Everyone. Next, we have 22nd Century Group. It trades on the NASDAQ under the symbol XXII and is the pioneering nicotine harm reduction company in the tobacco industry, enabling smokers to take control of their nicotine consumption. Happy to welcome back Chairman and CEO Larry Firestone. Welcome back to the conference today, Larry.
Thanks, Anna. Thanks for having us back. Good morning, everyone. Welcome to 22nd Century Group. I'll just, I'll take us forward. 22nd Century Group is traded on the NASDAQ under the ticker symbol XXII. We're headquartered in Mocksville, North Carolina, and we're a pure-play tobacco company with a unique portfolio of brands, including Smoker Friendly, Pinnacle, and our own VLN brands. In the nicotine harm reduction space, we've got our proprietary VLN products, which is technology that we've developed over the last 27 years. It's a very important technology, but that's driven itself into a proprietary 22nd Century VLN brand, branded products, as well as something new this year, which is partner VLN products. We are the only FDA authorized low nicotine combustible in the marketplace, and we're driving to create a low nicotine content category, which would be VLNC.
The target there is to separate the low nicotine category from the standard cigarette area, much like you see light beer, much like you see low and no spirits. We will cover some of that as we go forward. We are vertically integrated. We have our own manufacturing in Mocksville, North Carolina, and we do private label contract manufacturing for many, many brands. We call those our CMO brands, our contract manufacturing operation brands. Those run adjacent to our VLN portfolio. The integration of VLN into the CMO brands has been particularly interesting and I think will be particularly exciting as we go forward. We have other predicates and market access capabilities, but we are really poised for growth and value creation with both our low nicotine and conventional brands and what we call the house of brands.
We're fully aligned with the recent FDA low nicotine mandate, which was put out in January 2025. The only combustible cigarette that complies with that mandate is 22nd Century's VLN. We offer a choice to the consumer with nicotine consumption. Let's talk about our growth strategies. We've relaunched our VLN product, our 22nd Century VLN product, and we've added partner VLN in the market, with updated branding and marketing that we're very excited about. We're looking to expand our footprint. We're adding another SKU, VLN Red, to the lineup and partner brands with our CMO partners. We've built a portfolio of brands with VLN, partner VLN, and also with the CMO brands that I mentioned, with Smoker Friendly and Pinnacle to cross-sell in the market.
That is gonna drive expansion of not only the VLN brands, but the CMO brands as well. We are driving to create the new low nicotine category in the market. We think that is really important, as I mentioned, to separate our products from the mainstream cigarette category so that we can bring a customer's eye to that and help them understand that they have a choice and let them see the 95% less nicotine, so they can understand the impact to their health. We are developing new non-combustible VLN products to widen the product portfolio. We really, in 2025, came through a 2024 turnaround status. 2025, this is really a new company.
We're set on a track to take our company forward profitably and really develop a full, well-rounded company that has a set of products that matches the needs of the market. In the market, there are over 270,000 U.S. retail outlets selling cigarettes, cigarettes and cigarette products. Actually, I think it's like 273,000. As we penetrate those, we'll drive increased revenue, profitability, and cash flow. That's the target market that we're going after. Let's talk a little bit about VLN, and that's our new branding. Our old branding was a little bit antiseptic, kind of clinical. We think the new branding is much more vibrant, and we're pretty excited about it. Nicotine equals addiction. It's pure and simple.
22nd Century, for over a quarter of a century, has led the nicotine harm reduction movement by offering a choice. Nicotine today is in the spotlight like it never has been before. Billions are being spent on nicotine harm awareness campaigns, TV, radio commercials, websites, conferences, healthcare restrictions. Some states, you can't have surgery unless you've been proven to be off cigarettes for some period of time. The FDA with their mandate that they just recently issued and court-ordered warnings on retailers, stores, and point of sale, all identifying that nicotine is addictive. The interesting thing to me is Big Tobacco continues to keep their customers in nicotine even as they move them onto other nicotine delivery systems such as Heat Not Burn or Moist Snuff or whatever.
and so, you know, we're taking this, we're taking the tip of the spear on, on, nicotine harm reduction. We are the only tobacco company to offer a choice with nicotine and using our category defining low nicotine products to, to point out we can, we can reduce nicotine harm. We provide that choice with our VLN cigarettes, which are 95% less nicotine. The interesting thing to, to us as well is the, the advent of the zero and low proof spirits market. Customers and consumers, pardon me, are choosing to break the paradigm of, for example, in drinking high spirit, alcohol. If you go to a, you know, go to a cocktail party and you want a mocktail, it's, it's very, very, you know, it's, it's available now. This is a growing, part of the business.
