XXII

• Strategic Transition: The company is actively shifting away from high-volume, low/negative margin legacy CMO business to build a focused, profitable branded business centered on low nicotine tobacco and combustible cigarettes. The transition is expected to conclude by early 2027, with most low-value CMO export contracts wound down by the end of 2026. The company prioritizes profitable growth over uneconomic volume, exiting business that fails to meet required economic thresholds to free factory capacity for higher-margin branded offerings.

Commercial Progress: As of Q2 2026 end, the company’s branded products are placed in approximately 2,000 retail stores across 20 states. The Pinnacle brand platform has expanded with the launch of Pinnacle Pure, which targets the under-served premium tier 2 cigarette category and supports broader adoption of Pinnacle VLN. Distribution growth has generated follow-on interest from large retailers, cash and carry operators, and new trade channels including drug retailers and digital-first convenience outlets, broadening the commercial pipeline. The company recently entered the Metro New York, Northern New Jersey, and California markets, with expansion toward the 5,000 store-year end target already underway.

Pricing and Margin Trajectory: The company has implemented pricing resets across the business to recover excise tax increases, offset inflation, and align pricing with actual manufacturing and distribution economics. This discipline has resulted in some CMO customer attrition, which management views as an acceptable consequence of improving profitability. Gross loss has narrowed sequentially and year-over-year, with three key drivers expected to improve gross margin further: higher-margin branded product expansion, a shift from initial distribution load-in to repeat sales that improves factory absorption, and completed major pricing and contract restructuring. Non-recurring items in Q2 2026 included a $196,000 one-time charge for discontinued CMO customer inventory write-off, offset by a $692,000 one-time MSA NPM excise tax recovery.

Operational Updates: The company ended Q2 2026 with $6.1 million in cash and no outstanding debt, maintaining disciplined capital allocation focused on commercial expansion, marketing, and product development. Katherine Rouse Bailey has joined as Vice President of Marketing to lead brand building, and the company plans to add selective talent in sales and R&D to support growth. The company holds a first-mover and technology leadership position in low nicotine authentic tobacco products, with 28 years of developed technology portfolio, and continues engaging with the FDA for required regulatory authorizations.

• The company expects branded product shipments in the second half of 2026 to be significantly larger than in the first half of 2026. The legacy CMO transition will continue over the remainder of 2026 and into early 2027, so reported top-line revenue will continue to reflect this wind-down over the next two to three quarters.
• The company targets expanding retail footprint from ~2,000 stores at the end of Q2 2026 to ~5,000 stores across 35 U.S. states by the end of 2026, with a simultaneous focus on activating existing distribution to improve consumer pull-through and rate of sale.
• Management expects improved product mix (more higher-margin Pinnacle and VLN SKUs) and increased repeat reorder activity will deliver gross margin improvement in the second half of 2026, building on the year-over-year and sequential narrowing of gross loss seen in the first half of 2026.
• Management reaffirms its 2026 strategic priorities: expand VLN distribution, maintain cost discipline, and deliver meaningful gross margin improvement.

The company is transitioning away from legacy contract manufacturing organization (CMO) business and growing its branded reduced nicotine tobacco segment. For Q2 2026, total net revenue was $2.9 million, and first half 2026 net revenue totaled $7 million, down from $10 million in first half 2025 due to intentional wind-down of low-margin CMO volume. Gross loss narrowed to $0.3 million in Q2 2026 from $0.6 million in Q1 2026 and $0.6 million in Q2 2025; first half 2026 gross loss was $0.9 million, down from $1.2 million in first half 2025. Operating loss was $3.3 million in Q2 2026, up from $3 million in Q1 2026. Net loss from continuing operations was $3.3 million in Q2 2026, compared to $3 million in Q1 2026. Adjusted EBITDA was negative $3.5 million in Q2 2026, compared to negative $2.6 million in Q1 2026. The branded low nicotine product segment (including Pinnacle, Pinnacle Pure, and VLN offerings) carries substantially higher gross margin potential than the legacy CMO business, which is being wound down. No specific absolute revenue or contribution percentage breakdown is provided for each segment in this transcript.

• Execution risk remains critical to delivering projected second half 2026 margin improvement; the pace of gross margin improvement in the first half of 2026 was slower than management originally planned.
• Lower overall plant volume from the wind-down of legacy CMO volume creates factory absorption pressure that must be offset by growing branded volume.
• Forward-looking statements are inherently subject to unknown factors that could cause actual results to differ materially from projections; additional risk factors are detailed in the company's SEC filings, including the most recent Form 10-K.

There is no question and answer section included in the provided earnings call transcript.