Welcome to the 22nd Century Group Fourth Quarter 2023 Conference Call and Webcast. [Operator Instructions] 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 at xxiicentury.com. 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 e-mail 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, there is what I call a tax on the business. This tax comes in the form of 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…

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. We will now open up the call for questions.

[Operator Instructions] Your first question comes from Aaron Grey with Alliance Global Partners. Please go ahead.

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.

Okay.

Your next question comes from Jim McIlree with Dawson James. Please go ahead.

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. Do you want to take that, Hugh?

No, Larry. Go ahead. That's fine.

I will take the front end of that. If I miss anything, Hugh, fill in. We have a hearing coming up in April. First hearing. So that 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, I would say, 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 - when I looked at our website and our socials, I would say it has been dormant now for about 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, 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.

There are no further questions at this time. I will now turn the call over to Larry for closing remarks.

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.