Welcome to the 22nd Century Group's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode, and the floor will be opened for questions following management's prepared remarks. As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Joe Schepers, Vice President of Communications and Investor Relations. Please begin.
Thank you, Alex. Good morning, and welcome to 22nd Century Group's second quarter earnings conference call. Joining me on the call today are Jim Mish, our Chief Executive Officer, Hugh Kinsman, our Chief Financial Officer, and John Miller, who leads our tobacco business. Earlier today, we issued a press release announcing our results for the second quarter 2022. We'll start today's call with prepared remarks from Jim, John, and Hugh before moving into a 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.
Those of you joining by webcast can submit questions through the online interface, which we may include during the Q&A section of today's call, time permitting. Slide two. 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 also will 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. With that, I'll turn the call over to Jim, beginning from slide three.
Thanks, Joe, and good morning to everyone. I'm really excited to be joined today for the first time by John Miller, the President of our tobacco business, and Hugh Kinsman, our CFO. I welcome these two leaders to deliver on our shareholders' request for more detailed tobacco commercial updates and insight into the execution of our business fundamentals as we grow. If you listen carefully, you're gonna hear much more detail than in the past and help connect the dots. The second quarter was a major transformation that included the most significant developments in the history of the company. We continue to execute and deliver on our mission to improve human health through reduced nicotine content tobacco, improved hemp cannabis plant technologies, and advanced hop plant science. In fact, we had major success in two key areas.
First, we launched our highly anticipated VLN pilot program at more than 150 Chicagoland Circle K stores starting in early April. We have exceeded our key market expectations, and that was only through product distribution, in-store point of sale, and general PR and media outreach supporting the launch. We now have a baseline set on market share and are testing several targeted offers designed specifically to accelerate further growth. In short, we are off to the races on VLN, and John will speak in much more detail on this topic. Second, we completed a major transaction on May thirteenth, acquiring one of the top ingredients and CDMO providers in the hemp-derived actives space, GVB Biopharma.
In addition to doubling our revenue on an annualized basis and improving our margins, GVB completes the vertical integration of our hemp cannabis business from receptor science and plant genetics all the way to finished white label goods on shelves for consumers. In addition to global scale facilities and a new advanced extraction unit just about to come online, we also picked up a world-class management team, including our new CFO, Hugh, who will speak more about this. I couldn't be more pleased or excited about the progress we made in the quarter and the continued growth of our legacy business, but we're just getting started. Moving to slide four. We now operate in three large alkaloid plant franchises, each with unique growth opportunities, tobacco, hemp cannabis, and hops. In tobacco, we are building on the pilot program success, expanding our activities in Chicago and beyond.
The results of the pilot program drove our decision to accelerate our launch plans, and I'm pleased to say that we're going into Colorado, where we can continue to increase our market footprint substantially while benefiting from the MRTP state excise tax rate that favors our VLN products. This is a $600 million market in just one state, and we see a clear pathway forward as we continue to expand our reach. Again, John will elaborate much more on this in just a few minutes. For hemp cannabis, the acquisition of GVB accelerates our path to profitability in this exciting market. The new Oregon extraction facility will be coming online in the next few months with a commensurate scale-up of volumes from the business. We're also integrating our unique plant science to provide even higher yields and margins.
Currently, we are actively investing in a number of business development activities to further scale this business and align the site to rapid growth in cash positive operations. Finally, our ops franchise is advancing well with our scientific teams now under the direction of Dr. Calvin Treat, who joined us earlier this year. We're hitting key technical milestones in this large global market that is ripe for disruption. With that, I'll turn the call over to John Miller to talk about our reduced nicotine content tobacco products. John?
Thanks, Jim, and good morning. I'm pleased to be here on my first call with 22nd Century Group. I have been involved in the tobacco industry for more than 30 years, and this is potentially the most disruptive and impactful product I have seen in my career. A product that will help adult smokers to smoke less. Moving to slide six. Our Chicago pilot with Circle K is going very well. We started with an initial distribution launch in the more than 150 stores selected to participate, providing basic media support, in-store point of sale, and for example, clerk training for in-store promotions. Our goal was to set a baseline market share with the actual results exceeding our internal targets. Due to a commercial need for confidentiality, we can't share the Circle K numbers at this time.
However, what we can share is that we are more than pleased with what we're seeing. Feedback in the stores and from consumer focus groups has been overwhelmingly favorable and has reinforced our confidence that the VLN will be accepted and adapted by adult smokers through three key activities, education, awareness, and trial. With Helps You Smoke Less as part of our FDA required label, smokers know exactly what our product is designed to do. Given that 60%-70% of smokers want to quit and have even tried repeatedly to do so, we fill a need where they are actively seeking new tools to reduce their nicotine consumption. We are now in phase II of our pilot program, deploying targeted offers to drive increased share. By refining our approach, we will then be able to move into an expanded launch as part of the phase III rollout.
