22nd Century Group, Inc. Q4 2025 earnings call

Thank you. Hello, and welcome to 22nd Century's fourth quarter and full year 2025 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 quarter and year ended December 31, 2025. The earnings 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, 2025, and subsequent events post the close of quarter ends. 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 non-cash or non-operating expenses. For more details on these measures, please refer to our earnings release issued earlier today. With that, I'll now turn the call over to Larry.

Thank you, Matt. Good morning, everyone, and thank you for joining 22nd Century's fourth quarter 2025 results conference call. 2025 was truly our transition year from restructuring to fully focus on growth. As final acts of the restructuring, we closed out a host of legacy issues from the prior business model, closed unprofitable contracts and product lines, reduced our manufacturing overhead, and paid off our structured senior and subordinated remaining debt. We shifted into growth in 2025, that allowed us to launch new brands and new products, secure a substantial base of retail outlets, and begin to see initial sales of VLN products in the market under our own VLN brand and our two newest VLN partner brand products. The progress made in 2025 was an extremely heavy lift, and our team did an awesome job.

As a result, we have set our company up to begin an exciting growth path for 2026 and beyond. We are now in the market with our VLN combustible cigarette products, and smoking consumers are finding our products in 1,636 retail outlets in 23 states. These numbers will continue to grow, especially as we secure more retail partners throughout the U.S. The consumer tobacco market is changing rapidly. The big tobacco companies are aggressively pushing consumers into alternative, yet highly addictive nicotine products like pouches and vapes in order to maintain their customer base. They know many of their customers want to smoke less, which is, of course, bad for their business model. Their solution is to transition as many of their 28.8 million U.S. cigarette customers as possible to other addictive products.

This strategy prioritizes revenue and market share to the detriment of the health of the consumer and the overall cost of healthcare related to illnesses derived from smoking and nicotine. In contrast, we're the only tobacco products company focused on reducing the harms of smoking through nicotine reduction while using the form factor smokers are used to and most comfortable with, a cigarette. The company's proprietary low nicotine technology is designed to serve adult smokers who want to change their smoking habits and smoke less by significantly reducing nicotine consumption. 22nd Century Group is focusing on smoker health and wellness by giving smokers an opportunity to control their tobacco consumption rather than switching them to another highly addictive product like a vape or a pouch. Although the market is in flux, we are right in the middle of the directional battle for the smoker.

Our VLN products are now in stores in 23 states, and consumers who enjoy smoking are choosing our VLN products and giving them a try. We've seen some stores with very low volume but building, and some stores are moving VLN products and the reorders are starting to materialize. Some stores are about to put our VLN products into position in the front of the store and begin selling. Our sample size is small as we are in the first quarter of selling our VLN products. Even with the compressed timeline and the small data set, we are seeing month-over-month growth within the stores. Our VLN products are backed by science, and we have the results to prove it.

We have examples of smokers who have changed from their traditional high nicotine brand to one of our VLN brands in just 12 weeks, have cut their smoking habit by two-thirds. The positive impact of this change for the smoker is huge, health-wise as well as financially. The total addressable market for smokers in the U.S. is 28.8 million smokers. And as we've reported, surveys of adult smokers indicate that approximately 70% have expressed their desire to change their habit, including quitting. Unfortunately, nicotine is what keeps them coming back at the rate they are used to. Many smokers actually enjoy their smoke as it is a comfort zone for them. They just wish they could maintain their habit at a more controlled pace. That's where we come in.

If 70% of the 28.8 million smokers are sincere, our serviceable addressable market, or SAM, is 20.2 million smokers, roughly a $58 billion market. All of the smokers who have been making the choice to now try our VLN products represent a shift in the market. We have our sights set on taking a meaningful share of that market, where even initially a small piece would be a substantial business for 22nd Century Group. We know that none of our competitors are going to move over and let us in, so we'll have to win on every front to gain retail positions and earn a shot at the smoking consumer's mind. This is why we welcome other brands to join the battle and introduce a VLN concept within their own brands that they have in the market.

