Executive Summary

Q2 2015 showed a sharp revenue ramp as XXII scaled manufacturing and recorded initial MAGIC sales in Europe: revenue $2.307M vs $0.016M in Q2 2014 and $0.616M in Q1 2015; net loss improved to $(1.29)M (or $(0.02) per share) helped by a $1.0M litigation settlement, offset by gross loss from underutilized factory capacity .
Revenues exceeded management’s prior Q2 expectation of “in excess of $1.5M” and the company maintained FY2015 revenue guidance of “more than $5 million” (Q1 phrasing: “substantially more than $5 million”), a key potential stock catalyst for micro-cap coverage expansion and execution narrative .
Gross margin was negative (COGS 112.7% of sales) due to fixed-cost absorption from underutilized capacity; operating loss was $(2.35)M, while Adjusted EBITDA was $(1.80)M vs $(0.85)M YoY, reflecting higher sales and marketing and scale-up costs .
Strategic progress: RED SUN achieved approvals in all 50 states; MAGIC launched in Spain with initial UK rollout delayed to fall due to required label changes; the company advanced MRTP plans for very low nicotine cigarettes with a targeted submission in fall 2015 .

What Went Well and What Went Wrong

What Went Well

Revenue execution beat internal expectations: Q2 revenue $2.307M exceeded the company’s prior guide of >$1.5M, with contributions from RED SUN, third‑party MSA brand manufacturing, filtered cigars, and initial MAGIC sales in Europe .
Commercial milestones: “We successfully obtained approval from all 50 states to sell our RED SUN super-premium cigarette brand across the country,” supporting broader U.S. distribution and consumer marketing programs .
Pipeline and IP: The company “dramatically increased [its] intellectual property portfolio,” now “more than 185 issued patents and more than an additional 54 pending,” and prepared to submit MRTP for very low nicotine BRAND A in fall 2015, positioning regulatory differentiation .

What Went Wrong

Margin pressure from underutilization: COGS were 112.7% of sales (gross margin approximately −12.7%) as fixed factory costs outweighed volumes; operating loss was $(2.35)M despite revenue growth .
MAGIC UK timing slippage: UK introduction, initially intended for June, was postponed to fall due to required changes in consumer warning labels, modestly delaying European expansion .
Higher operating spend: Sales and marketing rose to $0.291M in Q2 (vs $0.034M YoY) to support RED SUN and MAGIC launches; general and administrative costs remained elevated with factory-related expense, contributing to negative Adjusted EBITDA $(1.80)M vs $(0.85)M YoY .

Financial Results

P&L summary (oldest → newest):

Metric	Q2 2014	Q1 2015	Q2 2015
Revenue ($)	$16,114	$616,000	$2,306,953
Gross Profit (Loss) ($)	$2,938	N/A	$(293,493)
COGS as % of Revenue	81.8%	N/A	112.7%
Operating Loss ($)	$(2,038,163)	$(4,100,000) (reported)	$(2,346,736)
Net Loss ($)	$(1,965,815)	$(4,116,739)	$(1,288,703)
Diluted EPS ($)	$(0.03)	$(0.06)	$(0.02)
Adjusted EBITDA ($)	$(845,073)	$(1,517,367)	$(1,800,746)
Other Income (Litigation) ($)	$0	$0	$1,000,000

Estimates vs Actuals (Q2 2015):

Metric	Consensus	Actual	Surprise
Revenue ($)	N/A (SPGI consensus unavailable)	$2,306,953	N/A
EPS ($)	N/A (SPGI consensus unavailable)	$(0.02)	N/A

KPIs and Balance Sheet (as of/for Q2 2015):

KPI	Value	Context
MAGIC retail locations (Spain)	~1,137 stores (as of early May)	European launch underway
RED SUN state approvals	50 states	U.S. distribution enabled
Cash and Cash Equivalents	$8,196,739	Cash at 6/30/2015
Working Capital	~$9.2M	Positive working capital
Net Cash Used in Operations (YTD)	$(3,604,029)	1H15 operating cash use
Shares Outstanding (as of 8/4/2015)	70,873,164	Post Q2 issuance

Segment/driver commentary:

Revenue drivers: third‑party MSA cigarette brand manufacturing, filtered cigars, RED SUN proprietary brand, initial MAGIC sales in Europe .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue	Q2 2015	“In excess of $1.5M” (Q1 guidance)	Actual $2.307M	Beat prior expectation
Revenue	FY 2015	“Substantially more than $5 million” (Q1)	“More than $5 million” (Q2)	Maintained (language slightly nuanced)

No other formal guidance (margins, OpEx, tax, etc.) was provided in the Q2 press release or 10‑Q .

