Welcome to 22nd Century Group's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Mei Kuo, Director of Communications and Investor Relations. Please begin.

Thank you, Jessie. Good morning, and welcome to 22nd Century's Third Quarter Earnings Conference Call. Joining me today are James Mish, our Chief Executive Officer; Mike Zercher, our President and Chief Operating Officer; and John Franzino, our Chief Financial Officer. Earlier today, we issued a press release announcing our results for the third quarter. We have also posted an earnings supplemental presentation that summarizes and highlights the progress we have made this past quarter. We hope this supplemental information will serve as a framework for management's prepared remarks, reinforce key takeaways from today's call and provide additional transparency and insight into our business, strategy and objectives. Both the release and supplemental presentation are available on our website at xxiicentury.com. We'll start today's call with remarks from Jim, Mike and John before moving into a new addition to our earnings call, a Q&A session. Before we begin, some of the statements made today are forward-looking. Forward-looking statements 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 Form 10-K filed on March 11, 2020, and in our Form 10-Q filed earlier today. During this call, we will 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 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.

Thanks, Mei. Good morning, everyone, and thanks to all for joining 22nd Century's conference call today. In my first few months as CEO, I've met with many stakeholders, such as scientists, public health officials, national cigarette retailers, farmers, and most importantly, our shareholders. I listen carefully. And what I heard from everyone is that 22nd Century's VLN cigarettes have the potential to not only disrupt but redefine the entire tobacco industry, and in doing so, prevent millions of our youth from ever becoming addicted to the only legal consumer product that, when used as intended, kills half of all its long-term users. Understanding these facts has really helped me to truly appreciate our company's primary mission of reducing the harm caused by smoking and to reaffirm our priorities. The tobacco epidemic, and make no mistake, it is an epidemic, is one of the biggest public health crisis the world faces. Worldwide, smoking kills more than 7 million people each year, is responsible for over 1,300 deaths per day in the U.S. To put this in perspective, the U.S. opioid epidemic claims 128 lives per day and approximately 1,100 people are dying each day from COVID-19. Smoking claims more lives per day in the U.S. than these other 2 threats combined. If smoking continues at its current rates, the CDC estimates that more than 5 million Americans who are currently younger than 18 years of age will die prematurely from a smoking-related illness. This is a staggering ratio of about 1 in every 13 young Americans alive today. Cigarette smoking is the leading cause of preventable disease and death and is responsible for 1 in every 5 deaths in the United States. These numbers are simply not acceptable any longer. 22nd Century has a real solution to help reduce the harm…

Thanks, Jim. At the forefront of everyone's mind, including my own, is the status of our MRTP application. We continue to believe that we will see a positive outcome from the FDA, and we believe a decision could come at any time. We continue to maintain a dialogue with the FDA and we know the agency is in the final stage of review. There are no outstanding requests for information by the FDA, and we believe they have everything required to make a final decision about our application. In addition to our ongoing contact with the agency, we have intensified our proactive efforts with our public and government affairs advisers and lawyers to highlight the public health importance of our MRTP application and encourage a near-term authorization. Our lawyers and advisers are regarded as among the best in the industry, and we assure you that we are pulling every lever available to secure an MRTP authorization for VLN. We continue to feel confident in a positive outcome for several reasons. First, the FDA continues to interact with our company regarding our application, which is often not the case with applications that are bound for rejection. More broadly, the FDA has funded and continues to fund millions of dollars of research to better understand the public health benefits of our reduced nicotine content cigarettes. Authorizing VLN will support the FDA's comprehensive plan for tobacco and nicotine regulation. VLN cigarettes contained just 0.5 milligrams of nicotine per gram of tobacco, which is the same level the FDA is proposing for all combustible cigarettes to ensure they have "minimally or nonaddictive" levels of nicotine. Finally, in authorizing our PMTA application last year, the FDA decided that the sale of our VLN cigarettes is appropriate for the protection of public health, which is the…

