Q4 2022 22nd Century Group Inc Earnings Call
Speaker 1: we will focus on commercial advancements driving revenue in our VLN tobacco and GDB hemp cannabis business units.
Speaker 1: If you have questions about our business that are not addressed on today's call, you're welcome to email Investor Relations using my contact information provided in today's release.
Speaker 1: A few reminders about today's call.
Speaker 1: Some of the statements made today are forward-looking. Forward-looking statements are subject to risks and uncertainties.
Speaker 1: and other factors that may cause actual results to differ materially from those contemplated by these statements.
Speaker 1: Additional information regarding these factors can be found in our annual, quarterly, and other reports filed with the SEC.
Speaker 1: Also, during today's call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, tax, depreciation, and amortization, as adjusted for certain non-GAAP and non-operating expenses.
Speaker 1: For more details on these measures, please refer to our press release issued earlier today. With that, I'll turn the call over to Jim beginning on slide 3.
Speaker 2: Thanks, Matt, and good morning, everyone.
Speaker 2: The fourth quarter and really all of 2022 were transformative for 22nd century. As we advanced to an aggressive commercial rollout of VLN, reduced nicotine content cigarettes, and accelerated revenue and margin growth opportunities with our hemp cannabis business unit.
Speaker 2: The benefits of those activities are only just beginning to show in the first quarter and will become more and more evident as 2023 progresses and as we transform from an R&D company into a truly commercial entity.
Speaker 2: Our exceptional Chicago pilot results lay the groundwork for an aggressive 2023 multi-state VLN launch program.
Speaker 2: The pilot clearly showed that adult smokers are willing to switch brands to VLN to help them smoke less. And John's going to tell you why we are so confident in this.
Speaker 2: Those results are bringing major retail change to our door, wanting to carry VLN.
Speaker 2: We have established distributor relationships with the top tobacco and sea store distributors serving national and regional level chains that will achieve our goal of up to 18 states by the end of 2023.
Speaker 2: GBB volumes have continued to scale as we confirmed our dominant share position in the hemp derived ingredients market.
Speaker 2: We recently launched an industry first CBMO plus distribution category management distribution model and submitted an application to FDA to provide plant derived APIs to the growing pharmaceutical trial industry centered around CBD based molecules.
Speaker 2: The November fire at our Grass Valley facility has actually strengthened our industry position by fully meeting our revenue target even after the fire, continued to build volumes and putting in place plans to come back even stronger with our new facilities. And I'll talk more about that later on in the discussion.
Speaker 2: Perhaps most importantly to those of you on this call, we are confirming a clear path to cash-positive operations inclusive of corporate overhead in both our VLN and hemp cannabis business units.
Speaker 2: This is the first for this company.
Speaker 2: You've been asking for it, and slide four summarizes how we get to cash positives.
Speaker 2: This update includes both corporate overhead allocation and adjustments for the fire in Grass Valley, among other updates.
Speaker 2: VLN now has relationships in place with Coremark, EB Brown, and a growing funnel of top regional and national distributors that will enable us to launch hundreds or thousands of stores across multiple states with the top retail chains.
Speaker 2: Our initial example of 18 states represents up to 600 million cartons sold per year and provides a clear path to cash positive in early 2024. Again, John is going to detail this math for you.
Speaker 2: In hemp cannabis, we still intend to hit cash positive 2024 driven by the continued acceleration of consumer demand for CBD derived products, improved operating results such as our Primeville crude extraction facility, and an industry first fully verticalized solution with top customer and consumer CBD brands.
Speaker 2: sticking to centralize with GVB's ingredients, manufacturing, and now distribution. Again, I'll talk more about that as we get back into the hemp cannabis business unit after John . But that's a good point to let John dive into the incredible work his teams are doing in our tobacco business unit. John ?
Speaker 1: Thanks, Jim, and good morning, everyone. We are moving rapidly to bring an incredibly disruptive product to market. Starting from slide six and where we were in 2022.
Speaker 1: The Chicago pilot with Circle K confirmed the exceptional interest from adult smokers in our VLN reduced nicotine cigarettes, most of whom have repeatedly tried and failed to quit using traditional methods. VLN offers a new tool to reduce their smoking that is easy to understand and has been proven effective in clinical studies.
Speaker 1: Moving from the pilot, we expanded sales in Illinois and added Colorado where the MRTP excise tax structure provides a favorable financial incentive.
Speaker 1: We also announced launch plans in Arizona, New Mexico, and Utah.
Speaker 1: We began with non-traditional distributors Eagle Rock and Krieger Mercantile in Colorado, and both organizations have been excellent partners to 22nd Century, Circle K, and Smoker Friendly.
