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2C

22nd Century Group, Inc. (XXII)·Q3 2015 Earnings Summary

Executive Summary

  • Q3 2015 net revenues rose to $2.668M, up 15.6% sequentially vs Q2 ($2.307M) and dramatically above Q3 2014 ($0.064M); net loss was $2.762M and Adjusted EBITDA was -$2.137M, reflecting underutilized factory capacity and higher cash operating expenses .
  • Management raised full-year 2015 revenue guidance to “more than $8M,” up from prior “more than $5M,” citing stronger-than-expected sales across RED SUN, contract manufacturing, filtered cigars, and MAGIC in Europe; this is a significant positive surprise vs earlier expectations .
  • Liquidity: cash on hand was $6.7M at Sep 30 (down from $8.2M at Jun 30); management stated cash plus ongoing revenues is adequate through June 2016, excluding potential up to $7M BAT milestones or partnership deposits .
  • Strategic catalysts: MRTP application for “BRAND A” targeted for submission before year-end 2015; settlement with former CEO resolved litigation and instituted a lock-up through end-2016, reducing governance overhang .

What Went Well and What Went Wrong

  • What Went Well

    • Revenue momentum: Q3 net revenues increased to $2.668M (+15.6% q/q), with nine-month revenues at $5.591M vs $0.528M in 9M14, driven by RED SUN, MSA contract cigarette, filtered cigars, and MAGIC EU sales .
    • Guidance raised: FY2015 revenue outlook increased to >$8M from >$5M previously; CFO noted Q3 revenue trajectory exceeded earlier projections .
    • Strategic progress: MRTP application bulk prepared; management expects submission before year-end and believes 22nd Century can be first to market a reduced-exposure combustible cigarette; “we believe 22nd Century will be the first company approved by the FDA to label and market a brand of cigarettes as a reduced exposure tobacco product” .

  • What Went Wrong

    • Gross loss persists: Company reported gross loss on product sales, attributing it to excess manufacturing capacity; negative Adjusted EBITDA widened to -$2.137M in Q3 vs -$1.923M in Q3 2014 .
    • Cash burn: cash declined from $8.2M (Jun 30) to $6.7M (Sep 30), reflecting ~$2.1M cash loss for the quarter plus patent-related capex; investors raised concerns about dilution and runway .
    • MAGIC EU rollout pause and fine-tuning: rollout paused to adjust taste characteristics for Europe; UK/Holland/France/Italy timing pushed to Q4’15/2016, creating near-term commercialization timing uncertainty .

Financial Results

MetricQ3 2014Q1 2015Q2 2015Q3 2015
Revenue ($USD Millions)$0.064 $0.616 $2.307 $2.668
Net Loss ($USD Millions)$2.724 $4.117 $1.289 $2.762
EPS (Net Loss per Share, $USD)($0.05) ($0.06) ($0.02) ($0.04)
Operating Loss ($USD Millions)$2.82 $4.10 $2.35 $2.75
Adjusted EBITDA ($USD Millions)($1.923) ($1.517) ($1.801) ($2.137)

Notes:

  • Sequential revenue growth Q3 vs Q2: +$0.361M or +15.6% (as stated by CFO) .
  • Nine-month revenues: $5.591M (2015) vs $0.528M (2014), underscoring scale-up .

KPIs and Liquidity

KPIQ2 2015Q3 2015
Cash on Hand ($USD Millions)$8.2 (Jun 30) $6.7 (Sep 30)
RED SUN Retail Locations (#)n/a>600
MAGIC EU Retail Presence (# shops)UK launch postponed; intent to launch in fall Spain active; paused broader EU rollout to fine-tune taste; >900 shops in Spain earlier (press context)

Adjusted EBITDA Reconciliation (Q3 2015 vs Q3 2014)

