Good day, and welcome to the 22nd Century Third Quarter 2018 Business Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom James. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining our call. My name is Thomas James, the General Counsel of the company. And thank you for bearing with us while I read the obligatory legal 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 similar expressions or similar meanings are 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 SEC 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 will 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 September 30, 2018, as publicly issued yesterday on November 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.

Thank you, Tom. Good afternoon, everyone. Thank you for dialing in to the 22nd Century Third Quarter 2018 Business Update Call. My name is John Brodfuehrer, and I am the Chief Financial Officer of 22nd Century Group. Today's conference will be 1 hour in duration and will conclude at 5:00 p.m. Eastern Time. We will 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 9 months ended September 30, 2018. Before I address the usual quarterly financial metrics, I want to discuss some positive transactions that occurred during the third quarter of 2018 that propels 22nd Century into a net income position for both the 3 and 9 months ended September 30 of 2018. The three distinct but related transactions are as follows. Number one, on August 8, 2018, our 14.8% equity investment in Anandia was acquired by Aurora Cannabis, a publicly-traded Canadian company. As a result of this transaction, 22nd Century received 1,947,943 shares of Aurora common stock and a warrant to purchase 973,971 shares of Aurora common stock. We recorded a realized gain on this transaction of $4,516,000 during the third quarter of 2018. The second transaction was subsequent to this - the Aurora/Anandia transaction, we sold the Aurora common stock, resulting in net cash proceeds in the amount of $13,052,000, and we reported a realized gain on the sale for GAAP accounting purposes in the amount of $3,830,000. It should be noted, however, that we realized a tax gain of more than 800% on the sale of the Aurora common stock since our original equity investment in Anandia of approximately $1.4 million, consisting of cash and common stock for 22nd Century. For further emphasis, we originally invested…

Thanks, John. Good afternoon, and thank you again to our conference call participants for joining us. I would like to begin my remarks today with an overview of our Modified Risk Tobacco Product, or MRTP, application for our Very Low Nicotine Content cigarettes that contain at least 95% less nicotine as compared to the highly addictive tobacco contained in conventional cigarettes. Although assembling a robust MRTP application is a major undertaking, I am pleased to report that we remain on schedule for a December filing with the FDA. Our particular MRTP application has required the assembly of significant amounts of clinical research results, a large body of data related to the technical properties of our product and substantial, additional documentation relating to a wide array of topics such as environmental impact, product ingredients and analyses, manufacturing specifications and tolerance ranges, consumer perception studies and so on. The application will contain the results of more than 100 published, independent clinical trials and studies relating to our company's proprietary Very Low Nicotine tobacco. The team of internal staff and expert consultants that we have talked - or tasked to assemble and complete our MRTP application includes highly talented scientists, toxicologists, regulatory experts, manufacturing experts, and unfortunately, but of course, necessarily, a bevy of attorneys. This massive effort has been the primary focus of 22nd Century for more than a year. All in, our company's MRTP application will be more than 100,000 pages in length at a cost of more than $10 million. As we speak, our company-sponsored consumer perception studies conducted in support of our MRTP application are in their final stages. Separately, our "abuse liability studies" that were commissioned to identify any possible negative consequences related to VLN cigarette use are already showing that VLN cigarettes have a much lower propensity…

[Operator Instructions]. The first question will come from Manuel Harnish [ph] with Birch Capital.

So you mentioned a strong cash position, which is certainly great, and congratulations on the sale of the Aurora shares. But could you elaborate a little bit on the rationale on the timing and why you chose to do that rather than just keeping investment and seeing where it goes?

Well, we're not a mutual fund, and I don't think investors want us to be gambling with securities of other companies' common stock. So our thought was to liquidate our shares in a ratable way of the Aurora stock, and we're going to hold on to the warrants and enjoy the upside of the warrant.

The next question will come from John Cloud with PRIMECAP Management.

