22nd Century Group, Inc. (XXII) Earnings Call Transcript & Summary

Welcome to the 22nd Century Group's Annual Meeting of Stockholders. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the meeting over to Mei Kuo, Director of Communications and Investor Relations.

Thank you, Michelle, and good morning, everyone. As previously announced, in response to COVID-19, we made the decision to hold this meeting virtually in order to protect the health and safety of all meeting participants. In addition, we believe this format provides greater access to all of our stockholders and maximizes the ability of everyone to meaningfully engage with us. I'd now like to introduce those joining me today. We have Michael Zercher, our President and Chief Operating Officer; and Andrea Jentsch, our Chief Financial Officer, who will act as secretary of the meeting. We are also joined by our Director nominees, our other directors and representatives from our registered accounting firm, Freed Maxick. Please remember that you may vote your shares online anytime during this meeting prior to the closing of the polls. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed, and no further action is needed. If you are a record holder and wish to change your vote, or did not been in a proxy and wish to cast your vote now, or have not already cast your vote using our electronic voting system, you may cast your vote by electronic ballot at virtualshareholdermeeting.com/xxii2020 at this or any time until the closing of the polls. You will notice a link to the voting site on your screen. We have allocated time after the adjournment of the formal part of the meeting for Q&A. There is a text box on your screen, where you can submit your questions at any time throughout the meeting. In order to hold an efficient meeting, no stockholder may ask more than 2 questions, and we will not be answering questions that are irrelevant to 22nd Century's business or the conduct of its operation or that otherwise related to confidential matters. If we're unable to get to your questions, you may always e-mail us at [email protected]. Before we begin our prepared remarks, it is possible that some of this morning's comments or responses to your questions may contain forward-looking statements that are based on certain assumptions and are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to differ materially. We have 3 items of business to conduct at today's meeting. They are: the election of 2 Director nominees as Class III Directors to serve until Annual Meeting of Stockholders in the year 2023; the approval of advisory resolution on the company's 2019 executive compensation, as reported in this 2020 proxy statement; and the ratification of the appointment of Freed Maxick CPAs, P.C. to serve as the company's independent registered public accounting firm for the year ended December 31, 2020. Before we vote on these measures, Mike will provide an overview and update on the business. We have a presentation to accompany this part of the meeting, which can be found on your screen and in the Events section on the company's Investor Relations website at xxiicentury.com/investors. I will now turn the floor over to Mike.

Thanks, Mei. Good morning, everyone, and thank you for joining us today. I'm grateful for the technology and the efforts of the many people that have made it possible for us to meet today, despite all that has changed around us. Let's begin the presentation with the company's mission. We're focused on reducing the harm caused by smoking by introducing adult smokers to our proprietary reduced nicotine tobacco products, made from what we sometimes call our very low nicotine content or VLNC tobacco plants. In the area of hemp/cannabis, we are working to develop proprietary varieties of legal hemp/cannabis plants, with valuable cannabinoid profiles and other superior agronomic traits. I'll go into further detail in a moment on both of these strategies and our achievements in each of these 2 areas. Moving on to the next slide. Our company is led by a seasoned management team with diverse backgrounds in tobacco, plant biotechnology, regulatory science and acquisitions. We're in the process of further strengthening our team with a new CEO and other key leaders. The company has engaged an executive search firm to identify and recruit qualified candidates, specifically with life sciences and public company experience for the CEO role. We expect to fill this role in the coming months. Our company's strengths lie in several distinct areas. First, we have a significant intellectual property portfolio of issued patents and patent applications, relating to both tobacco and hemp/cannabis plants. Our company has extensive capabilities in plant development and genetics research, with both tobacco and hemp/cannabis plants. We have strong regulatory affairs capabilities, and have been working closely and successfully with the FDA. As outlined on the previous slide, we have a management team in place with expertise in consumer packaged goods, including tobacco. We have a strong balance sheet to support our long-term strategy, and we have already received FDA authorization of our premarket tobacco product application, or PMTA, and for our VLNC cigarettes, while our modified risk tobacco product, or MRTP application, for the same product, is now in the final stages of FDA review. The 2 industries in which we operate, tobacco and legal hemp/cannabis, differ in many ways. But importantly, they're