Given that we're talking about an $80 billion U.S. retail market, capturing even a very small percentage of this market will be transformative for 22nd Century Group and our revenue line. Just extrapolating the math to illustrate the initial opportunity we see within the total national market, and you can pick your own numbers, but let's keep it really simple. Every 0.5 share point achieved in the U.S. retail market would equate to approximately $400 million in retail sales, which is about $250 million in VLN revenue to 22nd Century Group. That's an exciting starting point for any company, and obviously we want to move well beyond that starting line. Markets outside the U.S. also provide exciting opportunities to drive further top line and bottom line growth and create further value. Moving to slide seven. How do we get there?
By expanding our launch. The success of our Chicago pilot showed us that our marketing mix was highly effective already, and so we've decided to accelerate our plans and launch our VLN products in Colorado, which we expect to have in place as early as next month. Colorado is the first of many exciting announcements we expect to make, all centered around organic expansion and adding to our market opportunities. I want to be clear. None of these expansion opportunities we are presently looking at detract in any way from the ongoing expansion plans with Circle K and any other drugstore or channel partners we've previously mentioned. They're all additive, and they're all accretive. As well as being a large market with excellent partners for retail, Colorado has a $6.50 per carton state excise tax savings for MRTP authorized products.
This excise tax savings can be used in comprehensive programs, for example, to provide adult consumer incentives, expand store and brand distribution, or to fund additional marketing to raise awareness among adult smokers of our unique products. A number of states actually offer this incentive. In fact, Michigan recently approved a similar $5 per carton MRTP state excise tax reduction. This is a good example of state actions that can benefit our market opportunity even ahead of federal action, and recognizes the positive contributions our MRTP products can make to society by helping people smoke less. Key takeaway here is that Colorado is a $600 million market with a large number of adult smokers whom VLN can be a game changer. Turning to slide eight. With thousands of stores across the state carrying tobacco products, we have a great opportunity here.
We've already identified 3,000 stores in the state that we intend to service. This is sizable. Considering that going national with a single chain would be in the range of 4,000-5,000 stores, we are taking opportunities to open VLN up to additional retail partners within the state. By combining these additional distribution points with our learnings from our pilot program in Chicago, we will be able to deploy multiple initiatives to build education, raise awareness, and drive trial for the brand. Additionally, some of these retailers are well-placed to further partner on the VLN expansion and distribution into other states. To ensure we can support retailers and effectively stock stores with VLN, we are engaged with two top-tier CPG distribution partners that want to carry our products.
The first is a large CPG distributor that covers grocery, convenience store, and drugstores with a variety of brands, making it a great partner to distribute our products. The second is a more specialized distributor with expertise in CPG and the other tobacco products category. We're finalizing agreements and readying for launch, and I look forward to sharing either further information with you all at that time. Moving to slide nine. We are also executing on our strategy to ramp up our growing and manufacturing operations to support demand. Our manufacturing facility is a key strategic asset where we have built the capabilities needed to produce high quality, reduced-nicotine cigarettes, as well as our current VLN production.
We've already produced tens of millions of research cigarettes used in the independent clinical studies that underlie our Helps You Smoke Less label requirement and FDA's larger plans to ban menthol and require all cigarettes to be non-addictive. Given the increasing demand we anticipate, our factory team is expanding capacity by 25%, including the addition of a new line and a second shift. To meet anticipated demand for our VLN products, we are working with highly experienced U.S. tobacco growers to produce our largest ever VLN tobacco crop in 2022. This crop includes the company's second generation reduced nicotine tobacco plants. Already this year, we are seeing higher yields, enhanced quality leaf, improved disease resistance, and a reduction in nutrient inputs. Positive developments from both a commercial and sustainability perspective. Harvest and leaf curing will occur throughout this fall.
Our CMO tobacco revenue has helped cover the cost of our facilities to date. Looking ahead, as VLN expands its rollout and ramps volume, we expect to transform this vision business into a high margin, higher volume operation. This includes the opportunity to license our technology and capabilities to other brands that want to join us in the reduced nicotine revolution, helping even more adult smokers to smoke less, all while driving top line growth. Finally for me, slide 10. The FDA has been clear about the critical role that reducing nicotine in cigarettes can play in tobacco harm reduction, which will bring even greater societal benefits than the proposed menthol ban. A CDC survey a couple of years ago showed that high levels of support for reducing nicotine content in cigarettes, with 80% of adults, including 80% of smokers, supporting reducing nicotine in cigarettes.
These facts and other data show that the adult smoker understands the potential value in a product like VLN, which can help them smoke less. Obviously, we recognize that these policies won't happen overnight, but incremental progress helps smokers take positive actions even before the policies are fully realized. This includes policies being implemented by the number of cities and states to move in this direction even ahead of federal action. As part of the public comment period, we have submitted our response to the FDA proposals, and as we have stated before, our position is that we are in favor of the proposed menthol ban in highly addictive cigarettes.
