22nd Century Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 3 speakers on the call.

Operator

Quarter results conference call. Joining me today are Larry Firestone, CEO and Dan Otto, CFO. Earlier today, we issued a press release announcing our results for the Q2 of 2024. The release and Form 10 Q are available in the Investors section of our website atxxiicentury.com. Today's call will include prepared remarks from Larry and Dan, updating you on 22nd Century's business, operations, strategy and financial results through June 30, 2024 and subsequent.

Operator

Before we begin, a few reminders for today's call. Some of the statements made today are forward looking. Forward looking statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly and other reports filed with the SEC. During today's call, we will also discuss non GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted for certain non cash and non operating expenses and net debt calculated as total principal amount of debt outstanding less cash and cash equivalents.

Operator

For more details on these measures, please refer to our press release issued earlier today. And with that, I'll now turn the call over to Larry.

Speaker 1

Thank you, Matt. Good morning, everyone, and thank you for joining 22nd Century's Q2 2024 Financial and Operating Results conference call. This is my 3rd call as your CEO and our 2nd quarter results show just how significant and positive the changes have been over the last 9 months since I joined in December. Much has changed even in the last 90 days as we continue on the path to turn our company around to be a profitable cash positive business. One thing that has not changed however is our commitment to using our unique position in the tobacco industry to confront the harms of nicotine addiction among tobacco users and to offer a meaningful option to those who want to take control of their smoking habit and addiction.

Speaker 1

Before I get into the operational updates, let me give you a summary of our financial turnaround efforts. As you see in our financial results release, we moved our company from a consolidated net loss of $21,000,000 in the Q2 of last year to just $1,600,000 this year. This was no small feat, but we won't be satisfied until those numbers turn solidly positive. But I will caution our shareholders, this is a bumpy ride getting there. The revenue growth initiatives we've been communicating, including adding volume to our factory, re pricing key customer accounts, our lean operating model and cost improvement initiatives have taken shape nicely in Q2 and will continue into the latter half of the year as we make progress against achieving our goal of net income in Q1 of 2025.

Speaker 1

Dan will cover the details on our key financial metrics. We have touched every part of this organization and business and we're still shaping it. Perhaps most important now is our company is quickly switching from defense to offense, meaning that we are shifting from the damage control and cost containment focus of the past few quarters and we are now focusing on growth and profitability. The executive team of 22nd Century has been slimmed down and completely rebuilt. We are pleased to welcome our latest addition to the team, Robert Manfredonia, who will head up our sales and marketing activities.

Speaker 1

Robert will focus heavily on activating our VLN brand, rolling out our flanker brands for VLN and then launching our new VLN that is going through the rebranding process. Robert comes from the adult beverage industry and brings with him extensive experience in new brand launch initiatives and seeing nascent brands through to successful traction in the market. He has worked in regulated consumer products for most of his career, he understands how to connect with retail customers in this environment to drive consumer engagement, loyalty and most important of all repurchase meaning sell through velocity. Now let's look under the hood at the company's operations. We have 2 distinct businesses at 22nd Century.

Speaker 1

The first is our branded products business that incorporates our proprietary technologies that target control of nicotine consumption and help people smoke less. The second is our contract manufacturing operations or CMO business where we manufacture for other brands. I'm going to talk about our CMO business first as it provides the most immediate and direct path to our breakeven goal, while our branded products provide the growth opportunity to take our company to the next level. On the CMO side of the business, we produce cigarettes, filtered cigars and distribute cigarillos for what I would call OEM tobacco companies whose products are distributed, marketed and sold by them below the big tobacco tiers. These are usually discount brands that are sold where price per pack and price per carton are the key selling point.

Speaker 1

And they could be house brands that are non premium products and always based on predicates that were approved by the FDA before 2007. By having us manufacture those products on a contract basis, our customers can avoid carrying the investment in a factory, the manufacturing overheads or having to obtain extensive regulatory approvals that would be required for in house production. They can also access a well known high quality manufacturing partner in our NASCO operations in North Carolina, which is critical. In order to expand the footprint of the tobacco product brand, it requires an intensive state by state approval process with respect to state attorney generals that govern regulated products, which is a collective organization called NAG. This process takes time and requires patience until the approval.

