This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Welcome to the 22nd Century Group's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode, and the floor will be open for questions following management's prepared remarks. As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Mei Kuo, Director of Communications and Investor Relations. Please begin.
spk06: Thank you, Jessie. Welcome to the 22nd Century's Third Quarter Earnings Conference Call. Joining me today are Jim Misch, our Chief Executive Officer, Mike Serker, our President and Chief Executive Officer, and John Granino, our Chief Financial Officer. Earlier today, we issued a press release announcing our results for the third quarter. We'll start today's call with prepared remarks from Jim, Mike, and John before moving into Q&A. During our prepared remarks, we will be referring to slides which are available for viewing in the webcast and posted in the Investors section of our website at XXIICentury.com under the Events subheading. We hope these slides will serve as a framework for management's prepared remarks, reinforce key takeaways, and provide additional transparency and insight into our business, strategy, and objectives. Also, those of you joining by webcast can submit questions through the online interface, which we may include during the Q&A section of today's call, time permitting. Before we begin, some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly, and other reports filed with the SEC. During this call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest taxes, depreciation, and amortization as adjusted for certain non-cash and non-operating expenses. For more details on these measures, please refer to our press release issued earlier today. And with that, I'll turn the call over to Jim, beginning from slide three.
spk05: Thanks, May, and good morning, everyone. Appreciate your time today. You know, this has already been an incredible year of transformation for 22nd century. And we still have two more months to go with key milestones to lock down. Slide three highlights just a few of our more recent accomplishments, all of which drive the company to revenue growth across our three franchises. Starting in tobacco and our primary mission, we are in the final step of MRTP authorization for our VLN reduced nicotine tobacco. And our confidence is at its highest level regarding the outcome and timing following our October 14th meeting with senior staff at FDA. We could not have been more thrilled with that meeting. We are well along the path for the offshore launch of VLN by Q1 2022. We're focused on a few very well-known leading markets in Asia and a test market in Europe where we believe we can launch rapidly. We are also setting up a branch in New Zealand in full support of that country's plans to reduce nicotine and all cigarettes to non-addictive levels. Our supply chain is ready to immediately scale production of our VLN products for launch in the U.S. and offshore. We also brought in another record harvest of our VLN tobacco leaf, and as part of our plans to globalize the VLN business, secured southern hemisphere growing agreements and launched our first grow outside of the U.S. In hemp cannabis, we have harvested our first growth at Needlerock Farm and have offtake commitments for all of the production. We expect to achieve first revenues on sale of the biomass portion in this quarter. We have decided that the portion will be sent to a new type of purification process and potential partner that we are working with to create a new type of high purity distillate, which we then expect to sell in Q1 next year. We're also reading the 2022 lines for planting season and advancing 2023 lines all the while working on additional new disruptive plant lines. As part of our expansion, we have secured global breeding partners for year-round plant line development programs and begun the application process for the USDA organic certification at Needlerock. This will enable us to further establish premium pricing and premium margin. We also expect to initiate IP revenue in the fourth quarter, as we said before, including agreements with Aurora relating to both plant development and licensing of shared and anti-IP for biosynthetic cannabinoids. In a particularly exciting development, we've announced that we are launching a new industry standards effort in partnership with Keygene and NIST, or the National Institute of Standards and Technology, which will establish measurement and purity standards for the entire hemp cannabis industry. This will dramatically improve the entire industry's credibility and more so consumer confidence. Finally, we announced our entry into the global hops market as our third franchise. We are now focused on four highly disruptive technologies in hops to enable us to rapidly disrupt this industry with valuable enhancements to high volume plant lines. We are engaging with multiple hops growers and consumer products partners to develop specific tools to accelerate desired trades in leading hop strains with a target for first revenue within 18 months. I'll come back and detail that a bit later in the discussion. But let me be crystal clear. We remain absolutely dedicated to finalizing MRTP authorization while also building for long-term revenue growth and value creation across multiple franchises and complementary global market opportunities. With that, I'll turn it over to Mike to detail our tobacco activities then I'll come back to discuss our hemp cannabis and hops franchise actions with you. Mike?