Regardless of whether the ultimate regulatory proposal for menthol survives the inevitable litigation we anticipate from the tobacco industry, our FDA authorized VLN King and VLN Menthol King products are on the shelf today and will soon be even more accessible, giving more adult smokers around the U.S. a new tool to help them smoke less. I hope you can see that we've been incredibly active and are excited to finally bring VLN to market, and are moving ahead to open even more stores where smokers can buy these important products. I'll now pass you back to Jim for an update on our hemp, cannabis and hops franchises. Jim?
Thanks, John. It really has been an amazing second quarter in tobacco, and we are extremely excited for the path ahead. Let's turn to slide 12 as we focus for a few minutes on our other two growth franchises, starting with hemp cannabis. We remain absolutely committed to building our leadership position in the hemp cannabis industry by developing superior plant lines and now superior extraction, ingredient, and finished product capabilities. Our original mission was to optimize the plant genetics in hemp cannabis to create stable, improved varietals needed to move this industry to true commercial scale. In addition to better yield, plant consistency for harvest, disease resistance, drought resistance, and other key characteristics can be modulated to disrupt this industry. We've now taken it to a new level. On slide 13, we acquired GVB Biopharma, effective May 13.
GVB is a global leader in the manufacturing of hemp-derived active ingredients and finished products, servicing the nutraceutical consumer products and pharmaceutical industries. This acquisition positioned 22nd Century Group as the global leader in cannabinoid ingredients and leading CDMO for white label products across many end use markets. It completed our vertical integration platform, through which we can now monetize our deep intellectual property portfolio in hemp cannabis. It also doubles our revenue on an annualized basis, improved our gross margin profile, and accelerates our path to profitability in hemp cannabis. Slide 14 should be very familiar to many of you, illustrating our upstream hemp cannabis capabilities. You can quickly see the addition of GVB means we now own the extraction, purification, products capability with a global leading CDMO facility.
We're now fully verticalized and able to bring together plant science, best in class ingredients, and finished goods capabilities to help move this industry forward. Slide 15 gives you a feel for the facilities we picked up in the transaction, including a 30,000 sq ft refinement facility, a 40,000 sq ft manufacturing site, and perhaps most exciting, a new world scale extraction facility in Prineville, Oregon, that will start out at a 20,000 kg per month capacity, but we believe it can produce far more when fully loaded. Slide 16 illustrates the diverse range of ingredients that make up the bulk of GVB's revenue today. As a global leading cannabinoid API supplier, 22nd Century and GVB cover potentially the broadest spectrum of products in the industry, all at exceptional levels of quality.
Finally, I want to update you on our steady progress in specialty hops for the global market. This is a closely related alkaloid plant family where we can leverage our alkaloid plant expertise and IP for new growth opportunities. Hops is an extremely large global market, and we believe our unique know-how and IP can bring exciting improvements to this industry. We are hitting key technical milestones and working with strategic partners to transform the hops plant and reduce the development cycle to reduce cost, risk, and time required to create disruptive plant strains. The addition of Dr. Calvin Treat to our team, bringing world-class ag science experience gained at some of the largest players in food crops, has helped our team accelerate and focus these efforts. I'm excited for the path forward in this large and underserved market.
I'll now pass you over to Hugh to review our financial performance. Hugh?
Thanks, Jim, and good morning to everyone. Starting off on slide 20 with the quarterly results. Net sales increased by 73% year-over-year to $14.5 million, primarily through the addition of a half quarter of GVB revenue and improved CMO manufacturing mix. We continue to generate new business and orders with additional customers, plus are now manufacturing VLN cigarettes for a pilot program in Colorado now. Gross profit margin in the second quarter increased year-over-year to 6.1%. I would mention that that number is a result of purchase price accounting and does not reflect our projected gross margin for the business going forward. We expect to report a more typical gross margin starting next quarter, and I'll explain on slide 21. Since we had a partial quarter for GVB, this slide should help level set and explain both revenue and gross margin more clearly.
First on revenue. Tobacco revenue increased to $10 million from $8.3 million for the second quarter year-over-year, a gain of 19%. Gross margin on tobacco sales increased to 10% through a combination of increased volume and favorable sales mix. On the GVB side, we recorded approximately half a quarter of operations from the closing date of May thirteenth. Revenue recorded in half a quarter was $4.5 million. But we reported negative gross margin due to a $1 million amortization step up tied to purchase price accounting for the acquisition. Excluding this one-time non-cash charge, GVB's gross margin was about 22%. GVB's gross margin is typically 20%-25% and will be reflected in consolidated operations going forward. Slide 22 illustrates the purchase price accounting in more detail.
