22nd Century Group's (XXII) CEO Henry Sicignano on Q2 2016 Results - Earnings Call Transcript

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22nd Century Group, Inc. (NYSEMKT:XXII) Q2 2016 Earnings Conference Call August 10, 2016 4:00 PM ET

Executives

Tom James - General Counsel

John Brodfuehrer - CFO

Henry Sicignano - President and CEO

Analysts

James McIlree - Chardan Capital

Thomas McCarthy - Raymond James

Operator

Good day, and welcome to the 22nd Century’s Second Quarter 2016 Business Update Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Tom James, General Counsel of 22nd Century Group. Please go ahead, sir.

Tom James

Thank you very much. My name is Thomas James, the Vice President and General Counsel of 22nd Century, and I appreciate everyone’s patience while I read the required Safe Harbor text.

The statements made on today’s call that are not based on historical information are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, but are not limited to, statements regarding our company’s business strategy, future plans and objectives, and future results of operations or that may predict, forecast, indicate or imply future results performance or achievements. The words estimate, project, intend, forecast, anticipate, plan, expect, believe, will, will likely, should, or in the negative of such words, or words or expressions of similar meanings are intended to identify forward-looking statements.

These forward-looking statements are not guarantees of future performance and all such forward-looking statements involve risk and uncertainties, many of which are beyond our company’s ability to control. Actual results may differ materially from those expressed or implied by such forward-looking statements.

As a result of various factors, including but not limited to the risk factors disclosed in our company’s most recent Annual Report on Form 10-K as filed with the SEC on February 18, 2016. 22nd Century does not undertake and it disclaims any obligations to update any forward-looking statements or to announce revisions to any of the forward-looking statements.

During this call, we will also disclose certain non-GAAP financial measures including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted by 22nd Century for certain non-cash and non-operating expenses as described in our company’s earnings press release for the quarter ended June 30, 2016 that’s publicly issued yesterday on August 9, 2016, and which is available on our company’s website.

And with that, I’ll turn it over to our Chief Financial Officer, John Brodfuehrer.

John Brodfuehrer

Good afternoon, everyone, and thank you for calling into the 22nd Century’s second quarter 2016 conference call. For those of you who are new to the call, my name is John Brodfuehrer and I’m the Chief Financial Officer of 22nd Century. I’m pleased this afternoon to provide you with the summary of the company’s financial results for the second quarter of 2016.

I’ll first address our net sales revenue. The company’s most spectrum research cigarette order generated substantial revenue and positive gross margin. However, the shipping of such order was completed in the first quarter of 2016. So our Q2 ‘16 net sales revenue showed a decrease of approximately $190,000.

Specifically, net sales revenue for the second quarter of ‘16 were $2.828 million, an increase of $521,000 or 22.6% over net sales revenue of $2.307 million for the three months ended June 30, 2015. And there were - the net sales revenues for the second quarter were 4.7% higher than our NOS projections. Net sales revenue for the six months ended June 30, 2016 were $5.847 million, an increase of 100% or $2.924 million for the six months ended June 30, 2015.

I’ll next talk about our gross loss on product sales. Our gross loss on product sales has improved decreasing for both the three and six months ended June 30th as compared to the same periods of 2015. The gross loss decreased by approximately $152,000 or 52% for the three months ended June 30, 2016 and the gross loss decreased by $293,000 or 94% for the six months ended June 30, 2016. As such we continue to make progress in overcoming the under-utilization of our factory resources that we have discussed previously.

I'll move on to our operating expenses. Our operating expenses excluding non-cash items such as equity based compensation, amortization and depreciation have increased for both the three and six months ended June 30, 2016 as compared to the same periods of 2015. As such excluding the non-cash expenses just mentioned, our operating expenses increased approximately $748,000 and $2.128 million for the three and six months ended June 30, ‘16 when compared with the same periods in 2015.

The increase in our operating expenses consists of cost for strategic activities including personnel to strengthen our regulatory and scientific initiatives, investments in new sponsored research and non-recurring advertising and promotional costs. It should also be noted that our operating expenses for the second quarter of ‘16 were 19.8% lower than the analyst projections.

It's also important to understand as is typical of small public company, 22nd Century invest substantially more than $0.5 million per year, actually about 10% of our regular operating expenditures on SEC and New York Stock Exchange compliance cost. While all of these expenses are of course necessary the company is keenly focused on managing costs and operating our business as officially and effectively as possible.

I'll move onto our net loss for the period. Our net loss for the three months ended June 30, 2016 was $2.902 million or $0.04 per share as compared to a net loss of $1.289 million or $0.02 per share for the three months ended June of ‘15. Our net loss for the six months ended June 30, 2016 was $6.155 million or $0.08 per share as compared to a net loss of $5.405 million or $0.08 per share for the six months ended June of ‘15.