spk03: Thanks, Jim, and hello, everyone. Turning to slide five, there's been a flurry of activity at FDA recently, including the clearance of several PMTAs for e-cigarettes and other nicotine products. We're excited about the FDA's shift to active decision-making, and following the October meeting we had with senior FDA staff, Our confidence in our MRTP's positive outcome is at its highest level ever. The meeting with FDA was highly productive, and based on that discussion, along with our prior interactions with FDA since 2019, it's clear that despite the long period of time that this application has been under review, we are very closely aligned with FDA's own goals. FDA has been and remains highly supportive of the work we are doing. and understands the importance of this MRTP to their own larger plans to reduce the harm caused by smoking. While a final decision on the application is yet to be made, FDA did indicate that our application is indeed in the final clearance process that precedes the decision and announcement. Without exaggeration, this decision by FDA will be the most important event in our company's history. the culmination of years of tireless work by this team and others and significant investment by you and many of us here. This decision by FDA is the goal on which we remain squarely focused, a key milestone in realizing our tobacco harm reduction mission and a critical step towards the realization of FDA's own public health priorities. Smokers need new tools to help them break the cycle of addiction to cigarettes. and there is an extraordinary body of independent science that shows that VLN will help smokers to smoke less and help to reduce the enormous amount of death and disease caused by smoking. VLN looks, tastes, and smokes like a conventional cigarette, yet it is the only tobacco product not designed to create and sustain addiction. VLN is destined to capture the attention and imagination of the hundreds of millions of adult smokers around the world who want to break the chains of their addiction to smoking. And because of that, VLN will be the most disruptive new tobacco product to come to market in decades. Shifting to slide six, authorization of our MRTP and bringing VLN to market are critical next steps, not only in our mission to reduce the harm caused by smoking, but also in FDA's plan to introduce a product standard capping the nicotine content of all cigarettes at non-addictive levels, which is the cornerstone of FDA's comprehensive plan for tobacco and nicotine. This is a leading idea in tobacco public health that was born from 22nd century's research and investment in creating the first tobacco plants to grow with very low levels of nicotine. Since that first innovative use of plant science and modern plant breeding technologies, 22nd century has produced millions of research cigarettes to enable independent scientists to study the benefits of reducing nicotine in cigarettes. That clinical research has been largely funded by the U.S. government at a cost of over $100 million by our estimates. Based on that body of science and other innovations in the marketplace, FDA developed their comprehensive plan to reduce the harm caused by smoking, the leading cause of the death and disease in the U.S. In those plans, which are based on the principles of harm reduction, FDA acknowledges that all tobacco products fall on a continuum of risk, with combustible cigarettes being the most harmful and likely the most addictive form of nicotine delivery, and with menthol cigarettes likely being the worst of all. By banning menthol and reducing nicotine in all cigarettes, the science shows that smokers will more easily quit nicotine altogether or migrate to less toxic products if they can't or won't quit smoking. FDA has now officially authorized e-cigarettes, snus, and heated tobacco products as less harmful nicotine products and is expected to approve more alternative products in the coming weeks and months. This portfolio of less harmful products creates an off ramp for smokers, which will be important to the success of FDA's plans once all combustible cigarettes are required by FDA to be non-addictive. 22nd century is extremely well positioned for this future. Not only did we create the first tobacco plants with very low nicotine levels and the research cigarettes to help build FDA's plans, We have also built an extensive portfolio of IP, including gene and plant patents and know-how, related to the production of nicotine in tobacco plants. We continue to work on developing new varieties of reduced nicotine tobacco, including non-GMO versions of well-known and widely used Bright, Burley, and Oriental tobacco lines, which we look forward to bringing to market soon. On the regulatory front, we already have the only cigarette to be authorized by FDA as appropriate for the protection of public health. And that authorization does include a menthol reduced nicotine cigarette. We look forward to adding MRTP authorization for these products to our win column and bringing the world's lowest nicotine tobacco cigarette to market very soon. Finally, President Biden's potential nomination of Dr. Robert Califf as FDA Commissioner is positive news for the continued forward movement of FDA's plans. As a former FDA commissioner under President Obama, Dr. Califf knows the agency and its plans for tobacco and has indicated that a nicotine cap will be a key priority for him if he is nominated and confirmed to lead FDA once again. With the strength of our IP and our regulatory winds in hand, including our MRTP, we will hold the keys to transforming the entire tobacco industry by providing smokers a new alternative and by enabling all manufacturers to comply with FDA's plans to ban menthol and to reduce