Q4 2023 22nd Century Group Inc Earnings Call
Participants
Matt Kreps; IR Contact Officer; 22nd Century Group Inc
Larry Firestone; Chairman, CEO; 22nd Century Group Inc
R. Hugh Kinsman; Chief Financial Officer; 22nd Century Group Inc
Remington Smith; Analyst; Alliance Global Partners
Jim McIlree; Analyst; Dawson James Securities Inc.
Presentation
Operator
Yes, welcome to 22nd Century Group's fourth quarter 2023 Conference Call and Webcast. (Operator Instructions) It is now my pleasure to turn the floor over to Matt Kreps, Investor Relations for 22nd Century group.
Please begin.
Matt Kreps
Hello, and welcome to 22nd Century's fourth quarter results conference Call. Joining me today are Larry Firestone, CEO; and Hugh Kinsman, CFO.
Earlier today, we issued a press release announcing our results for the fourth quarter of 2023. The release and 10-K are available in the Investors section of our website at 22nd Century.com. We'll start today's call with prepared remarks from Larry and Hugh before moving into a Q&A session with our analysts. If you have questions about our business not addressed on this call, you're welcome to e-mail Investor Relations using the contact information provided in today's press release.
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 on our annual quarterly and other reports filed with the SEC.
During today's call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest taxes, depreciation and amortization as adjusted for certain noncash and non operating expenses. For more details on these measures, please refer to our release issued earlier today.
And with that, I'll now turn the call over to Larry.
Larry Firestone
Good morning, and thank you for joining 22nd Century's Fourth Quarter 2023 earnings call. I will cover the business status, and you will cover the financials, and then we will open it up for questions.
The timing of this call was interesting since it technically covers the fourth-quarter results, but so much has changed over the past four months that the results are not reflective of how the company is operating today since our focus is 100% on how 22nd Century moves forward to become a self-sustaining, profitable and cash flowing business. A lot of the information contained in my part of the discussion will be oriented towards the shape of the Company in the first quarter and so some of this will cross over to the first quarter earnings call in mid-May.
Our priority is what is good for the company comes first. We are dedicated to making 22nd Century live within its skin, which is a profitable cash positive Nasdaq listed company with a strong foothold in the tobacco space focused on nicotine harm reduction.
One of the first big changes was the sale of the GVV. hemp cannabis business at the end of December. This move helped us on several fronts. First, DVBU is the largest source of cash burn in 2023 with a lot of unfunded overhead that was driving some of our largest losses. And secondly, any company that has operations around cannabis.
There is what I call a tax on the business. This tax comes in the form of a cost premium, just about every cost that the entire Company incurs, for example, insurance, ensuring a business with a cannabis component, not only cost significantly more, but the mainstream insurers pass on underwriting policies due to the fact that cannabis is involved the same scenario, spreads widen across the supply chain. So there's an inherent limitation on what the company can do to keep its cost structure under control. Unfortunately, this tax on the business crosses over to the tobacco side as well, but now sans GVB., we can manage that. So unloading GVB. not only eliminated a substantial portion of our cash drain that the hemp cannabis business was causing, but also will allow us to lower our costs in the tobacco business as well.
Now let's talk about the actions we've taken in the past 120 days. To strengthen our core tobacco business. We've returned to our fundamental mission of using our patented biotechnology for creation of products that address the harms of nicotine addiction and commercializing those products we've cut our ongoing management labor overhead cost significantly.
And that includes me all employment agreements for the company's executives have been terminated, meaning everyone has employed. It will, as an example, I do not have an employment agreement. If I fail, I can be terminated without a severance payments for the results in 2023. There are no bonuses paid or planned and though equity compensation passed, what was already granted when I came on board the same as planned for 2024 spending on consultants and advisors has been terminated except only those few that are mission critical. Your Board of Directors has been working without compensation effective in the last quarter of 2023.
