Amendment No. 1 to the Agreement (the “Amendment”). The Amendment has a term of twelve (12) months and calls for the Company to pay Anandia a total of $785,100 in equal monthly installments of $65,425. During the three and nine months ended September 30, 2017, expenses related to the Agreement amounted to $196,275 and $457,975, respectively ($84,200 and $263,400, for the three and nine months ended September 30, 2016, respectively) and are included in Research and development costs on the Company’s Consolidated Statements of Operations. Under the terms of the Agreement, the Company will have co-exclusive worldwide rights with Anandia to all the intellectual property resulting from the sponsored research between the Company and Anandia. The party that commercializes such intellectual property in the future will pay royalties in varying amounts to the other party, with the amount of such royalties being dependent upon the type of products that are commercialized in the future. If either party sublicenses such intellectual property to a third-party, then the Company and Anandia will share equally in such sublicensing consideration.

The Company had an R&D agreement with the University of Virginia (“UVA”) relating to nicotine biosynthesis in tobacco plants. The extended term of the R&D agreement with UVA expired on October 31, 2016. In December 2016, the Company entered into a new sponsored research agreement with UVA and an exclusive license agreement with the University of Virginia Patent Foundation d/b/a University of Virginia Licensing & Ventures Group (“UVA LVG”) pursuant to which the Company will invest approximately $1,000,000 over a three-year period with UVA to create unique industrial hemp plants with guaranteed levels of THC below the legal limits and optimize other desirable hemp plant characteristics to improve the plant’s suitability for growing in Virginia and other legacy tobacco regions of the United States. This work with UVA will also involve the development and study of medically important cannabinoids to be extracted by UVA from the Company’s hemp plants. UVA and the Company will conduct all activities in this scientific collaboration within the parameters of state and federal licenses and permits held by UVA for such work. The agreements with UVA and UVA LVG grant the Company exclusive rights to commercialize all results of the collaboration in consideration of royalty payments by the Company to UVA LVG. During the three and nine months ended September 30, 2017, expenses related to the agreements amounted to $113,942 and $225,516, respectively ($74,769 and $187,742 for the three and nine months ended September 30, 2016, respectively) and are included in Research and development costs on the Company’s Consolidated Statements of Operations.

Lease Agreements - The Company leases a manufacturing facility and warehouse located in North Carolina on a triple net lease basis. The lease commenced on January 14, 2014, and had an initial term of twelve (12) months. The lease contains four (4) additional extensions; with one lease extension for an additional one (1) year and with the other three (3) lease extensions each being for an additional two (2) years in duration, exercisable at the option of the Company. The Company is currently in the first two-year lease extension term that will expire on October 31, 2017 and intends to exercise the second two-year lease extension. The lease expense for the three and nine months ended September 30, 2017 amounted to $38,438 and $115,314, respectively, ($36,131 and $108,393, for the three and nine months ended September 30, 2016, respectively). The future minimum lease payments if the Company exercises each of the additional extensions are approximately as follows:

Year ended December 31, 2017 -	$	41,000
Year ended December 31, 2018 -	$	169,000
Year ended December 31, 2019 -	$	169,000
Year ended December 31, 2020 -	$	169,000
Year ended December 31, 2021 -	$	141,000

The Company has a lease for its office space in Clarence, New York and extended the lease for an additional one-year renewal period that expired on August 31, 2017. The Company is currently leasing the office space on a month-to-month basis at a monthly lease payment of $5,267. On October 4, 2017, the Company entered a new lease for new office space at a new location with an initial three-year term and with a monthly lease payment of $6,375  commencing thirty (30) days after the Company occupies the new office space. The Company expects to occupy the new lease space in early 2018.

On November 1, 2015, the Company entered into a one-year lease for 25,000 square feet of warehouse space in North Carolina to store the Company’s proprietary tobacco leaf. The lease calls for a monthly lease payment of $3,750 and contains a three-year renewal option after the initial one-year term. In October of 2016, the Company exercised the three-year renewal option after the one-year initial term, but intends on terminating this lease, without further obligation, when the tobacco leaf is transferred to a new leased facility in the fourth quarter of 2017.

On May 1, 2016, the Company entered into a sublease for laboratory space in Buffalo, New York. The sublease calls for a monthly payment of $1,471 through April 30, 2018. Additionally, on February 1, 2017, the Company entered into an amendment to the initial sublease calling for the sublease of additional lab space at a cost of $1,219 per month, bringing the total monthly lease obligation to $2,690. On April 26, 2017, the Company entered into an amendment to the sublease to extend the term of the sublease for an additional twelve (12) months, commencing on May 1, 2017 at a total cost of $2,770 per month for the total lease obligation. Future minimum lease payments for the years ended December 31, 2017 and 2018 will be approximately $8,000 and $11,000, respectively.

On September 1, 2016, the Company entered into a sublease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment. The sublease calls for a monthly payment of $1,200 and expired on August 31, 2017. The Company has leased a new space in different facility in North Carolina, more fully described below, and moved the equipment to the new leased facility during the third quarter of 2017. There are no future minimum lease payments due under the sublease.

On April 20, 2017, the Company entered into a lease for warehouse space in North Carolina to store cigarette and filtered cigar raw materials. The lease calls for a monthly payment of $3,500 on a month-to-month basis. Future minimum lease payments remaining for the year ended December 31, 2017 are $10,500 and future minimum lease payments in subsequent years will be $42,000 as long as the Company continues to lease the warehouse space.

On August 14, 2017, the Company entered into a lease for warehouse space in North Carolina to store and operate tobacco leaf processing equipment and to eventually store the Company’s proprietary tobacco leaf. The lease calls for a monthly payment of $4,665, expires on August 14, 2018 and contains twelve-month renewal options as long as the Company continues to lease the warehouse. Future minimum lease payments for the year ended December 31, 2017 are approximately $14,000 and future minimum lease payments will be approximately $56,000 per year for each subsequent year the warehouse space is leased by the Company.

Litigation - In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.

On April 26, 2016, Crede CG III, LTD. (“Crede”) filed a complaint against the Company in the United States District Court for the Southern District of New York (the “SDNY Court”) entitled Crede CG III, LTD. v. 22nd Century Group, Inc. On May 19, 2016, Crede filed an Amended Complaint that included seven counts, alleging among other things, that the Company allegedly breached and/or interfered with certain agreements entered into with Crede, including the joint venture agreement relating to efforts to sell the Company’s proprietary tobacco into China, the Tranche 1A warrant and the prior securities purchase agreement with Crede. The Amended Complaint seeks money damages, to rescind the securities purchase agreement, to obtain declaratory and injunctive relief to require the Company to issue to Crede 2,077,555 shares of the Company’s common stock under the exchange provision of the Tranche 1A warrant, and entry of an injunction prohibiting the Company from selling tobacco into China without the joint venture’s involvement. The Amended Complaint also seeks attorney’s fees and such other relief as the Court may deem just and proper. We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims.

On May 19, 2016, Crede filed a motion for preliminary injunction, asking the SDNY Court to require the Company to issue 2,077,555 shares of its common stock to Crede under the exchange provision of the Tranche 1A warrant. After conducting an evidentiary hearing on this motion on June 14, 2016, the SDNY Court denied Crede’s motion and held, among other things, that Crede did not prove the potential for irreparable harm or a likelihood of success on its claim for such 2,077,555 shares under the Tranche 1A warrant, and that there was a likelihood that Crede had violated the activity restrictions of the Tranche 1A warrant, which would bar Crede’s claim for such shares from the Company.

Following such ruling, on July 11, 2016, the Company filed a motion to sever the Crede lawsuit into two separate cases, requesting all claims relating to the Tranche 1A warrant and the securities purchase agreement to stay in the SDNY Court and all claims relating to the China joint venture agreement to be transferred to the United States District Court for the Western District of New York (the “WDNY Court”), where the Company’s headquarters are located. On January 20, 2017, the SDNY Court granted the Company’s motion.

On February 14, 2017, Crede voluntarily dismissed its lawsuit against the Company in the WDNY Court.

On February 21, 2017, the SDNY Court granted the Company’s request to file a motion for summary judgment for the claims remaining in the SDNY Court, with all discovery in the case being deferred until after the SDNY Court issues its decision on the summary judgment motion of the Company.

On March 20, 2017, the Company filed its motion for summary judgment for the claims remaining in the SDNY Court. The response by Crede to the Company’s summary judgment motion was filed by Crede on May 1, 2017. On May 15, 2017, the Company filed its response to Crede’s filing. The parties are now awaiting the SDNY Court to issue its decision on such summary judgment motion.

