22nd Century Group (XXII) Q4 2018 Earnings Conference Call Transcript

Next, I will move on to discuss our operating expenses. Our net cash operating expenses that exclude noncash equity-based compensation, amortization, and depreciation for the year ended December 31, 2018 was $20,388,000, an increase of $9,685,000 or 90.5% from net cash operating expenses of $10,703,000 for the year ended December 31, 2017. The increase was primarily due to increased expenses attributable to our Modified Risk Tobacco Product application with the FDA for our BRAND A very low nicotine content cigarettes. Our expenses related to the MRTP application amounted to approximately $9,800,000 for the year ended December 31, 2018.

Next, I will address our net loss. We experienced a net loss for the year ended December 31, 2018 in the amount of $7,967,000 or a negative $0.06 per share as compared to a net loss of $13,029,000 for the year ended December 31, 2017 or a negative $0.13 per share, which is a decrease in our net loss of $5,062,000 or 38.9%. The decrease in the net loss of $5,062,000 was primarily attributable to the aggregate realized gains on the [Inaudible] award transactions in the amount of $14,493,000, an unrealized gain on the Aurora stock warrants in the amount of $284,000, an increase in net interest and dividend income of $1,176,000, and an increase in our gross profit on product sales of $1,607,000. Both numbers were partially offset by an increase in net cash operating expenses of $9,685,000, and as discussed earlier, an increase in equity-based compensation of $2,246,000 and an increase in depreciation and amortization expense of $395,000.

The significant gain on the [Inaudible] award transactions in the amount of $14,493,000 consisted of the following three items: unrealized gain of $4,516,000 on our equity investment in Anandia was acquired by Aurora Cannabis in the third quarter of 2018. We received 1,947,943 shares of Aurora common stock and a warrant to purchase 973,971 shares of Aurora common stock as a result of the acquisition of Anandia by Aurora. No. 2, a gain of $3,830,000 on the subsequent sale of the Aurora common stock that we received in the acquisition of Anandia by Aurora, which also occurred in the third quarter of 2018.

The sales of the Aurora common stock also generated $13,052,000 in net cash proceeds for the company. And thirdly, an unrealized gain in the first quarter of 2018 in the amount of $6,147,000 under U.S. GAAP accounting rules on our investment in Anandia. This amount became a realized gain upon the acquisition of Anandia by Aurora, boasting numbers in aggregate to the $14,493,000 realized gain.

It should be noted that we still own the warrant to purchase 973,971 shares of Aurora common stock that does not expire until August of 2023. The Aurora stock warrants had a value of $3,092,000 at December 31, 2018, and we recorded an unrealized gain and the adjustment to fair value in the amount of $284,000 for the year ended December 31, 2018. At future quarter and year-end dates, if the warrant is still owned by us at that time, we will record the fair value of the warrant and any unrealized gain or loss will be recorded in net income or loss for that quarter or year end. Next, I will address our adjusted EBITDA.

Our adjusted EBITDA, a non-GAAP financial metric previously defined by Tom James in his opening statement, for the year ended December 31, 2018, was a negative $19,489,000 or a negative $0.16 per share as compared to a negative $11,411,000 or a negative $0.11 per share for the year ended December 31, 2017, which is an increase in the negative adjusted EBITDA of approximately $8,078,000 or 70.8%. This increase is primarily the result of the previously discussed increase in our net cash operating expenses of $9,685,000 and is partially offset by an improvement in our gross profit on product sales of $1,607,000. Finally, I will discuss the cash position of the company at December 31, 2018. We continue to be in a strong cash position with cash, cash equivalents, and short-term investment securities totaling $56.4 million at December 31, 2018, an amount we believe will be adequate to cover normal monthly operating expenses of approximately $850,000 and meet all current obligations as they come due for a number of years.

In addition, we expect to incur an estimated amount of approximately $1.5 million in additional expenses relating to our Modified Risk Tobacco Product application with the FDA by the end of the second quarter of 2019. That concludes my remarks. Thank you for your time, consideration, and continued interest in 22nd Century Group. I will now turn the remainder of this conference call over to our President and CEO, Henry Sicignano, who will provide you with a business review and update.

Thank you very much.

Henry Sicignano -- President and Chief Executive Officer

Thanks, John. Good afternoon and thank you again to our conference call participants for joining us. Today, I have a host of important issues to discuss. In brief, I will discuss Dr.

Scott Gottlieb's recently announced decision to resign as commissioner of the FDA and what his departure may mean to 22nd Century shareholders; two, I'll talk a bit about the FDA's plan to dramatically reduce the nicotine content of all cigarettes sold in the United States; three, provide an update on 22nd Century's Modified Risk Tobacco Product application and its progress at the FDA; and four, perhaps most significantly, I will talk about 22nd Century's cannabis research initiatives and strategic vision. At the end of our time together, I will also briefly touch on the wholly frivolous class action lawsuits that have been filed against our company in recent weeks. First things first. As you likely know, this week, we learned that Dr.

Scott Gottlieb has decided to resign as commissioner of the FDA. This is unfortunate. Dr. Gottlieb has moved the ball forward on a number of important FDA initiatives, including speeding the approval process for important new drugs, addressing the opioid epidemic, questioning the place for flavors in e-cigarettes, and of course, in advancing the FDA's broad nicotine reduction plans across a host of tobacco products.

We appreciate the work Dr. Gottlieb has done and we will miss him as commissioner. However, it is important to point out 22nd Century's Modified Risk Tobacco Product or MRTP application is under review at the FDA Center for Tobacco Products, also known as the CTP, not the FDA at large. Accordingly, Mitch Zeller, director at the FDA's Center for Tobacco Products, is actually the one who is overseeing our MRTP application.

It is also important to realize that the FDA's Center for Tobacco Products is the division of the FDA that is advancing the agency's plan to limit nicotine in all cigarettes sold in the U.S. to minimally or nonaddictive levels. With respect to this larger-planned national mandate, Dr. Gottlieb was a terrific champion.

It was not, however, the beginning or the end of the FDA's nicotine reduction movement. Actually, the FDA began to collaborate on 22nd Century's spectrum research cigarette initiative in 2011, which was six years before Dr. Gottlieb arrived on the scene. The FDA and various agencies of the U.S.

federal government spent many tens of millions of dollars on independent research with very low nicotine content cigarettes long before Dr. Gottlieb made his historic 2017 announcement that all cigarettes in the United States should contain drastically lower levels of nicotine.