Q3 2020 22nd Century Group Inc Earnings Call
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Ladies and gentlemen face could you just stand by the 22nd century Group Conference call and webcast will begin shortly again. Please could you just stand by the 22nd century Group Conference call and webcast will begin shortly thank you.
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Welcome to 22nd century groups third quarter 2020 earnings conference call. At this time, all participants are in a listen only mode and the floor will be open for questions. Following management's prepared remarks as a reminder, today's conference is being recorded at this time I would like to turn the call over to make flow director of communications and Investor.
Relations. Please begin.
Thank you Kathy good morning, and welcome to 22nd century third quarter earnings Conference call.
Joining me today are James mesh, our Chief Executive Officer, Mike Starker, our President and Chief operating Officer, and Jon Graf you know, our Chief Financial Officer.
Earlier today, we issued a press release announcing our results for the third quarter. We have also posted an earnings supplemental presentation that summarizes and highlights the progress we have made this past quarter.
We hope this supplemental information will serve as a framework for management's prepared remarks, we import key take away from today's call and provide additional transparency and insight into our business strategy and objectives.
The release and supplemental presentation are available on our website at X X I century dot com well.
Well start todays call with remarks from Jim Mike and John before moving into a New addition to our earnings call you a nice fashion.
Before we begin some of the statements made today are forward looking forward.
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 form 10-K filed on March 11, 2020, and in our form 10-Q filed earlier today.
During this 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.
For more details on these matters. Please refer to our press release issued earlier today.
And with that I'll turn the call over to Jim.
Thanks Nate.
Good morning, everyone and thanks to all for joining 22nd centuries conference call today.
My first few months as CEO [laughter].
Met with many stakeholders such as fine pitch public health officials national cigarette retailers farmers.
Most importantly, our shareholders.
Listen carefully.
You know I heard from everyone is the 22nd centuries be Olin cigarettes.
Central to not only disrupt what redefine the entire tobacco industry.
And in doing so prevent millions or use from ever becoming addicted to the only legal consumer product that when use it doesn't attended kills half involves long term users.
Understanding. These facts has really helped me to truly appreciate our company's primary mission of reducing the harm caused by smoking and to reaffirm our priorities.
The tobacco epidemic and make no mistake. It isn't epidemic is one of the biggest public health crisis the world faces.
Worldwide smoking kills more than 7 million people each year.
He was responsible for over 1300 deaths per day in the U.S.
Put this in perspective, the U.S. opioid epidemic claims $128 per day, approximately 1100 people are dying each day from COVID-19.
Smoking claims more whites per day in the U.S. and these other two threats combined.
Smoking continues at its current rate the C.D.C. estimates that more than 5 million Americans, who are currently younger than 18 years of age will die prematurely from a smoking related illness [laughter].
Staggering ratio about one in every 13 young Americans alive today.
Cigarette smoking is the leading cause of preventable disease and death and is responsible for one in every five deaths in United States. These.
These numbers are simply not acceptable any longer.
22nd century has a real solution to help reduce the harm caused by smoking and drive these terrible statistics that down.
Our reduce nicotine content cigarette deal. It is in the final stages. The MRT peer review process and once authorized by the F.D.A. will be the first and only combustible cigarette on the market.
With 95% less nicotine than leading brands or any other cigarette in the U.S.
Furthermore, villain will be the only FDA authorized MRT product develop specifically to not to create or sustain addiction.
This is why securing an F.D.A. marketing authorization for our MRT p. reduced nicotine content cigarettes is the company's number one near term priority and obsession.
Our feeling product is truly remarkable and supported by decades of research and over $125 million of the Companys F.D.A. NIH funding.
Importantly, the eminent authorization of violent supports the FDA plans to implement an industry wide reduce nicotine products standard.
We believe the FDA authorization of Bln and its commercial success will not only benefit 22nd century, and our shareholders will also help advance global tobacco and nicotine regulation and improved public health worldwide.
No other consumer product has the opportunity to be so impactful and so my enthusiasm freebie Olin continues to grow.
As I said securing of them RTP authorization from F.D.A. for B S. One remains our number one priority.
Separately, but at the same time, we've made product launch plans and including National rollout with large well recognized retail chains in the United States and a marketing campaign that has been designed to introduce adult smokers to the worlds lowest nicotine content cigarettes.