And the overall Board compensation has been cut aggressively for when payment does resume. We've reduced our overall headcount. And right now we have about 60 people in the company. We've raised our prices on our filtered cigars business, which has traditionally lost money at the gross profit line. We will get this part of the business on the right side of the profit line, our accident, we eliminated our second shift at our production facility and consolidated production to one shift for a substantial productivity gains.
We closed our facilities in Buffalo and Maryland and consolidated all of our operations to our factory in North Carolina, we sold excess tobacco inventory and although we took a non-cash accounting charge to cost of goods sold, this provided us with a non-dilutive cash infusion of approximately $1.2 million. That's an illustration of just some of the major actions we have taken. There are many more, but these are the major ones as a result of this hard work. We have reduced our cash burn substantially and are still driving towards a much lower financial breakeven point than we had as a company in 2023. We expect to reach breakeven in the first quarter of 2025.
What I can tell you is the cash burn is now massively smaller than last year when at times we are burning $15 million in a quarter as we operate today, we are still working through prior cash obligations, but we're on a downward slope, which is much lower than where we were last year as a part of closing the gap. In addition to the cost reductions, we're working on new profitable revenue opportunities for both L. and the contract manufacturing or CDMO business to drive higher gross profits and get to our breakeven as soon as possible. We have several CMO opportunities that are near term. And once they go live, we'll gradually lift our revenue.
These will counter some of the contracts they lose the offloading where we lose money. Once the dust settles, we're going to be in better shape. The additional CMO volume also helps our manufacturing overhead absorption. So the more volume we run through the factory on the same overhead cost, the lower our cost per carton will be on existing products. This business will continue to get healthier as we go.
Now I'm going to talk VLN and I know I'm the new guy and picking up where others have left off, but I couldn't be more excited about VLN and its possibilities in the marketplace for Consumer Health and for the success of 22nd Century.
Let me first say that VLN. means Very Low Nicotine scientific community uses the acronym VLNC. to represent Very Low Nicotine Content, our trademark brand deal and to nicotine harm reduction from cigarettes as decaf coffee has to coffee or skim milk has to milk. If anyone has told you that you need to cut back, we are the alternative. We are the brand in the marketplace representing the only Very Low Nicotine cigarette and bln name stands for something very important and it's up to us to make account.
Second, I'm going to do a little level setting for our shareholders. It's been widely speculated and anticipated that various government agencies from the U.S. and other countries are going to enact laws or some form of legislation that will position our VLN cigarettes as the only alternative for smokers essentially opening up a lane where only VLN can travel, we can't simply rely on government action as a part of our business plan we also can't count on legislation of this type to happen anytime soon.
And even with action, I don't believe that the U.S. government will enact a law so that VLN. is the only cigarette on the market. We must build this brand and this company from the ground up so that our success will not only be dependent solely on legislation for federal action that would result in a huge hit to a major industry that provides substantial financial infrastructure within our domestic economy.
Thinking about jobs, taxes, revenue, import export related to the overall tobacco industry. We also cannot assume or bet solely on whether the US government. We'll make sure that our population of menthol smokers have menthol cigarettes available to them. If they enact a law that prohibits them from being manufactured or sold in the US, even absent government action, I would offer that our government, including the FDA, believes that the smoking population in the US will heed the warnings on the pack and realize the harmful addictive nature of cigarettes and take the initiative to stop smoking on their own and solve the problem.
The overarching cost in lives, health care and infrastructure related to smoking is huge. So how do we move this forward and achieve success without relying on government actions, it's common knowledge that a majority of smokers want to quit and they are trying to quit consistently year after year and they need help to smoke less. They need tools such as VLN We are an authorized and unique enabler to help reduce nicotine consumption. We are the first and only combustible cigarette to receive an FDA authorization that specifically focuses on nicotine harm reduction we are well protected from an intellectual property standpoint.
