Greetings, and welcome to the 22nd Century Group's Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode, and the floor will be open for questions following management's prepared remarks. As a reminder, today's conference is being recorded.

At this time, I'd like to turn the call over to Mei Kuo, Director of Communications and Investor Relations. Please begin..

Thank you, Rob. Good morning, and welcome to 22nd Century’s fourth quarter and full-year earnings conference call. Joining me today are Jim Mish, our Chief Executive Officer; Mike Zercher, our President and Chief Operating Officer; and Rich Fitzgerald, our Chief Financial Officer.

Earlier today, we issued a press release announcing our results for the fourth quarter and full-year 2021. We'll start today's call with prepared remarks from Jim, Mike, and Rich before moving into the Q&A session.

During our prepared remarks, we will be referring to slides, which are available for viewing in the webcast and posted in the Investor section of our website at xxiicentury.com under the Events subheading.

We hope these slides will serve as a framework for management's prepared remarks, reinforce key takeaways, and provide additional transparency and insight into our business, strategy, and objectives.

Also, those of you joining by webcast can submit questions through the online interface, which we may include during the Q&A session of today's call, time permitting. Before we begin, 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 this 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 non-cash and non-operating expenses. For more details on these measures, please refer to our press release issued earlier today.

And with that, I will turn the call over to Jim, beginning from Slide 3..

Thanks, Mei, and good morning, everyone. "Helps You Smoke Less ", this was the shot heard around the tobacco world on December 23rd as the FDA authorized the first and only MRTP ever given to combustible cigarettes for our VLN products, and then added the clinical evidence-based claim "Helps You Smoke Less " as a requirement on every single package.

These authorizations in claims are all exclusive to NASDAQ traded XXII. Let me just unpack that for a second.

After 20 years in development and 10 years in clinical trials, exceeding even pharmaceutical timelines, the FDA chose to specifically highlight in its authorization that the extensive scientific data shows VLN reduced nicotine content cigarettes helps you smoke less.

The addition of the "Helps You Smoke Less " claim means that every time an adult smoker goes to the store to get a pack of cigarettes, sitting on the shelf right next to the other premium cigarette brands will be a pack of our VLN staring them in the face with the statement "Helps You Smoke Less " printed boldly right on the front of the package.

We took a collaborative, patient and thoughtful approach to our interactions with the FDA and could not have asked for a better result. We believe that Helps You Smoke Less will be a paradigm shift going forward in the $80 billion U.S. tobacco market. And the almost $800 billion global market.

I also want to be very clear, this team has had correct assumptions and delivered on all of our commitments to date. We're now moving to deliver on our commitment with a successful pilot and national launch and also deliver on our commitment for a successful international launch.

Driving that effort is an incredible VLN team that has successfully executed this type of branded specialty launch, such as with Natural American Spirit, gaining market share and creating extraordinary value. You're already seeing some of the early results of that effort and our pilot detail. But they are just getting started.

By the end of this month, we expect to go live with our first sales of VLN at more than 150 Circle K stores across metro Chicago. This pilot will enable us to test and optimize our marketing and point-of-sale programs to reach adult smokers and let them know we have a product to help them smoke less.

From there, we have the opportunity to rollout more than 7,000 Circle K stores nationwide, as well as other regional and national trade partners that we will announce as competitive environment allows. This is an efficient, low-cost, and far-reaching national launch strategy in line with our current balance sheet.

Because of the Helps You Smoke Less claim and the unique appeal of VLN, we don't need hundreds of millions of dollars for a brand launch. We just need good partners who are joining us in the mission to help you smoke less.

With hundreds of issued, pending, and licensed patents, and an IP moat around our reduced nicotine tobacco plants and biosynthesis processes, in fact, a moat that Big Tobacco has said would take decades and $20 billion to replicate, we're very well-positioned to consider licensing our technology to those who want to join us in the fight to reduce the harm caused by smoking.