Specifically, I wanted to ask about the MRTP application. It seems like your company, given the amount of studies the government - several government agencies have done with your cigarettes, that you guys are somewhat aligned with the government already and they know your product well. Are you anticipating that it's only 12-months period to review your MRTP application? Or without putting a guess [indiscernible], do you think it could happen sooner than that?

Well, if experience is any guide, when we submitted a preliminary application to the FDA in December of 2015, we heard back from the agency very quickly and wound up in the Maryland headquarters in January, actually, in consultation with the FDA. After that initial meeting, things seemed to slow down a bit. But our expectation now - at least, my expectation is because Very Low Nicotine cigarettes seem to be such an important topic on the FDA agenda now, I would expect that our MRTP application will be reviewed much, much quicker than it was in 2016. So I'm not sure if that is exactly what you're looking for, but I would be surprised if we didn't have feedback in the first quarter.

[Operator Instructions]. The next question will come from Robert Branciford [ph] with Morgan Stanley.

First, very quickly, I just want to say that I'm a professional investor for about 40 years, and I'm very, very committed in the future of the company. But even I get weak knees when I read these short articles. So I very much appreciate the pushback. It was exactly what I wanted to hear. So next, just a logical timeline. I don't mean to be speculative here, but I'm just trying to think logically. The FDA probably is waiting for the results of this 2 or 3 - the third study that's almost complete. But when those results are in, there wouldn't be any chance of them coming out with their mandate before the MRTP. I mean, I'm assuming that a logical rule would be, they then wait. They get the results from the study. It proves the science. You follow your MRTP. They accept the MRTP. And then the mandate would be proffered. Is that something like the dream timeline?

I think the - even though the products are related, I think they're independent processes. So we're waiting right now, everyone is waiting for the notice of proposed rulemaking that most folks believe the FDA will issue before the end of the calendar year. So that's separate, distinct from our MRTP filing. But we believe that when our MRTP application is filed, that our application will add fuel to the fire, I think, and will hasten the progress that's being made already on the national nicotine reduction mandate. So that is what we expect. We expect to see another proposed rulemaking. Hopefully, by the end of this calendar year, we'll be submitting our own MRTP by the end of this calendar year. We would expect in the first quarter to have some sort of feedback from the FDA on our application. And well, major public health organizations have called on the FDA to issue its final rule by March of '19. Now I'm not sure that they'll be quite as aggressive as that, but the American Heart Association and American Lung Association and 39 other major public health organizations are calling on the FDA to actually issue its formal, final rule this spring. So I guess, fingers crossed, we'll see what happens. But my expectation is that we will receive an authorized MRTP before the final nicotine reduction rule. Is that helpful?

Okay. Yes, it's very helpful. Just I don't mean to dominate, but another question. From what I've been reading, all the studies that have been done with VLNs have used your cigarettes. Am I correct in that? Are there any other companies that have been used in these tests? Any other company cigarette?

None. None that I'm aware of. So yes, that's why when detractors make comments, and it boggles the mind because the FDA has used all of the science and all the studies done with our Very Low Nicotine cigarettes to issue a planned mandate that all cigarettes sold in the country are very low nicotine. To me, that's unassailable. But - so I appreciate your question. I think they're very good ones. I am glad you gave us the chance to respond.

Your next question will come from Marion Green [ph], a private investor.

So far, everything is in the right direction. All good news. But - and with one thing that you have done that I was very pleased with, it was - I think it was the Washington Observer, there was an editorial there.

Okay, I think we...

Are the [indiscernible] safer?

Well, that's an excellent point. And to be honest with you, we'd like to do more of that. And I think it's been a big undertaking for our small company to compile 100,000 pages for this MRTP application. But my expectation is that when that application is filed, that all of our folks will have much more time to devote to op-eds like that. We plan to do much more of that in the new year in support of Very Low Nicotine cigarettes generally. So thank you for your observation, and I think you're spot on.

Our next question will come from Irvin Rosenfeld with Newbridge Securities.

