Welcome to 22nd Century Group's First Quarter 2023 Conference Call and Webcast. It is now my pleasure to turn the call over to Matt Kreps, Investor Relations for 22nd Century.

Thanks, Brian, and good morning, and welcome to 22nd Century's First Quarter Earnings Conference Call. Joining me today are Jim Mish, CEO, Hugh Kinsman, CFO; and John Miller, President of our Tobacco Business. Earlier today, we issued a press release announcing our results for the first quarter of 2023. The release of this presentation and 10-Q are available in the Investors Section of our website at xxiicentury.com. We'll start today's call with prepared remarks from Jim, John, and Hugh before moving into a Q&A session with our analysts. Given the limited time for today's call and Q&A, we will again focus on commercial advancements driving revenue in our VLN tobacco and GVB hemp cannabis business units. If you have questions about our business not addressed on this call, you are welcome to e-mail Investor Relations using my contact information provided in today's press release. On Slide 2, 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 noncash and nonoperating expenses. For more details on these measures, please refer to our press release issued earlier today. And with that, I'll turn the call over to Jim beginning from Slide 3.

We continue to execute our operational plan to grow the tobacco and cannabis business and transform to cash positive in 2024. We recognize that there are many key questions from our shareholders that we will answer today. These include clear guidance on revenues and how and when we get there, VLN distribution, and more importantly, store count and commercial sales, as well as hemp cannabis ingredient and distribution ramp-up. We also get a lot of questions about cost-cutting. I can assure you that this is a constant part of our discipline to focus dollars only where it leads to our goal of operating profit. Just this quarter, for example, my staff has been reduced by 30%, and we have ongoing cost programs across the business. Now this said, we will not cut costs our way to success. We are a growth company. We're off to a great start this year on revenue in Q1. And once the business interruption insurance for Q1 is received here in Q2, it will result in us exceeding the plan on revenue, gross profit, and operating results for the first quarter. I'm proud of this team and our continued execution of our plan that will drive growth, margin improvement, and operating performance. Recall that we have been consistent that Q2 would be when we gained real traction on commercial sales of VLN based on the flagged planning process and the timing of our retailers. It's important to understand that the VLN rollout follows a detailed process, but it is happening at twice the speed of a typical tobacco product rollout. John will detail our aggressive commercial rollout of our FDA-authorized VLN reduced nicotine cigarettes. This includes a highly anticipated launch covering thousands of stores across California, Texas, and Florida with the number one U.S. C-store chain supported by national scale distribution providers. Additional new retail chains are already scheduling product launches planned for 2023 to ensure their position with us. In our hemp/cannabis business, we're focused on growth initiatives to capitalize on our dominant market position in cannabinoid ingredients in our new sales and distribution services. We again reported record cannabinoid ingredient volumes and recently signed two transformational CDMO+D license agreements with industry leaders Cookies and Old Pal. Combined, these agreements are worth at least $140 million in sales over their three-year term with very attractive margins, and additional deals are well into the pipeline. We're also restoring our capacity lost in the Grass Valley fire, and while business interruption insurance will cover our margin impact in Q1 and Q2, we will see significant margin expansion in the second half of 2023 due to this restored capacity. Combining these facts, our confidence in our growth outlook has us introducing our first revenue guidance for full-year 2023 with revenue of $105 million to $110 million. This represents a 69% to 77% increase from the $62 million in 2022. Achieving that goal plus execution on several cost-cutting and margin improvement initiatives already in progress provides us a clear pathway to achieve cash positive operations from both businesses in 2024. Slide 4 provides a snapshot of this path. In Tobacco Products, we've secured major national scale distribution agreements with the number one and number two distributors that expedite putting VLN into hundreds or even thousands of stores at a time across multiple states. This enables the launch we are working on now with thousands of C-stores in the three largest state markets and for us to expand our relationship with the number two C-store chain, and also opens up a massive funnel of more than 100 retail chains interested in VLN. Q2 is where the commercial sales and store count will take traction, and recall that we just need to hit an annualized run rate of 1.2 million VLN carton sales to generate positive cash flow in our tobacco business unit. In hemp/cannabis, we continue to deliver record ingredient volumes as the dominant leader. We're driving increased demand for our CDMO services and have now secured the first two exclusive fully verticalized sales and distribution agreements with major brands. Combining with several cost-cutting and margin improvement programs, we're tracking to our goal of cash positive in the first half of 2024 in this business. I say with continued confidence and stay confident that we will deliver on the company's full potential and cash positive operations. With that, let me turn it over to John to discuss our tobacco business activities in much more detail.

