Company Overview and History

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.

22nd Century Group's origins can be traced back to 1998, when the company was founded with the goal of developing biotechnology solutions to address the global health crisis caused by tobacco use. In its early years, the company focused on developing innovative tobacco plant biotechnology, working on genetically modifying tobacco plants to produce less nicotine. This pioneering effort in the development of reduced nicotine content tobacco plants marked a significant milestone in the company's history.

Challenges and Milestones

Over the past two decades, the company has faced numerous challenges and achieved important milestones. Despite having developed groundbreaking technology, 22nd Century Group initially struggled to commercialize its reduced nicotine content products, facing financial difficulties and undergoing restructuring efforts to turn the business around. In 2019, the company made a strategic move by acquiring GVB Biopharma, which expanded its capabilities into the hemp and cannabis space. However, this diversification also brought new operational and regulatory challenges.

The company continued to face headwinds, including liabilities from the GVB acquisition, difficulties in the hemp/cannabis business, and ongoing losses in their core tobacco operations. This led to a comprehensive strategic review and restructuring effort starting in 2023. Under new leadership, 22nd Century Group has worked to refocus the business on its core tobacco operations, shedding the hemp/cannabis assets and aggressively cutting costs. They have renegotiated debt, settled outstanding liabilities, and raised additional capital through equity offerings, which have helped stabilize the company's balance sheet and financial position.

In 2021, 22nd Century Group achieved a major milestone when it received the first and only FDA authorization for a combustible cigarette as a Modified Risk Tobacco Product (MRTP). This authorization recognized the company's reduced-nicotine content cigarette as a product that can significantly reduce the exposure to and consumption of nicotine, a key driver of tobacco addiction.

Business Segments

Today, 22nd Century Group operates two distinct business segments: its branded products business, which focuses on the development and commercialization of its proprietary reduced-nicotine content cigarettes, and its contract manufacturing operations (CMO) business, which provides manufacturing services for other tobacco brands.

The company's flagship product, VLN, is a 95% reduced-nicotine content cigarette that has been clinically proven to reduce smoking behavior and nicotine exposure. By offering smokers a non-addictive alternative that respects the smoking ritual, 22nd Century Group aims to disrupt the traditional tobacco industry and contribute to a significant reduction in the devastating health consequences of smoking.

The Contract Manufacturing segment is currently 22nd Century Group's primary revenue driver. This business consists of manufacturing branded filtered cigars and cigarettes for third-party customers. In the third quarter of 2024, contract manufacturing revenues were $5.95 million, down 21.1% year-over-year, primarily due to lower volumes for cigarette and filtered cigar products. For the first nine months of 2024, contract manufacturing revenues were $20.29 million, down 15.9% compared to the prior year period. The decrease was attributed to lower volumes for Pinnacle cigarette products launched in the prior year as well as a large one-time export order. However, the company saw an increase in cigarillo revenues in 2024 from the expanded Pinnacle branded product offerings.

The VLN Reduced Nicotine Cigarettes segment represents the company's proprietary product line. VLN revenues were negligible in Q3 2024 and $70,000 for the first nine months of 2024, down significantly from $699,000 in the prior year period. The company cited lower volumes as VLN products have not yet achieved the desired sell-through at retail despite securing broad distribution. The company is planning to rebrand and relaunch its VLN product line to better align with consumer preferences and drive increased sales and brand loyalty.

Financials

In the most recent fiscal year, 22nd Century Group reported revenue of $32.20 million. However, the company faced significant losses, with a net income of -$54.69 million. The company's operating cash flow (OCF) was -$54.99 million, and free cash flow (FCF) was -$60.60 million, indicating substantial cash burn.

In the most recent quarter, the company reported revenue of $5.95 million, a 24.50% decrease year-over-year. This decrease was primarily driven by lower carton volume for both cigarettes and filtered cigars, partially offset by a significant one-time order of the company's Spectrum low-nicotine research cigarettes. The net income for the quarter was -$3.76 million, with an operating cash flow of -$2.98 million and free cash flow of -$2.91 million.

