22nd Century Group, Inc

Good morning, ladies and gentlemen, and welcome to the 22nd Century Group Second Quarter 2023 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. I would now like to turn the conference over to Mr. Matt Krebs. Please go ahead, sir.

Thanks, Lara. Good morning, and welcome to 22nd Century's second quarter results conference call. Joining me today are John Miller, interim CEO, and Hugh Kinsman, CFO. Earlier today, we issued a press release announcing our results for the second quarter of 2023. The release, presentation, and 10-Q are available in the investor section of our website at xxiicentury.com. We'll start today's call with prepared remarks from John and Hugh before moving into Q&A. The Q&A will be a session with our analysts, and today's call will focus on key updates to the commercial activity in our VLN tobacco and GBB hemp cannabis business units. We will not be able to cover every aspect of the business in the time allotted for this call. If you have questions about our business not addressed in this call, you're welcome to email Investor Relations using the contact information provided in today's press release. On slide two, a few reminders for today's call. Some of the statements made today are forward-looking. forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly, and other reports filed with the SEC. During today's call, we may also discuss non-GAAP financial measures, including an adjusted EBITDA, which redefines earnings before interest, taxes, depreciation, and amortization as adjusted for certain non-cash and non-offensive expenses. For more details on these measures, please refer to our press release issued earlier today. And with that, I'll turn it over to Matt, beginning from slide three.