Keep in mind that the net losses for the three and six months ended June of ‘15 also included proceeds from a legal settlement with an unrelated third party in the amount of $1 million. This means that our net loss for the first half of ‘15 would have been worse without that 2015 legal settlement revenue, but it also means that that our net loss for the first half of ‘16 is an improvement over the previous year.

I'll move onto our adjusted EBITDA, which Tom has defined in his comments. Our adjusted EBITDA, which is a non-GAAP financial metric that we've discussed previously. For the three months ended June of ‘16 was negative $2.404 million or $0.03 per share as compared to a negative $1.807 million or $0.03 per share for the three months ended June 30, 2015. Our adjusted EBITDA for the six months ended June ‘16 was a negative $5.144 million or $0.07 per share as compared to a negative $3.308 million or $0.05 per share for the six months ended June of ‘15.

Both the increases in the net loss and negative adjusted EBITDA are primarily the result of increased operating expenses the importance of which have been addressed in my earlier comments.

Finally, cash position of the company. We reported the cash balance of $2.841 million at our balance sheet at the end of June 30, 2016. As previously reported on June 27, ‘16 we closed on a registered direct offering that generated net proceeds of $4.7 million for the company. Including the cash balanced at June 30, of ‘16 coupled with a net proceeds from the capital raise, but not including potential milestone payments of up to $7 million from BAT and not including deposits or other advanced payments from potential strategic partnerships, we believe our current cash balanced coupled with revenues from ongoing product sales would be adequate to sustain operations and meet all current obligations as they come due to released the May 2017.

Thank you for your time, consideration and continued interest in 22nd Century. I will now turn the remainder of the conference over to our President and CEO, Henry Sicignano who will provide you with a business review and update. Thank you very much.

Henry Sicignano

Thank you, John. Good afternoon to our conference call participants. Thank you for joining us today. I would like to begin my remarks by discussing what is likely the most important competitive advantage held by 22nd Century. Indeed the tremendous and still largely untapped value of our company is highlighted by the growing course of support of public heath officials around the world who content that 22nd Century’s proprietary very low nicotine cigarettes are poised to make major differences and the smoking cessation and tobacco hard reduction arenas.

Recent public presentations and agency mandates have made clear that the FDA has made regulating nicotine a primary objective in the United States. At the same time the World Health Organization commonly referred to as WHO has recommended that all member countries implement limits on the amount of nicotine and tobacco cigarettes to below addictive levels. This focus on mandated reductions of nicotine in cigarettes is potentially troubling news for many in the tobacco industry, but it is very good news for 22nd Century.

Indeed variable nicotine combustible cigarettes are a game changing idea and 22nd Century is the sole source in the for naturally grown tobacco at very levels of nicotine. Our technology makes possible very low nicotine smoking cessation cigarettes that have the potential to save millions of lives. Conversely for smokers who do not wish to quite smoking our technology makes possible the world’s lowest tar-to-nicotine ratio cigarettes that could drastically reduce smokers’ exposure to the most toxic elements of cigarettes.

Similarly 22nd Century’s patented technology facilitates our development of THC free industrial help, they could revolutionize agriculture for fiber and biomass. Our proprietary technology will also enable 22nd Century to increase the expression of medically important cannabinoid in the cannabis plant, which has the potential to help millions of patients suffering from neurological diseases and other medical elements.

After core of 22nd Century investor s find the bio technology company devoted to changing people's lives through novel applications of our extraordinary technology. On an international level we are pleased to hear that public health agencies around the world are beginning to broadly announce positions and support of very low nicotine tobacco cigarettes. As I stated earlier the World Health Organization recently published a report, which recommends that all WHO member countries essentially mandates the use of very low nicotine tobacco. To give you a flavor of exactly what is contained in this remarkable 36 page WHO report I will read here a few exerts.

Fundamentally the WHO study group concluded “that nicotine is the primary addiction chemical common to combusted and non-combusted tobacco products, and therefore”, because non-nicotine components of tobacco are critical to the sensory experience of smoking, very low nicotine tobacco is more effective in reducing craving and producing greater pleasure in smokers than nicotine without tobacco.

The WHO report further state that “no specific amount of nicotine has yet been identified as the absolute threshold for addiction; however, it is likely to be equal or possibly less than 0.4 milligrams per gram of dry cigarette tobacco filler”.

22nd Century is the only company in the world capable of producing combustible tobacco cigarettes at this very low level of nicotine, without any artificial extraction or chemical processes. It is important to understand that reduced nicotine yield cigarettes, first developed and marketed by big tobacco companies in the 1970s at light and low tar, terms now banned by the FDA, deliver doses of nicotine that are actually comparable to full flavored conventional cigarettes, and in fact, extend the prevalence of addiction.

In start comparison, 22nd Century’s very low nicotine cigarettes drastically reduced smokers’ exposure to nicotine to levels that have been shown in independent clinical trials to decrease daily cigarette consumption, as well as to reduce nicotine and toxicant exposure. This growing body of independent scientific evidence including the ground breaking clinical trial published in October in the New England Journal of Medicine demonstrates that 22nd Century’s proprietary very low nicotine cigarettes do not sustain addiction and can help to decrease or break nicotine addiction without withdrawal symptoms.