This could range from including our low-nicotine tobacco in their products, or they could license our VLN brand and use it within their brand lineup. I'll transition now to discuss topics in the regulatory arena. In December 2025, we filed our MRTP renewal application with the FDA. We're excited about this milestone as we also plan to expand our PMTA and MRTP filings with the FDA for other products. We have the 100 mm version of our VLN cigarette, which once authorized, will allow us to expand served markets for those consumers who prefer the 100 mm cigarette. For the broader picture, the FDA published their low-nicotine proposed rule in January 2025, with a comment period extending through to September 2025. This allowed the FDA to harvest comment letters from all constituents, those for and those against, and they are now in an internal review process.

Our VLN products and science are the backbone of the proposed rule, including specific citations to 22nd Century Group and Spectrum research cigarettes, which once again proves the positive impact we can make on smokers' health and wellness. Our attitude with respect to the proposed rule is we are the only ally the FDA has from the tobacco business in this battle. The FDA, the tobacco industry, and the politicians all know what the answer is, and we have the answer. However, the forces of politics, financial power, and taxes all cast aside the care and the cost of care and the mortality of our smoking population who are addicted. We have to force ourselves into the ring and fight the fight to at least offer the option to smokers who have had what we call the moment.

Our strategy is to continue to expand distribution and push our way into retail in all 50 states, continue to gain consumers and share the market so that when the FDA has to make the final go, no-go decision on the mandate, we, 22nd Century Group, will have already established a full low-nicotine ecosystem to address their low-nicotine mandate and silence the claims that were made by opposition in their responses to the FDA. This would include the development of other low-nicotine tobacco strains developed by our team to expand the variety, setting up and contracting with growers who can produce our low-nicotine crops with no problem and no harm or degradation to their business, entering into agreements with other brands that will have adopted a VLN SKU in their branded lineup.

Retail positions that can display the products prominently for the consumer so they may choose how they want to pursue their habit. This would be a normal share shift, as we have seen over many years in all varieties of consumer products. We are building the chassis of a business that will develop new strains of low-nicotine tobacco, sell low-nicotine tobacco to others, and potentially license others to grow and produce low-nicotine products using our genetics and technology, and potentially license our VLN brand to others, making VLN a prominent worldwide brand. We are clearly at the center of the conflict as the larger forces and around the industry are pushing more and more nicotine. We're pulling the opposite way. We know the harms of nicotine has on the brain, the skeletal system, and the vascular system.

While our competitors are pushing as hard as they can to keep consumers addicted and looking away from the harms of nicotine, they are also adding new consumers and are ignoring the bigger picture, which is health. We are just fine having the answer and being the contrarian. One thing is clear, all the smokers who have quit in their lifetime and the 70% of the 28.8 million smokers in the U.S. who have declared they want to make a change have all had the moment. When they do, we will be there with the answer. An answer that does not require pharma to invent a new drug or a visit to the doctor or other nicotine reduction therapies. The answer, VLN products, will be ready and on the shelf for the consumer to choose.

We also consider the regulatory environment outside the U.S., where the World Health Organization has a similar mandate as the FDA. Their doctrine is known as the Framework Convention on Tobacco Control, or FCTC. Like the FDA's mandate, 22nd Century's low nicotine cigarettes and the science behind are mentioned in the document. Even though this organization has been around since 2016, the international tobacco market has remained challenged in impacting widespread positive change in tobacco harm reduction. However, we believe additional action is beginning to shape to address the harms of smoking and the harms of nicotine worldwide. Australia, for example, has just implemented a doubling of the tax on cigarettes, and every legal pack of cigarettes in Australia now retails for $40. Australia is a government that is serious about smoking.

Thank you, Larry. Good morning, everyone, and thank you for joining our discussion today. Fourth quarter and full year 2025 reflect continued progress in strengthening our balance sheet and improving our operating model as we transition the business into higher margin proprietary branded products. During the year, we exited several unprofitable high volume revenue streams and focused our resources on building the foundation for growth in our reduced nicotine VLN cigarette portfolio and partner VLN brands. Shipments of our VLN and partner VLN products continued to build as distribution expanded and additional retail locations were authorized. In the fourth quarter of 2025, we shipped approximately 8,800 cartons of newly branded VLN and partner VLN to our customers, in many cases being swapped out or exchanged for the legacy branded VLN packages.