We believe that the claims are frivolous, meritless and that the Company has substantial legal and factual defenses to the claims. The Company has defended and intends to continue to defend against these claims vigorously.

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EARNINGS PER COMMON SHARE

9 Months Ended

Sep. 30, 2017

Earnings Per Common Share [Abstract]

EARNINGS PER COMMON SHARE

NOTE 14. - 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, 2017 and 2016:

	September 30,		September 30,
	2017		2016
Net loss attributed to common shareholders	$	(3,316,634)	$	(2,679,988)
Denominator for basic earnings per share-weighted average shares outstanding		100,673,834		80,386,519
Effect of dilutive securities:
Warrants, restricted stock and options outstanding		-		-
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities		100,673,834		80,386,519
Loss per common share - basic and diluted	$	(0.03)	$	(0.03)

The following table sets forth the computation of basic and diluted earnings per common share for the nine month periods ended September 30, 2017 and 2016:

	September 30,		September 30,
	2017		2016
Net loss attributed to common shareholders	$	(9,293,535)	$	(8,834,794)
Denominator for basic earnings per share-weighted average shares outstanding		94,369,953		76,826,949
Effect of dilutive securities:
Warrants, restricted stock and options outstanding		-		-
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities		94,369,953		76,826,949
Loss per common share - basic and diluted	$	(0.10)	$	(0.11)

Securities outstanding that were excluded from the computation because they would have been anti-dilutive are as follows:

	September 30,		September 30,
	2017		2016
Warrants		12,204,580		9,531,921
Options		6,856,691		5,650,679
		19,061,271		15,182,600

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EQUITY BASED COMPENSATION

9 Months Ended

Sep. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

EQUITY BASED COMPENSATION

NOTE 15. – EQUITY BASED COMPENSATION

On April 12, 2014, the stockholders of the Company approved the 22nd Century Group, Inc. 2014 Omnibus Incentive Plan (the “OIP”) and on April 29, 2017, the stockholders approved an amendment to the OIP to increase the number of shares available for issuance by 5,000,000 shares. The OIP allows for the granting of equity and cash incentive awards to eligible individuals over the life of the OIP, including the issuance of up to an aggregate of 10,000,000 shares of the Company’s common stock pursuant to awards under the OIP. The OIP has a term of ten years and is administered by the Compensation Committee of the Company’s Board of Directors 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 OIP. As of September 30, 2017, we had available 3,929,765 shares remaining for future awards under the OIP.

During the three and nine months ended September 30, 2017, the Company issued stock option awards from the OIP for 20,000 and 1,392,000 shares, respectively, to eligible individuals having vesting periods ranging from one to three years from the date of the award. During the three and nine months ended September 30, 2016, the Company issued stock option awards from the OIP for 665,000 shares and 2,389,037 shares, respectively. All stock option awards were valued using the Black-Scholes option-pricing model on the date of the award.

For the three and nine months ended September 30, 2017, the Company recorded compensation expense related to restricted stock and stock option awards granted under the OIP of $259,415 and $582,398, respectively ($204,860 and $677,076 for the three and nine months ended September 30, 2016, respectively).

During the three and nine months ended September 30, 2017, there were no issuances of stock or stock options to third-party service providers. During the three and nine months ended September 30, 2016, the Company issued stock to third-party service providers in the amount of 0 and 15,811 shares, respectively, and during the three and nine months ended September 30, 2016, the Company issued stock options in the amount of 0 and 100,000 shares, respectively, to third-party service providers. The Company had no equity based compensation expense related to third-party providers for the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recorded equity based compensation expense related to third-party providers in the amount of $0 and $30,873, respectively.

As of September 30, 2017, unrecognized compensation expense related to non-vested restricted shares and stock options amounted to approximately $2,165,000, which is expected to be recognized approximately as follows: $262,000, $848,000, $448,000 and $140,000 during 2017, 2018, 2019 and 2020, respectively. Approximately $467,000 of the unrecognized compensation expense relates to previously issued stock options, with the vesting of such stock options being based on the achievement of a certain milestone, and the attainment of such milestone cannot be determined at this time.

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 nine months ended September 30, 2017 and 2016:

	2017			2016
Risk-free interest rate (weighted average)		2.12	%		1.31	%
Expected dividend yield		0	%		0	%
Expected stock price volatility		90	%		90	%
Expected life of options (weighted average)		5.14 years			4.87 years

The Company estimated the expected volatility based on data used by a 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 yield of the equivalent U.S. Treasury bonds 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 since December 31, 2015 is as follows:

					Weighted
					Average
			Weighted		Remaining		Aggregate
	Number of		Average		Contractual		Intrinsic
	Options		Exercise Price		Term		Value
Outstanding at December 31, 2015		3,161,642	$	1.10
Granted in 2016		2,489,037	$	0.97
Outstanding at December 31, 2016		5,650,679	$	1.04
Granted in 2017		1,392,000	$	1.40
Exercised in 2017		(85,988)	$	0.79
Expired in 2017		(100,000)	$	1.43
Outstanding at September 30, 2017		6,856, 691	$	1.12		7.1 years	$	11,347,700
Exercisable at September 30, 2017		3,617,670	$	1.10		6.1 years	$	6,042,860

There were stock options granted during the nine months ended September 30, 2017 and 2016, to purchase a total of 1,392,000 shares and 2,489,037 shares, respectively. The weighted average grant date fair value of options issued during the nine months ended September 30, 2017 was $0.98 ($0.66 for the nine months ended September 30, 2016). The total fair value of options that vested during the nine months ended September 30, 2017 amounted to $750,265 ($1,242,110 for the nine months ended September 30, 2016). There were 85,988 options exercised on a cashless basis during the nine months ended September 30, 2017 resulting in the issuance of 51,927 shares of the Company’s common stock, and during the nine months ended September 30, 2016 no options were exercised.

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2017

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 16. - SUBSEQUENT EVENTS

On October 10, 2017, the Company closed a registered direct offering (the “Offering”) with institutional investors purchasing an aggregate of 20,570,000 shares of the Company’s common stock at a price of $2.6250 per share generating net cash proceeds for the Company of approximately $50,700,000, after deducting expenses associated with the transaction. The securities purchase agreement entered into with the institutional investors provides that, subject to certain exceptions, for a period of one year following the closing of the Offering, the Company will be prohibited from effecting or entering into an agreement to effect any issuance by the Company or any of its subsidiaries of common stock or common stock equivalents (or a combination of units thereof) involving a variable rate transaction, which generally includes any transaction in which the Company (i) issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of common stock either (A) at a conversion price or exchange rate that is based upon and/or varies with the trading prices of or quotations for the shares of common stock at any time after the initial issuance of such securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the common stock or (ii) enters into any agreement, whereby the Company may issue securities at a future determined price. The securities purchase agreement also provides that, subject to certain exceptions, the Company will not enter into any agreement to sell common stock for a period of ninety (90) days.

Effective on October 31, 2017, the Company appointed James E. Swauger, Ph.D., as our Senior Vice President of Science and Regulatory Affairs. Dr. Swauger entered into an employment agreement with the Company containing customary terms and conditions with an initial three-year term. In connection with his appointment, Dr. Swauger was awarded a time vesting stock option to purchase nine hundred thousand (900,000) shares of the Company’s common stock at an exercise price of $2.12 per share. One-third of this time vesting stock option vests over each of the next three years and such stock option had a fair value upon issuance of approximately $1,400,000. In addition, Dr. Swauger was awarded a performance vesting stock option to purchase three hundred thousand (300,000) shares of the Company’s common stock at an exercise price of $2.12 per share that vests on the attainment of various performance based milestones and had a fair value upon issuance of approximately $480,000.

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. 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.

Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The balance sheet as of December 31, 2016 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements.

These interim consolidated financial statements should be read in conjunction with the December 31, 2016 audited consolidated financial statements and the notes thereto.

Principles of Consolidation

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of 22nd Century Group, Inc. (“22nd Century Group”), its three wholly-owned subsidiaries, 22nd Century Limited, LLC (“22nd Century Ltd”), NASCO Products, LLC (“NASCO”), and Botanical Genetics, LLC (“Botanical Genetics”), and two wholly-owned subsidiaries of 22nd Century Ltd, Goodrich Tobacco Company, LLC (“Goodrich Tobacco”) and Heracles Pharmaceuticals, LLC (“Heracles Pharma”) (collectively, “the Company”). All intercompany accounts and transactions have been eliminated.