nicotine in combustible cigarettes. Slide seven provides some background about our launch readiness and manufacturing capabilities for BLN. Our pilot launch programs are ready and awaiting MRTP authorization. Our programs in the U.S. and internationally will be focused on testing and refining our messaging and marketing mix to activate the most adult smokers, build word of mouth and buzz around VLN, and deliver the highest ROI when VLN begins scaling nationally and globally. In the U.S., we are at advanced discussions with well-known national and regional chains in the tobacco trade. and we have a pipeline of additional chains that are closely tracking our progress and ready to join with us once MRTP is granted. We are ready to ramp up manufacturing at our North Carolina facility and have locked in supply of the key manufacturing inputs needed to produce VLN. Also, to further build and diversify our supply chain, we have started growing VLN tobacco in the Southern Hemisphere, which will provide us with year-round growing capabilities and the ability to rapidly scale VLN post-pilot. Advancing to slide eight, we have initiated the launch process in key global markets with initial revenue expected early next year. We are targeting several key markets in Asia and Europe where regulations will allow us to go to market with claims today or with minimal interaction with regulators. Adult smokers in these markets have a strong affinity for new, reduced-risk tobacco products, and these markets have large premium price segments and corresponding margins. Once we have MRTP in hand from FDA, we will leverage that endorsement of our MRTP claims to initiate the launch process in additional countries where regulatory approvals will be required to launch VLN with MRTP-type claims. Like the FDA, New Zealand's tobacco regulators are also developing a plan to reduce nicotine in all combustible cigarettes there. New Zealand is a bellwether for new tobacco regulations, and we are supporting New Zealand's efforts in every way we can. Leveraging our unique knowledge about the public health benefits of reducing nicotine in cigarettes, we recently submitted our own comments in support of New Zealand's plan. You can find a link to those comments in this morning's press release. Also, as Jim mentioned, we are establishing a company branch in New Zealand to support the implementation of New Zealand's plan. Given the exciting progress so far with VLN, we remain in contact with several potential strategic partners that could help us scale VLN in the U.S. and globally. And we have also expanded our strategic partnership discussions to include potential partners in the pharmaceutical space, where our reduced nicotine cigarettes may be synergistic with FDA-authorized tobacco harm reduction therapies already in the market and under investigation. We have a great group of professionals working on and supporting our efforts with BLN and our tobacco business in general. I want to especially thank our manufacturing team for the exceptional work that they continue to do to support the profitable growth of our business and their continuing commitment to making the best possible products at our factory in North Carolina. John will talk more about the continued success coming from our great team there. All in all, our tobacco business is in the best shape it's ever been. Our operations and IP are strong. We have put together one of the best teams in the industry. We are successfully driving VLN to launch in the U.S. and abroad, and the regulatory winds are at our back and blowing strong. We are excited about our progress, and we are ready and as eager as ever, as I know each of you are, to see VLN go to market. Most importantly, we look forward to helping smokers break the cycle of nicotine addiction and to helping the FDA, public health policymakers around the world, and the tobacco industry itself reduce the enormous harm caused by smoking. I thank you for your time today and for your confidence in our company. I'll now pass you back to Jim. Jim?
spk05: Thanks, Mike. And let's turn to slide 10, and we'll review the cannabis hemp and hops. You know, from the start, our focus on hemp cannabis has been in helping growers secure scalable plant lines that exhibit stable genetic profiles. predictable agronomic traits, and really high yields. We took a major step forward in this goal with our first harvest, which will feature both biomass offtake and the production of a new type of high purity distillate utilizing a new purification technology with a third party and potential partner from our first lines of high CBD and CBG plants. We're also closing in on IP agreements as well, which will include both plant IP opportunities with key partners and our shared Inandia IP that addresses the production of biosynthetic cannabinoids. But these really are just first steps. We're moving aggressively to accelerate additional lines featuring important traits desired by our partners for the 2022 and 2023 growing seasons as we move our business to scale. This includes advancing with strategic commercial partners and building on the base we established with Aurora. We anticipate these will become tangible drivers in 2022 revenue. We're enhancing our international reach to do so, which will enable us to accelerate agreements with well-recognized pharma, food and nutrition, medicinal, recreational, and consumer products customers. In short, our hemp cannabis business is accelerating to revenue at a very fast pace. That capability is due to our relentless development of our upstream development capabilities. Many of you have seen slide 11 in our prior presentations, but I wanted to point out a few important enhancements to our upstream value chain, which we believe