In a nutshell, the World Health Organization has recommended a policy of limiting the sale of cigarettes to brands with an overall reduction in nicotine intake on the order of 90% to 95%. Again, only 22nd Century is capable of producing cigarettes with naturally grown tobacco at this very low level of nicotine.

Last, but most importantly, the World Health Organization report that very low nicotine cigarettes may support quitting not only for smokers who seek treatment, but also for smokers who have not previously expressed an interest in quitting. In other words 22nd Century’s VLN cigarettes may actually significantly expand the market of smokers, who are willing to quit.

These World Health Organization recommendations have not gone unnoticed in the United States. And remember, as a result of the Tobacco Control Act passed by Congress in 2009, the FDA already has the regulatory power to set an across the board maximum nicotine level for all cigarettes sold in the United States.

Although, 22nd Century would greatly benefit from the FDA exercising such power, we are concerned that any governmental regulations that require drastic reductions in nicotine for all cigarettes could result in the same ill effects created by alcohol prohibition almost 100 years ago. And would likely spur a massive black market for conventional cigarettes.

Instead pragmatic public health advocates have proposed what is perhaps a far better idea, which is that the FDA could simply require all U.S. cigarette manufacturers to offer consumers a very low nicotine brand style alongside their existing cigarette styles. For example, if such an FDA mandated policy were put in place, the existing Marlboro Red, Gold, Silver and menthol cigarette styles would be joined by a Marlboro very low nicotine brand style.

Under this scenario, 22nd Century’s proprietary very low nicotine tobacco with the taste and sensory characteristics of conventional cigarettes, but with approximately 95% less nicotine than conventional cigarettes currently made by [indiscernible] and other big tobacco companies would be made available to all tobacco companies for using their brands, and in this way, no black market would arise, the competitive landscape among big tobacco manufacturers would remain intact. And most importantly, consumers would actually have the freedom to choose what nicotine level to smoke.

This idea makes a great deal of sense. It is eminently feasible and could go a long way to addressing the stubbornly high smoking rates in America today. Of course, while we are patiently waiting for public health officials to consider such common sense approaches to tobacco policy, 22nd Century is also pursuing our own company-specific strategy to introduce very low nicotine tobacco in the U.S. market.

Our modifying risk tobacco product application for BRAND A VLN tobacco cigarettes has been with the FDA now for seven months and appears to be moving along in the approval process. As a reminder, FDA guidance for the MRTP process reflects a 360 day review period. That said, even as others urge FDA to take broader regulatory action on very low nicotine tobacco we remain eager to cooperate with the FDA in order to speed the approval of our BRAND A reduced exposure cigarettes so that U.S. consumers can have a choice of a very low nicotine combustible tobacco product.

In other news, in May of this year the FDA announced new deeming regulations, which for many tobacco marketers is a serious impediment to future sales. Indeed the new regulations require that little cigars as well as premium cigars and most other tobacco products hold to a 2007 product kit requirement. This means that without a valid 2007 predicate, many cigar marketers will effectively be unable to sell their products in the United States unless they commit to cost prohibitive investments for extensive new regulatory filings required by FDA.

While this is a huge problem for most manufacturers, these new regulations have already proven to be a great opportunity for 22nd Century. We have secured what we believe are valid 2007 little cigar predicates and we have even produced our own filtered cigar brands based on these predicates. Over the last two months our regulatory strategy has earned a notice of several other tobacco marketers, who are searching for ways to remain in business under the new FDA regulations.

Using the same strategy that led to our creation of our own filtered cigars, we offered a pathway for other brands to leverage our predicate products. As a result in July of this year we added eight new contract manufacturing customers at our manufacturing facility and over the course of the next 12 months as the new regulations take full effect we expect to add even more new names to our growing contract manufacturing customer list.

On to international developments, at our European manufacturing partner’s facility, next week we will begin manufacturing Magic cigarettes, which are just in for France. These cigarettes are planned for market introduction early in September following the August European holiday season. This long awaited product launch will mark the first time our very low nicotine tobacco will be combined with the CelFX carbon metrics filter.

Manufacturing at our North Carolina factory for distribution of Magic and RED SUN in Australia will follow a similar timeline though the inter-market date will be slightly later given the long trans-Pacific shipping time. Upon achieving market penetration in France and in Australia we will relaunch Magic combined with the CelFX carbon metrics filter in Spain and we anticipate a number of additional countries also bringing the brand to market in the coming months.

As some of you may know, I met with a number of tobacco and pharmaceutical companies in India this June, though I cannot yet announce any specific collaboration in India, I am pleased to report that our tobacco and technology were very well received. In India and elsewhere we have found a growing interest in our process tobacco leaf, both very low nicotine varieties and high nicotine varieties. And while we have valuable relationships with experienced farmers who can grow our unique tobaccos we have not yet been satisfied with partner companies charged with processing our proprietary tobaccos.

