22nd Century Files 2018 Third 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 third quarter 2018 financial results. 22nd Century will provide a business update for investors on a conference call to be held Thursday, November 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 9672282. The conference call will consist of an overview of recent business highlights and a summary of the financial information presented in the Company's third quarter 2018 Form 10-Q. Immediately thereafter, there will be a question and answer segment open to all callers.

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

On July 16, 2018, the U.S. Food and Drug Administration ("FDA”) closed public comments on the Agency’s Advance Notice of Proposed Rulemaking ("ANPRM”) to develop a new rule to 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) urgently needed in the interests of public health and (iii) immediately feasible. The Company pointed out that 22nd Century has produced and delivered millions of proprietary SPECTRUM® Very Low Nicotine Content ("VLNC”) research cigarettes since the year 2011 for use in independent clinical studies funded by agencies of the United States federal government. The results of these 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 studies provide a solid scientific foundation for the FDA’s proposed nicotine reduction mandate.

On July 24, 2018, 22nd Century announced that an independent clinical study published in JAMA Psychiatry, a specialty journal of the American Medical Association, found that nondaily smokers who switch to 22nd Century’s proprietary VLNC cigarettes reduced their smoking by 51%. This was the first published clinical study to focus on occasional, intermittent smokers, which comprise 25% to 33% of all U.S. smokers. The results of this study show that intermittent smokers assigned to VLNC cigarettes reduced both the overall number of cigarettes smoked and the number of days on which they smoked. The researchers reported that their study results did not vary by sex or race/ethnicity and since intermittent smokers responded to VLNC cigarettes in a manner similar to daily smokers, study researchers concluded that a universal nicotine reduction policy by the FDA is possible.

On July 31, 2018, 22nd Century reported that The Washington Examiner newspaper published an op-ed article by 22nd Century’s James Vail, Director of Communications, and Juan Sanchez Tamburrino, Ph.D. Vice President of Research and Development. The article calls for the U.S. Congress, tobacco control advocates, and the American people to ensure that the FDA’s nicotine reduction plan quickly becomes reality. The article cites the many completed clinical studies using VLNC cigarettes and summarizes the important results from these clinical studies; namely that VLNC cigarettes are associated with reduced cravings, reduced consumption of cigarettes, and increased quit attempts. In addition, the benefits of VLNC cigarettes appear to extend to adolescents, nondaily smokers, and vulnerable population groups, including people with psychiatric disorders and opioid dependence. The article also cited independent clinical studies confirming that "compensation” (smoking a greater number of cigarettes to obtain the level of nicotine desired by the smoker) does not occur with VLNC cigarettes.

On August 8, 2018, Aurora Cannabis, Inc. acquired 100% of the outstanding shares of common stock of Anandia Laboratories, Inc., including the 14.8% equity stake in Anandia owned by 22nd Century. In the closing of this transaction, Aurora issued to 22nd Century a total of 1,947,943 shares of Aurora common stock and a currently exercisable warrant with a five-year term to purchase 973,971 shares of Aurora common stock at an exercise price equal to $9.37 Canadian Dollars per share (approximately $7.26 per share in U.S. Dollars at September 30, 2018). During the third quarter of 2018, 22nd Century sold the 1,947,943 shares of Aurora common stock for total net cash proceeds of more than $13 million. Since the Company originally acquired its equity ownership in Anandia for approximately $1.4 million in cash and 22nd Century common stock, 22nd Century realized a tax basis gain of more than 800% on the sale of the Company’s shares of Aurora common stock. At this date, 22nd Century retains ownership of a warrant to purchase 973,971 shares of Aurora common stock.

Even more significantly, 22nd Century retains rights to research and intellectual property developed through its collaboration with Anandia. In particular, 22nd Century retains rights to an exclusive sublicense in the United States and a co-exclusive sublicense in the remainder of the world, excluding Canada, to patents and patent applications that enable the Company to regulate the genes in the cannabis plant that produce cannabinoids. The Company also retains rights to 22nd Century’s Zero-THC hemp plants and other important plant lines developed with Anandia. 22nd Century is currently in discussions with Ananda to extend the research collaboration agreement between the companies.