Thanks, Mike. While our tobacco franchise is taking center stage, we're making substantial progress of our considerable hemp/cannabis franchise as well. Remember, the genesis of our research in hemp/cannabis was established back in 2014 through a worldwide license agreement with Anandia Laboratories. Today, we maintain exclusive sublicense in the U.S. and co-exclusive sublicense in the remainder of the world for 23 patent and patent applications relating to the hemp/cannabis plant. Licenses for these valuable patents survive Aurora Cannabis's acquisition of Anandia. In 2019, we continue to pursue and advance our research in hemp/cannabis and entered into a worldwide strategic research and development agreement with KeyGene, a global leader in plant research involving high-value genetic traits and increased crop yield. Our exclusive worldwide collaboration is now focused on developing hemp/cannabis plants select agronomic traits including lines with stable, ultra-high THC levels, lines with higher levels of rare cannabinoids, and lines with ultra-low terpene levels for use in high-growth consumer and life science markets. Over the past year, we have completed building our proprietary bioinformatics platform. With this encyclopedia of information on hemp/cannabis genome, we can now begin to monetize the vast intellectual property we have developed through our collaborative efforts with KeyGene. Our partnership with KeyGene is a key competitive advantage for us. And through our collaborative efforts with them, we were able to modify and improve the hemp/cannabis plant using the fastest and most cost-effective methods available. Additionally, we have made the decision to refocus our hemp/cannabis strategy to target the upstream segments of the cannabinoid value chain and related intellectual property, in particular, in the areas of plant biotechnology research, gene modification and engineering, modern plant breeding and development, and extraction. We will reset our investment with Panacea to focus on and ensure the accelerated delivery of valuable commercial…

Thank you, Jim, and good morning to everyone. Operating loss improved by $3.6 million in the third quarter and improved by $5.1 million for the first 9 months of 2020. This was driven by higher gross margins and lower operating expenses, which I will detail in a moment. Our net sales revenue for the third quarter was up approximately 13% to $7.3 million, and for the first 9 months of 2020, was up 12% to $20.8 million. The increase for both periods was primarily driven by higher volume and pricing in our contract manufacturing business. In the third quarter, gross profit improved by $383,000. And for the first 9 months of the year, gross profit improved by $1.1 million. The improvements were primarily the result of higher volume, price increases and lower labor and overhead costs driven by factory efficiencies implemented over the past 9 months. Total operating expenses also improved by $3.2 million in the third quarter and improved by $4 million on a year-to-date basis. This improvement was primarily due to the following: decrease in R&D expenses of $1 million for the third quarter and $2.2 million year-to-date. This decrease was driven by a reduction in personnel expenses, lower license and contract costs and the absence of a onetime impairment charge taken on research tobacco inventory in the prior year. Separately, R&D expenses related to the MRTP application was favorable this quarter by $65,000 and $1.4 million year-to-date. SG&A expenses improved by $890,000 in the third quarter. The favorability was driven by lower onetime severance expenses and a decreased noncash equity compensation that occurred in the third quarter of 2019. SG&A expenses were $690,000 higher year-to-date due to an increase in consulting and professional services and an increase in personnel and insurance costs. This was partially offset by…

[Operator Instructions] We do have a question coming from the line of Jim McIlree with Bradley Woods.

I have a few questions. I'll just ask them all at once, if you don't mind. You talked about the commercialization of VLN post MRTP approval, suggesting you do have at least some infrastructure in place, but you also talked about a marketing campaign. I was wondering if you can kind of give an indication about how much that might be in terms of dollars in the first 12 months. And then along those lines, you talked about retail partnerships, but you also said rolling out in select markets. I was just wondering if the retail partnerships -- the national retail partnerships you talked about, if you have signed agreements that give them exclusivity or either in time or geography? And then lastly, on the patent. You said that it now gives you genetic control in virtually any variety. And I'm wondering if there are any varieties that we should be aware of that it doesn't give you genetic control? And then did you add some varieties with that patent? And I think that will do it for me.

Thanks for the question, Jim. I'll pass it on to Mike, and I'll chime in. But Mike, go ahead and fill in the blanks for Jim, please.