It should be noted that certain portions of the purchase price accounting will be adjusted in the coming quarters, in particular the goodwill and intangible sections. As the footnote from our 10-Q explains, this preliminary allocation reflects provisionally estimated fair values as of the date of the acquisition. The fair values are determined using significant estimates and assumptions, and we are completing valuations required to allocate the purchase price in areas such as property and equipment, intangible assets, deferred taxes and goodwill. As a result, we expect these allocations to change in the future. Last for me, on slide 23, you'll see a few key highlights from our balance sheet. Of note, the total assets of more than $119 million includes the $44 million of goodwill from the GVB acquisition.
The $26 million of cash at quarter end was supplemented by an additional $35 million in gross proceeds from our offering in July, which will help accelerate our VLN launch plans. I know that many of you are focused on our cash position and how we are using it to continue our steady progress toward profitability. The company is selectively deploying capital to accelerate the launch of VLN, expand tobacco manufacturing operations, invest in GVB's production capacity, and increase inventory levels to meet growing demand for both hemp, cannabis, and tobacco products. 22nd Century Group's cash requirements are anticipated to decrease, reflecting higher sales volume for VLN products through fiscal year 2023, and continued organic growth of the GVB's operations. As a result, the company has adequate liquidity from the current balance sheet to complete its strategic initiatives.
In fact, the acquisition of GVB was not only done at a very reasonable multiple of sales, it also transforms 22nd Century Group's hemp cannabis business from a cost center to an organically expanding and cash generating business, which we expect to be fully realized in 2023 after the investments we are now making to meet market demand. I'll now pass it back to Jim.
Thank you. It's an exciting time for 22nd Century Group as we accelerate our U.S. VLN launch with several major national C-store and pharmacy chains, placing our VLN products in front of customers. With our pilot exceeding our expectations and a massive market opportunity, even a relatively small share of that market is transformational to us, as John described. With the proposed menthol ban moving ahead as it should, plus state actions in advance of federal policies, there's never been a better time for a disruptive, reduced nicotine content product. We're ready to go, not just on our innovation tobacco products, but also on our hemp cannabis products and new GVB platform that doubles our revenue now that is fully integrated and enhances our path to profitability as we plan to capture and leverage all of the synergies of our two companies in the months ahead.
We have built the framework and foundation, and we are in a strong position to execute the next phase of our strategy to maximize the full potential of our tobacco and hemp cannabis business now and hops in the future. With that, operator, please open the call for questions. Thank you.
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, you may submit questions via the web by using the ask a question feature on the side of your screen. We will take questions from the approved list of analysts first. If we have time, Joe will read a question that was submitted via the webcast. Our first question comes from the line of Vivien Azer with Cowen. Please proceed with your question.
Hi, good morning.
Hey, Vivien. Morning.
Hi, good morning. I wanted to start on Chicago with the VLN pilot, please. I certainly appreciate that Circle K's metrics are competitively sensitive. I was wondering if you could just offer some relative context, perhaps. You know, like, how would velocity in an average door compare to a mainline combustible cigarette competitor? Just as one example, but just to help dimensionalize the performance. Thank you.
Good morning, Vivien. This is John Miller. The best way to put it is, you know, we looked at our own internal goals set forth through several different KPIs and metrics. One of them is obviously historical performance of what a new product introduction would do in a similar space. We also looked at stores in different areas. If you look at Chicagoland, you know, as a market, all of our stores have some very different variables within them. Some of them are in Cook County, some of them are near, you know, schools, churches, whatever, that have different regulation. The actual performance of the product does vary based on store neighborhood pricing. There's different taxes in Cook County than, you know, in some of the other stores.
Overall, we found that our sales and our share levels increased beyond what we set as targets. We're extremely favorable. Really some of the keys of that were also the learning that we did in the focus groups about what drove that. That led to our decision to expand through Illinois and then move into Colorado, which different than Illinois, has an MRTP tax basis that is $6.50 a carton less than traditional cigarettes. I mean, in summary, a good broad segment of stores from different variables achieved our results. Looking at historical numbers in terms of what the space has provided for new products, very, very happy with that. Took those learnings, and now we're expanding through Illinois into Colorado.
Understood. Thank you for that perspective. If I could just follow up, recognizing, of course, the demographic differences across the store base in the Chicago area, but any trends that are, you know, solid enough that you could call out, you know, in terms of kind of average age of consumer or average relative income of consumer that's attracted to the VLN product? Thanks.
I would say, you know, when you look at the I can't say that the demographics of VLN are going to be any different than the demographics of a cigarette smoker. What I will tell you is this, though, the smoker that is looking to quit smoking, that 60%-70% of that population of 34 million-40 million people, that's who this is attracting. It ninety days into the program, I can't tell you household income numbers, things like that, but I can tell you who's interested. It's the people who are trying to quit smoking. That was originally identified as the target consumer. That continues to be the target consumer. That's where this message resonates.