Speaker 1: As our launch plans took shape, other major retailers wanted access to BLM, but wanted to use their current delivery systems through traditional local and national scale distribution networks.
Speaker 1: It quickly became apparent that we would have to develop these local, regional, club, and national distributor accounts ahead of schedule. PIE 7 demonstrates the power of our focused action over the last 100 days.
Speaker 1: We have created a distribution network that includes the largest c-store distributor, Coremark.
Speaker 1: we are in the last stage of signing the number two national distributor.
Speaker 1: Additionally, we have developed a group of regional, local, and club accounts to distribute PLN. We piloted with the number 2 sea-store chain in the country.
Speaker 1: are in the final stages of signing the number one sea-store chain in the nation.
Speaker 1: We also have a growing list of top ten and regional retailers, plus four military bases in the sales funnel.
Speaker 1: We were active in two states and announced three more.
Speaker 1: We just announced today plans to enter the three largest cigarette states, California, Texas, and Florida, launching as soon as the agreements I just mentioned are finalized in the next few weeks.
Speaker 1: We are also announcing two more international tests in Switzerland and Japan. In summary, we're as close as we could be, short of naming these new partners and ready to go with a rollout that massively expands our retail footprint, with national scale distribution partners, and within the largest and most important cigarette markets. And this is just the starting point for VLN.
Speaker 1: Now turning to slide 8, you can see what this enhanced programming enables.
Speaker 1: We have announced eight states, including the top four markets. We've dramatically expanded distribution with national and retail, excuse me, national and regional leaders in the sea store ecosystem and have begun to announce the first of many new retail partners in our pipeline, including the largest sea store chains and distributors.
Speaker 1: As 2022 came to an end, VLN was available in almost 500 stores.
Speaker 1: Less than three months later, we have the ability to launch in hundreds of new stores at a time, enabling us to achieve our goal of updating states by the end of the year. Our top retail partners alone operate thousands of stores in our targeted states, plus regional chains such as Texas-based SEFCO, where we expect to launch approximately 100 stores in the near future.
Speaker 1: Our pipeline is full of many exciting national and regional opportunities, and we look forward to adding new partners to the logos on this slide as we move through the year.
Speaker 1: Perhaps most importantly, the states announced to this date represent 240 million cartons of annual cigarette sales.
Speaker 1: And slide nine shows we need only a fraction of that volume to hit our goal of becoming cash flow positive.
Speaker 1: The exceptional pilot results in Chicago confirmed our pathway to achieving one SharePoint in the category.
Speaker 1: Then we focus late in the year on large-scale distribution channels based on demand from several national retailers. We can now launch entire chains across multiple states.
Speaker 1: well earlier than we had originally expected.
Speaker 1: The highlighted 18 states represent more than 600 million cartons of potential volume. Now we won't be in on every corner or in every shelf in these states, which is okay. After the scale-up investment process this year to be cash flow positive, we just need to achieve a sales run rate of approximately 1.2 million cartons per year.
Speaker 1: and we are well on this trajectory.
Speaker 1: On slide 10, I know our international efforts are also important for many, particularly after New Zealand enacted its national policy allowing only reduced nicotine content cigarettes to be sold starting in a little over two years.
Speaker 1: We have committed to grow enough seed to supply the entire New Zealand tobacco market with reduced nicotine tobacco, about 2 billion sticks. Whether it's our product, our seeds, or our tobacco, we are working closely with local leaders to support their efforts.
Speaker 1: We are also planning to expand our programs in South Korea and launch pilots in Japan and Switzerland with more details following. Finally, for me on slide 11, we have talked extensively about the federal regulations, including a proposed ban on menthol products and a reduced nicotine content mandate, both of which are moving closer to reality, having been made a clear priority by both the FDA and the Biden Union.
Speaker 1: But even more, the science shows that a national reduced nicotine mandate such as the approach taken by New Zealand, whether through federal regulations or any of more than 100 bills introduced this year at the state and local level, would help all smokers more easily equip or migrate less toxic products. And we currently have the only product that meets this standard with the clinical data that back it.
Speaker 1: I'll now pass you back to Jim for an update on our hemp cannabis franchise. Jim?
Speaker 2: Thanks, John . It's been an amazing year for tobacco progress. We're teeing up a transformative opportunity at the business unit to cash flow positive and well beyond. Thanks for joining me for Washington Topithe eyelash drive.
Speaker 2: Let's turn to slide 13 as we discuss how we intend to do the same for hemp cannabis on an even faster timeline.
Speaker 2: GVB is the market leader in North America for the manufacturing of hemp-derived active ingredients and finished products servicing the consumer packaged goods, nutraceutical and pharmaceutical industries with a broad global footprint.
