22nd Century Group, Inc.: Form 10-Q for the period ended Jun 30, 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 April 2, 2024, we implemented a 1-for-16 reverse stock split, on December 17, 2024, we implemented a 1-for-135 reverse stock split, and on June 20, 2025, we implemented a 1-for-23 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 a tobacco products 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 second quarter of 2025 were $4,083, a decrease of 48.6% from $7,947 in the prior year period reflecting shifts in product mix.
• Second quarter 2025 cartons sold of 779 compared to 719 in the comparable prior year period.
• Gross profit for the second quarter of 2025 was a loss of $635 compared to a profit of $570 in the prior year period.
• Total operating expenses for the second quarter of 2025 decreased to $2,346 compared to $2,617 in the prior year quarter driven by:
• Sales, general and administrative expenses decreased to $2,119 compared to $2,360 in the prior year period, primarily driven by lower insurance and legal costs, lower headcount (compensation and benefits), offset by higher strategic consulting expenses.
• Research development expenses decreased to $227, compared to $250 in the prior year period, mainly driven by lower headcount (compensation and benefits costs).
• Operating loss from continuing operations for the second quarter 2025 was $2,981, compared to a loss of $2,047 in the prior year period, primarily as a result of decreased revenue and margin from research cigarettes shipped in the prior year period offset by lower operating expenses.
• Net loss from continuing operations in the second quarter of 2025 was $3,296 and basic and diluted loss from continuing operations per common share was $13.16 compared with net loss from continuing operations in the second quarter of 2024 of $2,214, and basic and diluted net loss from continuing operations per common share of $843.98.
• As of June 30, 2025, the Company had $3,083 in cash and cash equivalents.

Our Financial Results

Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024

Product line revenue, net

For the second quarter and six months ended June 30, 2025, total product line revenues decreased to $4,083 and $10,039, respectively, compared to the prior year periods.

• For the second quarter of 2025, cigarette volumes increased to 594 cartons reflecting additional CMO cigarette customers, including new export volume, as compared to the prior year period. The decrease in sales dollars is a result of a contractual increase in consideration payable due to the customer effective April 1, 2025. Additionally, in prior year periods under legacy contracts, similar pricing arrangements were recorded within cost of goods sold. During April 2024, the Company also benefitted from a one-time Spectrum® research cigarette order which provided a $889 benefit to the prior year period.

For the six months of 2025, cigarette sales 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, offset by pricing arrangements recorded as consideration payable to the customer recognized within revenue. In prior year periods under legacy contracts, similar pricing arrangements were recorded within cost of goods sold.

• For the second quarter and six months of 2025, filtered cigars net revenues decreased to $1,319 and $2,422, respectively, from the prior comparable periods, reflecting lower volumes as the Company implemented repricing of customer contracts and shifts its product mix into higher margin branded cigarettes and VLN® cigarettes.
• Cigarillo distribution net revenues for the second quarter and six months of 2025 declined compared to the prior year due to initial stocking orders in April 2024 to be sold through its distributors.
• VLN® cigarette net revenues reflect return accruals for product previously sold that will be exchanged, as initial shipments begin to schedule for the rebranded product and partner VLN® products to be launched in the third quarter of 2025.

Gross (loss) profit

Gross (loss) profit for the second quarter and six months of 2025 declined as compared to the prior year comparable period, primarily driven by the decrease in overall volume, and shift in product mix. Additionally, during April 2024, the Company also benefitted from a one-time Spectrum® research cigarette order which provided an approximate $750 benefit to the prior year period.

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

(a) Compensation and benefits expense decreased for the three and six months ended June 30, 2025 compared to the prior year period due to a reduction of headcount.

(b) Increases of strategic consulting for the three months ended June 30, 2025, compared to the prior year period was due to increased spending related to investor relations and public company expenses.

Decreases of strategic consulting for the six months ended June 30, 2025, compared to the prior year period was due to reduced consulting expenses related to post-market studies offset by increased investor relations and public company expenses.

(c) Legal expenses decreased for the three and six months ended June 30, 2025 compared to 2024 mainly due to an increase in regulatory legal expense in the prior year period.

(d) Decreases for the three and six months ended June 30, 2025 compared to the prior years periods were due to lower insurance premiums.

(e) Decreases in other expenses for the three and six month periods ended June 30, 2025 compared to 2024, was driven primarily by decreased sales and marketing expense, depreciation expense, repair and maintenance expense and technology expense.

