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Presentation

22nd Century Group, Inc. misses on earnings expectations. Reported EPS is $-1.89 EPS, expectations were $-1.1.

Operator: Welcome to 22nd Century Group’s First Quarter 2025 Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode. 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 First Quarter 2025 Results Conference Call. Joining me today are Larry Firestone, CEO; and Dan Auto, CFO. Earlier today, we issued a press release announcing the results for the quarter ended March 31, 2025. The release and 10-Q 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 March 31, 2025 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. Also, during today’s call, we may 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 less — outstanding less cash and cash equivalents. For more details on these measures, please refer to our release issued earlier today. And with that, I’ll now turn the call over to Larry.

Larry Firestone: Thank you, Matt. Good morning, everyone, and thank you for joining 22nd Century’s First Quarter 2025 Results Conference Call. On our 2024 year-end financial results call in March, I addressed our journey over the first 16 months of my tenure as CEO, which was defined as a turnaround. We’re now putting 2024 in the past and are solely focused on our future. We have completely reconfigured our business and laid the tracks to drive into what we believe will be a very profitable future. Dan will talk about the numbers and the wins we had in the first quarter of 2025, and I would like to begin my remarks. First, by talking a little bit about the turbulent tobacco market that we serve, and then I will describe our road map to success as we continue the transition of 22nd Century into a growth company.

The $85 billion combustible cigarette market is showing increasing friction around price, products, nicotine delivery systems, FDA regulatory environment and more. Right now, we see an incredible focus on nicotine that we’ve never seen before, even as big tobacco remains under the pressure to reduce the harms of smoking. Big tobacco’s answer to smoking arm is to keep their consumers booked on nicotine by transitioning what have been their mainstream products to non-combustible products such as nicotine pouches, which come in all levels of nicotine, with some brands bragging about having the highest nicotine to the wave of heat not burn to avoid the carcinogens, vaping, moist snuff, which has been in the market for a long time. They, being big tobacco flat out, disregard the harms of nicotine and drive to deliver nicotine in new ways.

Nicotine addiction is their secret weapon to keep consumers addicted to their products. In fact, high nicotine and access to high nicotine is in their marketing materials and core to some of their brands and products. In addition, we have the same big tobacco companies raising their combustible cigarette prices as often as quarterly, which has the era of arrogance and lack of care for their consumer and their consumers’ wallet. It seems to be almost a contest to see how far they can dig into their consumers’ pocket book before the consumer’s attitude changes and therefore, big tobacco’s attitude changes. The cost of a pack of Tier 1 branded cigarettes is competing in the consumer’s wallet for consumer staple items such as gasoline and groceries and especially as prices for consumer goods are increasing steadily.

It’s as if they know that their customer is addicted, thanks to nicotine, and they can charge whatever they want for their cigarettes. And they’re testing that theory quarterly with their price increases. We look at the market differently, with changing dynamics in Tier 1 as an opportunity for 22nd Century. 22nd Century serves and will serve two main segments of the market, reduced nicotine premium products and value-focused CMO brands. our main domestic brands are Smoker Friendly, Pinnacle and VLN. Our smoker-friendly and Pinnacle CMO brands, our value brands that serve the Tier 4 market, which is roughly two thirds of the price of a Tier 1 brand to the consumer; this is a price point that is much friendlier to the consumer’s wallet for those who want to continue to smoke a standard combustible cigarette.

So, this is predominantly a value price play. Then with the relaunch of our VLN-branded products into the market, we will serve consumers who wish to take control of their nicotine consumption. There are plenty of consumers who wish to control their nicotine to either transition from a need to smoke every day or multiple times a day, and they can choose when to smoke or not need to smoke at all. This, we will prove out as we make our VLN-branded products available across the U.S. and gain distribution and rate of sale. This is predominantly a health and wellness play. We believe there’s a large consumer population for both Tier 4 value brands and the consumers who want to control their smoking habit with low-nicotine cigarettes. This will fuel our customers’ growth and 22nd Century’s growth as well.

Our growth will also come from wider distribution as a result of expanded domestic state approvals. But once approved within the state, we will be looking to add points of distribution and launching targeted marketing campaigns that will drive rate of sale. So as the smoker-friendly, Pinnacle and VLN footprint grows throughout the U.S., our revenues will grow as will our profitability. In the past, these brands have had limited approvals in the U.S., and we are opening up the opportunity to serve all 50 states across all brands. In addition to the widening footprint of our brands nationwide, we’re developing with Smoker Friendly and Pinnacle, new products, which will widen the SKU count in the stores where we are the manufacturer. The latest product introductions include, for Smoker Friendly, which has over 350 stores and another 450 authorized dealers, is introducing Smoker Friendly Black Label for the natural cigarette market, containing only tobacco and water that is designed to compete directly with major names on quality and profile — flavor profile at a much more affordable price.