both plant-based, highly regulated and consumer-facing. In tobacco, with over 34 million adult smokers in the U.S. and nearly 1 billion adult smokers worldwide, the commercial and public health opportunity for 22nd Century's VLNC cigarettes is enormous. While the tobacco industry is mature and dominated by a few major players, the U.S. hemp/cannabis market remains highly fragmented, with no clear leaders and lacking real brand and product differentiation. We are leading in both tobacco and hemp/cannabis, and we have the opportunity to strengthen our position through science-driven differentiation and by building consumer trust. We believe our company is uniquely positioned to create value in these 2 large industries by leveraging our strengths and expertise in plant science, intellectual property, regulatory affairs and consumer packaged goods to disrupt the global tobacco industry and position ourselves as a leader in the emerging, rapidly growing hemp/cannabis industry. With these opportunities in tobacco and hemp/cannabis in mind, let's review our strategic priorities. First, we are focused on supporting the planned commercialization of our VLNC cigarettes as well as the FDA's proposed plan for the adoption of a reduced nicotine product standard for all combustible cigarettes, which could lead to industry-wide demand for our VLNC tobacco and access to our patents. We're also focused on leveraging our scientific assets and our team's expertise in plant genetics and IP to create value in the emerging hemp/cannabis space, both through internal investments and also external relationships. And finally, we remain focused on using our resources effectively, to deliver the best possible returns for all of our stakeholders. Let's talk a bit more about our tobacco strategy. Our strategy here is to successfully commercialize our VLNC cigarettes with a focus on licensing and strategic partnerships, while also helping ensure the adoption of an FDA-reduced nicotine product standard for all combustible cigarettes. Let me talk more here about the 2 types of FDA authorizations needed to bring our VLNC cigarettes to market. The first is the PMTA, which is required to put a new tobacco product on the market. The PMTA review process is a rigorous, scientific evaluation that encompasses 14 areas of science. In December, we passed our PMTA test with flying colors when FDA authorized our PMTA. That authorization allows us to sell our VLNC cigarettes today under the brand name Moonlight. However, it does not allow us to describe or make any claims about the unique characteristics of the product, either on the packaging or in any advertising. For a new tobacco product to be marketed with claims, such as very low nicotine content, or 95% less nicotine, the product needs to have an MRTP authorization in addition to a PMTA authorization. We are now awaiting FDA's authorization of our MRTP application, which, if granted, will allow us to market our VLNC cigarettes under a new brand name, VLN, which will hopefully replace the name Moonlight. More importantly, the MRTP authorization will, hopefully, allow us to market our VLNC cigarettes with pack and advertising claims stating that VLN contains 95% less nicotine as compared to conventional tobacco cigarettes as well as other related claims regarding reduced nicotine exposure. If we receive MRTP authorization from FDA, we can then go to market with claims. This slide shows the evolution of our VLNC cigarettes. On the left, you see SPECTRUM. In 2011, we developed our SPECTRUM research cigarettes at the request of the FDA and the NIH, or National Institutes of Health, to facilitate clinical research necessary to understand the potential public health benefits of reduced nicotine cigarettes. Since that time, we have produced more than 28 million research cigarettes for use in numerous independent clinical studies, with several agencies of the U.S. federal government investing more than $100 million in these studies. That science is very important because it underlies all of our work with FDA. Next is Moonlight, which is the PMTA product approved in December, while VLN, on the right, is the MRTP product. I won't go into the reasons now for the different names but what's important to understand here is that these are all the same products. Moonlight and VLN both are made with the same proprietary, reduced nicotine tobacco as our SPECTRUM VLNC cigarettes. Moreover, our proprietary VLNC cigarettes are all made in the same way as conventional cigarettes, using materials, ingredients and processes well-established in the tobacco industry. Let's talk about why our VLNC cigarettes are important, and what the clinical science tells us about them. Unlike conventional cigarettes, our VLNC cigarettes contain, on average, just 0.5 milligrams of nicotine per cigarette compared to 10 to 14 milligrams per cigarette using conventional products. Otherwise, they look, taste and smoke the same as conventional cigarettes [indiscernible] that smokers are [indiscernible] unlike with many vape and smokeless tobacco products. The benefits of VLNC cigarettes are real and significant. Studies show conclusively that adults who smoke our VLNC cigarettes, even smokers with no intention of quitting, smoke on average, 50% fewer cigarettes per day. They show reduced levels of biomarkers of nicotine and other toxicants. They show reduced nicotine dependence, with minimal evidence of compensatory smoking or nicotine withdrawal. They