When you look at those three pillars of what we learned in the test, and these are the critical pillars, when you look at education, awareness, and trial, that is what the marketing platforms will be built off of. That's what people need to understand about this product. If someone's a Marlboro smoker, it doesn't necessarily translate that this product is for them. If someone's a Marlboro smoker who wants to quit, understands what the product is, sees it in store, understands what it does, how it performs, that will be our target demographic. That's who we will attract.
Okay, that's helpful. Thank you. Just pivoting, last question, please, to Colorado. Some of your larger peers, you know, haven't had the ability to take advantage of some of these MRTP tax incentives or tax savings. Understanding that you can deploy those savings across a number of different consumer engagement initiatives, does the law mandate that that's where that tax savings goes? Can you drop some of it to the bottom line? Just curious, the mechanics of that tax law. Thank you.
I'm not aware of it being mandated that it has to be put into any specific, you know, pricing or promotion or merchandising, whatever. I'm not aware of the law saying that. Understanding the law and understanding the benefit, what we've learned in the pilot, our takeaways out of Chicago, what we've seen in our research moving forward, which is why in my comments, I talked about specifically some things we can use that for. That savings, you know, certainly could be reflective in price, could be reflective in additional education and awareness programs, trial programs, enhanced margins for retailers who are doing additional merchandising. We are still working out some of those things, and some of those decisions will be based probably on more on channel than anything else.
It does give us a bit of room to operate. There's no doubt about it.
Understood. Thank you very much. It does. Thank you.
Thank you.
Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.
Hi, good morning, and thank you for the question. Kind of want to piggyback a little bit off of what Vivien was saying, you know, in terms of Chicago. Again, can appreciate how you cannot give, you know, exact numbers. While it's still in the early days, you know, any color you can provide in terms of, you know, retention, you know, versus trial that you're seeing, especially given it is a user that you said was looking to, you know, quit conventional cigarettes. Then as well, whether or not you're seeing in terms of like dual use with VLN versus traditional cigarettes or maybe turning that on with some type of a patch or e-cigarette. Any types of consumer trends without giving any exact data would be helpful. Thanks.
Sure. Thanks, Aaron. In terms of very specific, you know, connection to data on, you know, repeat purchases, previous purchase patterns, we just don't have that yet. One of the great, you know, so Circle K is a very sophisticated retailer, especially in the convenience industry. One of the best convenience marketers out there. They do have some loyalty programs. We're tying into their technology, you know, and that's really what phase II has been about, is getting into their lift programs, MVP programs, kind of understanding how their consumers shop. We're trying to get some of that data right now, but again, we're looking at 150 store tests, and it's hard, you know, with the causation correlation about multiple purchases. Were they in the right stores? Do they understand the test stores?
These are all things we're working through. We understand the importance of that, certainly understand the importance of understanding how many times a consumer buys a product, stays in the category, stays with a brand. Reasons for purchase, path to volume. I mean, those are all things we're getting to. That's why we're hoping expanding the launch, going deeper into different states, will help us get that type of information.
In terms of dual use with a patch, probably the best I can tell you is that when you looked at the research that 22nd Century provided the FDA and some of the research that came out of this was actually a consumer, an adult smoker that uses VLN in combination with an NRT, and whether that's, you know, gum patch, whatever, it seems to help both of them, both of those products get people off of nicotine. Right now we don't have definitive data on a Circle K shopper also buying Nicorette, but we do know that through the data, both of those products work well together, which is a very interesting strategy moving forward.
Okay, great. Thank you for that. Wondering, I can give numbers just in terms of it exceeding your expectations. Could you just let us know in terms of maybe like the trends, so maybe month-over-month, have you continued to see an increase or was there kind of an initial, you know, large uptake that has then since trimmed it down? Just in terms of whether or not it's continued to trend upwards in terms of your sales as well as market share will be helpful without giving the exact numbers. Thanks.
Yeah. No, certainly trending upwards. Certainly the first 6 weeks, you know, as some of the marketing piece, that's what we call our phase I timeframe. As those things started to kick in, consumers started to understand what the product was, ramp up, saw, you know, every store having sales. Phase II, now that we're starting to do more and more of it, certainly continues to grow.
Okay, great. Thank you very much. I'll jump back in the queue.
Thank you.
Our next question comes from the line of Brian Wright with ROTH Capital Partners. Please proceed with your question.
Thanks. Good morning. Was hoping, I think, can you provide some color on consumer kind of trials as far as like following, you know, test groups or anything like that? Is initial trials or there's any work along those lines that you can speak to?
Brian, just to clarify, are you saying about the recent research studies or actual in-store feedback?
Kind of in-store feedback, you know, following any initial users or groups of initial users or anything of that nature.
Right. We do it now. We have two different things I can kind of report out. One is anecdotal feedback that we have received back from either store personnel or the occasional consumer we or our people may have run into. But that feedback, obviously very positive, from some of our brand ambassadors that have worked with store personnel, getting people to understand what this product is, having them try it, that's been very positive. On the research side, we did an in-home use test, which was completed, have gotten the preliminary feedback from that. Again, when you start talking about education awareness trial, key pillars that came out of that. But even the feedback on the product from the in-home use test, right? People said it was a great smoking experience. People said it provided good tobacco taste. It provided tobacco satisfaction.