Accordingly to control our own destiny and to support future sales last week we purchased a tobacco thrashing machine capable of processing many thousands of pounds of tobacco per day the unit will enable us to test market on a larger scale both our high and low nicotine tobaccos to international customers. This new machine will be located near our Mocksville, North Carolina manufacturing facility and is right sized for our company at this early stage in our efforts to process and sell our proprietary tobaccos.

This topic presents an opportunity for me to remind shareholders about an important philosophy we have here at 22nd Century. Though we are not yet profitable and though we are a small cap company, or rather precisely because we are not yet profitable and because we are a small cap company, 22nd Century management has endeavored to run our business conservatively and prudently.

Accordingly, every piece of equipment in our factory including our new thrashing machine is owned by 22nd Century out right. We have no equipment loans. In fact 22nd Century as a whole has very little long-term debt. The officers of this company and our shareholders who run our business with care and prudence of business owners. I am proud of this fact and I’m quite confident that this philosophy is far better than a highly leveraged approach.

As a virtually debt free company, we are transparent to our shareholders and we’re well positioned to commercialize our IP portfolio. As I have reported in the past, commercializing two different products that utilize our very low nicotine tobacco, first BRAND A, our reduced exposure products, and eventually X-22, the world’s only smoking cessation aid in the form of a combustible tobacco cigarette are top strategic objectives of the company.

As I mentioned, the company’s MRTP application to the FDA has already been submitted for BRAND A. We believe 22nd Century will be the first company in the world to achieve a modified risk tobacco product designation for a combustible cigarette.

In more recent months, we have turned our attention to identifying the right strategic partner for X-22. The company believes that our X-22 smoking cessation product in development may in fact prove to be the world’s most effective smoking cessation aid. This remarkable product is also by the way overwhelmingly preferred by consumers.

To this end, we recently hired a full time former pharmaceutical executive to spearhead our efforts to sign a joint venture partner to fund Phase III clinical trials for X-22. Having spent more than a decade with Johnson & Johnson and MS Corporation, managing the company’s sales efforts for its diabetic insulin pump, our new business development director, Jim Wale, has already brought valuable new insights to our team and is confident that we will sign a JV agreement for X-22, VLN smoking cessation cigarettes.

For those of you, who do not know, many independent clinical studies have shown that 22nd Century’s VLN cigarettes are highly effective, when used alone and have also been shown to increase the advocacy of virtually all other smoking cessation products, including nicotine replacement therapies and Pfizer’s very dangerous drug CHANTIX.

For these reasons, we believe 22nd Century will ultimately capture a substantial portion of the world’s multibillion dollar smoking cessation market.

Another important milestone on our priority list is to develop important cannabis varieties for the industrial and medical markets. To this end, our VP of Plant Biotechnology, Dr. Paul Rushton is hard at work in our molecular laboratories at the Cleveland Biolabs building on the Buffalo Niagara Medical Campus.

Together with a small stuff of post doc scientists, Dr. Rushton is advancing research to both improve our tobacco technology and to develop unique varieties of cannabis. Combining these two core competencies, Dr. Rushton is working to produce medically important cannabinoids in tobacco. A novel concept that with patent protection only 22nd Century can pursue.

Of course, we are also continuing our cannabis research and development in Vancouver, Canada with our partner in India Anandia Labs. And I am pleased to report, we have plans to expand our cannabis research and development with other partners to be announced in the near future, after we have finalized and executed appropriate agreements.

In the agricultural arena, our technology could once again make hemp a major fueled crop in the United States. In this regard, our company is actively meeting with State Agricultural Departments, major research universities and farmers to help them develop unique hemp plants, that are optimized for local growing conditions.

We are at the forefront of the developing hemp industry in many states. We will also be using our technology to develop proprietary cannabis plants with high levels of medically important cannabinoids for use in medicines and for further scientific research on the medicinal benefits of certain cannabinoids.

In short, our cannabis related technology has the potential to make people’s lives better around the globe. Our BRAND B low tar-to-nicotine cigarette also remains a very important priority to the company. A major milestone in the development of BRAND B is to conduct a proof-of-concept study. Featuring a relatively small sample size, this study is schedule for completion in December of this year, and if all goes according to plan, it will help us to design for submission to the FDA, a larger, more comprehensive exposure study.

All of these studies will be conducted for the purpose of demonstrating the 22nd Century’s extremely low tar-to-nicotine ratio cigarettes expose smokers to considerably less tar and less smoke per unit of nicotine inhaled. And are therefore far superior to conventional cigarettes made by big tobacco companies. When our trials are complete, we expect to use their result to file a modified risk tobacco product application for BRAND B with the FDA.

In conclusion the management and staff of 22nd Century will continue to focus on achieving important and specific strategic initiatives. We believe that reaching these milestones will increase shareholder value tremendously and will bring to market very important Tobacco products that significant reduce the harm caused by smoking. At the same time, we intend to bring industry leading new varieties of medical marijuana and commercial hemp to the market.

