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spk03: Greetings and welcome to the 22nd Century Group's fourth quarter and full year 2021 earnings conference call. At this time, all participants are on a listen-only mode and the floor will be open for questions following management's prepared remarks. As a reminder, today's conference is being recorded. At this time, I'd like to turn the call over to May Kuo, Director of Communications and Investor Relations. Please begin.
spk00: Thank you, Rob. Good morning and welcome to 22nd Century's fourth quarter and full year earnings conference call. Joining me today are Jim Misch, our Chief Executive Officer, Mike Thurker, our President and Chief Operating Officer, and Rich Fitzgerald, our Chief Financial Officer. Earlier today, we issued a press release announcing our results for the fourth quarter and full year 2021. We'll start today's call with prepared remarks from Jim, Mike, and Rich before moving into 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. Also, those of you joining by webcast can submit questions through the online interface, which we may include during the Q&A session of today's call, time permitting. Before we begin, some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual quarterly, and other reports filed with the SEC. During this call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, and amortization as adjusted for certain non-cash and non-operating expenses. For more details on these measures, please refer to our press release issued earlier today. And with that, I'll turn the call over to Jim, beginning from slide three.
spk05: Thanks, May, and good morning, everyone. Helps you smoke less. This was the shot heard around the tobacco world on December 23rd as the FDA authorized the first and only MRTPs ever given to combustible cigarettes for our VLN products. And then added the clinical evidence-based claim helps you smoke less as a requirement on every single package. These authorizations and claims are all exclusive to NASDAQ traded XXII. Let me just unpack that for a second. After 20 years in development and 10 years in clinical trials, exceeding even pharmaceutical timelines, the FDA chose to specifically highlight in its authorization that the extensive scientific data shows VLN reduced nicotine content cigarettes helps you smoke less. The addition of the helps you smoke less claim means that every time an adult smoker goes to the store to get a pack of cigarettes, sitting on the shelf right next to the other premium cigarette brands will be a pack of our VLN staring them in the face with a statement, helps you smoke less, printed boldly right on the front of the package. We took a collaborative, patient, and thoughtful approach to our interactions with FDA and could not have asked for a better result. We believe that Helps You Smoke Less will be a paradigm shift going forward in the $80 billion U.S. tobacco market and the almost $800 billion global market. I also want to be very clear. This team has had correct assumptions and delivered on all of our commitments to date. We're now moving to deliver on our commitment with a successful pilot and national launch and also deliver on our commitment for a successful international launch. Thriving that effort is an incredible VLN team that has successfully executed this type of branded specialty launch, such as with Natural American Spirit, gaining market share and creating extraordinary value. You're already seeing some of their early results of that effort in our pilot detail, but they're just getting started. By the end of this month, we expect to go live with our first sales of VLN at more than 150 Circle K stores across Metro Chicago. This pilot will enable us to test and optimize our marketing and point of sale programs to reach adult smokers and let them know we have a product to help them smoke less. From there, we have the opportunity to roll out more than 7,000 Circle K stores nationwide. as well as other regional and national trade partners that we will announce as competitive environment allows. This is an efficient, low-cost, and far-reaching national launch strategy in line with our current balance sheet. Because of the Helps You Smoke Less claim and the unique appeal of ELN, we don't need hundreds of millions of dollars for a brand launch. We just need good partners who are joining us in the mission to help you smoke less. With hundreds of issued, pending, and licensed patents and an IP moat around our reduced nicotine tobacco plants and biosynthesis processes, in fact, a moat that Big Tobacco has said would take decades and $20 billion to replicate, we are very well positioned to consider licensing our technology to those who want to join us in the fight to reduce the harm caused by smoking. But it just doesn't stop there. I also want to acknowledge the increased momentum for the proposed menthol ban in combustible nicotine cigarettes, policy that could leave our reduced nicotine cigarette as the only authorized menthol cigarette on the market as a critical off-ramp to current menthol smokers. The FDA is moving swiftly and has already sent a proposed rule to prohibit menthol cigarettes to the OMB. Whether you think about the $80 billion U.S. market or the $800 billion global market, where we are also moving ahead with our first international sales by shipping to South Korea later this month, just capturing even a few points of market share over whatever timeframe you want to use as transformative to 22nd century. I'll stop here and let Mike fill in some of the details on our pilot program. Then I'll briefly discuss our hemp cannabis and hops franchise actions with you. But I cannot be more excited about 2022 and the future for 22nd century.
