22nd Century Group, Inc.: Form 10-Q for the period ended Mar 31, 2025

For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), references to the “Company,” “we,” “us” or “our” refer to the operations of 22nd Century Group, Inc. and its direct and indirect subsidiaries for the periods described herein. In addition, dollars are in thousands, except per share data or unless otherwise specified.

The following MD&A should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, as well as our Condensed Consolidated Financial Statements and the accompanying notes included in Item 1 of this Form 10-Q. Note references are to the notes to consolidated financial statements included in Item 1 of this Form 10-Q.

On December 17, 2024, we implemented a 1-for-135 reverse stock split and on March 28, 2024, we implemented a 1-for-16 reverse stock split. All historical share and per-share amounts reflected throughout this section have been adjusted to reflect the reverse stock splits. The par value per share of our common stock was not affected.

Forward Looking Statements

Except for historical information, all of the statements, expectations, and assumptions contained in this section are forward-looking statements. Forward-looking statements typically contain terms such as “anticipate,” “believe,” “consider,” “continue,” “could,” “estimate,” “expect,” “explore,” “foresee,” “goal,” “guidance,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “preliminary,” “probable,” “project,” “promising,” “seek,” “should,” “will,” “would,” and similar expressions. Forward looking statements include, but are not limited to, statements regarding (i) our ability to continue as a going concern, (ii) our expectations regarding our debt obligations, (iii) our ability to remain listed on NASDAQ (iv) our financial and operating performance, (v) our strategic alternatives, including our cost savings initiatives, (vi) our expectations regarding regulatory enforcement (vii) our products, and (viii) the volatility of our common stock and warrants. Actual results might differ materially from those explicit or implicit in forward-looking statements. Important factors that could cause actual results to differ materially are set forth in “Risk Factors” in our Annual Report on Form 10-K filed on March 20, 2025. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as otherwise required by law. All information provided in this quarterly report is as of the date hereof, and we assume no obligation to and do not intend to update these forward-looking statements, except as required by law.

Our Business

22nd Century Group, Inc. (NASDAQ: XXII) is an agricultural biotechnology company focused on tobacco harm reduction by offering tobacco products with 95% less nicotine, designed to improve health and wellness by giving smokers a choice to control their nicotine consumption. Backed by comprehensive and extensively patented technologies that regulate nicotine biosynthesis activities in the tobacco plant, the Company has pioneered development of high-yield, proprietary reduced nicotine content (RNC) tobacco plants and clinically validated RNC cigarette products. The Company received the first and only FDA Modified Risk Tobacco Product (MRTP) authorization for a combustible cigarette in December 2021. The Company is a subsequent participating manufacturer under the Master Settlement Agreement ("MSA") and vertically integrated for the production of its both own products and contract manufacturing operations ("CMO"), which consist primarily of branded filtered cigars and conventional cigarettes.

Financial Overview

• Net revenues for the first quarter of 2025 were $5,956, a decrease of 7.9% from $6,469 in the prior year period.
• First quarter 2025 cartons sold of 476 compared to 628 in the comparable prior year period.
• Gross profit for the first quarter of 2025 was a loss of $609 compared to a loss of $1,129 in the prior year period.
• Total operating expenses for the first quarter of 2025 decreased to $1,961 compared to $3,305 in the prior year quarter driven by:
• Sales, general and administrative expenses decreased to $1,799 compared to $2,906 in the prior year period, primarily driven by lower headcount (compensation and benefits), strategic consulting expenses, legal expenses and other expenses mainly due to a decrease in insurance premiums.
• Research development expenses decreased to $162, compared to $425 in the prior year period, driven by lower headcount (compensation and benefits costs), and other costs mainly due to a decrease in tobacco growing agreements in the current year period.
• Operating loss from continuing operations for the first quarter 2025 was $2,570, compared to a loss of $4,434 in the prior year period, primarily as a result of lower expenses.
• Net loss from continuing operations in the first quarter of 2025 was $3,274 and basic and diluted loss from continuing operations per common share was $1.89 compared with net loss from continuing operations in the first quarter of 2024 of $5,450, and basic and diluted net loss from continuing operations per common share of $230.82.
• As of March 31, 2025, we had $1,133 in cash and cash equivalents.

Our Financial Results

* Giving retroactive effect to the 1-for-16 reverse stock split on April 2, 2024 and 1-for-135 reverse stock split on December 17, 2024.