Earnings Call Themes & Trends

Note: A Q2 2015 call was held Aug 5, 2015, but a transcript was not available via our sources; themes below reflect Q1 and Q2 disclosures .

Topic	Q-2 (Q4 2014)	Q-1 (Q1 2015)	Current (Q2 2015)	Trend
Regulatory/MRTP	N/A	“On schedule” to submit very low nicotine modified risk application in summer 2015	Targeting BRAND A MRTP submission in fall 2015; BRAND B in 2016 subject to funding	Continued progress, timeline shifted to fall
Product launches (MAGIC)	N/A	Spain launch live; ~1,137 stores; plan to expand to UK/France/Italy/Belgium in coming months	Spain ongoing; UK/NL/Italy/France launch postponed to fall due to label changes	Execution with UK timing delay
U.S. brand (RED SUN)	N/A	Approved in 49 states; consumer marketing planned	Approved in all 50 states; ambassador program and consumer promotions underway	Broader footprint and marketing
Manufacturing utilization	N/A	Factory producing third‑party MSA brand, filtered cigars, RED SUN	Underutilization causing gross loss; scaling contract manufacturing base	Utilization improving but still below breakeven
Partnerships/Asia	N/A	Pursuing JV for X‑22; exploring opportunities in China/Korea/Japan	Continuing JV efforts incl. Asia; optimistic on 2015 contracts	Ongoing dialogue

Management Commentary

“Revenues during the second quarter of 2015, in the amount of $2,307,000, exceeded previously announced revenue expectations of $1,500,000…” .
“We successfully obtained approval from all 50 states to sell our RED SUN super-premium cigarette brand across the country.” .
“We now intend to submit to the FDA in the fall of 2015 a completed application for our proprietary BRAND A very low nicotine tobacco cigarettes.” .
“We successfully launched MAGIC, the world’s only ‘0.0mg nicotine’ tobacco cigarette brand, in more than 900 state-licensed retail shops in Spain in April 2015.” ; “As of late last week, MAGIC cigarettes are available… at approximately 1,137 retail shops across Spain.” .

Q&A Highlights

A conference call was held on August 5, 2015; however, no public transcript was available through our sources. As a result, we cannot provide Q&A highlights or any guidance clarifications beyond the press release and 10‑Q disclosures .

Estimates Context

Wall Street consensus estimates from S&P Global (EPS and revenue) for Q2 2015 were not retrievable due to access limits; given the company’s size, coverage may be limited. Therefore, comparisons to consensus could not be provided. We benchmarked actuals against management’s disclosed expectations instead (Q2 revenue guide >$1.5M, actual $2.307M) .

Key Takeaways for Investors

Execution improving: Material revenue inflection ($2.31M) with diversified drivers (own brands + contract manufacturing) and a clear beat vs internal expectations; watch for sustained sequential growth in H2 2015 as utilization increases .
Margins remain the swing factor: Gross losses stem from fixed-cost absorption at the factory; incremental volumes (new contracts/brand growth) are key to moving COGS below revenue and driving operating leverage .
Near-term catalysts: Fall 2015 MRTP submission for very low nicotine cigarettes (BRAND A) and resumed UK/EU MAGIC rollout after label revisions; any Asia JV announcements would further validate strategy .
Marketing scale-up: RED SUN now 50‑state approved with consumer-facing campaigns; spending is rising, but could accelerate brand trials and distribution—monitor sales and marketing ROI .
Liquidity adequate for 12 months: $8.2M cash and ~$9.2M working capital at quarter end, plus $0.6M settlement receivable expected in August; shelf capacity remains available if needed .
Non-recurring tailwind: $1.0M litigation proceeds aided Q2 net loss; exclude this when modeling run-rate loss/EBITDA trajectory .
Risk/Reward: Regulatory and commercialization milestones could re-rate the story, but execution risk on utilization, EU expansion timing, and MRTP outcomes remains significant .

Citations:

Q2 2015 8‑K and Exhibit 99.1 press release:
Q2 2015 10‑Q (financials, MD&A, cash flow, balance sheet):
Q1 2015 8‑K press release:
MAGIC EU launch background (additional context):

22nd Century Group, Inc. (XXII)·Q2 2015 Earnings Summary