Q4 2024 22nd Century Group Inc Earnings Call
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[music].
Welcome to the 22nd century group's fourth quarter and full year 2024 conference call and webcast.
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Speaker Change: It is now my pleasure to turn the floor over to Matt Kreps Investor Relations for 22nd century group. Please begin.
Speaker Change: Hello, and welcome to twenty-second Centurys fourth quarter and full year results Conference call. Joining me today are Larry Firestone CEO, Dan Auto CFO.
Speaker Change: Earlier today, we issued a press release announcing our results for the year ended December 31, 2020 for the release and 10-K are available on the investors section of our website at X X I I century Dot com.
Speaker Change: Today's call will include prepared remarks from Larry and Dan updating you on twenty-second century's business operations strategy and financial results through December 31, 2024 and subsequent.
Speaker Change: Before we begin if you reminders for today's call.
Speaker Change: 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.
Speaker Change: 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 nonoperating expenses.
Speaker Change: Net debt calculated as total principal amount of debt outstanding less cash and cash equivalents.
Speaker Change: More details on these measures please refer to our release issued earlier today.
Speaker Change: And with that I'd like to now turn the call over to Larry.
Larry Firestone: Thank you Matt.
Larry Firestone: Good morning, everyone and thank you for joining twenty-second centurys fourth quarter and full year 2024 results conference call.
Speaker Change: When I joined 22nd century group, a little over 16 months ago, as CEO and chairman.
Speaker Change: The task at hand was 100% focus on restructuring and turnaround efforts. The company was burning cash posting significant losses operating with an unclear in unfunded strategy.
Speaker Change: Entering fiscal 2020 for our near term operating plans were consumed with the day to day and week to week liquidity.
Speaker Change: Concerns.
Speaker Change: I'm happy to say that the situation has evolved into so much more over the course of 'twenty 'twenty four and we're now focused on 2025 and beyond.
Speaker Change: The executive team and employees at our company.
We're tasked with the most difficult of restructurings to be completed and under capitalized cash burning and loss generating public company.
Speaker Change: However, we have embarked on an incredible transformative journey involving much more than just the financials. We're progressing now with our new strategy and restoring the mission that was crafted over 25 years ago.
Speaker Change: We believe it's time.
Speaker Change: Well the tobacco user.
Speaker Change: To decide for themselves.
Speaker Change: Much nicotine they choose to consume.
Speaker Change: And through our flagship V O N product.
Speaker Change: We can give adult smokers and authentic and familiar alternative smoking that helps them take control.
Speaker Change: I would now like to take the time to reflect on the major milestones and accomplishments of the company over this time period before providing further overview of.
Speaker Change: Of the strategic direction, we are executing today.
Speaker Change: First.
Speaker Change: In late 2023, we repositioned our focus to a pure play tobacco company.
Speaker Change: To do this we divested the GBP cannabis business shutdown, all R&D projects related to him cannabis and HOPPS, which greatly reduced the operating cash burn.
Speaker Change: Second we restructured our board of directors and board compensation. We also terminated all executive management team contracts have restructured personnel.
Speaker Change: <unk> eliminated cash bonuses and stock based compensation awards.
Speaker Change: We also turned over every function and department expenditure.
Speaker Change: During we achieve the appropriate operating model and overhead for the reduced size and scale of the company.
Speaker Change: This dramatically reduced our R&D and G&A expenses.
Speaker Change: Next we worked over the balance sheet.
Speaker Change: Repaying or settling approximately $18 million.
Speaker Change: And total liabilities, including $5 2 million in subordinated debt.
Speaker Change: 4.1 million in convertible senior secured debt.
Speaker Change: Various tobacco creditors and other payables repaid from the <unk> divestiture.
Speaker Change: And shut down the hip cannabis operations.
Speaker Change: Then we turned our attention to V O N.
Speaker Change: The person only FDA authorized modified risk tobacco product.
Speaker Change: Which needed redesigned packaging plus.
Speaker Change: Plus new marketing and selling activities to support the relaunch in store activation.
Speaker Change: We also began expanding the number of state regulatory approvals. So that V. L. M would be authorized for sale in all 50 states in the U S.
In addition, our R&D strategy now includes the technology roadmap to expand the reach of B O N. Two other tobacco products and revived efforts to grow the best varieties and quality.
Speaker Change: But where our proprietary low nicotine tobacco leaf finally, the base of our operations has been our CMO customers.
Speaker Change: With the productions of cigarettes and filtered cigars.
Speaker Change: During 'twenty 'twenty four we signed it began shipping additional CMO brands for export Offloaded certain filtered cigar contracts that were losing money.
