Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the other sections of this Form 10-K, including “Risk Factors,” and the Financial Statements and notes thereto. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K. See “Cautionary Note Regarding Forward-Looking Statements and Risk Factor Summary.” Our actual results may differ materially. For purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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.
All historical share and per-share amounts reflected throughout this section have been adjusted to reflect prior reverse stock splits. The par value per share of our common stock was not affected.
All figures reported below reflect continuing operations, excluding discontinued operations related to the sale and exit of the Company’s hemp/cannabis business in late 2023, except as noted.
Dollars are in thousands, except per share data or unless otherwise specified.
Overview
The Company remains dedicated to being the leader of the tobacco harm reduction movement through science-based innovation, regulatory alignment, and responsible commercialization of reduced nicotine content combustibles. Our mission is to provide adult smokers with alternatives in the form factor that they are comfortable with, cigarettes, that significantly reduce nicotine exposure, supporting the potential for reduced dependence while preserving consumer choice.
Tobacco Operations Highlights
Poised to benefit from the January 2025 proposed FDA rule mandating reduced nicotine content in all combustible cigarette products, if advanced. The Company has the only FDA-authorized combustible cigarette able to meet the proposed stringent reduced nicotine content product standard.
The Company filed its submission of public comment in support of the FDA proposed “Tobacco Product Standard for Nicotine Yield of Cigarettes and Certain Other Combusted Tobacco Products,” in September 2025.
Continued agreements with national-scale C-store distribution partners to support state-wide or multi-state availability of VLN ® and partner VLN ® at hundreds of stores within our target markets.
Began shipments of its new VLN ® product branding and launched marketing initiatives designed to drive greater customer engagement, as well as the development of partner VLN ® brands to be sold alongside proprietary VLN ® products.
Restructured contract manufacturing business operations to deliver improved efficiency and exited or renegotiated underpriced contracts in favor of improved customer agreements.
Signed a new license and manufacturing agreement with Smoker Friendly, one of the largest independent cigarette retailers in the United States, covering 11 brands currently sold in the Smoker Friendly network of retail stores and dealers in the U.S., plus another eight new premium brands to be launched and establishing a framework for other planned future products to be added.
Expanded the Pinnacle private label brand to add distribution of moist snuff other tobacco products to its existing Pinnacle cigarette products currently sold as a private label brand in a top-5 U.S. gas station convenience store chain.
Exited 2025 with a significantly strengthened balance sheet, including the elimination of debt and improved liquidity, providing flexibility to execute our strategy.
Financial Overview – Fourth Quarter and Full Year 2025 Results
Net revenues for the fourth quarter of 2025 were $3,537, a decrease of 12.0% from $4,020 in 2024, primarily driven by a decrease in cigarettes and filtered cigars sales offset by an increase other tobacco products.
Fourth quarter 2025 total cartons sold of 248 compared to 338 in the comparable prior year period.
Net revenues for the full year 2025 were $17,587, a decrease of 27.9% from $24,382 in 2024.
Gross loss for the fourth quarter of 2025 improved to a loss of $834 compared to loss of $1,254 in the prior year period.
Gross loss for the full year 2025 was a loss of $3,137, compared to a loss of $2,400 in 2024.
Total operating expenses for the fourth quarter 2025 decreased 30.6% to $1,969 compared to $2,837 in the prior year quarter driven by:
Sales, general and administrative expenses decreased to $1,825, driven primarily by decreases in strategic consulting, legal, and other public company expenses.
Research and development expenses decreased to $105, driven by a decrease in contract and IP related costs.
Other operating expense, net was $39 compared to $147 in the prior year period, driven by an increase in non-recurring charges in 2024.
Operating loss for the fourth quarter 2025 was $2,803, compared to a loss of $4,091 in the prior year period. Operating loss for the full year 2025 was $11,566, compared to a loss of $13,950 in 2024.
Net loss in the fourth quarter of 2025 was $2,783 representing a net loss per share of $5.89 compared with net loss in the fourth quarter of 2024 of $4,246, representing a net loss per share of $3,257.47. Net loss for the full year 2025 was $13,117, representing a net loss per share of $71.26 compared with net loss for the full year 2024 of $15,495, representing a net loss per share of $27,812.56.
As of December 31, 2025, we had $7,149 in cash and cash equivalents.
