Q2 2025 22nd Century Group Inc Earnings Call
Speaker #1: Excuse me, this is a conference operator. Please continue to hold. The call will begin shortly. Thank you.
Conference Operator: Excuse me, this is the conference operator. Please continue to hold. The call will begin shortly. Thank you.
Speaker #2: Good morning and welcome to the 22nd Century Group's second quarter 2025 results call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero.
Matthew Kreps: Good morning and welcome to the 22nd Century Group's second quarter 2025 results call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. Please note this event is being recorded. I would now like to turn the conference over to Matthew Kreps. Please go ahead.
Speaker #2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad.
Speaker #2: Please note this event is being recorded. I would now like to turn the conference over to Matthew Kreps. Please go ahead.
Speaker #3: Hello, and welcome to 22nd Century's second quarter 2025 results conference call. Joining me today are Lawrence Firestone, CEO, and Daniel Otto, CFO. Earlier today, we issued a press release announcing our results for the quarter ended June 30, 2025.
Daniel Otto: Hello and welcome to 22nd Century's second quarter 2025 results conference call. Joining me today are Larry Firestone, CEO, and Daniel Otto, CFO. Earlier today, we issued a press release announcing our results for the quarter ended June 30th, 2025. The release and 10-Q are available in the investors section of the website at xxii-century.com. Today's call will include prepared remarks from Larry and Daniel, updating you on 22nd Century's business, operations, strategy, and financial results through June 30th, 2025, and subsequent events post the close of quarter end. 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 FCC.
Speaker #3: The release and 10-Q are available in the investors' section of our website at xxiiicentury.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 June 30, 2025, as well as subsequent events following the close of the quarter.
Speaker #3: 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.
Speaker #3: 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 non-cash and non-operating expenses.
Daniel Otto: 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 non-cash and non-operating expenses, and net debt calculated as the total principal amount of debt outstanding, less cash and cash equivalents. For more details on these measures, please refer to our release issued earlier today. Now with that, I will now turn the call over to Larry. Thank you.
Speaker #3: Net debt is calculated as the total principal amount of debt outstanding, less cash and cash equivalents. For more details on these measures, please refer to our release issued earlier today.
Speaker #3: Now, with that, I will now turn the call over to Larry. Thank you.
Speaker #4: Thank you, Matt. And good morning, everyone. And thank you for joining 22nd Century's second quarter 2025 earnings results conference call. 22nd Century is today a purpose-built tobacco company designed to lead the tobacco harm reduction movement into the future.
Larry Firestone: Thank you, Matt, and good morning, everyone. Thank you for joining 22nd Century's second quarter 2025 earnings results conference call. 22nd Century is today a purpose-built tobacco company designed to lead the tobacco harm reduction movement into the future. This position leverages our leadership in harm reduction for the past 27 years. The basis is the plant bioscience that was developed over the years to give 22nd Century the patented technology to produce our low-nicotine tobacco strains that are the foundation of our 95% low-nicotine VLN® cigarettes. The reason this is critical is that standard tobacco leaves produce the highly addictive substance nicotine, and then highly addictive consumer products that are marketed and sold using the nicotine-laden standard tobacco. According to the University of California, San Francisco, nicotine has been proven to be as addictive as cocaine and heroin and may even be more addictive.
Speaker #4: This position leverages our leadership in harm reduction for the past 27 years. The basis is the plant bioscience that was developed over the years to give 22nd Century the patented technology to produce our low-nicotine tobacco strains, which are the foundation of our 95% low-nicotine VLN cigarettes.
Speaker #4: The reason this is critical is that standard tobacco leaves produce the highly addictive substance nicotine, and then highly addictive consumer products that are marketed and sold using the nicotine-laden standard tobacco.
Speaker #4: According to the University of California, San Francisco, nicotine has been proven to be as addictive as cocaine and heroin, and may even be more addictive.
Speaker #4: Many people who smoke develop nicotine dependence, which makes quitting all the harder--especially when they try to stop smoking on their own. In fact, 70% of smokers report wanting to quit but many wait until they develop a significant tobacco-related disease such as heart disease, cancer, or stroke.
Larry Firestone: Many people who smoke develop nicotine dependence, which makes quitting all the harder, especially when they try to stop smoking on their own. In fact, 70% of smokers report wanting to quit, but many wait until they develop a significant tobacco-related disease such as heart disease, cancer, or stroke. Think about that as the problem statement. There are 1.1 billion smokers in the world, all who are addicted to nicotine. In addition to the smoking population, there are another 300 million smokeless tobacco users who are addicted to nicotine. Now we not only have nicotine from tobacco plants, but our industry has developed synthetic nicotine, which is now used in pouches. Think about that. The desire to keep consumers addicted has created a synthetic version. Of the 1.1 billion smokers in the world, approximately 8 million die each year due to tobacco-related illnesses.
Speaker #4: Think about that as the problem statement. There are 1.1 billion smokers in the world, all of whom are addicted to nicotine. In addition to the smoking population, there are another 30 million smokeless tobacco users who are also addicted to nicotine.
Speaker #4: And now, we not only have nicotine from tobacco plants, but our industry has developed synthetic nicotine, which is now used in pouches. Think about that.