Speaker 1

Our CMO business is a service business and we are looking to book business which will load our factory to maximum capacity where we can help our customers drive down the cost of their products and we can both make money in this price sensitive segment

Speaker 2

of the

Speaker 1

market. Over time, we will look to penetrate larger brands as a manufacturing service model, which is the structure in many other industries such as electronics, automotive and adult beverage. In addition to domestic brands, import and export are 2 key areas of the CMO Tobacco business. We will utilize our quality manufacturing processes and facility to attract OEMs looking for lower cost, flexibility and lower overhead options to take advantage of these areas of the business. Our CMO business is in sync with our branded low nicotine business as we will produce under our proprietary predicate to service the demand for our new brand both domestically and internationally.

Speaker 1

We have already announced a few wins in this business during the Q2, including a contract to expand our CMO volumes which are in process of ramping up for the benefit of the second half of the year. We are working on other upside opportunities to help achieve our goal of consuming our factory capacity. Doing so has a direct benefit to our P and L and generates resources that we can reinvest into growth on our other brands, which is a good transition to talk about nicotine and our low nicotine solution currently known as VLN. It's common knowledge among our investors that 22nd Century produces the only MRTP, PMTA low nicotine combustible cigarette. We have the only low nicotine predicate approved by the FDA.

Speaker 1

And we have extensive intellectual property rights protecting this technology. So unless we license our technology to someone else, we will be the only ones who produce this MRTP FDA authorized predicate. As you'll see in our press release and our 10 Q, we have broken out our carton numbers so that our investors can see how we perform and track our progress as we go. Our carton numbers of VLN products shipped are still only a fraction of our factory capacity and do not yet reflect what we believe is the full potential of the product. So no matter good, bad or indifferent, we will report these numbers going forward.

Speaker 1

In the U. S. And some other jurisdictions, there is so much energy and financial support regarding nicotine addiction and quitting smoking. For example, recently, you may have seen the commercials for undo.org, und0.org. If you haven't seen them, log in and watch them.

Speaker 1

The message is clear. It's nicotine addiction at the center of the tobacco universe. Some groups may identify smoking, particularly cigarette smoking, but nicotine addiction and allowing smokers to choose to smoke less or not at all is what the world is trying to solve when it talks about the health risk of smoking. The next item that has to be respected is the smoking ritual, which entails lighting up and the hand to mouth ritual of smoking a cigarette as well as other hand to mouth motions and rituals. In order to smoke less, we have to respect this ritual and it is well documented that hand to mouth rituals known as oral fixations are ingrained in our society and in many cases since birth.

Speaker 1

Coffee cup to mouth, beer bottle to mouth, silverware to mouth, food to mouth, you get the picture. I will argue if an individual wants to smoke less or stop smoking altogether for the lion's share of the smokers, gum won't do the trick and a patch won't do the trick as well as other nicotine replacement therapies or NRTs. How many times have you grabbed your coffee cup when it's empty and tried to take a sip only to find it empty and you set it back down and do it again in a little while with the same empty cup. Simple presence of the cup drives behavior. In a smoker's case, nicotine drives their urge to have another and going for a cigarette is part of the ritual or the oral fixation.

Speaker 1

To a smoker, smoking is often seen as quiet time, time to think. It can even be relaxing. Clinical data supports this and shows that most smokers who attempt to stop smoking fail even with the help of the most common cessation aids on the market today. And that's why over a half a 1000000 people die each year from smoking. The smoking ritual matters and that is the problem we are addressing with our solution of a 95% reduced nicotine content cigarette clinically documented to reduce smoking by cutting the nicotine content received while smoking.

Speaker 1

The studies show that once the highly nicotine content is taken out of the equation, the smoker begins to smoke less. That is the goal with VLN and our mission to have our consumers take control versus have nicotine be in control. We offer that VLN rather than switching to vaping or other means of highly addictive nicotine content delivery, which have a lot of marketing dollars behind and which are intended to keep the smoker addicted. BLN is a truly reduced nicotine tobacco product driving lower nicotine consumption and ultimately the harm associated with tobacco use. Clinical data from studies around the world consistently show that reduced nicotine content products like VLN can work very well for adult smokers, if they stick with the product.

Speaker 1

The 22nd century problem is we approached our go to market like we were selling a premium cigarette that already had a market presence. We went to the market solely focused on C Stores and when the sell through didn't happen, we were unable to continue funding the expansion of points of distribution and hope for improved sell through without any programs to drive sales in the market where we had points of distribution. As a part of the solution, we are in the process of re blending, rebranding our VLN to ensure that we have the best possible product for our smoking consumers. While we are still selling VLN, we will relaunch the new brand into the market as we have learned from our mistakes. But let's pick on our execution for a moment.