It's a better for you position. It's above premium price. It's domestic and international relevancy, and it really augments the traditional spirits business. Instead of looking at it as a competitor or encroachment on the business, it's really accessing those customers that they couldn't get. That's the way we sort of look at VLN and its partnership with regular tobacco. Another interesting thing is this is a rapidly growing space. Five years ago, this was not a space. Now it's a space and it is segregated, so it has its own category, pardon me. It's expected to grow to $85 billion by 2033. The interesting point about that is $85 billion is the size of the U.S. tobacco market, cigarette market. A little bit of parity there.
We sort of look at the low proof spirits business for marketing alignment and customer alignment as well. Our VLN products plan is, we are the first and only low nicotine combustible product authorized by the FDA. We are fully aligned with the 2025 low nicotine initiative. As I mentioned, we are driving to create the category, but our newly branded VLN is ready to ship. There you see a small section of it down there with the red, the gold, and the menthol. This is really how we are starting to go to the market, a little more vibrant, a little more attention.
I'll show you some more examples of our marketing here as we go, but it certainly has a different look and feel, as customers go into the retail store and look at the cigarette aisle. Our Smoker Friendly VLN is our first partner. That's our first, what we call partner VLN, and it's ready to ship as the states approve. We've got our new marketing collateral and approach. We've got our newly branded VLN, and it's ready to ship as states approve. Smoker Friendly VLN is ready to ship as states approve. This is a very, very exciting platform to launch from. Here's our partner VLN. This is building the portfolio and the category.
and so we're leveraging, you know, what we realized is, is going to the market with VLN and just, just going at the market with VLN, if we have the partner's brand equity in their existing brands, so with Pinnacle and Smoker Friendly and other brands that we're talking to as well. That becomes a tuck into their product portfolio. Access to the market is, is more straightforward and also access to their customers so they can see a VLN product on the market, in their, in their style of, of retail. So we're leveraging our CMO brands and distribution for, for example, Smoker Friendly has 350 of their corporate stores. And then of course we're doing it with Pinnacle, as well. And so we expect the VLN product portfolio to grow into the market.
This is just a few examples of some of the customers that we're working with, customers that we're talking to. They ride along the traditional VLN in the market. This is an example on the left. Pardon me for a second. This is an example on the left of what we consider the VLN category or the VLNC category, which would feature our VLN on the top, Smoker Friendly VLN in the middle, and Pinnacle VLN on the bottom and/or other VLNs, as we insert 'em. This is pretty exciting to us because what it really does is characterize the opportunity for the consumer to take control. We have, you know, other marketing collateral, change mats.
At the bottom you see with that red bar is a, you know, a garbage can wrap around at a gas station, floor mats, things to catch the consumer's attention so that we can, you know, that we can introduce the product, introduce the concept. Also, we're working with the store, the store leadership so that they are trained on the product and they can, they can introduce the product appropriately. We have a training program that we go through with them as well. Distribution-wise, we've had 5,100 retail stores across 26 states, including the largest markets in the country, and with very reputable brands, you know, retail brands out there. As I mentioned, there's 273,000 out there. We're really at 2% of the way to the target in the market.
As we see it, as I see it, there's no reason why VLN and the partner VLNs shouldn't penetrate their way in throughout the whole universe of resellers of tobacco products in the U.S. In the past, what you see at the top is we had stopped at 26 states with the original VLN. We are registering in all 50 states. We're gonna be 50 states registered for VLN and for the partner VLNs so that we can take it to every state in the nation, take it wide and have access to all 273,000 retailers. It is a long road. It starts with state approval, then it goes to selling the retailer.
Once we get the retailer bought in, then it's, you know, selling into the store and then rate of sale kicks in. We sort of look at this as the beginning of a locomotive starting. It'll start slow and pick up momentum. As we go, it'll just be, you know, incrementally growth and accretive to the financials. Now I'm gonna introduce another brand, another product. This is Smoker Friendly, and they have just introduced what they call Smoker Friendly Black Label. This is exciting for us because Smoker Friendly, they've developed this over a couple of years. They identified a spot in the market for a natural cigarette. This is Smoker Friendly Black, and what you see is the king size and the hundreds here, and it's an additive free.