Speaker 2: Now selling 100,000 kilos of cannabinoid rich hemp extracts in 2022 and growing. So price swings have accelerated in fourth quarter and into 2023.
Speaker 2: We had a setback in our original cash positive plans for the November Grass Valley Fire, which primarily impacted margin even though we maintained all customer deliveries and exceeded our revenue target for the fourth quarter.
Speaker 2: We responded aggressively and plan to achieve cash positive operations regardless in 2024 with a combination of scale and operating enhancement. I'll go into more detail. What truly sets GBB apart though is our complete vertically integrated control from plant receptor science to ingredients to finished goods and now even retail category management.
Speaker 2: This is what we have built. This is what we have been building it for. And here's why we have been building it.
Speaker 2: Slide 14 covers the assets underpinning our fully integrated ingredient manufacturing chain. This starts with a world-class extraction facility in Prineville, Oregon, with an expected output capacity of 15,000 kilos per month by the end of 2023.
Speaker 2: As this facility scales, it will displace a majority of our third-party crude purchases in the market.
Speaker 2: We're replacing our distant and isolate production capacity from the November Grass Valley fire, which has temporarily injected a lot of one-time costs into our year-end results.
Speaker 2: We are fortunate to have a strong balance sheet and insurance coverage to recover fully. We can build back a far superior campus long term for both economic efficiency and scalability. It will be an absolute center of excellence in the cannabis hemp world.
Speaker 2: From there, our 40,000 square foot Las Vegas manufacturing site can produce an extensive variety of white label products for our consumer product customers.
Speaker 2: This capability will leverage our VLN market sales and distribution teams for the new CDMO plus D agreement, which I'll cover shortly. Again, I'll repeat, this is an accelerant with the VLN team, not a distraction. A tremendous amount of synergies.
Speaker 2: We have also opened new facilities in Europe and acquired RXP in the UK to create a strong footprint for landed ingredient sales in the higher margin European market and access to the emerging food and nutraceuticals market in the UK.
Speaker 2: And finally, we have filed a DMF to allow our CBD isolate to be used by companies conducting clinical trials with the FDA.
Speaker 2: supplying the multi-billion dollar pharmaceutical industry. These clinical trials allow immediate revenue. These are not long-term revenues that would take five to seven years to develop. They start very quickly due to the clinical trial volumes that have to go up even as we speak. Slide 15 provides more complete update on Grass Valley.
Speaker 2: First and foremost, I remind you that thankfully all of our
Speaker 2: employees who were safely extracted from the situation and are doing well.
Speaker 2: Next, we were still able to source ingredients, certify them to our standards, and supply our customers with delivered products in the fourth quarter. In fact, volumes actually increased sequentially by almost 75 percent to 47,000 kilos, and we hit our revenue goal.
Speaker 2: That volume growth is continuing into 2023, with 20,000 kilos already shipped in January .
Speaker 2: We are seeing a shortage of raw hemp in the marketplace.
Speaker 2: as the market grows. And this provides a premium to our ability to source and supply consistently.
Speaker 2: We are standing up an interim facility in Triangle for distillate and isolate production, which will enable margin recovery as 2023 progresses.
Speaker 2: gets us to cash flow positive and then builds a comprehensive campus that will support greater economic efficiency and scalability than our original grass valleys could have enabled.
Speaker 2: We're also working directly with the governor's office in Oregon as well as their state economic development agency for key incentives.
Speaker 2: Slide 16 details the new CBMO plus retail channel management model. We are pioneering with several top consumer brands in the cannabis space.
Speaker 2: We should announce our Cornerstone partnership very soon.
Speaker 2: This model leverages an exclusive license from the brand to GVB to source ingredients, manufacture and ultimately distribute to the retail shelf.
Speaker 2: There's no other way to say this, but this is a transformative opportunity for revenue, scale, and profit expansion in the cannabis hemp business unit. By verticalizing our capabilities, it offers a key solution to establish brands looking for turnkey solutions and world-class CPG distribution expertise. It also enables us to further leverage our VLN sales team and channel in place.
Speaker 2: products with retailers seeking innovative high velocity high margin small footprint consumer CBD products.
Speaker 2: Just one or two of these deals would be transformative to the revenue scale and we are excited to move forward on several opportunities.
Speaker 3: Moving to slide 17.
Speaker 2: Our position in the higher margin European market has also greatly improved. Our Netherlands warehouse facility supports faster delivery to European customers and a landed cost inclusive of import tariffs and other duties to more than $3 billion in growing market. Our RXP acquisition brings more than 1,200 novel food applications secured using GVB's mobile Assistant system divide a ElectricityGeriatric approach on loudly Elliot and Chad Dod Cole. Torqued solutions arePCS availability in Awakese Honor and Worksring? Magic Awards hosts 23 members to form a spacecraft with Chung
Speaker 2: We believe the US market will go the same direction.