But it just doesn't stop there. I also want to acknowledge the increased momentum for the proposed menthol ban and combustible nicotine cigarettes, policy that could leave our reduced nicotine cigarette as the only authorized menthol cigarette on the market as a critical off-ramp to current menthol smokers.

The FDA is moving swiftly and has already sent a proposed rule to prohibit menthol cigarettes to the OMB. Whether you think about the $80 billion U.S.

market or the $800 billion global market, where we are also moving ahead with our first international sales by shipping to South Korea later this month, just capturing even a few points of market share over whatever time frame you want to use is transformative to 22nd Century.

I'll stop here and let Mike fill in some of the details on our pilot program. Then I'll briefly discuss our hemp Cannabis and hops franchise actions with you. But I cannot be more excited about 2022, and the future for 22nd century. Mike..

To reduce the harm caused by smoking. We want adult smokers to know that for the first time they have a non-addictive tobacco cigarette option, one that can truly help them smoke less.

I won't share many of the details right now for competitive reasons, but be assured that we have built a very impressive marketing program that will introduce VLN to hundreds of thousands of adult smokers across Chicago in the coming months.

Coming out of the pilot, we will have the data needed to maximize our marketing ROI and the understanding of how smokers are using VLN, so that we can move towards a national launch with confidence. We're already in discussions to broaden our trade partnerships so that we can get VLN into the hands of as many adult smokers as possible at that point.

By focusing on what we can test and learn now in the pilot, when we scale VLN nationally and globally, we will be able to make the smartest marketing investments and build optimal partnerships with those in the trade and broader industry, like Circle K, who share our mission and desire to help adult smokers.

VLN's appeal is far broader than just the U.S. market, as noted on Slide 9. This month, we're moving forward with the first of several international market launches. We've identified South Korea as our first international market where the smoking rate is high for a developed nation, especially among men where approximately one in three are smokers.

VLN is very well aligned with the government's efforts there to reduce smoking. South Korea is a premium price market with a strong interest from smokers in innovative tobacco products. We expect VLN will be very well received by smokers there.

More generally, we have been and will continue to target markets where, like South Korea, regulations allow us to quickly go-to-market with compelling MRTP -type claims.

Also, now that we have the MRTP in hand, we will leverage that FDA authorization as a highly credible proof point in our discussions with regulators in countries where governmental approvals will be required to launch VLN with claims.

I would like to take a moment here to thank our sales and marketing team for their tireless efforts to build these partnerships in South Korea, Chicago, and elsewhere, to create a launch platform for VLN. It's fantastic to see the many months of hard work and planning now coming to fruition as we look to finally launch VLN in just a matter of weeks.

Advancing to Slide 10. Authorization of our MRTP and additional FDA actions on its proposed menthol ban indicate that FDA is actively moving ahead with its tobacco policy efforts, which includes a product standard to reduce nicotine in all cigarettes to a non-addictive level, a level already achieved by VLN.

Late last week, the agency sent their proposed menthol products standard to the Office of Management and Budget at the White House, a key step in the rule-making process.

The science shows that removing menthol and caffeine, nicotine in highly addictive cigarettes will help smokers to more easily quit nicotine all together, or help them migrate to less toxic products if they can't or won't quit.

FDA has reiterated many times recently that there is adequate data to support several findings about the harm caused by menthol cigarettes, including that menthol increases the likelihood of regular smoking, and that menthol makes quitting more difficult.

But, a total ban of menthol cigarettes could have negative consequences by possibly driving adult smokers to illicit markets and adulterated products. By authorizing our MRTP, FDA has already given adult smokers, including menthol smokers, a tool to satisfy the urge to smoke while allowing them to breakaway from nicotine.

In its press release authorizing our MRTP, FDA said, and I quote, "In reaching today's determination, the FDA considered both the current legal status of menthol cigarettes and the available science demonstrating that these particular products would help addicted cigarette smokers reduce their nicotine consumption and the number of cigarettes they smoke per day.