is the best in the business. First, you can see in the title that this slide now addresses both hemp cannabis and hops, because in reality they are two siblings in the same alkaloid plant family. This relationship enables us to cross much of our IP into hops and facilitates a faster and more meaningful disruption to the industry. Our exclusive partnerships with Canometrics and Keygene continues to evolve as we open new opportunities in our franchises. A big leap forward came about recently with our breeding partners who are among the most expert alkaloid-based plant breeders in the world and give us full access to both northern and southern hemisphere locations. This provides a comprehensive year-round capability of 22nd century to support the commercial scale-up and cultivation of disruptive plant lines far beyond the capabilities of independent competitors or in-house breeding and consumer product companies. Finally, as I've mentioned in my opening, we have added standards to the extraction and purification column as we ramp up the partnership with T-Gene and NIST to develop definitive new standards for the entire hemp cannabis industry. This will put us into a thought leader position. This will establish the first ever quality and measurement standards for cannabinoids, terpenes, and other compounds in hemp cannabis, enabling us not only to better quantify the value in our plant lines, but also ultimately build credibility for our customers, and even more importantly, help consumers know clearly what is in the products that they are consuming. Through the company's collaboration with Keygene, we will provide diverse lines of cannabis plants containing various levels of THC, other cannabinoid profiles, and compounds. Utilizing these samples, NIST will establish quality standards for the entire hemp cannabis industry, distinguishing higher quality products from the saturated marketplace. The collaboration is pivotal to the growth of hemp cannabis industry as there is a need for consistent, stable cannabinoids, terpenes, and other hemp cannabis-derived compounds meet the needs of the life sciences, medicinal, and pharmaceutical end-use markets. Slide 12 gives you a sample of the key projects we are currently advancing to bring disruptive plant lines to the hemp cannabis industry. I think you can quickly see how each one of these projects would be valuable to a grower, CPG account, or industry customer looking for an edge on cost, quality, and reliability. And that brings me to our newest franchise, the global hops market. This is a very exciting to us as it utilizes the technology and skills we already developed for hemp cannabis, which is a close hop relative. This enabled us to quickly bring highly disruptive plant lines to a massive global market with much fewer regulatory requirements. Hops relies on traditional breeding techniques today. that are characterized by long, costly, and high-risk efforts that take years, perhaps decades, to evaluate with little certainty of success. We're using our experience with tobacco and hemp cannabis to shorten this cycle and bring greater certainty to hops development programs. Our early programs will center on important advancements, including improved disease resistance, better yield, and the expression of desirable traits, such as aroma, flavor, or wellness properties. As part of our entry into the global hops market, we have opened up a European subsidiary, which will also be helpful in facilitating our VLN and hemp cannabis business in that region. Slide 15 details our value proposition in more detail. Our programs with key gene are focused on four key programs to disrupt the hops market, which include rapid cycle breeding, double haploid, sailor grafting, and mutagenesis. These are the holy grails in the hops market that people have been chasing for decades. We have a high confidence level in working with Keej on this that have had success with these approaches in other plant lines in the past. These techniques can lead to more effective breeding programs and lower costs to achieve successful plant varieties versus existing in-house and external breeding programs. The logos of the companies on the right highlight several of the key players throughout the industry, ranging from growers to product companies. We can collaborate versus compete with all of them. One thing you might notice is that our opportunities go far beyond the most common use of hops, which is beer. And although it's an outstanding opportunity for improved varietals. But hops has a lot of exciting opportunities in nutraceutical and wellness applications. A market segment has been growing quite quickly and represents a key opportunity aligned to our specific value proposition. And similar to our hemp cannabis section, slide 16 illustrates a few of the projects in our pipeline, including the projects with key gene I highlighted. The first two examples focus disease resistance and yield, both of which are key to production economics in the hops industry and have been chased for decades. The next two address the consumer aspects of hops focusing on aspects that are key to the actual brewing and taste profile, including both alpha acid and flavor profiles. The last is a great example of a wellness program using hops to provide a natural approach to managing health concerns. I hope that the detail from both Mike and I convey just how exciting it is now, a 22nd century, and we believe this is just the tip of the iceberg. With MRTP and overseas VLN launches in the works, our first hemp cannabis revenue, and incredible opportunities in the new hops market. I've never been more confident and excited for this company. Now I'm going to pass you over to John to review our financial performance. John?