Some people said things like they never saw anything like this. We got, you know, like 93% interest in purchase intent from focus group participants. Great acceptance and usage. When you do in-home use tests, you know, invariably some of the people fall out of the group. What we saw here was our first week, 100% of the participants stayed in the focus group. At the end of two weeks, we had 96% of the people still in the focus group. It was really interesting seeing what happened. Now, again, as I already stated, you know, this is a group of consumers that is interested in stopping smoking. This is a group of interests that want to get away from cigarettes.
That's why we know, as we move deeper into these markets, and we continue to pursue this education awareness and trial platform, that's how we're gonna get people to use the product. The other research we have going, that was our in-home use test. The other one we have going is what's called a capstone project, which is more of perception post-trial. That research is still being done, and I haven't gotten the results of that back yet. Again, you know, about 90 days into this. You know, we know how important it is to understand this about the consumer. We know how important it is to understand why they're using it, whether or not it's working, and what their perception is of the product.
No, that's great feedback. Thank you so much. Could you also maybe provide us just a little more details on kind of the increased Chicago Circle K stores or expansion outside of Chicagoland area in Illinois, just any way to kinda think about, you know, what's next there?
Right. Sure. Like any launch of a product, right, as you get into it, you start understanding, you know, where you wanna go, what are the drivers of the volume, how are you sourcing your volume, who are the consumers, right? We haven't pulled back from wanting to be a national brand. There's no doubt about it. I mean, everything we talked about today, what we put in that presentation, in the press release, all of that is additive to what we wanna do. You know, these are things we're gonna continue to keep moving forward. We're seeing a change in the environment, right? Since we've launched this product, there's been a tremendous amount of PR on what's happening within low content nicotine cigarettes, what's happening with the FDA, what's happening with Joe Biden, and what he's saying about his policies.
We're starting to get out in front of consumers' minds a little bit, but we know we have to get out there and explain to people what this product is. We have to educate them, get awareness on this. We're going to move through Illinois, where we already have a foothold. We're going to be moving into Colorado, which makes sense. It'll be our first MRTP tax state. We have multiple other things that we're working on right now, which I just don't want to announce right here on this call. They are in process. The plans are being made, and we're gonna continue. This is. There's a lot of momentum behind this product right now and our activities to expand and expand quick.
No, that sounds great. You know, there are a lot more stores in Chicago. Is it too early to talk about kind of the next kind of tranche of those stores and kinda how to think about the size on that? You know us investors, we love numbers, so any help with something like that would be great.
I totally understand it. I understand for your modeling and things like that. I'd rather not put a hard number on Illinois just yet, because we are working on some things that I just don't feel comfortable yet to announce. You know, Illinois is a fantastic state.
There's some big stuff that's coming, and we just gotta be patient. I got it. Okay. Thanks.
I just wanna be able to announce it. I mean, you know, to your point about Illinois, you know, there's a lot of stores there. There's a lot of interest in the product now. I mean, I think Illinois is the number 14 state in terms of sheer volume. Very good chains, you know, in addition to Circle K. Very good customers. So we're moving forward there. You know, Colorado, again, like, it's the 24th biggest state, you know, not the biggest, but there's some very interesting things that go on in Colorado, and there's a reason why we picked it. Not only the MRTP tax savings, but also you have Denver, you have Colorado Springs, you have some different markets there to look at, you know, what's working, what's not working.
You have a real technology base of people. You have a young, energized base there that's moving into Colorado. There's a lot of people there that are looking for this solution. We have a firm out there we're working with who did some metrics for us about attitudes towards quitting smoking, understanding that flows right into our messaging. What we're seeing is the importance is to be able to penetrate a market, get into a market, get the message out. I use the expression all the time about being an oil well or an oil slick. For this product, for people to understand what it does, you have to get into a market and penetrate it and go deep. Which is why we're
Again, you know, when you start talking about addition to your plans, certainly wanna have a national presence. You know what? You've got to do it smart, and you have to do it in the right way so people know what's happening with this brand, going deep into a market, getting people to understand it. I hope that answers it, Brian.
Yeah. No, that's very helpful. Very helpful. Thank you so much.
Yeah.
Our next question comes from the line of James McIlree with Dawson James. Please proceed with your question.
Thank you. Good morning. Given all that you've seen with the Circle K trial, it sounds to me like you're going to go multiple regional tests or trials or pilots or phase-ins over the, I don't know, next six to nine months before you go national. Am I hearing that correctly?