Speaker Change: Some of which we subsequently have re signed contracts with under new pricing terms in 'twenty 'twenty five.
Speaker Change: We've secured a long term commitment from one of our key accounts smoker friendly and we're working on others as we speak.
Speaker Change: Our team has had amazing focus and drive.
Speaker Change: As they worked incredibly hard through this effort and the results have been permanent changes in our business architecture.
Speaker Change: To put 2024 and perspective. This is the equivalent of taking apart and rebuilding your car, while you're driving it on the Autobahn.
Speaker Change: Turnarounds are extremely difficult and take time and cash.
Speaker Change: While we were losing money and pay down our liabilities outside investments support was and is still necessary to fund the lack of pre cash flow from operations.
Speaker Change: During 2024.
Speaker Change: We raised almost $17 million in financings.
Speaker Change: Which were primarily equity cash infusions.
Speaker Change: Debt conversions to support the company.
Speaker Change: Fortunately, we've been supported by investors Debtholders that believe in the long term growth potential of our company and that funded our efforts and realigning the business, giving twenty-second century, a chance to become profitable and cash positive for us to get our paradigm shifting wheel end product into the market.
Speaker Change: The fourth quarter numbers are improved in many ways.
Speaker Change: But also show the time necessary to complete the turnaround to begin top line and profitable growth in our business.
Speaker Change: This is why.
Speaker Change: As we rollout our rebranded V L M.
Speaker Change: Our focus.
Speaker Change: Is on driving rate of sale and carton volume.
Speaker Change: The second half of 'twenty 'twenty four was a transition process.
Speaker Change: As we fulfill last time buy orders on legacy filtered cigar contracts that were priced below cost.
Speaker Change: These contracts and orders were losing money at the gross profit line, which means they do not paper any operating expenses or overhead.
Speaker Change: We worked with our customers and ended those agreements.
Speaker Change: And in most cases.
Speaker Change: Replace them with properly priced agreements with the same customers, but that crossover time creates a dip in sales, which produced the revenue drops you saw in our filtered cigars cigarette businesses.
The lag time from contract signing to shipment on revenues is anywhere between three and six months.
Speaker Change: During 2024.
Speaker Change: We also remain focused on maintaining our NASDAQ listing.
Speaker Change: Regaining compliance with the minimum bid rules and the minimum shareholder equity.
Speaker Change: As a result in addition to capital raises and debt Paydowns, it's been necessary to effect to reverse splits in 2024.
Speaker Change: And so far that has accomplished our goal to maintain our listing.
Speaker Change: Before we talk about 2025 I acknowledge that during the turnaround process, we've seen an unstable share price and market capitalization that is not reflective of the value of this company.
Speaker Change: It's my bias that it is imperative that our management team remains committed to executing on our strategy and operations. This will drive our company to sustainable growth.
Speaker Change: And cash positive operations with a future that has very strong potential.
Speaker Change: Then I believe based on my experience investors in Wall Street, we.
Speaker Change: We will see this company as they once did and the incredible investment opportunity. It provides however.
Speaker Change: At this time.
Speaker Change: We're still working through cash burn operating losses and debt service in the final stages of our turnaround.
Speaker Change: I encourage all long term investors to read the latest annual report on Form 10-K outlining more detail on our strategy and business model.
Speaker Change: But also the inherent risk factors and challenges we are facing.
Speaker Change: Although we still have to finish our turnaround 2025 is essentially the launch of the new 22nd century.
Speaker Change: Now that we have put new foundational blocks in place.
Speaker Change: Let me characterize the opportunity that we have going forward.
Speaker Change: Our core contract manufacturing business, that's been the lion's share of our revenues over the past few years, which is.
Speaker Change: A high volume low margin business.
Speaker Change: In this business, we provide a turnkey manufacturing service, including in some cases regulatory services and supply chain management.
Speaker Change: Our customers are then responsible for their brand and brand development.
Speaker Change: Sales marketing product placement and the rate of sale.
Speaker Change: In our core business, we service, both domestic and international customers.
Speaker Change: Our domestic customers run to adjust in time structure.
Speaker Change: Where we replenish the mainstream distribution with initial initial load orders.
Speaker Change: If it's a new product and replacement orders if the products are already in the market.
Speaker Change: So domestic business is very much dependent on.
Speaker Change: Consumer behavior, and what we call rate of sale.
For the international customer shipments and some of the filtered cigar customers, we manufacture and ship on a per container basis.
Speaker Change: The order flow on this side of the business is much different than the replenishment orders the runs or longer and we ship in bulk.
