22nd Century Files 2018 Second Quarter Report

22nd Century Group, Inc. (NYSE American: XXII), a plant biotechnology company that is focused on tobacco harm reduction, Very Low Nicotine tobacco, and hemp/cannabis research, announced today the Company’s second quarter 2018 financial results. 22nd Century will provide a business update for investors on a conference call to be held Wednesday, August 8, 2018, at 4:00 PM (Eastern Time).

Henry Sicignano, III, President and Chief Executive Officer of 22nd Century Group, together with John T. Brodfuehrer, Chief Financial Officer, will conduct the call. Interested parties are invited to participate by dialing: (877) 260-1479 and using Conference ID 7777367. The conference call will consist of an overview of recent business highlights and a summary of the financial information presented in the Company's second quarter 2018 Form 10-Q. Immediately thereafter, there will be a question and answer segment open to all callers.

With net sales revenue of more than $6.9 million, 22nd Century posted another record quarter. At the same time, 22nd Century significantly increased spending – to more than $2.7 million this quarter – on the Company’s Modified Risk Tobacco Product ("MRTP”) application to the U.S. Food and Drug Administration ("FDA”) for "BRAND A” Very Low Nicotine cigarettes. As of June 30, 2018, the Company had more than $53 million in cash and short-term investments, which are sufficient reserves to meet regular operating expenses for a number of years.

For the second quarter of 2018, 22nd Century’s accomplishments and notable events include:

On April 23, 2018, the Company announced that the Food and Drug Law Institute ("FDLI”) published an article by Dr. James Swauger, who was then the Senior Vice President of Science and Regulatory Affairs at 22nd Century. In that public policy analysis, Dr. Swauger pointed out that since it is universally accepted that nicotine is the primary addictive component of cigarettes, the tobacco industry and public health officials should logically support the nicotine reduction plan proposed by the FDA. Dr. Swauger described Very Low Nicotine Content ("VLNC”) cigarettes as "well-studied by a diverse group of scientists” and linked these results to the FDA’s planned mandate to require that all combustible cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine. In establishing the importance of the FDA’s mandate, Dr. Swauger cited an editorial in the October 2015 edition of The New England Journal of Medicine in which Drs. Michael Fiore and Timothy Baker wrote: "Reducing the nicotine content of combustible tobacco to levels that will not sustain dependence seems to us to be the most promising regulatory policy option for preventing [at least] 20 million premature deaths.” Sadly, shortly before publication of his article in FDLI, Dr. Swauger passed away unexpectedly on April 19, 2018.

On April 25, 2018, 22nd Century announced that the Company is committed to working collaboratively with the FDA on the FDA’s planned new rule to require that all cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine. In contrast, earlier that same month, Altria Group, Inc., and Reynolds American Inc. (a subsidiary of British American Tobacco) petitioned the FDA for a 90-day extension beyond the original public comment period for the FDA’s Advance Notice of Proposed Rulemaking ("ANPRM”) that was then set to end on June 14, 2018. The FDA subsequently extended the public comment period for the ANPRM, but by only an additional 30 days, to July 16, 2018.

The FDA’s ANPRM is an important step in the FDA’s official rule-making process. The ANPRM describes the independent science that supports the FDA’s proposed nicotine reduction mandate. Although the ANPRM indicates that the FDA desires to receive input on a maximum allowable nicotine level, the ANPRM already references previously completed research that found: "an absolute limit of 0.4 to 0.5 mg of nicotine per cigarette should be adequate to prevent or limit the development of addiction in most young people. At the same time, it may provide enough nicotine for taste and sensory stimulation.” The ANPRM also cites the results of independent clinical studies, including the clinical trial by Dr. Eric Donny, et al., that was published in the October 2015 issue of The New England Journal of Medicine, that found: "Those participants using cigarettes with the lowest nicotine content (0.4 mg per gram nicotine/gram of tobacco filler), demonstrated reduced dependence… with minimal evidence of withdrawal-related discomfort or safety concerns.” 22nd Century provided all of the proprietary VLNC cigarettes that made this study possible. 22nd Century submitted its public response to the FDA’s ANPRM on July 16, 2018.

On May 24, 2018, 22nd Century announced that 41 public health and medical organizations, including the American Heart Association, the American Cancer Association, the American Medical Association and dozens of other public health and medical organizations, wrote an open letter to FDA Commissioner Dr. Scott Gottlieb urging the FDA to quickly implement its plan to reduce nicotine in cigarettes to minimally or non-addictive levels. In their letter, these well-known public health and medical organizations described the "massive public health benefits” that will result from the adoption of the FDA’s plan to reduce nicotine in cigarettes as follows:

"Every day that passes means more kids moving from experimentation to addiction and more adults who want to quit and try to quit, but remain addicted to a lethal product. We urge FDA to issue a proposed rule within six months of its ANPRM (by September 16, 2018) and a final rule six months later (by March 16, 2019). We also urge that implementation of the rule be no later than the one-year period provided for in Section 907 of the Family Smoking Prevention and Tobacco Control Act, which would allow the rule to be implemented by March of 2020.”