We have a tool, our VLN cigarette. We believe that smokers will want to use in their fight to quit smoking, introducing a new category in any market, much less the cigarette market is disruptive, difficult and very much a ground game to make those smokers in various states where VLN has distribution become aware that this product exists and the benefits of deal ends use being in that position. We must focus on developing an audience that uses our VLN products and communicates the positive results our customers have experienced so far and make sure successes known. And the word is passed to others in the market, like all segments of consumer brand markets, getting consumers to become aware and give new or a different brand.
A shot takes trusted results, time, energy and resources, the mission to drive reduced harm for smokers and acquire customers who want to reduce their nicotine intake is a simple math equation. The simple math is from a nicotine content perspective, one pack of 20 VLN cigarettes equals one single cigarette of any standard brand. What that means to a smoker who smoke some pack a day is the nicotine intake of smoking veal and for a full year would be the equivalent of smoking, a standard cigarette for 2.5 weeks to their pocketbook.
A pack of a smoker is spending the equivalent of $2.50 an hour on a full-time hourly rate to smoke and more to a part-time worker financially for 22nd Century. From the 5,100 retail outlets that currently carry VLN, we need them to sell nine packs per week to completely carry the company's overhead costs for essentially just one carton a week.
This does not seem like a heavy lift as we increase the deal and brand awareness, but we need to increase the awareness on a very small budget at this time. We do know that specific retail chains and independent retailers are currently selling VLN, developing separate in-store categories focused on harm reduction products for smokers. These categories would highlight products like VLN and give adult smokers an alternative to traditional cigarettes.
This action and commitment by retailers, it would be a major step forward in veal and brand awareness as we continue working on our branding and our product awareness initiatives. While we strengthen our financial capability and move towards profitability, we will increase our spending efforts with strategic retail partners and getting the message to smokers. As part of our strategy, we're looking to further increase our store distribution with relevant retailers and continue to build support with the medical and scientific community that understands the importance of the VLN brand to public health.
We also plan to continue to drive awareness through social and digital channels and to activate the incredibly important peer-to-peer advocacy process that supports smokers as they take these life-changing steps to reduce their smoking addiction. These efforts to get just the one carton per week store average plus our plans to improve the CMO sales and margin contribution put us on a path to profitability. We have laid the foundation, cut the costs and now we can focus on building the business to get there as quickly as possible.
A couple of other topics to cover. As you saw in this morning's press release, we initiated the reverse stock split of one to 16 to regain compliance with the Nasdaq listing rules. Trading under the reverse split will begin April second as we evaluated the options the same way returning the Company around, we decided to move to the end-state and close the discussion around the reverse split.
Part of that decision included discussions with our incumbent equity investors who have supported 22nd Century through the past 12 months and we believe are willing to support the company's greatly reduced cash needs as long as we close the gap to profitability and remain a Nasdaq listed company.
I will now turn the call over to Hugh to review the financial results for Q4 and 2023.
R. Hugh Kinsman
Thank you, Larry, and good morning to everyone. Our fourth quarter financial results are presented on a continuing operations basis, which excludes our hemp cannabis business, which has been classified as discontinued operations.
Net sales decreased by 26% quarter over quarter to $7.4 million, reflecting our ongoing reallocation of production resources to higher margin product mix focused on bln and conventional cigarette products as compared to lower margin filtered cigars. Gross profit decreased quarter over quarter to negative $7.8 million due to lower filtered cigars unit sales and the shift in product mix from filtered cigars to conventional cigarettes. Additionally, we recorded approximately $8 million in inventory reserves, primarily to excess and obsolete tobacco leaf inventory. Excluding the inventory reserve charge, gross margin would have been positive [$200,000] for the quarter.
Net loss for the fourth quarter was $22 million as compared to $11 million in the comparable prior year period. However, adjusted EBITDA loss decreased significantly to negative $3.2 million in Q4 2023 compared to negative $9.9 million for the same quarter prior year, reflecting the substantial reduction in operating expenses and implementation of efficiency initiatives.
