22nd Century targets profitability in first half 2026 while advancing branded VLN launches

Earnings Call Insights: 22nd Century Group (XXII) Q2 2025

MANAGEMENT VIEW

* Lawrence D. Firestone, President, CEO & Chairman, emphasized the company's leadership in tobacco harm reduction, highlighting the proprietary low nicotine tobacco strains forming the basis of their 95% low nicotine VLN cigarettes. He explained, "the FDA has proposed a new standard that when adopted into law, will require a 2-year transformation of all combustible cigarettes and filtered cigars to contain less than 0.7 milligrams per gram of nicotine or essentially 95% less nicotine than traditional cigarettes."
* Firestone announced the beginning of shipments for Pinnacle VLN in August, calling it "the largest single deployment of VLN products in the company's history," with a full launch planned in October at a major retailer. Smoker-friendly VLN products and further expansion into major retailers are set to follow.
* The company is shifting its business mix away from low-margin, high-volume CMO and export products to prioritize branded products with higher gross margins, which is expected to increase gross margin but temporarily reduce top-line revenue. Firestone stated, "this right now is really the new beginning of 22nd Century and our move into a stronghold within the tobacco harm reduction movement."
* Daniel A. Otto, CFO, reported, "we've already begun shipping Pinnacle VLN in August with the first stocking orders being over 3,000 cartons. Adding the higher-margin branded products will break open gross margin profitability."
* Otto highlighted progress in improving the balance sheet by reducing debt by approximately $1 million and tightening finished goods inventory.

OUTLOOK

* Management now expects profitability to be achieved in the first half of 2026, later than previously indicated. Otto said, "we now expect the impact of delays in the time necessary to execute the remaining pieces of the turnaround will take us into the first half of 2026 to achieve profitability."
* The timeline for profitability is driven by the pace of state registrations, store counts, distribution, and rate of sale for high-margin branded products.
* The company anticipates increased research and development spending over the next two years to maintain its position in low nicotine IP and bring additional products to market.

FINANCIAL RESULTS

* Net revenue for Q2 2025 was $4 million, down from $6 million in Q1 2025. Gross margin remained at a loss of $0.6 million.
* Total cartons sold reached 779,000, up from 478,000 in Q1, driven by a significant increase in CMO cigarette volumes, particularly export products with lower pricing.
* Operating expenses for Q2 were $2.3 million, up from $2 million in Q1, which management described as a sustainable overhead level moving forward.
* Q2 net loss from continuing operations was approximately $3.3 million, consistent with Q1. Adjusted EBITDA loss was $2.6 million, compared to a $2.3 million loss in Q1.
* Debt reduction efforts continued, and the Dorchester Insurance Company lawsuit for a $9 million business interruption claim moves toward a November 2025 trial.

Q&A

* Andrew White, Emerging Growth: Asked about the timing for EBITDA breakeven. Daniel A. Otto answered the target is now "first half of 2026... really based on the timing of the branded products that we've spoken to high margin, both VLN and Partner VLN as we watch initial stocking, rate of sale and number of stores."
* White: Questioned cash sufficiency to reach breakeven. Firestone acknowledged a potential need to raise additional funds, noting, "there's a chance we're going to be raising some money in the near term, but the size of the raise will be less than what we've been doing in the past."
* White: Inquired about debt rollover plans. Firestone stated, "we will be talking to -- well, we're in conversations with our debtor on that issue and paying it off and becoming debt-free, extinguishing the debt."
* White: Asked about the MRTP renewal process. Firestone said, "I think there's very little chance that the MRTP won't be renewed."

SENTIMENT ANALYSIS

* Analyst questions were focused on execution risks, cash runway, debt management, and regulatory renewals, with a tone that was neutral to slightly cautious.
* Management maintained a confident tone in prepared remarks and the Q&A, emphasizing strategic progress and product launches, but acknowledged delays in profitability and the potential need for additional funding.
* Compared to the previous quarter, analyst sentiment shifted from optimism about breakeven timelines to more probing questions on delays and funding needs, while management moved from expressing near-term profitability expectations to resetting the timeline and focusing on the margin mix shift.
* Management used phrases such as "we are committed to achieving profitability in the near term, but this mix shift will slow our progress" and "we now expect the impact of delays... will take us into the first half of 2026 to achieve profitability," indicating a tempered but still confident outlook.

QUARTER-OVER-QUARTER COMPARISON

* The timeline for achieving profitability has moved from late 2025 (as previously stated) to the first half of 2026 due to delays in branded product rollout and market adoption.
* The business model focus shifted further toward high-margin branded VLN products, with top-line revenue expected to decline in the near term as lower-margin volumes are reduced.
* Analysts' attention shifted from congratulating management on progress and asking about growth drivers to more direct questions on cash sufficiency, funding needs, and execution risks.
* Management's tone shifted from a strong focus on imminent breakeven and growth to a more cautious approach, emphasizing operational execution and acknowledging the challenges ahead.

RISKS AND CONCERNS

* Delays in execution of branded product launches and state registrations are pushing back profitability targets.
* Cash runway may require additional fundraising, though management anticipates smaller raises than in the past.
* The sustainability of operations depends on successfully scaling high-margin product sales and controlling overhead.
* The outcome of the $9 million insurance claim lawsuit remains pending, with trial set for November 2025.
* Analyst concerns centered on timing to breakeven, funding requirements, and regulatory renewals.

FINAL TAKEAWAY

22nd Century Group is transitioning its business toward higher-margin branded VLN products and away from low-margin, high-volume CMO sales, with the largest rollout of VLN products underway. While this strategic shift is expected to strengthen gross margins and position the company as a leader in tobacco harm reduction, delays in execution and market adoption have pushed the anticipated profitability timeline into the first half of 2026. Management remains focused on expanding distribution, managing operational costs, and securing the necessary funding to bridge to sustainable profitability, with ongoing attention to regulatory and legal milestones that could further impact results.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/xxii/earnings/transcripts]

MORE ON 22ND CENTURY

* 22nd Century Group, Inc. (XXII) Q2 2025 Earnings Call Transcript [https://seekingalpha.com/article/4813648-22nd-century-group-inc-xxii-q2-2025-earnings-call-transcript]
* 22nd Century Group developing 100mm very low nicotine cigarette [https://seekingalpha.com/news/4462777-22nd-century-group-developing-100mm-very-low-nicotine-cigarette]
* Financial information for 22nd Century [https://seekingalpha.com/symbol/XXII/income-statement]