22nd Century Group, Inc. Price & Performance (XXII)

Hello and welcome to twenty second Century's Fourth Quarter and Full Year Results Conference Call. Joining me today are Larry Firestone, CEO and Dan Otto, CFO. Earlier today, we issued a press release announcing our results for the year ended December 31, 2024. The release and 10 ks are available in the Investors section of our website at xxxxiicentury.com. 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 12/31/2024 and subsequent. Before we begin, a few reminders for today's call. Some of the statements made today are forward looking. Forward looking statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual quarterly, and other reports filed with the SEC. During today's call, we 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 and net debt calculated as total principal amount of debt outstanding less cash and cash equivalents. More details on these measures, refer to our release issued earlier today.

And with that, I'd like to now turn the call over to Larry.

Thank you, Matt.

Good morning everyone and thank you for joining twenty second Century's fourth quarter and full year twenty twenty four results conference call. When I joined twenty second Century, Group a little over sixteen months ago, as CEO and Chairman the task at hand was 100% focused on restructuring and turnaround efforts. The company was burning cash posting significant losses in operating with an unclear and unfunded strategy. Entering fiscal twenty twenty four, our near term operating plans were consumed with the day to day and week to week liquidity concerns. I'm happy to say that the situation has evolved into so much more over the course of 2024 and we're now focused on 2025 and beyond. The executive team and employees at our company were tasked with the most difficult of restructurings to be completed as an undercapitalized cash burning and loss generating public company. However, we've embarked on an incredible transformative journey involving much more than just the financials. We're progressing now with a new strategy and restoring the mission that was crafted over twenty five years ago. We believe it's time for the tobacco user to decide for themselves how much nicotine they choose to consume and through our flagship VLN product we can give adult smokers an authentic and familiar alternative to smoking that helps them take control.

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 the strategic direction we are executing today. First, in late twenty twenty three, we repositioned our focus to a pure play tobacco company To do this, we divested the GVB hemp cannabis business shut down all R and D projects related to hemp cannabis and hops which greatly reduced the operating cash burn. Second, we restructured the Board of Directors and Board compensation We also terminated all executive management team contracts and restructured personnel eliminated cash bonuses and stock based compensation awards. We also turned over every function and department expenditure ensuring we achieve the appropriate operating model and overhead for the reduced size and scale of the company. This dramatically reduced our R and D and G and A expenses. Next, we worked over the balance sheet. Repaying or settling approximately $18,000,000 in total liabilities, including 5,200,000.0 in subordinated debt dollars 4,100,000.0 in convertible senior secured debt various tobacco creditors and other payables retained from the GVB divestiture and shut down the hemp cannabis operations. Then we turned our attention to VLN.

The person only FDA authorized modified risk tobacco product which needed redesigned packaging plus new marketing and selling activity to support the relaunch store activation. We also began expanding the number of state regulatory approvals so that VLN would be authorized for sale in all 50 states in The U. S. In addition, our R and D strategy now includes a technology roadmap to expand the reach of VLN to other tobacco products and revived efforts to grow the best varieties in quality of our proprietary low nicotine tobacco leaf. Finally, the base of our operations has been our CMO customers with the productions of cigarettes and filtered cigars. During 2024, we signed and began shipping additional CMO brands for export offloaded certain filtered cigar contracts that were losing money some of which we subsequently have re signed contracts with under new price pricing terms in 2025. We've secured a long term commitment from one of our key accounts Smoker Friendly and we're working on others as we speak. Our team has had amazing focus and drive as they worked incredibly hard through this effort and the results have been permanent changes in our business architecture. To put 2024 in perspective, this is the equivalent of taking apart and rebuilding your car while you're driving it on the Autobahn.