Speaker #4: The desire to keep consumers addicted has created a synthetic version. Of the 1.1 billion smokers in the world, approximately 8 million die each year due to tobacco-related illnesses.
Speaker #4: That's 21,000 to 900 people per day dying on average from smoking. Our tobacco industry does not like to talk about that, but we do. In the U.S., in 2018, more than $600 billion was spent on smoking-related illnesses and chronic health conditions born from smoking.
Larry Firestone: That's 21,900 people per day dying on average from smoking. Our tobacco industry does not like to talk about that, but we do. In the U.S., in 2018, more than $600 billion was spent on smoking-related illnesses and chronic health conditions born from smoking. I would speculate that seven years later, in 2025, that $600 billion is a much, much larger number. In the U.S., we spend six times more in health costs than the combined Big Four tobacco companies report in worldwide revenue annually. Additionally, the $600 billion that was spent in healthcare costs was 14 times the operating profit that was reported by those same tobacco companies combined. The U.S. government and the federal courts have been warning us about the harms of nicotine, including nicotine's addictive effect, since the early 1950s.
Speaker #4: I would speculate that seven years later, in 2025, that 600 billion is a much, much larger number. In the US, we spend six times more in health costs than the combined Big Four tobacco companies report in worldwide revenue annually.
Speaker #4: Additionally, the $600 billion that was spent in healthcare costs was 14 times the operating profit that was reported by those same tobacco companies combined.
Speaker #4: The US government and the federal courts have been warning us about the harms of nicotine including nicotine's addictive effect since the early 1950s. Seventy-five years of money spent researching, messaging, proving, and killing and still somehow are smoking populations can't change the course of their lives because of their nicotine addiction.
Larry Firestone: 75 years of money spent researching, messaging, proving, and killing, and still somehow our smoking population cannot change the course of their lives because of their nicotine addiction. There are warnings on the packs, warnings on the doors of retailers, no more commercial advertising, rules after rules are in place, and somehow we have not gotten the message. I believe it is a simple message. Nicotine is really bad for you. It is seriously addictive, and once you are hooked, you cannot quit, or if you do, it takes a Herculean effort to do so. The FDA has put out a very important new tobacco product standard to try and force the issue regarding nicotine and its addictive nature.
Speaker #4: There are warnings on the packs, warnings on the doors of retailers, no more commercial advertising, rules after rules are in place, and somehow we have not gotten the message.
Speaker #4: I believe it's a simple message. Nicotine is really bad for you. It's seriously addictive, and once you're hooked, you can't quit, or if you do, it takes a Herculean effort to do so.
Speaker #4: Now, the FDA has put out a very important new tobacco product standard to try and force the issue regarding nicotine and its addictive nature.
Speaker #4: Researchers, scientists, labs, and pharma companies have spent years and billions studying nicotine and its effect on the human brain. This includes brain development, human behavior, and the addiction that is created so quickly while using nicotine.
Larry Firestone: Researchers, scientists, labs, pharma companies have spent years and billions studying nicotine and its effect on the human brain, brain development, human behavior, and the addiction that is created so quickly while using nicotine. The FDA has proposed a new standard that, when adopted into law, will require a two-year transformation of all combustible cigarettes and filtered cigars to contain less than 0.7 milligrams per gram of nicotine, or essentially 95% less nicotine than traditional cigarettes. The worry for Big Tobacco is that they will not be able to convert their addicted brand-loyal consumers to an alternative of their combustible brands in time before the new law is enacted. They are hustling to develop other high-nicotine answers to keep their consumers addicted and married to their brands.
Speaker #4: Well, the FDA has proposed a new standard that when adopted into law, will require a two-year transformation of all combustible cigarettes and filtered cigars to contain less than 0.7 milligrams per gram of nicotine or essentially 95% less nicotine than traditional cigarettes.
Speaker #4: The worry for big tobacco is that they will not be able to convert their addicted, brand-loyal consumers to an alternative to their combustible brand in time before the new laws enacted.
Speaker #4: Their hustling to develop other high-nicotine answers to keep their consumers addicted and married to their brands. Therefore, the race is on to develop different forms of nicotine delivery systems such as heat not burn, which are battery-operated and oral products such as pouches and snuff.
Larry Firestone: Therefore, the race is on to develop different forms of nicotine delivery systems, such as heat-not-burn, which are battery-operated, and oral products such as pouches and snuff. It is interesting that these other nicotine delivery vehicles are considered to be in the class of tobacco harm reduction because really what we should be talking about is nicotine harm reduction. Our society in the U.S. has taken many steps over the years, and still we resist thanks to the products that are being marketed and sold in this category. We can no longer smoke on planes, in restaurants, public buildings, or designated smoking areas outside. In one community in California, you cannot smoke in your apartment, as the smoke travels through the air conditioning ductwork. We have also clearly identified harms from secondhand smoke and now thirdhand smoke.
Speaker #4: It's interesting that these other nicotine delivery vehicles are considered to be in the class of tobacco harm reduction, because really what we should be talking about is nicotine harm reduction.
Speaker #4: Our society in the US has taken many steps over the years and still we resist thanks to the products that are being marketed and sold in this category.