spk02: Mike?
spk07: Thanks, Jim. And hello, everyone. Turning to slide five, the news we were all waiting for came through on December 23rd when the FDA granted its first MRTP authorization for a combustible tobacco product for our VLN King and VLN Menthol King reduced nicotine content cigarettes. FDA granted all of our requested claims, including 95% less nicotine, helps reduce your nicotine consumption, and greatly reduces your nicotine consumption. The FDA also took the extraordinary step of granting us an additional unrequested claim of helps you smoke less and requiring that we include it on every pack of VLN and on every advertisement to tell adult smokers exactly what VLN is for and how it can help them. Take a moment to think about that. The FDA has required us to tell smokers that VLN is a cigarette that helps you smoke less. We thank the FDA for being so forward-thinking and supportive of the work we are doing. I also want to give some credit where it's also due. If you take a close look at our MRTP application, you'll see that this claim was included in our supporting studies. While our world-class regulatory team took a conservative approach in requesting the claims that we did, our team also knew that FDA would review all of the data and might grant us additional claims that we had not requested. And that's exactly what they did here in granting us the helps you smoke less claim. And we could not be happier with the outcome. I want to publicly congratulate and thank our entire regulatory team for an amazing victory. This enormous win demonstrates not only how strong the science is behind our product, but also how our products are indeed the cornerstone of FDA's tobacco policy plans. We believe our MRTP authorization is underpinned by an important acknowledgement. The smoking cessation tools available to smokers today are not enough. whether that's nicotine patches and gums, prescription drugs, or even other nicotine products like e-cigarettes and smokeless tobacco. This is why there are still 34 million smokers in the U.S. and 1 billion smokers around the world. And this is why even though three-quarters of smokers want to quit, very few actually succeed even after multiple quit attempts. Addiction to nicotine is the primary reason that people smoke. VLN reduces smokers' exposure to and consumption of nicotine to non-addictive levels that satisfy the urge to smoke while helping smokers to smoke less. Contrary to the claims of many people connected to the tobacco and nicotine industry, reducing nicotine to these very low levels does not result in smokers smoking more. Let's be clear. The independent clinical science shows that our approach delinks nicotine from smoking, leading to a reduction in smoking. 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, we believe VLN will be the most disruptive new tobacco product to come to market in decades. Moving to slide six, authorization of our MRTP immediately triggered a flurry of planned activities to begin our pilot launch within 90 days. We were well prepared, but there were and are still a number of important steps to complete ahead of the launch, including state regulatory approvals, which are in process now, and finalizing plans with Circle K, our retail launch partner. Our manufacturing team is well experienced in producing reduced nicotine content cigarettes, having made millions of research cigarettes to enable independent scientists to study the potential health benefits of these products. That clinical research was a significant part of the data behind the Helps You Smoke Less claim, and it was almost entirely funded by the U.S. government. In fact, we will be shipping another order for 3 million additional research cigarettes later this month to support this continuing scientific effort. We have the best crew of machine operators and mechanics in the tobacco industry at our factory in North Carolina, and it is with a big thanks to them and our operations leadership team that we were well prepared and able to begin manufacturing VLN quickly, even with the widespread disruption of supply chains because of COVID. We celebrated together as our first of VLN cartons for the pilot launch rolled off the line in late January. To further build and diversify our commercial capabilities, we are already making additional investments to expand our manufacturing capacity, adding new people to our sales and marketing team, planting our first commercial scale crop of our non-GMO BLN tobacco varieties, which is our largest planting of BLN tobacco ever, and expanding our growing program to the southern hemisphere, which has provided us with year-round growing capabilities and the ability to rapidly scale our VLN tobacco supply post-pilot. A big shout-out here to our LEAF team for all of the amazing... You might recall we invested in our own nicotine content measurement capabilities last year. an investment that has already paid off as we brought in this year's VLN crop and started VLN cigarette production. We are avoiding tens of thousands of dollars of third-party testing lab fees, and we are also able to do this testing