Speaker 2: when the FDA establishes its new role specific to the emerging food and nutraceutical market, which is distinct from our current growing consumer hemp business lines. It's incremental to that.
Speaker 2: Bringing it all together on slide 18, the cash positive hemp cannabis operations.
Speaker 2: First, we continue to execute on operating performance enhancement, resume in-house production, and bring our bulk crude extraction online for additional margin gain as we scale revenue.
Speaker 2: Second, our new vertical distribution agreements kick off a new growth channel placing top consumer brand CBD products at retail sites seeking new high velocity products to meet rapidly expanding consumer demand for CBD products.
Speaker 2: Just to return to normal operating parameters coupled with our organic growth and new CDMO plus D contract opportunities.
Speaker 2: can get us to cash positive by first half 2024 as it stands today, if not earlier.
Speaker 2: We also have longer term opportunities with our FDA Drug Master File that opens up to large adjacent market with notable pricing premiums, plus a new set of FDA guidelines specific to the food nutraceutical markets in the U.S., opens another adjacent channel for sales of our ingredients and CDMO capabilities with customers who will demand precisely calibrated, repeatable, and reliable ingredient solutions.
Speaker 2: And finally, put a node on hops.
Speaker 2: Our third plant science franchise leveraging our extensive alkaloid capabilities. We are developing new biotechnology tools and molecular techniques to accelerate the breeding of unique traits and new top genetics. In early 2022, we expanded our research agreement with Keygene to identify specific traits and
Speaker 2: which are appropriately engineered to benefit consumers of hot products in both the beer and nutraceutical industries. I want to give an update that's clear that we are making significant progress to lock down what I had termed in the past as the final technological milestone.
Speaker 2: And we'll then be able to go into detail as soon as the IP is filed on this work.
Speaker 2: And with that, let me turn it over to Hugh to discuss the financials. Hugh? Hello again It's a great honor to be here resist ending this topic.
Speaker 2: And with that, let me turn it over to Hugh to discuss the financials. Hugh? Thank you, Jim, and good morning to everyone.
Speaker 1: Starting off on slide 20 with fourth quarter financial results, net sales increased 141% on the urban quarter to 19.3 million.
Speaker 1: reflecting the addition of GDB revenue and increased unit sales for CMO manufacturing.
Speaker 1: We continue to experience strong customer demand for both our tobacco and hemp cannabis products.
Speaker 1: including higher CMS sales volume and increase unit sales of our hemp cannabis bulk ingredients.
Speaker 1: Gross profit decreased slightly quarter to quarter to negative $646,000, reflecting lower margin sales mix for CMO manufacturing combined with the impact of the Grass Valley fire. I will explain gross profit further on slides 21 and 22.
Speaker 1: Net sales for fiscal year 2022 increased 101%, 62.1 million, again reflecting the addition of GBV and higher CMO unit sales.
Speaker 1: Gross profit decreased slightly year over year to $1.2 million as a result of the lower margin CMO sales mix as well as the Grass Valley Fire.
Speaker 1: Moving to slide 21, tobacco revenue for the fourth quarter increased $10 million from 7.9 million, an increase of 27%.
Speaker 1: Gross profit margin on tobacco sales decreased slightly to negative 44,000, reflecting increased unit sales of our lower margin flavored cigars.
Speaker 1: We expect gross profit margin to improve going forward with the accelerated launch of DLM.
Speaker 1: Moving to slide 22, temp cannabis revenue for the fourth quarter grew 37%, 9.3 million from 6.8 million due to continued strong customer demand of new bulk ingredient products. Also, despite the Grass Valley fire, fourth quarter hemp cannabis revenue was 18% higher than prior quarter. five uses or Rather, the May May
Speaker 1: due to the company's thorough contingency planning and strong customer relationships.
Speaker 1: Press margin decreased to negative 602,000, again reflecting the impact of the Grass Valley fire.
Speaker 1: Gross margin will continue to improve as we build back our extraction capabilities this year. The hemp cannabis business is expected to have full restoration of its extraction facilities by Q1 2024.
Speaker 1: Slide 23 describes our recently completed $21 million senior debt facility.
Speaker 1: The new credit facility will fund increased working capital needs reflecting significant growth in both BLM and cannabis compliance.
