22nd Century Group Reports Financial Results and Business Highlights for the Second Quarter 2020
August 06 2020 - 7:00AM
22nd Century Group, Inc. (NYSE American: XXII) (“22nd Century” or
“the Company”), a leading plant biotechnology company focused on
technologies that alter the level of nicotine in tobacco plants and
the level of cannabinoids in hemp/cannabis plants through genetic
engineering, gene-editing, and modern plant breeding, today
reported results for the second quarter ended June 30, 2020.
“Despite the unprecedented challenges brought on by COVID-19, I
am pleased to report net sales revenue of $6.4 million for the
second quarter of 2020, up 11% from the prior year, continued gross
profit margin expansion, and improved operating loss. These results
demonstrate our ability to execute on our initiatives to improve
our margins and cost structure. Our financial position remains
strong and we will continue to operate with strict cost controls,
allocate our resources efficiently, and deploy capital where we
believe it will give us the greatest return on our investments,”
said James A. Mish, Chief Executive Officer of 22nd Century
Group.
“With the comment period now closed on our Modified Risk Tobacco
Product Application, the team is laser focused on setting the stage
for a successful VLN® launch upon the authorization of our MRTP
Application by the FDA. I am exceedingly proud of the dedication
and tremendous progress the team has made so far this year and
believe we are well positioned to capitalize on the many
opportunities ahead,” Mish added.
Business Highlights and Notable Events:
- The Company appointed James A. Mish as its Chief Executive
Officer, effective June 22, and John Franzino as its Chief
Financial Officer, effective June 3. Mish has extensive global
executive leadership experience leading science-driven
organizations with a focus on the development, manufacturing, and
commercialization of active pharmaceutical ingredients (“API”),
including cannabinoids, and related consumer products. Franzino has
extensive financial leadership experience in the tobacco and
alcoholic beverage industries. Mish is reviewing the Company’s
current strategy and objectives and is expected to provide an
update in November during the Company’s third quarter earnings
call.
- The public comment period for the Company’s Modified Risk
Tobacco Product (“MRTP”) Application for VLN® closed on May 18,
2020. The application requests a modified exposure designation from
the FDA to market the Company’s proprietary reduced nicotine
content tobacco cigarettes in the U.S. under the proposed brand
name of VLN® with product labeling and advertising claims stating
that VLN® has 95% less nicotine than conventional cigarettes, as
well as other claims related to reduced nicotine exposure. The
closing of the public comment period marks an important milestone
in the FDA’s ongoing scientific review of the Company’s MRTP
Application.
- On April 30, 2020, the Company announced that, in collaboration
with its research partner, North Carolina State University (NCSU),
it had completed research field trials validating new non-GMO
(genetically modified organism) methodologies for reducing nicotine
in tobacco plants. The research was funded by 22nd Century and was
conducted by NCSU’s Department of Crop and Soil Science with
project oversight provided by 22nd Century’s R&D team. During
the quarter, the Company also completed plantings of its non-GMO,
very low nicotine content (VLNC) tobacco plant lines in multi-site,
field trials to optimize the growing practices of its non-GMO, VLNC
plant lines in anticipation of the commercialization of these new
lines in the U.S. and internationally.
- Despite the COVID-19 pandemic, the Company was able to continue
a sizeable part of its research and development program in
hemp/cannabis including the sequencing of more than 250 additional
plant lines. The Company continues to expand its knowledge
foundation and bolster the information in its proprietary
hemp/cannabis bioinformatics platform. The data will help the
Company analyze and advance its understanding of the hemp/cannabis
plant and enable the identification of the genes and biosynthetic
pathways that are responsible for the modulation and production of
various cannabinoids and terpenes in the plant. Through this work,
the Company already has identified several hemp/cannabis lines that
exhibit distinctive levels of key cannabinoids and the associated
genetic markers that will allow the Company to create proprietary
plant lines for commercial use. Additional investigation and
research will be carried out to understand the mechanisms behind
these distinctive traits and to identify the candidates with the
greatest commercial value.
COVID-19 Update
- The Company’s manufacturing facility in North Carolina remains
open and operational. Despite the pandemic, the contract
manufacturing business remains strong and continues to demonstrate
improved gross margins.