In summary we are a biotechnology company with a great future in two major plans that will impact consumers around the world.

That's about it for now thank you for joining us this afternoon. At this point we will open the floor to your questions. And although we will - certainly will not devote non-public information and we cannot as a matter of prudent policy, disclosed strategy or material facts related to ongoing litigation we are happy to address any questions you may have about any aspect of the company's business.

With that thank you again for joining us. Operator please open the line to our first caller.

Question-and-Answer Session

Operator

[Operator Instructions]. We'll take our first question today from James McIlree with Chardan Capital. Your line is open.

James McIlree

Thank you. Good evening, Henry and John.

Henry Sicignano

Hi, Jim.

James McIlree

Have you received any questions or comments or suggestions or direction from the FDA on the modified risk application?

Henry Sicignano

We have not received questions or comments, but it is our understanding that the application has been circulated for review and that the agency is in the process of assembling the response that we should receive between now and the end of the year.

James McIlree

And so that response would be a decision or that response would be some suggestions or questions or asking it for clarification on the aspects of the…

Henry Sicignano

I mean, to be perfectly honest it could be either. I mean, we're certainly hoping and we're optimistic that that's going to be not only decision but a positive decision. But I certainly can't guarantee that and the agency have the discretion to ask any number of question that it sees fit. But as you know our application essentially is requesting permission to market BRAND A as a reduced exposure product to nicotine. And we feel very confident that our application has in fact proven that BRAND A has 95% less nicotine than conventional brands.

James McIlree

Right, I got it okay. The eight new customers the new set have signed up for contract manufacturing, when would you be generating revenue for those customers, is that this quarter or next quarter or…?

Henry Sicignano

No probably not until - as we've disclosed I believe in the Q1 and in the press release not until 2017 and at staggered points throughout 2017. Each of these customers will need to work off existing packaging and existing tobaccos that they have with other suppliers. But as these new regulations are actually coming into play and as we have all the filings done for these new customers we’ll begin to manufacture product for each of them.

James McIlree

And can you talk a little bit about BAT and it seems strange that if the World Health Organization and FDA are intrigued with low nicotine not BAT would it be more aggressive in that relationship with you?

Henry Sicignano

Yeah and without divulging non-public information I can suggest to you that big tobacco companies generally are quick to embrace low nicotine tobaccos because very low nicotine tobaccos give consumers a choice of smoking of products that can help them break their addiction to the product.

So speaking generally and not specifically about BAT big tobacco companies are actually more interested in higher nicotine tobaccos not to deliver more nicotine to consumers, but to deliver the nicotine more efficiently and or to create products that are potentially less harmful to conventional cigarettes and or to help them with blending of their very large tobacco inventories. So I think speaking generally about big tobacco are high nicotine tobaccos are most interest. The very low nicotine tobaccos there are certainly interest among the big tobacco companies. But it's interest on reduced risk products in certain countries where regulators might be requiring such products. Is that helpful to you?

James McIlree

Yeah, it is, I think you kind of danced around what's happening with BAT which is really what I'm asking.

Henry Sicignano

I mean with BAT we have quarterly updates, we were in communication they are doing a lot of work with our technology, they have made progress on both low nicotine and high nicotine tobacco. And I really can't say a lot more publicly although I guess I'd be shocked Jim if BAT didn't commercialize our technology. Now your next question is going to be when and I'm not going to comment on when.

James McIlree

Okay. Well, thanks for saving my time on that one.

Henry Sicignano

Sure, no problem.

James McIlree

I think that's it, I think I'll see you before. Thanks a lot Henry, I'll talk to you later.

Henry Sicignano

Thank you, Jim.

Operator

Thank you. We'll go next to [indiscernible] a private investor. Your line is open.

Unidentified Analyst

Thank you for taking the call. Can you hear me Henry?

Henry Sicignano

Certainly, thank you.

Unidentified Analyst

Yes, my question concerns the introduction that happens some months ago with regards to a huge investments made thereafter I think. You update us, are there sales continuing in Spain?

Henry Sicignano

My apology, the speech were cutting in and out, but I think what you are asking is what's the status of the product in Spain and If I'm correct I'll address that question. There are still sales in Spain we did not recall the products. But as we announced publicly we decided to reconfigure the cigarettes with the new patented CelFX filter and we had thought about introducing that product at the beginning of the summer. But due to the fact of the Europeans essentially take the summer off and the summer seems to be a difficult time to relaunch products. We've decided to relaunch the CelFX filter magic product in September along with the French launch.

Unidentified Analyst

Okay, excellent. Thank you very much.

Henry Sicignano

Okay.

Operator

Thank you. We'll go now to a private investor, Marian Green [ph]. Your line is open.

Unidentified Analyst

Yes, thank you for taking my call. I wanted to know in the future if possible that the two companies will split the marijuana and the cigarettes.