I appreciate the update. Had 2 quick questions. You mentioned cannabis sativa. What about cannabis indica?

We refer to the total genus. So that's all plant derivative from it.

Okay, good. That's what I wanted to make sure. Number two, my other question is, when do you expect revenue coming from the - from your license that - your discovery of the zero-THC for CBD?

We don't give future financial projections in that regard. Just know that we have it, and we're making use of it. But we're keeping control of it with our collaborations.

And we should - I'll comment, too. I'll mention, what we're doing - I mean, we're not just putting it on the shelf and sitting on it. We're actually working in collaboration with the University of Virginia to optimize that plant for the tobacco belt. So I mean, there's actually a lot of work and a lot of spending going on right now around the plants. And I expect that when we have the variety that we're happy with, especially for the tobacco belt, I think you'll see a lot more activity there.

Next question will come from John Keller [ph], a private investor.

Henry and all, I - my question would be this hemp bill that they're working to pass currently, what would that mean for us with our hemp technology?

Well, I think you're referring to the Farm Bill. And the 2014 Farm Bill expired and lapsed. 2018 Farm Bill is scheduled now that the midterm elections are done to be taken up by both houses of Congress and passed before the end of the year because it includes a lot of things like subsidies for farmers for normal crops. The benefit for hemp is that Mitch McConnell, the leader of the Senate, and from the state of Kentucky, where he wants to be the #1 hemp-growing state in the country, is pushing hemp to be treated in the new Farm Bill like any other agricultural crop: corn, soybean, wheat, the rest of that. No more DEA problems, and that includes extract. So we're very hopeful that it's passed quickly and will be greatly beneficial for us and the entire industry.

Greatly beneficial for us when that passes. Is that what you said?

Yes. Definitely.

Okay. One last thing. Marion [ph] commented on your editorial. My feeling is with the savings - well, first of all, with Big Tobacco misleading the general public for so many years and costing the general public so many dollars with us footing the bill for all the medical expenses, it seems like we could capitalize on our angle of saving so much money. And perhaps, we could pick up some investors if we pursued that a little bit more.

Well, I think you're right. And we are bringing on, in just a few short months, a new head of regulatory science. And one of his first charges is going to be to engage those kinds of efforts. We'd like to get more and more pieces out in the press, expressing exactly that view.

The next question comes from John Shaw with Wilshire Partners [ph].

Henry and everyone, three hopefully quick questions. The first one concerns - and I missed the acronym for the designation for how you would introduce the VLN without being able to make some specific product claims to the benefits of Very Low Nicotine. But my question is - it's big picture. It's like Botox was enormously successful as an off-label in a drug long before - years before it kind of approved. Wouldn't doctors who have patients who smoke and can't or won't quit say, even though it's not FDA labeled, I want you to try these VLN cigarettes and inform consumers, as I've always been, who just want that choice. Why is the company pleased not to pursue that kind of a market?

Well, that's an excellent question. And the problem is we wouldn't even be allowed to tell the doctors those benefits. So that's precisely the problem. I mean, an off-label indication would be great, but we need to communicate that and we would be prohibited from communicating any benefits or any "lower than" attributes of our cigarette relative to others without FDA authorization. So we're really trying our best to work in partnership with FDA, and we don't really want to get cross-wise with the agency by doing something that they wouldn't approve of. That's the best answer.

Yes. No, understood, and I want to be brief, so thank you for that. Number two is when we talk about the FDA issuing a sweeping mandate that all cigarettes be VLN, to me - and we're not biotech experts, but that seems so enormously sweeping that, A, if that was even a possibility, the stock would already be trading in the high 5 digits. I mean, it would be extremely valuable. So what is the more likely outcome? Is it that they would come in and phase in kind of like MPG standard for cars, they would phase it in over a number of years or they would mandate that - and I know I'm asking you for a guess. Or that they would mandate that companies, the Big Tobacco, sell not less than 10% of the cigarettes or that all the Big Tobacco companies at a certain level would be required to at least offer a VLN? What is the realistic, not best case, but middle-case scenario for what an FDA mandate really looks like?