  • Q3 2015 net loss: ($2.762M); adjustments include amortization and depreciation $0.197M, equity-based comp (officers/directors/employees) $0.315M, third-party $0.098M, interest $0.009M; Adjusted EBITDA: ($2.137M) .
  • Q3 2014 net loss: ($2.724M); Adjusted EBITDA: ($1.923M) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2015“More than $5M” (Aug 4, 2015) “More than $8M” (Nov 9, 2015) Raised
Liquidity runwayThroughNot previously specifiedAdequate through June 2016 (excl. BAT milestones/partner deposits) New disclosure
MRTP submission timing (BRAND A)2015Submit in fall 2015 Submit before end of 2015 Reaffirmed timing (calendar shift)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q3 2015)Trend
MRTP (BRAND A)Q1: submit “this summer” ; Q2: submit in fall 2015 Bulk prepared; intend to submit before year-end 2015; seeking reduced exposure claims Advancing toward submission
MAGIC Europe rolloutQ2: UK intended fall; expanded EU plans Paused to fine-tune taste; resume in Q4’15 and into 2016 Delayed/optimized
RED SUN U.S. expansionQ2: 50-state approvals; consumer marketing and Brand Ambassador program >600 stores; focus on Pacific NW, CA, CO, select East markets Growing distribution
Cannabis R&D (Anandia)Q2: cannabis IP portfolio and exploration Commenced new research with Anandia (Canada); targeting hemp (low/no THC) and high CBD strains Initiated projects
Cash runway and dilutionn/aCash adequate through June 2016 excluding milestones; no current capital raise plans; pursuing BAT milestones and partnerships Stable but monitored
BAT milestonesn/aUp to $7M across four milestones; ongoing BAT scientific work Potential upside

Management Commentary

  • “We believe 22nd Century will be the first company approved by the FDA to label and market a brand of cigarettes as a reduced exposure tobacco product.” — Henry Sicignano (CEO) .
  • “Adjusted EBITDA was a negative $2.1 million… Both the three and nine-month increases in negative EBITDA are primarily attributable to an increase in the gross loss on product sales… and cash related operating expenses.” — John Brodfuehrer (CFO) .
  • “Not including the potential milestone payments of up to $7 million from BAT… we believe that the cash on hand at September 30, 2015… will be adequate to sustain operations… through June of 2016.” — John Brodfuehrer (CFO) .
  • “We are building a multi-billion dollar company… eventually I am quite confident that The Street will realize the value of our technology.” — Henry Sicignano (CEO) .
  • “We intend to submit the final [MRTP] application to the FDA before the end of 2015.” — Henry Sicignano (CEO) .

Q&A Highlights

  • RED SUN distribution: >600 known stores; targeted coastal and college-educated demographics to drive adoption .
  • Cannabis strategy with Anandia: prioritizing Canadian projects; earliest product likely hemp; budgets and priorities mapped with Anandia leadership .
  • Liquidity/dilution: cash runway to early summer 2016; no current plans to raise capital; seeking non-dilutive cash via BAT milestones and strategic deposits .
  • BAT milestones: four milestones ($1.5–$2.5M each) across very-low and high-nicotine programs; BAT working diligently on science; 22nd Century to assist .
  • MRTP “Plan B”: management is not pursuing alternative claims; confident reduced exposure claims are irrefutable given 95% lower nicotine content .

Estimates Context

  • Wall Street consensus estimates via S&P Global for Q3 2015 were unavailable at the time of this analysis due to data access limits; as a result, comparisons to consensus EPS and revenue could not be provided [GetEstimates error].
  • Given raised FY revenue guidance (> $8M), sell-side models may need to adjust revenue trajectories and cash runway assumptions accordingly .

Key Takeaways for Investors

  • Sequential revenue growth and raised FY guidance (> $8M) signal commercialization traction across RED SUN, contract manufacturing, filtered cigars, and MAGIC EU; this is a positive inflection vs prior $5M outlook .
  • Profitability remains constrained by excess factory capacity causing gross losses; watch for new contract manufacturing wins to absorb capacity and narrow Adjusted EBITDA losses .
  • Liquidity appears adequate through June 2016 without dilution, with potential non-dilutive catalysts (up to $7M BAT milestones, partnerships) offering downside protection .
  • MRTP application could be a major re-rating catalyst; authorization to market reduced-exposure cigarettes would materially expand addressable market and strengthen pricing/claims .
  • MAGIC EU rollout requires taste-profile optimization; resumption in Q4’15/2016 is key to sustaining international revenue momentum .
  • Monitor regulatory and IP developments (200+ issued patents; >50 pending) as strategic assets underpin negotiation leverage with Big Tobacco and pharma partners .
  • Near-term trading: stock likely reacts to MRTP submission progress, contract manufacturing additions, and any BAT milestone triggers; medium-term thesis hinges on MRTP approval and X-22 partnership execution .