Good day, and welcome to the 22nd Century Second Quarter 2018 Business Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Mr. Thomas James. Please go ahead.

Thank you very much. I appreciate everyone bearing with us as I read the required safe harbor text. The statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding our company's business strategy, future plans and objectives and future results of operations or that may predict, forecast, indicate or imply future results, performance or achievements. The words estimate, project, intend, forecast, anticipate, plan, expect, believe, will, will likely, should, may or the negative of such words or words of expression of similar meanings are all intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and all such forward-looking statements involve risks and uncertainties, many of which are beyond our company's ability to control. Actual results may differ materially from those expressed or implied by such forward-looking statements as a result of various factors, including but not limited to, the risk factors disclosed in our company's most recent annual report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 7, 2018. 22nd Century does not undertake, and it disclaims any obligation to update any forward-looking statements or to announce revisions to any of the forward-looking statements. During this conference call, we'll also disclose certain non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization as adjusted by 22nd Century for certain noncash and nonoperating expenses as described in our company's earnings press release for the quarter ended June 30, 2018, as publicly issued yesterday on August 7, 2018, and which is available on our company's website. And with that, I'll turn it over to our Chief Financial Officer, John Brodfuehrer.

Well, thanks, Tom. Well, good afternoon, everyone, and thank you for participating in the 22nd Century second quarter 2018 business update call. For those of you that are participating in the call for the first time, my name again is John Brodfuehrer, I am the Chief Financial Officer of 22nd Century Group. Today's conference call will be 1 hour in duration and will conclude at 5:00 p.m. Eastern Time. We'll take questions at the end of the presentations as time permits. This afternoon, I will provide you with a summary of the company's financial results for the 3 and 6 months ended June 30, 2018. I will first discuss the company's net sales revenue from sales of products. As reported in our Form 10-Q, as filed with the SEC yesterday and was stated in yesterday's press release, net sales revenue for the second quarter of 2018 in the amount of $6,915,000 was the highest quarterly amount for product sales in the company's history. The net sales revenue for the second quarter 2018 of approximately [ $6.91 ] million representing increase of approximately $3.01 million or 77.4% over net sales revenue of approximately $3.9 million for the second quarter of 2017. The company's net sales revenue for the 6 months ended June 30, 2018, was approximately $13.03 million, representing an increase of approximately $6.9 million or 112.6% on the net sales revenues of approximately $6.13 million for the 6 months ended June 30 of 2017. This increase in net sales revenue for both the second quarter of 2018 and the 6 months ended June 30 of 2018 was primarily the result of continued additional net sales revenue generated from the contracted manufacturing existing brands of filtered cigars that commenced back in mid-May of 2017. I will next discuss the gross profit…

Thank you, John. Good afternoon, and thank you, again, for joining us today. About a year ago, by announcing its groundbreaking plan to dramatically lower nicotine in cigarettes to nonaddictive levels, the FDA explained to the world the importance of Very Low Nicotine cigarettes. In recent months big tobacco companies, public health officials and regulatory leaders alike have recognized that 22nd Century's proprietary Very Low Nicotine tobacco and technology will likely shape the future of what all combustible cigarettes sold in the United States will look like. As you know, the public comment period closed on July 16 for the FDA's Advance Notice of Proposed Rulemaking, also known as the ANPRM, regarding the FDA's new rule for the dramatic reductions of nicotine in cigarettes. The public comments submitted by 22nd Century to the FDA's ANPRM described how the FDA's proposed rules, one, supported by rigorous independent science; two, urgently needed in the interest of public health; and three, exceedingly practical and feasible. In our public comments to the FDA's ANPRM, 22nd Century's cited the facts that we have produced and delivered tens of millions of our proprietary spectrum research cigarettes since the year 2011 for use in numerous completed and ongoing independent clinical studies. The result of these clinical studies show that upon switching to the 22nd Century's Very Low Nicotine content cigarettes, smokers reduce their cigarette consumption, experience lessened withdrawal symptoms and increase their attempts to quit smoking. The results of these completed studies are not ambiguous. The findings are crystal clear. Beyond cigarettes will save of millions of American lives. Indeed dozens of peer-reviewed and published studies provide a solid foundation for the FDA's proposed nicotine reduction mandate. Furthermore, 22nd Century's production and delivery of tens of millions of our proprietary Very Low Nicotine content cigarettes for use…

[Operator Instructions] Our first question comes from [ James Bergens ].