increased the number of days they go smoke-free, and they increased their attempts to quit smoking. Again, these are results found even among smokers with no intention of quitting. These findings are based on dozens of independent clinical studies conducted by universities and research institutes around the world as well as by various agencies of the U.S. federal government, which has also provided the vast majority of the funding for these studies. These studies have clearly shown the benefits of VLNC cigarettes to smokers and public health, which is why we are hopeful for a positive decision from FDA about our MRTP application. These studies are also key to FDA's plan to implement a product standard requiring all combustible cigarettes sold in the U.S. to contain only minimally or nonaddictive levels of nicotine. And we believe the authorization of our MRTP application will be a key milestone in the continued forward movement of FDA's plan for nicotine. The public health benefits are clear, with our products and so is the commercial opportunity. Clearly, a mandate from FDA requiring all cigarettes to have very low levels of nicotine would be of huge value to the company, but such a mandate will take time to implement. And in the meantime, we believe the commercial opportunity for our MRTP product will be enormous. As I mentioned in an earlier slide, there are 34 million smokers in the U.S. alone. The tobacco industry in the U.S. is worth $100 billion today, approximately. Of that, just $15 billion or so are vape products, and most vape users are also still smokers. Vape is popular in large part because smokers are looking for alternatives to smoking and to nicotine addiction. CDC surveys show that 70% of smokers say they want to quit smoking, and 50% try each year to quit, but fail. Our own consumer research shows that 60% of smokers are likely to buy our product -- 60% of current adult smokers are likely to buy our product. And again, 60% of smokers that we spoke to, just to emphasize this point, say they are likely to buy a cigarette with 95% less nicotine. The opportunity here for public health and for 22nd Century is enormous. Let's turn now to our hemp/cannabis strategies. First, I think it is important to point out the difference between hemp, marijuana and cannabis. Cannabis sativa is the scientific name of the plant. Hemp and marijuana are both cannabis plants, in the same way that Rottweilers and Chihuahuas are both dogs. To avoid confusion, when we talk about our work, we distinguish between hemp/cannabis and marijuana/cannabis. As defined in the law, marijuana/cannabis has THC levels above 0.3%, while hemp/cannabis has THC levels below 0.3%. THC is the chemical in cannabis that makes you feel high. Because hemp/cannabis plants have very low levels of THC, hemp/cannabis cannot make you high. THC is 1 of over 100 chemicals, called cannabinoids, that are produced naturally by the cannabis plant. CBD is also a cannabinoid like THC, but CBD does not make you high. However, CBD, and many of the other 100-plus cannabinoids found in the plant, are believed to have many health and wellness benefits. All cannabinoids can be derived from hemp/cannabis plants. However, marijuana/cannabis is the only plant that THC can be efficiently derived from. This is why hemp/cannabis is legal in the U.S. at the federal level, [ states ], while marijuana/cannabis is not. And this is why we're able to legally work with hemp/cannabis plants in our own business and R&D. Nevertheless, this can be confusing, which is why we're very careful that our work in this space is done in full compliance with all applicable laws, including U.S. federal and state laws. So with that background, let's talk more about our hemp/cannabis strategies. Our first objective here is to establish ourselves as a leader in the emerging hemp/cannabis space by developing proprietary varieties of hemp/cannabis with valuable cannabinoid profiles and other superior agronomic traits. For example, these new plants could have CBD levels that are 2 to 3x higher than what most hemp CBD companies grow today, which would drive significant improvements in margins and pricing for the companies that have access to these new plants. Likewise, these plants could contain high levels of 1 or more of the other 100 minor cannabinoids that naturally occur at very low levels in the plant, and which potentially have very different health and wellness applications from CBD. We're also continuing the development of our zero-THC hemp plants. Our second objective here is to build strategic partnerships in the hemp/cannabis space, to commercialize our new proprietary hemp/cannabis plants currently in development. With these plants, 22nd Century and its partners will be able to go to market with products that are highly differentiated and quite possibly unlike any other products available. In the absence of clear leaders in the space, with these strategies, we believe we can establish a clear leadership position for 22nd Century in the legal hemp/cannabis space, built on science-driven differentiation and consumer trust. Let's talk more about our key partnerships. First, in 2014, we began our work in this area when we formed a partnership with Anandia Laboratories which yielded valuable new plants and also provided us an exclusive sublicense in the U.S. and a co-exclusive sublicense in the remainder of the world, except Canada, to important new patents and patent applications held by Anandia