Speaker #4: We can no longer smoke on planes, in restaurants, or public buildings. There are designated smoking areas outside. In one community in California, you cannot smoke in your apartment, as the smoke travels through the air conditioning ductwork.
Speaker #4: We've also clearly identified harms from secondhand smoke and now thirdhand smoke. Even with all these regulations, big tobacco still contests the FDA and their new mandate and race to keep consumers married to their nicotine habit.
Larry Firestone: Even with all these regulations, Big Tobacco still contests the FDA and their new mandate and race to keep consumers married to their nicotine habit. The newest efforts and claims are that these new nicotine delivery systems will reduce the exposure to the harmful tobacco-specific nitrosamines or TSNAs. Two of them, known as NNN and NNK to be specific, are two of the most harmful in the list of carcinogens and belong only to tobacco. The simple truth is TSNAs are most lethal when they are combusted. The thought process in the industry is if we could deliver nicotine and keep people addicted without combusting the tobacco causing TSNAs to activate, the tobacco industry believes it has somehow done a good thing for the consumer and society. This is simply not true.
Speaker #4: The newest efforts and claims are that these new nicotine delivery systems will reduce the exposure to the harmful tobacco-specific nitrosamines or TSNAs. Two of them known as NNN and NNK to be specific, are two of the most harmful in the list of carcinogens and belong only to tobacco.
Speaker #4: The simple truth is that TSNAs are most lethal when they're combusted. So the thought process in the industry is that if we could deliver nicotine and keep people addicted without combusting the tobacco—causing TSNAs to activate—the tobacco industry believes it has somehow done a good thing for the consumer and society.
Speaker #4: This is simply not true. The tobacco industry has kept their consumers addicted to nicotine while working on lowering the exposure to the two most deadly TSNAs.
Larry Firestone: The tobacco industry has simply kept their consumer addicted to nicotine while working on lowering the exposure to the two most deadly TSNAs. This message has to finally sink in that the FDA has gotten it right with their latest low-nicotine mandate. When we hear the word addiction, our minds have to relate to the definition of addiction, which is not having control over doing, taking, or using something to the point where it is or could be harmful to you. Look at opioids, cocaine, heroin, alcohol, basically harmful drugs and substances. If not controlled by the user, it can cause serious harm. Nicotine does not get a pass card in the addiction category. It simply means that the consumer has given up control. This is the control that we are on a mission to get back to the smoker.
Speaker #4: This message has to finally sink in that the FDA has gotten it right with their latest low-nicotine mandate. When we hear the word addiction, our minds have to relate to the definition of addiction, which is not having control over doing taking or using something to the point where it is or could be harmful to you.
Speaker #4: Look at opioids, cocaine, heroin, alcohol—basically harmful drugs and substances. If not controlled by the user, they can cause serious harm. Nicotine does not get a pass in the addiction category.
Speaker #4: It simply means that the consumer has given up control. This is the control that we are on a mission to get back to the smoker.
Speaker #4: In fact, due to the ease of access to nicotine, this industry has created a new harm: nicotine poisoning in children and youth. This has come about as children are getting a hold of nicotine pouches and are emulating adults, beginning to use these products.
Larry Firestone: In fact, due to the ease of access to nicotine, this industry has created a new harm: nicotine poisoning in children and youth. This has come about as children are getting a hold of nicotine pouches and are emulating adults and beginning to use these products. Children who have been affected by this situation are then rushed to the hospital to the poison center. Now we have to consume our medical resources to create a whole new mitigation strategy to add this condition off of the past. This will add to today's version of the $600 billion in healthcare costs related to nicotine addiction. The issue is that the tobacco industry is fighting to keep nicotine in the products. But 22nd Century Group started a technology initiative in 1998 to mitigate this nicotine addiction issue.
Speaker #4: Children who have been affected by this situation are then rushed to the hospital to the poison center. Now, we have to consume our medical resources to create a whole new mitigation strategy to add this condition off of the past.
Speaker #4: This will add to today's version of the $600 billion in healthcare costs related to nicotine addiction. The issue is that the tobacco industry is fighting to keep nicotine in the products.
Speaker #4: But 22nd Century started a technology initiative in 1998 to mitigate this nicotine addiction issue and having stayed on that path, we now have the only authorized combustible cigarette that complies with the new low-nicotine standard.
Larry Firestone: Having stayed on that path, we now have the only authorized combustible cigarette that complies with the new low-nicotine standard. The FDA mandate can be adopted successfully. In 2024, there was a marketplace research study that was completed using our 95% less spectrum research cigarettes. Out of 450 subjects, 40% of them changed their smoking habit dramatically and reduced their consumption over a 16-week period. I am going to project a concept, but if I extrapolate that over the 28.8 million U.S. smoking population, that would mean that 11.5 million smokers could potentially dramatically change their smoking habit and take control of their dependence on nicotine and their addiction in roughly the same amount of time.
Speaker #4: So the FDA mandate can be adopted successfully. In 2024, there was a marketplace research study that was completed using our 95% less spectrum research cigarettes. Out of 450 subjects, 40% of them changed their smoking habit dramatically and reduced their consumption over a 16-week period.