We are rapidly scaling an incredibly disruptive product and on track to move quickly from 500 stores carrying VLN to 5,000, and that's just to get things started. And while the path has certainly changed along the way, and we'll continue to evolve as we learn more about this incredible product, we are 100% committed to its success. Turning to Slide 6. It's important to appreciate that at this time last year, we were 30 days into our VLN pilot. We needed to confirm how to take this exceptional product from FDA authorization to scalable distribution to full consumer acceptance. The cigarette category is ultracompetitive. National distribution is multi-phased, time-consuming, and complex, and the adult smoker acceptance will be driven through sales and marketing actions that drive awareness, education, and trial. Early sales exceeded industry expectations and drove our continued market research activities and testing through the remainder of 2022. I came on board last May and in the fall began to hire our team of deeply experienced tobacco industry professionals to help us in our mission to be the last cigarette adult smokers ever purchase. By December, we knew that there was an opportunity to make a major shift into national-scale distributors with geo-focused retailers and the sales and marketing activities that will drive consumer acceptance. We understood this process would require some time but would also greatly accelerate our launch capabilities for 2023. We have now done that, and our new launch plans for thousands of stores will be the proof that the time, patience, and incredible effort that has taken place behind the scenes these last few months were 100% worth it. Slide 7 explains why. You've seen this map. What is different is that we now have the number one and number two national distributors signed up and shipping, allowing us to place VLN in 1,000 stores within weeks. This is critical as the opportunities our teams have worked on for the past five months can take us from 500 stores to 5,000 stores in a single agreement, and that's just the start. This distribution has also opened up the floodgates, and retailers are scheduling product launches across the rest of 2023. This includes not only convenience stores, but also pharmacy, big box, club stores, and military sites, all drawn from more than 100 retail chains now at various stages in our sales pipeline. Support is growing fast. For example, we have just been approved by the National Coalition of Franchise Associations behind one of our key retailers even before a launch. This gives VLN access to franchise owner groups covering more than 7,500 stores across the country. As another example of the benefit of taking the time to properly build the national distribution network, we expect to be rolling VLN to several Marine Corps bases later this month. The bases are located in Southern California, Arizona, and North Carolina. This provides an entry point to expanding with other branches of the armed forces domestically and internationally and supports a key Department of Defense initiative of helping our military personnel reduce smoking. These military facilities are all serviced through our new distribution agreements. Moving to Slide 8. Underpinning this phenomenal market access and acceleration, we have refined and enhanced our consumer marketing based on what we have learned so we can maximize these incredible opportunities. Our research last year helped us to understand how smokers are not just addicted to nicotine but also actively wish to address their nicotine addiction, and we also know that utilizing negative messaging often works against success with smokers. VLN offers a new tool and a positive, optimistic approach to reducing smoking. We empower smokers to confidently and capably take control of their habit, break the nicotine addiction, and then move away from the behaviors as well. This is a critical distinction for VLN. You'll also notice that the ad sample captures those same strengths that set VLN on a path: confidence, capability, freedom, and a lack of pressure from fear of failure. It's really an incredible opportunity to give power back to adult smokers, so they can succeed on their own terms. Turning to Slide 9. As part of getting the word out about this incredible new tool to reduce smoking, we're going heavily digital with a hyper-targeted awareness campaign designed to educate and encourage trial. We can be very precise with our placements, reaching just our targeted audience or key influencers by utilizing videos, native, banner, and image ads. These and other dynamic engagements are designed to convey the VLN product position, value proposition, and reinforce brand credibility. One of the things we learned is that many smokers are absolutely interested in switching once they learn about VLN; an incredibly difficult feat with smokers who are among the most brand-loyal consumers gives credence to how powerful VLN can be. Moving to Slide 10. We'll complement that engagement with the revamped brand site, testimonials, continued positive reinforcement and encouragement, plus local PR efforts to generate public awareness and proactive conversations about smoking harm reduction and how this new tool can help smokers reduce their smoking by still smoking until they naturally see a decline in their consumption. We're also looking to build and reach influencer communities. In addition to macro social influencers and clinical leaders, it's also micro influencers and peer-to-peer influence, such as family members and friends of smokers who can play important roles in education, awareness, and continued support along this journey. On Slide 11. So can we do it? That's the key question. The good news is that we not only have an incredible runway of exciting new relationships, market data, marketing campaigns, and retail stores, but we also have proof points that we can put a new product into thousands of stores across more than 20 states and quickly gain share, which is exactly what we are doing with VLN. The Pinnacle launch is a top-five C-store chain with 1,700 locations, rolling out in just weeks through one of our new distribution agreements. Early sales are robust even before the C-store began promotions, moving toward a run rate of several hundred thousand cartons per year. This experience illustrates the path for VLN with more retailers, more stores, and a more differentiated story. In short, yes, we can launch with the number one chain across thousands of stores in multiple states. All we need is the green light to go. On Slide 12, we update several other initiatives in place designed to expand and improve our business results. Many of you are keeping a close watch on our national efforts, which are moving forward. We've launched a test in Switzerland. The product has already shipped to our Swiss distributor, and more than 200 targeted stores will receive VLN later this month. In Japan, we have cleared all major regulatory hurdles and are preparing a shipment to our Japanese distributor to begin a test in approximately 200 stores in June. Our efforts in South Korea continue to move ahead. We learned a lot from the initial program. We've updated the packaging and product attributes to align closely with that market and will again be shipping mid-summer for an additional retail program. Slide 13. On the operational front, we're taking actions to improve our margins and profit. This includes rotating out of lower-margin filter cigar business and allocating greater production capacity to our growth markets in premium products like VLN and Pinnacle. Volumes have already increased ahead of retail placements as distribution centers prepare for their customer sales and replenishment orders. You will start to see this activity in the Q2 results and growing thereafter. Turning to Slide 14. We have talked extensively about the benefit of federal regulation in both the U.S. and overseas and believe these policies are moving closer to reality. We believe that the first action is the FDA's proposed ban on menthol slated for final rule status in August. We believe that our VLN Menthol King cigarettes could be the only combustible menthol cigarette on the market exempt from the federal menthol ban. Longer term, a federal reduced nicotine content mandate, such as that adopted by New Zealand, would be even more effective in reducing the harms of smoking. We are excited about New Zealand's groundbreaking policy as not only a great policy for their country, but as a template for other countries to pursue similar action. We announced a seed growing program sufficient to supply the entire New Zealand cigarette market, approximately 2 billion sticks. This shows that it's not only feasible, but actually workable to scale up a full federal reduced nicotine program in a relatively short period, a massive opportunity for public health benefit. Bringing it all together on Slide 15, we're rapidly accelerating toward our goal of achieving cash positive results in 2024. We are driving to exponentially increase VLN's availability. We're leveraging our new distribution agreements and an incredible pipeline of retail stores wanting to carry the product. These efforts are backed by a new consumer awareness, marketing, engagement, and influencer campaign designed to empower and affirm smokers, encouraging them to take control and achieve success. Our campaigns will support the adult consumer and positively reinforce their efforts. And along the way, we are optimizing our operations to transition our capacity towards these better margin growth opportunities, scale of VLN capacity, and generate results for our investment and the team driving the VLN ramp. Success here drives scale, margin improvement, and ultimately cash positive results in 2024. With that, I'll hand it back to Jim.