On June 20, 2018, 22nd Century announced that the Company had initiated three short-term studies investigating the behavioral and biochemical responses to 22nd Century’s proprietary VLN^TM tobacco. The Company will submit the data collected from these studies as part of 22nd Century’s revised and enhanced MRTP application to the FDA for "BRAND A” VLNC cigarettes.

On June 25, 2018, 22nd Century announced that it was added to the Russell 2000, Russell 3000, and Russell Global Indexes when FTSE Russell reconstituted its U.S. and global equity indexes on June 22, 2018. The Russell indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for investment strategies. In that same announcement, 22nd Century also stated that its research partner, Anandia Laboratories in Canada, had agreed to be acquired by Aurora Cannabis Inc. (TSX: ACB.TO) in consideration for units consisting of one share of Aurora common stock plus a warrant to purchase one-half of a share of Aurora common stock for each share of Aurora that is issued to Anandia. The number and value of the shares of Aurora common stock and warrants that will be issued to 22nd Century in consideration for the Company’s approximately 14.8% equity ownership of Anandia will not be known until the closing of the transaction, which is currently scheduled to occur in August 2018.

On June 26, 2018, 22nd Century announced that it had exclusively licensed from North Carolina State University several flue-cured and burley tobacco plant lines that grow with very low levels of nicotine. These new plants contain no foreign genetic material (non-GMO) and will compliment 22nd Century’s existing VLN^TM plants and technologies. The new, non-GMO, VLN^TM tobacco plant lines are immediately commercially viable as they are the result of multiple generations of plantings that have yielded stable, true-breeding crop lines of flue-cured and burley tobacco plants. The addition of these non-GMO tobacco varieties represents a significant advancement for 22nd Century’s next generation tobacco technology. 22nd Century’s new VLN^TM plant varieties will provide options for the Company and for potential licensees to more readily comply with the FDA’s plan to dramatically reduce the nicotine in all combustible cigarettes sold in the United States. The non-GMO nature of these tobacco varieties will also facilitate the sale of 22nd Century’s proprietary VLN™ tobacco in some foreign countries where the use of genetically modified crops is restricted.

Subsequent to the close of the second quarter of 2018, 22nd Century also announced:

On July 17, 2018, 22nd Century announced that the Company had submitted its public comments to the FDA’s ANPRM to develop a rule that will require that all cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine. 22nd Century’s public comments to the FDA’s ANPRM describe how the FDA’s proposed rule is (i) supported by rigorous independent science, (ii) exceedingly practical and urgently needed in the interests of public health and (iii) immediately feasible. 22nd Century cited the facts that 22nd Century has produced and delivered tens of millions of its proprietary VLNC SPECTRUM® research cigarettes since the year 2011 for use in numerous completed and on-going clinical studies funded by agencies of the United States federal government. The results of these independent clinical studies show that upon switching to 22nd Century’s VLNC cigarettes, smokers:

(1) reduce their cigarette consumption,
(2) experience lessened withdrawal symptoms, and
(3) increase their attempts to quit smoking.

These peer-reviewed and published studies provide a solid scientific foundation for the FDA’s proposed nicotine reduction rule. VLNC cigarettes are so promising that independent researchers estimate that in the first year after implementation of the FDA’s rule to limit cigarettes to minimally or non-addictive levels of nicotine, approximately 5 million people would stop smoking and, in as few as five years after implementation of the FDA’s mandate, more than 13 million people would stop smoking. To make VLNC cigarettes a prompt reality for all smokers, 22nd Century’s ANPRM response announced that 22nd Century is willing to license the use of its VLN™ technology and its VLN™ tobacco seeds/plants to all interested companies. The availability of this licensing opportunity negates any argument by other tobacco companies that contend it is somehow not possible to comply with the planned FDA nicotine reduction rule.

Second Quarter 2018 Financial Summary

Net sales revenue for the second quarter of 2018 was $6,915,000, an increase of $3,018,000, or 77.4%, over net sales revenue of $3,897,000 for the three months ended June 30, 2017. Net sales revenue for the six months ended June 30, 2018 was $13,031,000, an increase of $6,902,000, or 112.6%, over net sales revenue of $6,129,000 for the six months ended June 30, 2017. The increase in net sales revenue for the three and six months ended June 30, 2018 was primarily the result of continued additional net sales revenue generated from a filtered cigar manufacturing agreement that commenced in mid-May of 2017, as compared to net sales revenue for the three and six months ended June 30, 2017. The second quarter of 2018 net sales revenue of $6,915,000 was the highest quarterly net sales revenue from product sales in the Company’s history.