Our Financial Results
The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 15 of this report, for the periods presented (dollars in thousands, except per share amounts):
Year Ended
December 31
December 31
Change
Revenues, net
Cost of goods sold
Excise taxes and fees on products
Gross loss
Gross loss as a % of revenues, net
Operating expenses:
Sales, general and administrative ("SG&A")
SG&A as a % of revenues, net
Research and development ("R&D")
R&D as a % of revenues, net
Other operating expense, net ("OOE")
Total operating expenses
Operating loss from continuing operations
Operating loss as a % of revenues, net
Other income (expense):
Other income (expense), net
Interest income
Interest expense
Total other income (expense), net
Loss from continuing operations before income taxes
(Benefit) provision for income taxes
Net loss from continuing operations
Net loss as a % of revenues, net
Net loss per common share from continuing operations (basic and diluted)
2025 Compared with 2024
Product line revenue, net
Year Ended
December 31,
Change
Cartons
Cartons
Cartons
Contract manufacturing
Cigarettes
Filtered cigars
Other tobacco products
Total contract manufacturing
VLN ®
Total product line revenues
For the year ended December 31, 2025, total product line revenue was $17,587, a decrease of 27.9% from $24,382 in the prior year.
Cigarette volume increased to 1,525 cartons in 2025, including products sold for export, as compared to the prior year. Cigarette sales net revenues decreased from 2024 due to pricing arrangements recorded as consideration payable to the customer recognized within revenue, which in 2024 was 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 in 2024.
Filtered cigars net revenues decreased $5,317 reflecting lower volumes as the Company implemented repricing of customer contracts and shifts in its product mix into higher margin branded cigarettes, including natural styles, and VLN ® cigarettes.
Other tobacco products include new moist snuff sales of $387 in 2025 compared to none in the prior year. A decrease in cigarillo sales of $661 occurred in 2025 due to initial stocking orders in 2024.
VLN ® cigarette net revenues reflect VLN ® and partner VLN ® shipments for initial stocking orders offset by return accruals for product previously sold that will be returned or exchanged.
Gross loss
Year Ended
December 31
December 31
Gross loss
Percent of Revenues, net
The increase in gross loss and gross loss as a percent of revenues, net for the year ended December 31, 2025, compared to the year ended December 31, 2024, was primarily driven by the shift in product mix during 2025, with cigarettes inclusive of products sold for export representing higher volume as compared to filtered cigars in the prior year comparable period. Domestic cigarette excise taxes included amounts payable under the Master Settlement Agreement (“MSA), whereas filtered cigar volume has no comparable excise tax. Gross margin improvements in cigarettes began in the fourth quarter 2025, which demonstrates the steady shift in product mix to higher margin cigarette products.
Sales, general and administrative expense
Changes From Prior Year
Compensation and benefits (a)
Strategic consulting (b)
Legal (c)
Insurance (d)
Other expenses (e)
Net decrease in SG&A expenses
(a) Compensation and benefits decreased for the year ended December 31, 2025 compared to the prior year due to a reduction of headcount as part of our cost cutting initiatives.
(b) Decreases of strategic consulting for the year ended December 31, 2025 compared to the prior year were due to reduced spending of $482 for investor and public relations and $391 in other consulting related to MRTP post-market studies.
(c) Legal expenses decreased for the year ended December 31, 2025 compared to the prior year period due to decreased regulatory and corporate legal expense.
(d) Insurance expense decreased for the year ended December 31, 2025 compared to the prior year period due to lower insurance premiums.
(e) Other expenses decreased for the year ended December 31, 2025 compared to the prior year ended December 31, 2024 mainly due to decreases in public company expenses of $149, sales and marketing expenses of $134, supplies, repairs and maintenance expenses of $121, technology expenses of $55, depreciation expense of $75, offset by increased travel and entertainment of $60, facilities expense of $25 and other expenses mainly related to state registration fees of $100.
Research and development expense
Changes From Prior Year
Compensation and benefits (a)
Contract, IP and other expenses (b)
Net decrease in R&D expenses
(a) Decreased compensation and benefits primarily relate to the decrease in headcount in 2025 compared to the prior year.
(b) Contract, IP and other expenses decreased for the year ended December 31, 2025 compared to the prior year primarily due to a decrease in contract and royalty costs of $276 and IP related consulting and expenses of $84 due to our cost cutting initiatives.
Other operating expenses, net
Year Ended
December 31,
Impairment of intangible assets
Loss on sale or disposal of property, plant and equipment
Total other operating expense, net
Other operating expenses, net increased $20 due to increased impairment charges of $82 for patents and disposal of trademarks that we are no longer pursuing for the year ended December 31, 2025 compared to the prior year period, offset by a loss of $62 in 2024 for the sale of property, plant and equipment.
Other income (expense), net
Changes From Prior Year
Other income (expense), net (a)
Interest income
Interest expense (b)
Net (decrease) increase in other expense
Other income (expense), net decreased for the year ended December 31, 2025, compared to the prior year, due to a loss resulting from change in fair value of the Omnia warrant liabilities that did not occur in 2024.