That's really an incredible update and should give everyone listening a clear understanding of the massive amount of activity and line of sight to revenue in our VLN programs. I'm excited to say we're also seeing similar results in our hemp/cannabis division. Starting on Slide 17. GVB is the market leader in North America for the manufacturing of hemp-derived active ingredients and finished products servicing the consumer packaged goods, nutraceutical, and pharmaceutical industries with a global footprint. Sales have ramped strongly, and we believe we'll continue to do so, driving the cash positive operations in the first half of '24. This is driven by key actions in motion. First, we continue to set new records for ingredient volumes and sales delivered quarter after quarter. Second, our new CDMO+ distribution model provides a complete vertically integrated solution between 22nd century and brands. Third, our new extraction unit is online and a new distillate unit is coming online in Q2, putting us on track to replace capacity and recover margins following the Grass Valley fire last November. And fourth, we're taking several other actions to both ramp up our volume capability and reduce costs to improve profitability, such as new contract farming of our own hemp biomass. Moving to Slide 18. We continue to set new records in ingredient delivery each quarter and don't see that trend slowing. This quarter, we delivered more than 68,000 kilograms of ingredient. This is four times what GVB delivered in the quarter a year ago, and we see continued growth ahead even beyond this exceptional number. This has placed us in a dominant position for North America, and our deliberate decision to ensure we maintained all customer deliveries and volumes even at a short-term cost to our margins was absolutely the right path, especially when the first business interruption insurance is received in Q2, applicable to Q1 gross profit. And I want to point out again that we're doing this without our in-house production facilities. As our own capacity comes back online, those margins will return to positive territory. We can further improve them through our internal optimization efforts already in motion. On Slide 19, we announced last week the second of our transformative CDMO+D agreements, now encompassing both industry leader Cookies and the well-known Old Pal brand. These exclusive license agreements cover branded hemp-derived cannabinoid consumer products and accessories. 22nd Century provides single-source integrated production, sales, and distribution, leveraging our industry-leading formulation, ingredient, and manufacturing infrastructure, plus the company's turnkey sales and distribution platform for a complete go-to-market solution. The brand can then focus on customer engagement and marketing while we provide expansive access to mass market channels, urgently seeking new high-margin products to meet growing consumer demand. I continue to think that the market has underappreciated this opportunity as we estimate the combined value of our two agreements signed to date is potentially more than $140 million, a significant increase in revenue over the next three years from just the first of these opportunities. On Slide 20, making those agreements possible is our industry-leading infrastructure. We believe that as our world-class extraction facility in Prineville scales, it will displace our third-party crude purchases in the market. Our new distillate facility in Prineville will be online this quarter with isolate production capacity to come in either late '23 or very early '24. Our new campus approach will increase total capacity, efficiency, and productivity, generating better capability than our original facilities. From there, our 40,000 square foot Las Vegas manufacturing site will leverage our VLN market sales and distribution teams for the new CDMO+D agreements. We've also opened new facilities in Europe and acquired RXP in the U.K. to create a strong footprint for landed ingredient sales in the higher-margin European market. And finally, Slide 21. Bringing it all together, we are tracking to exciting growth and a clear path to cash positive operations in the first half of '24 for this business unit. We'll do that by a steady and dedicated focus on operating performance enhancement, internalizing and capturing margins across our growing volumes, plus the new CDMO+D business agreements that significantly scale up our revenue and enable us to capture a greater share of the margin chain. We're augmenting these immediate actions with developments for the future, including pathways to pharmaceutical sales as new facilities come online and positioning for the future food and nutraceuticals market opportunity once the FDA and Congress establish the new regulatory pathway. And our success is not dependent on this. This is all upside. With that, I'll turn it over to Hugh to cover the financials.

