22nd Century Group, Inc

Welcome to the 22nd Century Group's first quarter 2024 conference call and webcast. At this time, all participants have been placed in a listen-only mode. The floor will be open for questions following the management's prepared remarks. For covering research analysts on the call, if you would like to ask a question at any time, simply press star 1 on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Matt Kreps, Investor Relations for 22nd Century Group. Please begin.

Hello and welcome to 22nd Century's first quarter results conference call. Joining me today are Larry Firestone, CEO, and Dan Otto, CFO. Earlier today, we issued a press release announcing our results for the first quarter of 2024. The release and thank you are available in the investor section of our website at XXIICentury.com. We'll start today's call with prepared remarks from Larry and Dan before moving into a Q&A session with our analysts. If you have questions about our business not addressed on this call, you are welcome to email Investor Relations using the contact information provided in today's press release. Before we begin, 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. Also during today's call, we may discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, and amortization as adjusted for certain non-cash and non-operating expenses. For more details on these measures, please refer to our release issued earlier today. And with that, I'll now turn the call over to Larry.

Good morning, and thank you for joining 22nd Century's first quarter 2024 results conference call. When I spoke to you for the first time as CEO of this company last quarter, I told you that 22nd Century had a brand new focus to become a self-sustaining and cash flowing business. I said that our priority was what is good for the company comes first and that we are dedicated to making this company live within its skin as a profitable cash positive NASDAQ listed company with a strong foothold in the tobacco space focused on nicotine harm reduction. I meant that as a sincere commitment, and I want to say at the outset that I mean it just as much today. Last quarter, I told you about some of the steps we had taken right away to turn this company in the direction of profitability. I'm eager to tell you about how those steps are starting to pay off and how we are continuing to turn the ship in the right direction. At the same time, I want to be straightforward and remind everyone that turnarounds don't happen overnight, and there is a lot of work yet to be done. An example of results, cash used in the first quarter of 2024 fell to just $2.5 million, as opposed to last year's quarterly cash burn rate of approximately $15 million. The number of financings we had to arrange over the past year to support that kind of spending tells the story. We will continue to consume cash over the balance of the year, but please know that we are pulling hard on all levers to continue to drop our burn along the way to break even and then cash positive in 2025. Before I get into more specifics, let me just say one thing about those financings. Raising capital in these markets remains difficult, and we are thankful to the investors that have supported our company during this turnaround process. It's important to note that they are not just buying and selling stock, but are providing critical incremental capital that sustains us through this turnaround. In April, those investors raised an additional $4 million to help us keep moving forward to success. Every dollar counts, and we are stretching those dollars as far as we can and evaluate every decision by answering the question, how are you going to pay for it? This is in light of our goal to achieve cash positive results. Getting back to operations, I couldn't be more proud of how quickly our team has moved to drive to the goal of break even by making significant changes in our business that put us on a path forward to accomplishing our goal. We have increased prices on or discontinued unprofitable product lines, significantly reduced our operating expenses in all corners of the company, and our cash utilization rate is down to a fraction of what the company had been spending before I joined. We intend to show even more progress in the second quarter as we work to grow our revenues profitably and continue to push on operating expenses in our drive to break even in Q1 of 2025. We booked some new profitable CMO business, which we announced in April, and those orders are beginning to ramp in the second quarter. Not only have we focused on the P&L, but we have strengthened our balance sheet through debt reductions using stock as our currency. Let me unpack some of the key pieces of our transformation efforts in a little more detail. On the revenue side, we declined slightly quarter over quarter, which was expected as we worked through the product mix, adjust pricing, and in some cases, turn off certain lines in the CMO business that had or negative gross margins. Some of this may drag through Q2 and into Q3 as we have contractual agreements that obligate us while the product is transitioned out of our shop and into a new supplier. We expect gross margin improvement as we execute the rest of the year. During April, we announced a new CMO customer that will boost our CMO volumes by up to 20% once fully implemented. But just as important, we'll work to profitably offset the decline in the unprofitable filtered cigar business as we offload those that are unprofitable. Our new contracts began to ramp up in the second quarter. We also announced a new distribution agreement