spk02: Thanks, Jim, and good morning to everyone. Starting off on slide 18, I'm sure many of you are excited to see that we uplisted our common shares to the NASDAQ on August 16, 2021, and continue to trade under the current symbol XXII. Transferring the listing to NASDAQ aligns the company with other innovative and growth-oriented global science and technology companies. Joining the NASDAQ will also enable the company to be a more agile organization in hemp, cannabis, and draw in more coverage, interest, and investments. We've also crossed several momentous milestones this quarter, including new research coverage initiated by Vivian Azar, leading beverages, tobacco, and cannabis senior analyst at Cowan & Company, and the addition of 22nd Century to the Russell 2000, Russell 3000, and Russell Global indexes. Looking at a few of the financial highlights, net sales increased by 7% to $7.8 million for the quarter through a combination of higher volume and price increases in our contract manufacturing and cigarette business. We continue to generate new business and scale volume ahead of launching our BLN cigarettes following the authorization of the MRTP, including additional orders for both of our CMO businesses and variable nicotine research cigarettes. Revenue in the third quarter was impacted by certain supply shortages that are affecting our industry. causing some shipments to move from the third to the fourth quarter. We believe this will ultimately correct and have taken action in our supply chain, but we may see some lumpiness in the short term, as are others in the industry. Gross profit margin grew 70 basis points. This marks our seventh consecutive quarter of year-over-year improvement, demonstrating our ability to execute on the objectives and strategies we set to the business. Every incremental dollar of CMO contributions help cover our operating overhead and fund growth investments rather than utilizing our balance sheet cash to do so. With VLN positioned as a premium brand and product, which will command higher revenue and therefore higher margin, we expect that the launch of VLN, both in the U.S. and overseas, will be net positive to our revenue and gross margin profiles. That generated margin would be earmarked to initially fund launch activities. Additionally, in the midterm, it will generate much greater revenue and margin per carton than our CMO business. The cost of production, taxes, and other expenses that go into the production will not be notably different from our contract business today, which means that those additional dollars would provide an incremental cash for investments towards the further development of the business. We have again provided a more detailed comparison of our financials for the quarter on slide 19. Total operating expenses for the third quarter increased by $3.5 million, driven by $3.6 million of higher SG&A expenses. The increase in SG&A includes higher personnel, insurance, financial and strategic consulting costs, and marketing costs as we move quickly to market readiness in both tobacco and hemp cannabis. Although R&D expense was lower by $52,000, R&D investments are expected to grow in future quarters as the company continues to accelerate the development of new, highly differentiated hemp cannabis plants and expand its R&D efforts to hops plant-based franchise. For the third quarter, operating loss of $7.9 million increased by $3.4 million over the third quarter of last year. Total other... Total other income includes non-cash unrealized loss of $1.9 million related to its fair value adjustments for investment in Aurora Cannabis stock warrants and investment in Exactus Common Stock. Turning to our strength and balance sheet, with more than $55 million of cash at the quarter end, we have the resources to fund a significant runway for growth as our reduced nicotine, tobacco, and cannabis franchises transition to commercial launch. We intend to use the proceeds of our $40 million offering to accelerate our revenue progression in a number of ways, including BLN U.S. launch readiness, commencing international BLN market launches, accelerating the commercialization of our disruptive hemp cannabis plant lines and IP, and launching our third franchises. Now I'll pass back to Jim.
spk05: Thanks, John. The summary on slide 20 you've seen before and captures our priorities, which align to the key strategies we shared at the start of the year. Paramount is the launch of our VLN product in support of our mission in tobacco harm reduction. As Mike indicated, we're also seeing renewed momentum and support for reduced nicotine and menthol ban mandates, both of which we believe strongly favor our VLN product. The recent actions by FDA and nominee for commissioner, which seem to support this outlook, and we're very excited about the road ahead. In hemp cannabis, we're moving to monetize our portfolio beginning in the fourth quarter of this year, accelerating additional revenue opportunities in 2022 and 2023. Our programs and partners are moving ahead quickly, and the prospects in this franchise only continue to expand. And we've now announced HOPs as our third franchise, with work already well underway toward our goal of revenue in the next 18 months by leveraging the capabilities we have already developed in hemp cannabis for a large, less regulated additional market opportunity. And we're doing all of this backed by a strong balance sheet and good financial discipline, if you just heard from John, to keep us on track to our goals. And with that, operator, please open up the call for questions.
spk08: Thank you. We will now be conducting our question and answer session. If you are listening via webcast, you may type your questions into the Ask a Question field located on the left side of your screen. If you would like to verbally ask your question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is on the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from Vivian Acer with Cowan. Please proceed with your question.
spk07: Hi, good morning.
spk05: Good morning, Vivian.
spk07: So I'd love to start with the FDA, certainly encouraging that you've had some constructive dialogue with senior staffers as recently as a couple of weeks ago. Did they give you any indication on what may be prompting the delay? I mean, my suspicion is that there's been quite a lot of activity on the PMTA process, kind of positive and negative from the agency and a little self-inflicted on their part around e-cigs. Is that the principal driver of the delay?
spk03: Good morning, Vivian. This is Mike. Yeah, thanks for the question. They did not indicate the reason for the delay to us in that call. You know, I think your suspicion is probably well founded. We've seen sort of in the public activity around the PMTAs that they didn't quite come out with the announcements that everyone was expecting around the vague products, et cetera. So, I mean, they have assured us in the past that there are separate work streams for MRTPs and PMTAs, but it is possible that, you know, in this final clearance stage, that there's overlap there. But they have assured us that this is our application is a very high priority for them.