For example, Natural American Spirit is one of the top-selling brands in the market. I think it’s number seven. And one of the most expensive, quite possibly number one as the most expensive. Smoker Friendly in conjunction with 22nd Century has launched this new natural-style cigarette in the U.S. And once we obtain additional state approvals, Smoker Friendly Black Label will be available to be offered in every state at a price point that is much more affordable compared to Natural American Spirit. This is an exciting growth opportunity for both Smoker Friendly and 22nd Century. Smoker Friendly VLN, which is a private label presentation of our VLN. This is a new set of SKUs for our Smoker Friendly relationship, and we will be available not only chain-wide but potentially in every state as we receive state approvals and distribution.

The importance of the adoption of VLN to these brands is not only the well-established distribution channels that they already possess, but also the brand equity that they carry. We believe we can build the VLN product franchise within our CMO customers brands nicely and then move the 22nd Century-branded VLN alongside as awareness expands. Our Pinnacle-branded products are sold in a top five C-store chain in the U.S. with over 1,700 outlets, where the retailer is looking to expand the Pinnacle SKU lineup as well. This will come together in the second half of 2025 and will add additional revenue opportunities for both the retailer and 22nd Century. The year-over-year growth in the Smoker Friendly and Pinnacle branded products that we produce, continue to drive not only retail growth, but 22nd Century growth profitably as well.

We believe we’re in a great position to build our company on the market opportunities in the Tier 4 and the nicotine control consumer, who would be a candidate for our VLN products. The sequence of this rollout is key to understand, as none of this is an instant success. First, there’s product development and brand alignment, then state registration, followed by state approval. Then once the states approved, the SKUs ability for sale, that’s when we begin the sales cycle to the various retailers in the various states. And upon successful adoption from retail, we will add distribution. Finally, once approved by the retailers, then shipments to the distributors who will then ship to the stores. Then we will work on rate of sale as the distributors will replenish the supply to the retailer after the first loading.

This is a very serial process and will roll out and gain momentum over time like starting a locomotive. We start slow and pick up steam as we go. This will be an extended growth process that will add to the normal year-over-year growth in the same-store sales of the existing distribution. Eventually, we’d like to create a VLN category in retail. That would separate all of our VLN-branded SKUs from the standard cigarette category. This will take time and rate of sale numbers to create, but we believe this is possible. Our growth comes from growth in same-store sales plus new distribution. Then as we add new products, we follow the same cycle. We believe that current market dynamics, which include price pressure on consumers from big tobacco, have and will continue to create an opportunity for our high-quality branded products in the overall Tier 4 and above markets.

The balance of our CMO business is high-volume, low-margin, low-mix business for domestic supply of filtered cigars and container orders for export cigarettes. This steady volume of business consumes our machine capacity and allows us to manage our above-the-line costs while contributing to our gross profit. Now turning my attention to other areas that our management team continues to progress with. We will be launching a new 22nd Century website in the coming weeks and a refreshed Tri-VLN resource so that once we have established distribution, consumers will be able to find VLN products in retail locations 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 branded and VLN products.

On the regulatory front, the low-nicotine FDA proposed rule is midway to the completion of the comment period, which ends in September. When the comment period concludes, we can determine the FDA’s direction on what could be the most meaningful and impactful tobacco harm reduction policy in a generation. But I also want to be very clear, we are not waiting for the FDA to finalize their rule, and we are not dependent on the FDA’s rule. We have developed an important technology in our low-nicotine tobacco and VLN products that the FDA has already approved, and a certain contingent of customers will want today that give smokers a choice with their nicotine consumption. It’s important to note that we have the only FDA-approved combustible cigarette that meets the new policy standard.

Pulling all the pieces together, we have rebuilt the foundation of our company to what we believe is a more substantial business model. This model features a suite of our branded products, which include Smoker Friendly, Pinnacle and 22nd Century VLN, which now represents a wide menu of SKUs. Further, we service our standard high-volume, low-mix CMO customers for domestic filtered cigars and export cigarettes. Approaching the market with our current suite of products is a much different proposition than what we had with just the original VLN product set when I joined the company. The railroad tracks are laid, now we have to drive as fast as the states will let us and the markets will allow us to. And now I’ll turn the call over to Dan to discuss the numbers.

