22nd Century Group Inc Stock

Thank you. Welcome to the 22nd Century Group's second quarter 2026 conference call and webcast. [Operator Instructions] It is now my pleasure to turn the call over to Dan Otto, Chief Financial Officer of 22nd Century Group.

Good morning, everyone, and welcome to 22nd Century Group's second quarter 2026 earnings conference call. Thank you for joining us. With me on the call today is Larry Firestone, Chief Executive Officer. Before we begin, please note that today's remarks include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those described in these statements. Please refer to the company's earnings release and SEC filings, including our most recent annual report on Form 10-K, for a discussion of these risks and other factors.

In addition, during today's call, management may refer to certain non-GAAP financial measures. Reconciliations of those measures to the most directly comparable GAAP measures are included in the company's earnings release. I'll now turn the call over to Larry.

Thanks, Dan, and good morning, everyone. Thank you for joining us today and for your continued interest in 22nd Century Group. The second quarter was an important period for our company. We continued executing a strategy that is reshaping 22nd Century into a stronger, more focused, and ultimately more profitable business. That strategy is centered on building a scalable branded platform led by our proprietary reduced nicotine tobacco products, including our flagship VLN cigarettes, expanding distribution of our higher-margin products, improving our product mix and moving decisively away from the legacy business that did not generate acceptable economics.

22nd Century is the leader in low-nicotine tobacco and low-nicotine combustible cigarettes, designed with authentic tobacco to help smokers reduce their nicotine consumption. We're seeing smokers choose our VLN products as an alternative to full-strength combustible cigarettes. And we believe this category has meaningful room to grow. More broadly, our direction is clear. We are prioritizing profitable growth over uneconomic volume. We are investing behind brands that can win at retail, and we are aligning our commercial model, pricing strategy and manufacturing footprint to support a stronger earnings profile over time.

The first half of 2026 reflects a company in transition, but transition with purpose. Historically, too much of our business was tied to high-volume, low or negative margin contract manufacturing. That volume may have added scale, but did not create durable value. In many cases, it created negative working capital, absorbed factory capacity and masked the true earnings power of the branded platform we are now building.

Today, we are taking a different path. We are building 22nd Century around higher-quality revenue streams, branded products, differentiated offerings and categories where we can compete on value, innovation and margin rather than simply on price. We believe that shift is the right one for shareholders and the right one for retail partners and the right one for the long-term future of the company.

Let me turn now to what we believe were the most important developments in the quarter: Commercial progress, pricing discipline and the foundation for margin improvement in the second half of the year. The second quarter delivered meaningful validation of the opportunity in front of us. We announced new distribution that will be ramped up to begin selling in Q4 for Pinnacle VLN in Metro New York and Northern New Jersey through one of the nation's largest cigarette retailers. This expansion adds nearly 150 high-visibility store locations in a dense and attractive market, creating another strong platform for consumer trial, brand awareness and incremental high-margin revenue.

That matters for several reasons. First, it is another proof point that retailers are increasingly willing to allocate space to the Pinnacle platform and the low-nicotine offerings under the Pinnacle brand. Second, it shows that our commercial discussions are translating into placement with meaningful operators in attractive geographies. And third, broader distribution is one of the key levers for accelerating awareness, trial and repeat purchase over time. We also continue to build out the broader Pinnacle branded portfolio, including the launch of Pinnacle Pure. This is strategically important because we do not view Pinnacle as a single product story. We view it as a growing brand family that can compete across multiple product types, price points and merchandising positions.

The more complete our portfolio becomes, the more relevant we are to retailers and the more leverage we have in distribution discussions, and we believe our Pinnacle brand is poised to become a national brand. Further, we believe Pinnacle Pure opens up a particularly compelling opportunity. In the premium Tier 2 cigarette category, especially within tobacco and water style product offerings, there are relatively few strong options available from major retailers and traditional cigarette purveyors. That gives us room to differentiate our brand, win new shelf space and support the broader momentum of the Pinnacle franchise. Importantly, the success of the conventional Pinnacle portfolio also supports the adoption of Pinnacle VLN because both the retailer and the company benefit from broader brand recognition and the ability to merchandise the brand across multiple slots in the store.

Beyond what we announced during the quarter, we are encouraged by what we are seeing in the pipeline. The progress we made in Q2 is generating follow-on interest from additional large retailers and cash-and-carry operators. We're also seeing growing interest from new classes of trade, including drug and digital-first convenience. In other words, the funnel is broadening, and that's exactly what we want to see at this stage of commercialization. At the same time, we want to be clear about where we are in the revenue cycle. Much of the volume we have seen to date still reflects initial load-in orders. That's an important milestone, but it's only the beginning.

The next phase is about execution, converting initial placement into repeat purchasing, increasing velocity at store level and building a recurring revenue base that becomes more predictable and more profitable over time. That is why our focus in the back half of the year is not just on adding slots, but on activating those slots. Our objective is to grow total store count from approximately 2,000 to 5,000 by year-end across roughly 35 states, while also improving rate of sale and consumer pull-through. Those 2 goals must work together. Distribution without sell-through is not enough, and strong unit economics require both broader placement and better recurring movement at retail.

To support that next phase, we're refreshing our marketing approach and adding expertise that we believe will strengthen commercial execution in the second half. Our goal is straightforward: Faster adoption, deeper penetration and better conversion of pipeline interest into productive durable accounts. Another major theme of the quarter is pricing discipline. Across the tobacco industry, successful operators manage pricing carefully to recover declines in unit volume, increases in excise taxes and offset inflationary pressure across material, labor and overhead. We are doing the same. We have taken steps to ensure that our pricing better reflects the real economics of manufacturing and distribution, and we believe that this discipline is necessary if we're going to build a sustainable and investable business.

This is especially relevant in the legacy CMO business, where significant volume historically came with low or even negative gross margin. As we have implemented pricing changes to improve profitability, some customers have chosen not to continue with 22nd Century and instead moved to lower-cost suppliers. We view that as an acceptable consequence of rational pricing.

Let me be very clear. We are not interested in holding on to revenue that undermines gross profit and consumes factory capacity without creating shareholder value. If a piece of business cannot meet appropriate economic thresholds, it is not the right business for us to pursue. Our reported revenue and volume will continue to reflect the final stages of this transition over the next 2 to 3 quarters.