These products remain central to our strategy, as they typically generate gross profit margin in the range of 20%-30% after marketing and promotional costs and assuming optimal labor and overhead is achieved within our factory. As I discussed at length in the third quarter, this has been a large focus of 2025. We now will track rate of sale metrics in early 2026 with a keen eye for the effectiveness of pricing and promotional strategies, which has long been the tactics used to drive revenue across the heavily regulated tobacco industry in lieu of the ability to directly market the product. In addition to garnering new customers and repeat purchase, scaling in 2026 will occur primarily through expanded distribution and adoption at additional retail locations, with the majority being second half of the year additions.

We are now authorized across the majority of U.S. states and continue working to increase store count and availability of our product. We estimate increasing current store count by more than double by the end of 2026. Let me now walk through some of the specific numbers from our financial results for the fourth quarter and full year 2025. All figures discussed exclude discontinued operations unless noted. For the fourth quarter of 2025, we recorded net revenue of approximately $3.6 million, compared with $4 million in the third quarter of 2025. Total cartons shipped during the quarter were approximately 248,000, compared with 517,000 cartons in the third quarter. The reduction in volume reflects our strategic shift away from lower margin contract manufacturing activity into higher margin branded products that we've previously spoken of.

Revenue will remain consistent in the first quarter of 2026 and then will begin growing sequentially thereafter, mirroring the timing of added points of distribution. The initial 8,800 cartons of VLN and partner VLN shipped in the fourth quarter continue to be distributed and sold to retail, and we anticipate restocking shipments to commence later in the second quarter of 2026. For the full year 2025, net revenues were approximately $17.6 million, compared with $24.4 million in 2024. Again, reflecting the same strategic repositioning of the business that I've spoken of.

Gross profit for the fourth quarter improved sequentially with a gross loss of approximately $0.8 million, compared with a $1.1 million gross loss in the third quarter of 2025, reflecting early benefits from our late third quarter cost reduction initiatives and operational restructuring of our manufacturing facility. As volume scales in the high margin branded products throughout 2026, that will drive gross margin improvement. Operating loss for the fourth quarter was $2.8 million, compared with $3.2 million in the third quarter, and net loss from continuing operations for the fourth quarter was approximately $2.8 million, compared with $3.8 million in the third quarter. And adjusted EBITDA for the fourth quarter was $2.4 million, compared with $2.9 million in the third quarter of 2025.

Now, for the full year 2025, net loss from continuing operations was approximately $13.1 million, improved from $15.5 million in 2024, reflecting the progress made in reducing operating expenses and restructuring the business. Turning to the balance sheet, we ended the year with approximately $7.1 million in cash and cash equivalents, and importantly, $0 long-term debt, having fully extinguished our remaining senior secured debt during 2025. We also increased our inventory position during the fourth quarter of 2025 to approximately $4.3 million, up from $2 million at the end of the third quarter, reflecting the harvest of our 2025 reduced nicotine tobacco crop in preparation for expanded VLN production.

Overall, we believe our strengthened balance sheet, inclusive of the capital raise activity earlier this week, which added approximately $5.6 million in cash, our debt-free capital structure and streamlined cost base positions us well to execute our growth strategy as we move into 2026. In summary, 2025 was a year of transition and foundation building for the company. We strengthened the balance sheet, exited unprofitable revenue streams, restructured our manufacturing operations, continued expanding the distribution of our proprietary reduced nicotine products. With these steps largely behind us, our focus now turns to scaling distribution, increasing product adoption, and leveraging our improved operating model to drive sequential improvements in revenue, margin, and overall profitability as we progress through 2026. I will now turn the call back over to Larry for concluding remarks.

Thank you, Dan. The most important point from today's call is 2026 is really the new beginning for 22nd Century. We have built the operating foundation, the brands, the products, and the initial pathways to reach the consumer with a product that can truly change smoking behaviors and reduce health harms. We meet the adult smoker where they are with a cigarette and give them, for the first time, a real option to choose a lower nicotine pathway. This has been over a quarter of a century in the making and we have a very large market to serve with what I call the answer. I would personally like to take a minute and 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.

They have done an awesome job, and we look forward to updating you with press releases along the way and again at next quarter's earnings release timeframe. I hope you all have a great day and thank you for joining.