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spk02: Welcome to 22nd Century Group's fourth quarter 2023 conference call-in webcast. At this time, all participants have been placed in a listen-only mode. The floor will be open for questions following management's prepared remarks for recovering research analysts on the call. If you would like to ask a question at that time, simply press star 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Matt Kreps, Investor Relations for 22nd Century Group. Please begin.
spk03: 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 10K are available in the investor section of our website at 22ndcentury.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 email 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 in our annual, quarterly, and other reports filed with the SEC. During today's calls, 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 non-cash 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.
spk00: Good morning, and thank you for joining 22nd Century's fourth quarter 2023 earnings call. I will cover the business status, and Hugh will cover the financials, and then we will open it up for questions. The timing of this call is 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 reductions. One of the first big changes was the sale of the GBV hemp cannabis business at the end of December. This move helped us on several fronts. First, GBV was the largest source of cash burn in 2023, with a lot of unfunded overhead that was driving some of our largest losses. And second, 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 on just about every cost that the entire company incurs. For example, insurance. Insuring a business with a cannabis component not only costs significantly more, but the mainstream insurers pass on underwriting the policies due to the fact that cannabis is involved. This same scenario spreads wide 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 costs significantly, and that includes me. All employment agreements for the company's executives have been terminated, meaning everyone is employed at will. As an example, I do not have an employment agreement. If I fail, I can be terminated without a severance payment. For the results in 2023, there are no bonuses paid or planned and no equity compensation passed what was already granted when I came on board. The same is 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 head count, and right now we have about 60 people in the company. We've raised our prices on our filtered cigar 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 or exit it. We eliminated our second shift at our production facility and consolidated production to one shift for a substantial productivity gain. 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've 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 were 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 VLN and the contract manufacturing or CMO business to drive higher gross profits and get to our break even 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 that we will be 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. The scientific community uses the acronym VLNC to represent very low nicotine content. Our trademark brand, VLN, is to nicotine harm reduction from cigarettes as decaf coffee is to coffee or skim milk is 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 VLN name stands for something very important and it's up to us to make it count. 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 or federal action that would result in a huge hit to a major industry that provides substantial financial infrastructure within our domestic economy. Think about jobs, taxes, revenue, import export related to the overall tobacco industry. We also cannot assume or bet solely on whether the US government will 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 U.S. Even absent government action, I would offer that our government, including the FDA, believes that the smoking population in the U.S. 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, healthcare 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 wanna 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 the smokers in various states where VLN has distribution become aware that this product exists and the benefits of VLN's use. and make sure success is 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 smokes a pack a day is the nicotine intake of smoking VLN for a full year would be the equivalent of smoking a standard cigarette for two and a half weeks. 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 or essentially just one carton a week. This does not seem like a heavy lift as we increase the VLN 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 currently selling VLN are 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 would be a major step forward in VLN 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 1 to 16 to regain compliance with the NASDAQ listing rules. Trading under the reverse split will begin April 2nd. As we evaluated the options, the same way we're turning 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.
spk04: 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 VLN and conventional cigarette products as compared to lower-margin filtered cigars. Gross profit decreased quarter of a quarter to negative 7.8 million due to lower filtered cigar unit sales and the shift in product mix from filtered cigars to conventional cigarettes. Additionally, we recorded approximately 8 million in inventory reserves, primarily related to excess and obsolete tobacco leaf inventory. Excluding 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 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. As a result of the efforts undertaken by Larry since joining the company and our cost-cut 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 moved the company to cash-positive results. And 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 vestiture 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 due to reduction operating expenses and the hemp cannabis divestiture. Finally, I should note that we are vigorously pursuing our lawsuit against Dorchester Insurance Company based on their failure to pay any amount towards our claim for business interruption insurance following a devastating fire that destroyed our Grass Valley, Oregon manufacturing facility. We're seeking $9 million in actual damages in addition to significant consequential damages.
spk01: We'll now open up the call for questions.
spk02: Thank you, ladies and gentlemen. We will now begin the question and answer session. If you have a question, should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Aaron Gray with Alliance Global Partner. Please go ahead.
spk06: Hi, good morning, and thank you for the questions. This is Remy Smith on for Aaron Gray. So my first question for VLN, could you speak to some of the sales or velocity specifically that you've seen so far from VLN cigarettes in any of your markets?
spk00: Oh, it's, you know, 2023 was a largely a stocking year. So we've seen you know, we've seen stock up in the stores. The takeoff of the product has been slow. And in early 2024, in January, we also raised the price. So we had some pull in coming from that. But it really is now, you know, sort of a traction game out in the market. And that's our challenge. So I would say that our, our big lift right now is getting from, from, uh, the stocking point of view up to, uh, as I mentioned, you know, a carton per store, but I don't have exact numbers for you. That's something we're working on is on the, uh, on the sell through side.