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Product line revenue, net

For the first quarter 2025, total product line revenue, net decreased to $5,956, compared to $6,469 in the prior year period and includes the following product line revenue, net highlights:

• Cigarette sales volume benefitted from new customer contracts with our largest CMO customer effective January 1, 2025, including the initial impact of accounting for revenue accruals recorded as over-time revenue recognition.
• Filtered cigars net revenues decreased to $1,103 from $3,626 in the prior comparable period, reflecting lower volumes as the Company implemented its plans to reprice customer contracts. New contracts were executed in the first quarter of 2025 and additional volume is expected to resume in the remainder of 2025.
• Cigarillo distribution net revenues for the first quarter were negligible, and reflect the time necessary for initial stocking orders in 2024 to be sold through our distributors before additional reorders are fulfilled in the second half of 2025.
• VLN® cigarette net revenues reflect return accruals for product previously shipped, as initial shipments begin to schedule for the rebranded product to be launched in the second quarter of 2025.

Gross (loss) profit

Gross (loss) profit for the first quarter 2025 improved as compared to the prior year comparable period, primarily driven by stabilized volume under new customer contracts and the overall shift in product mix.

Sales, general and administrative (“SG&A”) expense

(a) Compensation and benefits and equity compensation expense decreased for the three months ended March 31, 2025 compared to the prior year period due to a reduction of headcount.

(b) Decreases of strategic consulting for the three months ended March 31, 2025 compared to the prior year periods were due to reduced spending related to investor relations expenses.

(c) Legal expenses decreased for the three months ended March 31, 2025 compared to 2024 mainly due to an increase in regulatory legal in the prior year period.

(d) Decreases in other expenses for the three month period ended March 31, 2025 compared to 2024 was driven by lower D&O and other insurance premiums offset by an increase in public company expenses in the current year due to waived board fees in the first quarter of 2024.

Research and development (“R&D”) expense

(a) Decreased compensation and benefits for the three months ended March 31, 2025 are mainly related to the decrease in headcount in the current year periods compared to the prior year periods.

(b) Decreases in Contract, IP and other expenses for the three month periods ended March 31, 2025 compared to the prior year period relate to decreases from tobacco growing agreements that were not entered into for the current year period.

Other income (expense)

(a) Other income (expense), net increased for the three months ended March 31, 2025, compared to the same prior year period, due to a loss resulting from change in fair value of warrant liabilities that did not occur in the prior year period.

(b) For the three months ended March 31, 2025 compared to the prior year period, interest expense primarily decreased as a result of ongoing repayment and elimination of debt obligations on our balance sheet. Cash interest decreased $101 and non-cash interest amortization increased $601 recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations increased by $137), additional decreases of $82 as a result of change in fair value of conversion option derivative liability and other interest charges of $10. Additionally, interest expense decreased $729 from the Subordinated Note, which was extinguished prior to maturity in April 2024.

Liquidity and Capital Resources

We have incurred significant losses and negative cash flows from operations since inception and expect to incur additional losses until such time that we can generate significant revenue and profit in our tobacco business. We had negative cash flow from operations of $2,976 for the three months ended March 31, 2025 and an accumulated deficit of $398,199 as of March 31, 2025. As of March 31, 2025, we had cash and cash equivalents of $1,133 and working capital deficit from continuing operations of ($5,201) (compared to working capital from continuing operations of $1,790 at December 31, 2024). Given our projected operating requirements and existing cash and cash equivalents, there is substantial doubt about our ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements herein are issued.

In response to these conditions, management is currently evaluating different strategies for reducing expenses, as well as pursuing financing strategies which include raising additional funds through the issuance of securities, asset sales, and through arrangements with strategic partners. If capital is not available to the Company when, and in the amounts needed, it could be required to liquidate inventory or assets, cease or curtail operations, seek to negotiate new business deals with our business partners or seek protection under applicable bankruptcy laws or similar state proceedings. There can be no assurance that the Company will be able to raise the capital it needs to continue operations. Accordingly, there is substantial doubt regarding our ability to continue in operations. Management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern through one year following the date that the Condensed Consolidated Financial Statements are issued.

Our cash, and cash equivalents and working capital from continuing operations as of March 31, 2025 and December 31, 2024 are set forth below:

Subsequent to March 31, 2025, we received net proceeds of $5,112 from the inducement and exercise of 6,889,497 existing warrants for shares of common stock and issuance of 6,889,497 warrants to purchase common stock. Of the aggregate net proceeds, we were obligated under the Debentures of the convertible senior secured credit facility to repay outstanding debt in the amount of $1,017. See Note 14 “Subsequent Events.”