Henry Sicignano

Well, I guess anything is possible and we've certainly set up separate operating divisions for each of our different business units. But we have no plans or intentions at present to do that.

Unidentified Analyst

Okay. The other things just curious has anyone tried writing a letter to Obama since he is the one who stopped smoking,love to smoke.

Henry Sicignano

That would be something that I think shareholders should do, that will be something Mr. Green if you were to send him a letter I think it might have more impact than a letter coming from the company. You should tell Obama about our technology and about our very low nicotine tobacco cigarettes and you should suggest that he learn more about 2nd Century and contact us to try some.

Unidentified Analyst

I certainly will, thank you.

Henry Sicignano

If that works out and he responds I owe you a dinner.

Unidentified Analyst

Okay. You'll have to come to New York City.

Henry Sicignano

Thank you very much.

Unidentified Analyst

Thank you.

Operator

Thank you. And we'll go now to Rex Wiggins [ph], private investor. Your line is open.

Unidentified Analyst

Yeah, Henry it’s Rex. Good job on your [indiscernible] today. I like it. It's been in the company more as a biotechnology company which have been kind of my bug-a-bee [ph] all along that, because that's what you are, right?

Henry Sicignano

That's right.

Unidentified Analyst

…exclusively in biotech stocks and now I'm up to probably about 30% of my portfolio in your company, believe, one thing I guess I would stress on here you seems to have from your background you know the ins and outs of tobacco people quite well. You hired a guy on the marijuana or what's called cannabis side. It seems to me that and I can see some of the reactions of large tobacco, not necessarily want to go into the lower nicotine tobacco cannabalizing in sales by getting people quit smoking. I guess I would just support from you guys to consider nosing around some of the bankers, or we’re trying numerous ones I am sure you probably do too. I know large pharma extremely well. I know lot of [indiscernible] people quite well. And at this point it’s hard to believe without some effort that the company couldn’t attract large pharma in helping fund a Phase III trial.

And then also large pharma let’s face it you can say whatever you want is going to get things through the FDA quicker than independent companies. So I know those guys are hard to pin down but compared to [indiscernible]. I mean it is to me it looks like the most likely joint venture candidate for me for the company is large pharma and not large tobacco. It might be at the end maybe you and I can have bet each other on eventual sale of the company. But I would just consider hopeful you guys are reaching out, because a lot of good investment bankers that specialize in doing deals with large pharma. So anyway that's my two-cents worth.

Henry Sicignano

Well thank you Mr. Wiggins and I guess I agree with you. We are making a priority signing a deal with large pharma and Jim Wale is in discussions with several companies. And as I have been and I guess none of these things close as quickly as any of us would like, but we're continuing to pursue these opportunities and Jim is travelling around the country and internationally and I can't wait until we have an exciting announcements to make on one of these conference call about a strategic partnership.

Unidentified Analyst

I know that take time, I guess the only thing I'm saying is there is probably at least 8 or 10 healthcare investment bankers that can speed up with that process and it will be worthwhile expenditure to shareholders to give them the 5% to 7% of the deal. So I'm not talking about the dirt bag [ph] guys that you're with, but I'm talking about I shouldn’t say that. But people who really know large pharma in the business a lot of guy will just return their calls and along with down the road. But anyway you all are running the ship, I still think that's the eventual route that's going to go and that's why I keep increasing my shareholder base and I think you and you do a multiple shots on goal here to win and I like all of that. But just press on the gas for large pharma because I think that's the big announcement pay day is my guess.

Henry Sicignano

Well I appreciate that we will pursue some investment banking relationships. Thank you I appreciate that.

Unidentified Analyst

Okay, alright good job keep it up.

Henry Sicignano

Thank you Mr. Wiggins.

Operator

[Operator Instructions]. We'll go next to Pat Delong a private investor. Your line is open.

Unidentified Analyst

Yeah can you give us an update on the creed situation the lawsuit or what’s the latest there?

Henry Sicignano

Well I have to be careful what I say there. I can say - I can repeat the fact that we think the claims made by Creed against the company are frivolous and completely without merit. And as previously announced we intend to not only vigorously defend against the claims, but we're planning to file counter claims against both Creed and [indiscernible] personally.

We've given some update in the Q and I guess, I would point you there for some timeline and what's going on right now in terms of a motion to change venue for one part of the case. And we feel very confident about that motion. So thus far the case has gone very, very well for the company. And I guess without getting into too much legal trouble I'll just sort of point you to the Q.

Unidentified Analyst

Thank you.

Henry Sicignano

Okay.

Operator

Thank you. We'll take our next question from Bret Rosenberg [ph] a private investor. Your line is open.

Unidentified Analyst

Hi, thank you for taking the call. Can you hear me okay?

Henry Sicignano

Yes sir.

Unidentified Analyst

Okay. One of the applications you've mentioned with…

Henry Sicignano

I'm sorry I lost the call. I'm sorry sir I can't hear you at all now.