For the three months ended June 30, 2018, the Company reported an operating loss of $7,041,000 as compared to an operating loss of $3,283,000 for the three months ended June 30, 2017, an increase in the operating loss of $3,758,000, or 114.5%. The increase in the operating loss was primarily due to an increase in operating expenses of $4,085,000, partially offset by $327,000, representing the change in the gross loss on product sales in the second quarter of 2017 to a gross profit on product sales in the second quarter of 2018. For the six months ended June 30, 2018, the Company reported an operating loss of $12,009,000, as compared to an operating loss of $6,252,000 for the six months ended June 30, 2017, an increase of $5,757,000, or 92.1%. The increase in the operating loss was primarily due to an increase in operating expenses of $6,429,000, partially offset by $672,000, representing the change in the gross loss on product sales in the six months ended June 30, 2017 as compared to a gross profit on product sales in the six months ended June 30, 2018. The increase in the Company’s operating expenses was primarily the result of expenses incurred in connection with the Company’s increased investment in its MRTP application to the FDA for "BRAND A” VLNC cigarettes, and an increase in equity-based compensation recognized during the second quarter of 2018 as the result of the vesting of certain stock options previously granted to Dr. James Swauger, the Company’s former Senior Vice President of Science and Regulatory Affairs, due to his unexpected death in April of 2018.

The Company had a net loss for the three months ended June 30, 2018 of $6,739,000, or ($0.05) per share, as compared to a net loss of $3,356,000, or ($0.04) per share, for the three months ended June 30, 2017. The increase in the net loss for the second quarter of 2018 of $3,383,000, or 100.8%, was due primarily to the net increase in the operating loss of $3,758,000 discussed above, partially offset by an increase in net other income of $375,000. The net loss for the three months ended June 30, 2018 included non-cash expenses consisting of equity-based compensation totaling approximately $1,682,000 and depreciation and amortization in the approximate amount of $302,000.

The Company had a net loss for the six months ended June 30, 2018 of $5,352,000, or ($0.04) per share, as compared to a net loss of $5,977,000, or ($0.07) per shares, for the six months ended June 30, 2017. The decrease in the net loss for the six months ended June 30, 2018 of $625,000, or 10.5%, was due primarily to an increase in net other income of approximately $6,382,000, partially offset by the increase in the operating loss of $5,757,000 discussed above. The increase in net other income was primarily the result of an unrealized gain during the first quarter of 2018 on the Company’s investment in Anandia Laboratories in the approximate amount of $6,147,000.

Adjusted EBITDA (as described in the paragraph and table below) was approximately a negative $5,098,000, or ($0.04) per share, for the three months ended June 30, 2018, as compared to approximately a negative $2,897,000, or ($0.03) per share, for the three months ended June 30, 2017. Adjusted EBITDA was approximately a negative $9,211,000, or ($0.07) per share, for the six months ended June 30, 2018, as compared to approximately a negative $5,469,000, or ($0.06) per share, for the six months ended June 30, 2017.

Below is a table containing information relating to the Company’s Adjusted EBITDA for the three and six months ended June 30, 2018 and 2017, including a reconciliation of net loss to Adjusted EBITDA for such periods.

Adjusted EBITDA, which the Company defines as earnings before interest, taxes, depreciation and amortization, as adjusted by 22nd Century for certain non-cash and non-operating expenses, is a financial measure not prepared in accordance with generally accepted accounting principles ("GAAP”). In order to calculate Adjusted EBITDA, the Company adjusts the net loss for certain non-cash and non-operating income and expense items listed in the table above in order to measure the Company’s operating performance. The Company believes that Adjusted EBITDA is an important measure that supplements discussions and analysis of its operations and enhances an understanding of its operating performance. While management considers Adjusted EBITDA to be important, it should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP, such as operating loss, net loss and cash flows from operations. Adjusted EBITDA is susceptible to varying calculations and the Company’s measurement of Adjusted EBITDA may not be comparable to those of other companies.

About 22nd Century Group, Inc.

22nd Century is a plant biotechnology company focused on technology which allows it to increase or decrease the level of nicotine in tobacco plants and the level of cannabinoids in hemp/cannabis plants through genetic engineering and plant breeding. The Company’s primary mission in tobacco is to reduce the harm caused by smoking. The Company’s primary mission in hemp/cannabis is to develop proprietary hemp strains for important new medicines and agricultural crops. Visit www.xxiicentury.com and www.botanicalgenetics.com for more information.

Cautionary Note Regarding Forward-Looking Statements: This press release contains forward-looking information, including all statements that are not statements of historical fact regarding the intent, belief or current expectations of 22nd Century Group, Inc., its directors or its officers with respect to the contents of this press release, including but not limited to our future revenue expectations. The words "may,” "would,” "will,” "expect,” "estimate,” "anticipate,” "believe,” "intend” and similar expressions and variations thereof are intended to identify forward-looking statements. We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances, or to reflect the occurrence of unanticipated events. You should carefully review and consider the various disclosures made by us in our annual report on Form 10-K for the fiscal year ended December 31, 2017, filed on March 7, 2018, including the section entitled "Risk Factors,” and our other reports filed with the U.S. Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

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