spk06: Okay. I appreciate the color there. And then my second question, I'm still focusing a little bit on, on VLN. So appreciate the focus on profitability. Um, and the cost cuts this quarter. But given the education need to continue to build awareness for VLN, can you speak a little bit more, provide additional details on your planned marketing spend and initiatives to building that awareness?
spk00: Yeah, we're actually engaging to work on a little bit of brand enhancement around VLN. We've got some strategies that that may allow, you know, I would say additional SKUs to be brought to the market, as well as, you know, consumer awareness materials that are out there that comply with the FDA. That's where we've fallen short is, you know, going through 2023. We pulled the funding for pretty much all of that. We'll start to present the product in retail, again, in compliance with the FDA, and that should help attract some attention as well as the packaging and the information we provide. We're also redressing our social networks and the website that we have, and especially the TriVLN website, which has you know, information has been pretty stale out there. So I would say we're going through right now on a very, very thin budget, you know, a total redress of the VLN presentation.
spk06: Thank you. And my last question, shifting over to CMO. So could you speak to a little bit of the CMO opportunities that you have given tobacco is a more mature category with structural declines, any color in terms of Where are you seeing those opportunities potentially in additional white label opportunities? Any color on that would be helpful.
spk00: Yeah, they are additional white label opportunities. So we have, you know, we've got a great asset in North Carolina at our production facility that we call NASCO. And we've got some customers that that need volume that either it exceeds their current volume or they're doing a cost-benefit analysis and figuring out that they'd like to use our tools in their structure. So we've got, I want to say, six opportunities for additional volume coming into NASCO in the form of CMO opportunities. And that's, you know, 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, it will reduce the carton cost for everything that we're doing out of NASCO.
spk06: Great. I appreciate the call there, and I'll hop back in the queue.
spk01: Okay.
spk02: Your next question comes from Jim McIllery with Dawson James. Please go ahead.
spk05: Yeah, thank you. Good morning.
spk00: Good morning, Jim.
spk05: Can you talk about the GVB note, whether or not they need to raise capital in order to pay you guys off?
spk00: Yeah, I'll let Hugh take that one.
spk04: Yep. Hey, Jim. The answer is yes. Our understanding is they're in the process of getting that completed. I know they've received term sheets for refinancing that facility and I think they're you know kind of going through the process of selecting the final lender and then you know closing transactions so for the answer they're making you know significant progress and steadily moving towards the refinancing okay and then secondly on the on the insurance recovery I know you addressed it I was just hoping it could be
spk05: maybe a little bit more predictive on what you think the outcome will be and when?
spk01: Sure. I'll take that.
spk00: You want to take that, Hugh? No, Larry, go ahead. That's fine. Yeah, I'll just take the front end of that. If I miss anything, Hugh, fill in. 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. It's in Oregon. It's in federal court in Oregon. So, you know, the timing-wise, it's going to be a docket question. But being more predictive on the outcome, we feel pretty strong about the outcome. You know, we have, you know, just to kind of put a point on it, you know, we have business interruption insurance. Um, it's there for a reason. The business got interrupted. Uh, we went to the insurance company to get paid and, uh, and they didn't pay. So, um, that's a huge problem, huge gap in their commitment, huge gap in the policy. And, um, and so, you know, the numbers are the numbers they were put together and, uh, And so unfortunately we, instead of having them hit their commitment and what we paid for, we've got to take them to court in order to win. So it's a long, you know, longer process drawn out, but you know, we feel pretty confident in everything that's been put together.
spk05: Okay. Thank you. And I'm just trying to understand there, there seems to be a conflict between the, um, The growth of VLN and the limited resources to make it grow. And it seems like, you know, 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 accomplishing growth in VLN given the limited resources right now. Well,
spk00: First of all, there's many ways that we can, I would say, enhance the presentation of VLN in the market. Price is 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 VLN right now. And so To move some market awareness material into a major chain, 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 world that we have has been pretty dormant for the last... When I looked at our website and I looked at our socials, I'd say it's been dormant now for about, I'll just throw a number, six months. So we can start to activate a lot of that on a very little budget. As we go, as we grow, as VLN starts to sell, VLN's a very profitable product for us. Margins are very healthy, very tobacco industry healthy. We just need to get the product moving through the stores. And that should start the, you know, the generation of cash, generation of profitability.
spk01: Okay. Yeah, thank you. That's helpful. That's it for me. Thank you. Thanks, Jim.
spk02: If there are no further questions at this time, I will now turn the call over to Larry for closing remarks.
spk00: Thank you. I'd like to thank everyone for joining our call today. 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 BLN brand, and our CMO brands as well, and keeping our costs in line. We look forward to updating you again soon in mid-May. 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 ladies and gentlemen this concludes your conference call for today we thank you for participating and after you please disconnect
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