Turnarounds are extremely difficult and take time and cash. While we were losing money and paying down our liabilities, outside investment support was and is still necessary to fund the lack of free cash flow from operations. During 2024, we raised almost $17,000,000 in financings. Which were primarily equity cash infusions and debt conversions to support the company. Fortunately, we've been supported by investors and debt holders that believe in the long term growth potential of our company and have funded our efforts in realigning the business giving twenty second Century a chance to become profitable and cash positive and for us to get our paradigm shifting VLN product into the market. The fourth quarter numbers are improved in many ways, but also show the time necessary to complete the turnaround and begin top line and profitable growth in our business. This is why as we roll out our rebranded VLM, our focus is on driving rate of sale and carton volume. The second half of twenty twenty four was a transition process as we fulfilled last time buy orders on legacy filtered cigar contracts, that were priced below cost. These contracts and orders were losing money at the gross profit line which means they do not pay for it.

Any operating expenses or overhead. We worked with our customers and ended those agreements and in most cases replace them with properly priced agreements with the same customers but that crossover time creates a dip in sales which produced the revenue troughs you saw our filtered cigar and cigarette businesses. The lag time from contract signing shipment on revenues is anywhere between three and six months. During 2024, we also remain focused on maintaining our NASDAQ listing regaining compliance with the minimum bid rules and the minimum shareholder equity. As a result, in addition to capital raises, and debt pay downs, it's been necessary to affect two reverse splits in 2024 and so far that has accomplished our goal to maintain our listing. 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. 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 and cash positive operations. With a future that has very strong potential. Then I believe based on my experience investors in Wall Street will see this company as they once did and the incredible investment opportunity it provides.

However, at this time, we are still working through cash burn operating losses and debt service in the final stages of our turnaround. I encourage all long term investors to read the latest annual report on Form 10 ks outlining more detail on our strategy and business model but also the inherent risk factors and challenges we are facing. Although we still have to finish our turnaround, 2025 is essentially the launch of the new twenty second century. Now that we have put new foundational blocks in place, let me characterize the opportunity that we have going forward. Our core contract manufacturing business has been the lion's share of our revenues over the past few years which is a high volume low margin business. In this business, we provide a turnkey manufacturing service including in some cases regulatory services and supply chain management Our customers are then responsible for their brand development sales, marketing, product placement and rate of sale. In our core business, we service both domestic and international customers. Our domestic customers run to adjust in time structure where we replenish the mainstream distribution with initial initial load orders if it's a new product and replacement orders if the products are already in the market.

So domestic business is very much dependent on consumer behavior 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. The order flow on this side of the business is much different than the replenishment orders. The runs are longer and we ship in both. One of the hidden gems in our CMO business is Smoker Friendly's latest product launch called Smoker Friendly Black. This is a tobacco and water only additive free all natural premium American blend cigarette that is designed to directly compete with the natural cigarette category which is the hottest segment in the full nicotine cigarette market right now. This appears to be a great growth engine for us as the manufacturer and smoker friendly starting in 2025. Our branded business has not been part of our revenues over the past couple of years and we consider our branded business as our growth business. Our VLN products and strategy are the core of our growth business. To frame the market that we play in, Big Tobacco contractually owns approximately 85% of the $85,000,000,000 U. S. Cigarette business. That leaves 15% for an approximately $12,500,000,000 market for all of brands to fit into.

New brands such as VLN 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. As we are poised at the beginning of twenty twenty five to relaunch VLN and bring our newly branded VLN into the market, Our strategy is different than what we implemented when VLN was first launched in 2022. Not only will we bring our twenty second Century VLN brand into the with three SKUs, gold, red and green or menthol We are introducing what I have referred to in the last year as flanker VLN. But what we are now calling partner VLN. And these are private label VLN brands that will enter the market under other brands and widen the presence of VLN in the market. This is where our CMO customers can adopt a VLN SKU within their lineup and add a higher margin product to their product line. This is similar to the Intel Inside approach for computers and instead a tobacco product with VLN inside. So as we announced you will begin to see smoker friendly VLN in the marketplace. However, I will point out this will be a slow gradual walk up as we want to establish not only the VLN brand, 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 is rate of sale at the cash register.