Nature of Business

Nature of Business - 22nd Century Ltd is a plant biotechnology company specializing in technology that allows (i) for the level of nicotine and other nicotinic alkaloids in tobacco plants to be decreased or increased through genetic engineering and plant breeding and (ii) the levels of cannabinoids in cannabis/hemp plants to be decreased or increased through genetic engineering and plant breeding. Goodrich Tobacco and Heracles Pharma are business units for the Company’s (i) potential modified risk tobacco products and premium cigarettes and (ii) smoking cessation product, respectively. The Company acquired the membership interests of NASCO on August 29, 2014. NASCO is a federally licensed tobacco products manufacturer, a subsequent participating member under the tobacco Master Settlement Agreement (“MSA”) between the tobacco industry and the settling states under the MSA, and operates the Company’s cigarette manufacturing business in North Carolina. Botanical Genetics is a wholly-owned subsidiary of 22nd Century Group, and was incorporated to facilitate an investment more fully described in Note 9.

Preferred stock authorized

Preferred stock authorized - The Company is authorized to issue “blank check” preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock.

Accounts receivable

Accounts receivable - The Company periodically reviews aged account balances for collectability. At September 30, 2017 and December 31, 2016, the Company established an allowance for doubtful accounts in the amount of $0 and $10,000, respectively.

Inventory

Inventory - Inventories are valued at the lower of cost or net realizable value. Cost is determined using an average cost method for tobacco leaf inventory and raw materials inventory and standard cost is primarily used for finished goods inventory. 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. Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Inventory - tobacco leaf	$	1,890,477	$	1,936,039
Inventory - finished goods
Cigarettes and filtered cigars		528,925		340,523
Inventory - raw materials
Cigarette and filtered cigar components		1,965,385		1,071,747
		4,384,787		3,348,309
Less: inventory reserve		350,623		255,623
	$	4,034,164	$	3,092,686

Fixed assets

Machinery and equipment - Machinery and equipment are recorded at their acquisition cost and depreciated on a straight-line basis over their estimated useful lives ranging from 3 to 10 years. Depreciation commences when the asset is placed in service.

Intangible Assets

Intangible Assets - Intangible assets are recorded at cost and consist primarily of (1) expenditures incurred with third parties related to the processing of patent claims and trademarks with government authorities, as well as costs to acquire patent rights from third parties, (2) license fees paid for third-party intellectual property, (3) costs to become a signatory under the tobacco MSA, and (4) license fees paid to acquire a predicate cigarette brand. The amounts capitalized relate to intellectual property that the Company owns or to which it has exclusive rights. The Company’s intellectual property capitalized costs are amortized using the straight-line method over the remaining statutory life of the primary patent in each of the Company’s two primary groupings of patent families, which expire in 2018 and 2028 (the assets’ estimated lives, respectively). Periodic maintenance or renewal fees are expensed as incurred. Annual minimum license fees are charged to expense. License fees paid for third-party intellectual property are amortized on a straight-line basis over the last to expire patents, which patent expiration dates range from 2028 through 2035. The Company believes costs associated with becoming a signatory to the MSA and acquiring a predicate cigarette brand have an indefinite life and as such, no amortization is taken. Total intangible assets at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Intangible assets, net
Patent and trademark costs	$	6,197,258	$	5,688,440
Less: accumulated amortization		2,378,241		2,021,926
Patent and trademark costs, net		3,819,017		3,666,514
License fees, net (see Note 13)		1,450,000		1,450,000
Less: accumulated amortization		302,085		228,568
License fees, net		1,147,915		1,221,432
MSA signatory costs		2,202,000		2,202,000
License fee for predicate cigarette brand		300,000		300,000
	$	7,468,932	$	7,389,946

Amortization expense relating to the above intangible assets for the three and nine months ended September 30, 2017 amounted to $145,934 and $429,832, respectively ($129,807 and $380,689 for the three and nine months ended September 30, 2016, respectively).

The estimated annual average amortization expense for the next five years is approximately $396,000 for patent costs and $98,000 for license fees.

Impairment of Long-Lived Assets

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, 2017 or 2016, respectively.

Income Taxes

Income Taxes - The Company recognizes 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 carry-forwards.

Considering the Company’s history of cumulative net operating losses and the uncertainty of their future utilization, the Company has established a valuation allowance to fully offset its net deferred tax assets as of September 30, 2017 and December 31, 2016.

The Company’s federal and state tax returns for the years ended December 31, 2014 through December 31, 2016 are currently open to audit under the statutes of limitations. There were no pending audits as of September 30, 2017.

Stock Based Compensation

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 or options to purchase common shares of the Company. 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.

Revenue Recognition

Revenue Recognition - The Company recognizes revenue from product sales 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 and filtered cigar federal excise taxes and other regulatory fees in the approximate amount of $2,436,000 and $5,980,000 are included in net sales for the three and nine months ended September 30, 2017, respectively (approximately $1,810,000 and $5,387,000 for the three and nine months ended September 30, 2016, respectively), except on sales of SPECTRUM research cigarettes, exported cigarettes, exported filtered cigars and in-bond sales of filtered cigars to other federally licensed tobacco products manufacturers, to 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 with research cigarettes. The contract was renewed in 2015 for an additional 5 years. These government research cigarettes are distributed under the Company’s mark SPECTRUM. There were no SPECTRUM research cigarettes delivered during the nine months ended September 30, 2017. Revenue generated from the sale of SPECTRUM research cigarettes amounted to $0 and $329,321 for the nine months ended September 30, 2017 and 2016, respectively. In May 2017, the Company received a purchase order from RTI for approximately 2.4 million SPECTRUM research cigarettes that are expected to be shipped in the fourth quarter of 2017 and generate sales revenue of approximately $325,000. The Company recorded deferred income in the approximate amount of $158,000 during the third quarter of 2017 primarily resulting from a down payment from RTI on the SPECTRUM research cigarette order.  

Derivatives

Derivatives - The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risks. The Company evaluates all 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 Statements of Operations. The methodology for valuing our outstanding warrants classified as derivative instruments utilizes a lattice model, 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 on the balance sheet as current or non-current based on if the net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date.

Research and Development

Research and Development - Research and development costs are expensed as incurred.

Advertising

Advertising - The Company expenses advertising costs as incurred. Advertising expense was approximately $6,000 and $49,000 for the three and nine months ended September 30, 2017, respectively ($24,000 and $259,000 for the three and nine months ended September 30, 2016, respectively).

Loss Per Common Share

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

Commitment and Contingency Accounting - The Company evaluates each commitment and/or contingency in accordance with 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

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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

Fair Value of Financial Instruments - Financial instruments include cash, accounts receivable, accounts payable, accrued expenses, accrued severance, note payable and warrant liability. Other than warrant liability, fair value is assumed to approximate carrying values for these financial instruments, since they are short term in nature, they are receivable or payable on demand, or have stated interest rates that approximate the interest rates available to the Company as of the reporting date. The determination of the fair value of the warrant liability includes unobservable inputs and is therefore categorized as a Level 3 measurement, as further discussed in Note 12.

Equity Investments

Equity Investments - The Company accounts for investments in equity securities of other entities under the equity method of accounting if the Company’s investment in the voting stock is greater than or equal to 20% and less than a majority, and the Company has the ability to have significant influence over the operating and financial policies of the investee. When the Company’s investment in equity securities falls below 20% and the Company does not have the ability to have significant influence over the operating and financial policies of the investee, the Company carries the equity investment at its cost basis.

Accounting Pronouncements

Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The revised effective date for the ASU is for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 and interim periods therein, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations,” to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing,” which clarifies the identifying performance obligations and licensing implementation guidance. The Company is continuing to evaluate the effect this guidance will have on its consolidated financial statements, including potential impacts on the amount and timing of revenue recognition and additional information that may be necessary for the required expanded disclosures. The Company has substantially completed its review of all outstanding contracts and is in the process of applying the five-step model to those contracts to evaluate the quantitative and qualitative impacts the new standard will have on its business and reported revenues.  Within this process, the Company has begun to assess when to recognize revenues related to certain manufacturing contracts to produce customers’ products and the presentation of certain federal excise taxes and other regulatory fees. At this time, the Company is unable to quantify the impact this new guidance will have on its reported revenues.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which supersedes existing lease guidance under GAAP. Under the new guidance, lessees will be required to recognize leases as right of use assets and liabilities for leases with lease terms of more than twelve months. The guidance will apply for both finance and operating leases. The effective date for the ASU is for annual periods beginning after December 15, 2018 and interim periods therein. The Company is currently evaluating the impact of the ASU on its consolidated financial statements.