Commercial product launch in licensing discussions with potential strategic partners in the U.S. and globally will commence within 90 days of MRT be authorization.
As a reminder of the tremendous opportunity we have in our tobacco franchise, achieving just one quarter of 1% market share of the U.S. cigarette market could drive the company's market capitalization more than 10 times higher than it is today.
On top of this we were recently granted the highly valuable U.S. patent that enabled us to rapidly introduce very low nicotine trains into all varieties of tobacco currently used in the production of cigarettes and other tobacco products.
Needless to say with all this.
To leave our share price is extremely undervalued.
We continue to believe that the M. RTP authorization and BLM watch what happens soon it.
It is a home run.
The Grand Slam that would drive the market capitalization, even higher is the equally important initiative to support and advance. The FDA is plan to require that all cigarettes sold in U.S.B. made minimally or non addictive by limiting their nicotine content to just 0.5 milligrams of nicotine per gram of tobacco you.
Hey level already achieved by our proprietary deal in cigarettes.
When the FDA mandate ultimately goes into effect, we plan to make our proprietary reduce nicotine content tobacco and related intellectual property available to every cigarette manufacturer in the United States.
In addition to all this we have conducted a comprehensive review of our existing business extensive IP portfolio and the regulatory climate and we have identified near term milestones and medium and long term opportunities and they have never been brighter.
Since we last spoke we have refocused our him can have a strategy to target the upstream segments of the value chain such as plant Biotechnology research gene modification in engineering and modern plant breeding.
This renewed emphasis is a shift away from CBD and hemp based consumer products and the already saturated U.S. market.
We will concentrate our him cannabis efforts on initiatives related to our current an exclusive teaching collaboration and on the existing worldwide license agreement with an anti laboratories.
I'll talk more about our him candidates strategy as well as a third plant based franchise with its similarities in its genome to the him cannabis plant. After my provides an update on our tobacco franchise.
John will discuss in more detail, but I will note that our operating results for the third quarter were strong driven by year over year revenue growth and continued gross margin improvement.
Our balance sheet is healthy and we have an excellent prospects to establish strategic partnerships upon him RTP authorization.
So we are fully prepared to operate and launch our historic BLM product without any plans or the need to raise additional capital at this time.
Mike will provide new details on the progress we've made in our tobacco franchise and the status of our MRT process in a few moments but.
But it's important that you understand that we are proactively using every means possible to highlight to the FDA, how the l. and fits perfectly into their overall comprehensive plan.
We will never compromise or reduce content cigarette brand and launch without an m. RTP designation.
And under my watch, we will fight relentlessly and we'll never surrender our efforts to cross the finish line soon with this remarkable product and solution to a global problem.
To demonstrate our confidence with the M. RTP timing and our pledge to our primary mission.
Mike John and I have made the decision to defer any bonuses of any kind until our MRT p. as approved and we bring BLM to market add value to our shareholders.
That I will turn the call over to Mike to discuss the tobacco franchise.
Thanks, Jim.
At the forefront of everyone's mind, including my own is the status of our NRT P. application.
We continue to believe that we will see a positive outcome from the FDA, We believe a decision could come at any time.
We continue to maintain a dialogue with the FDA and we know the agency is in the final stages of review.
There are no outstanding requests for information by the FDA we.
Well, we believe they have everything required to make a final decision about our application.
In addition to our ongoing contact with the agency, we have intensified our proactive efforts with our public and government Affairs advisors and lawyers to highlight the public health importance of our MRT p. application and encouraging near term authorization.
Our lawyers and advisors are regarded as among the best in the industry and we assure you that we are pulling every lever available to secure an m. RTP authorization for violent.
We continue to feel confident in a positive outcome for several reasons.
First the FDA continues to interact with our company regarding our application, which is often not the case with applications that are bound for rejection.
More broadly the FDA has funded and continues to fund millions of dollars of research to better understand the public health benefits that would reduce nicotine content cigarettes.
Authorizing violin will support the FDA comprehensive plan for tobacco and nicotine regulation.
The all in cigarettes contain just 0.5 milligrams of nicotine per Gram of tobacco, which is the same level as the age for closing for all combustible cigarettes to ensure they have quote minimally or non addictive levels of nicotine.