Speaker Change: One of the hidden gems in our CMO business.
The smoker friendly's latest product launch called smoker friendly black.
Speaker Change: This is a tobacco and water only.
Speaker Change: Additive free all natural premium American blend cigarettes.
Speaker Change: It is designed to directly compete with the natural cigarette category, which is the hottest segment in the full nicotine cigarette market right now.
Speaker Change: This appears to be a great growth engine for us as the manufacturer.
Speaker Change: And smoker friendly starting in 2025.
Speaker Change: Our branded.
Speaker Change: Business has not been part of our revenues over the past couple of years.
Speaker Change: And we consider our branded business as a growth business.
Speaker Change: <unk> products and strategy are the core of our growth business.
Speaker Change: To frame the market that we play in big tobacco contractually owns approximately 85% of the 85 billion dollar U S cigarette business.
Speaker Change: That leaves 15%.
Speaker Change: Or an approximately $12 5 billion dollar market for all the other brands to fit into.
Speaker Change: New brands, such as V. L N products in the market are not looked at favorably as all brands are battling for the same space on the shelf at the various retailers.
Speaker Change: As we are poised at the beginning of 2025 to relaunch V. L N and bring our newly granted V O N into the market our strategy is different than what we implemented.
Speaker Change: N V O N was first launched in 2022.
Speaker Change: Not only will we bring our 20th second century B L M Grand into the market with three Skus gold Red and Green are menthol.
Speaker Change: We are introducing what I have referred to in the last year as flanker V L N but.
Speaker Change: But what we are now calling partner V. L. M M.
Speaker Change: And these are private label deal and brands that will enter the market under other brands and widen the presence of Neil N in the market.
Speaker Change: This is where our CMO customers can adopt a vlan SKU within their lineup and they had a higher margin product to their product line.
Speaker Change: This is similar to the Intel inside approach for computers.
Speaker Change: And instead of tobacco product with V L N inside.
Speaker Change: So as we announced you will begin to see smoker friendly bill and the marketplace.
Speaker Change: However, I will point out this living a slow gradual walk up as we want to establish not only the V O N brand.
Speaker Change: But the product improve the rate of sale.
With our marketing and consumer engagement techniques to make sure that we succeed where we failed in the first launch and that as rate of sale at the cash Register.
Speaker Change: We are in the process of getting our newly granted V O N and partner B O N Skus approved for sale in the various regulatory agencies in all 50 states.
Speaker Change: This initiative should be complete by the end of July 2025.
Speaker Change: We have important markets that we could serve for example, Massachusetts.
Speaker Change: Or some doctors have reached out to communicate the state route to restrictions that are in force in our preventing patients who smoke from undergoing critical surgery.
Speaker Change: Until they have documented proof that they have stopped smoking for a minimum of six weeks in the doctors have communicated.
Speaker Change: These laws and sensor documentation to me.
Speaker Change: Believe that V Atlanta, as an asset to that endeavor.
Speaker Change: Beyond smoker friendly we believe that you will see other brands adopting deal instead of Skus and they're in their lineup.
Speaker Change: As we rolled these brands into the market along with our own V O N.
Speaker Change: We are still competing for the valuable shelf space that is represented by the 15% of the U S cigarette market.
Speaker Change: Greatest sale is everything and corporate retail because every slot.
Speaker Change: In every store has to perform and make money.
Speaker Change: Once a brand is in your on the clock and it's your job to make sure itself and then we achieved customer awareness with both partner B L ends as well as our own.
Speaker Change: This is why the walk up is going to be slower than one would think we have to be focused in.
Speaker Change: And if not I'll kick our coverage to use a football analogy.
Speaker Change: Once we prove our V L N domestically.
Speaker Change: We will look beyond the U S. We.
Speaker Change: We've already been contacted by a few companies that have international reach to potentially extend the positioning of B L. N beyond the U S borders and.
Speaker Change: In addition to.
Speaker Change: The V O N combustible products. We've also kicked off several R&D programs to develop new next generation products that fit.
Speaker Change: The BLM brand or fit V L N within the brand.
Speaker Change: These products will define a piece of our future and broaden the reach of V. L N to widen the opportunity and give tobacco users a choice to control their nicotine consumption.
Speaker Change: As we gain traction in the market.
Speaker Change: We are driving for a V O N C category, which will be a very low nicotine content category.
Speaker Change: And this would allow us to carve a real M products out of the mainstream cigarettes.
Speaker Change: Babes heat not burn and other tobacco products and instead standalone in retail as its own category numbers, just like Decaf coffee nonalcoholic spirits nonalcoholic beer.