The FDA is committed to moving forward with the rulemaking process to ban menthol as a characterizing flavor in cigarettes and all characterizing flavors in cigars and remains on track to issue proposed rules in the spring of 2022. “We believe that under such a menthol ban, our products can provide a critical off-ramp for menthol smokers.

And we believe we could have the only menthol cigarette on the market at that time. We view this as good evidence-based public health policy, well supported by the scientific research, and we believe this will be the ultimate direction FDA takes as it continues to advance its mission to reduce the harm caused by tobacco use. As Mr.

Mitch Zeller, the Director of the Center for Tobacco Products at the FDA, looks to retirement in April after a long and accomplished career in public service, we thank him for his leadership and tireless devotion to the cause of helping smokers. We also congratulate Dr. Robert Califf on his confirmation as FDA’s Commissioner. Dr.

Califf, who is a cardiologist and knows firsthand the terrible toll of smoking, has been clear about the importance of addressing the harms caused by smoking and the critical role that reducing nicotine in cigarettes can play in that effort. We look forward to continuing our work alongside him in all of the public servings at FDA.

Wrapping up, we're incredibly excited to finally bring VLN to market and highly confident in its appeal to smokers. It's a potential to disrupt the tobacco market and its ability to reduce the harm caused by smoking. I thank you for your time today and for your confidence in 22nd Century.

I'll now pass you back to Jim for an update on our Hemp Cannabis and Hops franchises. Jim..

Thanks Mike. And today we've focused on tobacco for obvious reasons, because it's been an incredible few months in tobacco to say the least. But we believe this is only the starting line and the best is still ahead. Let's turn to Slide 12.

I first want to make it very clear, that we are now a diverse and balanced company with two additional franchises full of opportunity. And I also want to make it very clear that I'm absolutely committed to all three franchises. Shifting to a brief update on these before we open up to Q&A lines.

We recorded some excellent news in hemp Cannabis as we build the pathway forward in that growing market opportunity, From the very beginning, our mission in hemp Cannabis has been to maximize the consumer experience and confidence, by developing scalable, disruptive plant lines that exhibit the stable genetic profiles, predictable agronomic trades, and highly valuable user profiles necessary to fully commercialize the industry.

We took a major step forward in this goal with our first harvest in the fourth quarter from our first lines of high CBD and high CBG, with low THC plants. Half of our biomass went to customers and half went into production of high purity distillate, utilizing a new purification technology.

We also delivered our first IP agreement, three-way deal with Aurora Cannabis and Cronos Group. The use of our shared an then the IP that addresses the production of biosynthetic cannabinoids. This gives 22nd Century a strong position in both disruptive natural and biosynthetic technologies.

We're accelerating additional lines featuring important traits desired by our industry partners, and greatly increasing our cultivation for the 2022 and 2023 growing seasons as we move our business into scale. I'll go into more in a moment.

But we also announced a major breakthrough in plant transformation with the first expression of inserted genes via gene editing.

This gives us greater capacity as it validates another tool alongside our existing molecular breeding tool sets to develop highly-targeted plants tailored to commercial needs in far shorter time frame and less costly method in traditional breeding.

We recently secured organic certification for Needle Rock Farms, facilitating a premium opportunity for plants and biomass to cultivate it there. We're also ramping up our year-round growing capabilities in tobacco and hemp/cannabis to dramatically expand on our capabilities and reach.

Slide 13 highlights a major breakthrough and trade secret that will expand our bandwidth in plant development. This is leading-edge successful expressions of plant transformation in hemp/cannabis, which greatly expands our bandwidth to create commercialized, highly-tailored plant lines.

Plant transformation is a means of inserting highly-targeted DNA-controlling desirable traits from one plant into the genome of a high-value target crop.

Using plant transformation in this way can improve commercially critical traits in hemp/cannabis, such as cannabinoid content, yield, flavor, aroma, physical characteristics of the plant, disease resistance, stress tolerance, and nutrient production even faster than we can now.