Working Capital

As of March 31, 2025, we had working capital deficit from continuing operations, excluding assets and liabilities held for sale, of approximately ($5,201) compared to working capital of approximately $1,790 at December 31, 2024 a decrease of $6,991. This decrease in working capital was primarily due to an increase in net current liabilities of $6,857 reflecting the reclassification of the convertible senior secured credit facility and the 2024 Omnia warrant liability to current, as the maturity date is within twelve months of the balance sheet date, offset by an increase of $134 in net current assets. Cash and cash equivalents decreased by $3,289 and the remaining net current assets increased by $3,655. As a result of the working capital balance, management has taken a number of steps to improve liquidity. Refer below to “Cash demands on operations.”

Summary of Cash Flows

Net cash used in operating activities

Cash used in operating activities increased $721 from $2,255 in 2024 to $2,976 in 2025. The primary driver for this change was lower net loss of $1,411, an increase of $41 related to net adjustments to reconcile net loss to cash, and an increase in cash used for working capital components related to operations in the amount of $2,173 for the three months ended March 31, 2025, as compared to the three months ended March 31, 2024.

Net cash (used in) provided by investing activities

Cash used in investing activities amounted to $59 the three months ended March 31, 2025, as compared to cash provided by investing activities of $15 for the three months ended March 31, 2024. The decrease in cash provided by investing activities of $74 was primarily the result of a decrease of $22 of proceeds from the sale of property, plant and equipment and an increase of cash outflows of $52 related to the acquisitions of patents, trademarks, licenses and property, plant and equipment.

Net cash (used in) provided by financing activities

During the three months ended March 31, 2025, cash provided by financing activities decreased by $1,953 from $1,699 in the prior year period, to cash used of $254, resulting from decreases in net proceeds from warrant exercise of $2,245 offset by decreases in cash outflows of note payable payments of $291 and taxes paid related to net share settlement of RSUs of $1.

Cash demands on operations

We have financed our operations to date primarily through the issuance of equity securities, proceeds from the exercise of warrants to purchase common stock and sale of debt instruments with various institutions, accredited investors, high net worth individuals and creditors.

In April 2025, we received net proceeds of $5,112 from the inducement and exercise of 6,889,497 existing warrants for shares of common stock and issuance of 6,889,497 warrants to purchase common stock. An additional tranche of 4,232,191 existing warrants for shares of common stock are exercisable under the same terms, under the conditions as described in the warrant inducement agreement, for additional net proceeds of up $3,103. In connection with the warrant inducement transaction, the Company amended the October 2024 PIPE warrants. See Note 14 “Subsequent Events”.

As of March 31, 2025, the remaining principal balance under our Senior Secured Credit Facility is $4,558, of which an additional $1,017 was repaid in April 2025. The Debentures under the Senior Secured Credit Facility allow the Holders to voluntarily convert the Debentures, in whole or in part, into shares of the Company’s common stock and the conversion option price in effect is $6.04. During the first quarter of 2025, the Holders converted $3,132 of principal balance in exchange for 518,600 shares of common stock.

Additionally, at its option, JGB may require the Company to redeem 2% of the original principal amount of the Debentures, as amended to be no more than 50% or $210 per calendar month through July 2025 and $421 per calendar month thereafter which amount may at the Company’s election, subject to certain exceptions, be paid in cash, shares of the Company’s common stock, or a combination thereof. JGB did not elect the monthly redemption feature during the three month period ended March 31, 2025. If the redemption feature is elected, as of March 31, 2025, contractual maturities under the senior secured credit Facility for the remainder of 2025 are $2,948, and for 2026 are $1,610.

Outstanding Warrants

As of May 7, 2025, we had the following warrants outstanding:

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.

There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2024.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 1 “Nature of Business and Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

There have been no material changes to the information set forth in our Annual Report on Form 10-K for the year ended December 31, 2024.

(a) Evaluation of Disclosure Controls and Procedures:

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934 (“Exchange Act”) reports are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to ensure information required to be disclosed is recorded, processed, summarized and reported within the time period specified by SEC rules, based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

(b) Changes in Internal Control over Financial Reporting:

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2024, as filed with the SEC on March 20, 2025.