Speaker Change: This however will take time and I'm sure, we'll be met with resistance from big tobacco.
Speaker Change: Along with the redress of B B L M.
Speaker Change: We will begin launching.
Speaker Change: Our new twenty-second century webpage, and a refreshed try V L N webpage.
Speaker Change: So that the consumers will be able to find V O N in a retail location in their market.
Speaker Change: We're also getting ready to reactivate our social media platform within the guidelines and restrictions of tobacco advertising, so that consumers can share their experiences would be with RV OEM products.
Speaker Change: Dan will discuss our numbers historically, but as we build the base of beall and distribution and traction through the rate of sale.
Speaker Change: Neil N is our most profitable product in our lineup and will be a major component to the completion of the turnaround.
Speaker Change: In January of this year.
Speaker Change: The F D a.
Speaker Change: Released a new proposed rule titled.
Speaker Change: Tobacco product standard for nicotine yield cigarettes, and certain other combusted tobacco products.
Speaker Change: Which gave us a little bit of a tailwind behind the relaunch of V O N.
Speaker Change: The new proposed standard would set a maximum nicotine content level of 0.7 milligrams of nicotine per gram of tobacco and cigarettes.
Speaker Change: With Veolia and being the only cigarette in the market that would meet the standard today.
Speaker Change: The comment period is.
Speaker Change: As currently scheduled to be completed by mid September 2025, and if enacted.
Speaker Change: We'll have a two year implementation period for which all combustible tobacco products must comply.
Speaker Change: We know there will be resistance in a lot of money money thrown at delaying this order by big tobacco So.
Speaker Change: So we will not rely on this implementation is a pillar to our success. However.
Speaker Change: If this were to succeed and is implemented.
Speaker Change: I will point out that we currently have the only FDA approved combustible tobacco product on the market that meets the standards set forth by the F D. A.
Speaker Change: Both sides of our business the core business and the growth businesses are poised for success in 2025 and beyond.
Speaker Change: As I explained this is a very surgical execution that will define the success of our CMO business, our branded business and the new products that we'll be bringing into the market in the future.
Speaker Change: Our team is laser focused.
Speaker Change: On that execution.
Speaker Change: Although our goals for distribution and penetration of our aggressive our implementation will be targeted and strategic.
Speaker Change: As we understand the rate of sale is the key to the puzzle.
Speaker Change: And with that I'll turn it over to Dan to discuss the numbers.
Dan Auto: Thank you Larry good morning, everyone and thanks again for joining our discussion today.
Speaker Change: Over the course of 'twenty 'twenty four I've spoken about the importance of implementing fiscal responsibility and our restructuring efforts.
Speaker Change: Can be categorized in three main pillars that we've made substantial progress against.
Speaker Change: First we're working to achieve profitability in the P&L for the first time in the company's history in 2025.
Speaker Change: We're poised for revenue growth and margin improvement with our CMO customer contracts in 2025 and will be rapidly expanding beyond points of distribution during the year.
Speaker Change: It sits on top of the lean operating cost and overhead structure implemented throughout 2024.
Speaker Change: Second restoration of normal balance sheet ratios and kpis through elimination of debt obligations and improvements in working capital.
Speaker Change: And third prioritizing secured cash runway to complete these initiatives and improve the overall capital structure.
Speaker Change: As I walked through additional financial details on our fourth quarter and full year results I'll also highlight progress in these three areas.
Speaker Change: As a reminder, all financial results in our earnings release are presented on a continuing operations basis, which excludes our former how Canada segment.
Speaker Change: Net revenue was $4 million in the fourth quarter 'twenty 'twenty four decreased sequentially from $5 9 million in the third quarter 2024, and gross margin was a loss of $1 2 million compared to 588000 in the same periods.
Speaker Change: Sequential revenue and margin decline is reflective of lower volume with cartons, all being 338000 compared to 439000.
Speaker Change: The volume change isn't reflective of the initiatives, Larry and I have been discussing regarding repricing, our CMO contracts, primarily with our filtered cigar customers and as a temporary decline.
Speaker Change: First quarter 2000, and twenty-five volume will begin to grow again and expand more rapidly in the second quarter of 2025 at certain of these tropic cigar customers are returning.
Speaker Change: The increase in volume and return of the CMO business will help stabilize revenue and provide appropriate economics for margin and cash flow.
Speaker Change: Further as Larry has discussed we are launching new marketing and awareness campaigns to drive the online sales.
Speaker Change: Rebranded V. L. N is expected to begin shipping in the second quarter of 2025.
Speaker Change: This will be expanded as we launch our partner brand products using recognize CMO brands to build the category going forward.
