Title

Presentation

22nd Century Group, Inc. beats earnings expectations. Reported EPS is $-48.96, expectations were $-648.

Operator: Welcome to 22nd Century Group’s Fourth Quarter and Full Year 2024 Conference Call and Webcast. At this time, all participants are — have been placed in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity for covering research analysts to ask questions. [Operator Instructions] Please note this event is being recorded. It is now my pleasure to turn the floor over to Matt Kreps, Investor Relations for 22nd Century Group. Please begin.

Matt Kreps: Hello, and welcome to 22nd Century’s Fourth Quarter and Full Year Results Conference Call. Joining me today are Larry Firestone, CEO; and Dan Otto, CFO. Earlier today, we issued a press release announcing our results for the year ended December 31, 2024. The release and 10-K are available in the Investors section of our website at xxiicentury.com. Today’s call will include prepared remarks from Larry and Dan, updating you on 22nd Century’s business, operations, strategy and financial results through December 31, 2024, and subsequent. Before we begin, a few reminders for today’s call. Some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements.

Additional information regarding these factors can be found in our annual, quarterly and other reports filed with the SEC. During today’s call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted for certain noncash and nonoperating expenses and net debt calculated as total principal amount of debt outstanding less cash and cash equivalents. More details on these measures, please refer to our release issued earlier today. And with that, I’d like to now turn the call over to Larry.

Larry Firestone: Thank you, Matt. Good morning, everyone, and thank you for joining 22nd Century’s fourth quarter and full year 2024 results conference call. When I joined 22nd Century Group a little over 16 months ago as CEO and Chairman, the task at hand was 100% focus on restructuring and turnaround efforts. The company was burning cash, posting significant losses in operating with an unclear and unfunded strategy. Entering fiscal 2024, our near-term operating plans were consumed with the day-to-day and week-to-week liquidity concerns. I’m happy to say that the situation has evolved into so much more over the course of 2024, and we’re now focused on 2025 and beyond. The executive team and employees at our company were tasked with the most difficult of restructurings to be completed as an undercapitalized cash-burning and loss-generating public company.

However, we’ve embarked on an incredible transformative journey involving much more than just the financials. We’re progressing now with a new strategy and restoring the mission that was crafted over 25 years ago. We believe it’s time for the tobacco user to decide for themselves how much nicotine they choose to consume. And through our flagship VLN product, we can give adult smokers an authentic and familiar alternative to smoking that helps them take control. I would now like to take the time to reflect on the major milestones and accomplishments of the company over this time period before providing further overview of the strategic direction we are executing today. First, in late 2023, we repositioned our focus to a pure-play tobacco company.

To do this, we divested the GVB hemp/cannabis business, shut down all R&D projects related to hemp/cannabis and hops, which greatly reduced the operating cash burn. Second, we restructured the Board of Directors and Board compensation. We also terminated all executive management team contracts and restructured personnel, eliminated cash bonuses and stock-based compensation awards. We also turned over every function in department expenditure, ensuring we achieve the appropriate operating model and overhead for the reduced size and scale of the company. This dramatically reduced our R&D and G&A expenses. Next, we worked over the balance sheet, repaying or settling approximately $18 million in total liabilities, including $5.2 million in subordinated debt, $4.1 million in convertible senior secured debt, various tobacco creditors and other payables retained from the GVB divestiture and shut down the hemp/cannabis operations.

Then we turned our attention to VLN. The first and only FDA authorized modified risk tobacco product, which needed redesigned packaging, plus new marketing and selling activity to support the relaunch and store activation. We also began expanding the number of state regulatory approvals so that VLN could be authorized for sale in all 50 states in the US. In addition, our R&D strategy now includes a technology road map to expand the reach of VLN to other tobacco products and revived efforts to grow the best varieties in quality of our proprietary low nicotine tobacco leaf. Finally, the base of our operations has been our CMO customers with the productions of cigarettes and filtered cigars. During 2024, we signed and began shipping additional CMO brands for export, offloaded certain filtered cigar contracts that were losing money, some of which we subsequently have resigned contracts with under new pricing terms in 2025.

We’ve secured a long-term commitment from one of our key accounts, Smoker Friendly, and we’re working on others as we speak. Our team has had amazing focus and drive as they work incredibly hard through this effort and the results have been permanent changes in our business architecture. To put 2024 in perspective, this is the equivalent of taking apart and rebuilding your car while you’re driving it on the Autobahn. Turnarounds are extremely difficult and take time and cash. While we were losing money and paying down our liabilities outside investment support was and is still necessary to fund the lack of free cash flow from operations. During 2024, we raised almost $17 million in financings, which were primarily equity cash infusions and debt conversions to support the company.