We are in the process of getting our newly branded VLN and partner VLN SKUs approved for sale in the various regulatory agencies in all 50 states. This initiative should be complete by the July 2025. We have important markets that we could serve for example Massachusetts where some doctors have reached out to communicate the state restrictions that are in force and are preventing patients who smoke from undergoing critical surgery until they have documented proof that they have stopped smoking for a minimum of six weeks and the doctors have communicated these laws and sent their documentation to me believe that VLN is an asset to that endeavor. Beyond smoker friendly, we believe that you will see other brands adopting VLN set of SKUs in their in their lineup. As we roll these brands into the market along with our own VLN we are still competing for the valuable shelf space that is represented by the 15% of The U. S. Cigarette market. Rate of sale is everything in corporate retail because every slot in every store has to perform and make money. Once a brand is in, you're on the clock and it's your job to make sure it sells and that we achieve customer awareness with both partner VLNs as well as our own.

This is why the walk up is going to be slower than one would think. We have to be focused and not outkick our coverage to use a a football analogy. Once we prove our VLN domestically, we will look beyond The U. S. We have already been contacted by a few companies have international reach to potentially extend the positioning of VLN beyond The U. S. Borders. In addition, to the VLN combustible products, we've also kicked off several R and D programs to develop new next generation products to fit the VLN brand or fit VLN within the brand these products will define a piece of our future and broaden the reach of VLN to widen the opportunity and give tobacco users a choice to control their nicotine consumption. As we gain traction in the market, we are driving for a VLNC category which will be a very low nicotine content category and this would allow us to carve our VLN products out of the mainstream cigarettes vapes, heat not burn and other tobacco products and instead standalone in retail has its own category numbers just like decaf coffee, nonalcoholic spirits, non alcoholic beer. This however will take time and I'm sure will be met with resistance from big tobacco.

Along with the redress of BLN we will begin launching a new twenty second Century webpage and a refreshed TriVLN webpage. So that the consumers will be able to find VLN in a retail location in their market. 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 with our VLN products. Dan will discuss our numbers historically but as we build the base of BLN distribution and traction through the rate of sale VLN is our most profitable product in our lineup. And will be a major component to the completion of the turnaround. In January of this year, the FDA released a new proposed rule titled tobacco product standard for nicotine yield of cigarettes and certain other combusted tobacco products. Which gave us a little bit of a tailwind behind the relaunch of VLN. The new proposed standard, which set a maximum nicotine content level of zero point seven milligrams of nicotine per gram of tobacco and cigarettes. With VLN being the only cigarette in the market that would meet this standard today, The comment period is currently scheduled to be completed by mid September twenty twenty five and if enacted will have a two year implementation period for which all combustible tobacco products must comply.

We know there will be resistance and a lot of money thrown at delaying this order. By big tobacco So we will not rely on this implementation as a pillar to our success. However, if this were to succeed and is implemented I will point out that we currently have the only FDA approved combustible tobacco product on the market that meets the standard as set forth by the FDA. Both sides of our business, the core business and the growth business are poised for success in 2025 and beyond. 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. Our team is laser focused on that execution and although our goals for distribution and penetration are aggressive, our implementation will be targeted in strategic as we understand the rate of sale is the key of the puzzle. And with that, I'll turn it over to Dan to discuss the numbers. Thank you, Larry. Good morning, everyone, and thanks again for joining our discussion today.

Over the course of 2024, I've spoken about the importance of implementing fiscal responsibility in our restructuring efforts. These can be categorized in three main pillars that we've made substantial progress against. First, we're working to achieve profitability in the P and L. For the first time in this company's history in 2025. We're poised for revenue growth and margin improvement with our CMO customer contract in 2025 and we'll be rapidly expanding VLN points of distribution during the year. This sits on top of the lean operating cost and overhead structure implemented throughout 2024. Second, restoration of normal balance sheet ratios and KPIs through elimination of debt obligations, improvements in working capital. And third, prioritizing secured cash runway to complete these initiatives and improve the overall capital structure. As I walk through additional financial details on our fourth quarter and full year results, I'll also highlight progress in these three areas. As a reminder, all financial results and our earnings are presented on a continuing operations basis which excludes our former hemp cannabis segment. Net revenue was $4,000,000 in the fourth quarter twenty twenty four, decreased sequentially from $5,900,000 in the third quarter twenty twenty four and gross margin was a loss of $1,200,000 to $588,000 in the same periods.