Just as important, the business we are building in its place is better business. Our branded platform and particularly products under the Pinnacle brand, offers stronger margin potential, greater brand equity and better strategic positioning than legacy contract volume ever could. So while our low-quality CMO revenue will decline, we believe the mix shift is underway and is directionally very positive for the company. As we look forward, we continue to expect the legacy CMO transition to play out over the balance of 2026 and into early 2027.

By the end of 2026 or early first quarter of 2027, we believe the majority of the remaining legacy CMO volume in categories such as filtered cigars, white-label cigarettes and export cigarettes will be substantially transitioned away from our factory, and those contracts will be largely wound down. That does not mean factory utilization stops mattering. It still does. Our contracts and pricing are now much better aligned with the economics we need, but sustained gross margin improvement still requires sufficient profitable volume to absorb the fixed cost structure of the plant.

While our pricing reset has been critical, it is only part of the equation. The other part is replacing low-quality volume with better quality, higher-margin revenue streams that can scale. That is why we continue to view the Pinnacle platform, our broader branded portfolio and our expanding commercial reach as the primary drivers of financial improvement going forward. When you put these pieces together, the gross margin story becomes clearer. We believe 3 forces are beginning to work in our favor.

First, we are expanding distribution of products that carry better margin potential than the legacy volume they are replacing. Second, we are moving from initial load-in towards repeat sales, which should help improve revenue quality and factory absorption over time. Third, we believe our major contract and pricing actions are now substantially in place, giving a stronger economic foundation from which to operate. For that reason, we believe the second half of the year should begin to show the benefits of the repositioning we have been discussing over the last several quarters.

We are not declaring victory, and we know execution remains critical, but we do believe the building blocks for gross margin enhancement are materially stronger than they were at the start of the year. Over the long term, we are building a strategy that is succeeding in the U.S. and that can ultimately extend beyond the U.S. to international markets facing many of the same challenges. We were first to market with our low-nicotine technology, and maintaining that leadership will require continued investment in product development, technology and distribution.

Our pipeline of retailer discussions remains very active. As our low-nicotine products continue reaching consumers in the market, we expect to keep building awareness, generating sales data needed to support the broader national and over time, international expansion. We have clear targets for the second half of 2026 that we believe can establish the foundation for a stronger 2027. Shipments of our branded products in the second half of the year are expected to be significantly larger than the first half of 2026. At the same time, we will continue completing the wind down of the volume-driven CMO business and focus our resources on growing branded products.

So to summarize, the second quarter reinforced that 22nd Century is moving in the right direction. We expanded commercial distribution. We advanced the Pinnacle brand platform. We broadened our opportunity set across retail and alternative channels. We maintained pricing discipline, and we continue to exit lower-quality business in favor of revenue streams with better economics and stronger long-term strategic value.

And with that, I'll turn the call over to Dan to go through the financial results in more detail.

Thank you, Larry. For the second quarter of 2026, net revenue was $2.9 million compared to $4.1 million in the first quarter of 2026, a sequential decline of approximately 29%. For the first half of 2026, net revenue was $7 million compared to $10 million in the first half of 2025. As Larry noted, our first half top line as well as expected over the next two quarters continues to reflect the intentional transformation of the business that we've already been discussing for several quarters, shifting away from the majority of our contract manufacturing business and focusing on our reduced nicotine products and branded offerings, which we believe provides substantially better gross margin potential.

Turning to gross margin. Both quarters in the first half of 2026 generated gross losses, but the trajectory is informative. Gross loss for the second quarter was $0.3 million compared to a gross loss of $0.6 million in the first quarter of 2026. On a year-over-year basis, our second quarter gross loss also narrowed meaningfully versus the $0.6 million recorded in the second quarter of 2025, reflecting our deliberate shift away from low-margin CMO export volume and toward higher-margin Pinnacle and VLN SKUs.

Included in second quarter gross margin were two discrete items. First, we recorded a one-time charge of approximately $196,000 for the reversal and write-off of aged inventory discontinued by one of our contract manufacturing customers. Second, and offsetting the first, we recognized a one-time MSA NPM excise tax recovery of approximately $692,000 covering prior tax periods. We view both items as non-recurring and neither is reflected in our forward planning.

For the first half of 2026, gross loss was $0.9 million compared to $1.2 million in the first half of 2025. While the narrowing of gross loss year-over-year is a positive directional signal, the pace of improvement has not been as fast as we planned. I'll come back to our expectations for the second half of 2026 in a moment.

Operating loss for the quarter was $3.3 million compared to $3 million in the first quarter of 2026. Net loss from continuing operations for the quarter was $3.3 million compared to $3 million in the first quarter, and adjusted EBITDA was a negative $3.5 million compared to $2.6 million in the first quarter of 2026. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $6.1 million and no outstanding debt. We continue to manage liquidity carefully and remain focused on aligning spending with our highest priority commercial and regulatory initiatives.

Capital allocation remains disciplined. Resources are being directed toward distribution growth, VLN commercial, Pinnacle portfolio launch, marketing initiatives and advancement of our reduced nicotine pipeline. Looking ahead, our focus for the remainder of 2026 and the central reason we continue to believe in a second half inflection is execution across two priorities: distribution growth and margin improvement. First, distribution. We ended the quarter with a retail presence of approximately 2,000 stores across 20 states, and we're targeting expansion to approximately 5,000 retail outlets by year-end 2026 across 35 states for our VLN and partner VLN cigarette products. That expansion is already underway with recent entries in the Metro New York, Northern New Jersey and California.

Looking beyond the convenience channel, we anticipate onboarding additional independents, cash and carry operators and a new digital-first convenience chain to help fill out that 5,000 store footprint, each contributing incremental stocking orders that support gross margin improvement.

Second is mix and absorption. We expect continued expansion of our product portfolio, together with higher-margin Pinnacle Pure and Pinnacle VLN reorder activity to improve the gross margin trajectory in the back half. At the same time, we continue to manage the absorption impact of lower overall plant volume as legacy contract manufacturing winds down. That balance, better mix offset with lower legacy volume essential to the second half story. Our 2026 strategic priorities remain unchanged: expand VLN distribution, manage costs with discipline and advance toward meaningful improvements in gross margin.

With that, I'll turn the call back to Larry for closing comments.

