22nd Century Group, Inc. Q1 FY2025 earnings call

• The company has restructured its business to focus on future growth, with segments including value-focused CMO brands (Smoker Friendly, Pinnacle) and reduced nicotine premium products (VLN). - Product development initiatives: Smoker Friendly is introducing Black Label for the natural cigarette market and VLN private label SKUs; Pinnacle is expanding SKU lineup. - Plans to launch a new 22nd Century website, refresh Tri-VLN resource, and reactivate social media within tobacco advertising guidelines. - Regulatory progress: Low-nicotine FDA proposed rule comment period ends in September; the company is not dependent on FDA rule and has FDA-approved low-nicotine products. - Balance sheet improvement: Reduced debt under convertible senior secured credit facility, and a capital raise in April 2025 provided approximately $5.4 million in gross proceeds.

In the first quarter of 2025, net revenue was $6 million, a 50% sequential increase from $4 million in the fourth quarter of 2024. Gross margin was a loss of $0.6 million, an improvement from the prior quarter. Total cartons sold were 476,000, up 41% from $338,000 in Q4 2024. The value-focused CMO brands (Smoker Friendly, Pinnacle) and reduced nicotine premium products (VLN) are the main segments. The CMO business is high-volume, low-margin, contributing to gross profit while the branded products (Smoker Friendly, Pinnacle, VLN) are driving growth through product development and expansion of distribution.

• Volume is expected to grow in Q2 2025 and more meaningfully in the second half of 2025. - Aim to achieve breakeven EBITDA in the fourth quarter of 2025. - The recent capital raise provides cash runway to execute the strategy for the remainder of 2025.

• Regulatory uncertainties, particularly regarding the low-nicotine FDA proposed rule. - Dependence on state approvals and distribution for product rollout. - Ongoing lawsuit against Dorchester Insurance Company over a $9 million business interruption insurance claim, with discovery ongoing and trial set for November 2025.

Q: Do you still foresee a breakeven of EBITDA for the fourth quarter of this year?

A: Yes, we're still on track in the later half of the year to get to breakeven.

Q: Do you see CMO continuing to grow from this first quarter level and VLN kicking in over the course of the year?

A: Yes, CMO is on a growth path with Smoker Friendly and Pinnacle franchises, and VLN distribution will start with state approvals.

Q: Looking at the balance sheet, with the increase in accounts receivable, does this portend a need for additional financial capital?

A: After the recent financing, we're comfortable with the cash runway, and a large portion of the receivable balance is from new CMO customer agreements.

Q: What is the status of warrant exercise dilution?

A: Approximately halfway through the exercise inducement process for warrants, with a remaining tranche to exercise for additional proceeds and shares.

Q: Are there implications for 22nd Century growth from competitor trends in the tobacco industry?

A: Tier 1 price increases drive migration to Tier 4, where 22nd Century's value-focused brands play, and we're anticipating VLN launch.

Q: Have we seen the worst of the CMO product line issues in 2024, and is it on a growth trajectory?

A: Yes, the worst of 2024 for CMO is past, and it's on a growth trajectory in cartons, price, and revenue