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Schedule of Inventory, Current

Inventories at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Inventory - tobacco leaf	$	1,890,477	$	1,936,039
Inventory - finished goods
Cigarettes and filtered cigars		528,925		340,523
Inventory - raw materials
Cigarette and filtered cigar components		1,965,385		1,071,747
		4,384,787		3,348,309
Less: inventory reserve		350,623		255,623
	$	4,034,164	$	3,092,686

Schedule of Intangible Assets and Goodwill

Total intangible assets at September 30, 2017 and December 31, 2016 consisted of the following:

	September 30,		December 31,
	2017		2016
Intangible assets, net
Patent and trademark costs	$	6,197,258	$	5,688,440
Less: accumulated amortization		2,378,241		2,021,926
Patent and trademark costs, net		3,819,017		3,666,514
License fees, net (see Note 13)		1,450,000		1,450,000
Less: accumulated amortization		302,085		228,568
License fees, net		1,147,915		1,221,432
MSA signatory costs		2,202,000		2,202,000
License fee for predicate cigarette brand		300,000		300,000
	$	7,468,932	$	7,389,946

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MACHINERY AND EQUIPMENT (Tables)

9 Months Ended

Sep. 30, 2017

Property, Plant and Equipment [Abstract]

MACHINERY AND EQUIPMENT

Machinery and equipment at September 30, 2017 and December 31, 2016 consisted of the following:

		September 30,		December 31,
	Useful Life	2017		2016
Cigarette manufacturing equipment	3 - 10 years	$	4,109,559	$	3,193,580
Office furniture, fixtures and equipment	5 years		105,096		103,945
Laboratory equipment	5 years		32,193		19,076
			4,246,848		3,316,601
Less: accumulated depreciation			1,147,234		881,938
Machinery and equipment, net		$	3,099,614	$	2,434,663

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WARRANTS FOR COMMON STOCK (Tables)

9 Months Ended

Sep. 30, 2017

Warrants For Common Stock [Abstract]

Schedule Of Warrants Outstanding

Outstanding warrants at September 30, 2017 consisted of the following:

	Number of		Exercise
Warrant Description	Warrants		Price		Expiration
December 2011 convertible NP warrants		700,148	$	1.3816	February 6, 2018
November 2012 PPO warrants		116,500	$	0.6000	November 9, 2017
August 2012 convertible NP warrants (1)		94,721	$	0.9310	August 8, 2018
June 2017 warrants pursuant to warrant exercise agreements		11,293,211	$	2.1500	December 20, 2022
Total warrants outstanding (2)		12,204,580

(1) Includes anti-dilution features.

(2) Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

Roll-Forward of Warrant Liability from Intitial Valuation

The following table is a roll-forward summary of the warrant liability:

Fair value at December 31, 2015	$	2,898,296
Reclassification of warrant liability to capital in excess of par		(2,810,000)
Gain as a result of change in fair value		(29,615)
Fair value at December 31, 2016		58,681
Loss as a result of change in fair value		138,813
Fair value at September 30, 2017	$	197,494

Warrant Activity

The following table summarizes the Company’s warrant activity since December 31, 2015:

	Number of
	Warrants
Warrants outstanding at December 31, 2015		16,634,778
Warrants issued in conjunction with registered direct offering		2,500,000
Unexercisable warrants(1)		(2,000,000)
Warrants exercised during January 2016		(67,042)
Warrants expired during January 2016		(6,831,115)
June 2015 registered direct offering warrants cancelled		(3,000,000)
February 2016 registered direct offering warrants cancelled		(2,500,000)
Warrants issued in conjunction with July 2016 registered direct offering		7,043,211
Additional warrants due to anti-dilution provisions		2,089
Warrants expired during September 2016(2)		(2,250,000)
Warrants issued in conjunction with October 2016 registered direct offering		4,250,000
Warrants outstanding at December 31, 2016		13,781,921
Warrants expired during February 2017		(172,730)
Warrants exercised during March 2017		(202,500)
Warrants exercised during April 2017		(162,000)
Warrants exercised during May 2017		(221,366)
Warrants expired during May 2017		(45,834)
Warrants exercised during June 2017		(6,116,903)
Warrants issued pursuant to June 2017 warrant exercise agreements		5,584,659
Warrants exercised during July 2017		(2,000,000)
Warrants exercised during August 2017		(3,949,219)
Warrants issued pursuant to June 2017 warrant exercise agreements		5,708,552
Warrants outstanding at September 30, 2017		12,204,580
Composition of outstanding warrants:
Warrants containing anti-dilution feature		94,721
Warrants without anti-dilution feature		12,109,859
		12,204,580

(1) Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

(2) Tranche 1A and Tranche 1B warrants expired unexercised on September 29, 2016.

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COMMITMENTS AND CONTINGENCIES (Tables)

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies Disclosure [Abstract]

Schedule of Future Minimum Rental Payments for Operating Leases

The future minimum lease payments if the Company exercises each of the additional extensions are approximately as follows:

Year ended December 31, 2017 -	$	41,000
Year ended December 31, 2018 -	$	169,000
Year ended December 31, 2019 -	$	169,000
Year ended December 31, 2020 -	$	169,000
Year ended December 31, 2021 -	$	141,000

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EARNINGS PER COMMON SHARE (Tables)

9 Months Ended

Sep. 30, 2017

Earnings Per Common Share [Abstract]

Computation of Basic and Diluted 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, 2017 and 2016:

	September 30,		September 30,
	2017		2016
Net loss attributed to common shareholders	$	(3,316,634)	$	(2,679,988)
Denominator for basic earnings per share-weighted average shares outstanding		100,673,834		80,386,519
Effect of dilutive securities:
Warrants, restricted stock and options outstanding		-		-
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities		100,673,834		80,386,519
Loss per common share - basic and diluted	$	(0.03)	$	(0.03)

The following table sets forth the computation of basic and diluted earnings per common share for the nine month periods ended September 30, 2017 and 2016:

	September 30,		September 30,
	2017		2016
Net loss attributed to common shareholders	$	(9,293,535)	$	(8,834,794)
Denominator for basic earnings per share-weighted average shares outstanding		94,369,953		76,826,949
Effect of dilutive securities:
Warrants, restricted stock and options outstanding		-		-
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities		94,369,953		76,826,949
Loss per common share - basic and diluted	$	(0.10)	$	(0.11)

Schedule Outstanding Excluded from Computation Because they would have bee Anti-dilutive

Securities outstanding that were excluded from the computation because they would have been anti-dilutive are as follows:

	September 30,		September 30,
	2017		2016
Warrants		12,204,580		9,531,921
Options		6,856,691		5,650,679
		19,061,271		15,182,600

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EQUITY BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Fair Value Assumptions

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 nine months ended September 30, 2017 and 2016:

	2017			2016
Risk-free interest rate (weighted average)		2.12	%		1.31	%
Expected dividend yield		0	%		0	%
Expected stock price volatility		90	%		90	%
Expected life of options (weighted average)		5.14 years			4.87 years

Summary of All Stock Option Activity

A summary of all stock option activity since December 31, 2015 is as follows:

					Weighted
					Average
			Weighted		Remaining		Aggregate
	Number of		Average		Contractual		Intrinsic
	Options		Exercise Price		Term		Value
Outstanding at December 31, 2015		3,161,642	$	1.10
Granted in 2016		2,489,037	$	0.97
Outstanding at December 31, 2016		5,650,679	$	1.04
Granted in 2017		1,392,000	$	1.40
Exercised in 2017		(85,988)	$	0.79
Expired in 2017		(100,000)	$	1.43
Outstanding at September 30, 2017		6,856, 691	$	1.12		7.1 years	$	11,347,700
Exercisable at September 30, 2017		3,617,670	$	1.10		6.1 years	$	6,042,860