related to genes that control the biosynthesis of cannabinoids in plants and other organisms. In 2019, we entered into new strategic partnerships with KeyGene and Panacea. I'll walk through both of the new partnerships in the next couple of slides. KeyGene is a global leader in plant biotechnology. In our exclusive collaboration with them, it is focused on developing hemp/cannabis plants with valuable traits. In just a short period of time working together, we have assembled high-density genome sequences of 2 hemp/cannabis lines and established a new proprietary hemp/cannabis bio-informatics platform. These are believed to be among the highest quality hemp/cannabis reference genomes in the world. The assembly of high-quality genomes usually take years to perform, however, our partnership with KeyGene enabled us to accomplish this in just under 3 months. This multiyear global partnership is expected to yield proprietary, unique and valuable hemp/cannabis plants and IP for 22nd Century that we will exclusively own and control. Now to touch on our investment in Panacea. Panacea is a rapidly growing, vertically integrated, consumer-facing company in Colorado that develops, produces and sells legal, hemp-derived CBD products. The company has growing extraction, distillation, testing and manufacturing capabilities, and operates out of a 51,000 square foot facility, with the capacity to produce over $1 billion of product per year. Panacea is led by an amazing team, including their founder and CEO, Leslie Buttorff, who's an accomplished businesswoman and entrepreneur. She and her team have built an incredible company in a very short period of time. And most recently, she has led Panacea into the fight against COVID-19 with the launch of a line of sanitizer products containing CBD. Our partnership with Panacea marks 22nd Century's first investment in legal hemp/cannabis consumer product space, and is a major milestone for the company with the opportunity for strong shareholder returns. Our plan is for Panacea to be a platform operating company in the hemp/cannabis space, that is able to leverage 22nd Century's leadership in plant research, our comprehensive expertise in FDA-regulated spaces and our leadership team's deep experience in consumer packaged goods. We are excited about both partnerships, and we continue to explore other strategic opportunities that can advance our leadership position and generate profitable revenue in the legal hemp-derived cannabinoid product space. With that, let me provide you with a high-level summary of where we started and what we have accomplished so far. 22nd Century was formed in 1998 to create reduced nicotine tobacco plants. In 2011, we created SPECTRUM cigarettes, in collaboration with various U.S. federal public health agencies. We began trading on the NYSE American Exchange in March of 2014. Since those early days, we've been working to bring our proprietary VLNC tobacco cigarettes to market and have been steadily making headway through the FDA's regulatory review process. In December 2019, the FDA authorized our PMTA application to allow the sale of our VLNC tobacco cigarettes, the first and only PMTA to be authorized for a combustible cigarette. Earlier this year, in February, we achieved another key milestone in the FDA's review process when we presented our MRTP application to the FDA's Tobacco Products Scientific Advisory Committee or TPSAC, the first and only time that a combustible cigarette has been reviewed by this scientific committee. Finally, just this month, the FDA announced that May 18 is the closing date for the public comment period of our MRTP application. This deadline is one of the final steps of the application review process leading to FDA's decision about our MRTP application. FDA's decision could come any time after the closing of the comment period. We are bullish on the opportunity ahead for our VLNC cigarettes, and we are hopeful that we will receive a positive decision from FDA. We're also looking -- we also look forward to making even more progress with Panacea to build a leading company in the hemp/cannabis product space. And in our R&D and IP programs, we have achieved important milestones in our work with both reduced nicotine tobacco and hemp/cannabis plants, which are described in more detail here and in our recent press releases. So in closing, we believe there's a large market opportunity for our company in both the tobacco and legal hemp/cannabis industries. We believe we have a very strong team in place, and we are committed to solidifying and focusing that team to drive our company's growth, including by bringing on a new CEO in the coming months. We have created a competitive moat with our intellectual property portfolio, consisting of dozens of issued and pending patent applications around the world. We are building a portfolio of strategic partnerships to legally develop and commercialize new and valuable hemp/cannabis plants. We have made significant progress navigating FDA's regulatory pathway with our PMTA and MRTP applications. And lastly, we're financially strong. We are set to release our first quarter 2020 financial results next Thursday, May 7, and we'll hold a conference call at 8:00 a.m. Eastern time to discuss those results. I encourage you to join the call, where we will provide more color on the first quarter and our year-to-date achievements. I will now turn things over to Andrea Jentsch, our CFO, to begin the formal part of the meeting.