adding cigarillo products to our Pinnacle brand. These will be sold through a top five C-Store chain with more than 1,700 stores across 26 states. This is an incremental addition to the shelves in one of the highest tobacco sales volume per square foot C-Stores where Pinnacle is promoted as their store brand to save customers money. This has also begun in Q2 and we'll add to our top line in gross margin. Dan will get into the details on gross margin and OpEx in his section, but I want to be clear. We've fully adopted a lean cost mantra across the company. All of this tallies up to substantial savings in 2024 and beyond. I've said before that our trademark brand, BLN, which stands for Very Low Nicotine, is to cigarettes as decaf is to coffee and skim is to milk. If anyone has told you you need to cut back, we have the tool. The name stands for something very important and it's up to us to make it count. We are retooling our VLN branding and we'll roll out our new branding in the second half of the year. We're driving to make VLN more visible in the store And the FDA data that we use to secure our MRTP authorization makes clear that our VLN cigarette can be a critical tool in the fight to reduce the harms from nicotine from smoking. And smokers who have used the product successfully credit VLN with playing an important part in breaking the cycle of nicotine addiction and helping them smoke less. When we launch our new branding, We want VLN to be the tip of the spear in the creation of an entire harm reduction category centered around reduced nicotine products. We are also looking for other brands that we produce to adopt and carry a VLN SKU in their product lines as well. If successful, this will give smokers who want to pursue changes in their nicotine consumption more very low nicotine choices and make the category more visible. The good news is that we have the distribution and stores to accomplish this goal in place. We just need to continue our pursuit of consumer awareness and consumer acquisition. To that end, we're focused on two aspects. First, we're rebuilding the marketing and education around VLN using resources that I've used before in similar efforts, as well as our branding efforts. And second, we're moving ahead on additional strains of reduced nicotine content tobacco to support additional blends as we go forward, which will allow us to offer customers a chance to more closely match a reduced nicotine alternative to their existing preferred brand. By engaging our audiences and potentially offering a variety of BLM SKUs adjacent to their existing cigarette of choice and offering additional brand choices, We want to make it easy for smokers to recognize the concept of BLM as a choice and switch to a reduced nicotine content product and commit to their harm reduction journey. I also want to reinforce this simple message to our shareholders. Government actions to push harm reduction products to the forefront could potentially help us. We simply cannot and will not rely on government action as a part of our business plan. We must run the business within our span of control and are planning our business accordingly. We want to make smokers aware of our very low nicotine product and have them make the choice real time to reduce their nicotine harm. This is a powerful tool in our toolkit and the market, but the government is not going to force customers to use our products. But even without government action, I believe that our US government and the FDA want the U.S. population of smokers to realize the harmful and addictive nature of cigarettes and take the initiative to stop smoking on their own and solve the problem. The overarching cost in lives and healthcare and infrastructure related to smoking is huge. Our bar for economic success with VLN remains low, with 5,100 retail outlets that currently carry VLN. We just need each of them to sell nine packs per week to completely carry the entire company's overhead costs. That is essentially one carton per week per store. Some of the chains that carry VLN share our interests already and are developing separate in-store categories focused on harm reduction products for smokers. This commitment by retailers would be a major step forward in VLN brand awareness. As we continue working on our branding and product awareness initiatives, while we strengthen our financial capability and move towards profitability, we will increase our spending efforts with strategic retail partners in getting the message to smokers. We are looking to further increase our store distribution with relevant retailers and continue to build a support with the medical and scientific community that understands the importance of VLN brand to public health. As far as our CMO business goes, which is currently the bulk of our revenues, we see an opportunity to expand our reach and provide a valuable service to the industry and grow organically. Contract manufacturing is prevalent in many other industries, and our team in North Carolina is equipped to take the fixed cost of direct labor and overhead at our customers' sites and turn it into a variable cost for our CMO customers. This relieves them of the fixed nature of the overhead behind the direct labor and overhead, and it's a much simpler model for them as they can focus on marketing and selling. We will continue to work our strategies in this area to develop a wider network of customers with the goal of full utilization of our factory's capacity. I will now turn the call over to Dan to review the financial results for Q1, as well as some excellent news we released about our balance sheet. Dan?