Fortunately, we’ve been supported by investors and debt holders that believe in the long-term growth potential of our company and have funded our efforts in realigning the business, giving 22nd Century a chance to become profitable and cash positive and for us to get our paradigm shifting VLN product into the market. The fourth quarter numbers are improved in many ways, but also show the time necessary to complete the turnaround and begin top line and profitable growth in our business. This is why as we roll out our rebranded VLN, our focus is on driving rate of sale and carton volume. The second half of 2024 was a transition process as we fulfilled last time buy orders on legacy filtered cigar contracts that were priced below cost. These contracts and orders were losing money at the gross profit line, which means they do not pay for any operating expenses or overhead.

We worked with our customers and ended those agreements, and in most cases, replaced them with properly priced agreements with the same customers, but that cross over time creates a dip in sales, which produced the revenue troughs you saw in our filtered cigar and cigarette businesses. The lag time from contract signing to shipment on revenues is anywhere between three and six months. During 2024, we also remained focused on maintaining our NASDAQ listing, regaining compliance with the minimum bid rules and the minimum shareholder equity. As a result, in addition to capital raises and debt paydowns, it’s been necessary to affect two reverse splits in 2024. And so far, that has accomplished our goal to maintain our listing. Before we talk about 2025, I acknowledge that during the turnaround process, we’ve seen an unstable share price and market capitalization that is not reflective of the value of this company.

It is my bias that it is imperative that our management team remains committed to executing on our strategy and operations. This will drive our company to sustainable growth and cash positive operations with a future that has very strong potential. Then I believe, based on my experience, investors and Wall Street will see this company as they once did, and the incredible investment opportunity it provides. However, at this time, we are still working through cash burn, operating losses and debt service in the final stages of our turnaround. I encourage all long-term investors to read the latest annual report on Form 10-K outlining more detail on our strategy and business model, but also the inherent risk factors and challenges we are facing.

Although we still have to finish our turnaround, 2025 is essentially the launch of the new 22nd Century. Now that we have put new foundational blocks in place, let me characterize the opportunity that we have going forward. Our core contract manufacturing business has been the lion’s share of our revenues over the past few years, which is a high-volume, low-margin business. In this business, we provide a turnkey manufacturing service, including, in some cases, regulatory services and supply chain management. Our customers are then responsible for their brand, brand development, sales, marketing, product placement and rate of sale. In our core business, we service both domestic and international customers. Our domestic customers run to a just-in-time structure where we’ve replenished the mainstream distribution with initial load orders, if it’s a new product and replacement orders if the products are already in the market.

So domestic business is very much dependent on consumer behavior and what we call, rate of sale. For the international customer shipments and some of the filtered cigar customers, we manufacture and ship on a per container basis. The order flow on this side of the business is much different than the replenishment orders. The runs are longer and we ship in bulk. One of the hidden gems in our CMO business is Smoker Friendly’s latest product launch called Smoker Friendly Black. This is a tobacco and water-only, additive-free, all-natural premium American blend cigarette that is designed to directly compete with the natural cigarette category, which is the hottest segment in the full nicotine cigarette market right now. This appears to be a great growth engine for us as the manufacturer and Smoker Friendly, starting in 2025.

Our branded business has not been part of our revenues over the past couple of years and we consider our branded business as our growth business. Our VLN products and strategy are the core of our growth business. To frame the market that we play in, big tobacco contractually owns approximately 85% of the $85 billion US cigarette business. That leaves 15% or an approximately $12.5 billion market for all the other brands to fit into. New brands such as VLN products in the market are not looked at favorably as all brands are battling for the same space on the shelf at the various retailers. As we are poised at the beginning of 2025 to relaunch VLN and bring our newly branded VLN into the market, our strategy is different than what we implemented when VLN was first launched in 2022.

Not only will we bring our 22nd Century VLN brand into the market with three SKUs, gold, red and green or menthol, we are introducing what I have referred to in the last year as flanker VLN but what we are now calling partner VLN. And these are private label VLN brands that will enter the market under other brands and widen the presence of VLN in the market. This is where our CMO customers can adopt a VLN SKU within their lineup and add a higher margin product to their product line. This is similar to the Intel Inside approach for computers and instead a tobacco product with VLN inside. So, as we announced, you will begin to see Smoker Friendly VLN in the marketplace. However, I will point out, this will be a slow, gradual walk-up as we want to establish not only the VLN brand, but the product, improve the rate of sale with our marketing and consumer engagement techniques to make sure that we succeed where we failed in the first launch, and that is rate of sale at the cash register.