Thanks, Dan. Many companies in the tobacco and adjacent industries describe themselves as a leader or leading within a particular niche. We believe 22nd Century has earned a differentiated leadership position as we are the leader in low-nicotine tobacco and low-nicotine combustible cigarettes made from authentic tobacco designed to help smokers reduce their nicotine consumption, and we intend to maintain that position.

We've spent 28 years developing the technology portfolio that has brought us to this point. Today, our VLN low-nicotine products are in the market. Consumers are buying them, and we have a strategy to expand the category further through additional blends and brands. We will continue to engage with the FDA, pursue the necessary authorizations, maintain our technology leadership, and work to establish a meaningful position in the global tobacco market.

With our current authorizations, we believe our first-mover advantage remains significant. We're building a different 22nd Century, one driven by better brands, better distribution, better pricing, and better economics. We believe the commercial traction we're seeing today is laying the groundwork for stronger margins, stronger recurring revenue, and stronger shareholder value over time. Our job now is focused on execution, getting our brands and products into the hands of adult smokers who are looking for a familiar alternative to their full-nicotine cigarette.

We are pleased to welcome Katherine Rouse-Bailey as our Vice President of Marketing. Consumer awareness is critical, and navigating brand building within the constraints of tobacco marketing requires the right expertise. We believe Katherine is well equipped to lead that effort.

We also expect to add talent selectively in other parts of the organization, including sales and R&D, to support our expanding retail presence and the continued work required across science, product development, and technology. We expect to have additional developments to share in the coming months, and we also plan to present at the H.C. Wainwright Conference in New York in September, along with other conferences in the fourth quarter. Finally, I want to thank our team for their hard work and commitment. The road to this point has not been easy, but we believe the road ahead is exciting and rewarding. The dedication of our employees has been and will continue to be critical to our success. We appreciate your continued interest in 22nd Century and your participation on today's call. Thank you and have a great day.

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

Welcome to the 22nd Century Group's First Quarter 2026 Conference Call and Webcast. [Operator Instructions]

It is now my pleasure to turn the floor over to Matt Kreps of Investor Relations for 22nd Century Group. Please begin.

Thank you. Hello, and welcome to 22nd Century's First Quarter 2026 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 ended March 31, 2026. The results release and 10-Q will be 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, 2026, 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 SEC.

During today's call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted for certain noncash or nonoperating expenses. For more details on these measures, please refer to our results release issued earlier today.

And with that, I will now turn the call over to Larry.

Thank you, Matt. Good morning, everyone, and thank you for joining 22nd Century's First Quarter 2026 Results Conference Call. As we signaled in our year-end 2025 earnings call, which focused on the relaunch and initial shipments of VLN cigarettes, we expected Q1 2026 to yield modest sequential top line growth and similar operating results to Q4. We anticipated additional shipments of our VLN products to be minimal, while the initial stocking orders were worked through, which allowed time for in-store placement, setup, retailer education, and awareness among other activities. As I will outline below, we will see further traction now in 2026.

As a broad overview, looking at 2026, the shift for our company is now 100% focused on execution and growth, not only on growth in our retail outlets and points of distribution within those outlets, but through targeted investments in marketing, merchandising and developing the base of adult smokers who we believe will, and those who have already begun to smoke VLN cigarettes.

We anticipate market expansion to be very much a grassroots effort for VLN products as the headliner of the tobacco harm reduction movement. We know big tobacco, also referred to as big nicotine, is instead putting all their financial and marketing muscle into transitioning combustible cigarette users into nicotine pouches and other highly addictive nicotine solutions.

We, on the other hand, are the contrarian, and we accept the challenge to join the global efforts of the many countries around the world and regulatory bodies, such as the U.S. FDA and the World Health Organization, who have been attempting to curb smoking and the health arms of smoking and nicotine for many years.

At the core of this problem is nicotine addiction. Initially, in 2026, focused mainly on the U.S., we are looking for those adult smokers who are looking to change their lifestyle for the better. Life without nicotine addiction, that's the goal.

Solving this problem for the adult smoking consumers is and has been the core of 22nd Century's strategy for 28 years. We fully understand that other companies are trying to develop other methods to help adult smokers alter their smoking habits in what they claim is a positive way, like heat-not-burn and vaping, but with nicotine still at the core. They are not helping.

Then there are additional companies trying to derive alternative solutions in the form of cigarettes, such as hemp-derived answers and even tea leaves. And the fact is our VLN is the only FDA-authorized cigarette that is made with authentic tobacco to satisfy the adult smokers' true smoking experience. We believe that for many smokers, they like to smoke as they enjoy the ritual and the experience. They just don't want to be beholden to an addiction where they have no choice.

We have heard from some of our new VLN smoking consumers that they're enjoying the VLN smoking experience, and have reported the ability to change their smoking habit to a more casual or social activity versus a need driven by nicotine. Along these lines, annual spending on their smoking habit always comes up in the conversation. With big tobacco raising their per carton prices every quarter, this price gouging has, for years, been putting pressure on the consumers' disposable income, similar to the increases in fuel, groceries, et cetera. A pack-a-day smoker smoking a premium brand will spend almost $5,000 per year on their smoking habit.

Our VLN cigarettes, once adopted, give the consumer the advantage to manage their smoking habit and their personal spending on this commodity. We are here to help the smoking public shift the advantage to the consumer with our VLN cigarettes. The fact still remains, we have a large market of smoking consumers who have weighed in and want to change, but nicotine keeps the escape hatch locked. We believe that changing the dependence on nicotine is the key.

Now on to the market and on to our consumer adoption. Make no mistake, our VLN cigarettes are a very disruptive product. In an industry that is desperately trying to keep people smoking, it is a product designed to help them smoke less.

On the sales side, during the early phase of our VLN product rollout, we have secured distribution in the #3 purveyor of tobacco products in the U.S. with our Pinnacle branded products. In fact, for this retailer, on a sales per retail outlet basis, they ranked #1. This is an important early accomplishment for the launch of our VLN products, as we now focus in 2026 and using this as a stepping stone to garner additional retail penetration, while the product rollout is occurring in planned phases.

We are still in our infancy. But as we mature with retailers, we anticipate a regular cadence where we can focus more on consumer adoption. In their stores from the get-go, we have seen sales activity from consumers. Some stores are moving Pinnacle VLN product quite nicely, others are on a slower start, but nevertheless, still selling. The initial launch was designed with limited marketing to establish a baseline, and now we have begun promoting Pinnacle VLN with cross-promotions with other products as well as digital promotions with their fuel rewards program. We are anticipating a meaningful lift from this activity. Bottom line, consumers are now finding and buying our Pinnacle VLN.