For the year ended December 31, 2025 compared to the prior year period, cash interest decreased $443, non-cash interest amortization increased $842 due to $1,091 of extinguishment charges recognized from the Senior Secured Credit Facility (of these totals, interest that was allocated to discontinued operations increased by $88), and other interest charges decreased by $76, offset by a gain that occurred in the prior year period of $556 as a result of change in fair value of conversion option derivative liability. Additionally, interest expense decreased $1,430 from the Subordinated Note, which was due to a $400 loss on extinguishment 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 $7,723 for the year ended December 31, 2025 and an accumulated deficit of $398,925 as of December 31, 2025. As of December 31, 2025, we had cash and cash equivalents of $7,149 and working capital from continuing operations of $10,359 (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 Consolidated Financial Statements included 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 Consolidated Financial Statements are issued.
Our cash and cash equivalents, and working capital as of December 31, 2025 and 2024, are set forth below:
December 31
December 31
Cash and cash equivalents
Working capital
Working Capital
As of December 31, 2025, we had working capital from continuing operations, excluding assets and liabilities held for sale, of approximately $10,359 compared to working capital of approximately $1,790 as of December 31, 2024, an improvement of $8,569. This increase in working capital was primarily due to an increase in net current assets of $7,160 and a decrease in current liabilities of $1,409. Cash and cash equivalents increased by $2,727 and the remaining net current assets increased by $4,381.
Summary of Cash Flow
Year Ended
December 31,
Change
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
Net cash used in operating activities
Cash used in operations decreased $6,622 from $14,345 in 2024 to $7,723 in 2025. The primary driver for this decrease was lower consolidated net loss of $10,110, an increase of $6,257 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 $9,745 for the year ended December 31, 2025, as compared to the year ended December 31, 2024.
Net cash used in investing activities
Cash used in investing activities amounted to $505 in 2025 as compared to $139 in 2024. The increase in cash used in investing activities of $366 was primarily the result decreases of cash outflows of $714 related to the acquisitions of patents, trademarks and property, plant and equipment and $500 from the issuance of the 2025 GVB promissory note. These cash outflows were offset by cash inflows of $748 of proceeds from the sale of property, plant and equipment primarily from the sale of Needlerock farms in 2025 and $100 payments received from the 2025 GVB promissory note.
Net cash provided by financing activities
During the year ended December 31, 2025, cash provided by financing activities decreased by $5,893, from $16,848 in 2024, to $10,955 in 2025, resulting from decreases in net proceeds from common stock issuances of $15,087, increases in payments of long-term debt of $3,034 and payments of deferred offering costs of $130 offset by increases in cash inflows from net proceeds from Series A convertible preferred stock of $9,893, warrant exercises of $1,721, issuance of notes payable of $399 and decreases of cash outflows from taxes paid related to net share settlement of RSUs of $1 and in payments on notes payable of $344.
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.
In April 2025, we received net proceeds of $5,075 from the inducement and exercise of 5,074 existing warrants for shares of common stock and issuance of an additional 5,074 warrants to purchase common stock. In August 2025, we received net proceeds of $9,893 from the issuance of new shares of Series A convertible preferred stock and issuance of 668,554 warrants to purchase common stock. The proceeds were used to fully repay the remaining principal balance of the Senior Secured Credit Facility.
Additionally, in September 2025, the Company settled its outstanding litigation with its insurer related to the November 2022 fire at the Company’s Grass Valley manufacturing facility in Oregon. Under the terms of the settlement, the insurer paid the Company an aggregate amount of $9,500 in cash.
We entered into a sales agreement (the “Sales Agreement”) with Needham & Company, LLC (the “Sales Agent”) which permits us to sell up to $25,000 of our common stock from time to time at prevailing market prices. During the three months ended December 31, 2025, we sold no shares under the Sales Agreement. Subsequent to December 31, 2025, the Company sold 44,381 shares of common stock under the ATM Program for gross proceeds of $200 at a weighted average price of $4.51.
March 2026 Series B Convertible Preferred Stock Offering
On March 20, 2026, we and certain investors entered into a securities purchase agreement with respect to the offer and sale of $20,000 of shares of Series B Convertible Preferred Stock, stated value $1,000 per share (the “Series B Preferred Stock”), initially convertible into shares of common stock at an initial conversion price of $3.57 (subject to adjustment in certain circumstances with a floor price of $0.714) and, alternatively, at a 15% discount to the lowest daily volume-weighted average price (“VWAP”) during the prior 20 trading days (the “Alternative Conversion Price”) and warrants to purchase shares of Common Stock pursuant to a registered direct offering. The Company has the ability to reset the fixed conversion price (lower), subject to board approval and the floor price. Stockholder approval for the offering was obtained at the February 20, 2026 Special Meeting of the Stockholders.