Speaker 1: Working capital needs are increasing rapidly due to the multiple national scale distribution partnerships requesting VLN stock as well as increasing consumer demand for GDB bulk ingredients and CDMA servers. Some of our credit stability firms are three…
Speaker 1: with no amortization in year one and 2% monthly amortization thereafter.
Speaker 1: The cash is straight and the facility the 5% original issue discount
Speaker 1: From last for me, slide 24, you'll see a few key highlights from our balance sheet. Of note, the total assets of more than 150 million includes 50 million of goodwill and tangibles from the GBB acquisition.
Speaker 1: And the strength of our balance sheet is quartering cap.
Speaker 1: of $21 million which does not include the additional proceeds from the new credit facility or the insurance proceeds of $5 million to receive the date from the fire.
Speaker 1: We expect additional insurance proceeds to be received in 2023 as well. 22nd Century's cash requirements are anticipated decrease reflecting higher sales volume for V-Line products through fiscal year 2023 and continued organic growth of hemp cannabis operations.
Speaker 1: In fact, 22nd Century is on pace to becoming a cashflow positive company and fiscal year 2024 due to the investments we are now making to meet growing consumer demand for both BLM and hemp cannabis products. I will now pass you back to Jim.
Speaker 2: Thank you. What we're really saying here is that we have been working several years to position ourselves to move from an R&D company into a commercial company. This is the year of the transformation and we continue to build significant momentum.
Speaker 2: We are leveraging our VLN demand for aggressive multi-state launch with major distribution that supports regional and national c-store customers, even in launch hundreds of stores at a time.
Speaker 2: Our GBB volumes are growing rapidly in the US and Europe , and our new fully integrated CDMO Plus V arrangement
Speaker 2: provides a new industry model for centralizing top-branded products with 22nd century from ingredient to shelf. Petty execution on these targets moves our BLM and hemp cannabis units into cash positives. And again, that is inclusive of corporate overhead allocations as we mature and become that commercial entity.
Speaker 4: And with that, Michelle, please open the call for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone.
Speaker 4: You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press the star followed by the two.
Speaker 4: If you're using a speakerphone, please lift the hands up before pressing any keys.
Speaker 4: One moment please for your first question. Your first question comes from Aaron Gray, Alliance Global Partners. Please go ahead.
Speaker 5: Hi, good morning and thank you for the question. So first question for me, just want to get a little bit more color in terms of the BLM launch and how that's trending in some of the legacy markets. So maybe if we could just touch on Chicago.
Speaker 6: Good morning, Aaron. Thanks for joining us, John .
Speaker 1: we continue to see results that are very positive for us.
Speaker 1: All of the results that we get are now driving our plans moving forward. The results we've gotten through the initial pilot.
Speaker 1: the consumer feedback we've received, the consumer testing we've done, Paul is talking about the product performing the way we want, which is again driving our path forward. So in terms of what we've seen in the legacy markets,
Speaker 1: That is the key driver of how we developed that the plans moving forward That's the key driver on how we've established our relationships with the big national distributors and then obviously expansion into retail
Speaker 1: These things just take a little bit of time. You know, we as I said, you know in my talk previously we had launched with You know smoker friendly and circle K with the old rock and Krieger Mercantile the distribution network But it became quite apparent that we had to go into more traditional distributors as well All three of those paths are continuing forward
Speaker 1: And as I said in the discussion about our pipeline, the second quarter is going to be as we really start seeing the retail distribution happen.
Speaker 5: Okay, great. Appreciate that, Cal, over there. Second question for me towards the hemp CBD. So obviously news earlier this month or this year from the FDA kicking it back to Congress in terms of the regulations. So just would love to get some color in terms of how you believe the impact it would have for you guys.
Speaker 5: Seems like the industry will kind of stay in its current state in the interim, might not have some of the bigger CPG operators come into the space. But how do you think that positions you guys sounds pretty bullish in terms of where you see yourself in the space. So any color you think that might have in terms of the FDA taking it back to Congress and how that might have an impact for you guys in terms of the industry. Thank you. Yeah, sure. I'll pick that one up there. And I think the way you need to think about 22nd century is our core business thus far.
Speaker 2: limit for CBD. We had counted on the fact that they're going to have to go to Congress at some point and the sooner the better to get that established. And what that really does is simply draw a box around in particular the nutraceutical markets in order to bring in the multinational accounts. But again our current growth.
Speaker 2: and a lot of our projected growth is in this gray market. The additional market that would be enabled by that final FDA authorization or safety limit into nutraceutical space is massive already and kind of icing on that cake. So it's a very good sign for us that the FDA has.
Speaker 2: progress to Congress. We do anticipate that the Congress will act as part of the farm bill renewal in the fall and then we'll set the stage for FDA to finalize that safety threshold limit and that will then open up really the panatlantic nutraceuticals market. So a very healthy growth.