Speaker #4: I'm going to project a concept, but if I extrapolate that over the 28.8 million US smoking population, that would mean that 11.5 million smokers could potentially dramatically change their smoking habit and take control of their dependence on nicotine and their addiction in roughly the same amount of time.
Speaker #4: To help make that vision a reality and prove that reduced nicotine content products can perpetuate and populate the market, we have introduced, over the past 18 months or so, a strategy we call flanker or partner VLN.
Larry Firestone: To help make that vision a reality and prove that reduced nicotine content products can perpetuate and populate the market, we have introduced over the past 18 months or so a strategy we call Flanker or Partner VLN®. Similar to the Intel Inside concept, now we have two early adopters to the new low-nicotine standard with Smoker-Friendly and our clinical brands who now carry a set of VLN® product SKUs in their lineup. These brands and the retailers that carry them are in a position to benefit when the FDA mandate goes into effect. Our hats are off to them. Our low-nicotine VLN® cigarette is a simple concept as a smoker will get less nicotine as they smoke and reduce the daily need for nicotine without giving up their comfort and practice of having a cigarette. No need to transition to a plastic battery-operated device.
Speaker #4: Similar to the Intel Inside concept, we now have two early adopters of the new low-nicotine standard with smoker-friendly and our Pinnacle brands, which now carry a set of VLN product SKUs in their lineup.
Speaker #4: These brands and the retailers that carry them are in a position to benefit when the FDA mandate goes into effect. Our hats are off to them.
Speaker #4: Our low-nicotine VLN cigarette is a simple concept: the smoker will get less nicotine as they smoke, reducing their daily need for nicotine without giving up the comfort and practice of having a cigarette.
Speaker #4: No need to transition to a plastic, battery-operated device; this would be like turning an addicted smoker into a casual smoker. Following that backdrop, here's where we are in the progress of building 22nd Century.
Larry Firestone: This would be like turning an addicted smoker into a casual smoker. Following that backdrop, here is where we are in the progress of building 22nd Century Group. Just to review what we have stated previously, market penetration for the tobacco business is a serial process. There is test data that we need to provide to the states, along with an application to sell our products in the state. The state attorney general approves or disapproves of the application. When approved, we are then registered to have our products sold in the state. Then we begin the sales process. For many retailers, they want to see that our products are authorized in all the states they have a presence before they launch, as these are chain-wide launches.
Speaker #4: Just to review what we've stated previously, market penetration for the tobacco business is a serial process. There's test data that we need to provide to the states, along with an application to sell our products in the state.
Speaker #4: Then the state attorney general approves or disapproves of the application when approved, we are then registered to have our products sold in the state.
Speaker #4: Then we begin the sales process. For many retailers, they want to see that our products are authorized in all the states where they have a presence before they launch, as these are chain-wide launches.
Speaker #4: As we noted in our press release, Pinnacle, VLN, began shipping into distribution in August and will be on sale in a major retailer in early September for a soft launch, with a full launch in October.
Larry Firestone: As we noted in our press release, Pinnacle VLN® began shipping into distribution in August and will be on sale at a major retailer in early September for a soft launch and a full launch in October. We are very excited as this has been a long time coming for 22nd Century Group. This is so far the largest single deployment of VLN products in the company's history. Smoker-Friendly VLN products will follow this launch, deploying Smoker-Friendly VLN into their corporate stores. Then 22nd Century Group VLN products will follow into another major retailer. We will keep you up to date with further developments. As mentioned previously, the margin profile for the branded products is much greater than the export CMO and filtered cigar products.
Speaker #4: We're very excited, as this has been a long time coming for 22nd Century. This is, so far, the largest single deployment of VLN products in the company's history.
Speaker #4: Smoker-friendly VLN products will follow this launch, deploying smoker-friendly VLN into their corporate stores. Then, 22nd Century VLN products will follow into another major retailer, and we will keep you up to date with further developments.
Speaker #4: As mentioned previously, the margin profile for the branded products is much greater than that of the export CMO and filtered cigar products. Therefore, you will see us shifting our business in Q3 and Q4 away from the very low or close to break-even high-volume business to focus on the branded business, which has healthier gross margins.
Larry Firestone: Therefore, you will see us shifting our business in Q3 and Q4 away from the very low or close to break-even high-volume business to focus on the branded business, which has healthier gross margins. Our top-line may decline in the near term, but our gross margin will increase as a result. We are committed to achieving profitability in the near term, but this mixed shift will slow our progress to achieving that. However, this is the right move for our company as our resources need to be spent on our future. This right now is really the new beginning of 22nd Century Group and our move into a stronghold within the tobacco harm reduction movement.
Speaker #4: Our top line may decline in the near term, but our gross margin will increase as a result. We are committed to achieving profitability in the near term, but this mixed shift will slow our progress toward achieving that.
Speaker #4: However, this is the right move for our company as our resources need to be spent on our future. This right now is really the new beginning of 22nd Century and our move into a stronghold within the tobacco harm reduction movement.
Speaker #4: We are now focusing on our higher margin products that utilize our cornered resource, a resource that no one else in the industry has or can obtain anytime soon and that is our proprietary low-nicotine tobacco.