I was interested to see if you could shed some more light on the Aurora Cannabis acquisition of Anandia? And how that could potentially affect our relationship with Anandia and moving forward with our hemp research and the future of our relationship with Anandia?

I'll let Tom address that question.

Sure. Thank you. I think, in general, we have a very good relationship with Anandia. It is not our only location where we're doing research. As you can see from our public filings we're doing it in the U.S. and in Canada and not just in Anandia in Vancouver. So we are still working with them. We look forward to that. And -- but beyond that, we want you to know that that's not the only location in which we're doing anything. So if that ever changes it, again, has no impact. We have duplicity in everything we do.

Right. Right. Absolutely. Can you shed a little bit more light on how the acquisition affects us from a financial standpoint as far as our next step with the warrants and the options to purchase shares of Aurora?

Well, the transaction hasn't closed yet. We expect the transaction to close very soon this month. But for example, if the transaction were to close today, let's just say, and let's just say we were to sell whatever securities we received in Aurora today at that market, we would realize more than $90 million in cash. Now the transaction hasn't closed, and I'm not saying that we intend to sell immediately, but that is the potential transaction if it were to close now and if we were to sell at market now.

It doesn't include the warrants.

Not including the warrants, of course.

Our next question comes from Jim McIlree.

Hey, in your -- in the company's response to the FDA's ANPRM, you guys talked about the different varieties that you can grow currently and that you're working on in the future. And I was hoping that you could talk a little bit about the challenges that you might face in growing different varieties. And so that is part one. Part two would be can you give us a summary of what type of a future growth that you're expecting? Either in terms of the number of crops or the size or the timing. And then part c on that would be, how much would that cost? Or is that included in the $850,000 per month cash operating expenses?

Thanks, Jim. I guess we'll start off, we don't have any problem on -- we're pleased to be able to grow Very Low Nicotine burley tobacco and Very Low Nicotine flue-cured tobacco. And we expect to have Very Low Nicotine, 95% less nicotine, non-GM crops of both of those varieties in short order. So I guess, that's the good news. Those 2 tobacco varieties make up, I don't know, say, 95% of all cigarettes sold in the U.S. Oriental is another variety that we're working on in the lab. But we see no problem as we think that we are many years ahead, if not decades ahead of the big tobacco companies on our work in those varieties. As I've mentioned in the past -- publicly mentioned that because tobacco plants produce so many seeds, we could literally grow enough seeds to supply the entire country if we were to grow, say, 20 acres of tobacco and put all of that to seed. So it's not tremendously expensive or difficult for us to produce enough seed to supply the entire country with Very Low Nicotine tobacco. It's a rounding error, really, when you talk about how much it would cost us to do that. So I guess, the answer is no. It's actually not in our $850,000 monthly burn, but it's not a significant investment if and when we make that investment. Did I answer all of your questions there?

Yes. It does. And can you talk may be just a little -- an additional one. Can you talk a little bit about what kind of growing schedule you're on right now? I guess, what I'm really trying to get at is, as you pointed out in your comments, big tobacco is claiming, this can't be done, it's just impossible. And my thought was that maybe you counter that argument is you grow the crops and say that's an incorrect statement. So I'm just wondering if that's maybe part of your strategy. And if so, how you intend to go about demonstrating to the FDA and to all of the constituents that yes, there is a way to grow this type of tobacco at commercial quantities.

Yes. Well, I guess what I can say is that every single crop that we grow demonstrates that we're capable of meeting the standard -- the contemplated standard of Very Low Nicotine tobacco. And if you can grow 50 acres, you can grow 500 acres, and which means you can grow 5,000 acres. And in terms of season and seasonality, we've actually grown in different hemispheres and in different countries. And we do that, so that we can grow essentially 12 months of the year. And without disclosing nonpublic information, I'll just tell you that right now, that we're growing in places outside of the United States, specifically so that we never miss a season, so that we're spending a lot of time each and every season of each of every year researching and growing and experimenting with our proprietary lines.

Okay. And you mentioned 50 acres, is that the kind of the general amount that you're growing right now?

Well, we've grown from tens of acres to thousands of acres with our Very Low Nicotine tobacco. At any one time, we grow -- to test pilot on a new variety, it might be a very small number of acres. We haven't rolled out -- I mean, we're not going to put in inventory millions of pounds of tobacco on the [ if-come ] but we're growing lots and lots of tobacco, further developing in different varieties that I talked about earlier. In particular, the non-GMO varieties

Our next question comes from [ Brandon ] [indiscernible].

