22nd Century Group, Inc. (NASDAQ:XXII) Analysis

Published on September 24, 2024 | Ticker: XXII

22nd Century Group, Inc. (NASDAQ:XXII) is an agricultural biotechnology company focused on tobacco harm reduction, reduced nicotine tobacco, and improving health and wellness through plant science. The company has developed proprietary reduced nicotine content (RNC) tobacco plants and cigarettes, which have become the cornerstone of the FDA's Comprehensive Plan to address the widespread death and disease caused by smoking.

Business Overview

22nd Century Group utilizes modern plant breeding technologies, including genetic engineering, gene-editing, and molecular breeding to deliver solutions for the life science and consumer products industries. The company has developed new, proprietary plants with optimized alkaloid and flavonoid profiles as well as improved yields and valuable agronomic traits.

To support the launch and expansion of its VLN® brand, the company is vertically integrated and utilizes its tobacco assets for contract manufacturing operations (CMO) that consist primarily of branded filtered cigars and conventional cigarettes. With high-speed manufacturing capabilities, 22nd Century continues to attract additional CMO business to absorb its manufacturing overhead and keep its unit cost profile low.

The company is a subsequent participating manufacturer under the Master Settlement Agreement (MSA), with all cigarette products being compliant.

Financials

For the full year 2023, 22nd Century Group reported annual net income of -$140,775,000, annual revenue of $32,204,000, annual operating cash flow of -$54,987,000, and annual free cash flow of -$60,604,000.

In the first quarter of 2024, the company reported net revenues of $6,469,000, a decrease of 27.5% from $8,926,000 in the prior year period. This decrease was primarily driven by a decline in volume, as the company intentionally shifted its product mix away from lower-margin filtered cigars towards higher-margin VLN® and conventional cigarette products.

Gross profit for the first quarter of 2024 was a loss of $1,129,000 compared to a profit of $17,000 in the prior year period. This decrease was primarily due to the lower volume, as well as one-time charges related to inventory write-offs and an excise tax assessment.

Total operating expenses for the first quarter of 2024 decreased significantly to $3,305,000 compared to $10,421,000 in the prior year quarter. This was driven by lower headcount, reduced strategic consulting, sales and marketing, and other cost-saving initiatives implemented by the company.

The operating loss from continuing operations for the first quarter of 2024 was $4,434,000, compared to a loss of $10,404,000 in the prior year period. Net loss from continuing operations in the first quarter of 2024 was $5,450,000, and basic and diluted loss from continuing operations per common share was $1.72 compared to a net loss from continuing operations of $10,830,000 and basic and diluted net loss from continuing operations per common share of $12.80 in the prior year period.

Liquidity

As of March 31, 2024, the company had $1,517,000 in cash and cash equivalents. Cash used in operations during the first quarter of 2024 declined significantly to $2,255,000 compared to $17,500,000 in the prior year period.

Subsequent to the first quarter, the company has taken several actions to strengthen its balance sheet, including:

1. Completing a registered direct offering in April 2024 that provided $4,237,000 in gross cash proceeds. 2. Executing multiple debt-for-equity exchanges that resulted in a total decrease of liabilities and increase in shareholders' equity of approximately $8,000,000. 3. Reducing the outstanding principal of its Senior Secured Credit Facility by $428,000 through the conversion of 200,000 shares of common stock. 4. Eliminating $5,228,000 of indebtedness related to the Subordinated Note in a primarily equity transaction. 5. Settling an aggregate of $1,500,000 of outstanding indebtedness under various commercial agreements through equity issuances.

These balance sheet improvements, combined with the company's cost-cutting initiatives, have positioned 22nd Century Group to continue its transformation towards profitability.

Outlook

22nd Century Group is focused on becoming a self-sustaining and cash-flowing business. The company has implemented significant cost-cutting measures, including reducing headcount, strategic consulting, sales and marketing, and other expenses. These initiatives have already resulted in a substantial decrease in the company's cash burn rate, from approximately $15,000,000 per quarter in the prior year to just $2,255,000 in the first quarter of 2024.