Larry Firestone: We are now focusing on our higher margin products that utilize our cornered resource, a resource that no one else in the industry has or can obtain anytime soon, and that is our proprietary low-nicotine tobacco. At the same time, multiple macro forces are pushing people away from traditional combustible cigarettes. The FDA, with its proposed low-nicotine standard, and Big Tobacco, with its not-so-subtle attempt to switch everyone to heat-not-burn and non-combustibles, who else has an option for all of those smokers being squeezed by these powerful macro forces? We do, with our low-nicotine VLN products and the partner VLN products being offered through Smoker-Friendly and Pinnacle. The summary of all this is as follows. We have been developing our low-nicotine VLN for 27 years.
Speaker #4: And at the same time, multiple macro forces are pushing people away from traditional combustible cigarettes. The FDA, with its proposed low-nicotine mandate, and big tobacco with its not-so-subtle attempt to switch everyone to heat-not-burn and non-combustibles—well, who else has an option for all of those smokers being squeezed by these powerful macro forces?
Speaker #4: We do. With our low-nicotine VLN products and the partner VLN products being offered through Smoker Friendly and Pinnacle, the summary of all this is as follows: We've been developing our low-nicotine VLN for 27 years.
Speaker #4: The tobacco industry through the recent mandate by the FDA for defined nicotine levels has opened up the lane for tobacco harm reduction for which we are the anchor and the leader and have the best product to help in this mission.
Larry Firestone: The tobacco industry, through the recent mandate by the FDA for defined nicotine levels, has opened up the lane for tobacco harm reduction, for which we are the anchor and the leader and have the best product to help in this mission. The smoker can simply transition to a VLN cigarette without having to buy a battery-operated device, manage device charging, and change the form factor of the habit that is such a big part of their life. We have enough plug-in battery-charged devices to manage in our world, and we do not need an electric nicotine delivery device to add to them. This same VLN cigarette, which is the only low-nicotine cigarette that is authorized by the FDA, is now in the market with Pinnacle VLN and Smoker-Friendly VLN products. Also, the only low-nicotine cigarette that complies with the FDA's new proposed low-nicotine standard.
Speaker #4: The smoker can simply transition to a VLN cigarette without having to buy a battery-operated device managed device charging, and change the form factor of the habit that is such a big part of their life.
Speaker #4: We have enough plug-in battery-charged devices to manage in our world, and we don't need an electric nicotine delivery device to add to them. This same VLN cigarette is the only low-nicotine cigarette that's authorized by the FDA and is now in the market with Pinnacle VLN and smoker-friendly VLN products.
Speaker #4: Also, the only low-nicotine cigarette that complies with the FDA's new proposed low-nicotine standard. The way I see the market shaping up is in four lanes.
Larry Firestone: The way I see the market shaping up is in four lanes. Lane one, pouches and moist snuff. Lane two, heat-not-burn or heated tobacco products. Lane three, low-nicotine or VLN products. Lane four, standard combustible cigarettes. Smokers who are not going to quit, they are going to smoke anyway. The first three lanes are coined as being part of the tobacco harm reduction movement. It is clear that VLN products in all forms will be directly competing with heat-not-burn or HTPs for all the combustible tobacco users. Also, as the FDA low-nicotine standard is enacted, 22nd Century's VLN products will be competing for the smokers in lane four as their full-strength cigarette brands will become unavailable. We see this as an opportunity to expand our partner VLN or VLN inside concept to expand to other brands with a licensed model for our low-nicotine tobacco and the VLN brand.
Speaker #4: Lane one: pouches and moist snuff. Lane two: heat-not-burn or heated tobacco products. Lane three: low-nicotine or VLN products. And lane four: standard combustible cigarettes, for smokers who are not going to quit—they're going to smoke anyway.
Speaker #4: The first three lanes are coined as being part of the tobacco harm reduction movement. It is clear that VLN products in all forms will be directly competing with heat not burn or HTPs for all the combustible tobacco users.
Speaker #4: Also, as the FDA low-nicotine standard is enacted, 22nd Century's VLN products will be competing for the smokers in lane four, as their full-strength cigarette brands will become unavailable.
Speaker #4: We see this as an opportunity to expand our partner VLN or VLN inside concept to expand to other brands with a license model for our low-nicotine tobacco and the VLN brand.
Speaker #4: The rate of sale is key for all products in our branded portfolio, and this will drive our business model to the profitability targets that our industry delivers.
Larry Firestone: Rate of sale is key for all products in our branded portfolio, and this will drive our business model to the profitability targets that our industry delivers. We are also very excited to see the fruits of our work here and very much are looking forward to advancing VLN throughout the U.S. and internationally. Now, I will turn the call over to Daniel Otto to discuss the numbers.
Speaker #4: We are also very excited to see the fruits of our work here and are very much looking forward to advancing VLN throughout the U.S. and internationally.
Speaker #4: Now, I’ll turn the call over to Dan to discuss the numbers.
Speaker #5: Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today. We continue to build tremendous momentum in our company as we're in the final stages and ready to emerge from what's been a challenging and lengthy restructuring period.