On August 21, 2018, 22nd Century announced that RTI International submitted an order for 3.6 million SPECTRUM® research cigarettes for use in further independent clinical studies funded by the FDA, the National Institute on Drug Abuse ("NIDA”), the National Institutes of Health ("NIH”), and other U.S. federal government agencies. Since the year 2011, 22nd Century has produced and delivered more than 24 million SPECTRUM® research cigarettes.

On September 5, 2018, 22nd Century announced that the Journal of the American Medical Association (JAMA) published results of an independent clinical study investigating the effects of an immediate reduction in nicotine content of cigarettes versus a gradual reduction in nicotine content of cigarettes. With this 1,250-participant randomized, parallel, double-blind clinical study, which is the largest clinical study using VLNC cigarettes conducted to date, lead researcher, Dr. Dorothy Hatsukami, et al. concluded that an immediate reduction in nicotine was superior to a gradual nicotine reduction, with an immediate nicotine reduction being associated with (i) lower toxicant exposure across time, (ii) fewer cigarettes smoked per day, (iii) greater reduction in nicotine dependence and (iv) more days in which participants smoked no cigarettes. In a companion article published by the University of Minnesota, Dr. Hatsukami explained that the results of this study support "the benefits of rapidly reducing nicotine in all cigarettes, primarily because this approach helped smokers, who initially had no immediate intentions to quit, experience smoke-free days. This is good news because the majority of smokers want to quit smoking, but only a small percentage of smokers are successful.”

Subsequent to the close of the third quarter of 2018, 22nd Century’s notable events include:

On October 11, 2018, Dr. Lynn Hull, Lead Pharmacologist at the FDA’s Center for Tobacco Products, held a public webcast summarizing the published science supporting the FDA’s proposed new rule to require that all cigarettes sold in the United States contain only minimally or non-addictive levels of nicotine. Dr. Hull’s presentation featured prominently many independent clinical trials conducted with 22nd Century’s VLNC SPECTRUM® research cigarettes. Dr. Hull contrasted VLNC cigarettes with so-called "light” cigarettes by clarifying that VLNC cigarettes contain minimally or non-addictive levels of nicotine as compared to traditional "light” cigarettes that contain just as much nicotine as traditional cigarettes. In contrast to the highly addictive tobacco cigarettes marketed by Big Tobacco companies, 22nd Century’s proprietary VLN^TM tobacco and technology make possible tobacco cigarettes with a nicotine content of just 0.4mg/g, which is more than 95% less nicotine than conventional cigarettes (conventional cigarettes contain approximately 15mg - 20 mg of nicotine per gram of tobacco). Dr. Hull concluded her webcast by stating that it is the FDA’s belief that rendering cigarettes minimally addictive by reducing their nicotine content could help current users quit and prevent future users from becoming addicted and escalating to regular use.

22nd Century has received preliminary results from two of its three Company-sponsored studies that are part of the Company’s MRTP application to be submitted to the FDA in December 2018. The two "Abuse Liability” studies (one for regular VLNC cigarettes and one for menthol VLNC cigarettes) are designed to measure the potential for the Company’s VLNC cigarettes to create and sustain addiction. As expected, the Company’s VLNC cigarettes preliminarily show a substantially lower potential for abuse. The third Company-sponsored clinical trial, measuring the number of cigarettes consumed per day for participants switching to VLNC cigarettes over the course of 6 weeks, is on schedule and nearing completion. The Company anticipates that this study will show that users who switch to VLNC cigarettes smoke fewer cigarettes per day and show reduced biomarkers of exposure to nicotine and other smoke components.

Third Quarter 2018 Financial Summary

Net sales revenue for the third quarter of 2018 was $6,260,000, an increase of $1,729,000, or 38.2%, over net sales revenue of $4,531,000 for the three months ended September 30, 2017. Net sales revenue for the nine months ended September 30, 2018 was $19,291,000, an increase of $8,631,000, or 81.0%, over net sales revenue of $10,660,000 for the nine months ended September 30, 2017. The increase in net sales revenue for the three and nine months ended September 30, 2018 was primarily the result of additional net sales revenue generated from the Company’s contract manufacturing business.