We have also secured distribution of 22nd Century VLN with the #2 purveyor of cigarettes in the U.S. in a limited market in Illinois. The results are similar as we have some stores selling in consistent volume, while others are just starting to see movement in the stores.

As we look forward to the rest of Q2 and Q3, we will be adding distribution in New York, New Jersey and Southern California for Pinnacle VLN and other Pinnacle branded products. This will cover approximately 200 outlets. Then in Q3, we'll be adding distribution to the Southeast for Pinnacle VLN for a new retailer. We expect to see initial shipments in late Q3 and early Q4. This should get us close to our target for 5,000 retail outlets by the end of 2026. And following the rate of sale patterns that we've seen in the early stage of the VLN rollout, we believe we will see measurable growth from all the markets we are in. But more importantly, with every pack or carton sold, we are helping someone change their life for the better.

On the marketing side, with our restructured balance sheet and our retail distribution expanding, we are now at the stage where we're investing in consumer marketing as the highest return on our resources. To that end, we're hiring a new Vice President of Marketing to build out our consumer marketing capability and lead our efforts to drive awareness and adoption of VLN products among adult smokers. Consumer adoption is the unlock from here, and we will build the toolkit to engage customer awareness.

On the science side, the science behind VLN cigarettes is proven. Our products and results have been recognized and documented by the FDA and the World Health Organization in their efforts to establish low nicotine standards worldwide. Multiple scientific studies have consistently demonstrated the merits of our VLN products.

Using our proprietary technology, we have created and will continue to create new and innovative products as well as new strains of non-GMO, low nicotine tobacco to support our brands and other brands around the world as opportunities arise. We continue to engage the scientific community in advancing approaches to this problem using the form factor most comfortable for the smoking consumer, a cigarette.

On the financial side, we are addressing the remaining low or no margin products that we still produce. We're addressing pricing first, and we are continuing to exit the few remaining unprofitable contracts while ensuring our customers have continuity of supply. This, along with our branded product initiatives, including VLN products, will begin to produce the anticipated improvements in gross profits as the year progresses.

On the operating expense side, consistent with our remarks in previous quarters, we will be adding head count in marketing and sales as we continue to unfold new opportunities to expand.

And with that, I'll turn the call over to Dan for a review of the financials.

Thank you, Larry. For the first quarter of 2026, net revenue was $4.1 million compared to $3.5 million in the fourth quarter of 2025, an increase of approximately 16.1% on a sequential basis. Gross loss for the quarter was $0.6 million compared to a gross loss of $0.8 million in the fourth quarter of 2025. As Larry noted, while first quarter revenue improved sequentially, overall top line and profitability performance still remain below where we are targeting. That said, we believe the sequential improvement in revenue and gross margin is an early indicator of the commercial progress we are working to build on as distribution expands and product mix continues to evolve.

Operating loss for the quarter was $3 million compared to $2.8 million in the fourth quarter of 2025. Net loss from continuing operations was $3 million compared to $2.8 million in the fourth quarter of 2025. And finally, adjusted EBITDA for the quarter was negative $2.6 million compared to negative $2.4 million in the fourth quarter of 2025. While our near-term profitability metrics remain under pressure, our operating focus continues to be on scaling revenue, improving gross margin mix and managing costs in a disciplined way as we expand the platform.

Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $9.5 million. We continue to manage liquidity carefully and remain focused on aligning spending with our highest priority, commercial and regulatory initiatives. Capital allocation remains disciplined, with resources directed toward distribution growth, VLN commercial support, marketing initiatives and key opportunities for advancement of our reduced nicotine pipeline.

For the remainder of 2026, we're solely focused on execution. That includes growing store count to more than 5,000 locations, expanding retail availability, supporting new launches under the Pinnacle portfolio of products and partner VLN platform and improving the underlying economics of the business through better absorption and mix. While the timing of that improvement may not be linear quarter-to-quarter, we continue to believe and we are very excited about the back half of the year, which has the potential to show much stronger commercial momentum than the first half.

With that, I'll now turn the call back to Larry for closing comments.

Thank you, Dan. As we look further into 2026, our priorities are clear. We are focused on execution. This includes expanding distribution, increasing retail outlets, improving the effectiveness of our VLN marketing campaigns, broadening the footprint of the Pinnacle franchise and continuing to advance the regulatory and product pipeline behind our current VLN reduced nicotine platform.

We have very disruptive technology and products with our low nicotine tobacco and VLN cigarettes. In fact, VLN is the only authorized disruptive product in the form of a cigarette on the market, and it is fully aligned and recognized by the global organizations who have adopted a mission to get to a smoke-free world.

To really accomplish this, they know that nicotine must be addressed. But step one is the smoking public. We believe at this time, we have the antidote. There are 1.1 billion smokers in the world, and a host of them are looking for an answer to change. We have the answer, and that's the size of our opportunity. Our job now is execution. And we know we will face headwinds from the market, but we'll continue to drive VLN cigarettes into smokers' hands and target to change lives one pack at a time.

I'd like to thank our team, as always, for their support and excellent execution as well as their belief and commitment to the mission we are on.

We appreciate your continued interest in 22nd Century and your participation on today's call. Have a nice day.

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

Welcome to 22nd Century Group's Fourth Quarter and Full Year 2025 Conference Call and Webcast. [Operator Instructions] It is now my pleasure to turn the floor over to Matt Kreps, Investor Relations for 22nd Century Group. Please go ahead.

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 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 SEC. During today's call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted for certain noncash or nonoperating expenses. For more details on these measures, please refer to our earnings release issued earlier today. And 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. Then as 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 2 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 health care 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 of 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 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. But even with the compressed time line 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 2/3.

