22nd Century Group, Inc

Welcome to 22nd Century Group's first quarter 2025 conference call and webcast. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Matt Kreps, investor relations for 22nd Century Group. Please begin.

Hello, and welcome to 22nd Century's first quarter 2025 results conference call. Joining me today are Larry Firestone, CEO, and Dan Otto, CFO. Earlier today, we issued a press release announcing the results for the quarter ended March 31, 2025. The release and 10Q are available in the investor section of our website at xxiicentury.com. Today's call will include prepared remarks from Larry and Dan, updating you on 22nd Century's business, operations, strategy, and financial results through March 31, 2025 and subsequently. Before we begin, a few reminders for today's call. Some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly, and other reports filed with the SEC. Also, during today's call, we may discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, and amortization, as adjusted for certain non-cash and non-operating expenses. And net debt calculated as total principal amount of debt less outstanding, less cash and cash equivalent. 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. Good morning, everyone, and thank you for joining 22nd Century's first quarter 2025 results conference call. On our 2024 year-end financial results call in March, I address our journey over the first 16 months of my tenure as CEO, which was defined as a turnaround. We're now putting 2024 in the past and are solely focused on our future. We have completely reconfigured our business and laid the tracks to drive into what we believe will be a very profitable future. Dan will talk about the numbers and the wins we had in the first quarter of 2025. I would like to begin my remarks first by talking a little bit about the turbulent tobacco market that we served. And then I will describe our roadmap to success as we continue the transition of 22nd century into a growth company. The $85 billion combustible cigarette market is showing increasing friction around price, products, nicotine delivery systems, FDA regulatory environment, and more. Right now, we see an incredible focus on nicotine that we've never seen before. even as big tobacco remains under the pressure to reduce the harms of smoking. Big tobacco's answer to smoking harm is to keep their consumers hooked on nicotine by transitioning what have been their mainstream products to noncombustible products such as nicotine pouches, which come in all levels of nicotine, with some brands bragging about having the highest nicotine. to the wave of heat not burned to avoid the carcinogens, vaping, moist snuff, which has been in the market for a long time. They, being big tobacco, flat out disregard the harms of nicotine and drive to deliver nicotine in new ways. Nicotine addiction is their secret weapon to keep consumers addicted to their products. In fact, high nicotine and access to high nicotine is in their marketing materials and core to some of their brands and products. In addition, we have the same big tobacco companies raising their combustible cigarette prices as often as quarterly, which has the air of arrogance and lack of care for their consumer and their consumer's wallet. It seems to be almost a contest to see how far they can dig into their consumer's pocketbook before the consumer's attitude changes and therefore big tobacco's attitude changes. The cost of a pack of tier one branded cigarettes is competing in the consumer's wallet for consumer staple items such as gasoline and groceries, and especially as prices for consumer goods are increasing steadily. It's as if they know that their customer is addicted, thanks to nicotine, and they can charge whatever they want with their cigarettes and they're testing that theory quarterly with their price increases. We look at the market differently, but changing dynamics in Tier 1 is an opportunity for 22nd Century. 22nd Century serves and will serve two main segments of the market, reduced nicotine premium products and value-focused CMO brands. Our main domestic brands are Smoker Friendly, Pinnacle, and VLM. Our smoker-friendly and pinnacle CMO brands are value brands that serve the Tier 4 market, which is roughly two-thirds the price of a Tier 1 brand to the consumer. This is a price point that is much friendlier to the consumer's wallet for those who want to continue to smoke a standard combustible cigarette. So this is predominantly a value price play. Then, with the relaunch of our VLN branded products into the market, we will serve consumers who wish to take control of their nicotine consumption. There are plenty of consumers who wish to control their nicotine to either transition from a need to smoke every day or multiple times a day, and they can choose when to smoke or not need to smoke at all. This we will prove out as we make our VLN-branded products available across the U.S. and gain distribution and rate of sale. This is predominantly a health and wellness play. We believe there's a large consumer population for both tier four value brands and the consumers who want to control their smoking habit with low nicotine cigarettes. This will fuel our customers' growth and 22nd century's growth as well. Our growth will also come from wider distribution as a result of expanded domestic state approvals. But once approved within the state, we will be looking to add points of distribution and launching targeted marketing campaigns that will drive rate of sale. So, as the smoker-friendly Pinnacle and VLN footprint grows throughout the U.S., our revenues will grow as will our profitability. In the past, these brands have had limited approvals in the U.S., and we are opening up the opportunity to serve all 50 states across all brands. In addition, to the widening footprint of our brands nationwide, we're developing with Smoker Friendly and Pinnacle new products which will widen the SKU count in the stores where we are the manufacturer. The latest product introductions