Starting off on Slide 23 with first quarter financial results. Net sales increased 144% quarter-over-quarter to $22 million, reflecting the addition of GVB revenues. Net revenues are expected to increase steadily through 2023, driven by increased VLN sales, growing GVB bulk ingredient revenue, and new CDMO distribution agreements. Gross profit is projected to improve significantly in Q2 2023, reflecting a higher-margin product mix for the tobacco business unit as well as the return of production capabilities, the establishment of a farming program, and new distribution agreements for hemp cannabis. Moving to Slide 24. Tobacco revenue for the first quarter remained relatively unchanged at $8.9 million, with gross profit decreasing slightly to $18,000, reflecting the planned reallocation of project capacity towards a higher-margin product mix, including VLN and conventional cigarettes. On Slide 25, hemp cannabis revenue for the first quarter grew 85% to $13 million from $7 million due to continued strong customer demand for bulk ingredient products. Gross profit decreased to negative $1.2 million, reflecting the impact of the Grass Valley fire. The gross profit will improve immediately in Q2, reflecting our new structure facility, and the return of distillate capabilities. Gross profit will continue expanding throughout the year due to the new farming program and the return of isolate production in Q4 2023. On Slide 26, you'll see a few key highlights from our balance sheet. Of note, total assets of more than $124 million include approximately $51 million of goodwill and intangibles from the GBV and RX Pharmatech acquisitions. The balance sheet includes $23.7 million in cash balances, including proceeds recently completed $21 million senior debt facility. The new credit facility will fund increased working capital needs, reflecting significant growth in both VLN and the hemp/cannabis business lines. It should be noted that the company received insurance proceeds of $5 million from the Grass Valley fire in Q1 this year, with additional proceeds of approximately $8 million for business interruption to be received beginning in Q2 2023. Finally, Slide 27 reaffirms our revenue guidance for fiscal year 2023 of $105 million to $110 million. Both tobacco and hemp/cannabis franchises are tracking to cash flow breakeven in fiscal year 2024, reflecting strong demand for VLN product and hemp cannabis bulk ingredients as well as accelerated unit sales from our new distribution agreements. And with that, the operator will now open the call to any questions.