Dan Otto: Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today. This has really been an exciting quarter for 22nd Century as the foundational pieces of our strategy continue to be laid and we execute growth initiatives, we are set up for success in improving financial results for the remainder of 2025. Larry and I have spoken consistently about the importance of restoring fiscal responsibility as a result of our restructuring efforts. And in our 2024 year-end results call, we expanded on those details. We’ve continued to make substantial progress. And although we aren’t claiming victory yet, we’ve come a long way. As a recap in setting the stage for today’s comments, I’ll cover three main pillars of our financial targets as we emerge from our restructuring and turnaround.

First, achieving profitability in the P&L. For the first time in this company’s history in late 2025, we are ready to deliver revenue growth and margin improvement with our CMO customer contracts in 2025. And we’ll begin rapidly expanding VLN points of distribution during the year. This sits on top of the much-improved operating cost and overhead structure implemented throughout 2024. Second, the restoration of normal balance sheet ratios and KPIs will occur through continued elimination of debt obligations and improvements in working capital; and third, prioritizing and securing cash run rate to complete these initiatives as we will then turn our attention to improvement of the overall capitalization table. First quarter 2025 results begin to showcase of the hard work and planning is coming together to help us deliver on these priorities.

Starting from the top, net revenue was $6 million in the first quarter of 2025, increased 50% sequentially from $4 million in the fourth quarter 2024. Gross margin was a loss of $0.6 million, also an improvement of 50% from the prior quarter. These results reflect slowly rebuilding volume and normal manufacturing capacity with our CMO customers. Total cartons sold were 476,000, increased 41% versus $338,000 in the fourth quarter. The volume change is reflective of the initiatives Larry and I have discussed regarding repricing our CMO customer contracts, which initially had created a temporary decline in the later half of 2024 as customers worked off last time buys, inventory, but is now beginning to reverse back to more normalized volumes. We expect volume will be similar to growing again in the second quarter of 2025 with more meaningful gains in the second half of the year.

As a function of the following three points, we also see an inflection point occurring later in 2025, whereby the gross profit deficits currently incurred will quickly be erased. First, we’ll continue to see the benefits of the revised pricing structures in the new customer contracts. Second, we’ll see volume ramping up and expanded shipments under those same agreements. And third, we’ll begin to see meaningful sales of our higher-margin branded cigarettes, including both natural style cigarettes and our FDA authorized very-low nicotine content cigarettes. Sharing positive gross margin in the early stages of the second half of 2025 from these initiatives is integral to us reaching our breakeven profitability goal. Total operating expenses for the first quarter were $2 million compared to $2.8 million in the fourth quarter of 2024.

This level of operating expense overhead is the lowest quarterly amount we’ve incurred since our turnaround began in late 2023. First quarter 2025 net loss from continuing operations improved to $3.3 million from $4.2 million in the preceding quarter. EPS improved to a loss of $1.89 a share compared to $10.59 a share and adjusted EBITDA significantly improved to a loss of $2.3 million from $3.9 million in the fourth quarter of 2024. As Larry mentioned, we’re exiting the turnaround phase now and moving into growth where our story focuses purely on execution against achieving our P&L goals. With respect to continued balance sheet improvement, we further reduced our outstanding debt under this convertible senior secured credit facility, bringing the remaining principal balance down to $3.9 million with debt for equity conversions of $3.1 million that occurred during the quarter and a contractual cash payment subsequent to quarter end of an additional $1 million.

Cash used in operations in the first quarter of 2025 was $2.9 million, and we remain focused on minimizing cash used by the business while also executing a rapid growth strategy. In late April 2025, subsequent to quarter end, we executed a capital raise through inducement of existing warrants to raise gross proceeds of approximately $5.4 million, with an additional option for a further exercise to raise $3.3 million. This provides us with the cash runway to execute on our strategy for the remainder of 2025. Finally, the company remains active in our lawsuit against Dorchester Insurance Company based on their failure to pay any amount toward our claim of $9 million in actual damages for business interruption insurance. Significant discovery is taking place in the Carteret trial date for November 2025.

That concludes our prepared remarks. I’ll now open it up for any questions from our analysts.

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

Andrew White: Good morning. Thank you for taking my questions. First, I want to say, these are great results, guys. You’re doing a good job. I do have a couple of questions. First and foremost, do you still foresee a breakeven of EBITDA for the fourth quarter of this year?