ourselves with much higher levels of accuracy and quality than any of the third-party testing labs. In fact, we think we may have even found a new business opportunity. Kudos to our QA team. On slide seven, choosing Chicago for our pilot launch was attractive for many reasons. Chicago has a diverse population that will help us optimize our marketing for the many demographic and psychographic segments of the adult smoker population who we expect will find VLN to be highly appealing. By the numbers, Illinois ranks as the second most expensive cigarette market in the U.S. at retail, with one of the highest smoking rates among high price markets. as well as a large menthol segment. Chicago is the third largest city in the US with a smoking rate of almost 13%, which is only slightly less than the national average of 15%. Moving now to slide eight, I'd like to introduce you to our pilot partner, Circle K, which is a name I'm sure many of you know. Circle K is the second largest convenience store chain in the US with more than 7,000 stores. Our sales and marketing team has worked with Circle K to identify more than 150 metro area stores for the pilot, which are selling in excess of 10 million packs of cigarettes per year. We selected these stores with Circle K as the best for the type of testing and research that we have planned for the pilot. VLN will be on those stores' shelves later this month with a premium position alongside Marlboro and Newport. This is a truly stellar partnership, and we were thrilled to work with Circle K on this launch to achieve our shared mission to reduce the harm caused by smoking. We want adult smokers to know that for the first time they have a non-addictive tobacco cigarette option, one that can truly help them smoke less. I won't share many of the details right now for competitive reasons, but be assured that we have built a very impressive marketing program that will introduce VLN to hundreds of thousands of adult smokers across Chicago in the coming months. Coming out of the pilot, we will have the data needed to maximize our marketing ROI and the understanding of how smokers are using VLN so that we can move towards a national launch with confidence. We are already in discussions to broaden our trade partnerships so that we can get VLN into the hands of as many adult smokers as possible at that point. By focusing on what we can test and learn now in the pilot, when we scale VLN nationally and globally, we will be able to make the smartest marketing investments and build optimal partnerships with those in the trade and broader industry, like Circle K, who share our mission and desire to help adult smokers. VLN's appeal is far broader than just the U.S. market, as noted on slide nine. This month, we're moving forward with the first of several international market launches. We have identified South Korea as our first international market, where the smoking rate is high for a developed nation, especially among men, where approximately one in three are smokers. VLN is very well aligned with the government's efforts there to reduce smoking. South Korea is a premium price market, with a strong interest from smokers in innovative tobacco products. We expect VLN will be very well received by smokers there. More generally, we have been and will continue to target markets where, like South Korea, regulations allow us to quickly go to market with compelling MRTP-type claims. Also, now that we have the MRTP in hand, we will leverage that FDA authorization as a highly credible proof point in our discussions with regulators in countries where governmental approvals will be required to launch VLN with claims. I'd like to take a moment here to thank our sales and marketing team for their tireless efforts to build these partnerships in South Korea, Chicago, and elsewhere to create a launch platform for VLN. It's fantastic to see the many months of hard work and planning now coming to fruition as we look to finally launch VLN in just a matter of weeks. Advancing to slide 10, authorization of our MRTP and additional FDA actions on its proposed menthol ban indicate that FDA is actively moving ahead with its tobacco policy efforts, which includes a product standard to reduce nicotine in all cigarettes to a non-addictive level, a level already achieved by VLN. Late last week, the agency sent their proposed menthol product standard to the Office of Management and Budget at the White House, a key step in the rulemaking process. The science shows that removing menthol and capping nicotine in highly addictive cigarettes will help smokers to more easily quit nicotine altogether or help them migrate to less toxic products if they can't or won't quit. FDA has reiterated many times recently that there is adequate data to support several findings about the harm caused by menthol cigarettes, including that menthol increases the likelihood of regular smoking and that menthol makes quitting more difficult. But a total ban of menthol cigarettes could have negative consequences by possibly driving adult smokers to illicit markets and adulterated products. By authorizing our MRTP, FDA