Jim, it's not that we're necessarily not going national. We are going in a smart sort of a way to move through different markets. There are certain things that you know, and again, I talk about the oil well, oil slick, but also people have to understand what this product is. This product has only been, we only got the MRTP designation since December. If you're launching another Marlboro line or you're launching another Copenhagen line, or you're launching a new Snickers bar, everyone knows what that is. In my old company, we could launch a new flavor and blast across the country. Don't have any problem with people understanding what the product is. What we're learning here is we have to get people to understand what this product is.
There has to be awareness. There has to be education on what this is. If someone were to buy a VLN, a pack of VLN thinking they're getting a pack of Marlboro, they're gonna have a different experience. When we can connect with the 60%-70% of that adult population that smokes, that wants to quit, and we get them the solution, that's how we're going to be gaining momentum. Yeah, I hope that makes sense. It's again, additive. How do you expand through what you know is important to this consumer base and move it along? It doesn't make sense right now to put it into 50 states and hope it sells. We have to be very smart about this, and the momentum will happen. We're starting to see it.
I mean, if you saw this week, there was another article in New York Times. There was another article again about low nicotine cigarettes. What's happening with this. You know, we're moving it forward.
Yeah. Thank you. I appreciate that. I was just more trying to understand the timing of how these rollouts proceed. You know, you've been in Chicago since April, and at least you say you're expanding there as well as into Illinois. And then you and in your remarks, you talked about expanding into Colorado. Again, it seems like you're going to do these state or citywide kind of initial campaigns for some period of time and use that to build up into a national rollout. I'm just trying to figure out, you know, that some period of time is, again, to me it sounds like it's six to nine months, maybe six to 12 months. Is that a reasonable assumption?
Yeah. I'd hate to put it to just a number and say that it's going to be X number of months before you see something else. I mean, we're going to continue to keep rolling this out, and it's making sense to do it in a very pragmatic, straight way about market penetration. Now, there might be multiple markets at the same time. We're working all of that out now. Again, we've only been in 150 stores. So now we're starting to move this out and expand it. And for the tobacco, you know, for the tobacco world, for new product, you know, different products, right, that have been out there, right?
When you look at something like ZYN, that Swedish Match had, they tested quite a while in one state, you know, like a Utah, Colorado test, and they launched that seven to eight years ago. They were there for a while testing things, right? They're testing pricing, flavors, product, packaging, seeing what works best before they went, you know, national. Not, not uncommon for a lot of brands to do this, right? Test it, get it right. Now we've tested it, and now we're expanding it. Seems like the right way to go, especially keeping the message consistent, getting to the consumer base, making sure they understand what the product is, benefits, goals, things like that.
Yeah, it does. Thank you. Can you talk about the cost of doing this type of rollout versus what your prior expectations might have been? This is a higher cost endeavor, this is a lower cost endeavor, it's the same?
Yeah. I mean, you know, when you look at this test that we started with, right? You're starting basically from ground zero, so you're building all of the things. You're building websites, you're putting together apps, you're putting together point-of-sale plans. We're testing multiple different coupon denominations, you know. There's some costs that are up front on this that will be, you know, utilized throughout all the other markets. I don't know that it was any more costly than anything else to launch. We did a lot of things. You know, we had six different pieces of point of sale approved in Circle K. You know, will we use all of those in every store moving forward? Probably not. I mean, that's just not the way those things work.
You know, there's costs associated with this, but the upfront costs are always your most expensive. That first store is always much more expensive than your 50,000th store, just because you're trying to get it right. We're fine-tuning, we're getting things dialed in. That's why you do pilots, and that's why you do tests, and that's why you keep expanding. You know, will the future programs look like exactly like the 150 stores in Chicago? Absolutely not. I mean, as we continue to evolve and understand our learning of the consumer, what the messaging needs to be and how we get to them, this is not a traditional cigarette brand. I think, you know, people have to understand that. This is, like I say, this is not a Marlboro line extension.
This isn't the Joe Camel campaign from 20 years ago. This is a very, very unique product that is really all about public health, as you can see it. It resonates in our brand. It resonates in our packaging, resonates in our point of sale. This will not be a traditional launch in terms of what people have seen in the past. This is very unique. We've done some very unique things with it, and we're continuing to elevate those things.
All right. Thank you. Just a couple things on GVB. When you acquired it, I think you were talking $45 million-$50 million in revenues for GVB on a standalone basis, not consolidated. Is that still a good number, and is that dependent upon the Oregon extraction facility coming online? Is that a big part of the ramp-up? What impact does that have on gross margins? That the extraction capacity coming online, is that a higher or a lower gross margin versus the 20%-25% you talked about yet?
Yeah, I can take that, Jim. I mean, I'll take it, Hugh. I mean, the run rate's in line on those figures. You know, we're still placing focus on the 2023 plan or starting to get looking at the 2023 plan. The run rate's in that ballpark.
It's not impacted by the extraction unit expansion. The margins favorability certainly are. You know, we can keep up with the demand side in either case. Certainly the margins show dramatic improvement as that unit comes online in the next few months and, you know, on a calendarized basis in 2023.