I've got a couple of questions that are probably going to Tom anyway. But they may be tougher to answer but I think it will give you a good opportunity to show that investor interests are still well protected. [indiscernible] Not selling any shares, but I will ask you to bear with my stuttering, if you will. When you talk about working collaboratively with the FDA on the ANPRM, can you talk about -- or can you tell us, are we financially or contractually engaged in some manner with the FDA at this time? And that doesn't mean respective contract. I mean, are you having discussions with people in the FDA regarding the assumption of our patents?

I can just answer to that just no. I'll just share flat out no, we're not.

To meet the ANPRM goal, it's interesting to have the ability to license and that is kind of like the we're open for business sign. But without those licensing agreements in place or the discussions, it seems to be like there's a threat of a monopoly on the tobacco market if you were -- if Scott were to go through with ANPRM. That creates a problem for them. So I wondered if those discussions when you talk about collaboratively, what does that mean then?

Yes. Obviously, we're a regulated company in a regulated industry and are regulated towards the FDA. And so we're always in discussions with our regulator. It's like the SEC; it doesn't mean anything bad. What we're talking about now is the ability to help facilitate the rule, but there are other solutions like chemical stripping out that have been around for decades that are not just not preferred and are not scalable. So we have the best solution, we believe, but there's no discussion about assumption of patents for your prior question that there's nobody [indiscernible] More patents. We own our patents. We have the option to license them out.

That's not actually -- and Tom, I hate to interrupt. That's not actually technically correct. I'm sure you know about [ booking by weight ] , and [ Bear ] and [ Zippo ] and what the government can do if it meets the public [indiscernible] Interest [indiscernible]?

Brandon [indiscernible]

No, I -- not to be argumentative, Tom. I just -- it is technically accurate to say that they could.

No, it's not. I'm the lawyer. We have numerous law firms that have looked things over. I answered this on the last call, it's not true. It's not going to happen, not possible.

To get off of that one, sorry. Do you have -- if you will allow me, and I understand if you don't. Are there any other surprises out there? I mean, we've considered -- have you considered the impact to our business if maybe the FDA mandate fails or stalls [indiscernible] Litigation? And what's our plan B look like?

Our biggest plan B, which was Plan A before the FDA planned mandate was announced is our MRTP application. Our MRTP application has, I guess, more fuel behind it now than ever before because in fact, public health officials and the regulators around the country have come out and said that Very Low Nicotine cigarettes are imperative for public health. They're the single most useful tool in either encouraging people to quit smoking or to never become addicted to cigarettes in the first place or to migrate down to a noncombustible product. So you've had such a huge tidal wave of support in the Very Low Nicotine cigarettes so if one were to say somehow that the FDA decided one day not to enact the national mandate, well, I would argue that our MRTP application would be back to plan A to have perhaps the only, and maybe the first, approved MRTP product on the market in the United States is invaluable. They're good questions, and we have to be careful with what we say that's not nonpublic. And our IP situation hey, we either own or control those couple of hundred patents and 50 pending applications. And in terms of -- I mean, I'm not sure if you're saying you -- all of the patents protect us squarely. And you've got Reynolds out there saying that. So I think that should give you some comfort.

Our next question comes from [ John Davis ].

Henry, in relation to some comments you've made on the last 2 conference calls, you mentioned loosely that you've been in negotiations with several different parties. Without saying any nonpublic information, because that's not what I'm getting at, I was wondering if you can discuss kind of how those negotiations have gone. Are they still ongoing? And if they've ended for some reason, maybe a reason why they've ended? Once again, not looking for nonpublic, just general information about these negotiations you'd mention for a couple of quarters here.

Yes. I have to say, negotiations generally haven't ended. I'd call them discussions. They have not ended. Some of them sort of get good here and more interesting, and then fade back, and then get more interesting, and then fade back. And so I guess, it's difficult for a company to pound the table and say that the FDA's mandate is impossible. And then to assume the technology that proves, in fact, that it is possible. So I guess, that's one way to look at it. And then another thing to think about is not every single company went up and said that the FDA mandate is impossible. So our doors are open, we're interested in talking with anyone. It's just -- it only make sense though that a potential licensee would have to be very careful with endorsing our technology while at the same time is saying it's not possible to make Very Low Nicotine cigarettes. Does that make any sense?

Yes. Of course, it does. They can't talk out both of us out of their mouth, for sure. One following question to that. Say that again, I'm sorry?