Dan Otto: Hi Andy, good morning. This is Dan. Yes, we’re still on track in the later half of the year to get to breakeven.

Andrew White: Okay. Great. So you’re seeing that CMO will continue to grow from this first quarter level and the VLN will hopefully kick in over the course of the year?

Dan Otto: Yes. that’s what we’re currently looking at. So, we have — as I said in the prepared remarks, Andy, we’ve got the smoker-friendly franchise on a pretty nice growth path. We’ve got the Pinnacle franchise on a nice growth path, and they’re going to add — they’re actually going to add some products, some SKUs to the lineup. And then as we get our state approvals for both of them and then state approvals for VLN and our partner VLN, we’ll start to see some distribution in there. So that side of the house is beginning to percolate pretty nicely.

Andrew White: Good to hear. Secondarily, looking at the balance sheet, you have a very large increase in the first quarter of accounts receivable. And that impacts your net working capital, which is notable that you’re almost breakeven on net working capital, despite the fact that your debt facility is now listed as a current liability. That’s pretty impressive. But I did want to ask, does this portend a need for additional financial capital, whether by debt or by share issuance?

Dan Otto: Yes indeed. And after the most recent financing we just completed here, we’re comfortable with the cash runway we have, getting into that latter half of the year where we plan to get to breakeven. As far as the receivable balance increasing, a large portion of that is a sizable contract asset, which is a result of some of the new customer agreements we’ve signed in the CMO business during the quarter.

Andrew White: Over what time period do you expect to collect the accounts receivable balance?

Dan Otto: It’s the same terms as the typical shipments. So generally, we collect when products delivered.

Andrew White: Okay. Do I have time to ask a couple of more questions?

Dan Otto: Yes.

Andrew White: Okay. Great. On the warrants, the overhang, what has been the share issuance dilution from that? And what can we still expect over the course of the year via exercise or inducement?

Dan Otto: Andy, current shares outstanding as of the filing date of the document, $11.3 million. That includes the almost seven million shares we issued under the warrant inducement offering we completed a couple of weeks ago. Between the end of the quarter and now, we had another 1.7 million warrants that were exercised. As far as going forward, really, I’d say our priorities still remain focused on P&L profitability, balance sheet strength. And as a function of those two coming into focus, we can continue to address the capitalization table of the warrants. But the first two priorities really are a focus areas.

Andrew White: Okay. Okay. So is it a fair comment to say that we’re about halfway through the exercise inducement process for the warrants?

Dan Otto: Yes. We — as part of the inducement offering we completed. We have another tranche that still has a period that can be exercised. That would be up to an additional $3.3 million of proceeds to the company and another four million or so approximately shares warrants that will be induced, that runs for a couple of months yet.

Andrew White: Okay. And last but not least, there have been some pretty good earnings results out from some competitors within the tobacco industry, Altria, Philip Morris in a starting point. Wondering, are there any implications for 22nd Century growth?

Dan Otto: From their earnings reports?

Andrew White: The trends that are driving them, yes?

Dan Otto: Yes. I would say I spoke to some of the trends in my prepared remarks. I think the upside for us or the place that we play would be really the advancement in the value play for us, which is a smoker-friendly and Pinnacle brands. And that’s a migration from the result of the price increases that have been going on in the market. The other results at big tobacco is in the middle of there are products like Zen, things like Panther, just nicotine pouches and what I’d say in the true combustible cigarette area, we have seen attrition from the Tier 1 brands down to Tier 4, and that’s where we play. So that’s — and then, of course, we’re waiting for not waiting. We’re anticipating the launch of the partner of VLN in the market.

Andrew White: Okay. And I guess, last but not least, just to reiterate, within the CMO product line, have we seen the worst of it in 2024 past? And are we now on a growth trajectory cartons-wise, price-wise, revenue-wise?

Dan Otto: Yes, that’s correct.

Andrew White: That’s correct. Good to hear. Well, those are my questions. Thank you very much, guys.

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. 22nd Century is in its new business model. As I stated on the last earnings call, this is the start of a new company. We have our branded lineup and our standard CMO business backing it up. Our cost structure is in line, and we believe we have the cash on the balance sheet to carry us into breakeven. That assumes the choreography of state approvals and shipments into distribution happen according to plan. And our team is excited in driving 22nd Century to profitability and beyond. I’d personally like to take a minute to thank and appreciate our team for their hard work transitioning our company in a very short period of time with very limited resources. They’ve done an awesome job. We look forward to updating you with press releases along the way and again at next quarter’s earnings release time frame. I hope you all have a great day. Thank you.

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