Finally in authorizing our PMTA application last year, the FDA decided that the sale of our BLM cigarettes is appropriate for the protection of public health, which is the statutorily mandated standard that all new tobacco products must meet to receive FDA authorization.
Therefore, the only question left to be answered with our MRT P. application is whether our request the claims the primary one being 95% less nicotine.
Meet the same public health standards.
To that point, our MRT P. application is very straightforward and its uncontroversial by design.
We are simply seeking a reduced exposure claim.
Not a reduced harm claim like other companies have sought reads.
Reduced exposure to nicotine is objective and measurable we.
We have measured each of the top 100 cigarette brands in the U.S. and showing the FDA that deal and has 95% less nicotine in the tobacco in the smoke and even into biomarkers associated with the intake of nicotine by smokers.
The Olin has 95% less nicotine in every way.
This is a straightforward claim that is easily proven and clearly supported by the evidence.
To date, the FDA has authorized only two and RTP applications, one first smokeless tobacco product and one for a heated tobacco product.
Both of these products received their authorizations approximately five to six months after the closing of the public comment period.
Our public comment period closed in mid May a little over five months ago.
With the assumption that are less complex application will follow a similar timeline.
But also taking into account the impact of Cove. It on the FDIC resources, we expect the Agencys decision to come sometime this year.
For these reasons, we have felt comfortable publicly stating that we believe the EBITDA is positive the decision about our application as a matter of when not if.
And we will be in the coming months not years upon.
Upon authorization Bill and will be the first and only combustible cigarette to receiving them RTP authorization.
And the only MRT product not developed to create or sustain addiction.
The opportunity here is massive.
We want to provide a solution to the public health crisis caused by smoking and in doing so capture meaningful share of the market as quickly as possible.
This is why we have already laid the groundwork for our commercialization plans.
And we're prepared to roll out villain in select markets within 90 days of our MRT piece authorization.
Today, we are in discussions with a number of independent regional and national tobacco retailers names. Many of you would recognize to partner with us to bring the Atlanta market.
The Olin has been positively received by the trade.
Tobacco industry is worth $100 billion.
And $800 billion worldwide.
With 90% of those sales coming from combustible cigarettes.
According to the CDC two thirds of smokers in the us want to quit smoking.
And more than half of them to a call attempt to quit.
In a given year, but less than 8% actually succeed.
A reduced exposure claim authorized by the FDA.
The world's preeminent life Sciences regulatory body will be a critical catalyst for 22nd century sales growth.
Achieving just one quarter of 1% of the US market. We believe could result in revenues that may over time.
Given the disruption the disruptive nature of the Olin drive our market capitalization more than 10 times higher than it is today.
In addition, FDA authorization will potentially open up multiple strategic partnership opportunities to scale villans growth in the us and globally.
As with the us market, our international plants reveal animal mature once m. RTP authorization is received.
While not required for international sales and FDA authorization is considered by regulators around the world to be the gold standard in public health and.
And Mark CP authorization will be incredibly helpful. In navigating the regulatory approvals necessary to bring via Atlanta market with labeling claims in international markets.
Introducing veal entered into these countries post FDA authorization is an enormous opportunity that we are excited to pursue.
Important to be Olin's international success will be our non GMO bright burley and Oriental reduce nicotine tobaccos.
In many countries Gino plants are products are unacceptable, the consumers or simply band.
Which makes our non GMO tobacco crucial to developing an international business with BLM.
The COVID-19 pandemic has.
Is brought into sharp focus the importance of <unk> respiratory health and their wide ranging harms of smoking and nicotine addiction.
Recently, Mitch cellar director of the SDA Center for tobacco products spoke at the food and drug law institutes tobacco and nicotine conference.
When asked if the FDA still considering moving ahead with its comprehensive plan for tobacco and nicotine regulation, including reducing nicotine in cigarettes to non addictive levels.
He indicated that the SDA remains quote absolutely committed to everything that was in that plan and quote.
Additionally, we know that the FDA and other leading public health institutions continue to fund research studies to investigate the role of reduced nicotine constant content cigarettes in public health.
And their potential to reduce and eliminate tobacco related diseases and death.