Transformation is often considered the holy grail of plant science, enabling the targeting and editing of specific genes leading directly to expression of a desired trait.

This breakthrough is facilitated by our extensive library of the hemp and cannabis germplasm, genome database, marker-assisted, rapid-cycle molecular breeding and mutagenesis, all supported by KeyGene's world-class bioinformatics and genome sequencing capabilities.

These tools are already rapid development cycle time even further and are typically only used by the largest plant science companies, such as Bayer/Monsanto, Corteva, and Syngenta. Now they will be used by 22nd Century to create valuable proprietary hemp/cannabis plants at a fraction of the time and cost of traditional breeding methods.

And that brings me to our newest franchise, the global hops market on Slide 15. We'll talk more as the year unfolds, but we're building out our foundation in this broad and valuable global market, which is heavily centered on Europe and the U.S.

Importantly, we are able to deploy much of our IP and capabilities from hemp/cannabis directly into this closely related alkaloid plant family. The global hops market is still heavily reliant on traditional breeding techniques, which are high cost, high-risk, and typically ten years plus in development.

We can greatly reduce this by using our advanced breeding capabilities, getting a major competitive cost and speed to market advantage to hops companies that work with us. Stay tuned as we will detail more of this market as we move ahead. I'll now pass you over to Rich to review our financial performance..

Thanks, Jim. And good morning to everyone. Starting off on Slide 17 with the quarterly results, net sales increased by 9% to $8 million for the three months ended December 31, 2021, through a combination of higher volume and price increases in our contract-manufacturing cigar and cigarette business.

We continue to generate new business and orders with additional customers on-boarded during the second half of 2021 and are now manufacturing VLN cigarettes for our pilot launch in both the U.S. and international markets.

Revenue and costs in the fourth quarter were impacted by certain supply chain shortages that are affecting our industry, causing some shipment timing to shift, but our team is managing through these very well with solid results.

Gross profit margin for the fourth quarter declined year-over-year to 4.9% compared with 8% due to product mix, shifts in product mix, supply chain delays, and the absence of a favorable one-time boost to volumes that benefited the prior-year fourth quarter.

Every incremental dollar of CMO contribution helps cover our operating overhead and fund growth investment rather than utilizing our balance sheet cash to do so. Our investment in the CMO business is now paying dividends, as we were able to promptly commence VLN manufacturing as part of our 90-day pilot market launch effort.

VLN will be well-positioned as a premium brand, which will command higher revenue and therefore higher margin, a net positive to our revenue and gross margin profile as we increase VLN volumes through the pilot and into our national and OUS launches.

Some of that benefit will be reinvested to initially fund launch activities, but in the mid-term, it will generate much greater revenue and margin per carton than our CMO business.

The cost, production, taxes, and other expenses that go into the production of VLN will not be notably different from our contract manufacturing business today, which means that those additional dollars flow directly through as incremental cash for future growth and investment.

Total operating expenses for the fourth quarter increased by $2.6 million, driven by $2.9 million of higher SG&A expenses, partially offset by year-over-year reduction in R&D expenses of $0.3 million.

The increase in SG&A included higher personnel, insurance, investor relations and corporate communications expense, strategic consulting expense, IP license fees, and marketing costs as we move forward toward market readiness in both tobacco and hemp/cannabis.

For the fourth quarter, operating loss was $9 million, reflecting an increase of $2.8 million over the fourth quarter operating loss of $6.2 million in the prior year. Higher SG&A spending of $2.9 million, combined with reduced gross margin due to product mix combined to drive a higher 2021 fourth quarter operating loss.

Other income expense for the fourth quarter of 2021 includes a non-cash unrealized loss of $5 million, related to fair value adjustments for our investment in Aurora Cannabis, stock warrants, and Panacea by science is common stock.