It's a, you know, kind of a natural cigarette, additive free, tobacco and water only. It's premium American blend, and it's made in the U.S. at our factory in Mocksville, North Carolina. For consumers who want a natural cigarette, this is a price alternative, and I'll explain that here in a sec. The identification was, one of the strongest brands in America is Natural American Spirit. The volume that they sell is over 25 million cartons annually, and its brand rank is number six. It's in over 220,000 outlets in the U.S. out of the 273,000 outlets. Its wholesale price, so the price out of manufacturing into retail, is $90 a carton. Smoker Friendly is able to offer a similar cigarette at $45 a carton.
As Big Tobacco has been raising their prices quarterly, it's getting pretty hurtful for the consumer to continue to pay up. This, I think, is maybe number one as far as the most expensive cigarette in the U.S. market, domestic cigarette in the U.S. market. What Smoker Friendly identified is an opportunity to come in with a value-driven brand at the same quality as Natural American Spirit. As the economy, and we're all living in this economy where things are changing, prices are going up, consumers will have an alternative to what they're currently been used to. As Smoker Friendly's volume grows and their penetration grows, ours does too because we're the manufacturer.
This has been launched and Smoker Friendly has had good traction in the market with it so far. Let's talk about our R&D for a second. We've got key areas of focus. Right now VLN is only available in king size. We're gonna add a hundred millimeter VLN to our lineup, and that'll come out in 2026. We're also, you know, our R&D roadmap is set. We're also working on non-combustible low nicotine product extensions. We've got a partnership with North Carolina State University to develop low nicotine tobacco improvements, disease resistance, and other strains so that we can continue to develop the brand, continue to develop the blends as we go forward and continue to refine, you know, the future of VLN.
We do have our VLN tobacco and all the technology around it is patented by us. We will file new patents as appropriate as we see in the countries where we see them appropriate. On the financial side, here you see we went through our valley in Q4, as we, you know, I think we talked about this quite a bit in 2024 as we worked our way out of the negative margin, filtered cigar business. We have seen those customers come back and they have come back in a profitable manner. We have come through the dip and we are starting to grow and we are bringing that, we are bringing the top line up and we are bringing the gross profit line up.
Also, I'll point out that our operating expenses hit the lowest since I've been here at under $2 million in the quarter. We keep working our way to break even and we're gonna get there in Q4. The other notable thing is we've taken our debt down to $3.9 million. That debt was, I wanna say it was north of $20 million when I first joined. We keep chipping away at that and working our way down. I see the way to, looking in the future to a debt-free 22nd Century Group. That's pretty exciting for me. In summary, we've initiated our growth platform. We've rebooted the company. Like I said, this is the beginning of a new company, and we've put the turnaround behind us.
We're not really focusing on that anymore. We're focused on the future, which is very exciting. Our VLN product strategy is solid and we're, you know, we're in the market. We're talking to the market. We're working with retailers. As soon as states get approval, we'll be moving the product on that path. The VLN product portfolio, including the partner VLNs, that's very exciting. We're taking a portfolio and we're widening it with partner product extensions in areas where they have access to their markets in a very natural way. Also, with their retail staff, they can bring the product forward very, very effectively. As I've mentioned, we're fully aligned with the FDA's low nicotine mandate.
We, you know, the low nicotine mandate has a bandwidth of, I think, 5% and our 95% low nicotine fits right smack in the middle of that. We are the only ones that have it. There is a lot of activity going on around that in the market, but we are not depending on it, but it would be nice to have if they get that pushed through. The potential of a low nicotine content category, I think that would be outstanding to really point out the opportunity to control your nicotine. The continued development of low nicotine strains, that is exciting for us because flavor profiles change. Of course, weather changes and crops change. It is an agricultural product.