For the three months ended September 30, 2018, the Company reported an operating loss of $6,209,000 as compared to an operating loss of $3,274,000 for the three months ended September 30, 2017, an increase in the operating loss of $2,935,000, or 89.6%. The increase in the operating loss was primarily due to an increase in operating expenses of $3,426,000, partially offset by $491,000, representing the change in the gross loss on product sales in the third quarter of 2017 to a gross profit on product sales in the third quarter of 2018. For the nine months ended September 30, 2018, the Company reported an operating loss of $18,218,000, as compared to an operating loss of $9,527,000 for the nine months ended September 30, 2017, an increase of $8,691,000, or 91.2%. The increase in the operating loss was primarily due to an increase in operating expenses of $9,855,000, partially offset by $1,164,000, representing the change in the gross loss on product sales in the nine months ended September 30, 2017 as compared to a gross profit on product sales in the nine months ended September 30, 2018. The increase in the Company’s operating expenses for the three and nine months ended September 30, 2018 were 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 in the amount of $3,135,000 and $7,155,000, respectively. In addition, the increase in operating expenses for the nine months ended September 30, 2018 also includes $1,227,000 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 net income for the three months ended September 30, 2018 of $6,305,000, or $0.05 per share, as compared to a net loss of $3,317,000, or ($0.03) per share, for the three months ended September 30, 2017, a positive change of $9,622,000, or 290.1%. This positive change was due primarily to the realized gain on investments in the amount of $8,346,000 and an unrealized gain on an investment in the amount of $3,923,000, partially offset by an increase in the operating loss of $2,935,000 discussed above. The realized gain occurred when the Company’s investment in Anandia was acquired by Aurora plus the gain realized when the Company subsequently sold the shares of Aurora common stock received by the Company when Aurora acquired Anandia. The unrealized gain is the result of the increase in the fair value of the warrant to purchase shares of Aurora common stock that 22nd Century received when Aurora acquired Anandia. The net income for the three months ended September 30, 2018 included non-cash expenses consisting of equity-based compensation totaling approximately $473,000 and depreciation and amortization in the approximate amount of $352,000.

The Company had net income for the nine months ended September 30, 2018 of $952,000, or $0.01 per share, as compared to a net loss of $9,294,000, or ($0.10) per share, for the nine months ended September 30, 2017, a positive change of $10,246,000, or 110.2%. This positive change was due primarily to the realized gain on investments in the amount of $8,346,000 and an unrealized gain on investments in the amount of $10,070,000, partially offset by an increase in the Company’s operating loss of $8,691,000 discussed above. The realized gain is discussed above regarding the Anandia/Aurora transaction. The unrealized gain consists of the unrealized gain on the warrant to purchase shares of Aurora common stock as discussed above, plus an increase in the fair value of 22nd Century’s investment in Anandia in the amount of $6,147,000 as recorded in the first quarter of 2018. The net income for the nine months ended September 30, 2018 included non-cash expenses consisting of equity-based compensation totaling approximately $2,719,000 and depreciation and amortization in the approximate amount of $946,000.

Adjusted EBITDA (as described in the paragraph and table below) was approximately a negative $5,384,000, or ($0.04) per share, for the three months ended September 30, 2018, as compared to approximately a negative $2,780,000, or ($0.03) per share, for the three months ended September 30, 2017. Adjusted EBITDA was approximately a negative $14,553,000, or ($0.12) per share, for the nine months ended September 30, 2018, as compared to approximately a negative $8,249,000, or ($0.09) per share, for the nine months ended September 30, 2017. The increases in the negative Adjusted EBITDA of approximately $2,604,000 and $6,304,000 for the three and nine months ended September 30, 2018, respectively, are primarily the result of costs related to the Company’s MRTP application as previously discussed above.

Below is a table containing information relating to the Company’s Adjusted EBITDA for the three and nine months ended September 30, 2018 and 2017, respectively, 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 income (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/cannabis 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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