spk07: Okay. That's encouraging. And certainly, you know, the continued dialogue is encouraging as well. Mike, maybe I can stick with you and we can pivot kind of to the international opportunity. The Asian markets can be quite big, and so is there any way for you to dimensionalize how we should think about kind of the revenue opportunity as you guys start realizing revenues from international VLN sales in the first quarter of 22?
spk03: Yeah, so you're right. Asian markets, many of them are large. I can tell you China is not on the list. That's a very difficult market to break into since the entire industry there is owned by the Chinese government. We are looking at several markets in Asia. There are some large ones among those. In terms of revenue modeling, we will likely take the same approach in the international markets that we're taking in the U.S., which is to start with some pilot markets. Again, being judicious in our investments in marketing and sales and testing our messaging and marketing mix in each of those countries before we look to increase investments in scale. So the impact on revenue and profitability I think will become more obvious once we're in the markets and then can start seeing what the response is in the marketplace to the product claims and the product itself in our marketing.
spk07: Okay, fair enough. And my last one, I think, Kim, is probably for you. on the cannabis hemp, encouraging that you guys are making progress there. But I'd love to understand how what you're doing in the marketplace could potentially be impacted by broader cannabis industry dynamics, and specifically, price deflation in the US THC market has been incredibly topical. How, if at all, does that impact or influence the economics around your offerings?
spk05: Yeah, it's a great question. The way we look at it is the U.S. market, obviously we're focusing at least until legislation catches up on hemp cannabis. And there we continue to see increasing interest in higher quality, higher stable ingredients that can build the credibility of the industry and to the consumer. So the material that we grew in needle rock, and now we've harvested and is drying as we speak, has very high levels of CBG and CBD, two different strains, and extremely low levels of THC. That material, even in its state, has caught the attention of many groups out there because of the cost impacts and more so the stable quality impacts. And that's where the offtake is going. Primarily, through a distributor arrangement into MSOs that are still driving CBD and CBG efficacy, but need additional support on that. Now, the offshore activities that are more in the R&D phase, we have not done a full-scale growth on the recreational THC lines. But that's where we're focusing those efforts. And, you know, driving really stable THC increases offshore is still a high interest because the stability and the variability of THC lines out there is getting worse, not better. And that is impacting the consumer's confidence in the entire industry. So, you know, our message of a rally point around increased consistency and demonstrating that on these early plant strains with the scientific data to back it up and both some of these non-THC cannabinoids and an offshore on the higher THC cannabinoids is still resonating very well. And that's where people are leaning into wanting to work with us and starting to realize that our approach indeed can work much faster and have more impactful results. So I expect you know, we're scratching the tip of the iceberg with these first two grows in the day that we're putting out in place. But as we are in discussions now for the 2022 grow, not only at Needle Rock, but throughout our breeder network, you know, those volumes are significantly increasing.
spk07: Got it. And not to put words in your mouth, but then, like, if I hear what you're saying, and just to paraphrase it back to you, So hemp CBD price deflation in the U.S. has already occurred, but you're not seeing any downward pressure on your own pricing because of the stability of your APIs?
spk05: Yeah, that's a much more elegant way of saying it, so thank you. Okay.
spk07: Well, that's encouraging to hear. Thank you so much.
spk00: Sure.
spk08: Thank you. Our next question is coming from the line of Jim McGillery with Dawson James. Please proceed with your question.
spk04: Thank you. Good morning. Regarding the FDA meeting that you had, is that something you initiated in order to get an update, or is that something they initiated? And if they did, can you help us understand what they were looking for?
spk03: Good morning, Jim. This is Mike. Yeah. Thanks for the question. There's a formal process for initiating meetings. We have had a lot of indirect outreach to FDA, but we did not request the meeting. It was set up at FDA's request. We have the policy not to reveal the details of discussions with FDA or other regulators, so I can't really get into any more specifics than what we've discussed so far.
spk04: Okay. Also, there was a, Mike, in your comments, you were talking about an off-ramp with other products that the FDA is creating. And my question is, is there something about the MRTP that the off-ramp needs to be created first before they deal with the MRTP? Or is it these things are moving simultaneously?
spk03: No, I think the MRTP is independent of creating that off ramp. FDA has talked about the off ramp and the importance of that as it relates to an industry-wide reduced nicotine mandate. And so, you know, so this positive movement from FDA on these alternative products is is helpful in understanding where FDA is with that broader mandate. But MRTP is independent of that, absolutely.