As outlined in our earnings release, we provide adjusted EBITDA as a non-GAAP measure aligned with our operating performance and as a result of the efforts undertaken by various since joining the Company on our cost-cutting initiatives and operational efficiencies, we have substantially decreased the cash needs of our business as evidenced by improvement in adjusted operating performance those efforts are ongoing in 2024 as we work to minimize cash requirements going forward and ultimately move the company to cash positive results in a few key highlights from our balance sheet, including our earnings release today of note, total assets decreased substantially to $27.5 million, primarily due to the write-down of intangible assets, including goodwill, reflecting the divestiture of the hemp cannabis business. Cash balances remained relatively unchanged at $2 million for Q4 2023, reflecting a significant decrease in cash loss from operations reduction. Operating expenses and the hemp cannabis divestiture.
Finally, I should note that we are vigorously pursuing our lawsuit against store Chester insurance company based on their failure to pay any amount towards our claim for business interruption insurance following the devastating fire that destroyed our Grass Valley, Oregon manufacturing facility, where seeking $9 million in actual damages. In addition to the significant consequential damages, we'll now open up the call for question.
Question and Answer Session
Operator
(Operator Instructions) Aaron Grey, Alliance Global Partners.
Remington Smith
Good morning, and thank you for the questions. This is Remington Smith on for Aaron Grey. So my first question for VLN. Could you speak to some of the sales or velocity specifically that you've seen so far from the on cigarettes in any of your markets?
Larry Firestone
So it's some, you know, 2023 was was a largely a stocking year.
So we've seen we've seen stock-up in the stores on the take-up of the product has been slow. And in in early 2024 in January, we also raised the price. So we had some we had some fall.
We had some pull-in coming from that, but it really is now sort of attraction game out in the market.
And that's that's our challenge. So I would say that our big lift right now is getting from from the stocking point of view up to, as I mentioned, no carton per store. But I don't have exact numbers for you. That's something we're working on. That's on the on the sell-through side.
Remington Smith
Okay I appreciate the color there. And then my second question, I'm still focusing a little bit on VLN. So I appreciate the focus on profitability and the cost cuts this quarter. But given the education need to continue to build awareness for VLN, you speak a little bit more proposition of details on your planned marketing spend and initiatives and initiatives to building that awareness?
Larry Firestone
Yes, we're working on.
We're actually engaging to work on a little bit of brand enhancement around VLN. We've got some strategies and that may allow you don't want, I would say, additional SKUs to be brought to the market as well as a consumer awareness materials that are out there that comply with the FDA. And that's that's where we've fallen short is going through 2023.
We pulled the funding group for three pretty much all of that.
So and we'll start to we'll start to present that product in retail again, in compliance with the FDA.
And that should that should help attract some attention as well as the packaging and the information we provide. We're also readdressing our social networks and in the end website that we have, especially the tri VLN. website which has information has been pretty stale out there. So I would say we're going through right now and have behaved very thin budget total redress sub of the deal M presentation.
Remington Smith
Thank you.
And my last question, shifting over to CMO. So could you speak to a little bit of the CMO opportunities you have on given tobacco is a more mature category with structural declines. Any color in terms of where you're seeing those opportunities potentially in additional white label opportunities? Any color there would be helpful.
Larry Firestone
Yes, there are additional white label opportunities so we have we've got a great asset in North Carolina at our in our production facility that we call Nasco. And we've got some customers that that need volume that either it exceeds their their current volume or that they're doing a cost-benefit analysis and figuring out that they'd like to use our tools in their in their structure. And so we've got I want to say, six opportunities for additional volume coming into Nashville in the form of CMO opportunities. And that's that as we look at it, as I mentioned, it's kind of a two dimensional play. One is certainly higher top line and we're quoting profitably now. And the second is, as we absorb our overhead, we will reduce the carton cost for everything that we're doing another Nasco.