Thank you, Mike. The Board of Directors has appointed [ Simon Coop ] of Broadridge to serve as the inspector of election for this meeting. He is present at the meeting today. As required by law, Mr. Coop has taken and signed an oath as inspector of election. A certified list of the stockholders of record entitled to vote at today's meeting for purposes of sending the notice of meeting and proxy statement is available online, and I have an affidavit from Broadridge attesting to the delivery of the notice. Mr. Coop has advised me that a majority of the company's outstanding voting shares held of record as of the close of business on March 5, 2020, the record date for this meeting, are represented at today's meeting by proxy. I declare this meeting duly and lawfully convened, and now open and ready for business. As mentioned, the first order of business is the election of the 2 Director nominees named in the attached proxy statement as Class III Directors to serve for a 3-year period until the Annual Meeting of Stockholders in the year 2023. The nominees are Clifford Fleet and Roger O'Brien. The second item of business for stockholder consideration at this meeting is approval of an advisory resolution on the company's 2019 executive compensation as reported in its 2020 proxy statement. The final item of business for stockholder consideration at this meeting is the ratification of the appointment of Freed Maxick CPAs, P.C. to serve as the company's independent registered public accounting firm for the year ended December 31, 2020. Now that all proposals to be voted on by the stockholders have been presented, I declare the polls open for voting on these 3 proposals. You must submit your electronic ballot in order for your votes to be counted. The inspector of election will not accept votes submitted after the closing of the poll. Please note that any votes by electronic ballot submitted today will be subject to final verification by the inspector of election. There being no further ballots, I hereby declare that the polls are now closed at this time for voting on the items of business. All electronic ballots and proxies are now in the custody of the inspector of election. We have received a preliminary tabulation of votes by our inspector of election. All votes are subject to final count certified by the inspector. Based on the vote, I declare that each of the proposals have been approved, and Mr. Fleet and Mr. O'Brien have been elected to the Board. I declare the formal business of today's meeting concluded. The company will report the final voting results on a Form 8-K filed with the SEC within 4 days of today's meeting. We would now like to open the meeting to questions.

Okay. So fielding questions. First question is -- I'll just read the question and then answer. So why has there been so much turnover at the company over the last year? What does this mean for the company? We believe we have the strongest leadership team now that the company has ever had. We have amazing talent on our team, driving regulatory affairs, R&D, our M&A activities and our communications and Investor Relations as well in the area of finance and accounting. And we will continue to build our team. We feel great about the team as it is in place. And as we're building it, and also about our Board of Directors that's overseeing the company and its strategy in advising us. Some of the changes over the past year were driven by cost considerations, and others were personal decisions by employees. So as the company evolves, or any company evolves and expands, changes happen for many reasons. For example, Cliff Fleet made the decision to step away from his role as CEO, in order to lead and be of service to a major, historic, nationally recognized nonprofit that has enormous value to our country. And while Cliff resigned as CEO, he remains a Board member, and he's extremely engaged with the company still today and committed to the strategy and success of the company. I myself have been with the company for several years now in various leadership positions and currently serving as President and COO. We're, as I've mentioned, looking to add to our team, with a new CEO. And the Board has initiated a formal search process to fill that role. And that's -- and the Board has retained a leading nationally known executive search firm to identify candidates for that role. And it's our Board's highest priority at the moment. Let's see. Next question. Is there anything the public or stockholders can do to speed up the FDA review of the MRTP application? So certainly, this is something that we think about every day, how to ensure the approval of this application in a timely way. Nevertheless, we have to keep in mind that the FDA's review of any MRTP application tends to be a lengthy, detailed and comprehensive process. However, we're very pleased with the progress our team has made and continues to make, and also with the relatively rapid review of our applications and the authorization of our PMTA by FDA. So at this time, all of the materials for our MRTP application have been submitted, and the FDA has announced the deadline for the submission of public comments to the application, which is less than a month away. So is there anything that can be done to support it? I think we would encourage you to submit your comments, while the comment period is open in support of the application. And we're hopeful that we'll receive a positive decision from FDA, allowing us to bring our VLNC cigarettes to market. Okay. Next question. The next question is, when VLN is approved, what is the company's strategy for producing these cigarettes? If the plant has reduced headcount? And does the company have the capability to market and sell logistically these cigarettes? The short answer is yes. We have well over -- we have significant capacity in our factory. We're manufacturing currently for other companies so that we are prepared across our supply chain in our operations to transition that capacity to VLN, if it's approved by FDA. And amongst our team, including myself, we have a long history and a lot of experience in the tobacco industry. As I mentioned in the previous comments, we'll be looking to partner with other companies to bring those products to market. And we think that there will be, and is, significant interest in doing that. Without further questions, I want to thank everyone for participating in today's meeting. We look forward to updating you on our progress on our first quarter earnings call. In the meantime, please reach out to Mei Kuo with any follow-up questions. We wish you and your families good health during these times.

Thank you. This concludes today's meeting. Have a wonderful day.