Daniel Otto: Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today. We continue to build tremendous momentum in our company as we are in the final stages and ready to emerge from what has been a challenging and lengthy restructuring period. We remain focused on entry of VLN® and partner VLN® products in the market by expanding distribution and customer adoption, which, although not yet reflected in our second quarter or year-to-date financial results, will begin in the third quarter and will generate steady revenue growth and gross margin expansion. As we move forward, we will continue to cycle out of the lower margin CMO business that makes either very little or loses money at the gross profit line and be replacing that volume with the high margin branded products.
Speaker #5: We remain focused on entry of VLN and partner VLN products in the market by expanding distribution and customer adoption. Which, although not yet reflected in our second quarter or year-to-date financial results, will begin in the third quarter and will generate steady revenue growth and gross margin expansion.
Speaker #5: As we move forward, we will continue to cycle out of the lower-margin CMO business that makes either very little or loses money at the gross profit line and be replacing that volume with the high-margin branded products.
Speaker #5: However, consistent with messaging earlier in the year, and in Larry's remarks today, there are a number of latent barriers to clear as we go to market with many of the new high-margin branded products, VLN and partner VLN SKUs.
Daniel Otto: However, consistent with messaging earlier in the year and in Larry's remarks today, there are a number of latent barriers to clear as we go to market with many of the new high margin branded products, VLN® and partner VLN® SKUs, which have resulted in delays to achieving our profitability goals. We now expect the impact of delays and the time necessary to execute the remaining pieces of the turnaround will take us into the first half of 2026 to achieve profitability. The milestones necessary to reach profitability will be measured against the interplay of continuing to cycle out of the low margin CMO volume and adding in the high margin growth volume of branded products and VLN®. Adding the high margin volume will depend on a number of variables such as state registrations, number of stores and distribution, rate of sale, among others.
Speaker #5: Which have resulted in delays to achieving our profitability goals. We now expect the impact of delays and the time necessary to execute the remaining pieces of the turnaround will take us into the first half of 2026 to achieve profitability.
Speaker #5: The milestones necessary to reach profitability will be measured against the interplay of continuing to cycle out of the low-margin CMO volume and adding in the high-margin growth volume of branded products and VLN.
Speaker #5: And adding the high-margin volume will depend on a number of variables, such as state registrations, number of stores and distribution, rate of sale, among others.
Speaker #5: Reflecting on the steps necessary to move forward, we are actively monitoring the timing of initial shipments of partner VLN products in the third quarter to our distributors, along with initial restocking orders and the rate of sale at the register.
Daniel Otto: Reflecting on the steps necessary to move forward, we are actively monitoring the timing of initial shipments of partner VLN® products in the third quarter to our distributors, along with initial restocking orders and rate of sale at the register. We have already begun shipping Pinnacle VLN® in August, with the first stocking orders being over 3,000 cartons. Adding the higher margin branded products will break open gross margin profitability and as we maximize the capacity and efficiency of our factory that has largely fixed labor and overhead. Aside from the P&L, during the quarter, we have made further progress in improving the balance sheet, reducing debt by approximately $1 million. We have also improved our working capital outlay by tightening finished good inventory on hand. Let me now spend some time and walk through the specific numbers of our financial results for the quarter.
Speaker #5: We've already begun shipping Pinnacle VLN in August, with the first stocking orders being over 3,000 cartons. Adding the higher-margin branded products will break open gross margin profitability, and as we maximize the capacity and efficiency of our factory that has largely fixed labor and overhead.
Speaker #5: Aside from the P&L, during the quarter we've made further progress in improving the balance sheet. We reduced debt by approximately $1 million. We've also improved our working capital outlay by tightening finished goods inventory on hand.
Speaker #5: Let me now spend some time and walk through the specific numbers of our financial results for the quarter. Starting from the top, net revenue was $4 million in the second quarter 2025, decreased sequentially from $6 million in the first quarter 2025, and gross margin was consistent at a loss of $0.6 million.
Daniel Otto: Starting from the top, net revenue was $4 million in the second quarter of 2025, decreased sequentially from $6 million in the first quarter of 2025, and gross margin was consistent at a loss of $0.6 million. Total cartons sold were 779,000 versus 478,000 in the first quarter. The increase in volume reflects a significant increase in CMO cigarettes, including export, which has high volume but low-priced product. Total operating expenses for the second quarter were $2.3 million compared to $2 million in the first quarter of 2025. This level of operating expense overhead is sustainable now as we move forward in expanding and launching the high-margin branded products, whereby the company will be able to achieve rapid growth without having to incur significant additional OpEx spend.
Speaker #5: Total cartons sold were 779,000 versus 478,000 in the first quarter. The increase in volume reflects a significant increase in CMO cigarettes, including exports, which have a high volume but low-priced product.
Speaker #5: Total operating expenses for the second quarter were 2.3 million compared to 2 million in the first quarter of 2025. This level of operating expense overhead is sustainable now as we move forward and expanding and launching the high-margin branded products whereby the company will be able to achieve rapid growth without having to incur significant additional OPEX spend.
Speaker #5: As it relates to our research and development overhead and expenditures, we will anticipate beginning to see additional spend over the next two years. There are important additional technologies for our company to complete research along with our research partners in order to maintain our stronghold on the low-nicotine IP landscape.