Sure, Jim. Thanks. Jim, thanks for the questions. It's good to hear your voice. In terms of our marketing campaign and budgets, we're not prepared to release figures like that. But I can tell you, the first several months of the rollout will be a phased approach. So this is a standard approach with CBG products to start in select geographies, refine the messaging in the real world, better understand the consumer behavior with the product, and then leverage that learning as you scale up the business. And so the budgets and the spending there will correspond, of course, to the scale of the campaign at that time. In terms of the retail partnerships, we don't have signed agreements in place at the moment. We're in discussions with a number of retailers about geographies and store counts during these -- the test phase. And so those terms are still in negotiation. And then as far as the new patent, there's no variety that we believe this technology will not work in any variety of tobacco -- tobacco plants are very similar, at least the ones used in commercial production. And so we believe this technology will work in any variety. The ones that we're focused on are bright or what's sometimes referred to as flue-cured Virginia tobaccos, burley tobaccos and oriental tobaccos. And we're focused on those because they are the 3 types of tobacco that are used in American blend cigarettes, which is a style of cigarette, a flavor profile that dominates, not just the U.S. market, but many markets internationally as well. However, we believe the technology will be useful for other types of tobacco like dark-fired tobaccos, which are used in some products elsewhere in the world as well as cigar tobaccos, which we believe, little cigars at the very least will likely be included in the FDA mandate to make all cigarettes nonaddictive. That will likely include little cigars as well. Those products typically use cigar varieties tobacco and this technology, we believe it will work in those varieties as well. So hopefully, that answered your questions?

That did.

We have no additional audio questions at this time. [Operator Instructions]

All right. I appreciate everybody's questions coming in here. We're getting a number of them, and we're going to get to as many as possible, and perhaps some of them we've answered along the way as they rolled in. But I'll pick out a few here that I find -- all of them are very thoughtful questions. I appreciate that as well. But I'll pick out a few here that I think go together and may shed some light on it. But there's a number of questions here regarding the potential for marijuana legalization and how that impacts our overall strategy, whether on a state basis or a federal basis. And I would like to at least shed some light on that with our hemp/cannabis strategy. So as everyone knows, the 22nd Century as a publicly traded company is not in the recreational marijuana space and were primary original objectives were to focus on the consumer end product with the investment in Panacea and combined with upstream plant lines. As I said during the conversation, we have shifted our focus dramatically to the upstream area. That downstream area was primarily in the consumer space, non -- let's call it, nonrecreational space. So we do believe, as time goes on, first, on a state-by-state basis and then ultimately, on a federal basis, down the road, we do believe that legalization ultimately will occur. And some of our new targets, new lines that we're identifying, high stable THC lines that we will conduct research offshore, are designed to match with that federal legalization. Now in the meantime, on a state-by-state basis, we have R&D to offer. We can certainly take full advantage of that and also outside of the U.S. So we're in -- we're watching like everybody else, the state-by-state and…

Sure, Jim. Yes. So Moonlight is the PMTA product that was authorized for sale by FDA back in December. It's actually exactly the same product as VLN, the MRTP product. We're not bringing Moonlight to market in any significant way and we're not planning to do that in any significant way because the PMTA authorization will simply -- simply allows us to put the product into the market. It does not allow us to describe what makes the product different from every other cigarette on the market. So imagine walking into a store and looking at the cigarette shelf and seeing this new brand Moonlight and not having any more information about it. Why would a consumer -- why would a smoker buy that product if they don't have any information to tell them what makes it different from the other 100 cigarette brands on the shelf in that store? That's the issue with Moonlight. That's why Moonlight is not going to the market in any significant way simply because we cannot explain what makes it different. We can't explain to smokers, what benefits they might derive from it. We can't even say that it has 95% less nicotine. Those are all statements that require an MRTP authorization. And that's why the MRTP application is so important to this effort. Internationally, it's a similar situation. Virtually every country, in fact, every country that I'm aware of has rules, has laws against making statements about tobacco products having less of something. And this goes back to the days of tobacco companies marketing supposedly safer cigarettes, light cigarettes, for example. And so there's a worldwide treaty from the WHO that virtually every country has signed on to that prohibits claims of tobacco product containing less of something, including nicotine. That prevents us from making a 95% last nicotine claim in those countries. And so our strategy there is to secure the MRTP authorization and then work with the regulators in countries around the world to allow us to go-to-market with a 95% less nicotine claim in their country. And we think that will be a successful strategy. In large part, we think it will be successful because we've talked to regulators, and we've talked to regulatory lawyers in many countries about this. And they've all said, yes, when the FDA says that authorizes this claim, then it will be relatively straightforward for us to review it and likely authorize it as well for our countries. And so it all comes down to our ability to lawfully -- to legally make -- to legally describe the products and make a 95% less nicotine claim.