The company expects to continue to consume cash over the balance of 2024, but management is committed to further reducing expenses and increasing revenues to achieve breakeven and then cash-positive results in 2025. Key initiatives to drive this transformation include:

1. Increasing prices and discontinuing unprofitable product lines. 2. Expanding its CMO business with new profitable contracts. 3. Rebranding and growing distribution for its VLN® brand of reduced nicotine content cigarettes. 4. Continuing to pursue debt reduction and balance sheet strengthening through equity transactions.

Risks and Challenges

While 22nd Century Group is making significant progress in its turnaround efforts, the company still faces several risks and challenges, including:

1. Ability to continue as a going concern: The company's substantial accumulated deficit and negative cash flows from operations raise substantial doubt about its ability to continue as a going concern. 2. Regulatory environment: The company's business is subject to extensive government regulation, including by the FDA, which could impact the company's ability to commercialize its products. 3. Competition: The company faces competition from larger, more established tobacco companies, as well as potential new entrants in the reduced nicotine content cigarette market. 4. Intellectual property: The company's success depends in part on its ability to protect its intellectual property, including its proprietary reduced nicotine content tobacco plants. 5. Financing and capital requirements: The company may need to raise additional capital to fund its operations and growth initiatives, which may be difficult in the current market environment.

Conclusion

22nd Century Group is in the midst of a significant transformation, focused on becoming a self-sustaining and cash-flowing business. The company has made substantial progress in reducing costs, strengthening its balance sheet, and positioning itself for future growth. While challenges remain, the company's focus on profitability, its proprietary reduced nicotine content technology, and its vertically integrated business model provide a solid foundation for long-term success. Investors should closely monitor the company's continued execution of its turnaround plan in the coming quarters.

You may be interested in...

Vaxart (VXRT): A Trailblazer in Oral Vaccine Innovation

Vaxart, Inc. (VXRT) is a clinical-stage biotechnology company leading the charge in developing a transformative oral vaccine platform. With a diverse pipeline targeting major infectious diseases and a steadfast commitment to improving global public health, Vaxart has emerged as a pioneering force in the pharmaceutical industry.

Generation Bio Co. (GBIO): Innovating Non-Viral Genetic Medicines for Rare and Prevalent Diseases

Generation Bio Co. is a biotechnology company at the forefront of developing innovative non-viral genetic medicines to provide durable and redosable treatments for hundreds of millions of patients living with rare and prevalent diseases. The company's journey began in 2016 when it was founded as Torus Therapeutics, Inc. and later changed its name to Generation Bio Co. in 2017. Over the years, Generation Bio has steadfastly focused on building two distinct and complementary platforms that are poised to revolutionize the field of genetic medicine.

22nd Century Group (XXII): Revolutionizing the Tobacco Industry

22nd Century Group, Inc. (XXII) is a pioneering tobacco products company that has been at the forefront of the fight against nicotine dependence. The company's mission is to provide smokers with a choice about their nicotine consumption, offering innovative reduced-nicotine content cigarettes that empower individuals to take control of their smoking habits.

Cibus Inc (NASDAQ:CBUS): A Pioneer in Gene-Edited Agricultural Traits

Cibus Inc (NASDAQ:CBUS) is a leading agricultural technology company that develops and licenses plant traits to seed companies for royalties. The company's proprietary gene editing platform, the Rapid Trait Development System (RTDS), has enabled it to revolutionize the speed and precision of trait development, positioning Cibus as a pioneer in the gene-edited agriculture industry.

Ispire Technology Inc. (ISPR): Defining the Future of Vaping Through Innovation and Global Expansion

Ispire Technology Inc. (ISPR) is at the forefront of the evolving vaping industry, redefining the landscape through its commitment to technological innovation and strategic global expansion. With a relentless focus on providing adult consumers with cutting-edge vaping solutions, Ispire has established itself as a leader in the research, development, and commercialization of advanced vaping hardware and precision dosing systems.