Another surge in operational expenses — particularly in expansion markets and its recent cannabis industry purchase — led to a 38.8% increase in the third-quarter loss for 22nd Century Group Inc. to $13.1 million.
The tobacco and cannabis manufacturer reported Tuesday an earnings loss of 6 cents, unchanged from a year ago.
The third-quarter loss also was up 13.9% from a second-quarter loss of $11.5 million.
The average earnings forecast was a loss of 5 cents by three analysts surveyed by Zacks Investment Research. Analysts typically do not include one-time gains and charges in their forecasts.
22nd Century, based in Buffalo, has its cigarette-manufacturing operations in a 62,000-square-foot plant in Mocksville where it has at least 49 of its 65 employees.
22nd Century chief executive James Mish said Tuesday the Mocksville plant has added both a production line and a second shift that has resulted in a 25% capacity increase.
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The company derives most of its revenue from producing traditional cigarettes for third-party customers.
The manufacturer’s VLN King and VLN Menthol King brands contain up to 95% less nicotine than conventional traditional cigarettes. It has been selling those cigarettes in test markets in Chicago and Colorado and is preparing for distribution in Arizona, New Mexico and Utah.
Revenue jumped from $19.38 million, compared with $14.48 million in the second quarter and $7.81 million a year ago.
The primary difference in the year-over-year revenue and expenses comparison is 22nd Century’s $55 million purchase in May of privately held GVB Biopharma.
GVB, founded in 2016 and based in Las Vegas, is one of the largest providers of hemp-derived active ingredients involving CBD products for the pharmaceutical and consumer goods industries worldwide, based on total tonnage.
It was the first full revenue quarter featuring GVB since the purchase.
‘We are now the largest merchant market supplier of CBD in North America and positioned to grow that stake even further,” James Mish, 22nd Century’s chief executive, said in a statement.
Meanwhile, the company’s cost of goods sold was at $18.76 million, up from $13.58 million in the second quarter and $7.52 million a year ago.
“We are moving quickly to complete the startup of our new Prineville crude extraction plant and secure additional certifications for our facilities that will further differentiate our products and make us the premier supplier of hemp-derived extracts and ingredients to consumer and wellness products,” Mish said.
Sales, general and administrative expenses were at $14.57 million, compared with $11.37 million in the second quarter and $6.83 million a year ago.
22nd Century said those expenses increased “primarily by the acquisition of GVB and higher strategic consulting and marketing, legal and personnel costs as we continue to expand the launch of VLN and build our executive management team.”
Big-picture focus
Mish said that the “past few months have demonstrated tremendous commercial progress in 22nd Century’s reduced nicotine tobacco and hemp/cannabis businesses.”
Mish cited as an example that 22nd Century is negotiating with the Circle K national convenience store chain to ramp up its distribution of VLN cigarettes to as many as 18 states by fall 2023.
22nd Century could not be immediately reached for comment on whether North Carolina would be included in those 18 states.
“Doing so would give us access to more than half the $80 billion U.S. tobacco market and position us in most, if not all, of the states that have enacted modified-risk tobacco product excise tax provisions favorable to our unique product authorization,” Mish said.
In 2018, the N.C. General Assembly passed a law addressing a modified-risk tobacco product that allows for a tax reduction of either 50% or 25%, based on whether the FDA issued either a “risk modification order” or an “exposure modification order.”
More than 40 anti-tobacco and public-health advocacy groups have filed a joint submission to the Food and Drug Administration urging it to reduce the nicotine levels to as low as legally possible to zero in hopes of curtailing demand.
Meanwhile, pro-tobacco and anti-smoking advocates expressed concern that smokers would opt to smoke more cigarettes to get the same levels of nicotine, which could make consuming cigarettes even riskier given the burning of tobacco leaves is the main carcinogen involved with traditional cigarettes.
They also expressed concerns about very-low-nicotine requirements being the catalyst for a thriving black market of foreign-made traditional cigarettes.
The FDA formally rolled out in June its proposal to reduce nicotine content in traditional cigarettes to minimal and potentially non-addictive levels by as early as May 2023.
The FDA proposal is expected to draw legal challenges from tobacco manufacturers that could take several years to address, similar to projections about the FDA’s recent strategy to prohibit or severely limit menthol flavoring in traditional cigarettes.
“We think it will take a decade or longer for the FDA to introduce nicotine caps due to the long nine-step process at the FDA, the inevitable litigation, and then the one-year time given to retailers to get rid of excess inventory,” Barclays analyst Jain Gaurav said in an investor note.
“The FDA will need to take into consideration inputs from scientific, legal, law enforcement, public health, industry and budgetary stakeholders, and respond to all the comments in an iterative process before it can publish a final rule.”
Mish said that “even just a 1% share, which we view as eminently achievable based on our pilot results, would be transformative to our revenue line,” Mish said.
A Barclays projection that 22nd Century could reach up to $43 million in annual sales “would be good news for its investors,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies.
However, Sweanor said the $43 million needs to be put into context given the U.S. traditional cigarette marketplace has about $60 billion in annual sales, according to Goldman Sachs analyst Bonnie Herzog.
“22nd Century would be taking, in Barclay’s optimistic forecast, somewhere in the range of 1/1,500th of the market, with a product that only makes health sense if its customers soon stop using it,” Sweanor said.
If very-low-nicotine traditional cigarettes prove attractive to tobacco consumers, the end result could be 22nd Century having a sharp increase in revenue and a potential buyout by a global tobacco manufacturer.
However, investors continue to take a cautious approach to 22nd Century even though it is the only tobacco manufacturer with retail-ready very-low-nicotine products.
The 52-week share-price range is 85 cents to $3.52. The stock opened trading Tuesday at $1.38.