has already given adult smokers, including menthol smokers, a tool to satisfy the urge to smoke while allowing them to break away from nicotine. In its press release authorizing our MRTP, FDA said, and I quote, in reaching today's determination, the FDA considered both the current legal status of menthol cigarettes and the available science demonstrating that These particular products could help addicted cigarette smokers reduce their nicotine consumption and the number of cigarettes they smoke per day. The FDA is committed to moving forward with the rulemaking process to ban menthol as a characterizing flavor in cigarettes and all characterizing flavors in cigars and remains on track to issue proposed rules in the spring of 2022, end quote. We believe that under such a menthol ban, our products can provide a critical off-ramp for menthol smokers, and we believe we could have the only menthol cigarette on the market at that time. We view this as good evidence-based public health policy, well supported by the scientific research, and we believe this will be the ultimate direction FDA takes as it continues to advance its mission to reduce the harm caused by tobacco use. As Mr. Mitch Zeller, the director of the Center for Tobacco Products at the FDA, looks to retirement in April after a long and accomplished career in public service, we thank him for his leadership and tireless devotion to the cause of helping smokers. We also congratulate Dr. Robert Califf on his confirmation as FDA commissioner. Dr. Califf, who is a cardiologist and knows firsthand the terrible toll of smoking, has been clear about the importance of addressing the harms caused by smoking and the critical role that reducing nicotine in cigarettes can play in that effort. We look forward to continuing our work alongside him and all of the public servants at FDA. Wrapping up, we're incredibly excited to finally bring VLN to market and highly confident in its appeal to smokers. It's a potential to disrupt the tobacco market and its ability to reduce the harm caused by smoking. I thank you for your time today and for your confidence in 22nd Century. I'll now pass you back to Jim for an update on our hemp cannabis and hops franchises. Jim?
spk05: Thanks, Mike. Today we've focused on tobacco for obvious reasons, because it's been an incredible few months in tobacco, to say the least. We believe this is only the starting line, and the best is still ahead. Let's turn to slide 12. I first want to make it very clear that we are now a diverse and balanced company with two additional franchises full of opportunity. I also want to make it very clear that I'm absolutely committed to all three franchises. Shifting to a brief update on these before we open up the Q&A lines, we reported some excellent news in hemp cannabis as we build the pathway forward in that growing market opportunity. From the very beginning, our mission in hemp cannabis has been to maximize the consumer experience and confidence by developing scalable disruptive plant lines that exhibit the stable genetic profiles, predictable agronomic traits, and highly valuable yield profiles necessary to fully commercialize the industry. We took a major step forward in this goal with our first harvest in the fourth quarter from our first lines of high CBD and high CBG with low THC plants. Half of our biomass went to customers, and half went into production of a high-purity distillate utilizing a new purification technology. We also delivered our first IP agreement, a three-way deal with Aurora Cannabis and Kronos Group for the use of our shared Anandia IP that addresses the production of biosynthetic cannabinoids. This gives 22nd Century a strong position in both disruptive natural and biosynthetic technologies. We are accelerating additional lines featuring important traits desired by our industry partners and greatly increasing our cultivation for the 2022 and 2023 growing seasons as we move our business into scale. I'll go into more in a moment, but we also announced a major breakthrough in plant transformation with the first expression of inserted genes via gene editing. This gives us greater capacity as it validates another tool alongside our existing molecular breeding tool sets to develop highly targeted plants tailored to commercial needs in far shorter time frame and less costly method than traditional breeding. We recently secured organic certification for needle rock farms, facilitating a premium opportunity for plants and biomass cultivated there. We're also ramping up our year-round growing capabilities in tobacco and hemp cannabis, dramatically expanding our capabilities and reach. Slide 13 highlights the major breakthrough and trade secret that will expand our bandwidth in plant development. This is leading-edge, successful expressions of plant transformation in hemp cannabis, which greatly expands our bandwidth to create and commercialize highly tailored plant lines. Plant transformation is a means of inserting highly targeted DNA-controlling desirable traits from one plant into the genome of a high-value target crop. Using plant transformation in this