Thank you, Mike. Appreciate that. There's a, I think, a good question regarding our cash position and current levels of burn rate and extension of that position into the future. The exact question is how far out will the current cash last based on the current burn rate? So I do want to address that correctly here myself and I do appreciate the question as well. So we've done a lot to actually reduce our burn rate in the first few months that I've been here. We're working diligently on continuing to do that. And we do see line of sight to additional reductions in our cash burn without mortgaging our strategy or our future. We're going to be implementing them as time goes on here into next year. With those new opportunities coming into effect, combined with our current healthy balance sheet and with certainly a plan to capitalize the launch of VLN into the marketplace, we believe we have ample cash to do all of the above, well into 2022 under the new burn rates that we'll be implementing. So we have plenty of cash on hand to get VLN onto the shelves, to operate efficiently and to execute on not only the tobacco franchise, but the cannabis franchise as well. So it's somewhere between at least 18 months and beyond of cash, including all of that. And that doesn't include any revenue stream from VLN coming in, in the second half of next year. So we're very comfortable with that. And as I've said and as John has said, that puts us into a very good position of not needing to or planning to have additional capital raises at this time. We're very comfortable with that moving forward. But it is a combination of cost efficiency that we've taken to reduce the burn rate, new success at the contract manufacturing side with regards to volumes and pricing that has offset that burn rate, and we'll continue to work on that, and have, I believe, really put us into a good position overall. So I appreciate the question, and again, do want to add a little bit more color to that than perhaps we got out of the earlier presentation. And I think we've got time for just a few more questions. I think this is a good question, Mike, for yourself. My screen just shifted, so bear with me. Will the sale of VLN be exempt from any cigarette excise taxes and our MSA payments or at either the federal or individual state level? Could you address that?

Sure. Yes, that's a great question. Currently, there are a few states that have put into place some excise tax exemptions or reductions for MRTP products. And once we've secured an MRTP authorization, that would apply to VLN. So the answer is yes, at the state level. We expect that sort of approach to tobacco regulation to continue at the state level, and we're hopeful that will be a strategy that can be successful at the federal level as well. MSA payments are a separate issue from taxation and so taxes are set by legislatures and Congress. MSA payments are governed by an industry settlement agreement. And so again, it's possible that, that could -- that settlement could be modified to provide some type of tax benefit for MRTP products, although I have not -- personally have not heard of any activity around that. But certainly, there's a lot of activity with excise taxes.

Thank you, Mike. And I think we've got time for just 1 more question. And these 2 questions kind of combined, I believe they're very solid. #1 is, can you please explain your backup plan in detail if the MRTP is not approved by the FDA? And also, you talk about putting pressure on the FDA for advancing MRTP. What is your leverage? I think I can address both of those questions. As we've said in the earlier part of the conversation, we believe that it is not a matter of if, but when, FDA will approve this. And it is measured in months. And we continue to believe that very strongly. Our backup plan is more around the ever-increasing effort to apply pressure from the ground up and from a top down with the FDA to enable them to do their job and enable the product to hit the shelves and let the consumers start to decide the value. The leverage is less about leverage and more about reminding them and ever-increasing channels and ever-increasing levels that this fits into their long-term plan that they establish. They funded a tremendous amount of the clinical studies and have been reinforcing those studies verbally. And it's a matter really of driving this through the typical bureaucracy of the FDA, and they're being very careful about their approach, and we respect that. So the backup plan and the leverage that we're utilizing is one and the same. We anticipate this MRTP coming here by the end of the year. If it should spill into next year, we -- the backup plan is to continue conversations with them through a variety of different channels and applying more and more pressure to get this resolved once and for all. But the leverage that we…

Thank you. This does conclude today's call. You may now disconnect.