Despite these challenges, 22nd Century Group has made significant progress in improving its financial position. In the second quarter of 2024, the company reported net revenues of $7.9 million, a slight decrease from the previous quarter but a significant improvement compared to the same period in the prior year. The company's gross profit margin, while still negative, narrowed to -9.9% from -88.2% in the second quarter of 2023, indicating progress in its cost-cutting and efficiency initiatives.

The company's operating expenses have also been significantly reduced, with sales, general, and administrative (SG&A) expenses decreasing by 63.3% year-over-year, and research and development (R&D) expenses declining by 61.5% during the same period. These cost-saving measures have been crucial in 22nd Century Group's efforts to reach its goal of achieving cash-positive operations by the first quarter of 2025.

22nd Century Group's CMO business has been a key driver of its recent financial improvements, with the company securing new customer contracts and expanding its production volumes. The company has also made progress in its branded products segment, launching a rebranding and relaunch of its VLN product to better align with consumer preferences and drive increased sales and brand loyalty.

Liquidity

As of September 30, 2024, 22nd Century Group had $5.34 million in cash and cash equivalents, a significant improvement from the $2.1 million reported at the beginning of the year. The company has also been actively managing its debt, reducing its net debt position from $13.3 million at the start of 2024 to just $3 million by the end of the third quarter.

The company's debt-to-equity ratio stands at -0.43, indicating a negative equity position. 22nd Century Group has a senior secured credit facility with an outstanding principal balance of $8.32 million. The facility allows the lenders to require the company to redeem up to $210,000 per month of the outstanding principal.

The current ratio of 1.09 and quick ratio of 0.93 suggest that the company may face challenges in meeting its short-term obligations. Management is evaluating various strategies to reduce expenses and pursue financing to improve liquidity and achieve profitability. However, the company continues to face substantial doubt about its ability to continue as a going concern.

Challenges and Future Outlook

Despite the progress made, 22nd Century Group continues to face several challenges, including the highly regulated nature of the tobacco industry, intense competition from larger tobacco companies, and the ongoing COVID-19 pandemic's impact on consumer behavior and supply chains. The company has also been the target of short reports, which have added to the volatility and uncertainty surrounding its stock.

In July 2024, the company received a deficiency letter from Nasdaq indicating that its stock did not maintain the minimum closing bid price required for continued listing. The company has until January 2025 to regain compliance. Additionally, 22nd Century Group has been involved in various legal proceedings, including a shareholder derivative lawsuit that was settled in 2023 for $768,000, which was covered by the company's insurance. In April 2024, the company received a request for arbitration from KeyGene N.V. related to the termination of collaborative research agreements. The matter is currently in arbitration.

Nevertheless, 22nd Century Group remains committed to its mission of providing smokers with a choice and reducing the harm caused by tobacco use. The company's innovative reduced-nicotine content products, coupled with its focus on operational efficiency and financial discipline, position it well to navigate the challenges ahead and potentially emerge as a disruptive force in the tobacco industry.

Looking forward, 22nd Century Group is aiming to achieve net income in Q1 2025. The company is shifting from a defensive, damage control and cost containment mindset to an offensive, growth-oriented approach. The CMO business is viewed as the most immediate and direct path to the breakeven goal, while the branded products business provides the growth opportunity.

For the VLN products, 22nd Century Group plans to rebrand and relaunch the product with a new blend and taste to make it more aligned with what smokers in the US want. This will be supported by new branding, point-of-sale materials, and expanded distribution. The company has begun breaking out VLN carton shipment numbers for investors to track progress, though these are still only a fraction of the factory capacity currently.

As 22nd Century Group continues to execute its strategic plan, investors and analysts will closely monitor the company's ability to drive increased sales of its VLN brand, expand its CMO operations, and maintain its progress towards achieving cash-positive operations. With a strong focus on innovation, regulatory compliance, and financial prudence, 22nd Century Group is well-positioned to play a significant role in the ongoing transformation of the tobacco landscape. However, the company cautions that the road to success with VLN will not be instant, and they will have to do "the hard work every day" to achieve their goals.