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. 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 consumers' 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 where 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-millimeter version of our VLN cigarette, which once authorized, will allow us to expand served markets for those consumers who prefer the 100-millimeter cigarette. For the broader picture, the FDA published their low nicotine proposed rule in January 2025 with a comment period extending through 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. So 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. So our strategy is to continue to expand distribution and push our way into retail in all 50 states, continue to gain consumers and share of the market so that when the FDA has to make the final go/no-go decision on the mandate, we, 22nd Century 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 that harms of nicotine has on the brain, the skeletal system and the vascular system. And 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 and 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, and 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 the 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 USD 40. Australia is a government that is serious about smoking. Several other countries have taken a strong position against smoking in public areas and the workplace. Our low-nicotine tobacco varieties include non-GMO, so we can manufacture products that comply with many of the international country standards for consumer products, including tobacco. Our non-GMO, low-nicotine tobacco varieties utilize our most recent technology developed into commercial form over the last few years. We've had an open dialogue with several international constituents, both at the governmental level and the commercial level regarding our low nicotine tobacco and our VLN products.

All of these discussions are in their infancy, but it is clear that we are in the middle of the battle. Our attitude internationally is the same as it is domestically, which is let's get our low nicotine tobacco and VLN products in the market, recognized by the retailers and consumers as a brand they can trust with their smoking choices and build a base of business like we are in the U.S. Transitioning now into the year ahead for 2026, I'm excited to report that we're finally in the building phase of our company and focused on growth. We fully understand that we're going to have to earn our place in the market one smoker at a time. And we know with every pack we sell, we're changing a life. This is a delicate transition for a smoker who's had what we call the moment. That moment has to initiate a change, and we understand that changing a habit is one thing, but altering an addiction as powerful as nicotine, which is akin to heroin is a really big deal.

Earlier this week, we closed an additional round of financing to provide additional growth capital to support the plans we will be implementing throughout 2026. We now have over $10 million in cash on the balance sheet to implement our strategy. Now looking ahead in the coming months, we'll be adding important additional points of distribution in the Northeast and other states that wrap around the Mid-Atlantic region. We'll also be expanding in California on the West Coast. We will be launching our latest Pinnacle combustible product, complementing the broad Pinnacle brand portfolio, Pinnacle Pure. Pinnacle Pure is a tobacco and water style cigarette that we will be looking to drive into existing retail outlet footprint. As we launched VLN under 3 different brands in the U.S., the initial phase was stocking retail locations as well as training distributors and retail associates about reduced nicotine content cigarettes.

Now we will add prominent retail collateral and strengthen our marketing support to increase rate of sale. We have very early baseline measurements and are looking for steady growth. We will track not only the number of cartons, but the geographies that are moving our VLN products the most. A key component of our growth is that we'll be adding headcount in the coming months to support product launches and other marketing initiatives. We believe we're the good guys in this market. And long term, even if a smoker desires a high nicotine alternative to a standard combustible cigarette, such as a vape, an e-cigarette, a heat-not-burn device, a pouch or moist snuff, we will be here in the market with a VLN answer when they have the moment and they decide they've had enough nicotine. We know this is the beginning of a very long and challenging road to success. We're up for the challenge. And as we've seen, we have consumers who are up for a change. Now I'll turn the call over to Dan to discuss the numbers.

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 continue 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% to 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 we'll 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 through 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 time frame. I hope you all have a great day, and thank you for joining.

Thank you for attending today's presentation. You may now disconnect.

Welcome to 22nd Century Group's Third Quarter 2025 Conference Call and Webcast. [Operator Instructions] It is now my pleasure to turn the floor over to Matt Kreps, Investor Relations for 22nd Century Group. Please begin.

Hello, and welcome to 22nd Century's Third Quarter 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 ended September 30, 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 September 30, 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 SEC. During today's call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted for certain noncash and nonoperating expenses. 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.

Thank you, Matt, and good morning, everyone, and thank you for joining 22nd Century's Third Quarter 2025 Results Conference Call. Our team continues to make significant progress. We've transitioned from a company that was dedicated to a massive cleanup and restructuring to a company poised to contribute important technology to a very well-established industry, which will fuel our growth phase. We have also improved our balance sheet significantly during this quarter, becoming debt-free and now we are funded with cash resources we have not had over the past 2 years.

Today, I will lay out the direction of our company as we end 2025 and enter 2026 where we are focused on growing distribution followed by measuring and accelerating rate of sale of our products. To start, I want to review some facts and lay some groundwork on the tobacco plant, nicotine and the overall industry. As the tobacco plant grows, it produces the highly addictive substance, nicotine. The leaves are harvested and cured, and the nicotine contained within is then utilized for a variety of highly addictive consumer products, both combustible and noncombustible.

These products are designed to release neurotransmitters that bind to the receptors in the brain, triggering the release of dopamine, norepinephrine and serotonin, which cause a feeling of pleasure and alertness, which contributes to its highly addictive nature. Once this cycle starts, the nicotine-laden products in the market keep consumers coming back for more and they remain addicted to nicotine and nicotine addiction is the market our competitors have thrived on.

According to the University of California, San Francisco, nicotine has been proven to be as or more addictive as cocaine and heroin. Therefore, many people who use these products, cigarette smokers, for example, develop nicotine dependence, which makes it extremely hard to quit, especially when they try to stop smoking under their own influence and will. 70% of smokers report they want to quit. But unfortunately, all too often, quitting attempts are not successful or pursued to completion unless they are predicated on the user having developed a significant tobacco-related health issues such as heart disease, cancer or stroke.

Sadly, according to the American Lung Association, tobacco use is the #1 cause of preventable death in the U.S. and of the 28.8 million smokers in the U.S., almost 500,000 people die each year from smoking-related issues. We can extrapolate these statistics and apply them to the worldwide market of 1.1 billion smokers and the same math, only larger numbers, such as approximately 8 million people die each year due to smoking-related health issues. In the U.S., we spend approximately $600 billion annually or 6x more than the total U.S. tobacco industry revenues in health care costs, cleaning up the mess that this industry has made.

This is why over the years, there's been a whole industry developed to help nicotine-addicted consumers reduce their consumption or quit, including pharma, health centers, rehabilitation centers, nonprofits, et cetera. And this does not include the billions that are siphoned from smokers' pocketbooks when they purchase cigarettes to allow the tobacco industry to make payments under the MSA or the Master Settlement Agreement to the settling states, which is funding designed to handle the significant health care prevention of you smoking, education and tobacco control issues resulting from smoking.