First question comes from Aaron Grey with Alliance Global Partners.

I just wanted to start off on VLN. It looks like you'll be transitioning to more revenue generation for then. Just to get more color. Did the shelf resets have an impact there? And are you already in place for that for your retailers, have been with the shelf space are you going to be expecting there? And then in terms of the revenue growth, you'll be expecting from tobacco off of that $40.5 million base of last year. It looks like based on the graph, it will be about in the low 50s or so. How much of that is driven by VLN versus by the Pinnacle?

I can take the question on the shelf and how we're going to be merchandising it. Everyone that we're going to market with, we have worked into their sets. We are part of the merchandising. A lot of them truly understood the story that we're putting out there about what our brand is about, and they want to provide us a solution to those 35 million smokers who want a solution. Yes, this is all encompassed within the schematics. And again, it talks about the process that I talked about, the extensive process, the complexity around it. That involves, obviously, planograms, reset schematics. VLN will be part of those sets. And I guess Hugh could probably answer the revenue question.

Aaron, just to give you some guidance. A significant portion of the incremental increase is related to VLN. Probably 60% to 70% of that, and the remainder is due to Pinnacle growth.

And then secondly for me, just in terms of the contracts that you have with Old Pal and Cookies, strong brands in the THC market, now transitioning to some of the other cannabinoids. As we think about the $140 million over the three years, how do we think about the timing and the ramping of that and how it might impact the P&L? One of the reasons I ask is because, again, kind of looking at the top line guidance, it would imply hemp sales to get in the low 50s. You guys did about $13 million. That kind of maintains that Q1 2023 run rate. Not sure if there are some shipments that might have impacted the timing that benefited the quarter that might not repeat or how to think about that segment going forward?