Net loss for the fourth quarter was $14 million, compared with $6.4 million in the prior year's fourth quarter, the $7.6 million increase in net loss was driven primarily by the $5.1 million unrealized loss. And a $2.9 million increase in SG&A for the fourth quarter.

Shifting to full-year results on Slide 18, our revenue increased 10% for the year to $30.9 million, driving a gross profit of $2.1 million or 6.7% compared with a gross margin of 5.1% in 2020 for the full year.

Total operating expenses for 2021 increased by $9.9 million to $30.5 million, driven primarily by $10.9 million in higher SG&A expense, partially offset by year-over-year reduction and R&D expenses of $0.9 million.

The increase in SG&A included higher personnel insurance, Investor Relations and Corporate Communications expense, strategic consulting expense, IP and license fees, and marketing costs as we move forward toward market readiness in both tobacco and hemp Cannabis.

Operating loss increased to $9.2 million -- by $9.2 million to $28.4 million for 2021, compared with $19.2 million in 2020. Largely reflecting our investment decisions in growing our business across all three plant franchises.

But in particular, our preparations for VLN launch, also included in our operating costs is non-cash stock-based compensation totaling approximately $4 million for the full year 2021.

Other income expense for 2021 of $4.2 million includes non-cash unrealized net loss of $4.4 million for the year related to the fair value adjustments of our investments in Aurora Cannabis stock warrants and Panacea life sciences common stock.

I would also note our net loss of $32.6 million in 2021, increased from $19.7 million in 2020 up that $12.9 million increased, $10.9 million was driven by higher SG&A expense which includes $4 million of non-cash stock-based compensation.

Also impacting 2021, was the net $4.4 million increase related to non-cash expenses related to the decline in valuation of our Aurora Cannabis stock warrants and Panacea the common stock investment.

Our press release provides an adjusted EBITDA measure that we believe is a useful tool in evaluating the operating performance for our business on an ongoing basis. Removing the effect of one time and non-cash expenses on an adjusted EBITDA basis, we reported a net loss of $23.1 million in 2021 versus $16 million in 2022.

Turning to our strengthened balance sheet on Slide 19, with $48.7 million of cash at the end of the year, we have the resources to fund a significant runway for the commercial launch and growth of our reduced nicotine tobacco and hemp/cannabis franchises.

I want to reiterate that our launch strategies emphasize using current resources and leveraging our partnership opportunities to drive scale rather than focusing on a high-cost launch strategy that would require additional capital from the outset.

I also want to emphasize that our balance sheet is adequate for our launch plans, which emphasize that partner-driven marketing rather than costly time-consuming internal branding teams, scale up. This is tailored to our unique VLN product claims as well as the distinct regulatory environment around tobacco products. I will now pass you back to Jim..

The summary on Slide 20 showcases just how transformative the past few months have been and where we're going in 2022. We're going to market in the U.S. with our VLN reduced nicotine cigarettes along with a major claim of Helps You Smoke Less.

We are full speed ahead on our pilot launch in Chicago with Circle K, the first of what we believe could be several major national C-stores and pharmacy change, placing our VLN products in front of customers, and launching in our first international market, South Korea.

The proposed menthol ban is gaining traction as it should, and may well leave us with the only combustible menthol cigarette in the market as a tool to help smokers transition away from these products. Our hemp/cannabis franchise is generating revenue from licensing and specialty biomass sales with even more lines and volume coming in 2022 and 2023.

And we achieved a major industry breakthrough in plant transformation that broadens our capabilities. In hops, we're advancing rapidly to deploy our alkaloid knowledge in this large market for the benefit of our partners, and look forward to many actions in the year ahead to make this market a reality.

And we have the balance sheet strength to fuel a full national launch and execute on these deliverables through a capital-light, partner-driven strategy taking us to full U.S. and international launches in our tobacco franchise, plus global leadership in the expanding hemp/cannabis and hops science markets.