The sequential revenue and margin decline is reflective of lower volume, with cartons sold being $338,000 compared to 439,000 The volume change is reflective of the initiatives Larry and I have been discussing, regarding repricing our CMO contracts primarily with our filtered cigar customers and is a temporary decline. First quarter twenty twenty five volume will begin to grow again, and expand more rapidly in the second quarter of twenty twenty five. As certain of these filtered cigar customers are returning. The increase in volume and return of the CMO business will help stabilize revenue and provide appropriate economics for margin and cash flow.

Further, as Larry has discussed, we are launching new marketing and awareness campaigns to drive the ELN sales. The rebranded VLN is expected to begin shipping in the second quarter of twenty twenty five. This will be expanded as we launch our partner brand VLN products using recognized CMO brands to build the category going forward. Together, restoration of the filtered cigar volume, growth in sales under certain cigarette CMO customers, and the expanded launch of VLN will lead us to achieving our P and L goals. Total operating expenses for the fourth quarter were 2,800,000.0 flat from the third quarter twenty twenty four. We have substantially decreased the G and A overhead of our business and we're beginning to make select investments in additional sales and marketing activities around the relaunch of our VLN products. Net loss, EPS adjusted EBITDA the fourth quarter twenty twenty four follow similar P and L trends as compared to prior periods. The balance sheet has improved substantially year over year with an overall decline in total liabilities of over 18,000,000 or nearly 50% ending the year at 17,700,000.0 The company has improved net working capital to positive 1,600,000.0 from a deficit of $8,800,000 in the prior year.

Also notably in the first quarter of twenty twenty five, we've now further reduced our outstanding debt under the convertible senior secured credit facility by 3,100,000.0 bringing the remaining principal balance down to 4,600,000.0 and reducing monthly cash principal amortization payments. Cash interest paid during 2024 was reduced 722,000 compared to $1,300,000 in the prior year, and which will be even further reduced now in 2025. 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. 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 $9,000,000 in actual damages for business interruption insurance. Significant discoveries taken place, the court set a trial date for November 2025. Now with that, we will open it up for questions from our analysts.

Will now begin the question and answer session. The first question today comes from Andrew White with Emerging Growth Research. Please go ahead.

Good morning. Thank you for that.

Following up on what you were talking about, do you see in the first quarter of twenty twenty five a stabilization of CMO contract [indiscernible] Other words, is this a 2024 story and not a 2025 story? And that question goes towards the second question as well, which is are you still expecting EBITDA to breakeven in the fourth quarter of twenty twenty five? Thank you very much.

Dan, I'll take the I'll take that one. Good morning, Andrew. Thanks for joining. [indiscernible] I would say the reshuffling of the CMO contracts is [indiscernible] gone full term and that really was a 2024 story. So now we have for our CMO customers that were going through that transition It's now moving into [indiscernible] production under the new contract if you will. And those economics are more in our favor. And so, as far as breakeven in Q4, yes, that's still our our outlook as we sit today.

This concludes our question and answer session. I would like to turn the conference back over to Larry Firestone for any closing remarks.

Thank you. We've come a long way in 2024 and are shifting to growth in 2025. Our strategy is in place. Our team is excited and we have started to execute our strategy. The posture in the company is predominantly offensive versus defensive as we book new contracts and lay the foundation for the future. Our balance sheet is stronger, our operating costs have been cut and are more closely aligned with our sales. Our CMO business is producing positive gross margins and is growing and we are beginning to build our branded business with our VLN reduced nicotine content products to drive profitable growth opportunities ahead. In short, while our turnaround is still not complete, we will keep working it and twenty second Century is on track to becoming a self sustaining profitable company for the first time in the company's history. 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. I would like to thank our team for their energy and stick to itiveness This has not been an easy road and our team tenacity to drive forward has been awesome.

If you have any questions or would like to arrange a follow-up, please contact Matt Kreps, Investor Relations for the company. Using his contact information provided on the press release or to myself directly as many of you have Have a great rest of your day and thank you for joining our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.