Obviously, we recently signed the agreement in terms of the shipments will start in Q3 of this year. And it increases pretty rapidly. The way to think of it is, I would say that bulk ingredients are pacing along the lines of what you said; it might even be a little higher, quite frankly. And we'll start later on the contract revenues. We fine-tune the production and supply chain cycle and then from there ramp the business accordingly, especially with the incremental penetration in the retail stores. Probably the way to think about it is ramping slightly in Q3, starting to really ramp significantly on both contracts in Q4. And then I would say, I wouldn't call it hitting a steady state because it looks like it will continue ramping meaningfully throughout 2024 and probably hitting a steady state sometime in mid-2024 and ramping steadily. But really the big ramp will be in the next two to three quarters for each of those contracts.

Next question comes from Vivien Azer with TD Cowen.

First off, with the launch of Pinnacle, can you please comment on price positioning, given the downtrading we're seeing in your cigarettes?

Yes. As we had discussed on the call, Pinnacle is a brand for one of our chains. And they're pricing it, I would say, probably the best position to say like probably around Lucky Strike. It seems to be in terms of that, in terms of their pricing and strategy on that product, not super premium, certainly not worth tier. But right around that position.

And then can you provide an update on the VLN's launch in the states that you were getting ready for last quarter, namely Arizona, New Mexico, and Utah?

Correct. As we continue to roll the product out and continue to refine the plans, we have had the product in Illinois and Colorado. We continue to make progress in those states. Certainly, still on the radar moving forward with all of those. Specifically, those three states are part of the 18 priority states that we're going to continue to ramp. And we are continuing to see, obviously, the retailer demand for that moving forward. Part of Aaron's question, really, it was very good because when you look at sort of some of the complexity around getting into the stores, it has been about timing. We are subject to resets, schematic changes, planograms. All of that is part of the discussions we're having with these major retailers in those states. It continues, and we feel we are on track to be exactly where we said we would be in those 18 states and probably a few others.

Next question comes from Alex Fuhrman with Craig-Hallum Capital.

I wanted to ask about, as you've expanded to more states, what have you seen in terms of the mix of menthol? And as you think about expanding to states that have either statewide or local city bans on menthol, how is your marketing strategy going to be different?

At the end of 2022, menthol accounted for around 35% of the market. With states like California and various local brands initiating over 100 efforts to ban menthol and flavored products, it's clearly impacting the category. Historically, our menthol levels have aligned closely with the market, sometimes slightly above, which is typical for a new product. We are actively monitoring the situation and have implemented strategies to position VLN as a solution for menthol smokers. A significant concern with menthol bans is that many smokers do not quit; about 50% to 60% simply switch to other products. We are presenting our case to legislative bodies to highlight why VLN serves as a viable solution, both federally and at the state level. As we move into markets like California, where menthol is banned, we recognize there is still a demand for alternatives.

And then can you comment on, now that you've been in more states that have preferential tax treatment for VLN, are you seeing any kind of a difference in velocity or profits for you or the retailers?

We are definitely utilizing different strategies depending on the state and how the retailer wishes to position the product. In Colorado, for example, we positioned it similarly to Marlboro's mainline. We've started collaborating with Circle K and Smoker-Friendly in Colorado and experimenting with various pricing strategies. Sometimes, we use funds for a better initial introductory offer for consumers. We're also conducting tests in Chicago with Circle K to determine the impact of removing the tax on MRTP products, and we are currently moving forward with that test. This flexibility allows us to try different approaches and promotes not only the product but also encourages people to try it and make repeat purchases.

Next question comes from Brian Wright with ROTH MKM.

I wanted to understand a little more about the comments regarding the processing of distillate in the fourth quarter. I'm interested in what will drive the additional gross margin improvement in the GVB in the second and third quarters, and what steps we should be aware of.