Thank you, Matt, and good morning, everyone. It is my pleasure to update you on the meaningful progress we made this past quarter and our company's path forward. I was appointed interim CEO of 22nd Century in late July, and I am grateful for this opportunity at such an important time in our history. I believe 22nd Century possesses unique assets in both the tobacco and hemp cannabis business to create meaningful value for the company. This is what originally attracted me to 22nd Century last year, and my enthusiasm about the future has not changed. As interim CEO, my number one goal is to grow the value of our assets while being fiscally disciplined. I am very pleased to report in our hemp cannabis business, we had another record volume quarter as we continue to assert our industry leadership. In the first six months of 2023, Kilogram shipments have already exceeded shipments for all of 2022, and we expect improved operating results in the second half of this year as we bring our internal production back online and move ahead with our Cookies and Old Pal license agreements. We have also made solid progress on the tobacco side of the business. We had some delays in our commercial plans earlier in the year, but we have quickly expanded both our state and store counts for VLN over the past couple months. This includes our recent launch in California, Texas, and Florida with the number one U.S. e-store chain and other retailers in those states. These retail placements are all supported by national and regional distribution programs we executed earlier this year. Additional retail chains continue to schedule launches, including our first drugstore chain that will push us to over 4,000 stores in 16 states in September. In addition to making strides building our brand, We are also revising our go-to-market strategy to better maximize the potential of our product portfolio by prudently deploying our capital. Another important element I will share with you today is the way in which we have previously supported VLN is changing. With our 16 to 18 state footprint, we are pivoting our VLN strategy to streamline operating costs, focus on demonstrating the unique brand attributes of VLN, and drive performance to create value from this incredible product. I have considerable experience in this product development and know it takes time and money to build a brand. Even after a brand is established in the marketplace, there are considerable resources required to keep the brand relevant. The path to creating value with VLN is within reach with our new footprint, and it requires a more targeted and efficient approach showcasing how VLN is a brand of choice for adult smokers who want to smoke less. These changes in our strategy are part of how we are able to target over $15 million in annualized cost savings from our business, as noted in our July press release. Starting from slide four, let me dig into the tobacco business and our continued evolution of the commercial plan. Slide five gives key updates in our VLN rollout so far this year. During the second and third quarter, we have expanded our state and store presence, which now stands at almost 3,000 stores across 14 states. We expect to surpass 4,000 stores in 16 states by early September with a drugstore chain launch in five states and the continued development of the diverse funnel of regional and national chains interested in VLN. We are pleased with the progress we are making bringing VLN to new states, yet we recognize the launch has not been without delays. We experienced longer than expected lead times bringing on new C-stores as we don't often control the retail distribution timelines. Delays are typical for any product launch. Our launch is no exception. But one thing is clear. Retail chains recognize that adult smokers are interested in this product. Our expanded retail footprint now gives us the base and scale on which to prove out VLN as a brand, which is the full focus of our new marketing and social channel activity in the second half of the year. This campaign emphasizes positive motivation and empowerment, as opposed to the typical negative messaging associated with anti-smoking campaigns. I'm pleased to report early returns on engagement and driving adult smokers to stores that sell our product are solid. We are also eagerly awaiting the FDA updates on its highly anticipated menthol policy, which is scheduled to be issued this month. Menthol is known to increase the addictiveness of tobacco products, and menthol products have for years targeted higher risk and minority communities. Banning menthol could be a transformative public health policy. But research and experience tells us that a menthol ban, absent an off-ramp product, is not effective at reducing smoking, and instead tends to drive menthol smokers to other traditional cigarette brands. We believe a clinically and scientifically informed policy providing for non-addictive off-ramp products, such as VLM menthol, can help these smokers truly cut back and make real progress. Millions of dollars have been spent on studies illustrating this fact, many of them used for MRTP authorization and funded by federal health agencies. This makes our product an ideal candidate for exemption. Turning to slide six, we began commercial efforts on VLN at the start of this year and made progress versus what is normal in industry, even for established brands. Perhaps most important, you'll see a larger number of dark green states where we have initiated VLN sales activity, including the three largest markets of California, Texas, and Florida. We now have line of sight to 16 states with our upcoming drugstore rollout, which will increase store counts to more than 4,000 locations. Much of this has been accomplished due to the national and regional distribution resources put in place early this year. It was an investment of time and money and added key chains quicker than we could have otherwise. This includes the three-state corporate launch with the number one C-store and upcoming five-state drugstore rollout. Proving out the brand with these chains will be a major part of our second half efforts where we are increasing our focus on maximizing market acceptance within our footprint as we continue to refine and update our strategy. Doing so will be the key to opening up new partnerships, licenses, and other opportunities for VLN and other reduced nicotine products our technology can support. On slide seven, the updates to our strategy are closely tied to what we have identified as key success drivers for VLN. including awareness, education, trial, repeat purchase, and advocacy as smokers see positive outcomes with VLN. Early consumer data from our new marketing campaign continues to affirm strong product acceptance at more than 70%, and a similar metric for VLN replacing their usual brand. An amazing 98% of smokers are willing to talk about VLN with other smokers. Getting the word out is important. And our new campaign deploys an extensive toolset, including marketing communications, in-store activations, digital and social outreach, our brand website, consumer engagement, peer-to-peer marketing, and PR efforts. We are augmenting our brand activities with regulatory efforts to drive a more favorable environment for harm reduction products. We are pursuing commercial development towards partnerships and licensing opportunities that could further the reach of reduced nicotine products. Governmental outreach has been initiated to educate and inform on the need for policies driven by science that build on good clinical research to reduce the harms of smoking. And marketing campaigns have launched to create a more favorable environment for adult smokers to choose a lower nicotine future. Slide 8 illustrates some of the new marketing campaign elements to reach adult smokers. Much of this is driven by targeted social and digital marketing, especially in channels where we can identify a likely smoker or person interested in reduced smoking, including influences with smokers, such as family members. As you know, VLN is a very different product from traditional FDA approved smoking cessation products. It recognizes that smokers are not just addicted to nicotine, but also the act of smoking itself. We want adult smokers to learn that VLN offers a new positive and optimistic approach to reducing smoking that gives them flexibility to keep moving forward with their health goals even if they have a setback. We empower smokers to confidently and capably take control of their habit, break the nicotine addiction, and then move away from the behavior. This education process takes time and is definitely a different mindset from traditional cessation tools, but a welcome new idea to many adult smokers who want to smoke less. Early data in key markets show that our campaigns are driving BLM messaging to interested adult smokers. We're seeing high impression and content viewership rates and strong click-through rates, as well as data demonstrating that the campaign interactions are creating store visits from potential BLM consumers. This and other data allows us to build efficient campaigns in specific markets. Moving on to slide nine, we'll discuss Pinnacle, a private label conventional product that we contract manufacturer for a top five C-store chain. Pinnacle is positioned as a well-crafted traditional cigarette, attractively priced versus other well-known brands. For those not yet ready to cut back or quit, Pinnacle offers a high-quality, reduced-cost option and is now available across more than 20 states and 1,200 locations. Early sales are good, and we look forward to the retailer's efforts to increase share and drive additional volume. Pinnacle can also help pave the way to other private label brands and placing BLM products in these partners' stores. That wraps up my overview on our tobacco progress and the revised strategy. Starting from slide 10, I want to spend a few minutes on our successful and growing hemp cannabis business, where we are now in position to further improve operating results with the return of our in-house manufacturing capabilities. On slide 11, GBP continues to assert its market-leading position for the supply of hemp-derived active ingredients and finished consumer packaged goods. We've built a solid global footprint, providing opportunities for further market growth as this industry becomes more mainstream in multiple markets. Sales have ramped strongly, and we believe we'll continue to do so, proving an important opportunity as we resume in-house production at our new facilities. In addition to record volume and the return of vertical manufacturing, we now have multiple additional growth and improvement vectors. These include our new license and distribution agreements with major brands such as Cookies and Old Pal, the launch of our own hemp extraction capability, rather than purchasing, extracting third parties, and our first direct biomass contract growing program. This will help to reduce costs and transfer more margin to 22nd century. Putting all these pieces together, we believe our hemp cannabis business is now firmly on a strong trajectory in an exciting new global growth market. Slide 12 details our record-setting ingredient volumes. I'm pleased to report that this quarter we delivered more than 76,000 kilograms of ingredients. That's three times what GVB delivered in the same quarter last year. Additionally, for the first half of 2023, kilogram sales have already exceeded 2022 deliveries. As you can probably surmise, this has put us in a strong position in the North American hemp cannabis extraction business. Our decision to ensure we maintained all customers' deliveries during the rebuild is paying off, even though we incurred a margin cost that has directly impacted our cash flow models and cash position. As noted in today's press release in 10-Q, we believe our business interruption insurance will cover a portion of these losses, which were estimated at $2.4 million in the most recent quarter alone. and we have initiated litigation to protect our interest in this matter. As our capacity comes back online, we expect our margins will return to positive territory and even increase through internal optimization efforts already in motion. This is an important point to reiterate as it provides true gross profit dollars to offset operating costs where we have not been able to do so for the past nine months. On slide 13, we're also moving into the implementation phase of our license and distribution agreements with Cookies and Old Pal. These exclusive agreements cover branded hemp-derived cannabinoid consumer products and accessories. Uniquely in the industry, 22nd Century can provide a single source of integrated supply, production, sales, and distribution, leveraging our industry-leading formulation, ingredient, and manufacturing infrastructure, plus a comprehensive sales and distribution platform. With 22nd Century providing these functions, the brand can fully focus their resources on product and market development, helping to grow a new market characterized by high margin, high velocity products that fit perfectly into the existing C-store and specialty channels that already serve the targeted consumer. To summarize, our GVB business remains strong. We are now well positioned to drive improved operating performance to generate cash flows to better offset our operating costs and improve total corporate performance for our stockholders. Now I'll turn the call over to Hugh for a detailed review of our financial results On slide 14.