Nicotine addiction is clearly the issue at hand that needs to be addressed and solved. Some of our peers in the industry talk a big game and some not at all. The whole concept of Tobacco Harm Reduction starts by addressing the nicotine that is produced in the tobacco plant itself. We at 22nd Century have made Tobacco Harm Reduction our mission and are here to help solve this big problem with our technology and our products. One thing is clear, there's a substantial place in the market for our low nicotine tobacco and other VLN products. In our opinion, every combustible cigarette brand should be carrying a VLN set of SKUs to round out their product portfolio and shift their position to support the FDA and the tobacco harm reduction movement.

Now to our business. We've spoken in our remarks throughout 2025 about a shift in our strategy away from elements of our legacy CMO business, whereby we have had either negative margin or low-margin product sales. Many of these customer contracts were high volume with razor-thin margins and consumed significant working capital. Although high volume in manufacturing is usually an advantage, frankly, the nature of this business model and our company is not aligned to our mission and is counter to our overall profitability goals.

Our financial results each quarter this year reflect the slow transition of revenues from this business into the higher-margin branded products as our product mix shifts. However, with the sustained losses at the gross profit line, during the third quarter, we also implemented widespread changes in our manufacturing operations to improve the cost structure so that it fits in the direction of where this company is headed and to shutter the slow drip burn in profitability and cash. Had we continued, our breakeven point running the former CMO business would have been over 12 million cartons annually. This simply was not achievable for these products and frankly, was a distraction to our larger strategy and does not take advantage of the cornered resource we have in our IP and our technology.

Now to our branded business. We are the only company that produces and distributes brands that carry both full nicotine and very low nicotine combustible cigarettes. So far, the brands that we are carrying in the full nicotine landscape are primarily represented in Tier 4. We believe in offering our customers other mid-tier and premium options in these brands. This is important as our sales pitch to distributors, wholesalers and retail requires a full slate of product offerings as opposed to just VLN products.

Although our primary goal is to advance our VLN products in the market, we need to continue to gain brand recognition, awareness and product availability in order to be successful. This is why our product offerings have expanded to include other mid-tier and premium full nicotine combustibles, primarily with natural style cigarettes. Natural style cigarettes, generally having only tobacco and water as the main ingredients are underrepresented in the market with respect to the lower-tier brands. Most natural style product offerings are in a premium position only.

Not only does our company benefit from the expanded product offerings at higher margin, but we are also able to provide customers with a product mix of SKUs that have higher margin per slot in a category that carries significant demand. By pairing the natural style with existing brands and a partner brand VLN, we are able to more quickly gain market penetration. Our newly branded and partner-branded VLN products are finally in the market for sale, with shipments occurring in the third quarter and many store display resets are actually being implemented.

Smoker-friendly VLN can be found in smoker-friendly stores in Missouri and Florida. Pinnacle VLN can be found in 1,361 Murphy USA stores in 20 states and 22nd Century VLN can now be found in Illinois in the Chicago land area in Circle K. We also have commitments from some smaller wholesalers and retailers in other markets that will keep our VLN brands moving to the market and widening distribution and consumer accessibility. Our new tryvln.com web page has a store locator that will allow our customers to find our VLN and Partner VLN products in the market and currently reflects all locations I just mentioned.

With respect to adoption of our natural VLN and Partner VLN product offerings, we've added smoker-friendly Black Label, which is a natural style and SmokerFriendly VLN now represented by over 20 different SKUs in total for all styles. Likewise, we are adding Pinnacle Pure as a natural to complement the Pinnacle VLN products for a top 5 C-store chain in the U.S., bringing that total SKU count to 10. We will continue this strategy as we continue to introduce our brands and expand our presence.

The importance of this approach where we develop brands with both a full nicotine and a low nicotine presentation is that if and when the FDA enacts their very low nicotine mandate, our branded customers will already be positioned to have a surviving product with long-term brand recognition. In any event, we are helping our customers address the changing demands of the tobacco consumer in the U.S. We look forward to having additional customers and brands adopt our Partner VLN strategy and add a set of VLN SKUs to their roster, ultimately to widen the VLN presence in the market and to be prepared to support the FDA mandate.

We are currently in development of a third brand under this strategy as well as others that would be available for licensing to retailers for their own private label brand. Given the margin profile of the One-Two Punch of the natural style and VLN product offerings, our profitability will benefit regardless of product mix between them. The natural and VLN products business model in comparison to the high-volume business model has a breakeven point of approximately 500,000 cartons, which is quite a difference from selling over 12 million cartons of the low-margin CMO products required to be sold for us to breakeven.

Now to our technology. We continue to move ahead. Our plans are to offer not only packaged combustible cigarette products, but also to offer low nicotine leaf to other players in the market as well as licensing opportunities. And therefore, our technology development platform is the nucleus of our company, and we believe will be a key to a transformation of the tobacco industry. We understand that others are developing alternate technologies for low nicotine combustible products. We've seen vapes, hemp/cannabis tea and other composites as attempts to deliver a similar result to our VLN cigarette.

The challenge is, smoking is a very personal habit and having to change form factors to something other than the familiarity of a combustible cigarette is a big deal. We believe that our straightforward low-nicotine tobacco combustible solution is the strongest offering for the market with a very entrenched customers who are used to smoking tobacco in cigarette form. For that reason, we see our solution as the easiest and most straightforward transition to a low-nicotine tobacco product. Not to mention, our VLN predicate is already FDA authorized, familiar in taste and format and form factor and is now in the retail market that offers the consumer an easy choice.

Our development plans also include 100-millimeter VLN cigarettes to join our King size, which we will file a PMTA application with the FDA in the coming months. Additional low nicotine tobacco strains, which will be available for license or alternative blends. We successfully grew very low nicotine oriental tobacco varieties as part of our 2025 crop year to add to our flue-cured and burley leaf, disease resistance to help crop yields, very low nicotine filtered cigars. We previously developed this form factor and have sold limited quantities to universities to be used for research purposes. Under the FDA's proposed rule, filtered cigars are included and therefore, are an important addition to our very low nicotine products offerings in the market.

Other Tobacco Harm Reduction attributes. We are not finished developing improved technology for this industry. In 2024, there was a marketplace research study that was completed using our 95% less nicotine Spectrum research cigarettes. And out of 450 subjects, 40% of them changed their smoking habit dramatically and reduced their consumption over the 12-week period. This is a huge result. If we extrapolate that against 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 the roughly the same amount of time. 11.5 million smokers is 57% of the 70% of the smoking population that has reported that they want to quit.