We are in the process of getting our newly granted VLN and partner VLN SKUs approved for sale in the various regulatory agencies in all 50 states. This initiative should be complete by the end of July 2025. We have important markets that we could serve. For example, Massachusetts, where some doctors have reached out to communicate the state restrictions that are in force and are preventing patients who smoke from undergoing critical surgery until they have documented proof that they have stopped smoking for a minimum of six weeks and the doctors have communicated these laws and sent their documentation to me believe that VLN is an asset to that endeavor. Beyond Smoker Friendly, we believe that you will see other brands adopting VLN set of SKUs in their lineup.

As we roll these brands into the market, along with our own VLN, we are still competing for the valuable shelf space that is represented by the 15% of the US cigarette market. Rate of sale is everything in corporate retail because every slot in every store has to perform and make money. Once a brand is in, you’re on the clock. And it’s your job to make sure it sells and that we achieve customer awareness with both partner VLNs as well as our own. This is why the walk-up is going to be slower than one would think. We have to be focused and not outkick our coverage, to use a football analogy. Once we prove our VLN domestically, we will look beyond the US. We have already been contacted by a few companies that have international reach to potentially extend the positioning of VLN beyond the US borders.

In addition to the VLN combustible products, we’ve also kicked off several R&D programs to develop new next-generation products that fit the VLN brand or fit VLN within the brand. These products will define a piece of our future and broaden the reach of VLN to widen the opportunity and give tobacco users a choice to control their nicotine consumption. As we gain traction in the market, we are driving for a VLNC category, which will be a very low nicotine content category and this would allow us to carve our VLN products out of the mainstream cigarettes, vapes, heat not burn and other tobacco products and instead standalone in retail has its own category numbers, just like decaf coffee, non-alcohol spirits, nonalcoholic beer. This, however, will take time, and I’m sure will be met with resistance from big tobacco.

Along with the redress of VLN, we will begin launching a new 22nd Century webpage and a refreshed try VLN webpage, so that the consumers will be able to find VLN in a retail location in their market. We are also getting ready to reactivate our social media platform within the guidelines and restrictions of tobacco advertising so that consumers can share their experiences with our VLN products. Dan will discuss our numbers historically, but as we build the base of VLN distribution and traction through the rate of sale, VLN is our most profitable product in our lineup and will be a major component to the completion of the turnaround. In January of this year, the FDA released a new proposed rule titled Tobacco Product Standard for Nicotine Yield of Cigarettes and Certain Other Combusted Tobacco Products, which gave us a little bit of a tailwind behind the relaunch of VLN.

The new proposed standard would set a maximum nicotine content level of 0.7 milligrams of nicotine per gram of tobacco in cigarettes. With VLN being the only cigarette in the market that would meet this standard today. The comment period is currently scheduled to be completed by mid-September 2025, and if enacted, we’ll have a two-year implementation period for which all combustible tobacco products must comply. We know there will be a resistance and a lot of money thrown at delaying this order by big tobacco. So, we will not rely on this implementation as a pillar to our success. However, if this were to succeed and is implemented, I will point out that we currently have the only FDA-approved combustible tobacco product on the market that meets the standard that’s set forth by the FDA.

Both sides of our business, the core business and the growth business are poised for success in 2025 and beyond. As I explained, this is a very surgical execution that will define the success of our CMO business, our branded business and the new products that we’ll be bringing into the market in the future. Our team is laser-focused on that execution. And although our goals for distribution and penetration are aggressive, our implementation will be targeted and strategic as we understand the rate of sale is the key to the puzzle. And with that, I’ll turn it over to Dan to discuss the numbers.

Dan Otto: Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today. Over the course of 2024, I’ve spoken about the importance of implementing fiscal responsibility and our restructuring efforts. These can be categorized in three main pillars that we’ve made substantial progress against. First, we’re working to achieve profitability in the P&L for the first time in this company’s history in 2025. We’re poised for revenue growth and margin improvement with our CMO customer contracts in 2025 and we’ll be rapidly expanding VLN points of distribution during the year. This sits on top of the lean operating cost and overhead structure implemented throughout 2024. Second, restoration of normal balance sheet ratios and KPIs through elimination of debt obligations and improvements in working capital.