What you say sounds very practical, and I appreciate the thought that you're putting in. But to be perfectly clear here, the FDA has announced that it plans to mandate that every single cigarette sold in the U.S. is minimally or nonaddictive. So - and the question that you just asked about a phase-in, that's a question the FDA asked. And frankly, the question was asked and answered with the study, the 1,250-patient study that was published in JAMA in September, the Journal of American Medical Association, that study basically showed the difference between a gradual reduction in nicotine levels and immediate drop. And it became very clear, as we take a look at that study, that gradual reduction doesn't help. It doesn't serve as a public health benefit. You need an immediate drop to very low nicotine, and you need it to be across the board. But one of the most important things that the FDA is trying to do is to prevent underaged smokers from becoming addicted to combustible cigarettes, right? So helping people to quit, that's, of course, important. But even more important, the FDA has said, is preventing a new generation of smokers from becoming addicted to combustible cigarettes. So the FDA reasons that if they make every single combustible ticket sold in the U.S. only minimally or nonaddictive then they can save - I think the numbers are something like 2,500 underaged smokers every single day become addicted to cigarettes. That's over 900,000 young people every year are becoming addicted to combustible cigarettes now. The FDA wants to nip that in the bud. So I think that real answer to your question is not if, but when. Now why is our stock where it is? Because obviously people are gaming. There is this, "hey, this isn't going to happen for two years or it's not going to happen for four years. I guess, those are estimations that everyone needs to make of their own accord. We believe strongly that it's going to happen. The question is when. The American Medical Association, the American Heart Association, the American Lung Association, they are pushing for this to happen with a final rule, a final rule to be issued this spring and for that rule to become effective 12 months later.

Third question is, if I may, very different subject. I was in Thailand last month, and I hadn't been in 20 years. And I was - I really noticed how much less smoking I saw around the country. I was in 4 cities. And vaping, which didn't exist when I was there 20 years ago, I'm not talking about cannabis but just tobacco or nicotine-flavored vaping, was so outlawed that you could not buy a vape battery, a cartridge, anything in the country. And there was like no black market because they support their laws in a very serious way. Why - and again, I apologize if this has been addressed in recent calls. Why is the company not marketing to - in countries that clearly have very strong pro-health care, anti-tobacco bias? Or can they all be waiting for the FDA? Because it seems that the science will be compelling for a country with that kind of a bias.

Well, that's another very thoughtful question. And I think the short answer is that many countries don't have "FDA" of their own. And so many of them do look to the United States FDA for leadership. So we've heard that many times. But at the same time, even though our cigarette is very low nicotine, it is still a combustible cigarette. And so there are very different laws in every country all around the world about combustible cigarettes. Suffice to say that we've been in discussions with many of these countries, and we know that at least 4 of them are exploring Very Low Nicotine cigarette mandates or encouragements of their own, each in a different way. There's tax policy that some are exploring. There are brand offerings that some are exploring. And then there are mandates that some are exploring. So all of these things are being explored. My guess is that when the FDA moves, everyone else will follow soon thereafter. I'm just - we're going to take the next call, but I just want to mention there are 7 minutes remaining. We have a hard stop at 5:00. So I'll be happy to answer the questions until we have to stop.

Next question will come from John Elgot [ph], a shareholder.

Henry, this is just a follow-up to the last question, actually. Everything we talked about, obviously, has been pretty much domestic, a little bit north of the border. And I appreciated the last question because I wanted to ask that relative to the Very Low Nicotine cigarettes. But is there anything that you can share with us in terms of the cannabis sativa or indica that also might be going on outside of the U.S.?

Nothing that we can talk about, but we are exploring partnerships in both cannabis and in tobacco internationally. So that's all I can say is that we're certainly aware of the opportunities, and we're certainly working on the opportunities and not only on this continent.