We know of no other technology and solution that has the potential impact that our VLN products have. Following that backdrop, here's where we are in the progress of building 22nd Century. Our management team has completely reshaped 22nd Century since November of 2023. And we are now ready for the marathon of building a technology-driven consumer products business with market-leading technology in the tobacco industry. Our business model going forward will change again as we will support not only products manufactured and sold by us, given the importance of addressing the nicotine epidemic in the U.S. and around the world, we will also support licensing arrangements that will allow other tobacco companies to adopt VLN products under their brands.

This could come through us selling leaf, licensing the plant science technology to other companies, licensing our FDA authorized VLN predicate or licensing the use of the VLN trademark for use in their products like our partner brands. We believe by opening this door to others in the industry, this will welcome other tobacco companies to join forces with us and support the FDA and the low nicotine mandate by licensing our technology and offering the choice of low nicotine products under their brands. Many in the industry currently oppose the FDA's goal with respect to implementation of a low nicotine standard for combustibles.

However, we believe it is similar to other sweeping industry changes that we've seen in the past caused from the enactment of law for the betterment of public health, such as the implementation of unleaded gas. We already are and plan to continue to be the first to market and the architect of the low nicotine combustible market with both cigarettes and filtered cigars. When other players in this industry begin to understand that low-nicotine tobacco is crucial to tobacco harm reduction and fits within the scope of their harm reduction mission and a complementary product offering necessary for consumers, we stand ready to help them. We have several solutions to offer the industry.

22nd Century branded VLN products, those are already in the market. Partner-branded VLN products such as SmokerFriendly and Pinnacle, those are already in the market. Other partner VLN brand options, ones manufactured by 22nd Century, we can make those for people. Licensed for manufacturing by others, we can license out so that folks can manufacture with our tobacco. Our low nicotine tobacco that is leaf not consumed by us, can be sold to other companies who wish to adopt and license a VLN product line or can be licensed to other tobacco companies who wish to license our technology and leaf to grow their own and license the VLN product line.

When we look at the industry, and our consumers, we believe that we have the right product for this changing market in a form factor that is familiar to the consumer. We are very much aligned with the advent of the NA beer and NA spirits markets as those established markets are also transitioning. Like these parallels, beer and spirits industry delivered these NA products in the same form factor that was familiar and customary for the consumer. VLN cigarettes do the same. Tobacco harm reduction does not need to rely on new electronic vessels to consume tobacco products. We believe that a better combustible low-nicotine cigarette or filtered cigar that gives the consumer a choice is a far superior answer in this market to solve a problem.

The product reviews of our newly branded and partner branded VLN products are strong. Our VLN products received excellent reviews on taste and smoking experience. Now as we expand distribution to all 50 states in the U.S. and gain traction with C-stores, independents and other retail outlets, rate of sale will be the key measure for all products in our branded portfolio, and this will drive our business model to the profitability targets that our industry delivers.

Before I transition to Dan to talk over the numbers, I want to end with a reflection of accomplishments during the quarter and through today. Our company and management team is increasingly focused on our future. And for the most part, we are no longer dealing with the issues of the past. Examples of this include we filed our response to the FDA's low nicotine mandate. Not only are we in support of the FDA's proposed rule, our technology is the foundational backbone, and we have proven the commercial feasibility of this standard. Further, we are fully aligned with the responses publicly available on the FDA's website condition by the medical community, counting the impactful benefits to public health.

From an industry point of view, based on published comments, 22nd Century is the only tobacco company that is an ally of the FDA and the proposed rule. Every other tobacco company is opposed and wants to fight the FDA and keep nicotine addiction as part of the equation. Having the wider tobacco industry carry both full nicotine and low nicotine cigarettes would be a huge step forward in the Tobacco Harm Reduction Movement. As Dan will share, we finally have a balance sheet that we can now direct our resources towards the future versus the cleanup that we've been executing. This included raising capital, which allowed us to pay off our senior secured debt and ground the balance sheet for growth capital.

We also settled the insurance lawsuit, which has added $9.5 million in non-dilutive cash to the balance sheet. We will also implement an at-the-market ATM facility. This is a responsible tool for us to selectively and opportunistically raise capital to meet the demands we will have for growth capital. We currently are well funded and therefore, we'll look to this resource to maintain lower cost of capital moving forward in comparison to where we have been in the past 2 years.

And finally, this management team has entered into customary executive employment agreements with our key NEOs who have been instrumental in transitioning this company and will be key resources moving forward to achieve rapid growth. We're 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.

Now I'll turn the call over to Dan to discuss the numbers.

Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today. Third quarter 2025 is a story of significant improvement to our balance sheet and completion of the necessary steps to drive margin improvement with the restructuring of our manufacturing operations. The stage is set now for adoption of our higher-margin branded products to begin delivering sequential quarterly improvement, both top line and in overall profitability. Shipments of our newly branded VLN and Partner VLN products year-to-date through the end of October now represent approximately 6,000 cartons.

Natural style cigarettes, which we have been shipping for a larger portion of the year, have added an additional 14,000 cartons. As we push forward to breakeven profitability, we will measure progress against our annual goal of 500,000 cartons of these products, adding to the remaining layer of base CMO business. The higher-margin branded products typically provide for gross profit margin of 20% to 30% after accounting for pricing promotions and other marketing dollars. Scaling will occur through adoption of these products at additional store locations.

VLN and Partner VLN cigarette products are now in approximately 1,500 stores today across 21 states, and we are authorized in approximately 40 states. The full detail of state authorizations for each brand is provided in our earnings release. As our state authorizations continue to increase for each product SKU, that will allow for more rapid expansion to increase store count. Availability of very low nicotine cigarettes across the United States is paramount to our ongoing effort of educating consumers and garnering trial and adoption. And therefore, each additional state we receive from authorization is key.

We expect to begin seeing rate of sale metrics in the early part of 2026. These metrics will provide invaluable data as to the efforts and successes of our marketing collateral, which is all reflective of our latest branding as well as our current pricing structures such as buydowns, rebates and other spend. As I mentioned, we implemented cost savings and restructuring initiatives of our manufacturing operations during the quarter in effort to more rapidly improve gross margin. Outside of raw materials used for our products, our costs are largely fixed, and therefore, each additional carton manufactured and sold drives improvement to margin.