way can improve commercially critical traits in hemp cannabis, such as cannabinoid content, yield, flavor, aroma, physical characteristics of the plant, disease resistance, stress tolerance, and nutrient production even faster than we can now. Transformation is often considered the holy grail of plant science, enabling the targeting and editing of specific genes leading directly to expression of a desired trait. This breakthrough is facilitated by our extensive library of hemp and cannabis germplasm, genome database, marker-assisted rapid cycle molecular breeding, and mutagenesis, all supported by key genes, world-class bioinformatics, and genome sequencing capabilities. These tools cut our already rapid development cycle time even further and are typically only used by the largest plant science companies such as Bayer, Monsanto, Corteva, and Syngenta. Now, they will be used by 22nd century to create valuable proprietary hemp cannabis plants at a fraction of the time and cost of traditional breeding methods. And that brings me to our newest franchise, the global hops market on slide 15. We'll talk more as the year unfolds, but we're building out our foundation in this broad and valuable global market, which is heavily centered on Europe and the U.S., Importantly, we were able to deploy much of our IP and capabilities from hemp cannabis directly into this closely related alkaloid plant family. The global hops market is still heavily reliant on traditional breeding techniques, which are high cost, high risk, and typically 10 years plus in development. We can greatly reduce this by using our advanced breeding capabilities, giving a major competitive cost and speed to market advantage to hops companies that work with us. Stay tuned as we'll detail more of this market as we move ahead. I'm going to pass you over to Rich to review our financial performance.
spk02: Thanks, Jim, and good morning to everyone. Starting off on slide 17 with the quarterly results, net sales increased by 9% to $8 million. The three months ended December 31, 2021. Through a combination of higher volume and price increases in our contract manufacturing cigar and cigarette business, We continue to generate new business and orders with additional customers onboarded during the second half of 2021 and are now manufacturing VLN cigarettes for our pilot launch in both the U.S. and international markets. Revenue and costs in the fourth quarter were impacted by certain supply chain shortages that are affecting our industry, causing some shipment timing to shift. But our team is managing through these very well with solid results. Gross profit margin for the fourth quarter declined year over year to 4.9% compared with 8% due to product mix, supply chain delays, and the absence of a favorable one-time boost to volumes that benefited the prior year fourth quarter. Every incremental dollar of CMO contribution helps cover our operating overhead and fund growth investment rather than utilizing our balance sheet cash to do so. Our investment in the CMO business is now paying dividends as we were able to promptly commence VLN manufacturing as part of our 90-day pilot market launch effort. VLN will be well positioned as a premium brand, which will command higher revenue and therefore higher margin, a net positive to our revenue and gross margin profile as we increase VLN volumes through the pilot and into our national and OUS launches. Some of that benefit will be reinvested to initially fund launch activities, but in the midterm, it will generate much greater revenue and margin per carton than our CMO business. The cost production taxes and other expenses that go into the production of VLN will not be notably different from our contract manufacturing business today, which means that those additional dollars flow directly through as incremental cash for future growth and investments. Total operating expenses for the fourth quarter increased by 2.6 million, driven by 2.9 million of higher SG&A expenses, partially offset by a year-over-year reduction in R&D expenses of 0.3 million. The increase in SG&A included higher personnel, insurance, investor relations, corporate communications expense, strategic consulting expense, IP and license fees, and marketing costs as we move forward. toward market readiness in both tobacco and hemp cannabis. For the fourth quarter, operating loss was $9 million, reflecting an increase of $2.8 million over the fourth quarter operating loss of $6.2 million in the prior year. Higher SG&A spending of $2.9 million combined with reduced gross margin due to product mix combined to drive a higher 2021 fourth quarter operating loss. Other income expense for the fourth quarter of 2021 includes a non-cash unrealized loss of $5 million related to fair value adjustments for our investment in Aurora Cannabis stock warrants and Panacea Life Sciences Common Stock. Net loss for the fourth quarter was $14 million compared with $6.4 million in the prior year's fourth quarter. The $7.6 million increase in net loss was driven primarily by the $5.1 million unrealized loss and a $2.9 million increase in SG&A for the