Welcome to the 22nd Century Group Fourth Quarter 2023 Conference Call and Webcast. 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 fourth quarter results conference call. Joining me today are Larry Firestone, CEO; and Hugh Kinsman, CFO. Earlier today, we issued a press release announcing our results for the fourth quarter of 2023. The release and 10-K are available in the Investors section of our website. We'll start today's call with prepared remarks from Larry and Hugh before moving into the Q&A session with our analysts. If you have questions about our business not addressed in 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. During today's call, we may also 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 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 fourth quarter 2023 earnings call. I will cover the business status, and Hugh will cover the financials, and then we will open it up for questions. The timing of this call is interesting since it technically covers the fourth quarter results, but so much has changed over the past four months that the results are not reflective of how the company is operating today. Since our focus is 100% on how 22nd Century moves forward to become a self-sustaining, profitable, and cash-flowing business, a lot of the information contained in my part of the discussion will be oriented towards the shape of the company in the first quarter, and so some of this will cross over to the first quarter earnings call in mid-May. Our priority is, what is good for the company comes first. We are dedicated to making 22nd Century live within its skin, which is a profitable, cash-positive, NASDAQ-listed company with a strong foothold in the tobacco space, focused on nicotine harm reduction. One of the first big changes was the sale of the GVB hemp cannabis business at the end of December. This move helped us on several fronts. First, GVB was the largest source of cash burn in 2023, with a lot of unfunded overhead that was driving some of our largest losses. And second, any company that has operations around cannabis incurs a cost premium on just about every cost that the entire company incurs, for example, insurance. Insuring a business with a cannabis component not only costs significantly more, but the mainstream insurers pass on underwriting policies due to the fact that cannabis is involved. This same scenario spreads wide across the supply chain, so there is an inherent limitation on what the company can do to keep its cost structure under control. Unfortunately, this cost burden crosses over to the tobacco side as well. But now, since GVB, we can manage that. So unloading GVB not only eliminated a substantial portion of our cash strain that the hemp cannabis business was causing, but also will allow us to lower our costs in the tobacco business as well. Now, let's talk about the actions we've taken in the past 120 days to strengthen our core tobacco business. We've returned to our fundamental mission of using our patented biotechnology for the creation of products that address the harms of nicotine addiction and commercializing those products. We've cut our ongoing management labor overhead costs significantly, and that includes me. All employment agreements for the company's executives have been terminated, meaning everyone is employed at will. As an example, I do not have an employment agreement. If I fail, I can be terminated without a severance payment. For the results in 2023, there are no bonuses paid or planned and no equity compensation past what was already granted when I came on board. The same is planned for 2024. Spending on consultants and advisors has been terminated, except only for those few that are mission critical. Your Board of Directors has been working without compensation effective in the last quarter of 2023, and the overall board compensation has been cut aggressively for when payment does resume. We've reduced our overall headcount, and right now we have about 60 people in the company. We've raised our prices on our filtered cigar business, which has traditionally lost money at the gross profit line. We will get this part of the business on the right side of the profit line or exit it. We eliminated our second shift at our production facility and consolidated production to one shift for a substantial productivity gain. We closed our facilities in Buffalo and Maryland and consolidated all of our operations to our factory in North Carolina. We sold excess tobacco inventory; and although we took a non-cash accounting charge to cost of goods sold, this provided us with a non-dilutive cash infusion of approximately 1.2 million. That's an illustration of just some of the major actions we have taken. There are many more, but these are the major ones. As a result of this hard work, we've reduced our cash burns substantially and are still driving towards a much lower financial break-even point than we had as a company in 2023. We expect to reach break-even in the first quarter of 2025. What I can tell you is the cash burn is now massively smaller than last year, when at times we were burning $15 million in a quarter. As we operate today, we are still working through prior cash obligations, but we're on a downward slope, which is much lower than where we were last year. As a part of closing the gap, in addition to the cost reductions, we're working on new profitable revenue opportunities for both VLN and the contract manufacturing or CMO business to drive higher gross profits and get to our breakeven as soon as possible. We have several CMO opportunities that are near-term, and once they go live, we'll gradually lift our revenue. These will counter some of the contracts that we'll be offloading where we lose money. Once the dust settles, we're going to be in better shape. The additional CMO volume also helps our manufacturing overhead absorption, so the more volume we run through the factory on the same overhead cost, the lower our cost per carton will be on existing products. This business will continue to get healthier as we go. Now, I'm going to talk VLN. I know I'm the new guy and picking up where others have left off, but I couldn't be more excited about VLN and its possibilities in the marketplace for consumer health and for the success of 22nd Century. Let me first say that VLN means Very Low Nicotine. The scientific community uses the acronym VLNC to represent very