Edited Transcript of XXII earnings conference call or presentation 8-May-19 8:00pm GMT

I will first start with our net sales revenues. As reported in our first quarter 10-Q filed with the SEC yesterday and also as stated in yesterday's press release, net sales revenue for the 3 months ended March 31, 2019, was $6.294 million as compared to net sales revenue for the 3 months ended March 31 of 2018 of $6.116 million, an increase of $178,000 or 2.9%. The net sales revenue increase is primarily the result of additional net sales revenue generated from our contract manufacturing of filtered cigars and cigarettes during the first quarter of 2019 as compared to the same quarter of 2018. However, we did experience a gross loss in those unmet sales revenue during the first quarter of 2019 in the amount of $103,000 as compared to the gross profit on net sales revenue for the 3 months ended March 31 of 2018 in the amount of $72,000. This negative change from the gross profit to a gross loss during this period was primarily a result of additional expenses recorded to the cost of goods sold in the first quarter of 2019 as compared to the first quarter of 2018. Those additional expenses consisted primarily of an increase in fees due to the FDA and filtered cigars of approximately $100,000 and a net increase in other manufacturing expenses charged to the cost of goods sold of approximately $60,000, mainly relating to labor and equipment maintenance costs.

I will now move on to our operating expenses. Our net cash operating expenses, that is operating expenses that exclude noncash equity-based compensation, amortization and depreciation for the 3 months ended March 31 of 2019 were $4.476 million, an increase of $292,000 or 7% on net cash operating expenses of $4.184 million for the 3 months ended March 31 of 2018.

Included in the operating expenses for both the 3 months ended March 31, 2019 and 2018, the expenses relating to our Modified Risk Tobacco Product application with the FDA for our BRAND A Very Low Nicotine Content cigarettes in the amount of 1,211,000 and 1,296,000, respectively.

Next, I will address our net loss for the quarter. We experienced a net loss for the 3 months ended March 31, 2019, in the amount of $2.073 million or negative $0.02 per share as compared to net income of $1.386 million for the 3 months ended March 31 of 2018 or $0.01 per share. The negative change from net income for the first quarter of 2018 to the net loss in the first quarter of '19 amounted to a change of $3.459 million or 250%. This negative change of $3.450 million is attributable to the following. Number one, an increase in the unrealized -- a decrease, excuse me, in the unrealized gain on investment of $3.174 million.

During the 3 months ended March of 2019, we recorded an unrealized gain and a fair value adjustment for the Aurora Cannabis stock launch that the company owns in the amount of $3.973 million.

During the 3 months ended March 31 of '18, we recorded an unrealized gain on our investment in the (inaudible) in the amount of $6.147 million as a result of the adoption of the new accounting standard that became effective on January 1 of 2018. The difference between these 2 unrealized gains is a decrease of $3.174 million.

Point #2, the negative change in gross profit loss on product sales was approximately $174,000, and as I discussed above. Three, an increase in operating expenses in the amount of $236,000.

And fourth, those 3 amounts were partially offset by an increase in various other income expense items in the amount of $125,000.

Next, I will address our adjusted EBITDA. Our adjusted EBITDA, a non-GAAP financial metric previously defined by Tom James in his opening remarks. For the 3 months ended March 31, 2019, it was a negative $4.580 million or a negative $0.04 per share as compared to a negative $4.113 million or negative $0.03 per share for the 3 months ended March 31, 2018, which is an increase in the negative adjusted EBITDA of approximately $467,000 or 11.4%. This increase is primarily the result of the previously discussed increase in our net cash operating expenses of $292,000 and the negative change in our gross profit loss and net sales revenue in the amount of $174,000.

Finally, I will discuss the company's cash position as of March 31, 2019. We continue to be in a strong cash position with cash, cash equivalents and short-term investment and securities totaling $51.9 million at March 31, 2019. This is an amount we believe will be additive to cover normal monthly operating expenses of approximately $950,000 and these all current obligations as they come due for a number of years.

In addition, we expect to incur an estimated amount of approximately $400,000 in additional expenses relating to our Modified Risk Tobacco quality 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. I will now turn the remainder of the conference call over to our President and CEO, Henry Sicignano, to provide you with a business review and update. Thank you very much.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, John. Good afternoon, and thank you, again, to our conference call participants for joining us today.

22nd Century has invested considerable time and capital to accomplish in recent months what I believe is the most important project in our history: admission to the FDA of our premarket tobacco product application and our Modified Risk Tobacco Product application for the company's proprietary Very Low Nicotine Content cigarettes. The final submission included more than 150,000 pages of data, including research from 187 independent studies.

With the PMT and MRTP applications, 22nd Century is seeking the FDA's authorization to commercialize the company's proprietary VLN-branded cigarettes and to advertise to consumers that VLN cigarettes contain 95% less nicotine as compared to the 100 leading cigarette brands in the United States.

As part of the FDA's review of our PMT application, just 2 weeks ago, the FDA conducted a comprehensive inspection of our manufacturing facility in North Carolina. The FDA's inspection represents an important milestone in the third phase of the FDA's 4-phase review process for our PMT application. As such, the FDA inspectors witnessed actual production of 22nd Century's proprietary VLN cigarettes.

In addition, FDA inspectors reviewed 22nd Century's raw material receiving and storage procedures, quality control processes, manufacturing equipment and systems, tobacco processing methods and finished products assessment procedures.

Of course, the big question remains. When will the FDA grant 22nd Century a marketing order for the company's VLN product? As you may now, just last week, the FDA granted a premarket tobacco marketing order for Altria's IQOS, the first of its kind heat-not-burn product approved in the U.S. Though it took considerably longer than the FDA guidance suggests, this approval is a welcome news for all companies with pending PMT and MRTP applications. The IQOS approval shows that the FDA is, in fact, moving products through its regulatory process. Historically, the FDA track record on PMT applications have not been encouraging. Only about 2% of PMT applications ever make it to the "filing stage." Notably, 22nd Century's PMT application for VLN cigarettes received notice of filing from the FDA in record time just a few months after our submission.

And in part, because our PMT and MRTP applications for VLN cigarettes are considerably less complex than the IQOS applications, we believe that we could see a final application from the FDA or -- excuse me, a final action from the FDA on our PMT application much quicker than Altria's, perhaps as soon as the summer for our PMT application and with the FDA's final action on the company's MRTP application to follow in due course.

It is important to realize the FDA has expressed publicly strong support for reduced nicotine cigarettes. One former FDA official went so far as to describe Very Low Nicotine Content cigarettes as, "the ultimate harm reduction strategy."

Based on many years of research funded by more than $125 million from the FDA and from other U.S. federal government agencies and using 22nd Century spectrum research cigarettes, in 2017, former FDA Commissioner Dr. Scott Gottlieb announced to the world that the FDA plans to actually mandate the amount of nicotine in all cigarettes sold in United States may not exceed, "minimally addictive or nonaddictive levels.