Yes, just to refresh everyone's memory, right now, we're purchasing and reselling both the distillate and isolate. The first big impact on margin improvement will come as our new world-scale extraction unit is online and operating. We'll continue to ramp that up, and that makes a big impact on margin improvement. The rebuild of the distillate facility is now moving very quickly in Prineville; it comes online in Q2. That relieves any of the purchase and resale; we go internal again. We continue to see margin improvement, dramatic margin improvement on top of that, especially now fed by our own extraction crude material. And then we've been expediting bringing the new isolate facility online. We had put a stake in the ground for Q1 of 24. We see pathways of pulling that forward, and we're executing on that. It's not definitive yet, but I do think we have a good opportunity to get that fully operational by even the end of the year, which will further improve margins. The margin improvement is stacked as we get into even Q2 now with the extraction and distillate and then into Q4 and Q1 on the isolate. In the meantime, for at least Q1 and Q2, the business interruption insurance heavily impacts the financials. It's a bit retroactive because the Q1 sales are covered by insurance that we're receiving now in Q2.

And then just wanted to understand you made some comments about some cost efficiencies and some reductions. And just was that just your staff? Or were there broader kind of actions? And just any kind of quantifications on kind of efficiencies there?

Yes, it's more of a constant process across all the functions. In both business units, we're looking for every opportunity to control our costs in a very disciplined manner and making every attempt to make sure every dollar goes towards our single goal, which is operating profitability. It cuts into every function, it cuts into every location, and it takes many different forms, whether it's an attritional loss that we're not backfilling, or we're taking proactive measures on the SG&A basis or CapEx programs, etc. Every dollar spent is under very high scrutiny for both myself, Hugh, John, and others, as they are functional leaders. We're looking for every way to control our costs. We know there's not an endless stream of capital out there, especially in today's market. Our intent is to drive this towards operating profit with no further dilution. It's an all hands review on a weekly basis to make sure every dollar is being maximized.

The VLN sales by the end of the year are going to be pretty significant as far as the overall tobacco business. And just like have you thought about like timing as far as when you think you'll start officially breaking out those sales?

I think we prefer to kind of get it into a little bit more of a steady state to such a significant incremental ramp for VLN over the next two to three quarters sequentially. Probably, there’s thought that we probably would start breaking out separately sometime Q2, Q3 of next year.

Next question comes from Jim McIlree with Dawson James.

In Q1, you did 68,000 kilograms of bulk ingredients. Once you get all of your reconstruction and construction plans completed, what will be the bulk ingredient capacity relative to the Q1 levels? Are you just replacing what you've been buying online? Or is it going to be replacing and adding?

We'll have capacity once we have all of our disciplined capabilities, including, obviously, the crude extraction capability online. And of course, a lot of it's incremental; we can always keep layering on incremental capacity going forward. But we'll have a capacity to produce that first quarter and probably five times as much if we wanted to on a run rate basis.

And can you help me understand what gross margin you think you will exit 2023 and 2024 at for both the hemp and the tobacco business?

Yes, I'd say for hemp tobacco 2023, so much of it's weighted towards the back end as far as margin expansion for the reasons that Jim had mentioned, but that probably is somewhere in the high single digits. Again, if you were to take fourth quarter and run that, it’d be much higher. Going into 2024, it would be maybe because it would have a full-year benefit of return of all of our function capacity, not to mention the farming program, which caps our per unit raw material costs, which is significant. Solidly in the 20% and possibly moving towards 30%. And then back of 2023, again, because of ramping up VLN and it's happening mostly in the second half of the year as Q2 and the second half of the year. We're going to see that plus the fact that we have Pinnacle and other tobacco products that are higher margin than, say, just the side of cigars; that margin will steadily expand, heading to 20%, and then it's going to be much higher than that going into 2024 as the weighted average. The majority of the weighted average sales are going to be geared towards VLN.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.