And third, prioritize and secure cash run rate to complete these initiatives and improve the overall capital structure. As I walk through additional financial details on our fourth quarter and full year results, I’ll also highlight progress in these three areas. As a reminder, all financial results in our earnings release are presented on a continuing operations basis which excludes our former hemp/cannabis segment. Net revenue was $4 million in the fourth quarter of 2024, decreased sequentially from $5.9 million in the third quarter 2024 and gross margin was a loss of $1.2 million compared to $588,000 in the same period. The sequential revenue and margin decline is reflective of lower volume with cartons sold being 338,000 compared to 439,000.

The volume change is reflective of the initiatives Larry and I have been discussing regarding repricing our CMO contracts, primarily with our filtered cigar customers and is a temporary decline. First quarter 2025 volume will begin to grow again and expand more rapidly in the second quarter of 2025 as certain of these filtered cigars customers are returning. The increase in volume and return of the CMO business will help stabilize revenue and provide appropriate economics for margin and cash flow. Further, as Larry has discussed, we are launching new marketing and awareness campaigns to drive VLN sales. The rebranded VLN is expected to begin shipping in the second quarter of 2025. This will be expanded as we launch our partner brand VLN products using recognized CMO brands to build the category going forward.

Together, restoration of the filtered cigar volume, growth in sales under certain cigarette CMO customers and the expanded launch of VLN will lead us to achieving our P&L goals. Total operating expenses for the fourth quarter were $2.8 million, flat from the third quarter of 2024. We have substantially decreased the G&A overhead of our business and we’re beginning to make select investments in additional sales and marketing activities around the relaunch of our VLN products. Net loss, EPS and adjusted EBITDA in the fourth quarter 2024 felt similar P&L trends as compared to prior periods. The balance sheet has improved substantially year-over-year with an overall decline in total liabilities of over $18 million or nearly 50%, ending the year at $17.7 million.

The company has improved net working capital to positive $1.6 million from a deficit of $8.8 million in the prior year. Also, notably in the first quarter of 2025, we’ve now further reduced our outstanding debt under the convertible senior secured credit facility by $3.1 million, bringing the remaining principal balance down to $4.6 million and reducing monthly cash principal amortization payments. Cash interest paid during 2024 was reduced to $722,000 compared to $1.3 million in the prior year and which will be even further reduced now in 2025. Last, our overall cash burn has declined meaningfully in the past year. We remain focused on minimizing cash used by the business while executing the turnaround and emerging into a rapidly growing business.

And finally, the company remains active in our lawsuit against Dorchester Insurance Company based on their failure to pay any amounts toward our claim of $9 million in actual damages for business interruption insurance. Significant discovery has taken place and the court set a trial date for November 2025. Now with that, we will open it up for questions from our analysts.

Operator: [Operator Instructions] The first question today comes from Andrew White with Emerging Growth Research. Please go ahead.

Andrew White: Good morning. Thank you for that. Following up on what you were talking about, do you see in the first quarter of 2025 a stabilization of CMO contract terminations? In other words, is this a 2024 story and not a 2025 story? And that question goes towards the second question as well, which is, are you still expecting EBITDA to break even in the fourth quarter of 2025? Thank you very much.

Larry Firestone: Dan, I’ll take that one. Good morning, Andrew. Thanks for joining. Yes, the — I would say the reshuffling of the CMO contracts has gone full term, and that really was a 2024 story. So now we have for our CMO customers that were going through that transition, it’s now moving into production under the new contract, if you will. And those economics are more in our favor. And so as far as breakeven in Q4, yeah, that’s still our outlook as we sit today.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Larry Firestone for any closing remarks.

Larry Firestone: Thank you. We’ve come a long way in 2024 and are shifting to growth in 2025. Our strategy is in place, our team is excited, and we have started to execute our strategy. The posture in the company is predominantly offensive versus defensive as we book new contracts and lay the foundation for the future. Our balance sheet is stronger. Our operating costs have been cut and are more closely aligned with our sales. Our CMO business is producing positive gross margins and is growing and we are beginning to build our branded business with our VLN reduced nicotine content products to drive profitable growth opportunities ahead. In short, while our turnaround is still not complete, we will keep working it and 22nd Century is on track to becoming a self-sustaining and profitable company for the first time in the company’s history.

We will be participating in investor conferences throughout the year and look forward to updating you again, as new developments occur, including the progress on our new branding, new webpage, new contracts, new distribution, shipments and other developments. I would like to thank our team for their energy and sticktoitiveness, this has not been an easy road and our team’s tenacity to drive forward has been awesome. If you have any questions or would like to arrange a follow-up, please contact Matt Kreps, Investor Relations for the company using his contact information provided on the press release, or to myself directly as many of you have. Have a great rest of your day, and thank you for joining our call.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.