Research and development (“R&D”) expense

(a) Decreased compensation and benefits for the three and six months ended June 30, 2025 are mainly related to the decrease in headcount in the current year periods compared to the prior year periods.

(b) Increases in Contract, IP and other expenses for the three months period ended June 30, 2025, compared to the prior year period were due to higher amortization expense from our NCSU contract and additional testing costs.

Decreases in Contract, IP and other expenses for the six months ended June 30, 2025 compared to the prior year period relate to decreases from tobacco growing and sponsored research agreements that were not recurring in the current year periods.

Other income (expense)

(a) Other income (expense), net decreased for the three and six months ended June 30, 2025, compared to the same prior year period, due to a loss resulting from change in fair value of the Omnia 2024 warrant liabilities that did not occur in the prior year periods.

(b) Decreases in interest expense was a result of ongoing repayment and elimination of debt obligations on our balance sheet. For the three months ended June 30, 2025 compared to the prior year period, cash interest decreased $102, non-cash interest amortization increased $9 including $129 of extinguishment charges recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $28), and other interest charges of $54, offset by a loss that occurred in the prior year period of $541 as a result of change in fair value of conversion option derivative liability. Additionally, interest expense decreased $301 from the Subordinated Note, which was a $400 loss on extinguished prior to maturity in April 2024.

For the six months ended June 30, 2025 compared to the prior year period, cash interest decreased $202, non-cash interest amortization increased $610 including $129 of extinguishment charges recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations decreased by $109), and other interest charges of $65, offset by a loss that occurred in the prior year period of $459 as a result of change in fair value of conversion option derivative liability. Additionally, interest expense decreased $1,030 from the Subordinated Note, which was a $400 loss on 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 $6,454 for the six months ended June 30, 2025 and an accumulated deficit of $401,606 as of June 30, 2025. As of June 30, 2025, we had cash and cash equivalents of $3,083 and working capital deficit from continuing operations of ($3,064) (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 June 30, 2025 and December 31, 2024 are set forth below:

Working Capital

As of June 30, 2025, we had working capital deficit from continuing operations, excluding assets and liabilities held for sale, of approximately ($3,064) compared to working capital of approximately $1,790 at December 31, 2024 a decrease of $4,854. This decrease in working capital was primarily due to an increase in net current liabilities of $6,251 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 $1,397 in net current assets. Cash and cash equivalents decreased by $1,339 and the remaining net current assets increased by $2,736. 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 decreased $516 from $6,970 in 2024 to $6,454 in 2025. The primary driver for this change was lower net loss of $884, an increase of $1,111 related to net adjustments to reconcile net loss to cash, and a decrease in cash used for working capital components related to operations in the amount of $289 for the six months ended June 30, 2025, as compared to the six months ended June 30, 2024.

Net cash provided by (used in) investing activities

Cash provided by investing activities amounted to $672 the six months ended June 30, 2025, as compared to cash used in investing activities of $49 for the six months ended June 30, 2024. The increase in cash provided by investing activities of $721 was the result of an increase of $748 of proceeds from the sale of property, plant and equipment primarily from the sale of Needlerock farms and an increase of cash outflows of $27 related to the acquisitions of patents, trademarks, licenses and property, plant and equipment.

Net cash (used in) provided by financing activities

During the six months ended June 30, 2025, cash provided by financing activities decreased by $1,797 from $6,240 in the prior year period to $4,443, resulting from decreases in net proceeds from common stock issuances of $3,913, increases of payments of long-term debt of $768, decreases of proceeds from issuance of notes payable of $233, offset by increases in cash inflows from net proceeds from warrant exercises of $2,830 and a decrease of cash outflows from taxes paid related to net share settlement of RSUs of $1 and a decrease in payments on notes payable of $286.

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 $5,075 from the inducement and exercise of 76,100 existing warrants for shares of common stock and issuance of 76,100 warrants to purchase common stock. The additional tranche of 184,008 existing warrants for shares of common stock was not exercised and has expired under the terms of the inducement.

As of June 30, 2025, the remaining principal balance under our Senior Secured Credit Facility is $3,790. 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 $138.92. During the first quarter of 2025, the Holders converted $3,132 of principal balance in exchange for 22,549 shares of common stock. During the second quarter of 2025, the Company repaid $1,017 of principal balance contractually required with the proceeds of the warrant inducement transaction.

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 June 30, 2025. If the redemption feature is elected, as of June 30, 2025, contractual maturities under the senior secured credit Facility for the remainder of 2025 is $2,104, and for 2026 is $1,686.

Outstanding Warrants

As of August 11, 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 June 30, 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.