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Narrative) (Details) pure in Millions	1 Months Ended	3 Months Ended		9 Months Ended
	May 31, 2017 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)
Condensed Financial Statements, Captions [Line Items]
Amortization of Intangible Assets		$ 145,934	$ 129,807	$ 429,832	$ 380,689
Allowance for Doubtful Accounts Receivable		0		0		$ 10,000
Advertising Expense		6,000	24,000	49,000	259,000
Excise and Sales Taxes		2,436,000	1,810,000	5,980,000	5,387,000
Sale of products, net		4,530,865	$ 3,097,648	10,659,588	8,944,362
Sales Revenue Expects To Be Generated in Fourth Quarter	$ 325,000
RTI International [Member]
Condensed Financial Statements, Captions [Line Items]
Deferred Revenue, Additions		158,000
Patent and Trademarks [Member]
Condensed Financial Statements, Captions [Line Items]
Finite-Lived Intangible Assets, Amortization Expense, after Year Five		396,000		396,000
Licensing Agreements [Member]
Condensed Financial Statements, Captions [Line Items]
Finite-Lived Intangible Assets, Amortization Expense, after Year Five		$ 98,000		$ 98,000
Maximum [Member]
Condensed Financial Statements, Captions [Line Items]
Property, Plant and Equipment, Estimated Useful Lives				10
Minimum [Member]
Condensed Financial Statements, Captions [Line Items]
Property, Plant and Equipment, Estimated Useful Lives				3
SPECTRUM Order [Member]
Condensed Financial Statements, Captions [Line Items]
Purchase Order Received During Period	2.4
Sale of products, net				$ 0	$ 329,321

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Inventory [Line Items]
Inventory - tobacco leaf	$ 1,890,477	$ 1,936,039
Inventory - finished goods
Cigarettes and filtered cigars	528,925	340,523
Inventory - raw materials
Cigarette and filtered cigar components	1,965,385	1,071,747
Inventory - tobacco leaf, net	4,384,787	3,348,309
Less: inventory reserve	350,623	255,623
Inventory, Net	$ 4,034,164	$ 3,092,686

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1) - USD ($)	Sep. 30, 2017	Dec. 31, 2016
Intangible assets, net
Intangible assets, net	$ 7,468,932	$ 7,389,946
Patent and Trademark [Member]
Intangible assets, net
Patent and trademark costs	6,197,258	5,688,440
Less: accumulated amortization	2,378,241	2,021,926
Patent and trademark costs, net	3,819,017	3,666,514
Licensing Agreements [Member]
Intangible assets, net
Patent and trademark costs	1,450,000	1,450,000
Less: accumulated amortization	302,085	228,568
Patent and trademark costs, net	1,147,915	1,221,432
MSA Signatory Costs [Member]
Intangible assets, net
License fee for predicate cigarette brand	2,202,000	2,202,000
License Fees, Net [Member]
Intangible assets, net
License fee for predicate cigarette brand	$ 300,000	$ 300,000

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JUNE 2017 WARRANT EXERCISE AGREEMENTS (Narrative) (Details) - USD ($)		1 Months Ended					3 Months Ended			6 Months Ended	9 Months Ended		12 Months Ended
	Aug. 09, 2017	Jun. 30, 2017	Jun. 19, 2017	Jun. 19, 2017	Jul. 27, 2016	Jan. 25, 2016	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2017	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016	Aug. 31, 2017	Oct. 19, 2016
Class of Warrant or Right, Number of Securities Called by Warrants or Rights															4,250,000
Number Of Warrants Exercised	6,167,646					67,042	240,667	843,110	202,500	5,657,157	5,708,552		67,042
Proceeds from Warrant Exercises			$ 6,169,212								$ 12,380,358	$ 196
Fair Value of Warrants		$ 6,913,031						$ 6,913,031		$ 6,913,031
Class of Warrant or Right,Exercise Price One [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1.00		7,043,211	7,043,211
Class of Warrant or Right, Exercise Price of Warrants or Rights			$ 1.00	$ 1.00	$ 1.00
Number Of Warrants Exercised	3,813,500			3,229,711	7,043,211
Class of Warrant or Right,Exercise Price Two [Member]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1.45		4,250,000	4,250,000
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 1.45	$ 1.45	$ 1.45				$ 1.45		$ 1.45
Number Of Warrants Exercised	1,895,052	4,250,000		2,354,948
New Warrants [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 2.15	$ 2.15	$ 2.15				$ 2.15		$ 2.15				$ 2.15
Number Of Warrants Exercised										5,584,659
Fair Value of Warrants			$ 16,049,031	$ 16,049,031										$ 9,135,223
Warrants Expiration Term											are exercisable six months from the date of issuance of the New Warrants for a period of five (5) years.
Number Of Warrants Issued		5,584,659	11,293,211	5,708,552

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OCTOBER 2016 REGISTERED DIRECT OFFERING (Narrative) (Details) - USD ($)	1 Months Ended		3 Months Ended		6 Months Ended
	Oct. 19, 2016	Jan. 25, 2016	Sep. 30, 2017	Mar. 31, 2017	Mar. 31, 2017	Jun. 30, 2017
Subsidiary, Sale of Stock [Line Items]
Stock Issued During Period, Shares, New Issues		2,618	146,320	100,928	525,118
Fair Value of Warrants						$ 6,913,031
October Offering [Member]
Subsidiary, Sale of Stock [Line Items]
Stock Issued During Period, Shares, New Issues	8,500,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 1.45
Fair Value of Warrants	$ 3,380,000
Shares Issued, Price Per Share	$ 1.3425
Proceeds from Issuance or Sale of Equity	$ 10,707,823
Conversion Of Warrants Terms Of Conversion	The holders of the warrants did not have the right to exercise any portion of the warrants if the holders, together with its respective affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock (including securities convertible into common stock) outstanding immediately after the exercise; provided, however, that the holder could increase or decrease this limitation at any time, although any increase shall not be effective until the 61st day following the notice of increase and the holder could not increase this limitation in excess of 9.99%.
October Offering [Member] | Common Stock [Member]
Subsidiary, Sale of Stock [Line Items]
Stock Issued During Period, Shares, New Issues	4,250,000

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JULY 2016 REGISTERED DIRECT OFFERING (Narrative) (Details) - USD ($)	1 Months Ended		3 Months Ended			6 Months Ended
	Jul. 27, 2016	Jan. 25, 2016	Sep. 30, 2017		Mar. 31, 2017	Mar. 31, 2017	Jun. 30, 2017	Dec. 31, 2016	Oct. 19, 2016	Dec. 31, 2015
Subsidiary, Sale of Stock [Line Items]
Stock Issued During Period, Shares, New Issues		2,618	146,320		100,928	525,118
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									4,250,000
Fair Value of Warrants							$ 6,913,031
Class of Warrant or Right, Outstanding			12,204,580	[1]				13,781,921		16,634,778
July Offering [Member]
Subsidiary, Sale of Stock [Line Items]
Stock Issued During Period, Shares, New Issues	4,682,764
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	7,043,211
Class Of Warrants Or Right ,Terminated	5,500,000
Shares Issued, Price Per Share	$ 0.81
Warrant Expiration Term	5 years 6 months
July Offering [Member] | Minimum [Member]
Subsidiary, Sale of Stock [Line Items]
Class of Warrant or Right Terminated, Exercise Price	$ 1.21
July Offering [Member] | Maximum [Member]
Subsidiary, Sale of Stock [Line Items]
Class of Warrant or Right Terminated, Exercise Price	$ 1.25
July Offering [Member] | Common Stock [Member]
Subsidiary, Sale of Stock [Line Items]
Stock Issued During Period, Shares, New Issues	6,172,840
July Offering [Member] | Warrant [Member]
Subsidiary, Sale of Stock [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 1.00
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,543,210
Fair Value of Warrants	$ 858,000
Class of Warrant or Right, Outstanding	5,500,001
July Offering [Member] | Six Month Warrant [Member]
Subsidiary, Sale of Stock [Line Items]
Fair Value of Warrants	$ 3,058,000

[1] Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

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FEBRUARY 2016 REGISTERED DIRECT OFFERING (Narrative) (Details) - USD ($)		1 Months Ended	3 Months Ended		6 Months Ended	9 Months Ended
	Feb. 05, 2016	Jan. 25, 2016	Sep. 30, 2017	Mar. 31, 2017	Mar. 31, 2017	Sep. 30, 2017	Sep. 30, 2016	Jun. 30, 2017	Oct. 19, 2016
Direct Offering [Line Items]
Stock Issued During Period, Shares, New Issues		2,618	146,320	100,928	525,118
Warrants Expiration Period	66 months					66 months
Fair Value of Warrants								$ 6,913,031
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									4,250,000
Proceeds From Issuance Registered Direct Offering Three						$ 0	$ 5,091,791
February Offering [Member]
Direct Offering [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 1.21
Warrants Expiration Period	66 months					66 months
Shares Issued, Price Per Share	$ 1.10
Fair Value of Warrants	$ 1,940,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	2,500,000
Proceeds From Issuance Registered Direct Offering Three	$ 5,091,791
Common Stock [Member] | February Offering [Member]
Direct Offering [Line Items]
Stock Issued During Period, Shares, New Issues	5,000,000