include for Smoker Friendly, which has over 350 stores and another 450 authorized dealers, is introducing Smoker Friendly Black Label, for the natural cigarette market containing only tobacco and water that is designed to compete directly with major names on quality and flavor profile at a much more affordable price. For example, Natural American Spirit is one of the top selling brands in the market. I think it's number seven. And one of the most expensive, quite possibly number one as the most expensive. Smoker Friendly, in conjunction with 22nd Century, has launched this new natural-style cigarette in the U.S., and once we obtain additional state approvals, Smoker Friendly Black Label will be available to be offered in every state at a price point that is much more affordable compared to natural American spirit. This is an exciting growth opportunity for both Smoker Friendly and 22nd Century. Smoker Friendly VLN which is a private label presentation of our VLN. This is a new set of SKUs for our smoker-friendly relationship, and we will be available not only chain-wide, but potentially in every state as we receive state approvals and distribution. The importance of the adoption of VLN to these brands is not only the well-established distribution channels that they already possess, but also the brand equity that they carry. We believe we can build the VLN product franchise within our CMO customers' brands nicely and then move the 22nd century branded VLN alongside as awareness expands. Our Pinnacle branded products are sold in a top five C-store chain in the U.S. with over 1,700 outlets, where the retailer is looking to expand the Pinnacle SKU lineup as well. This will come together in the second half of 2025 and will add additional revenue opportunities for both the retailer and 22nd century. The year-over-year growth in the smoker-friendly and pinnacle-branded products that we produce continue to drive not only retail growth, but 22nd century growth profitably as well. We believe we're in a great position to build our company on the market opportunities of the Tier 4 and the nicotine control consumer who would be a candidate for our VLN products. The sequence of this rollout is key to understand, as none of this is an instant success. First, there's product development and brand alignment, then state registration followed by state approval. Then once the states approve the SKUs ability for sale, that's when we begin the sales cycle to the various retailers in the various states. And upon successful adoption from retail, we will add distribution. Finally, once approved by the retailers, then shipment to the distributors who will then ship to the stores. Then we will work on rate of sale as the distributors will replenish the supply to the retailer after the first loading. This is a very serial process and will roll out and gain momentum over time like starting a locomotive. We start slow and pick up steam as we go. This will be an extended growth process that will add to the normal year-over-year growth in the same store sales of the existing distribution. Eventually, we'd like to create a VLN category in retail. That would separate all of our VLN branded SKUs from the standard cigarette category. This will take time and rate of sale numbers to create, but we believe this is possible. Our growth comes from growth in same store sales plus new distribution. Then as we add new products, we follow the same cycle. We believe that current market dynamics, which include price pressure on consumers from big tobacco, have and will continue to create an opportunity for our high-quality branded products in the overall Tier 4 and above markets. The balance of our CMO business is high-volume, low-margin, low-mix business for domestic supply of filtered cigars and container orders for export cigarettes. This steady volume of business consumes our machine capacity and allows us to manage our above the line costs while contributing to our gross profit. Now turning my attention to other areas that our management team continues to progress with. We will be launching a new 22nd century website in the coming weeks and a refreshed TriVLN resource so that once we have established distribution, consumers will be able to find VLN products in retail locations in their market. We are also getting ready to reactivate our social media platform within the guidelines and restrictions of tobacco advertising so that consumers can share their experiences with our branded and VLN products. On the regulatory front, the low nicotine FDA proposed rule is midway to the completion of the comment period, which ends in September. When the comment period concludes, we can determine the FDA's direction on what could be the most meaningful and impactful tobacco harm reduction policy in a generation. But I also want to be very clear. We are not waiting for the FDA to finalize their rule, and we are not dependent on the FDA's rule. We have developed an important technology in our low nicotine tobacco and BLN products that the FDA has already approved in a certain contingent of customers will want today that gives smokers a choice with their nicotine consumption. It's important to note that we have the only FDA approved combustible cigarette that meets the new policy standard. Pulling all the pieces together, we have rebuilt the foundation of our company to what we believe is a more substantial business model. This model features a suite of our branded products, which includes Smoker Friendly, Pinnacle, and 22nd Century VLN, which now represents a wide menu of SKUs. Further, we service our standard high-volume, low-mex CMO customers for domestic filtered cigars and export cigarettes. Approaching the market with our current suite of products is a much different proposition than what we had with just the original VLN product set when I joined the company. The railroad tracks are laid. Now we have to drive as fast as the states will let us and the markets will allow us to. And now I'll turn the call over to Dan to discuss the numbers.