Speaker 1

Our current branding and trade dress is like a chameleon in the cigarette space and not only is it invisible, it does not communicate the message for what the tool is designed to accomplish, which is to help smokers smoke less. We went only to the C store market, which is convenience stores and achieved reasonable sell in success getting the product on the shelf in approximately 5,100 stores, but we did not have the money nor the programs to properly support the sell through. We did not properly track sell through and same store sales velocity. And as a result, we have a product that we believe can change people's lives for the better, but a brand that went neutral so far in the marketplace. We're looking at our relaunch as a new initiation in the marketplace in an effort to launch the brand correctly this time and drive sales velocity along with even further expanded distribution as we ramp.

Speaker 1

As I keep cautioning our investors, this is a long road to success. We will keep you posted as the pieces of the relaunch come into place. Our competitors talk a big game about smoking cessation and in fact our government has forced big tobacco and retail points of sale such as C Stores to post signs declaring the fact that nicotine is addictive and tobacco products are dangerous. But these tobacco companies want consumers to continue with their nicotine addiction by just changing to another line extension, meaning big tobacco is still attached to their wallets. The world needs to understand that we're offering a solution that is different than the nicotine attachment plan.

Speaker 1

If the smoking population in the U. S. Just simply smoke less, then healthcare costs would reduce significantly, including insurance premiums, surgeries, patient out of pockets, Smokers and former smokers would have more disposable income. Smoker health would improve, meaning fewer sick days, better overhaul health to improve their quality of life and productivity and lives could be saved from those that suffer from heart and lung disease as a byproduct of smoking, again, all documented in global research studies. This is not going to be an if you build it they will come solution.

Speaker 1

It will also not be an instant success. I know this is what some of our investors would like to see, but we're going to have to do the hard work every day, day in and day out to achieve success. This is a long road and I caution our investors who believe that our low nicotine solution will be an instant hit and a smashing success to watch our numbers as the brand rolls out. In the Brie brand, we are setting up a new blend, changing the taste to make a smoother tasting product and even more aligned to what smokers in the U. S.

Speaker 1

Want. New branding ensuring that the product presence and resonates with smokers so they not only try reduce nicotine content cigarettes, but also develop a brand loyalty and a commitment to drive sell through and repurchase to achieve the benefits of our product. Point of sales, shelf talkers, programs and our points of distribution and other education sales support to make smokers aware and keep them committed to their reduced smoking journey and expanded distribution. The point is 580,000 people die every year in the U. S.

Speaker 1

From tobacco harm. That is a number that is unacceptable and can and must be slashed. What we have been doing to help smokers I. E. NRT isn't really working.

Speaker 1

It's not bending the curve. We know that. Once someone starts smoking, it's incredibly hard for them to stop. I've heard numbers like 2 weeks with a full strength cigarette at less than a pack a day and you're hooked, meaning addicted. But a reduced nicotine content cigarette that delivers a non addictive level of nicotine can change the game and we have the only one.

Speaker 1

The only predicate, the only low nicotine cigarette that respects the smoking ritual or oral fixation on the journey to smoke less or to let the smoker take control of their habit by reducing their smokers nicotine intake. More is coming on this as we complete our rebranding process and introduce our improved product to the market. And we will continue to build our underlying CMO business always to first cover our costs and then contribute resources to invest in growth all towards the goal of becoming cash positive in Q1 of next year. And with that, I'll turn it over to Dan to discuss the numbers.

Speaker 2

Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today. I'll walk through additional details on our Q2 financial results. As a reminder, all financial results in our earnings release are presented on a continuing operations basis, which excludes our former hemp cannabis segment. Net revenue was $7,900,000 in the Q2 2024, increased sequentially from $6,500,000 in the Q1 2024 and compared to $8,100,000 in the Q2 2023.

Speaker 2

Included in the Q2 results was a significant one time order of our Spectrum product, which are low nicotine research cigarettes, helping boost both top line revenue and gross profit. As seen in our product line revenue results and discussion in our earnings release, overall carton volume declined slightly in the Q2 2024 compared to the prior year comparable period, which reflects the message that we've been communicating over recent quarters regarding product mix changes between cigarettes and filtered cigars. Reaching sustainable gross profit in our CMO business is critical to our success and why we're highly focused on ensuring the appropriate pricing for our key customers and exiting any business where we are losing money such as certain negative margin filtered scars. We have served price increases to our customers effective in April 2024 and added new volume in the Q2. The ramp in volume will accelerate more significantly in the latter half of the year as we continue to demonstrate to our customers the high quality production capability we possess and we secured additional wins in the CMO business as well as working through the relaunch initiatives related to VLN.