- The Company re-opened its corporate office in Williamsville,
New York, in June and its R&D laboratory in Buffalo, New York,
in May. Both are operating under strict safety protocols in
accordance with New York state’s reopening guidelines. These
protocols include physical distancing, mandatory face coverings,
disinfection of surfaces, and other health and safety measures. The
Company continues to encourage remote work arrangements where job
duties permit.
2020 Second Quarter and Year-to-Date Financial
Results
- Net sales revenue for the second quarter of 2020 was $6.4
million, an increase of 10.7% over net sales revenue of $5.8
million during the second quarter of 2019. Net sales revenue for
the first half of 2020 was $13.5 million, an increase of 11.4% from
net sales revenue of $12.1 million for the first half of 2019. The
increase in sales for both periods was primarily driven by higher
volume and pricing in our contract manufacturing business.
- Gross profit improved by $288 thousand in the second quarter of
2020 compared to prior year and improved $677 thousand year-to-date
compared to the first half of 2019. The improved gross margin was
primarily the result of price increases and lower labor and
overhead costs driven by factory efficiencies implemented over the
last six months.
- Operating loss improved by $276 thousand in the second quarter
of 2020 to ($4.8) million, compared to an operating loss of ($5.0)
million in the prior year. The improvement was driven by higher
gross profit which increased by $288 thousand and was partially
offset by higher operating expenses of $11 thousand. Year-to-date,
operating loss improved by $1.5 million to ($8.9) million. This
improvement was driven by the combination of higher gross profit
which increased by $677 thousand and operating expenses which
decreased by $834 thousand. Operating expenses decreased as a
result of lower R&D and MRTP application expenses, partially
offset by an increase in SG&A expense. The majority of the
decrease in R&D and MRTP expenses was driven by lower personnel
and contract costs this year and a reduction in expenses related to
our MRTP application. The increase in SG&A expense was driven
by higher consulting and professional service fees, D&O
insurance premiums, and one-time personnel expense.
- Net loss for the second quarter of 2020 improved by $3.0
million to ($5.1) million, representing a net loss per share of
($0.04) as compared to a net loss of ($8.0) million, or a net loss
per share of ($0.06) for second quarter of 2019. In addition to the
improvements in operating loss of $276 thousand, other income and
expense improved by $2.7 million due to an unrealized gain on
Aurora warrants of $1.7 million this quarter, a legal settlement of
$1.9 million recognized last year and favorable interest income.
The Company recorded an impairment charge of $1.1 million related
to its Panacea stock warrant investment, which was based on an
assessment of macroeconomic indicators including, overall decline
in the cannabidiol (CBD) industry, FDA regulation uncertainty, and
continued disruption of the market from COVID-19. This non-cash
charge partially offset the improvement in other income and expense
in the quarter.
- Net loss for the first half of 2020 improved by $1.0 million to
($9.1) million, representing a net loss per share of ($0.07) as
compared to a net loss of ($10.1) million, or a net loss per share
of ($0.08). An improved operating loss of $1.5 million was
offset by an increase in other income and expense of $443 thousand.
The increase in other income and expense was driven by the non-cash
impairment charge related to the investment in Panacea and was
offset by the interest income from Panacea this year and a legal
settlement expense of $1.9 million recognized in the prior
year.
- Adjusted EBITDA was ($3.2) million for the second quarter of
2020, an improvement of $857 thousand, or 21% compared to Adjusted
EBITDA of ($4.1) million for the second quarter of 2019.
- Adjusted EBITDA was ($6.5) million for the first half of 2020,
an improvement of $2.2 million, or 25% compared to Adjusted EBITDA
of ($8.7) million for the first half of 2019.
Balance Sheet and Liquidity
- For the first half of 2020, net cash used in operating
activities was approximately $11.5 million, compared to
approximately $8.7 million in the first half of 2019. Cash usage
for the first half of the year included additional expenses related
to professional services, executive search fees, and personnel
expense, which were primarily non-recurring expenses and higher
D&O insurance premiums.
- On July 21, 2020, the Company filed a Form S-3 universal shelf
registration statement with the U.S. Securities and Exchange
Commission (“SEC) to raise up to $100 million of capital. While the
Company does not have any immediate plans to raise capital at this
time, the new shelf registration will replace its previously
expired shelf registration and should provide the Company
flexibility and optionality to raise capital in order to make
crucial investments, should compelling opportunities arise in the
future.