This is all encouraging evidence of Fda's continued commitment to pack of harm reduction and in particular to their proposed reduced nicotine products standard.
A landmark public health initiative.
We welcome the Fda's ongoing commitment to a drive to drive a paradigm shift and the tobacco industry.
Fda's decisions about our <unk> application and reduced nicotine mandate could be the most important public health policy decisions in a generation.
Commercialization of V O N and the implementation of the Fda's comprehensive plan will be important wins for adult smokers public health and 22nd century.
And we remain laser focused on making every move we can to secure fda's authorization of R. M. RTP application to bring <unk> into market successfully in the U S. As soon as possible and to support the implementation of Fda's plan to make all cigarettes in the us non addictive.
I'll now pass your back to gym for an update on our hands cannabis strategy and franchise.
Hmm.
Thanks, Mike.
While our tobacco franchise take center stage, we're making substantial progress or considerable hemp cannabis franchise as well.
Remember the Genesis of our research and Ham cannabis was established back in 2014 through a worldwide license agreement with some Andy of laboratories.
They we maintain exclusive sublicense in the U S and co exclusive sublicense and the remainder of the world for twenty-three patented patent applications relating to the hem cannabis plant.
Licensees for these valuable patents survive aura campuses acquisition of in India.
In 2019, we continue to pursue in advance or research and him cannabis and entered into a worldwide strategic research and development agreement with key Jean Global leader implant research involving high value genetic traits and increased crop you.
Are exclusive worldwide collaboration is now focused on developing hemp cannabis plants with.
With select agronomic traits, including the lines with stable Ultra high T. H C levels line.
The lines with higher levels of rare cannabinoid and lines with ultra low chirpy levels for use in high growth consumer in life Science markets.
Over the past year, we have completed building our proprietary bioinformatics platform.
Cause this encyclopedia of information on hemp cannabis genome, we can now begin to monetize the vast intellectual property would develop through our collaborative efforts with teaching.
A partnership with teaching as a key competitive advantage for us and through our collaborative efforts with him we were able to modify and improve the him cannabis plant using the fastest and most cost effective methods available.
Additionally, we have made the decision to refocus or hemp, Canada strategy to target the upstream segments of the cannabinoid value chain and related intellectual property in particular in the areas of plant Biotechnology research gene modification in engineering modern plant breeding and development and extraction.
We will reset our investment with panacea to focus on and ensure the accelerated delivery a valuable commercial plant lines and technology over C. B D and hemp based consumer products.
We expect our cannabis hemp R&D efforts will generate tremendous growth opportunities for us as we monetize our I P and continue to bring disruptive technology forward.
As a reminder, the global cannabis market is projected to be 100 billion dollar industry by 2024 and.
And we believe we are at the forefront of technological development related to this fascinating plant.
Finally, we have identified a third franchise that we are extremely excited about.
I wanted to announce the plant mine on this call, but we are still in the process of securing valuable intellectual property in pursuing strategic partnerships to support the development of this franchise.
I will identify the plant line as soon as possible as the competitive situation allows.
But I can say is that we will increase our attention on this franchise only after securing our M. R. T P designation and executing on or near a medium term objectives in our tobacco and hemp cannabis franchises.
I can also share with you that this plant species is very similar genome to the hemp cannabis plant.
And offers a very attractive growth opportunities.
Additionally, this new space is not as highly regulated or legislated like our tobacco on him cannabis franchise. So we believe we were able to add shareholder value in this franchise faster than we have with the first two.
With that I'll now turn the call over to Jon for a review of our financial or zones.
Thank you, Jim and good morning to everyone.
Operating loss improved by 3.6 million in the third quarter and improve by 5.5.
$5.1 million for the first nine months of 2020.
This was driven by higher gross margins and lower operating expenses, which I will detail in a moment.
Ah net sales revenue for the third quarter was up approximately 13% to $7.3 million and for the first nine months of 2020 was up 12% to $20.8 million <unk>.
The increase for both periods was primarily driven by higher volume and pricing in our contract manufacturing business.
And the third quarter gross profit improved by $383000 and for the first nine months of the year gross profit improve by $1.1 million.
The improvements were primarily the result of higher volume price increases and lower labor and overhead costs driven by factory efficiencies implemented over the past nine months.