Operator

And we'll move now to Thomas McCarthy with Raymond James. Your line is open.

Thomas McCarthy

Would you please give us an overview of competitive landscape especially in terms of other technologies?

Henry Sicignano

Sure, that's a good question. We are the only company in the world that can grow very low nicotine tobacco at levels of 90% to 95% less the conventional tobacco as recognized as important level by the World Health Organization and by many independent researchers. We're the only company in the world that can do that. Now have other companies reduced nicotine and tobacco chemically, artificially with a process, yes. Actually, I believe Phil Morris did that, I think maybe two decades ago with a plant they built in Virginia, and they came out with a product called Next. And that reduced nicotine cigarette had nicotine extracted from it.

My understanding is that, at that time, I think Philip Morris had purchased General Foods. General Foods was parent of Sanka Coffee and so folks of Philip Morris said well if we could take the caffeine out of coffee, why don’t we take the nicotine out of tobacco and that could make a great product.

So again that was sort of the impetus for the project. They built this - I think factor for some hundreds of millions of dollars in Virginia. And they were successful and being able to reduce the nicotine or strip the nicotine out of the tobacco. Unfortunately, the cigarettes just didn’t taste good. It was a sort of a dismal product in terms of sensory characteristics. That said, the next product generated, I understand approximately 1% of the market in terms of sales.

So the product was pulled and seen as a failure. Philip Morris doesn’t want products else here today, I guess, doesn’t really need products that have 1% share, they were looking for giant blockbusters.

So that company with that product demonstrates that nicotine can be stripped out of tobacco, but that also demonstrates that the resulting product is simply not satisfactory to consumers. Our tobacco on the other hand has the exact same taste and sensory characteristics of conventional tobacco. And I should also mention that if were we to fail and achieve 1% market share, our company would be worth well over $1 billion, up from the $70 million that it’s worth today.

So did that give you some idea of the competitive landscape as I see it?

Thomas McCarthy

Sure, sure. Are there other technologies in the works? You’re the only one in the world currently, who can reduce nicotine that much, but what else is in the works?

Henry Sicignano

To my knowledge, nothing, and our patent portfolio really makes it virtually impossible for another company to do anything like what we’re able to do with the tobacco plant. So I guess - and could other companies reduce nicotine maybe 10% or 15%? Sure, that’s possible. But what all the independent scientist and researchers have learned is that, reducing nicotine by say 10% or 20% doesn’t help a smoker, it actually causes something called compensation, where the smoker actually smokes more cigarettes to get the level of nicotine or the dose of nicotine that he or she is accustom to.

By reducing nicotine levels to below 85% less and this comes from that New England Journal of Medicine Study, levels below 85% less, which are only achievable in naturally grown tobacco by 22nd Century means. No other company can do that. Only at those levels to smoker - that’s the non-addictive levels of tobacco. WHO believes it’s 90% to 95% less nicotine. We think the magic number is about 95% less nicotine, about 4 milligrams per gram.

So I’m proud to say that we have a virtual monopoly here reducing nicotine 10% or 20% just doesn’t do it.

Thomas McCarthy

When do your patents run out?

Henry Sicignano

Well, that’s a complicated question. We have a couple of hundred of them in countries all over the world. And so I guess, there is a range in dates from I want to say 2019 to the late 2020s. Is that right, Tom?

Tom James

2030.

Henry Sicignano

2030. And then in addition to that patent protection, we also have something called plant variety protection on some of our most important streams. And this plant variety protection actually protects the plants as oppose to the genetic material in the plants, but the actual plants the very low nicotine plants for decades after the patents expire.

Thomas McCarthy

What is your worldwide patent situation?

Henry Sicignano

Well, we have - I mean, it’s again, it’s a pretty complicated metrics. But I can tell you that, we have patent coverage in approximately 96 countries, generally, all of those are very low nicotine tobacco and many are also on our higher nicotine varieties and that is the best answer I can give you without massive spreadsheet with 100s of columns.

Thomas McCarthy

Sure, I appreciate it very much. Thank you.

Henry Sicignano

Thank you for your interest.

Operator

[Operator Instructions].

Henry Sicignano

Operator, I would like to mention to all callers right now. It's been mentioned or suggested in the past that some folks thought 22nd Century might prescreen questions or might sensor questions. I would like to make it clear that we do not do that and the call is open to any question out there we do not prescreen the questions I have no idea who is going to call and we don't sensor any of them. So I have an open invitation here to all investors and all shareholders please do ask whatever questions you have about the company or our technology.

Operator

Thank you. And we do have a question from Michael Susron [ph] from NYC Interchange. Your line is open.

Unidentified Analyst

Henry, how are you doing?

Henry Sicignano

Well, thank you. Hi, Michael.

Unidentified Analyst

I have a question, what are your patents currently worth? You said it was large like over $200 million I think it was.