Speaker Change: Together restoration of the filtered cigar volume growth and sales under certain cigarette CMO customers and the expanded launch of V. L. N will lead us to achieving our P&L golf.
Speaker Change: Total operating expenses for the fourth quarter were $2 8 million flat from the third quarter 2024.
Speaker Change: We have substantially decreased the G&A overhead of our business and we're beginning to make select investments in additional sales and marketing activities around the relaunch of our <unk> products.
Speaker Change: Net loss EPS and adjusted EBITDA in the fourth quarter 2024, how similar P&L trends as compared to prior periods.
Speaker Change: The balance sheet has improved substantially year over year with an overall decline in total liabilities of over 18 million or nearly 50% ending the year at $17 7 million.
Speaker Change: The company has improved networking capital to positive $1 6 million from a deficit of $8 8 million in the prior year.
Speaker Change: Also notably in the first quarter of 2025, we've now further reduced our outstanding debt under the convertible senior secured credit facility by $3 1 million.
Speaker Change: Bringing a remaining principal balance down to $4 6 million and reducing monthly cash principal amortization payments.
Speaker Change: Cash interest paid during 2024 was reduced to 722000 compared to $1 3 million in the prior year, and which will be even further reduce now in 2025.
Speaker Change: Last our overall cash burn has declined meaningfully in the past year, we remain focused on minimizing cash used by the business, while executing the turnaround and emerging into a rapidly growing business.
Speaker Change: And finally, the company remains active in our lawsuit against Dorchester insurance company based on their failure to pay any amounts toward our claim of $9 million in actual damages for business interruption insurance.
Speaker Change: Significant discoveries taken place and the court set a trial date for November 2025.
Speaker Change: Now with that we will open it up for questions from analysts.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing.
Speaker Change: If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Operator: The first question today comes from Andrew Light with emerging growth research. Please go ahead.
Speaker Change: Good morning. Thank you for that following up on what you were talking about do you see in the first quarter of 2025, a stabilization a CMO contract terminations in other words. If this is 224 store and not a 2025 story and.
Speaker Change: That question goes towards the second question is well wishes are you still expecting EBITDA to breakeven in the fourth quarter of 2025. Thank you very much.
Speaker Change: Yeah, and I'll take the I'll.
Speaker Change: I'll take that one.
Andrew: Sure Good morning, Andrew Thanks for thanks for joining.
Speaker Change: Yeah, the I would say the reshuffling of the CMO contracts as.
Speaker Change: As you know going full term.
Speaker Change: That really was a 2020 core story. So so now we have for our CMO customers that were that were going through that transition.
Speaker Change: It's now moving into production.
Speaker Change: Production under the new contract if you will.
Speaker Change: And and those economics are more in our favor.
And so as far as breakeven in Q4, Yeah. That's still are that's still our outlook as we sit today.
Speaker Change: Okay.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Larry Firestone for any closing remarks.
Larry Firestone: Thank you.
Speaker Change: We've come a long way in 2024.
Speaker Change: And are shifting to growth in 2025, our strategy is in place. Our team is excited and we have started to execute our strategy.
Speaker Change: Posturing the company is predominantly offensive versus defensive as we booked new contracts and lay the foundation for the future.
Speaker Change: Our balance sheet is stronger our operating costs have been cut.
Speaker Change: There are more closely aligned with our sales our CMO business is producing positive gross margins and is growing.
Speaker Change: And we are beginning to build our branded business with our V. L N reduced nicotine content products to drive profitable growth opportunities ahead.
Speaker Change: In short.
Speaker Change: While our turnaround is still not complete we.
Speaker Change: We will keep working it and 22nd century is on track to becoming a self sustaining a profitable company for the first time in the company's history.
Speaker Change: We will be participating in investor conferences throughout the year and look forward to updating you again as new developments occur, including the progress on our new branding new webpage, new contracts, new distribution shipments and other developments.
Speaker Change: I would like to thank our team for their energy and Stick-to-it-ive Miss.
Speaker Change: This has not been an easy road and our team's tenacity to drive forward has been awesome.
Speaker Change: If you have any questions or would like to arrange a follow up please contact Matt Kreps Investor relations for the company.
Speaker Change: Using his contact information provided on the press release.
Speaker Change: Or to myself directly as many of you have.
Speaker Change: Have a great rest of your day and thank you for joining our call.
Speaker Change: Yes.
Speaker Change: The conference has now concluded.
Speaker Change: Thank you for attending today's presentation you may now disconnect.
Speaker Change: [music].
Speaker Change: Yeah.