22nd Century plans to exit cannabis business at steep loss

22nd Century, based in Buffalo, has its cigarette-manufacturing operations in a 62,000-square-foot plant in Mocksville.

The manufacturer reported in a regulatory filing Monday that it entered on Nov. 20 an agreement to sell its GVB Biopharma business for $2.25 million overall to a group identified as Specialty Acquisition Corp. of Nevada.

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.

By comparison, in May 2022 the manufacturer’s purchase of the privately held cannabis manufacturer was valued at between $55 million and $60 million. The manufacturer paid for that deal by providing 32.9 million unregistered shares of its stock to GVB, along with assuming $4.5 million of GVB debt.

Because the deal includes three non-identified 22nd Century employees becoming executive officers in Specialty, as well as investors, an analyst said the sale could be at attempt at a low-key management spin-off of the cannabis business.

“22nd Century has essentially run out of paths to viability,” said David Sweanor, an adjunct law professor at the University of Ottawa and the author of several e-cigarette and health studies. 

The company now has a total market value of under $7 million and is bleeding cash.” 

Sweanor said that “cannabis was a potential lifeline that also meant being in a business that was fueled by hype.”

“The company separated those two components, but then opted to go with delivery of just the lethal smoke rather than benign forms of the nicotine consumers seek.”

When 22nd Century purchased GVB, former chief executive James Mish called it “a transformational acquisition for 22nd Century that will enable us to rapidly grow our hemp/cannabis franchise.”

On Monday, interim chief executive John Miller said “the sale of our hemp/cannabis franchise will immediately and materially further reduce the cash and operating demands within our business.”

22nd Century unveiled on July 25 that it was conducting an undefined cost-reduction initiative expected to cut expenses by $15 million annually — equivalent to about 26% of its $58.3 million in fiscal 2022 operating expenses.

“We expect this transaction will substantially lower 22nd Century’s operating expenses beyond the previously announced $15 million in cost-savings initiatives on an annual basis,” Miller said.

More to come?

Miller said the pending sale of GVB doesn’t end its consideration of potentially selling its tobacco assets, including its very-low-nicotine traditional cigarette products.

In September, 22nd Century announced its board of directors was “evaluating strategic alternatives” for its very-low-nicotine products that at least two analysts say could be a foreshadowing of a federal bankruptcy filing.

22nd Century said the corporate review will include “consideration of a range of strategic, operational and financial transactions and alternatives, such as business combinations, asset sales, licensing agreements, alternate financing strategies and other options.”

Despite a major and risky distribution push this year with Walgreens pharmacies and 7-Eleven and Circle K convenience stores, the products have struggled to gain traction with smokers.

In early November, the manufacturer reported a third-quarter loss of $72.7 million, compared with a $13.1 million loss a year ago.

Third-quarter sales were down 8.1% to $17.8 million. That included $9.9 million from hemp and cannabis-related products and $7.9 million from tobacco-related products.

“Our dynamic store count growth did not translate into immediate revenue,” Miller said in November.

Clive Bates of Counterfactual, a London-based public health and sustainability consultancy, said the company “makes much of how many stores can in theory carry its VLN product, but remains tight lipped about how much it has actually sold.” 

Core deal details 

22nd Century projects closing the deal in early December with Specialty required to obtain up to $3 million in financing by no later than Dec. 30.

22nd Century has a 30,000-square-foot hemp ingredient manufacturing facility in central Oregon, a 40,000-square-foot finished product plant in Las Vegas, and an industrial-scale hemp extraction facility in Prineville, Ore. The companies did not disclose the workforce levels at those facilities.

GVB also has offices in the United Kingdom and Brussels.

The deal requires the approval of 22nd Century’s senior lender. 22nd Century plans to use the proceeds from the sale to further deleverage its balance sheet.

The sale involved a $1 million cash payment at closing and a 12% secured promissory note issued by Specialty valued at $1.25 million. The note is payable in six equal monthly installments commencing on the fourth calendar month following the closing.

The companies have agreed to equally share in the liabilities related to the GVB assets that are not purchased.

22nd Century will retain any insurance proceeds — ranging from $2 million to $9 million— received in connection with the fire at GVB’s Grass Valley manufacturing facility.

22nd Century’s struggles

A beleaguered 22nd Century Group Inc.’s global expansion prospects has taken several significant blows during 2023.

The latest comes with the new New Zealand governing coalition and its governing priorities being unveiled Friday following the Oct. 14 election, including repealing amendments to its Smokefree Environments and Regulated Products Act 1990 and other regulations by March.

Among the repeals is reduced nicotine requirements for traditional cigarettes that were set to go into effect in April 2025.

22nd Century’s very-low nicotine products — known by the acronym “VLN” — are touted as containing 95% less nicotine than a traditional cigarette, thus a potential option for smokers looking to cut back, if not halt, their consumption.

It is the only currently available reduced-nicotine traditional cigarette product.

22nd Century said in a February news release that its potential in the New Zealand reduced-nicotine traditional cigarette marketplace was enough to accelerate a seed cultivation project for its proprietary reduced nicotine content tobacco.

“New Zealand was the standard bearer and front runner for the reduced nicotine rule,” Bates said.

Regulatory uncertainty

22nd Century’s momentum has been slowed significantly with the Food and Drug Administration delaying a potential reduced-nicotine rule until December, if not well into 2024.

Analysts say those rules likely will face years of legal challenges before being implemented, if ever.

Anti-smoking advocates say that if the FDA is successful in mandating very-low nicotine cigarettes, some smokers may go to a black market to buy those made outside the U.S. with current nicotine levels.

Smokers could decide to consume more very-low-nicotine cigarettes in order to gain the same nicotine levels as they are accustomed to now.

On Nov. 16, 22nd Century Group received its second notification this year that its share price is not meeting Nasdaq minimum listing standards.

A deficiency letter was sent from Nasdaq’s Listing Qualifications Department for minimum bid prices. The letter formally informed the tobacco and cannabis manufacturer that its share price had been below $1 for 31 consecutive business days.

The share price opened trading Tuesday at 21 cents. The last time the share price finished above $1 was on Sept. 22.

22nd Century regained compliance with Nasdaq listing requirements on July 21 after being issued a warning in early April when its share price was worth 68 cents.

The manufacturer achieved that requirement in large part by conducting a risky reverse 1-for-15 stock split that increased its share price at the time from 30 cents to $4.50.