Total operating expenses also improved by $3.2 million in the third quarter and improve by $4 million in a year to date basis.
This improvement was primarily due to the following.
Decrease in R&D expenses of $1 million in the third quarter and $2.2 million your date.
Decrease was driven by a reduction in personnel expenses lower license and contract costs and the absence of a one time impairment charge taken on research tobacco inventory in the prior year.
Separately R&D expenses related to the M. R. T. P application was favorable this quarter by $65000 and $1.4 million a year to date.
S G and a expenses improved by $890000 in the third quarter.
Favorability was driven by lower one time severance expenses and a decrease non-cash equity compensation that occurred in the third quarter of 2019.
S T and the expenses were $690000 higher your date.
Due to an increase in consulting and professional services and an increase in personnel and insurance costs.
For the quarter improved by 26%.
On a and by 23% year to date.
Our liquidity remains strong with cash cash equivalents and short term investment securities totaling approximately $26.8 million at the end of the third quarter.
In summary.
We have demonstrated strong performance in the first nine months of the year, we continue to manage our expenditures very carefully and continued to improve margins in our contract manufacturing operations.
Our balance sheet is healthy and we are confident that we can sustain our current operations drive our strategy to achieve our objectives and launched Veo end without the need to raise additional capital at this time.
And with that operator, please open up the call for questions.
Thank you at this time, we'll be conducting a question and answer session.
A reminder, you may type your questions into the ask a question field located on the left side of your webcast screen sharing listening by phone and we'd like to verbally ask your question. Please press star one on your telephone keypad, a confirmation certainly indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
One moment, please let me pull for questions.
Thank you we do have a question coming from the line of Jim Nic Excuse me, Jim Mcilree with Bradley Woods. Please proceed with your question.
Yeah, Thank you and good morning.
I've a few questions I'll just ask them all at once if you don't mind.
You talked about.
The commercialization of Bln post M. RTP approval.
Suggesting you do have at least some infrastructure in place, but you also talked about a marketing campaign.
I was wondering if you can.
You kind of give an indication about how much that might be in terms of dollars in the first 12 months and then along those lines you talked about retail partnerships.
He also said rolling out in select markets.
Let's just wondering if the retail partnerships the national retail partnerships you talked about.
If you have signed agreements that give them exclusivity or or.
Either in time or geography.
And then lastly on the patent.
You you said that it now gives you genetic control in virtually any variety and I'm wondering if.
If there are any.
Varieties that we should be aware of that it doesn't give you genetic control and then did you add some varieties with that patent.
And I think that'll do it for me. Thank you.
Thanks for the question John I'll I'll pass it onto a Mike chime in but Mike go ahead and.
Fill in the blanks for Jim Please.
Sure Jim Thanks, Jim Thanks for the questions. It's good to hear your voice.
In terms of our marketing campaign in budgets.
You know, we're not prepared to release figures like that but I can tell you.
The first several months of the of the rollout will be a phased approach. So this is a standard approach with CPG products to startup in select geographies.
Refine the.
The messaging.
In the real World.
Better understand the consumer behavior with the product and then leverage that learning as you scale up the.
The business and so the budgets and the spending there will correspond to of course to the scale of the.
Of the of the campaign at that time.
In terms of the retail partnerships.
We don't have signed agreements in place at the moment we're.
We are in discussions with a number of retailers.
About geographies and store accounts during these.
The test phase.
And so those terms are still in negotiation.
And then just as far as the new patent.
There's no variety that we believe this technology will not working any.
Any variety.
Tobacco in tobacco plants or are.
Our very similar.
At least the ones used in commercial production and so we believe this technology will work in any variety.
The ones that we're focused on our bright.
Right or but sometimes referred to as procured Virginia tobaccos early tobaccos and Oriental tobaccos and we're focused on those because they are the.
Thank you we have no additional audio questions at this time, so as a reminder, ladies and gentlemen, if you would like to submit a question. Please take your question into the ask a question box located on the West side of your webcast Council.
Okay.
[laughter].
Our focus on dramatically to the upstream area.
That downstream area was primarily in the consumer space not.
No on let's call it non recreational space.
So we do believe as time goes on.
First on a state by state basis, and then ultimately on a federal basis down the road we.
