Edited Transcript of XXII earnings conference call or presentation 7-Mar-19 9:00pm GMT

First, I will discuss our net sales revenues generated from product sales. As reported in our Form 10-K filed with the SEC yesterday and stated in yesterday's press release, net sales revenue for the year ended December 31, 2018, was $26,426,000, the highest annual net sales revenue in our history as compared to net sales revenue for the year ended December 31, 2017, of $16,600,000. The quarterly net sales revenue increased by $9,826,000 or 59.2% for the year ended December 31, 2018, as compared to the net sales revenue for the year ended December 31, 2017. The net sales revenue increase is primarily the result of additional net sales revenue generated from our contract manufacturing of cigarettes and filtered cigars during 2018 as compared to 2017.

Next, I will address our gross profit on product sales. Our factory in North Carolina continued to utilize additional production capacity that resulted in the increased net sales revenue as just discussed above. As a result, we generated gross profit on net sales revenue for the year ended December 31, 2018, in the amount of $899,000. In comparison, we experienced a gross loss on net sales revenue for the year ended December 31, 2017, in the amount of $708,000. This positive change from the gross loss to gross profit amounted to $1,607,000 for the year ended December 31, 2018, as compared to the year ended December 31, 2017, and this improvement is primarily the result of increased factory utilization.

Next, I will move on and 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 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 Anandia/Aurora transactions in the amount of $14,493,000, an unrealized gain on the Aurora stock warrant 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. Those 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 Anandia/Aurora transactions in the amount of $14,493,000 consisted of the following 3 items. Unrealized gain of $4,516,000 on our equity investment in Anandia as 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. Number two, 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, fostering numbers in aggregate to the $14,493,000 realized gain.

It should be noted that we still own a 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. And at future quarter and year-end dates, and if the warrant is still owned by us at that time, we will record the fair value of the warrant and then the 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 negative $0.16 per share as compared to a negative $11,411,000 or 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 would 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 related 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 the business review and update. Thank you very much.

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Henry Sicignano, 22nd Century Group, Inc. - President, CEO & Director [4]

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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 hemp/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.