spk04: Okay, thank you. A couple more, if you don't mind. The press release, and you guys talked about it in the commentary also, regarding a, I'm not sure what language you used, a pharmaceutical partnership or a discussion. I'm trying to understand what has changed either in the market or your capabilities or your confidence that you would start initiating this process with a pharma company.
spk05: Yeah, I can pick up on that one a bit and ask Mike to chime in because, you know, look, I come out of the pharmaceutical industry, have strong contacts, you know, around the world. And as we were working our strategy, you know, obviously we've been in close contact with strategic partners on the tobacco side. And Mike's, you know, discussed those time and time again. But the opportunity to, you know, introduce the technology and the product into those pharmaceutical houses that have, you know, reduced harm products on the marketplace is And are having success to some extent, but, you know, we feel there's combination opportunities that would, you know, be synergistic to both product lines. So, took it upon ourselves to reach out here in this quarter to gauge the interest. I'm not saying where we've made contact with, but I've had personal discussions with long-term contacts with several large pharmaceutical houses. and indeed they have an interest of learning more and exploring more. So we'll continue to have optionality around strategic partnerships with Big Tobacco, but we certainly want to diversify that portfolio and bring in other large parties of interest, and pharmaceutical is right up our alley. And those initial discussions, at the very least, have been quite positive.
spk04: And would it be fair to say that that you need MRTP before those pharmacy discussions advance further?
spk05: Yeah, I would certainly say that, you know, it's not quite as a caveat for big tobacco, but, you know, big pharma is going to want that FDA stamp of approval. And, yeah, But we're turning our attention past that milestone into the forward plan here going into early part of next year. So to answer your question, yeah, it would certainly be desirable for them, much like their own FDA-approved products as well.
spk03: Jim, I would just add to build on Jim's comments, I would just add that, again, There is a fair amount of independent clinical science showing that using VLN or reduced nicotine cigarettes in combination with nicotine replacement therapies and other cessation therapies like Chantix actually improves the efficacy of those therapies for cessation. And so obviously there's been a lot of innovation around alternative nicotine products, including new medicinal nicotine products that the pharmaceutical companies are developing. So there's a lot of opportunity here potentially to combine VLN with these other cessation-focused products to create new offerings in that space, I think.
spk04: Understood. Yeah, thanks for that clarification, Mike. And my last one, I think I've asked this in the past, but the launch of VLN, I'm worried about how that impacts whatever cycles are happening at the whatever retail partnerships you're discussing. Do we need to hit a window? Do we need to get MRTP by make up a date, December 1st, in order to hit whatever stocking window takes place at your retail partners?
spk03: It's a good question. Our pilot partners are working with us on any schedule that will be driven by the MRTP decision. So in other words, the launch of the pilot and our ability to launch within 90 days of the MRTP decision are not dependent on those cycles that would otherwise apply to the cigarette or any category in these retail channels. you know, as we look to sort of a phase two, more of a scaling nationally, then that would likely apply. But the folks that we're partnered with on the pilots are very much bought into the idea of VLN, the importance of VLN in tobacco harm reduction. These are chains that are thought leaders in tobacco harm reduction themselves. and introducing new nicotine products. And so, you know, they're highly collaborative with us in this regard.
spk04: Fantastic. Thanks a lot, guys. Good luck with everything. Thanks, Jim.
spk08: Thank you. Our next question is coming from Aaron Gray with Alliance Global Partners. Pleased to see with your question.
spk01: Hi, good morning, and thank you for the questions. You know, first one for me has been speaking back off you know, cannabis, speaking with, you know, cultivators, you know, recently, um, in the past, I mean, a lot of conversations about, you know, F1 seeds, kind of those first generation seeds in terms of, you know, getting better genetics and consistency. So just want to get some color from you in terms of, you know, your product offering and whether or not that would be, you know, complimentary to that. Cause I know that'd be a very expensive process and take time to get to the F1 seeds. It was better genetics. So, you know, you're offering, would that be complimentary to, Is that something to offer more in the near term until you get to that to get the better yields and consistency? So just any color that I think would be helpful. Thank you.
spk05: Yeah, sure. Thanks for the question, Aaron. It's a great, great question. I mean, the way we look at it is we could, you know, we could build off of what's already been established out there and continue to refine it in a relatively short cycle, you know, this two-year development cycle. So we could, you know, work with strategic partners from that perspective. But we believe that the new strains that are coming out of key gene and are in the kind of the seeding round now to grow enough to create seeds for field trials, et cetera, are equal if not superior to what's out in the marketplace, the offerings right now and kind of the next generation. So, you know, we have the ability to focus on both paths, But from our confidence in what happens at Key Gene, what's coming out of there and what's moving now into the breeding programs in Tasmania and in North America and in Rotterdam, for that matter, on the THC bearing lines, we think they're the best strains on the market prepared for scale-up. So hopefully that answers or addresses the question.