Daniel Otto: As it relates to our research and development overhead and expenditures, we will anticipate beginning to see additional spend over the next two years. There are important additional technologies for our company to complete research, along with our research partners, in order to maintain our stronghold on the low-nicotine IP landscape. 22nd Century Group will remain dominant in the low and very low-nicotine plant genetics and bioscience space. Further, as we bring additional low-nicotine products to market across multiple form factors, funding for clinical research and market studies will be necessary, along with the resources to submit additional or supplemental PMTA and MRTP filings with the FDA.
Speaker #5: 22nd Century will remain dominant in the low and very low-nicotine plant genetics and bioscience space. And then further, as we bring additional low-nicotine products to market across multiple form factors, funding for clinical research and market studies will be necessary along with the resources to submit additional or supplemental PMTA and MRTP filings with the FDA.
Speaker #5: Now, continuing on, second quarter 2025 net loss from continuing operations was approximately 3.3 million consistent with the first quarter. And adjusted EBITDA during the quarter was a loss of 2.6 million as compared to a loss of 2.3 million in the first quarter of 2025.
Daniel Otto: Continuing on, second quarter 2025 net loss from continuing operations was approximately $3.3 million, consistent with the first quarter, and adjusted EBITDA during the quarter was a loss of $2.6 million as compared to a loss of $2.3 million in the first quarter of 2025. Finally, the company remains active in our lawsuit against Dorchester Insurance Company based on their failure to pay any amounts owed toward our claim of $9 million in actual damages for business interruption insurance. Significant discoveries taken place, and the court has set a trial date for November 2025, which is now less than three months away. With that, I would like to open it up for any questions from our analyst.
Speaker #5: Finally, the company remains active, and our lawsuit against Dorchester Insurance Company is based on their failure to pay any amounts owed toward our claim of $9 million in actual damages for business interruption insurance.
Speaker #5: Significant discovery's taken place and the court has set a trial date for November 2025. Which is now less than three months away. With that, I'd like to open it up for any questions from our analyst.
Speaker #6: At this time, if you'd like to ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys.
Matthew Kreps: At this time, if you would like to ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then two. Once again, that is star then one to ask a question. Our first question comes from Andrea White at Emerging Growth.
Speaker #6: To withdraw your question, please press star then two. Once again, that's star then one to ask a question. Our first question comes from Angela White at Emerging Growth.
Speaker #7: Good morning. Thank you for your presentation this morning, guys. I had a couple of questions I wanted to ask. Are you there?
Larry Firestone: Good morning. Thank you for your presentation this morning, guys. I had a couple of questions I wanted to ask. Are you there?
Speaker #5: Yep. Go ahead.
Andy: Yep. Go ahead, Mark. Go ahead.
Speaker #7: Good morning. Go ahead. Good morning. yeah. first and foremost, it sounds as if, break-even on EBITDA might be pushing back. can you give some visibility on when you might achieve break-even on a quarterly basis EBITDA?
Larry Firestone: Good morning. First and foremost, it sounds as if break-even on EBITDA might be pushing back. Can you give some visibility on when you might achieve break-even on a quarterly basis EBITDA?
Speaker #7: Dan, I'll let you take that one.
Andy: Dan, I will let you take that one.
Speaker #5: Okay.
Larry Firestone: Okay.
Speaker #8: Yeah, Andy, at this point, we're looking at first half of 2026. definitely second quarter and we're working on, first quarter there, really based on the timing of the branded products that we've spoken to, high margin, both, VLN and partner VLN as we watch, initial stocking, rate of sale, and, number of stores that that will be the measure to see whether that first quarter versus second quarter 2026 is achievable.
Daniel Otto: Yeah, Andy, at this point, we are looking at the first half of 2026. Definitely Q2, and we are working on Q1 there, really based on the timing of the branded VLN® products that we have spoken to, high margin, both VLN® and partner VLN®, as we watch initial stocking, rate of sale, and the number of stores. That will be the measure to see whether that Q1 versus Q2 2026 is achievable.
Speaker #7: Okay. So first quarter or second quarter. Okay. Good. Thank you. secondarily, your cash is sitting at about 3 million as of the end of the second quarter.
Larry Firestone: Okay. So, Q1 or Q2. Okay, good. Thank you. Secondarily, your cash is sitting at about $3 million as of the end of Q2. Is that sufficient to see you through to break even in Q1 or Q2 of next year, or will you envision an additional capital raise?
Speaker #7: Is that sufficient, to see you through to break-even in the first or second quarter of next year or will will you envision an additional share residence?
Speaker #8: Dan, you want that one or you want me to take that one?
Andy: Dan, you want that one, or do you want me to take that one?
Speaker #5: Go ahead, Larry.
Larry Firestone: Go ahead, Larry.
Speaker #7: Yeah. So, so, you know, that's this is Andy, this is one of the reasons why we're shifting away from the low margin and, you know, some of it's loss margin, CMO businesses.
Andy: Yeah. This is Andy. This is one of the reasons why we are shifting away from the low margin and some of its lost margin CMO businesses. It consumes our working capital. We have got to get to the point where, and we are actually tracking our way to get to the point where, the positive gross margin, the gross margin performance of the branded products, carries our overhead, but also contributes to the working capital. So there is a chance we are going to be raising some money in the near term, but the size of the raise will be less than what we have been doing in the past.