Speaker 2: in order to drive towards cash positive, just with this gray market. The FDA will finalize these things. They're moving in that direction. These are steps that needed to be taken. And what that really opens up is this multinational nutraceutical business, which will then mean explosive growth for CBD as an ingredient.
Speaker 2: be dominant in that market as it opens up.
Speaker 2: is to secure the DMF, is to make sure that our quality and our compliance and our certifications are pharmaceutical grade, which would absolutely be required, and then it will be in the dominant position, the lead position, as an ingredient supplier, and then ultimately as a CDMO to help with those types of formulations as well. So we like the way it's going.
Speaker 2: It would have been a shock if FDA simply had acted on it without going to Congress. It could have happened. We weren't exactly counting on it, but they've made this move, and it's really a box around that nutraceutical space. —
Speaker 4: Okay, thanks. I appreciate that, Colin. I'll jump back to number two. Thank you. The next question comes from Vivian Acer of TD Cohen. Please go ahead.
Speaker 4: I appreciate that, Colin. I'll jump back into the queue. Thank you. The next question comes from Vivian Aeser of TD Cohen. Please go ahead. Hi. Good morning. Good morning.
Speaker 7: Good morning, Vivian. Thank you very much for all the incremental detail around the VLN aspirations over the next year or two. You noted that the state-level expansion can be up to 18. Can you talk about some of the key KPIs that we should be monitoring over the course of 2023 to understand?
Speaker 1: the chain account business. We know for this brand that the chains are where we'll be starting, which again totally makes sense because when you look at the national volume, over 65% of the volume goes through the chains.
Speaker 1: So that makes sense. That's a key driver for us right there is you know we've got to hit the chains As which again then ties into the distribution strategy you know of having the national distribution network set up as well So you know for us it's going to be
Speaker 1: the chains in terms of the retailers, the distributors, and those partnerships, so we're just building them on a daily basis.
Speaker 1: And what we're really finding out, which is critical, and it kind of ties back into Aaron's last question about the product, right? The product is meeting all of the consumer preferences and needs. It truly gets back to a previous conversation we've had about awareness education trial, advocacy, and repeat purchase.
Speaker 1: Those are going to be the drivers. There's no doubt in my mind this product reforms There's no doubt in my mind that when people understand what this product does what it's meant for they're educated about it That it is definitely a solution for that 60 to 70 percent of the 35 million smokers who are looking for a way to either lower their nicotine intake, smoke less.
Speaker 1: or whatever their personal situation is, those things are met. Now it becomes scale into the stores, awareness through the marketing campaigns, and all that is set to go.
Speaker 1: So those are our key and I hope that answers your question Vivian, but that's that's really what we're looking at You know the product itself we know works. We've got it priced now correctly We think in the category in terms of its position. You know we understand how to promote it
Speaker 1: So those are our key, and I hope that answers your question, but that's really what we're looking at. You know, the product itself we know works. We've got it priced now correctly, we think, in the category in terms of its position. You know, we understand how to promote it.
Speaker 7: getting the word out and making sure people understand about it. Yeah, absolutely. That is helpful. And I appreciate the disclosure in the 10K around your fourth quarter carton volume of 1354. Obviously it's a far cry from the 1.2 million cartons. But from our modeling standpoint, how should we think about average ASPs? Right? So if we're going to start driving our model.
Speaker 1: So, just a couple of questions, everybody, just to clarify. Are you looking at the average?
Speaker 1: So, just a couple of questions, everybody. Just to clarify, are you looking at the average sales price at retail?
Speaker 7: Well, no, like so you guys disclosed your cartons sold in your 10K, so we can calculate an average ASP based on your segment level revenues. But there's a mixed component that I think everyone should be cognizant of, right? There should be a difference in terms of the manufacturer revenue that you guys are realizing for cartons that you're commercializing now for consumer views versus the like.
Speaker 1: through the actual number of cards in the projection, which again, is significantly increased, especially with these 18,000, excuse me, 18 states. The way we're looking at this in our projections moving forward, we talked a little bit about the cashflow positive number, right, to get to 1.2 million, how does that look?
Speaker 1: when you look at these addressable markets within the 18 states that we're going to be selling and marketing the products and it's a small fraction.
Speaker 1: Even just in the channel specific approach to the business, you know, you kind of back into the numbers if you're looking at Those 18 states represent 56% of the total volume The chains represent 65% of the volume within those states just as a simple math There's a clear pathway there to get to one point
Speaker 5: million in gardens. Okay, I understand. Yep, a little bit, a little bit. Thank you. Okay, I can clarify offline then.