fourth quarter. Shifting to full-year results on slide 18, our revenue increased 10 percent for the year to $30.9 million, driving a gross profit of $2.1 million, or 6.7 percent, compared with a gross margin of 5.1 percent in 2020 for the full year. Total operating expenses for 2021 increased by $9.9 million to $30.5 million, driven primarily by $10.9 million in higher SG&A expense, partially offset by year-over-year reduction in R&D expenses of $0.9 million. The increase in SG&A included higher personnel, insurance, investor relations and corporate communications expense, strategic consulting expense, IP and license fees, and marketing costs as we move toward market readiness in both tobacco and hemp cannabis. Operating loss increased to $9.2 million by $9.2 million to $28.4 million for 2021 compared with $19.2 million in 2020, largely reflecting our investment decisions and growing our business across all three plant franchises. But in particular, our preparations for VLN launch, also included in our operating costs, is non-cash stock-based compensation totaling approximately $4 million for the full year 2021. Other income expense for 2021 of 4.2 million includes non-cash unrealized net loss of 4.4 million for the year related to the fair value adjustments of our investments in Aurora Cannabis stock warrants and Panacea Life Sciences common stock. I would also note our net loss of 32.6 million in 2021 increased from 19.7 million in 2020. Of that, 12.9 million increased 10.9 million was driven by higher SG&A expense, which includes 4 million of non-cash stock-based compensation. Also impacting 2021 was the net 4.4 million increase related to non-cash expenses related to the decline in valuation of our Aurora Cannabis stock warrants and Panacea common stock investment. Our press release provides an adjusted EBITDA measure that we believe is a useful tool in evaluating the operating performance for our business on an ongoing basis, removing the effect of one-time and non-cash expenses. On an adjusted EBITDA basis, we reported a net loss of $23.1 million in 2021 versus $16 million in 2022. Turning to our strength and balance sheet on slide 19, With $48.7 million of cash at the end of the year, we have the resources to fund a significant runway for the commercial launch and growth of our reduced nicotine tobacco and hemp cannabis franchises. I want to reiterate that our launch strategies emphasize using current resources and leveraging our partnership opportunities to drive scale rather than focusing on a high-cost launch strategy that would require additional capital from the outset. I also want to emphasize that our balance sheet is adequate for our launch plans, which emphasize that partner-driven marketing rather than costly, time-consuming internal branding team scale-up. This is tailored to our unique VLN product claims as well as the distinct regulatory environment around tobacco products. I'll now pass you back to Jim.
spk05: Thanks, Rich. The summary on slide 20 showcases just how transformative the past few months have been and where we are going in 2022. We're going to market in the U.S. with our VLN reduced nicotine cigarettes, along with a major claim of helps you smoke less. We are full speed ahead on our pilot launch in Chicago with Circle K, the first of what we believe could be several major national C stores and pharmacy chains, placing our VLN products in front of customers and launching in our first international market, South Korea. Proposed menthol ban is gaining traction as it should and may well leave us with the only combustible menthol cigarette in the market as a tool to help smokers transition away from these products. Our hemp cannabis franchise is generating revenue from licensing and specialty biomass sales with even more lines and volume coming in 2022 and 2023. We achieved a major industry breakthrough and plant transformation that broadens our capabilities. In hops, We're advancing rapidly to deploy our alkaloid knowledge in this large market for the benefit of our partners and look forward to many actions in the year ahead to make this market a reality. And we have the balance sheet strength to fuel a full national launch and execute on these deliverables through a capital-light, partner-driven strategy, taking us to full U.S. and international launches in our tobacco franchise, plus global leadership in the expanding hemp, cannabis, and hops science markets. As we go into Q&A, I want to point out the advertisement on slide 21, which is now running in the New York Times. This is a good example of the advertising limitations of tobacco, which is one of the most heavily regulated products on the market today. We can't directly promote our one-of-a-kind product. We will promote our mission in tobacco harm reduction and our technology that can positively improve public health in the U.S. and worldwide. We will use all of our tools to make people aware of our exciting new VLN product to help smokers smoke less and get this product in as many hands of smokers as possible as fast as possible. And with that, operator, please open the calls for questions.