All right, very good. That's it for me. Thanks, and I'll talk to you soon.
Sure.
Our next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.
Great. Thanks very much for taking my question, and congratulations on the what sounds like very successful early launch of the pilot program. I wanted to ask about something that you mentioned on the call about your cash requirements expected to decrease. Wondering if you can give us a little bit more color on when we should start to see that happen. I would think just given the magnitude of the VLN launch, you know, potentially taking a product here from zero to, you know, maybe hundreds of millions of dollars of revenue over the next couple of years. I mean, clearly you're gonna need to build inventory and spend on marketing.
You know, is there not gonna be a little bit more maybe short-term increase in the cash burn over the next couple of quarters, and then things perhaps start to become closer to cash flow break-even? Just considering all the moving pieces you've got going on here, if you could help to unpack that statement about cash requirements decreasing, that would be very helpful.
Sure. This is Hugh Kinsman, so happy to answer that question. I mean, we're obviously going to use, you know, the cash that's on hand right now. We'll heavily invest, you know, the vast majority of those proceeds into continuous launch of the VLN product. Not so much on CapEx, but obviously sales and distribution channels, much to what John just alluded to. There'll be some portion of those proceeds will be used to just build up the working capital for GVB's operation. GVB constantly selling out their inventory because of, you know, perpetual market demand. There'll be a need for a marginal amount of money to just build up their permanent working capital base and their permanent inventory levels.
GVB on a standalone basis will eventually, you know, become self-sufficient in 2023, later just because of continued organic growth. You're right, there'll be a substantial amount of cash that's initially spent going through the launch process and the progressive rollout strategy through, for, you know, for the VLN product. You know, after a certain point in time, particularly if we reach a certain accelerated sales level, the overall enterprise becomes somewhat self-sufficient, you know, over the next 12-18 months. We have the adequate resources to meet, you know, these strategic goals and complete the corporate initiatives.
Okay. That's really helpful then. So putting that all together, I mean, if we think about the $8 million adjusted EBITDA loss in Q2, when we start to layer in the full quarter for GVB and the acceleration of the VLN launch, I mean, should we expect the loss in Q3 and Q4 to be greater than that and then start to improve next year? Is that kind of a reasonable timeline to think about?
Yeah, that's probably the right way to think about it just because of simultaneous investments in both businesses and particularly VLN. That probably is the right approach.
Okay. That's really helpful. Thank you.
Sure.
Our final question is a follow-up from Vivien Azer with Cowen. Please proceed with your question.
Hi. Thanks for taking the follow-up. Just circling back to VLN in Chicago. The retail footprint opportunity is clearly much bigger than what you guys have done in the Chicago area to date. I'm curious, are you thinking about priorities? Do you wanna kind of replicate, you know, a C-store model so you've got apples to apples comparators, or is that outside of your control entirely and that's gonna be a joint decision with you and your distribution partner? Thank you.
Yeah, thanks, Vivien, for the follow-up. Yeah, there's no doubt Chicago has, and Illinois have thousands of stores. We are not married to a specific channel, in terms of our willingness to wanna market this to adult consumers who are looking for a solution to smoking. Quite honestly, there's some very good channels outside of just convenience for this product. That's all being evaluated. It's gonna be driven off of consumer demand. It'll be driven off of, you know, where consumers live, shop, all those things. Yes, to your point, we are looking at expanding this through multiple channels, multiple partners and having much more of a statewide presence there. Hope that answers your question, Vivien.
Thank you. It does. Thank you.
Yeah.
Thank you. Ladies and gentlemen, we have reached to the end of the question and answer session. I will now turn the call over to James Mish for closing remarks.
Thanks, operator. Thanks everyone for joining us today and thanks for the great questions. Just to tie a bow around some things, what you heard today is that all the recent announcements are in addition to our original strategy and accelerating an expansion of the VLN increases. That's what you heard from John today. To become efficient with that and to reach our objectives, which is to get this product into the hands of educated consumers as quickly as possible, is really what you heard today. We're gonna be sharing more and more of that over the next coming weeks and laying out even more detail to that.
We are truly off and running, and despite, you know, all of the headwinds in the macroeconomic and in spite of all the challenges of this tobacco industry, we are on a very successful pathway with the VLN expansion and rollout. Not to mention everything we're doing on the cannabis and hemp as well. Stay tuned for our next updates and press releases that'll be coming shortly as we continue to expand our VLN launch in the U.S. and move ahead on our opportunities with GVB and hemp cannabis. We will be present at a number of investor and industry events coming this fall. You'll hear more about that as well. If you'd like to arrange a meeting, please reach out to our investor relations team noted on the press release. With that, I thank you again.
Thank you for your support and continued interest, and we'll speak soon. Have a great day.
Thank you. This does conclude today's call. You may now disconnect.