Henry Sicignano

That's our internal assessment based on comparables generated by some legal software that we have they compare our patents, with like patents, with similar coverage around the world. So yes I did say in court that we believe that our patents are working access of $200 million and I guess I am going to stick probably that estmates.

Unidentified Analyst

Alright. Thank you that's my question. Good work.

Henry Sicignano

Thank you.

Operator

Thank you. [Operator Instructions] And we have a follow-up question from Rex Wiggins, a private investor. Your line is open.

Unidentified Analyst

Yes, Henry one more thing a comment and then a question I wanted to congratulate you on the financing that's no small feet getting a deal priced at market as oppose to the discount. So congrats on that and that tells me that whether it was [indiscernible] or whoever it was you certainly have the rear and there a big believer of you [indiscernible]. But did I hear you right and you think that with the cash on hand and internally generated cash that you don't have further cash needs May of ‘17 did I hear that correctly or…

Henry Sicignano

there are a couple of assumptions there one is that we don't receive $7 million in milestone payments from BIT before hand because that would obviously extend the period or two that we don't engage in any special project to take more cash than we are projecting at this point. But that's exactly right our estimates are that we have enough cash on hand to last through May of next year.

And to be very honest with you we didn't need to raise money a few weeks ago. But enough shareholders expressed concern that they were worried that we were going to run out of cash in the fall or before we had some sort of response from the FDA about our brand A MRTP application. So frankly the offer was made by an interested investor who has a history with the company and we decided it just made sense to take the money at that time.

Unidentified Analyst

And I completely applaud you for because it tells me that I just read into it because you could have $10 million or $15 million this is five but I applaud you for not diluting this any further and it tells me you have pretty high level of confidence to something else will happen. But I'm glad to have the extra cash on the balance sheet because as you enter final negotiations with whether it be tobacco or a large firm if they’re running out of cash so then you lose your negotiating buyer. So I think it was an excellent move all way around. Yeah that I am glad to hear that it’s good to '17 because I have a high degree of confidence you will have something pulled off between now and then. So good luck and keep at it.

Henry Sicignano

Thank you Mr. Wiggins. Appreciate it.

Operator

Thank you. We'll go now to Micheal Brownski, a private investor. Your line is open.

Unidentified Analyst

Hi, Henry. How are you?

Henry Sicignano

Did we lose you earlier?

Unidentified Analyst

No, I'm first time calling.

Henry Sicignano

I'm sorry. Okay.

Unidentified Analyst

I'm just curious how were the RED SUN sales doing?

Henry Sicignano

That's a good question and I guess in the markets that we've decided to target and stand behind, which is primarily Portland and bolder and San Francisco and sort of American Spirit top markets and hip opinion leading markets that make a lot of sense for RED SUN the product is doing very well. Now at the same time because we're a biotechnology company and because cash is very important to conserve before we have a strategic partnership announcement.

We've decided not to expand in markets all over the country aggressively, because frankly we want to conserve cash. So I guess the product is doing very well in the places where we've decided to fight for it and the places that we think American Spirit does very well, but we're not out there actively growing more stores before we have a strategic partner.

Unidentified Analyst

Okay, great. Thanks.

Henry Sicignano

Thank you.

Operator

[Operator Instructions]. We'll take a follow-up question from Pat Delong [ph], a private investor. Your line is open.

Henry Sicignano

Hello.

Operator

And Pat Delong your line is open. Please check your mute function.

Unidentified Analyst

Yes Henry sorry. Can you tell me back to the BAT $7 million milestone payment what is the time with which they have to commit to that?

Henry Sicignano

Well I should clarify it's not actually not one payment, there are actually four different milestone payments. I believe two of them are $1.5 million each and two of them are for $2 million each. Two of those payments relate to the very low nicotine tobacco, two of the payments relate to high nicotine tobacco. And the research period that BAT is currently in end at the end of September 2017.

So those milestone payments if they're paid would be paid between anytime between now and the end of September 2017. At the end of September 2017 BAT has the option or beforehand the option to commercialize the technology and then move into the commercial license that has very different terms without research milestones.

Unidentified Analyst

Okay, thank you very much.

Operator

And I'm showing we have no further questions today. I'd like to return the call to our presenters for any closing remarks.

Henry Sicignano

I'll just say thank you very much to everyone who participated on the call. Mr. Wiggins I think he reported that he has 30% of his portfolio on our stock, while that seems high that speaks to I guess confidence and the excitement that many of our investors have shown. As we've mentioned in our press release as in the queue our most recent financing was completed with an existing institutional investor and it seems that those who know our company best have made the biggest investments in 22nd Century stock.

And that’s something I'm very proud of I'm very proud to say that my family and my friends are heavily invested in 22nd Century and once again those who know us and those who truly understand our technology have made substantial investments and I'm very confident we'll be handsomely rewarded. So thank you to all of our investors and thank you to everyone who participated on the call. We'll look forward to updating you in the weeks and months to come with news as we have it. Thank you.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.

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