I said at least not publicly.

Yes, exactly right. So is there an opinion or a belief by you guys as a company that we have this solution and if 1 company were to try to do an exclusive license deals and/or buy us, doesn't that kind of cripple the rest of the big tobacco industry if all of these licensee -- if all of your IP was now taken off the table and belonged to Reynolds or you make one of them up. Doesn't that cripple the rest of them almost?

I don't know. That's competitive advantage and strategy and all kinds of things that are above my pay grade. I guess, you could imagine that the most lucrative scenario for 22nd Century would be to license our technology and our products to all of the tobacco companies that do business in the United States. But I'm sure that there are scenarios where we would partner with one or fewer companies, especially with an MRTP product.

The next question comes from [ Tom ] [indiscernible].

My question is, the $53 million that you've stated that we had in cash and cash equivalents, would that be inclusive of the possibility -- the possible value of the Anandia Labs sale? [indiscernible]

No. That was the -- yes, the $53 million does not include whatever cash proceeds we may realize if we were to sell our Aurora stock once that Anandia transaction goes through.

Okay, so that does not have that in there. Okay, that's positive. Two, you might not even be aware, but I get the strangest requests to allow me to utilize your mighty position including type 2 for people to [indiscernible] you’re definitely getting some people who do not want to see you to succeed. I'm not even sure if you're aware of that, and that might be creating a major hamper in our ability to prove that we are who we are. My other question was actually -- it was actually brought to me by one of my clients. And he asked me -- he said, "well, what if I wanted to buy some of their seed to plant on my land?" Because he's got 2,000 hectares of coffee and he kind of wants to diversify. And I'm like, I don't even know that's even possible. Do you ever get farmers that ever come to you and say, "I have all this land and I want to try something different. Can we use your seeds?"

We actually do have farmers come to us. And we establish relationship with farmers in all different ways. Sometimes, through existing farmers where we've had existing relationships for some years. Other times, farmers approach us. So you can send us separately the contact name and number for your client and who knows, maybe we would contract grow on his farm. That's possible.

I mean, he's international. So I don't if we have to be secured. Are you doing any business with anybody in Brazil?

Well, we don't want to get crazy with the nonpublic information. But if you have a proposal...

[ Are we in South ] America? Are we somewhere in the Southern Hemisphere?

Yes, we have test grown as have licensees of ours in the Southern Hemisphere. So that's public information. But the specific, I'm not going to get more specific than that.

I don't need specific, I just want -- I don't want to be able to brush off of his idea, and then it [ turned out to be ] something to be really good. And then my next question was, although we're working on getting the ability to be the first combustible cigarette that can assist a smoker, which I am and I can see the true value in that, but more importantly, are we looking at providing the vapor market with the liquid equivalent to our SPECTRUM cigarettes that could then assist those who have now believe that they -- that the vapor pens are actually their best bet?

Not currently. That's a sort of a loaded question. But currently we're focused squarely really on cigarettes and that's $80 billion market just in the U.S. So we think there's plenty of opportunity right now in just the combustible cigarettes.

But do we have that ability?

I mean, sure, we could produce a Very Low Nicotine extract and a liquid. But I think the vapor guys already have lower high nicotine concentration liquids, so I'm not sure we've had a huge competitive advantage there. But it's a good question, but it's not our focus right now. And just because, it's really 5:00 and we're only going to take maybe 2 more questions because really we've already gone over the time allotted. So I'll get take 2 more and thank you very much for calling in.

Our next question comes from [ Paul ] [indiscernible].

My question has to do with the Modified Risk Tobacco Product. This has obviously been a major effort by your company. And you've indicated that you expect to the application going by the end of the year. And hopefully [indiscernible] quickly because you have been coordinating with them. That's [indiscernible]. What I'm asking is what's the business plan for -- now I'm assuming that you get this designation approved for your BRAND A cigarettes. What would be your scale of the roll out that you would contemplate? And do you have funds for [indiscernible] or are you going to partner to do that? Could you give a little more information about the what your business plan would be if you get this authorization to have your product labeled in this way?