And with the strategy shift to focus on higher-margin branded products, we will be able to reach our profit goals with significantly fewer cartons. We expect to see sequential improvement in the fourth quarter of 2025 and throughout 2026, reflecting these efforts. I'll transition now to walk through some of the specific numbers in our financial results for the quarter, all excluding discontinued operations unless noted. The balance sheet includes $4.8 million of cash on hand and a $9.5 million receivable related to insurance recovery from the Dorchester business interruption insurance claim, which was subsequently received in cash in October 2025. This increased total assets to $32.4 million as compared to $21.7 million at December 31, 2024.

Current and long-term debt were 0 at September 30, 2025, reflecting the full repayment of the senior secured credit facility during the quarter. The company also paid in full the put option exercised on the Omnia warrants of $1.23 million held by a former subordinated lender after quarter end, further improving our liabilities and overhang from the past. Total liabilities decreased to $11.3 million at September 30, 2025, as compared to $17.7 million at December 31, 2024. Accordingly, we have ended the quarter with having improved our balance sheet current ratio to approximately 2.3:1.

Moving to the P&L. Net revenue was $4 million in the third quarter 2025, decreased from $4.1 million in the second quarter 2025. Total cartons sold were $517,000 versus $779,000. The decrease in volume reflects the aforementioned adjustments we have made in shifting our strategy within the CMO business. Gross profit was a loss of $1.1 million in the third quarter of 2025 as compared to a $0.6 million loss in the second quarter of 2025. The increase in loss was reflective of lower volume and the transition period of our product mix from low-margin CMO to higher-margin branded products as well as incurring some restructuring costs from implementing our cost savings initiatives and inventory write-downs.

Total operating expenses for the third quarter were $2.2 million as compared to $2.3 million in the second quarter. Interest expense for the third quarter was $0.5 million, but included a $0.4 million noncash debt extinguishment charge related to the full repayment of the senior secured credit facility. Continuing on, third quarter 2025 net loss from continuing operations was approximately $3.8 million as compared to $3.3 million in the second quarter and adjusted EBITDA during the third quarter was a loss of $2.9 million as compared to a loss of $2.6 million in the second quarter of 2025.

Finally, consolidated basic earnings per share for the third quarter 2025, inclusive of discontinued operations was $1.55 per share, reflective of recognizing the $9.5 million gain on insurance settlement from the Dorchester business interruption claim as compared to a basic loss per share of $13.61 in the second quarter of 2025.

That concludes our prepared remarks. I'd now like to open it up for any questions from our analysts.

The first question comes from the line of Andrew White with Emerging Growth Research.

Good to hear from you again. It looks like you had a pretty interesting quarter, good quarter, too. I had a couple of questions, if I could ask you. First and foremost, it looks like post the end of the quarter, you had about $14 million in cash. What are your plans to use that cash going forward?

Yes, Andy, we're going to look forward to entering 2026 with a pretty well-funded balance sheet, as Larry said. This represents some growth capital that we've really needed and haven't had over the last couple of years. And so this will support operations. It will support advancing VLN in the market, where we'll continue to add additional store count and distribution. And we actually have a little bit of R&D and CapEx that will start. That will commence in the early part of '26 as well, where we've really not been able to do much of that in the last couple of years as we work through the restructuring.

Okay. Do you intend to use any of the cash to settle outstanding warrants? And for that matter, what's the share equivalent of outstanding warrants right now?

No.

No. Okay. And what's the current share equivalent of outstanding warrants?

Just under 7 million shares outstanding as of quarter end and on a fully diluted basis with the convertible Series A preferred and common warrants, fully diluted basis were $23.7 million.

Okay. I was wondering if you could spend a little bit more time on the Needham sale agreement and the severance agreement. Why now? And what will be the impact on SG&A going forward?

Sure. I'll start with that. So yes, starting with the employment agreements, Andy, these are just customary employment agreements. They will not change what the current G&A level is, just formalizing terms and conditions for our named executive officers. As far as the sales agent agreement with Needham, we're commencing an at-the-market offering up to $25 million that will be off the shelf. As Larry and I said in our remarks, we're currently well funded. And so really, this is just a responsible tool that we've got another arrow in our quiver, if you will, where if we can opportunistically raise additional capital to support our growth, we will. But we certainly are not necessarily under the gun in any respect to go ahead and use that.

Okay. Good to hear. And last but not least...

Andy, let me just add one thing on the executive agreements. When I joined the company, I just banded all agreements with the executives and just to run the -- execute the turnaround so that everyone that's here at the company is on the same playing field, and now I feel like that we come through the turnaround that we've come through and we've got the company positioned where it's positioned, it's time to actually put situations like that back into play for the team. We've got an awesome team, and we want them taking us to the next step.

Understandable. And last but not least, EBITDA breakeven before you had indicated second quarter of 2026. I understand your rate of sales stats aren't in yet for the end of the year. But are you standing by that second quarter breakeven for EBITDA? Or has that changed?

We're still driving for that, Andy. That's a line of sight. That's where we're looking to.

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

Thank you. All the structural changes we've made to date have been leading up to this point. I don't believe there's an element of this company that we have not touched or reshaped. Our team has put the building blocks in place to start the long process of securing distribution and rate of sale. And we're fortunate to have had investors who have funded our turnaround so that we could bring the company to this spot. 22nd Century has very important technology for the tobacco industry. And instead of the traditions in the industry of having secret recipes and trying to outmaneuver one another, we welcome our larger peers to join us in leading the Tobacco Harm Reduction Movement by licensing our technology and pushing our VLN technologies expansion as fast as we all can.

Based on the scientific results, our low nicotine tobacco and VLN cigarettes are a game changer for those who smoke and want to take control. The wider tobacco universe needs to become good stewards of the health of our consumers and move this technology into the market. This would allow a wider audience to join the FDA and the medical profession in the pursuit of a healthier America instead of the constant fighting. The core elements of the fight can be resolved with VLN products in the marketplace. This would also keep the industry economics in place for growers, employees, taxes, et cetera.

This is a long game from here, but we're excited to take on the challenge, and we have a great team to bring this together. On behalf of the Board and myself personally, I'd say thank you to our entire team 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 a monumental task, and they've done an awesome job. We look forward to updating you with press releases along the way and again in Q1 as we close 2025. Thank you all, and have a great day.

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