At the initial closing, the investors purchased $16,000 of shares of Series B convertible preferred stock and warrants. The remaining $4,000 of shares of Series B Preferred Stock and warrants are expected to be purchased at a second closing. The investors may request the second closing at any time until the one-year anniversary of the initial closing date and we may require the second closing at any time until the one-year anniversary of the initial closing date by individual investor once less than 50% of such Investor’s Series B Preferred Stock purchased at the initial closing remains outstanding and certain equity conditions have been satisfied for at least 7 of the prior 10 trading days, including: (1) the Common Stock closes above 2.5 times the floor price and (2) the daily dollar trading volume of the Common Stock exceeds $500. The warrants are immediately exercisable at an exercise price of $3.57 per share of common stock and expire on the date that is five years after issuance. In addition, the Company issued placement agent warrants to purchase an aggregate of 187,816 shares of common stock with substantially the same terms as the Warrants, except that the exercise price of the Placement Agent Warrants is $3.927.
We used the net proceeds from the offering to repurchase at par all of the shares of outstanding Series A Convertible Preferred Stock issued in August 2025 in the amount of $9.65 million. The balance of the net proceeds from the offering was approximately $5,680, after deducting placement agent case fees but before any other offering expenses.
Following the offering, 130 shares of Series B Preferred Stock were converted into 33,929 shares of common stock, with 15,870 Series B Preferred Stock shares remaining outstanding.
Outstanding Warrants
As of March 23, 2026, we had the following warrants outstanding:
# of warrants outstanding
Weighted average exercise price
Weighted average expiration date
Amended October 2024 PIPE warrants (1)
July 15, 2030
August 2025 warrants (2)
August 27, 2030
August 2025 Placement Agent warrants (2)
August 27, 2030
March 2026 warrants (2)
March 24, 2031
March 2026 Placement Agent warrants (2)
March 24, 2031
(1) The warrants contain anti-dilution protection provisions relating to subsequent equity sales of shares of the Company’s common stock or common stock equivalents at an effective price per share lower than the then effective exercise price of such warrants. Additionally, the warrants allow the holder of such warrants to also effect an alternative form of cashless exercise on or after the initial exercise date whereby the aggregate number of shares of common stock issuable in such alternative form of cashless exercise pursuant to any given notice of exercise shall equal the product of (x) the aggregate number of shares of common stock that would be issuable upon exercise of the warrant in accordance with the terms of the warrant if such exercise were by means of a cash exercise rather than a cashless exercise and (y) 2.0 (a “Zero Exercise Price Exercise”). Accordingly, a Zero Exercise Price Exercise for the warrants will result in the issuance of two (2) shares for no additional consideration.
(2) The warrants contain anti-dilution protection provisions relating to subsequent equity sales of shares of the Company’s common stock or common stock equivalents at an effective price per share lower than the then effective exercise price of such warrants.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 15 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
Critical Accounting Estimates
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.
We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions have had or are reasonably likely to have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 15 of this report.
Inventories
Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.
Historically, our adjustments or write-off charges recorded against inventory have been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. Additionally, if our demand forecasts for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our gross profit and net income.
Valuation of Long-Lived Assets
We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our intangible and other long-lived assets. Intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis on December 1, the measurement date, and whenever events or business conditions change that could indicate that the asset is impaired. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.
Evaluation of indefinite-lived intangible assets for impairment
Our indefinite-lived intangible assets include the MSA, cigarette brand predicate and trademarks. We perform an annual impairment review of our indefinite-lived intangible assets on December 1, the measurement date, unless events occur that trigger the need for an interim impairment review. We have the option to first assess qualitative factors in determining whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.
For our indefinite-lived intangible assets, we performed a qualitative evaluation and considered factors such as current and future sales projections, strategic objectives, future market and economic conditions, competition, and federal and state regulations. We determined as of December 1, 2025 it is more likely than not that that the assets are not impaired.
Evaluation of long-lived assets for impairment
When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) including, but not limited to, PP&E, right-of-use lease assets, and definite-lived intangible asset(s) exceeds the related undiscounted future cash flows. In cases where the carrying value exceeds the undiscounted future cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life.
Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment. Events could occur that would materially affect our estimates and assumptions. Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives.
For our long-lived assets, we determined that no impairment indicators occurred during 2025.
Detachable Warrants
Warrants issued pursuant to debt or equity offerings that the Company may be required to redeem through payment of cash or other assets outside its control are classified as liabilities and therefore measured at fair value. The Company uses a Monte Carlo valuation model to estimate fair value at each issuance and period-end date. The key assumptions used in the model are the expected future volatility in the price of the Company’s shares and the expected life of the warrants.
Off-Balance Sheet Arrangement
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Item 7A. Quantitative and Qu alitative Disclosures About Market Risk
Not required for smaller reporting companies.