Speaker 2

I will however echo Larry's earlier remarks. Expanding our volume at the scale to reach profitability will take time and patience as we navigate the challenges of the regulatory environment that surrounds transitioning production of a new customer's products to our factory. Maximizing with this new business in our factory will allow us to achieve the gross margin profitability goals we seek. Total operating expenses for the Q2 2024 were $2,600,000 decreased from $3,300,000 in the Q1 of 2024 $11,100,000 in the Q2 of 2023. As a result of our cost reduction initiatives and lean operating focus, we've substantially decreased the G and A cash needs of our business and we will look to sustain this operating model going forward now that we've reached appropriate run rates for a public company of our size.

Speaker 2

Net loss, EPS and adjusted EBITDA follow similar trends of substantial improvement sequentially as compared to the Q1 of 2024 and as compared to the prior year period. Our cash burn has declined from the prior year when we reached a peak burn rate of almost $15,000,000 a quarter. Our financial discipline now being exercised by our management team ensures that every dollar spent is productive for the company and focused on our core strategy. Cash used in operations during the Q2 of 2024 was approximately $4,700,000 and beyond operations and working capital fluxes is reflective of a number of balance sheet improvement initiatives that we completed during the quarter. This includes negotiating terminations from long term leases we maintained at facilities no longer in use, settling a significant amount of prior liabilities and payables notably below face value and cash portions of negotiated debt reduction strategies that we employed.

Speaker 2

Our Q2 2024 financial results show that we're continuing to make steady progress against transforming our financial position with improvements to both our P and L and balance sheet. As I mentioned last quarter, we have a goal of quickly restoring normal balance sheet KPIs for simple metrics, including positive working capital, minimum standard current ratio and reversing shareholders' deficit to positive equity. In April May, we completed transactions benefiting each of our balance sheet goals. For example, we completed multiple debt and other liability exchanges for equity transactions, resulting in a total decrease of liabilities and increase in shareholders' equity of approximately $10,700,000 As we continue to repay our outstanding debt obligations, we will also continue to sequentially lower interest payments and interest expense. Collectively, the progress made to date in the first half of twenty twenty four is remarkable and has paved the path for reaching our balance sheet and profitability goals.

Speaker 2

Finally, as an update to our lawsuit against Dorchester Insurance Company based on their failure to pay any amounts towards our claim of $9,000,000 in actual damages for business interruption insurance. Since our last earnings call update, significant discovery has taken place and the court has set a trial date for November 2025. To conclude, we continue to operate from a cost efficient mindset and work toward our primary financial goal of cash positive operations in the Q1 of 2025. Now with that, I'll turn it back to Larry for closing remarks.

Speaker 1

Thanks, Dan. I would like to thank everyone for joining our call today. We are now 9 months into our turnaround at 22nd Century and I hope you can see the fruits of our hard work by everyone on our team. It's been a challenging process, but the numbers have changed significantly to the positive. Our balance sheet is stronger, our operating costs have been cut and more closely aligned to our sales and our CMO business is producing positive margin and growing and we are building out a new branding and strategy on our reduced nicotine content products to grow to drive growth opportunities ahead.

Speaker 1

In short, while we are not fully out of the woods yet, 22nd Century is on track to becoming a self sustaining and profitable company for the first time in our history. The posture inside the company is quickly turning from defensive to offensive as we continue to shed the obligations of the past and focus on the future. We will be participating in investor conferences later this month and throughout the fall and look forward to updating you again as new developments occur, including branding, new contracts and our next results report. If you have any questions or would like to arrange a follow-up, please contact Matt Kreps, Investor Relations for the company using his contact information provided on the press release.

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Key Takeaways

  • Quarterly net loss narrowed from $21M to $1.6M year-over-year, reflecting significant progress in the ongoing turnaround.
  • The CMO segment secured new contracts and implemented price increases, ramping volumes in H2 and driving improved gross profit margins.
  • VLN branded cigarette shipments remain a small fraction of factory capacity due to execution and branding challenges, prompting a relaunch to boost sell-through.
  • Operating expenses fell from $11.1M to $2.6M sequentially, with cash burn down to $4.7M, positioning the company for targeted cash-positive operations in Q1 2025.
  • A lawsuit against Dorchester Insurance over a $9M business interruption claim is ongoing, with trial set for November 2025.
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Earnings Conference Call
22nd Century Group Q2 2024
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