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JOINT VENTURE, CONSULTING AGREEMENT AND ASSOCIATED WARRANTS (Narrative) (Details) - USD ($)	1 Months Ended	3 Months Ended	9 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Sep. 30, 2017	Sep. 30, 2016	Oct. 19, 2016
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Issuance of Stock and Warrants for Services or Claims	$ 2,810,000		$ 0	$ 30,873
Class of Warrant or Right, Number of Securities Called by Warrants or Rights					4,250,000
Warrant Exercisable Per Share	$ 3.36
Consulting Agreement [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Issuance of Stock and Warrants for Services or Claims		$ 4,070,000
Other Prepaid Expense, Current		$ 1,978,785
Consulting Agreement [Member] | Tranche 1A Warrants [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,250,000
Consulting Agreement [Member] | Tranche 1B Warrants [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,000,000
Consulting Agreement [Member] | Tranche 2 Warrants [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,000,000
Consulting Agreement [Member] | Tranche 3 Warrants [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1,000,000

XML

MANUFACTURING FACILITY (Narrative) (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Manufacturing Facility [Line Items]
General and Administrative Expense, Total	$ 1,635,226	$ 1,230,967	$ 5,060,823	$ 4,799,349
North Carolina Manufacturing Facility [Member]
Manufacturing Facility [Line Items]
General and Administrative Expense, Total	$ 300,824	$ 140,690	$ 635,514	$ 422,626

XML

MACHINERY AND EQUIPMENT (Narrative) (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Property, Plant and Equipment [Line Items]
Depreciation, Total	$ 88,711	$ 81,354	$ 265,296	$ 243,018

XML

MACHINERY AND EQUIPMENT (Details) - USD ($)	9 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 4,246,848	$ 3,316,601
Less: accumulated depreciation	1,147,234	881,938
Machinery and equipment, net	3,099,614	2,434,663
Cigarette manufacturing equipment [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 4,109,559	3,193,580
Cigarette manufacturing equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	10 years
Cigarette manufacturing equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Useful Life	3 years
Office furniture, fixtures and equipment [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 105,096	103,945
Property, Plant and Equipment, Useful Life	5 years
Laboratory equipment [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 32,193	$ 19,076
Property, Plant and Equipment, Useful Life	5 years

XML

INVESTMENT IN ANANDIA (Narrative) (Details) - USD ($)	3 Months Ended			9 Months Ended
	Sep. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Jul. 25, 2017	Feb. 17, 2017	Dec. 31, 2016	Sep. 08, 2016	Sep. 15, 2014
Schedule of Equity Method Investments [Line Items]
Equity Method Investments	$ 1,366,493			$ 1,366,493				$ 1,020,313
Equity Method Investment, Ownership Percentage	19.40%			19.40%		19.00%	20.00%
Equity Method Investment, Realized Gain (Loss) on Disposal	$ 0		$ (29,997)	$ 346,180	$ (172,068)
Income (Loss) from Equity Method Investments	0		14,412	7,526	43,236
Accounting Standards Codification 323 [Member]
Schedule of Equity Method Investments [Line Items]
Equity Method Investment, Realized Gain (Loss) on Disposal	$ 0		29,997	$ 346,180	172,068
Anandia Laboratories, Inc [Member]
Schedule of Equity Method Investments [Line Items]
Equity Method Investments										$ 1,199,000
Equity Method Investment, Ownership Percentage	24.40%			24.40%					25.00%
Equity Method Investment, Realized Gain (Loss) on Disposal	$ 0		$ (15,585)	$ 16,872	$ (128,832)
Anandia Laboratories, Inc [Member] | Other Assets [Member]
Schedule of Equity Method Investments [Line Items]
Equity Method Investments	$ 1,366,493			$ 1,366,493				$ 1,020,313
Anandia Laboratories, Inc [Member] | Accounting Standards Codification 323 [Member]
Schedule of Equity Method Investments [Line Items]
Equity Method Investment, Realized Gain (Loss) on Disposal		$ 336,834

XML

NOTES PAYABLE AND PATENT ACQUISITION (Narrative) (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2014	Dec. 31, 2016	Dec. 22, 2016	Dec. 22, 2015	Dec. 23, 2014
Notes Payable And Patent Acquisition [Line Items]
Other Commitment						$ 1,213,000
Finite Lived Intangible Assets Acquired With Notes Payable		$ 925,730
Notes Payable, Current	$ 326,924		$ 307,938
Patents [Member]
Notes Payable And Patent Acquisition [Line Items]
Other Commitment				$ 333,333	$ 333,333	1,000,000
Other Commitment, Due in Second Year	213,000					213,000
Other Commitment, Due in Third Year						$ 333,333
Finite-lived Intangible Assets Acquired	$ 1,138,730

XML

SEVERANCE LIABILITY (Narrative) (Details) - USD ($)	3 Months Ended
	Dec. 31, 2014	Sep. 30, 2017	Dec. 31, 2016
Severance Liability [Line Items]
Severance Costs	$ 624,320
Severance Term	36 months
Accrued Severance Liabilities Current		$ 38,793	$ 199,657
Employee Severance [Member]
Severance Liability [Line Items]
Monthly Severance Cost	$ 18,750

XML

WARRANTS FOR COMMON STOCK (Narrative) (Details) - USD ($)					1 Months Ended						2 Months Ended	3 Months Ended					6 Months Ended		9 Months Ended			12 Months Ended
	Aug. 09, 2017	May 15, 2017	Feb. 08, 2017	Feb. 05, 2016	Jun. 30, 2017	Jun. 19, 2017	Jun. 19, 2017	Oct. 19, 2016	Jul. 27, 2016	Jan. 25, 2016	Aug. 31, 2017	Sep. 30, 2017		Jun. 30, 2017	Mar. 31, 2017	Sep. 30, 2016	Jun. 30, 2017	Mar. 31, 2017	Sep. 30, 2017		Sep. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Jun. 02, 2015
Class of Warrant or Right [Line Items]
Derivative, Gain (Loss) on Derivative, Net, Total												$ 55,886				$ 46,995			$ 138,813		$ 14,602
Warrants Expiration Period				66 months															66 months
Fair Value of Warrants					$ 6,913,031									$ 6,913,031			$ 6,913,031
Stock Issued During Period, Shares, New Issues										2,618		146,320			100,928			525,118
Class of Warrant or Right, Number of Securities Called by Warrants or Rights								4,250,000
Number Of Warrants Exercised	6,167,646									67,042		240,667		843,110	202,500		5,657,157		5,708,552			67,042
Warrants Expired And Unexercised		45,834	172,730							6,831,115
Class of Warrant or Right, Outstanding												12,204,580	[1]						12,204,580	[1]		13,781,921	16,634,778
Tranche 2 And 3 [Member]
Class of Warrant or Right [Line Items]
Warrants and Rights Outstanding												$ 2,000,000							$ 2,000,000
New Warrants [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights					$ 2.15	$ 2.15	$ 2.15				$ 2.15			$ 2.15			$ 2.15
Fair Value of Warrants						$ 16,049,031	$ 16,049,031				$ 9,135,223
Number Of Warrants Exercised																	5,584,659
Number Of Warrants Issued					5,584,659	11,293,211	5,708,552
Class of Warrant or Right,Exercise Price One [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights						$ 1.00	$ 1.00		$ 1.00
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1.00					7,043,211	7,043,211
Number Of Warrants Exercised	3,813,500						3,229,711		7,043,211
Class of Warrant or Right,Exercise Price Two [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights					$ 1.45	$ 1.45	$ 1.45							$ 1.45			$ 1.45
Class of Warrant or Right, Number of Securities Called by Warrants or Rights	1.45					4,250,000	4,250,000
Number Of Warrants Exercised	1,895,052				4,250,000		2,354,948
Common Stock [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights												12,204,580							12,204,580
February Offering [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 1.21
Warrants Expiration Period				66 months															66 months
Fair Value of Warrants				$ 1,940,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights				2,500,000
February Offering [Member] | Common Stock [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 1.21
Class of Warrant or Right, Number of Securities Called by Warrants or Rights				2,500,000
June Offering [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights																								$ 1.25
Warrants Expiration Period																			66 months
Fair Value of Warrants																								$ 2,067,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights																								3,000,000
June Offering [Member] | Minimum [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right Terminated, Exercise Price									$ 1.21
June Offering [Member] | Maximum [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right Terminated, Exercise Price									$ 1.25
October Offering [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights								$ 1.45
Warrants Expiration Period								66 months
Fair Value of Warrants								$ 3,380,000
Stock Issued During Period, Shares, New Issues								8,500,000
July Offering [Member]
Class of Warrant or Right [Line Items]
Warrants Expiration Period									5 years 6 months
Stock Issued During Period, Shares, New Issues									4,682,764
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									7,043,211
Class Of Warrants Or Right ,Terminated									5,500,000
July Offering [Member] | Minimum [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right Terminated, Exercise Price									$ 1.21
July Offering [Member] | Maximum [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right Terminated, Exercise Price									$ 1.25
July Offering [Member] | Common Stock [Member]
Class of Warrant or Right [Line Items]
Stock Issued During Period, Shares, New Issues									7,043,211
July Offering [Member] | Six Month Warrant [Member]
Class of Warrant or Right [Line Items]
Fair Value of Warrants									$ 3,058,000
October 2016 Offering [Member]
Class of Warrant or Right [Line Items]
Number Of Warrants Exercised					2,354,948						1,895,052
July 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Number Of Warrants Exercised					3,229,711						3,813,500								2,000,000
Warrant [Member] | July Offering [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights									$ 1.00
Fair Value of Warrants									$ 858,000
Class of Warrant or Right, Number of Securities Called by Warrants or Rights									1,543,210
Class of Warrant or Right, Outstanding									5,500,001
Warrants With Provision Of Anti Dilution [Member]
Class of Warrant or Right [Line Items]
Class of Warrant or Right, Number of Securities Called by Warrants or Rights												94,721							94,721