low nicotine content. Our trademark brand, VLN, is to nicotine harm reduction from cigarettes as decaf coffee is to coffee or skim milk is to milk. If anyone has told you that you need to cut back, we are the alternative. We are the brand in the marketplace representing the only very low nicotine cigarette, and the VLN name stands for something very important, and it's up to us to make it count. Second, I'm going to do a little level setting for our shareholders. It's been widely speculated and anticipated that various government agencies from the U.S. and other countries are going to enact laws or some form of legislation that will position our VLN cigarettes as the only alternative for smokers, essentially opening up a lane where only VLN can travel. We can't simply rely on government action as part of our business plan. We also can't count on legislation of this type to happen anytime soon, and even with action, I don't believe that the U.S. government will enact a law so that VLN is the only cigarette on the market. We must build this brand and this company from the ground up so that our success will not only be dependent solely on legislation or federal action that would result in a huge hit to a major industry that provides substantial financial infrastructure within our domestic economy. Think about jobs, taxes, revenue, import, export related to the overall tobacco industry. We also cannot assume or bet solely on whether the U.S. government will make sure that our population of menthol smokers have menthol cigarettes available to them if they enact a law that prohibits them from being manufactured or sold in the U.S. Even absent government action, I would offer that our government, including the FDA, believes that the smoking population in the U.S. will heed the warnings on the pack and realize the harmful addictive nature of cigarettes and take the initiative to stop smoking on their own and solve the problem. The overarching cost in lives, healthcare, and infrastructure related to smoking is huge. So how do we move this forward and achieve success without relying on government actions? It's common knowledge that a majority of smokers want to quit and they are trying to quit consistently year after year and they need help to smoke less. They need tools such as VLN. We are an authorized and unique enabler to help reduce nicotine consumption. We are the first and only combustible cigarette to receive FDA authorization that specifically focuses on nicotine harm reduction. We are well protected from an intellectual property standpoint. We have a tool, our VLN cigarette, we believe that smokers will want to use in their fight to quit smoking. Introducing a new category in any market, much less the cigarette market, is disruptive, difficult, and very much a ground game to make the smokers in various states where VLN has distribution aware that this product exists and of the benefits of VLN's use. Being in that position, we must focus on developing an audience that uses our VLN products and communicates the positive results our customers have experienced so far and make sure success is known and the word is passed to others in the market. Like all segments of consumer brand markets, getting consumers to become aware and give a new or different brand a shot takes trusted results, time, energy, and resources. The mission to drive reduced harm for smokers and acquire customers who want to reduce their nicotine intake is a simple math equation. The simple math is, from a nicotine content perspective, one pack of 20 VLN cigarettes equals one single cigarette of any standard brand. What that means to a smoker who smokes a pack a day is the nicotine intake of smoking VLN for a full year would be the equivalent of smoking a standard cigarette for 2.5 weeks. To their pocketbook, a pack a day smoker is spending the equivalent of $2.50 an hour on a full-time hourly rate to smoke, and more to a part-time worker. Financially, for 22nd Century, from the 5,100 retail outlets that currently carry VLN, we need them to sell nine packs per week to cover the company's overhead costs or, essentially, just one carton a week. This does not seem like a heavy lift as we increase the VLN brand awareness, but we need to increase the awareness on a very small budget at this time. We do know that specific retail chains and independent retailers currently selling VLN are developing separate in-store categories focused on harm reduction products for smokers. These categories would highlight products like VLN and give adult smokers an alternative to traditional cigarettes. This action and commitment by retailers would be a major step forward in VLN brand awareness. As we continue working on our branding and our product awareness initiatives while we strengthen our financial capability and move towards profitability, we will increase our spending efforts with strategic retail partners and getting the message to smokers. As part of our strategy, we're looking to further increase our store distribution with relevant retailers and continue to build support with the medical and scientific community that understands the importance of the VLN brand to public health. We also plan to continue to drive awareness through social and digital channels and to activate the incredibly important peer-to-peer advocacy process that supports smokers as they take these life-changing steps to reduce their smoking addiction. These efforts to get just the one carton per week store average, plus our plans to improve the CMO sales and margin contribution, put us on a path to profitability. We have laid the foundation, cut the cost, and now we can focus on building the business to get there as quickly as possible. A couple of other topics to cover, as you saw in this morning's press release, we initiated the reverse stock split of 1-for-16 to regain compliance with the NASDAQ listing rules. Trading under the reverse split will begin April 2. As we evaluated the options, the same way we're turning the company around, we decided to move to the end state and close the discussion around the reverse split. Part of that decision included discussions with our incumbent equity investors who have supported 22nd Century through the past 12 months, and we believe are willing to support the company's greatly reduced cash needs as long as we close the gap to profitability and remain a NASDAQ-listed company.