Remington Smith
Great. I appreciate the color there, and I'll hop back in the queue.
Operator
(Operator Instructions) Jim McIlree, Dawson James.
Jim McIlree
Yes, thank you.
Good morning.
Larry Firestone
Good morning.And Jim,
Jim McIlree
can you talk about the GVB. note whether or not they need to raise capital in order to in order to pay you guys off?
Larry Firestone
Yes, I will.
I'll let Hugh take that.
R. Hugh Kinsman
Yes, hey, Jim, the answer is yes, our understanding is they're in the process of getting that completed. And I know that received term sheets for refinancing that our facility, I think they're kind of going through the process of selecting the final lender and then closing transaction. So the answer is they're making significant progress it steadily moving towards a refinance.
Jim McIlree
Okay. And then secondly, on the on the insurance recovery, I know you addressed it. I was just hoping it could be maybe a little bit more predictive on what you think the outcome will be and and when?
Larry Firestone
Sure. I'll take that Hugh want to take.
R. Hugh Kinsman
As you know, Larry go ahead.
Larry Firestone
That's out of the secret front, end of that, if I miss anything you fill in.
But so we have a hearing coming up in April first hearing.
And so that should kick off the process. But I think, Jim, as you know, I mean, this is in the courts in Oregon, in federal court in Oregon. So the timing wise, it's going to be a docket question, but being more predictive on the outcome, we feel we feel pretty strong about the outcome we have just to just to kind of put a point on it.
We have business interruption insurance. It's there for a reason.
The business got interrupted. We went to the insurance company to get paid and they didn't pay. So that's a huge problem, huge gap in their commitment and huge gap in the policy. And then so the numbers are the numbers that were put together. And so unfortunately, we instead of having them hit their commitment and then what we paid for it, we've got to take into corner to win. So it's a long longer process drawn out, but we feel pretty confident everything has been put together.
Jim McIlree
Okay, thank you. And I'm just trying to understand that there seems to be a conflict between the on the growth of VLN and the limited resources to make it grow and it seems like you really can't make it. You really can't get it to grow and drive that business until you get additional cash resources. And so I'm just puzzled over the timing and how you guys are looking at at accomplishing growth and deal and given the limited resources right now?
Larry Firestone
Well, first of all, you know, there's there's many There's many ways that we can, I would say and hence the presentation available in the market prices.
One, I don't like to touch price as a first option, but it's certainly out there for us.
And then we've got some major chains that are carrying carrier deal on right now. And so, you know, it's a move to move some market awareness material into a major chain. That's the good news is whatever money we spend gets pretty widely distributed.
So those will be discussions that we'll be having with the chains and then, of course, the digital the digital world is awesome. You know that we have been pretty dormant for the last deal when I looked at our Web site there and with diverse socials. I'd say it's been dormant now for about I'll just round numbers six months from so we can start to activate a lot of that on a very little. We'll budget as we go as we grow as veal and starts to sell downs of very profitable product for us. Margins are very healthy. I'm very, very tobacco industry healthy. So we just need to get we need to get the product moving through the stores and that should start than we know the generation of cash generation profitability.
Jim McIlree
Okay. Yes, thank you. That's helpful for me.
Larry Firestone
Thank you, Jim.
Operator
There are no further questions at this time. I will now turn the call over to Larry for closing remarks.
Larry Firestone
Thank you.
So I'd like to thank everyone for joining our call today. And in closing, I'll emphasize that we are absolutely focused on turning 22nd Century around and becoming a profitable company for the first time in the Company's history. This, as I described earlier, is going to require our full focus on the business of making and selling cigarettes, our VLN brand and our CMO brands as well and keeping our costs in line. We look forward to updating you again soon in mid May on our first quarter 2024 conference call. But lastly, I'd like to thank our employees who keep driving 22nd Century forward.
That concludes our remarks.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect.