As we go into Q&A, I want to point out the advertisement on Slide 21, which is now running in the New York Times. This is a good example of the advertising limitations of tobacco, which is one of the most heavily regulated products on the market today. We can't directly promote our one-of-a-kind product.

We will promote our mission and tobacco harm reduction and our technology that can positively improve public health in the U.S. and worldwide. We will use all of our tools to make people aware of our exciting new VLN product to help smokers smoke less and get this product in as many hands of smokers as possible, as fast as possible.

And with that Operator, please open the calls for questions..

Thank you. At this time, we'll be conducting a question-and-answer session. One moment, please, while we poll for questions. Our first question comes from Vivien Azer with Cowen and Company. Please proceed with your question..

Hi. Good morning..

Good morning..

Good morning..

Exciting times in terms of the pilot roll out, I know that's still underway, but given the nature of this product launch, is there anything that you can offer just in terms of helping us from a modeling perspective and thinking about the ramp from a top line, roll out for Illinois and then I'll follow up with a margin question. Thank you..

Good morning, Vivien. This is Mike. Thanks for the question. The -- it's -- in terms of its size, its relatively modest. We're working through a 150 stores, they sold out 10 million packs a year, so as far as revenue ramp those -- really the important information for modeling purposes will likely come out of the end of the pilot..

Understood. Just in terms of assessing velocity..

Yeah, assessing velocity as well as anticipated total market share..

Got it. Okay, that's helpful. And then you call out in your press release that you would expect margins to be comparable to the premium price are consistent with the premium price positioning for VLN but you call out a lot of marketing efforts.

So I'm just trying to reconcile that because it probably is not reasonable at all to use perhaps like Ultra is smokable segment as an EBITDA margin benchmark. But, how should we think about the magnitude of that investment spending? Thank you..

Yeah, it's a great question. I think the premium margins, we believe, will be where this product will deliver in the longer-term. But in the near-term, as we launch the product, we'll be certainly in an investment phase. And so, a lot of those profits will be put back into the marketing.

But we will cross a point or cross a line there where margin will accrue, and we're designing the marketing programs, designing our launch strategy and the marketing strategy with the ultimate objective of delivering premium margins..

I understand. That's helpful. Thank you. And then, just moving onto the hemp/cannabis side of the business. Great to see that you generated some revenues in the quarter. It was pretty materially below what we were anticipating. But again, really hard to have any kind of high conviction around our estimates there.

So any incremental detail you guys could offer around the monetization of the IP sharing deal with Cronos that might be helpful? Thank you..

Yes, Vivien, great question. I'll take that. I think two important points. I'm not quite at liberty to disclose all of the dollar amounts involved with Cronos as part of the agreement, but I will say that the initial revenue stream in December was just that.

There were additional payments tied into those deals that come in, in Q1 and Q2 as well on an ongoing basis.

So we're going to get line of sight to that, most likely the later quarterly call, but we were off to a good start there, even though the initial payments in December were the first ones and again all the agreements, the licensing deal has milestone payments, additional biomass sales, and of course, selling at the isolate at the higher premiums were still tabulating.

So we had a good run and look forward to ramping up here as the year progresses with a much, much larger grow season than last year, and then also hitting additional milestone payments from the licensing revenue as the year progresses..

Understood. And I apologize for jumping back and forth, but I do have one last one on the VLN side of business, please. Just in terms of the South Korea launch, can you offer any detail on who you're partnering with from a distribution standpoint? Thanks..

Yeah. The company we're working with is a new company that's been formed specifically to commercialize VLN..

Okay.

So it's not, they don't have existing route to market capabilities?.

They have existing relationships with the channels and media and government. So we think they are a very strong partner..

Okay. Understood. I'll hop back in the queue. Thank you..

Our next question is from Jim Macrae with Dawson James, please proceed with your question..

Thank you. And good morning. You've characterized the marketing as partner-driven marketing.