[1] Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

XML

WARRANTS FOR COMMON STOCK (Outstanding Warrants) (Details) - $ / shares		9 Months Ended
		Sep. 30, 2017		Dec. 31, 2016	Dec. 31, 2015
Class of Warrant or Right [Line Items]
Number of warrants		12,204,580	[1]	13,781,921	16,634,778
December 2011 Convertible Notes Payable Warrants One [Member]
Class of Warrant or Right [Line Items]
Number of warrants		700,148
Exercise Price		$ 1.3816
Expiration		Feb. 06, 2018
November 2012 Private Placement Offering Warrants [Member]
Class of Warrant or Right [Line Items]
Number of warrants		116,500
Exercise Price		$ 0.6
Expiration		Nov. 09, 2017
August 2012 Convertible Notes Payable Warrants One [Member]
Class of Warrant or Right [Line Items]
Number of warrants	[2]	94,721
Exercise Price	[2]	$ 0.931
Expiration	[2]	Aug. 08, 2018
June 2017 Warrants Pursuant to Warrant One Exercise Agreements [Member]
Class of Warrant or Right [Line Items]
Number of warrants		11,293,211
Exercise Price		$ 2.1500
Expiration		Dec. 20, 2022

[1] Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

[2] Includes anti-dilution features.

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WARRANTS FOR COMMON STOCK (Roll-Forward of Warrant Liability from Initial Valuation) (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016	Dec. 31, 2015
Class of Warrant or Right [Line Items]
Fair value of warrant liability upon Issuance / conversion	$ 197,494	$ 58,681	$ 2,898,296
Reclassification of warrant liability to capital in excess of par		(2,810,000)
Gain as a result of change in fair value		$ (29,615)
Loss as a result of change in fair value	$ 138,813

XML

WARRANTS FOR COMMON STOCK (Warrant Activity) (Details) - shares			1 Months Ended		2 Months Ended	3 Months Ended				6 Months Ended	9 Months Ended		12 Months Ended
		Aug. 09, 2017	Jun. 30, 2017	Jan. 25, 2016	Aug. 31, 2017	Sep. 30, 2017		Jun. 30, 2017	Mar. 31, 2017	Jun. 30, 2017	Sep. 30, 2017		Dec. 31, 2016
Class of Warrant or Right [Line Items]
Warrant outstanding beginning balance				16,634,778					13,781,921	13,781,921	13,781,921		16,634,778
Warrants issued in conjunction with registered direct offering													2,500,000
Unexercisable warrants	[1]												(2,000,000)
Warrants exercised		(6,167,646)		(67,042)		(240,667)		(843,110)	(202,500)	(5,657,157)	(5,708,552)		(67,042)
Warrants expired													(6,831,115)
Additional warrants due to anti-dilution provisions													2,089
Warrant outstanding ending balance						12,204,580	[2]				12,204,580	[2]	13,781,921
Composition of outstanding warrants:
Warrants containing anti-dilution feature											94,721
Warrants Without Provision Of Anti Dilution											12,109,859
Warrants Outstanding						12,204,580					12,204,580
June 2015 Offering [Member]
Composition of outstanding warrants:
Warrants Cancelled In Registered Direct Offering													(3,000,000)
February 2016 Offering [Member]
Composition of outstanding warrants:
Warrants Cancelled In Registered Direct Offering													(2,500,000)
July 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants issued in conjunction with registered direct offering													7,043,211
Warrants exercised			(3,229,711)		(3,813,500)						(2,000,000)
September 2016 Offering [Member]
Class of Warrant or Right [Line Items]
Number Of Warrants Exercised Two	[3]												(2,250,000)
October 2016 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants issued in conjunction with registered direct offering													4,250,000
Warrants exercised			(2,354,948)		(1,895,052)
February 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants expired											(172,730)
March 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											(202,500)
April 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											(162,000)
May 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											(221,366)
Warrants expired											(45,834)
June 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											(6,116,903)
June 2017 Warrants Pursuant to Warrant Exercise Agreements [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											5,584,659
August 2017 Offering [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											(3,949,219)
June 2017 Offering One [Member]
Class of Warrant or Right [Line Items]
Warrants exercised											5,708,552

[1] Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

[2] Excludes 2,000,000 Tranche 2 and Tranche 3 warrants that will never become exercisable, as discussed in Note 6.

[3] Tranche 1A and Tranche 1B Warrants expired unexercised on September 29, 2016.