Speaker 4: Thank you. The next question comes from Alex Furman of Craighalem Capital Group. Please go ahead.
Speaker 1: Hi guys, thanks very much for taking my question. I would love to hear about how some of the Southwest markets have been scaling up with the VLN launch relative to the original pilot stores in Chicago. And as you get ready to launch in much bigger markets like California and Texas, what do you think you're going to be doing differently as you approach those bigger markets?
Speaker 2: tested a lot of different...
Speaker 2: predominantly retail communication pieces. As we've moved into Colorado, some of the variables there, we had MRTP pricing, right? And how do we, you know, how do we utilize that? We had two great partners with Circle K and Smoker Friendly, who have, you know, again, tested some of the retail components, some of the pricing components.
Speaker 2: We've definitely aligned on where we are pricing. And now that we're starting, you know, we're going to start getting the scale throughout our markets. Now we're going to start really introducing much more of the, you know, what I would call enhanced marketing programs, right? And again, it gets back to that awareness, education, and trial piece.
Speaker 2: How do we get large groups of people with a much larger set of stores to understand where you can buy the product, be aware of the product, educate about the benefits of the product, get the communication out. And that's really what this is going to allow us to do now is really start upping the cadence and the frequency of our marketing actions.
Speaker 2: Again, I get back to the product as, you know, the product has been successful in terms of what it delivers. Now it's getting to the consumer at a much larger scale.
Speaker 2: Again, I get back to the product as, you know, the product has been successful in terms of what it delivers. Now it's getting to the consumer at a much larger scale. So that'll be the differences of what you're gonna see out.
Speaker 1: Okay, that's really helpful, thanks. And then can you walk us through a little bit more of the math of how you get to be cash flow positive in 2024? I mean, I imagine on both sides of the business, you're going to be continuing to grow working capital in 2024, given the growth trajectory that you're on and the need for inventory.
Speaker 1: to get there would be helpful.
Speaker 6: Alex, we've got a question for you.
Speaker 8: Yep, I have it. So really the key I think is, you know, maybe if we just break it into sort of two business units. If you look at tobacco, it's really about when we hit cash flow positive post corporate overhead. What are the unit sales required to reach that point? It's around, you know, call 250,000 to 300,000 units.
Speaker 8: quarterly. So it's called you know we're from 1.1 to 1.2 million annualized as Jim referred to and at that point you know you've really had enough density in the markets and it's really not that that significant of a in market percentage we can discuss that further offline.
Speaker 8: But what it does is basically give you enough critical volume to cover all discretionary sales market and distribution costs and at that point after overhead allocation.
Speaker 8: you're basically cash flow breakeven for that division. And to John's point, we have significant momentum on the distribution channel right now to have a clear line of sight when we can achieve that and it looks like it would be clearly in 2024. And then for the head canvas.
Speaker 8: business unit, it really is a function of executing again on our organic growth strategy both domestic and overseas in Europe , which we have a lot of significant pent-up demand for our bulk ingredient product base there. So we felt very confident about that. And then if you were to combine that with some of the new incremental revenue streams here.
Speaker 8: business unit, post-corporate overhead as well.
Speaker 1: Great, that is really helpful. Thank you very much.
Speaker 4: Thank you. The next question comes from Brian Wright, Roth MKM. Please go ahead.
Speaker 5: Thanks. Good morning. I just wanted to get, you know, follow up on starting with the question as far as the rule out in the big states, Texas, California, and Florida, and just how to think about how that gets prioritized. Is it your call? Is it your customer?
Speaker 9: of how you're thinking about that would be helpful.
Speaker 5: Sure, yes. Brian , in terms of the cadence, you know, a lot of the rollout strategies as we had laid out, you know, those 18 states were our primary targets.
Speaker 5: Brian , in terms of the cadence, you know, a lot of the rollout strategies as we had laid out, you know, those 18 states were our primary targets.
Speaker 2: We knew that there were customers that were going to go, like we said, go where we go. There's a reason why we want to be in these states. Customers understood the message we were talking about, the reasons why, and they also have some of their own goals that they're looking at. So between the two organizations is how some of these distribution agreements came about.
Speaker 8: As you recall, California wasn't on the list during our last call, but because of what's happening there right now, we know there's a huge opportunity for VLN. Some of our customers saw that. So that has been, it's sort of, the best way to put it is it's both of the organizations working together to determine.
Speaker 8: you know, what are the best markets to move into, what are some of the environmental factors within those markets that would drive volume, what are they seeing in their business, what do we know through our research.
Speaker 2: So that's been some of the things you're seeing through the cadence through the states. What you're going to be able to see now more as we have more scale and scope of stores is an enhanced marketing program around most of those levers that we can pull. Now, obviously we have some constraints where cigarette companies still looked at, you know, by FTC and FDA, but...