Thank you, Larry, and good morning to everyone. Our fourth quarter financial results are presented on a continuing operations basis, which excludes our hemp cannabis business, which has been classified as discontinued operations. Net sales decreased by 26% quarter-over-quarter to $7.4 million, reflecting our ongoing reallocation of production resources to higher margin product mix, focused on VLN and conventional cigarette products as compared to lower margin filtered cigars. Gross profit decreased quarter-over-quarter to negative $7.8 million due to lower filtered cigar unit sales and the shift in product mix from filtered cigars to conventional cigarettes. Additionally, we recorded approximately $8 million in inventory reserves, primarily related to excess and obsolete tobacco leaf inventory. Excluding the inventory reserve charge, gross margin would have been positive $200,000 for the quarter. Net loss for the fourth quarter was $22 million as compared to $11 million in the comparable prior year period. However, adjusted EBITDA loss decreased significantly to negative $3.2 million in Q4 2023 compared to negative $9.9 million for the same quarter prior year, reflecting substantial reduction in operating expenses and implementation of efficiency initiatives. As outlined in our earnings release, we provide adjusted EBITDA as a non-GAAP measure aligned with our operating performance. As a result of the efforts undertaken by Larry since joining the company and our cost cut initiatives and operational efficiencies, we have substantially decreased the cash needs of our business, as evidenced by improvement in adjusted operating performance. Those efforts are ongoing in 2024 as we work to minimize cash requirements going forward and ultimately move the company to cash positive results. A few key highlights from our balance sheet include in our earnings release today, of note, total assets decreased substantially to $27.5 million, primarily due to the write-down of intangible assets, including goodwill, reflecting the divestiture of the hemp cannabis business. Cash balances remained relatively unchanged at $2 million for Q4 2023, reflecting a significant decrease in cash loss from operations due to reduction in operating expenses and the hemp cannabis divestiture. Finally, I should note that we are vigorously pursuing our lawsuit against Dorchester Insurance Company based on their failure to pay any amount towards our claim for business interruption insurance, following a devastating fire that destroyed our Grass Valley, Oregon, manufacturing facility. We are seeking $9 million in actual damages, in addition to significant consequential damages.