XML

COMMITMENTS AND CONTINGENCIES (Narrative) (Details)								1 Months Ended							3 Months Ended		9 Months Ended
	Oct. 04, 2017 USD ($)	Aug. 14, 2017 USD ($)	Mar. 13, 2017 USD ($)	Sep. 01, 2016 USD ($)	Dec. 08, 2015 USD ($)	Nov. 01, 2015 USD ($) ft²	Feb. 10, 2014 USD ($)	Apr. 26, 2017 USD ($)	Apr. 20, 2017 USD ($)	Jan. 31, 2017 USD ($)	Sep. 28, 2015 USD ($)	Sep. 15, 2014 USD ($)	Aug. 27, 2014 USD ($)	Aug. 22, 2014 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Dec. 31, 2017 USD ($)	Feb. 01, 2017 USD ($)	Dec. 31, 2016 USD ($)	May 19, 2016 shares	May 01, 2016 USD ($)	Apr. 26, 2016 shares
Other Commitments [Line Items]
Annual minimum royalty payments															$ 225,000		$ 225,000			$ 1,219			$ 1,471
Milestone payment upon approval of a product																	150,000
Research and Development Expense, Total															784,587	$ 691,970	2,148,725	$ 1,799,289
License Costs										$ 85,681
Amortization of Other Deferred Charges															145,934	129,807	429,832	380,689
Lease Payments															38,438	36,131	115,314	108,393
License Maintenance Fees Due Current													$ 75,000
Operating Leases, Future Minimum Payments Due, Next Twelve Months															41,000		41,000
Operating Leases, Future Minimum Payments, Due in Two Years															169,000		169,000
Operating Leases, Rent Expense, Minimum Rentals						$ 3,750
Land Subject to Ground Leases | ft²						25,000
Minimum Annual Royalties In Year Four															25,000		25,000
Minimum Annual Royalties After Year Four															50,000		50,000
Minimum Annual Royalties In Year Three															25,000		25,000
Litigation Settlement Shares To Be Issued | shares																						2,077,555		2,077,555
Minimum Annual Royalties In Year One															10,000		10,000
Minimum Annual Royalties In Year Two															15,000		15,000
Research and Development Arrangement [Member]
Other Commitments [Line Items]
Long-term Purchase Commitment, Amount			$ 785,100
University of Virginia [Member]
Other Commitments [Line Items]
Research and Development Expense, Total															113,942	74,769	225,516	187,742
Research and Development Arrangement, Investment Amount																					$ 1,000,000
Payment One [Member]
Other Commitments [Line Items]
Research and Development Arrangement, Contract to Perform for Others, Costs Incurred, Gross			$ 65,425								$ 379,800
Payment Two [Member]
Other Commitments [Line Items]
Research and Development Arrangement, Contract to Perform for Others, Costs Incurred, Gross															196,275	84,200	457,975	263,400
Office space in Clarence, New York [Member]
Other Commitments [Line Items]
Lease And Rental Expense																		5,267
Office space in Clarence, New York [Member] | Subsequent Event [Member]
Other Commitments [Line Items]
Operating Leases, Rent Expense, Minimum Rentals	$ 6,375
Lessee, Operating Lease, Term	3 years
Warehouse Space in North Carolina [Member]
Other Commitments [Line Items]
Annual minimum royalty payments				$ 1,200
Minimum Royalty Fee Payments Due In Year Two									$ 42,000
Operating Leases, Future Minimum Payments, Remainder of Fiscal Year									10,500
Lease Expiration Date				Aug. 31, 2017
Lease And Rental Expense		$ 4,665							$ 3,500
Future Minimum Sublease Rentals, Sale Leaseback Transactions, within Two Years																			$ 56,000
Laboratory space in Buffalo [Member]
Other Commitments [Line Items]
Annual minimum royalty payments																				$ 2,690
Operating Leases, Future Minimum Payments Due, Next Twelve Months																							8,000
Operating Leases, Future Minimum Payments, Due in Two Years																							$ 11,000
Operating Leases, Rent Expense, Sublease Rentals								$ 2,770
Lessee, Operating Lease, Renewal Term		12 months
Scenario, Forecast [Member] | Warehouse Space in North Carolina [Member]
Other Commitments [Line Items]
Future Minimum Sublease Rentals, Sale Leaseback Transactions, Remainder of Fiscal Year																			$ 14,000
Licensing Agreements [Member]
Other Commitments [Line Items]
Research and Development Expense, Total							$ 162,408								56,250	115,170	175,890	345,137
Licensing Agreements One [Member]
Other Commitments [Line Items]
License Costs					$ 150,000								$ 125,000
License Maintenance Fees Due Current															15,000		15,000
Minimum Royalty Fee Payments Due In Year Two															30,000		30,000
Minimum Royalty Fee Payments Due Thereafter															50,000		50,000
Capitalized Patent Costs Gross															12,928	4,056	37,170	37,995
Minimum Royalty Fee Payments Due In Year One															20,000		20,000
Patents [Member]
Other Commitments [Line Items]
Capitalized Patent Costs Gross															11,022	62,303	42,730	76,299
Precision License [Member]
Other Commitments [Line Items]
License Costs														$ 1,250,000
Amortization of Other Deferred Charges															24,505	24,505	73,516	73,516
Anandia Sublicense [Member]
Other Commitments [Line Items]
License Costs												$ 10,000
Upfront Fee												$ 75,000
Licensing Agreements Two [Member]
Other Commitments [Line Items]
Capitalized Patent Costs Gross															$ 236	$ 0	$ 30,102	$ 6,075

XML

COMMITMENTS AND CONTINGENCIES (Future Minimum Lease Payments) (Details)	Sep. 30, 2017 USD ($)
Other Commitments [Line Items]
Year ended December 31, 2017 -	$ 41,000
Year ended December 31, 2018 -	169,000
Year ended December 31, 2019 -	169,000
Year ended December 31, 2020 -	169,000
Year ended December 31, 2021 -	$ 141,000

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EARNINGS PER COMMON SHARE (Computation of Basic and Diluted Earnings Per Common Share) (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Net loss attributed to common shareholders	$ (3,316,634)	$ (2,679,988)	$ (9,293,535)	$ (8,834,794)
Denominator for basic earnings per share-weighted average shares outstanding	100,673,834	80,386,519	94,369,953	76,826,949
Effect of dilutive securities:
Warrants, restricted stock and options outstanding	0	0	0	0
Denominator for diluted earnings per common share-weighted average shares adjusted for dilutive securities	100,673,834	80,386,519	94,369,953	76,826,949
Loss per common share - basic and diluted	$ (0.03)	$ (0.03)	$ (0.10)	$ (0.11)

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EARNINGS PER COMMON SHARE (Anti-Dilutive Securities Outstanding Excluded from Computation) (Details) - shares	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities outstanding but excluded from computation of earnings per share	19,061,271	15,182,600
Warrants [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities outstanding but excluded from computation of earnings per share	12,204,580	9,531,921
Options [ Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Securities outstanding but excluded from computation of earnings per share	6,856,691	5,650,679

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EQUITY BASED COMPENSATION (Narrative) (Details) - USD ($)		1 Months Ended	3 Months Ended		9 Months Ended
	Apr. 12, 2014	Apr. 29, 2017	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Equity based employee compensation expense					$ 582,398	$ 677,076
Unrecognized compensation expense related to non-vested restricted shares and stock option			$ 2,165,000		$ 2,165,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value					$ 0.98	$ 0.66
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested in Period, Fair Value					$ 750,265	$ 1,242,110
Common Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period					51,927
Omnibus Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Equity based employee compensation expense			$ 259,415	$ 204,860	$ 582,398	$ 677,076
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			20,000	665,000	1,392,000	2,389,037
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized		5,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant			3,929,765		3,929,765
Omnibus Incentive Plan [Member] | Common Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	10,000,000
Scenario, Forecast [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation expense related to non-vested restricted shares and stock option							$ 140,000	$ 448,000	$ 848,000	$ 262,000
Third Party [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted shares awarded vested immediately				0		15,811
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross				0		100,000
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated Share-based Compensation Expense				$ 0		$ 30,873
Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation expense related to non-vested restricted shares and stock option			$ 467,000		$ 467,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period					85,988
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures, Total					1,392,000	2,489,037

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EQUITY BASED COMPENSATION (Schedule of Fair Value Assumptions) (Details)	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Fair Value Measurements, Recurring and Nonrecurring, Valuation Techniques [Line Items]
Risk-free interest rate (weighted average)	2.12%	1.31%
Expected dividend yield	0.00%	0.00%
Expected stock price volatility	90.00%	90.00%
Expected life of options (weighted average)	5 years 1 month 20 days	4 years 10 months 13 days

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EQUITY BASED COMPENSATION (Summary of All Stock Option Activity) (Details) - Employee Stock Option [Member] - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Number of Options
Options Outstanding, Beginning of Period	5,650,679	3,161,642
Granted	1,392,000	2,489,037
Exercised	(85,988)
Expired	(100,000)
Options Outstanding, End of Period	6,856,691	5,650,679
Exercisable, End of Period	3,617,670
Weighted Average Exercise Price
Options Outstanding, Beginning of Period	$ 1.04	$ 1.1
Granted	1.4	0.97
Exercised	0.79
Expired	1.43
Options Outstanding, End of Period	1.12	$ 1.04
Exercisable, End of Period	$ 1.1
Weighted Average Remaining Contractual Term
Options Outstanding, End of Period	7 years 1 month 6 days
Exercisable, End of Period	6 years 1 month 6 days
Aggregate Intrinsic Value
Options Outstanding, End of Period	$ 11,347,700
Exercisable, End of Period	$ 6,042,860

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SUBSEQUENT EVENTS (Narrative) (Details) - USD ($)		1 Months Ended		3 Months Ended		6 Months Ended
	Oct. 10, 2017	Oct. 31, 2017	Jan. 25, 2016	Sep. 30, 2017	Mar. 31, 2017	Mar. 31, 2017
Subsequent Event [Line Items]
Stock Issued During Period, Shares, New Issues			2,618	146,320	100,928	525,118
Subsequent Event [Member] | Employee Stock Option [Member] | Vice President [Member]
Subsequent Event [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		900,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price		$ 2.12
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Grant Date Fair Value		$ 1,400,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Rights		One-third of this time vesting stock option vests over each of the next three years
Subsequent Event [Member] | Performance Vesting Stock Options [Member] | Vice President [Member]
Subsequent Event [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		300,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price		$ 2.12
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Grant Date Fair Value		$ 480,000
Subsequent Event [Member] | October 2017 Offering [Member]
Subsequent Event [Line Items]
Shares Issued, Price Per Share	$ 2.6250
Stock Issued During Period, Shares, New Issues	20,570,000
Proceeds from Issuance of Common Stock	$ 50,700,000