That's a great question. I think first, I just have to clear up a little bit. I think it's when we get this authorization. When we do we get this authorization, we have a two-pronged strategy. One will be to launch our own brand. We do own our own manufacturing facility in Mocksville, North Carolina. And we've been growing our sales quite nicely there frankly to demonstrate that we're capable of growing a nice consumer products business. And some folks on the phone might remember my background includes growing the American Spirit franchise from about $30 million in sales to $150 million in sales over a course of a few years when we subsequently sold the brand for $356 million to R.J. Reynolds back then. And we only had 0.22% back then, and that was worth $356 million. Today, that 0.25% market share in the premium cigarette markets worth more like $1 billion in market cap. American Spirit back then didn't have a health claim or modified risk authorization. We are very excited by the opportunity to bring a modified risk cigarettes to market that will, in fact, reduce smokers' exposure to nicotine dramatically. Given that very unique and proprietary product, we think we can capture substantially more than 1% of the market, which would be very valuable to our company and our shareholders. But at the same time, while launching our own brand and manufacturing our own brand in our Mocksville facility, we fully intend to license our technology and our MRTP authorization, possibly, to one of our bigger, larger competitors. So we think that'll represent a pretty important revenue stream as well. Is that helpful?

Well, yes, in fact you made a statement the MRTP is something could license to a company. And I thought there were -- that was specific to the product that you were putting out yourselves. But you basically -- basically you could license that label, I guess.

Yes. I use that term lightly. It's probably a lot more complicated than a simple license. But conceptually, we could do that. Conceptually, we could work with or collaborate with or partner with a bigger tobacco company and "license the technology" to that company.

Does your $53 million in cash provide you with that -- I mean, that's not a normal business -- that's not a regular operating expense because you're not doing it now. So do you have enough headwind in the cash to actually do a major rollout?

Yes. Well, American Spirit was very successful with guerrilla marketing and focusing on the sort of opinion leading markets. And selling cigarettes profitably and reinvesting those profits to grow the business further. I think that the strategy is an important one, but I also think that if we were successful as I believe we will be with MRTP than our share price will appreciate substantially. And if we were short of marketing funds, I'm pretty sure that we can either partner with or raise additional funds to do whatever we need to do.

All right. That's -- so that is your plan because of the 2020 -- March 2020 was about as fast as the final ruling could come out. At least that's the date you have you here. So maybe some time, in which if you get this -- or when you get this -- if it falls in, that could be a major business plan?

Very much so. We could do a lot. With that MRTP authorization, that would change the face of the company, and we would be really a major player, I think, in the market. I think you'd see analysts being very interested in covering us. And I think everything would fall into place with an MRTP authorization. So that sounds pretty exciting. One more caller [indiscernible].

Our final question comes from [ Andy ] [indiscernible].

I just have -- I'm a physician. So my question is you talked about the FDA in the U.S. regulatory affairs. I'm wondering if you can talk about what the obstacles or what the obligations are for regulatory approval, for example, the EMA, other nations? And whether or not -- what activities are going on with the [indiscernible] regards to Very Low Nicotine cigarettes?

Well, I can say that we have had discussions with several different foreign countries about our tobacco and about the potential for our technology to greatly improve public health. I mean, as recently as last week we had one of those important discussions. And I'm not sure if you know, but the World Health Organization issued a special report recommending that all member countries adapt and mandate Very Low Nicotine cigarettes for their countries. So we -- and we're very proud of that fact, and that has given rise to several of these different member countries contacting us and discussing what needs to happen in order to sort of test and research our products in their market. So that's where we are right now. I suspect that anything that the FDA does will be very, very closely followed around the world. And that, with each step the FDA takes closer to the mandate or with each step that we take closer to the MRTP authorization, I think you'll see more and more interest and, conceivably, more deals done. I just want to add to what you just said, you also asked as a physician how can the American Medical Association weigh in more on this regulatory process and I just want to highlight that you may be aware, the AMA joined 40 other major health organizations in writing that collective letter for the FDA urging the FDA to implement this new rule promptly. And that's where the mid-September for the draft rule and final ruling March of 2019 comes from and then the implementation in March of 2020. So as a physician, all that you can do to work and help in that regard is greatly appreciated and highly respected. So we thank you for that.

And the AMA, I'm wondering the EMEA is sort of taking some of the lead time from the FDA and [indiscernible] so I think there's been -- sort of a harsh internationally that's pushed the FDA it's been back and forth. I'm just wondering if you're seeing that with regard to tobacco.

We've seen a lot. If you want, what you want to do is e-mail us we can have a dialogue and share with you what we've seen publicly around the world. Okay?

I think we've exceeded our 60 minutes so I think we'll close our call and I thank our callers very much.

Of course. Thank you, ladies and gentlemen. That does conclude today's presentation. You may now disconnect.