Next question will come from Rex Wiggin [ph], a private investor.

Yes, Henry, good job. I just had one quick question. From all your prior experience in the tobacco industry, upon approval of an MRTP, what would be your personal quotes for percentage of market share for [indiscernible] on your own?

Well, that's a good question. I think, today, demonstrated by American Spirit, which has a value of between $8 billion and $10 billion domestically, as calculated by a very respected Wall Street analyst, was about 2.5% market share. So what that suggests is that every percent market share is worth about $4 billion in market cap. I believe that Very Low Nicotine cigarette as a modified risk product without the mandate, I believe that 6% to 10% market share is absolutely feasible and absolutely possible. So I mean, you can do the math, and you could figure out what the market cap of the company could be if we had, say, 6% market share. I guess it'd be slightly different than American Spirit because presumably people would smoke fewer Very Low Nicotine cigarettes, and hopefully, many people will stop smoking altogether. But at discount - if we discount $24 billion in potential market cap from 6% share, if you discount that by, I don't know, you want to discount it by half, then you're down to a $12 billion market cap. So I think there's plenty of upside, and that's why this is so tremendously exciting for us.

The final question will come from John Cloud with PRIMECAP Management.

Just a follow-up. So Henry, based on all the information you gave us today with respect to FDA time lines, MRTP time lines, final ruling, all the information you shared with us, it seems to be widely known if you look for it. Big Tobacco companies certainly must be aware of all this same time lines, same sort of information that you've been talking about. So short of telling us anything nonpublic, what is their plan to deal with Very Low Nicotine tobacco? I mean, do they have a product they can compete? Or at some point, are they going to have to knock on your door for license or something else?

I think that it only makes sense that Big Tobacco's primary strategy is to delay, to do whatever they can to delay the mandate because it will, obviously, cut their market caps probably by more than 50%. So that's - the first priority is to delay, if they can and to the degree that they can. But as they all know that it's an inevitable and it is coming, you can rest assure that they all are working on a Plan B for when, in fact, the mandate does become effective. So all I can say is that, of course, I can't divulge nonpublic information, but you have to realize that they have to have a Plan B.

And is it your opinion, do they have a Very Low Nicotine plan internally? I mean, can they produce it themselves, I guess, is a good question?

Well, that's an excellent question, and I'm happy to say that, yes, Big Tobacco knows how to chemically strip nicotine out of tobacco. Absolutely, 100%, for sure, they know how to chemically - Philip Morris has said so publicly, and they launched a product in 1987 called Next. It was a chemically stripped cigarette. They spent, I believe, a couple hundred million dollars on a factory in Virginia that enabled them to chemically strip nicotine out of tobacco. The problem with the product, it generated 1% in test market sales back in the late 1980s. The problem was it didn't smell very good, and it tasted terrible. Still, they generated - at a time when people really weren't thinking about nicotine, they generated 1% market share in those test markets. More recently, a director of, I think, public policy at PMI explained that it would take Philip Morris International 20 years to genetically modify the tobacco as we have done, or if they chemically stripped the tobacco, it would cost $10 billion to $12 billion a year in the European Union alone to be able to comply with the rule if the FDA rule would find its way over to Europe. So if you do a little bit of math and back of the envelope kind of calculation, that means that their cost of products would go up by something like 50%. So technically, yes. Big Tobacco knows how to chemically strip tobacco to make a virtually nicotine-free tobacco. They cost 50% more, taste bad and smells bad. So I'll give them that. They can do that but if they want a Very Low Nicotine cigarette to taste good, smells good and the only cost will be a very low royalty to 22nd Century shareholders, then our doors will be wide open. Thank you, everyone, for joining us on the call. We look forward to speaking with you in a few more months.

Thank you, ladies and gentlemen. This concludes today's call. You may now disconnect your lines. Have a great evening.