The more variety we have in our low nicotine tobacco, the more we can offer different varieties and maybe even for some other countries as their tastes and flavors are different than ours. Growth in the CMO business, Smoker Friendly Black Label is a great example of that. We are very excited about Black Label and we're cheering on Smoker Friendly and we're cheering on the initiative in the market to go into that space for the natural cigarette. The improved balance sheet, I mentioned we're down to $3.9 million. We're putting together our plans to eliminate that as we go forward. We're still targeting break even in Q4 of 2025. Our keys to success now are state approvals, driving points of distribution, and then eventually it's ready to sell.
We can get it put out there, but we gotta get the customers buying it. That is where all that marketing cycle really runs itself through. I think that is it.
All right, Larry, are you ready for some questions?
I am.
Great job. All right. Wonderful progress. Your company's been focused on nicotine harm reduction for over a quarter of a century. Wow. Important work there. Explain a little bit about the significance of nicotine reduction to a smoker. What does that mean exactly?
Yeah. Nicotine can stay in your body between one and four days. It literally takes hardly any exposure to nicotine through cigarettes to become addicted to nicotine. At some point, I'll just say early in a smoker's journey with nicotine, the general smoker's given up control and their body develops the need for nicotine. This becomes an addiction.
Nicotine is highly habit forming. It's highly addictive, you know, and creating a nicotine dependence. Your body starts to crave nicotine and you, you know, if you've been in a conference room where people have to exit to go have a smoke break because they're, I mean, they're literally addicted. Nicotine reduction, you know, to us and what we've been working on for a quarter of a century, a little more than, gives control back to the person, to the consumer. Our VLN products have 95% less nicotine and significantly reduce the dependence on nicotine for the smoker. This ends up giving the smoker a choice as to whether they wanna smoke or need to smoke or when to smoke or if, if at all. We think that's pretty important, to, to not be, not be dependent.
Absolutely.
Why do other tobacco companies not embrace a nicotine harm reduction plan such as your 22nd Century has? Why do they not?
Yeah, this is a great question, but I think the answer is laying right out there. The tobacco industry really depends on nicotine in their products to develop customers who are addicted to nicotine and therefore they develop the need to smoke and that creates the cycle. I could put a parody out there to, you know, regular coffee drinkers who have a difficulty maybe stopping drinking coffee or they go to decaf and they might get a headache for a couple of weeks. Coffee stays in your body for about two hours. Nicotine, you know, when you're at the four-day rate, this, it goes a lot deeper.
You really do create, you know, I wouldn't call, there's some people who call, you know, their coffee habit an addiction, but they have a lot more control than they maybe even think they do. This would mean, you know, if smokers have a choice, you know, then that kind of changes the industry. That's why, you know, I'll call it Big Tobacco, is focused on other high nicotine delivery systems such as Moist Snuff, the recent Heat Not Burn and others so that they can move consumers from their cigarette platform to other ways that they can stay hooked. In fact, some brands now are being marketed and are bragging about being the highest nicotine on the market, which, you know, is to my eyes hurtful to the consumer.
That's really, you know, it's really feeding a system that's been in place for a long, long time. And so nicotine is not the enemy to those guys.
Who are your ideal customers? Who would use a VLN product?
Yeah, it's really anyone who has a want or a need to reduce their dependence on nicotine through smoking, you know, in other words, you know, exercise their ability to make smoking a choice. This would mean they have the choice how much they smoke, when they smoke, and instead of a biological, you know, dependence. For example, you know, people who need to reduce their cigarette intake for maybe medical reasons. I think of pregnant women, people who work in hazardous jobs, people who work in jobs that don't allow frequent smoke breaks.
Anybody who wants to take their habit, if you will, or their addiction and turn it into something that's in their own control. I sort of, you know, analogize it to, you know, I know some people that smoke three packs a day, but I don't know any cigar smokers that smoke three packs of cigars a day. You know, it's more of a casual event or something they do to relax at the end of their night or whatever. I think it's really the difference in the amount of nicotine that they've been exposed to and how they go. Anybody who wants to change would take a shot at that.
Wonderful. Larry, do you have any closing remarks for our viewers as we wrap up our time together today?
Yeah, I just want to thank everybody for joining. I gotta say that the team at 22nd Century is really excited to go through the growth stage now as we, as I said, restarted the company and keep track of us. We've got something here and we're very excited about it.
Absolutely. Thank you so much and we look forward to continuing on this conversation at a later time. We appreciate your time today, Larry. Thank you.
Thanks, Anna. Have a good day.
All right, everyone. We'll be right back.