We do believe that legalization ultimately will will occur.
Okay.
Shed some light with the with the shareholder base. So the the original investment with Panacea was again, primarily driven by the finished product consumer goods space.
And to at that point lesser to an extent to their upstream capabilities.
The that marketplaces is a very competitive very fragmented and I'm happy to say the panacea is doing a nice job, they're holding their own in a very complex and competitive marketplace in the finish a good space and I give them all the credit in the world for that.
Are interested in that investment is on there cause they are fully booked vertically integrated.
Our interest is in the upstream area, where they have also expertise and that's in the cultivation the breeding an extraction area.
So we don't intend on investing additional dollars into panacea, but we will refocus those dollars into their upstream opportunities of extraction breeding and plant cultivation, which really matches with our long term strategy and leave it to their expertise on the the downstream consumer products space.
And that's the kind of conversations we're having with them at the present.
Still a solid investment.
It's it's well funded but we do want to shift our focus to our core strengths that line with our core strength, which is around the the upstream value chain of that.
So there was a number of questions in there regarding.
Tennessee, and hopefully that again she had some some lights on it.
Here's a.
As I said I like Juicy questions. So here is I think a very valid question and one that has been trickling in in a couple of different from a couple of different angles here, but.
Why are insiders not been buying chairs, you're <unk> able to for some reason can you at least say that we need to know that insiders are confident in future S. P.
And I think it's a it's a great question and I'll answer from a from a personal standpoint.
As I said during the conversation I I believe that with everything we've got going on.
Mike There was a question on here I'd like to address.
And the question is.
When will moonlight be available to consumers if you could.
Could you address that.
Please sure Jim Yeah.
So mainly.
[noise] is the PMTA product that was authorized for sale by F.D.A. back in December.
It's actually exactly the same product ads B L N. The MRT product.
We're not bringing moonlight some market in any significant way.
There were not planning to do that in any significant way because the PMTA authorization.
Simply.
Having less of something.
And this goes back to the days of tobacco companies marketing supposedly say for cigarettes.
Light cigarettes for example, and so there's a worldwide treaty from the W. H O that virtually every country has signed onto that prohibits claims of a tobacco product containing less of something including nicotine that prevents us from making a 95 per <unk>.
<unk> less nicotine claim in those countries. So.
So our strategy there.
The line of sight to additional reductions in our cash burn without mortgaging, our strategy or future.
We're going to be implementing them.
As time goes on here into next year.
Those new opportunities coming to into effect.
Combined with our current healthy balance sheet and with.
They certainly a plan to.
Capitalize the launch of the lenders in the marketplace.
We believe we have ample cash to do all the above well into 2022.
Under the under the new burn rates that will be implementing.
Type of tax benefit for sure benefit for NRT products, although I have not.
Personally I've not heard of any activity around that but certainly there is a lot of activity.
With with excise taxes.
[laughter].
Thank you Mike.
And I think we've got time for just one more question and.
These two questions kind of combine I believe theyre, they're very solid number one is can you. Please explain your backup plan in detail with the M. RTP is not approved by the FDA.
And also you talk about putting pressure on the FDA for advancing AAM RTP. What is your leverage so I think the I can address both of those questions as Weve said.
In the early part of the conversation.
We believe that it is not a matter of if but when.
F D will prove this and as measured in months and we continue to believe that very strongly.
Our backup plan is more around the ever increasing effort.
Reply.
Pressure from the ground up it from a top down.
With the FDA to enable them to do their job and enable the product to hit the shelves and let the consumers start to decide the value.
The leverage is less about leverage and more about reminding them.
And ever increasing channels and ever increasing.
Levels.
That this fits into their long term plan that they establish.
They funded.
Amended some out of the clinical studies and have been reinforcing those studies.
Thirdly.
And it's a matter really of driving this through the typical bureaucracy of of the FDA and they're being very careful about their their approach and we respect that.
Let's.
It was always a thank you for your time for your thoughtful questions.
And your continued support of 22nd century.
Do you have any further questions. Following today's call. Please reach out to May I had investor relations at X X I I century Dot com.
And we'll be sure to try to answer the questions that we could not get to here today moving forward. Thank you again and have a good day.
Thank you that's does conclude today's call you may now disconnect.
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