XXII

Business Context and Reporting Period

Company: 22nd Century Group, Inc. (NASDAQ: XXII)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2026
Business Overview: A tobacco products company focused on reduced nicotine content (RNC) products, including the FDA-authorized VLN® brand, and contract manufacturing services (CMO). The company operates as a single reportable segment.

Key Financial Metrics

Note: Amounts in thousands except per share data. Net loss available to common shareholders was significantly higher due to deemed dividends and preferred stock redemptions.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 29.9% in Q2 2026 ($2.86M vs. $4.08M) and 30.6% for the six months ($6.97M vs. $10.04M). This was driven by a strategic shift away from high-volume, low-priced CMO export customers, resulting in a 79.8% drop in cartons sold in Q2 (151 vs. 779).
• Expense Increases: Operating expenses rose 27.8% in Q2 2026. SG&A increased 27.6% due to higher compensation and legal fees, while R&D increased 30.0% due to headcount growth.
• Gross Loss Improvement: Despite lower revenue, the gross loss narrowed to $(293) in Q2 2026 from $(635) in Q2 2025. This was due to a one-time excise tax recovery of $692, partially offset by a $196 inventory write-off.
• Interest Expense Reduction: Interest expense dropped significantly (95.2% in Q2) following the repayment of the Senior Secured Credit Facility in September 2025.

Guidance, Outlook, Risks, and Unusual Items

• Going Concern Warning: Management states there is substantial doubt about the Company's ability to continue as a going concern for one year following the report date due to significant losses and negative operating cash flows ($7.09M used in six months).
• Capital Raises & Equity Activity:
  • Issued Series B Convertible Preferred Stock (net proceeds ~$15.3M) to redeem Series A Preferred Stock ($9.65M).
  • Conducted a warrant inducement offering in June 2026, resulting in significant "deemed dividends" ($17.5M in Q2) which drastically increased the loss per share available to common shareholders.
  • Subsequent to period end (August 2026), all outstanding warrants were exercised on a cashless basis.
• Customer Concentration: Customer A accounted for 70.2% of Q2 2026 revenue. The loss of this customer or similar high-volume partners poses a significant risk.
• Legal Proceedings:
  • Cookies Retail Products: Breach of contract lawsuit ongoing; trial set for October 2026.
  • Employee Dispute: Settlement in principle reached for ~$55,000, expected to be paid in Q3 2026.
• Subsequent Event: Received a termination notice from a major customer (Smoker Friendly International) effective 180 days from July 1, 2026. An impairment charge of $300 is expected in Q3 2026 related to the associated license.

Investor Verification Checklist

• Liquidity Runway: Verify the sufficiency of the $6.06M cash balance against the projected burn rate and the timeline for securing additional financing.
• Customer Concentration Risk: Assess the impact of the termination notice from Smoker Friendly International and the reliance on Customer A (70% of Q2 revenue).
• Deemed Dividends Impact: Understand how the warrant inducement and preferred stock redemptions distorted the "Net Loss Available to Common Shareholders" metric ($21.76M loss in Q2 vs. $3.27M actual net loss).
• Going Concern Status: Review management's specific plans to raise capital and whether they have secured commitments to alleviate the substantial doubt expressed in the filing.
• Inventory Valuation: Confirm the status of the $4.54M inventory balance, particularly given the write-offs of aged inventory mentioned in the period.