I was hoping you could elaborate on the division of labor or tasks that you've agreed to with Circle K? So what is it that they're driving in this partner-driven marketing and what is it that you're responsible for?.

Yeah. Jim, thanks for the question. Good morning. So the tobacco space, as you know, is highly regulated. A lot of the communication with smokers happens at the point of sale.

And many of these retailers, especially chain retailers like Circle K, have established programs to market to consumers, and not just in the tobacco space but across all of the products that they sell. And so we're taking advantage of and able to access and operate in these programs with VLN.

So that's the partner component of it, but we are, of course, designing the content that goes into the programs, making the decisions about how those programs are used, and then also running a number of programs that are outside of the partners ' programs to help drive traffic to Circle K, and also to increase smokers ' awareness of and understanding of the whole proposition underlying VLN, which is that it's a 95% less nicotine cigarette that helps them smoke less.

So there'll be a number of programs that are on independently of Circle K that will accomplish those objectives..

And do you think that the additional partners that you've referred to a couple of times will be similar in that partner-driven marketing or will the nature of those new partners require more or less effort on your part?.

Most chains do have programs, like Circle K. They may not be exactly the same, but most chains that are competitive in the tobacco space, which is all of the national chains and most of the regional chains, do have this sort of program. So it will be a similar effort, which is why this is a good pilot for us..

And is the timing of the additional partners, is that going to be coincident with the pilot and rollout at Circle K or is it going to be sequential? That is, Circle K first and then Partner B second, and then Partner C third, etc..

We'll be working exclusively with Circle K during the pilot, and then we'll make the determination about how to sequence other partners as we move through the pilot and firm up the national launch plans..

Okay. That's helpful. And then lastly, on South Korea. I just want to make sure I understand that. So this is an existing commercial entity, or because it sounds it sounds like it -- I thought you said both things that it's new, but it's established.

So is this a new commercial entity? Or is this an established commercial entered entity, but it's this is first entree into the cigarette market?.

This is a new commercial energy entity that's owned and managed by several individuals that are in, that are Korea, South Korea nationals that live and work in South Korea that come from various industries that are related to media and tobacco retail channels and have also worked with regulators -- on regulator products in South Korea.

So this is a group of people who see the potential for VLN to help their fellow citizens in South Korea and are investing their own time and money in forming a company to bring VLN into market there. And they believe that -- and we believe that they have the capabilities and the network to do this successfully..

And is 22nd Century an investor in that entity? Or obligated to become an investor? Or have the option to become an investor?.

We're not an investor. There is an opportunity to become one, but no obligation to..

All right. That's it for me. Thanks a lot. And good luck with everything..

Thank you, Jim..

Our next question is from Aaron Grey with Alliance Global Partners. Please proceed with your question..

Thanks for question. Just one for me regarding VLN and the pilot program in Chicago with Circle K. You guys talked about the shelf positioning premium right below Marlboro that you'll be testing out.

I just want to know in terms of what you guys are going to do in terms of maybe putting it in different shelf positioning, maybe not so premium as well as marketing in some stores versus other just to better extrapolate how the products might perform on a national level where you might not have the same type of partnership with Circle K? Thank you..

Yeah. Good morning, Aaron. Thanks for the question. It's great question. There are at least a dozen different marketing programs that we will be operating and testing as part of this pilot.

We will be doing AB testing on each of them so that we can understand what works and what doesn't work in every potential situation that we may face in an international launch.

So yes, we will be in some stores using that premium positioning, and in other stores potentially even not having it on the shelf, but putting it behind the counter where it's not visible, but still supported by POS. So there are a lot of variables there, and we'll be testing all of them or as many of them as we possibly can during the pilot..

Okay. All right. Great. Thanks for the color..

Our next question is from Brian Wright with Roth Capital Partners. Please proceed with your question..

Thanks. Good morning.