- The Company’s liquidity remains strong with cash, cash
equivalents, and short-term investment securities totaling
approximately $28.9 million as of June 30, 2020.
Second Quarter Earnings Conference Call22nd
Century will host an audio-only webcast today at 8:00 a.m. ET to
discuss the Company’s second quarter 2020 financial results.
The live audio webcast will be accessible in the Events section
on the Company's Investor Relations website at
www.xxiicentury.com/investors/events. An archived replay of the
webcast will also be available shortly after the live event has
concluded.
About 22nd Century Group, Inc.22nd Century
Group, Inc. (NYSE American: XXII) is a leading plant biotechnology
company focused on technologies that alter the level of nicotine in
tobacco plants and the level of cannabinoids in hemp/cannabis
plants through genetic engineering, gene-editing and modern plant
breeding. The Company’s primary mission in tobacco is to reduce the
harm caused by smoking by bringing its proprietary reduced nicotine
content tobacco cigarettes – containing 95% less nicotine than
conventional cigarettes – to adult smokers in the U.S. and
international markets. The Company’s primary mission in
hemp/cannabis is to develop proprietary hemp/cannabis plants with
valuable cannabinoid profiles and agronomic traits and to
commercialize those plants through a synergistic portfolio of
strategic partnerships in the hemp/cannabis industry.
Learn more at xxiicentury.com, on
Twitter @_xxiicentury and on LinkedIn.
Cautionary Note Regarding Forward Looking
StatementsThis press release contains forward-looking
statements concerning our business, operations and financial
performance and condition as well as our plans, objectives and
expectations for our business operations and financial performance
and condition that are subject to risks and uncertainties. All
statements other than statements of historical fact included in
this press release are forward-looking statements. You can identify
these statements by words such as “aim,” “anticipate,” “assume,”
“believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,”
“may,” “objective,” “plan,” “potential,” “positioned,” “predict,”
“should,” “target,” “will,” “would” and other similar expressions
that are predictions of or indicate future events and future
trends. These forward-looking statements are based on current
expectations, estimates, forecasts and projections about our
business and the industry in which we operate and our management's
beliefs and assumptions. These statements are not guarantees of
future performance or development and involve known and unknown
risks, uncertainties and other factors that are in some cases
beyond our control. All forward-looking statements are subject to
risks and uncertainties and others that could cause actual results
to differ materially from those contained in our forward-looking
statements. Please refer to the “Risk Factors” in our Annual Report
on Form 10-K filed on March 11, 2020 and in our subsequently filed
Quarterly Report on Form 10-Q. We undertake no obligation to
publicly update or revise any forward-looking statement as a result
of new information, future events or otherwise, except as otherwise
required by law
Adjusted EBITDA, which the Company defines as earnings before
interest, taxes, depreciation and amortization, as adjusted by the
Company for certain non-cash and non-operating expenses, as well as
certain one-time expenses, is a financial measure not prepared in
accordance with generally accepted accounting principles (“GAAP”).
In order to calculate Adjusted EBITDA, the Company adjusts the net
(loss) income for certain non-cash and non-operating income and
expense items listed in the table above in order to measure the
Company’s operating performance. The Company believes that Adjusted
EBITDA is an important measure that supplements discussions and
analysis of its operations and enhances an understanding of its
operating performance. While management considers Adjusted EBITDA
to be important, it should be considered in addition to, but not as
a substitute for or superior to, other measures of financial
performance prepared in accordance with GAAP, such as operating
loss, net (loss) income and cash flows from operations. Adjusted
EBITDA is susceptible to varying calculations and the Company’s
measurement of Adjusted EBITDA may not be comparable to those of
other companies.