spk01: Oh, great. Thank you. That's helpful. And then switching over to the hops and the opportunity there that's, you know, in the more mature industry of beer, and I know you mentioned other applications, but just given, you know, hops, that there's more stability in the category versus cannabis. Provide some color in terms of maybe the reception you're getting from some of the, you know, more mature hops growers as it relates to the offerings. Thank you.
spk05: Yeah, sure. Another great question. I mean, we're not looking to create the, you know, 5,001 strain that's going to be dedicated to a new flavor profile. What we've, you know, in our discussions with both hot manufacturers and large beverage accounts, what's come through loud and clear is they've been chasing a few, you know, holy grails of tools to speed up that development. This is this double haploid approach, the mutagenesis cellular grafting, without any success, you know, for decades. Now, T-Gene has applied that in other plant lines and has had great success with that. So we have turned our attention to those tools, those three tools, any one of which, as we secure it, can be highly disruptive to the industry. If we hit two or all of them, ultimately it's a new paradigm for the entire industry. So we're focusing on those three programs. Now, in the meantime, we've already developed some disruptive plant strains that were highlighted in one of the HOP slides that already have yield improvements, already have disease resistance associated with them, and they're based on highly attractive flavor-profiled HOPs that are utilized in the marketplace today. So we are coming at it from multiple angles here, but really we can have a strong success on the new strains that are already coming out of the mid-level of the development pipeline. But I've turned our attention to these three technological tools that we have growing confidence in being able to being able to apply in the hops market. And any one of those are just paradigm changers for the industry and are well known to the industry and have, you know, have just been impossible for them to succeed with. We, you know, first looked at it and said, well, maybe it's, you know, too high of a mountain to climb until we understood the success rate and the approach that key genes already done in other plant lines and, you know, have grown confidence in that area and wanted to detail that in this presentation.
spk01: Okay, very helpful. That's a great detail. I'll jump back to the queue. Thank you. Thank you.
spk08: Thank you. We will now take some questions from the webcast. I'll turn the floor back over to May Kuo. Thank you.
spk06: Thanks, Jessie. Jen, this first question is for you. Can you elaborate on the NIST agreement and what it means for 22nd century groups?
spk05: Yeah, so NIST agreement is very exciting for us. But, you know, again, I come out of the ingredient space and the pharmaceutical API space. And when you take a look at what's developing, and it ties back into Vivian's question around, you know, the development of the cannabinoids and hemp market in the U.S. and the medicinal over-the-counter and recreational space outside, and what has typically transpired in other ingredients and consumer goods industries. has been establishing standards. Without establishing standards, the FDA can't ultimately set safety standards because you don't know what you're testing for. So we're not in a position in the finished goods market to go after finished goods standards, but we are in a position on the ingredients side, and no one has mapped this out in the cannabinoid space as of yet. So Keygene has a very strong relationship with NIST. In fact, they're co-located. Our relationship with Keygene then spilled over in our engagement with NIST. And they're in the United States and globally one of the most renowned standards and analytical approach in the marketplace. So we've agreed to work together to develop these cannabinoid standards across multiple cannabinoids that ultimately tie back into our plant strain. So this is really groundbreaking to step back and say step one in the industry to gain credibility and broader acceptance and broader growth in these consumer products markets is to establish the analytical standard methodology and establish the quality standards that would then be utilized in the entire industry and also drive the FDA safety approach on the finished goods. So for us, it's going back to the very beginning and putting ourselves in a very strong position in order to lead that. Ultimately, if you combine that approach with higher quality strains and higher purity ingredients, The market credibility of our customers who would be buying that material or licensing those strains goes up dramatically. And the consumer finally starts to realize what they're seeing on the label is what they're getting. And those purity standards and quality standards are well established and analytically derived. So that's why we're excited about it.
spk06: Thanks, Jim. And it looks like we are out of time. And if you have any closing remarks.
spk05: No, as always, I appreciate everyone's continued support of this company, all of our stakeholders. We're working hard. Our excitement level hopefully is coming through. Our confidence level hopefully is coming through, certainly on the primary mission around VLN and MRTP and continued confidence in all three of the franchises. So we're excited to go through Q4 successfully. and move forward. So thank you all for the support and all the time, and we'll talk real soon. Thank you.
spk08: Thank you. This concludes today's conference. All parties may disconnect, and have a great day.
Disclaimer