On South Korea, could you give us a little bit more info to figure out the market opportunity there? If 1/3 of adult men are -- in Korea are smokers, is -- are we talking about 20 million individuals? And then what's the annual sales that would be associated with -- with that?.

Yeah. I don't have the total number of smokers at hand, but I can definitely get you that information.

The projection -- it's hard to also to project right now since Chicago and South Korea will be the first markets that we're launching VLN, but certainly we'll be paying close attention to the outcomes in both of those places as we form our expansion plans, both across the U.S. and globally..

Okay. Okay. I'll follow up with you on the TAM and South Korea.

And then I was just curious if you could help us just better understand a little bit on the breakthrough with KeyGene and just what are we specifically targeting or what part of the genome that was targeted that was successful with so we could just have a little bit more of a better understanding of that because it sounds -- it sounds -- it sounds significant?.

Yeah, Brian. Great question. I'll try to answer that. This is really high technology and quite frankly, it was challenging to communicate this because it is such -- so advanced and so leading edge. But I think the better way to look at it is that the focus on that keyword transformation.

To-date in cross breeding, you don't transform the plant per se, even with the tools, as we've built them with KeyGene in the gene editing side, you begin certainly to modulate them.

But this is much more sophisticated in a plant transformation itself, which I think gets lost in the technology -- we're going to issue a much more detailed technological paper on it, so that we can really drill into it. But, where we have focused our initial efforts is into the broadest need for the plant in order to truly transform it.

And the best example I can give you is taking the low THC base genomes and advancing that into transformation. There's multiple reports coming out about crops being pulled up or burned because of them going hot in the field. These are hemp plants.

And I've heard numbers as high as sometimes 40% plus of these hemp plants are being burned in the field, as DEA catches up. We have a solution for that, and part of this transformative breakthrough is to take the genome that really modulates transformatively the low THC genome in the plant and can take that forward.

We already were onto that with some of our CBD and CBG lines in Colorado. This focus on the transformative technology is going to be focused on this to really go after the broadest issue, which are these hemp lines going hot in the field, more than would be burned, quite frankly. I just don't think the DEA has the resources to catch up with everybody.

But we have plant strains far along that can drive a solution towards this, and the first focus is on the transformation of the plant, which is the next evolution of our science is on -- in that area. There's others behind it. Round disease resistance, you start to take a look at those types of opportunities and then the cannabinoid content itself.

So that's a broad summary of where we're focusing our initial efforts and the criticality of that that where transformation is really what people need to hone in on.

We've modulated plants, which has been very successful on a two-year time period, now we can actually transform the plant itself for much more stable and much more faster strain development.

And where we're focusing our efforts is in one area, in the low THC, to rectify what's going on out there, which is just a tremendous amount of products being burned because they've gone hot in the growing season..

And then is it safe to say that this is -- this would be characterized as a GMO product? Or is it like you do it first with introducing from other plant genes and then you -- that's the first step, and then the second step is using gene editing for the plants ' natural capabilities to produce something like that? Or -- just curious as to how that develops over time..

Yeah. It's non-GMO. Absolutely non-GMO. And the sequence of events in many cases you just described is spot on.

So let's say you start out with these gene-editing tools that we've developed in partnership with KeyGene and we own the IP around with regards to cannabis and then you take that further in the plant strain itself to literally transform it at that point. All of these tools are absolutely non-GMO approach..

Great. Perfect. Thank you so much..

Sure. Thank you. Great question..

We've reached the end of the question-and-answer session. I would now like to turn the call back over to Jim Mish for closing comments..

Thank you. And thanks to everyone for joining us today and the great questions. I appreciate them, and stay tuned for our next updates as we continue to execute on our plans. We're laser focused on that. Continue to deliver results, particularly on our U.S. VLN launch.

And we will be presenting at the upcoming Roth Conference in March, and hope to see many of you there. Also, we look forward to our next update as we join you. Thank you very much and have a great day..

Thank you. This does conclude today's call. You may now disconnect your lines, and we thank you for your participation..