Below is a table containing information relating to the
Company’s Adjusted EBTIDA for the three and six months ended June
30, 2020 and 2019, including a reconciliation of net (loss) income
to Adjusted EBTIDA for such periods.
|
Quarter Ended June 30, Dollar Amounts in
Thousands ($000's) |
|
|
2020 |
|
|
|
2019 |
|
|
% Change fav / (unfav)1 |
Net loss |
$ |
(5,057 |
) |
|
$ |
(8,042 |
) |
|
(37%) |
Adjustments: |
|
|
|
|
|
Impairment of intangible assets |
$ |
146 |
|
|
$ |
- |
|
|
- |
Impairment of warrants |
$ |
1,062 |
|
|
$ |
- |
|
|
- |
Amortization and depreciation |
$ |
346 |
|
|
$ |
370 |
|
|
(6%) |
Amortization of license fees |
$ |
62 |
|
|
$ |
60 |
|
|
5% |
Personnel expense |
$ |
306 |
|
|
$ |
- |
|
|
- |
Unrealized loss (gain) on investment |
$ |
(312 |
) |
|
$ |
1,424 |
|
|
(122%) |
Realized (gain) loss on short-term investment securities |
$ |
(3 |
) |
|
$ |
(72 |
) |
|
(96%) |
Litigation settlement |
$ |
- |
|
|
$ |
1,891 |
|
|
(100%) |
Accretion of non cash interest expense |
$ |
19 |
|
|
$ |
13 |
|
|
42% |
Accretion of interest on Panacea investment |
$ |
(272 |
) |
|
$ |
- |
|
|
- |
Equity-based employee compensation expense |
$ |
374 |
|
|
$ |
517 |
|
|
(28%) |
Executive and board search fees |
$ |
289 |
|
|
$ |
- |
|
|
- |
Interest Income |
$ |
(190 |
) |
|
$ |
(243 |
) |
|
(22%) |
Interest Expense |
$ |
19 |
|
|
$ |
13 |
|
|
42% |
Adjusted EBITDA |
$ |
(3,213 |
) |
|
$ |
(4,069 |
) |
|
21% |
|
|
|
|
|
|
1Fav = Favorable
variance, which increases to Adjusted EBITDA; Unfav = unfavorable
variance, which reduces Adjusted EBITDA |
|
YTD Ended June 30, Dollar Amounts in Thousands
($000's) |
|
2020 |
|
2019 |
|
% Change fav / (unfav)1 |
Net loss |
$ |
(9,086 |
) |
|
$ |
(10,115 |
) |
|
(10%) |
Adjustments: |
|
|
|
|
|
Impairment of intangible assets |
$ |
146 |
|
|
$ |
- |
|
|
- |
Impairment of warrants |
$ |
1,062 |
|
|
$ |
- |
|
|
- |
Amortization and depreciation |
$ |
549 |
|
|
$ |
602 |
|
|
(9%) |
Amortization of license fees |
$ |
125 |
|
|
$ |
119 |
|
|
5% |
Personnel expense |
$ |
306 |
|
|
$ |
- |
|
|
- |
Unrealized loss (gain) on investment |
$ |
133 |
|
|
$ |
(1,549 |
) |
|
(109%) |
Realized (gain) loss on short-term investment securities |
$ |
- |
|
|
$ |
(56 |
) |
|
(100%) |
Litigation settlement |
$ |
- |
|
|
$ |
1,891 |
|
|
(100%) |
Gain on the sale of machinery and equipment |
$ |
- |
|
|
$ |
(87 |
) |
|
(100%) |
Accretion of non cash interest expense |
$ |
13 |
|
|
$ |
21 |
|
|
(38%) |
Accretion of interest on Panacea investment |
$ |
(306 |
) |
|
$ |
- |
|
|
- |
Equity-based employee compensation expense |
$ |
856 |
|
|
$ |
966 |
|
|
(11%) |
Executive and board search fees |
$ |
430 |
|
|
$ |
- |
|
|
- |
Interest Income |
$ |
(768 |
) |
|
$ |
(515 |
) |
|
49% |
Interest Expense |
$ |
31 |
|
|
$ |
24 |
|
|
31% |
Adjusted EBITDA |
$ |
(6,510 |
) |
|
$ |
(8,702 |
) |
|
25% |
|
|
|
|
|
|
1Fav = Favorable
variance, which increases to Adjusted EBITDA; Unfav = unfavorable
variance, which reduces Adjusted EBITDA |
Contacts:Mei Kuo22nd Century Group(716)
300-1221mkuo@xxiicentury.com
John MillsICR(646) 277-1254john.mills@icrinc.com
Deirdre ThomsonICR(646) 277-1283deirdre.thomson@icrinc.com
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