Your first question comes from Aaron Grey with Alliance Global Partners. Please proceed.

Hi, good morning, and thank you for the questions. This is Remi Smith on for Aaron Grey. My first question for VLN, could you speak to some of the sales or velocity specifically that you have seen so far from VLN cigarettes in any of your markets?

2023 was largely a stocking year. We have seen stock up in the stores. The takeoff of the product has been slow. In early 2024, in January, we also raised the price; we had some pull-in coming from that. It really is now a traction game out in the market. That is our challenge. I would say that our big lift right now is getting from the stocking point of view up to, as I mentioned, a carton per store. I don't have exact numbers for you. That is something we are working on. It is on the sell-through side.

Okay. I appreciate the color there. My second question, I am still focusing a little bit on VLN. I appreciate the focus on profitability and the cost cuts this quarter. Given the education need to continue to build awareness for VLN, can you speak a little bit more, provide additional details on your planned marketing spend and initiatives to building that awareness?

We are actually engaging to work on a little bit of brand enhancement around VLN. We have got some strategies that may allow additional SKUs to be brought to the market, as well as consumer awareness materials that are out there that comply with the FDA. That is where we have fallen short. Going through 2023, we pulled the funding for pretty much all of that. We will start to present the product in retail again in compliance with the FDA. That should help attract some attention as well as the packaging and the information we provide. We are also redressing our social networks and the website that we have. Especially the tryVLN website information has been pretty stale out there. I would say we are going through right now on a very thin budget. A total redress of the VLN presentation.

Thank you. And my last question, shifting over to CMO. Could you speak to a little bit of the CMO opportunities that you have? Given tobacco is a more mature category with structural declines. Any color in terms of where you are seeing those opportunities potentially in additional white label opportunities? Any color in there would be helpful.

There are additional white label opportunities. We have a great asset in North Carolina at our production facility that we call NASCO. We have some customers that need volume that exceeds their current volume. They are doing a cost-benefit analysis and figuring out that they would like to use our tools in their structure. We have six opportunities for additional volume coming into NASCO in the form of CMO opportunities. As we look at it, as I mentioned, it is a two-dimensional play. One is certainly higher top line. We are quoting profitably now. The second is as we absorb our overhead, it will reduce the carton cost for everything we are doing out of NASCO.

Great. I appreciate the color there. I will hop back in the queue.

Yes. Thank you. Good morning.

Good morning, Jim.

Can you talk about the GVB note, whether or not they need to raise capital in order to pay you guys off?

Yes, I will let Hugh take that one.

Hi Jim. The answer is yes. Our understanding is that they are in the process of getting that completed. I know they have received term sheets for refinancing that facility. I think they are going through the process of selecting the final lender and closing the transaction. The answer is they are making significant progress and moving towards refinancing.

Secondly, on the insurance recovery, I know you addressed it. I was hoping this would be a little bit more predictive on what you think the outcome will be and when.

I will take that. If I miss anything, Hugh, fill in. We have a hearing coming up in April. The first hearing should kick off the process. I think, Jim, as you know, this is in the courts. It is in Oregon. It is in Federal Court in Oregon. The timing-wise, it is going to be a docket question. Being more predictive on the outcome, we feel pretty strong about the outcome. Just to put a point on it, we have business interruption insurance. It is there for a reason. The business got interrupted. We went to the insurance company to get paid, and they did not pay. That is a huge problem. A huge gap in their commitment and a huge gap in the policy. The numbers are the numbers. They were put together. Unfortunately, instead of having them hit their commitment and what we paid for, we have to take them to court in order to win. It is a longer process drawn out, but we feel pretty confident in everything that has been put together.

Okay. Thank you. I am just trying to understand. There seems to be a conflict between the two. Between the growth of VLN and the limited resources to make it grow. It seems like you really can't make it - you really cannot get it to grow and drive that business until you get additional cash resources. I am just puzzled over the timing and how you guys are looking at accomplishing growth in VLN given the limited resources right now.

Well, first of all, there are many ways that we can enhance the presentation of VLN in the market. Price is one. I do not like to touch price as a first option, but it is certainly out there for us. We have some major chains that are carrying VLN right now. To move some market awareness material into a major chain, the good news is that whatever money we spend gets pretty widely distributed. Those will be discussions that we will be having with the chains. The digital world that we have has been pretty dormant for the last six months. We can start to activate a lot of that on a very little budget. As we grow, as VLN starts to sell, VLN is a very profitable business. Product for us, margins are very healthy, very tobacco industry healthy. We just need to get the product moving through the stores. That should start the generation of cash, generation of profitability.

Okay. Thank you. That's helpful. That is it for me. Thank you.

Thanks, Jim. Thank you. I would like to thank everyone for joining our call today. In closing, I will emphasize that we are absolutely focused on turning 22nd Century around and becoming a profitable company for the first time in the company's history. This, as I described earlier, is going to require our full focus on the business of making and selling cigarettes, our VLN brand, and our CMO brands as well, and keeping our costs in line. We look forward to updating you again soon in mid-May on our first quarter 2024 conference call. Lastly, I would like to thank our employees who keep driving 22nd Century forward. That concludes our remarks.

Ladies and gentlemen, this does conclude your conference call for today. We thank you for participating and ask that you please disconnect.