Speaker #7: It consumes our working capital. And, and so it, you know, we've got to get to the point where and we're actually, we're tracking our way to get to the point where the positive gross margin, the gross margin performance of the of the branded products, carries our overhead, but also contributes to the working capital.
Speaker #7: So, there's a chance we're going to be raising some money in the near term, but the, you know, the size of the raise will be, you know, will be less than what we've been doing in the past.
Speaker #7: Okay. Good to hear. And, in terms of, the debt that's currently outstanding, you made a lot of progress in reducing it over the last year.
Larry Firestone: Okay. Good to hear. In terms of the debt that is currently outstanding, you have made a lot of progress in reducing it over the last year and quarter. It is rolling over supposedly in, I think, March of 2026. What are your plans with rolling over the debt and/or handling it otherwise?
Speaker #7: And quarter. it's rolling over, supposedly, and I think March of 2026. what are your plans? With rolling over the debt and or handling it and otherwise?
Speaker #8: Yeah. Well, we will be talking to, well, we're we're in a we're in conversations with our debtor on, you know, on on that issue and paying it off and, and, becoming debt-free extinguishing the debt.
Andy: We will be talking to, we are in conversations with our debtor on that issue and paying it off and becoming debt-free, extinguishing the debt. But also, as we raise money, a piece of that will go to extinguishing the debt as well. So it is kind of a balance right now as we look to make money, turn the company profitable, and also extinguish that debt at the same time.
Speaker #8: but also, you know, as we raise money, you know, piece of that will go to extinguishing the debt as well. So, it's it's kind of a balance right now as we as we look to to make money and turn the turn the company profitable and also extinguish that debt at the same time.
Speaker #7: Okay. Okay. That's something to watch. and and last but not least, I think it was Dan who touched on the MRTP renewal process. is there any chance that VLN would not be renewed?
Larry Firestone: Okay. Okay. That is something to watch. Last but not least, I think it was Daniel Otto who touched on the MRTP renewal process. Is there any chance that VLN® would not be renewed?
Speaker #8: I can give you my my two cents on that is is given the FDA's, you know, recent mandate, that they put out in January, and the fact that that we comply and, and we're in the market, sort of enabling, not sort of, but enabling that that mandate to, to come to fruition, I think there's very little chance that the MRTP won't be renewed.
Andy: I can give you my two cents on that. Given the FDA's recent mandate that they put out in January, and the fact that we comply and we are in the market enabling that mandate to come to fruition, I think there is very little chance that the MRTP won't be renewed.
Speaker #7: Okay. Good to hear. Well, that was all my questions for this morning and I really appreciate it, guys. Thanks.
Larry Firestone: Right. Good to hear. That was all my questions for this morning, and I really appreciate it, guys. Thanks.
Speaker #8: All All right.
Andy: All right.
Speaker #6: And now it's your turn back over to Larry Firestone for closing remarks.
Matthew Kreps: I get turned back over to Larry Firestone for closing remarks.
Speaker #8: Thank you, everyone, for joining our call. 22nd Century has made a quantum leap forward. Our message is clear and aligned with the FDA. We've now begun to ship our newly branded VLN products into the market.
Andy: Thank you, everyone, for joining our call. 22nd Century Group has made a quantum leap forward. Our message is clear and aligned with the FDA. We have now begun to ship our newly branded VLN® products into the market. This is at a time when the focus of tobacco harm reduction is at its peak. We cannot be more excited for the launch of our VLN® products into the market and the effect that this important technology will have on consumers who smoke. We are now hyper-focused on the rate of sale and scaling. So stay tuned as this will be our discussion going forward as opposed to running an array of high-volume, super low or low gross margin products through the factory to achieve better cost absorption at our factory with our overhead, which is not the business model we are going to run going forward.
Speaker #8: This is at a time when the focus of tobacco harm reduction is at its peak. We cannot be more excited for the launch of our VLN products into the market and the effect that this important technology will have on consumers who smoke.
Speaker #8: We are now hyper-focused on the rate of sale and scaling so stay tuned as this will be our discussion going forward as opposed to running an array of high-volume super low or low gross margin products through the factory to achieve better cost absorption at our factory with our overhead which is not the business model we're going to run going forward.
Speaker #8: Our team is excited and driving 22nd Century to profitability. It will take a little longer, as we give up the margin contribution from the high-volume mix, but the focus on the branded business will pay off.
Andy: Our team is excited and driving 22nd Century Group to profitability. It will take a little longer as we give up the margin contribution from the high-volume mix, but the focus on the branded business will pay off. I would personally like to thank and appreciate our team for their extremely hard work transitioning our company in a very short period of time with very limited resources. This has been like moving a mountain, and they have done an awesome job. We look forward to updating you with press releases along the way and again at next quarter's earning release timeframe. Hope you all have a great day. Thank you.
Speaker #8: I would personally like to thank and appreciate our team for their extremely hard work transitioning our company in a very short period of time with very limited resources.
Speaker #8: This has been like moving a mountain and they've done an awesome job. So we look forward to updating you with press releases along the way and, again, at next quarter's earnings release time frame.
Speaker #8: Hope you all have a great day. Thank you.
Matthew Kreps: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.