Speaker 2: What we know is that we know what to do with retail and now we're starting to do the enhanced marketing programs as well So I'd rather not give you specific examples because of you know It's not what I want to put out for some of our competitors know as well But the enhanced marketing programs and those levers that we can pull are what you're going to see now in these bigger markets with more stores Okay, thank you. And and then just wanted to follow up. I just want to make sure I'm paraphrasing
Speaker 8: No, Brian , that's absolutely correct. That includes changes in working capital.
Speaker 8: I mean, if we're to have even a substantial accelerated growth, we'd be at that point generating enough internally generated cash and probably from a credit facility to have enough availability to meet incremental working capital needs. So yeah, we would be, for all the sake and purposes, recast for a breakeven at those milestones. we come.
Speaker 4: Great, thank you so much. Thank you. Our last question comes from Jim Massilvary of Dawson James. Please go ahead. Hi, I'm Jim Massilvary of Dawson James.
Speaker 2: Thank you. Good morning. On your slide 23 you were talking, you talked about
Speaker 2: working capital for the multiple national scale DLM stocking. Can you, can you walk us through how that works? I mean, I'm assuming there's a, uh, you know, an inventory fill that you need to, that you need to satisfy. How does that work? Is that a cartons per...
Speaker 2: you know market share target or you know, how is it
Speaker 2: How is it useful to look at that working capital commitment?
Speaker 8: If the modeling purposes, Jim, probably is more on the inventory and accounts receivable side, so call it the core short-term working capital needs with the growth. It's safe to take it as a percentage of sales right now initially. Obviously, it'll decline as a percentage over time just because of operating leverage, but our expectation is... The difference is, you're not going to be able to build your misfit value of another building.
Speaker 8: We're building up the inventory obviously for VLA and we're doing the same for Hamcasset as well. We have most of the short-term inventory needs satisfied, albeit there will be more incremental pressure on working capital for inventory going into the latter part of this year just with the scale. I'm the VP of Software IP for Xtr Teams. For more info about Ac carp that has been set forth with actual code and cybersecurity,
Speaker 8: And then a lot of it will become just basically financing our symbols. So, I should say both on DLN and hemp cannabis.
Speaker 8: We don't necessarily need short-term AR availability for our contract manufacturing since most of that is paid up front or paid upon delivery. So it really is, as the deal end grows and the app canvas grows, we'll definitely need to fund financing AR which can be modeled as a percentage of revenue for now.
Speaker 8: And I think the incremental inventory working capital needs will be, you know, we'll go past sort of our base case, you know, our steady state inventory levels and need more cash or inventory working capital in the second half of the year.
Speaker 10: Thank you.
Speaker 10: And on that point, it seems like
Speaker 2: as you continue to grow you'll still need working capital investments, but it'll be at a diminishing rate relative to the markets you enter. Is there, when does that hump happen or when's that peak at that hump? If that question makes sense to you. No, that makes complete sense. I think we get full benefit of the operating leverage if you will.
Speaker 8: you know, have significantly diminished working capital cash needs at that point.
Speaker 2: Got it. Since you're looking at 1.2 million cartons on manualized basis, let's call it by the middle of 2024, then you would still be short of that.
Speaker 8: at the end of 2023 to that kind of steady state work in capital needs, is that correct? That's correct, yeah. The incremental capital need from end of 2023 to mid 2024 is not as significant as the initial phase of a ramp during the pandemic.
Speaker 2: during the fiscal year 2023 which is why right right right right got that okay yeah um and then lastly are there any
Speaker 10: specific capital equipment needs that you have in order to get the hemp cannabis business up and running to the state that you want it.
Speaker 8: to be at? Is there anything significant we should be looking for? We have modeled approximately $8 million, mostly for the restoration of our facilities, as Jim discussed. We have our interim extraction capabilities before we start working towards a sort of...
Speaker 10: Got it. And then after that it's, you know, whatever the business is growing.
Speaker 11: Exactly.
Speaker 12: Okay.
Speaker 4: Fantastic. Thanks a lot. Talk to you guys later. Thank you. Thank you. There are no further questions at this time. I will turn the call back to Jim Mish for closing remarks.
Speaker 2: Thank you, Michelle, and thanks to everyone for joining us today. My closing comments are that we are laser focused on the business fundamentals for the company to achieve sustainable cash-positive in both business units for the long term, but we've been working hard for this. Our long term is now within 12 to 18 months.
Speaker 2: the press release. Again, thank you for your time, and we really look forward to updating you in the near future.
Speaker 4: Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.