spk03: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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 store keys. One moment, please, while we poll for questions. Our first question comes from Vivian Azer with Cowan & Company. Please proceed with your question.
spk09: Hi, good morning.
spk02: Good morning, Vivian.
spk09: So exciting times in terms of the pilot rollout. I know that's, you know, still underway. But, you know, given kind of the nature of this product launch, is there anything that you can offer just in terms of helping us from a modeling perspective and thinking about, you know, the ramp from a top line rollout for Illinois? And then I'll follow up with a margin question. Thank you.
spk07: Good morning, Vivian. This is Mike. Thanks for the question. In terms of its size, it's relatively modest. We're working through 150 stores. They sell about 10 million packs a year. So as far as revenue ramp goes, really the important information for modeling purposes will likely come out of the end of the pilot.
spk09: Okay, understood, just in terms of assessing velocity.
spk07: Yeah, assessing velocity as well as anticipated total market share.
spk09: Got it. Okay, that's helpful. And then you call out in your press release that you would expect margins to be comparable to the premium price or consistent with the premium price positioning. for VLN, but you call out a lot of marketing efforts. So I'm just trying to kind of reconcile that because it probably is not reasonable at all to use perhaps like Altria's smokable segment as an EBIT margin benchmark, but how should we think about the magnitude of that investment spending? Thank you.
spk07: Yeah, that's a great question. I think you know, the premium margins we believe will, uh, be where this product, uh, you know, we'll deliver in the longer term, but in, in the near term, uh, as we launched the product, we'll be in certainly in an investment phase. And, um, so a lot of those profits will be put back into, into the marketing. Um, but we will, you know, cross a point or across the line there where, um, you know, margin will accrue, and we're designing the marketing programs, designing our launch strategy and the marketing strategy with the ultimate objective of delivering premium margins.
spk09: Understood. That's helpful. Thank you. And then just moving on to the hemp cannabis side of the business, great to see that you generated some revenues in the quarter last It was pretty materially below what we were anticipating, but, again, really hard to have any kind of high conviction around our estimates there. So any incremental detail you guys could offer around the monetization of the IP sharing deal with Kronos? That might be helpful. Thank you.
spk05: Yeah, Vivian, great question. I'll take that. I think, well, two important points. I'm not quite at liberty to disclose all of the dollar amounts involved with Kronos as part of the agreement. But I will say that the initial revenue stream in December was just that there are additional payments tied into those deals that come in in Q1 and Q2 as well on an ongoing basis. So we're going to get line of sight to that most likely at a later quarterly call. But they were off to a good start there. even though the initial payments in December were the first ones. And again, all the agreements, the licensing deal has milestone payments, additional biomass sales, and of course, selling it the isolate at the higher premiums were still tabulating. So we had a good run and look forward to ramping up here as the year progresses with a much, much larger growth season. than last year, and then also hitting additional milestone payments from the licensing revenue as the year progresses.
spk09: Understood, and I apologize for jumping back and forth, but I do have one last one on the VLN side of the business, please. In terms of the South Korea launch, can you offer any detail on who you're partnering with from a distribution standpoint? Thanks.
spk07: Yeah, the company we're working with is a new company that's been formed specifically to commercialize VLN.
spk09: Oh, okay. So they don't have existing route-to-market capabilities?
spk07: They have existing relationships with the channels and media and government, so we think they're a very strong partner.
spk09: Okay, understood. I'll have that back in the queue. Thank you.
spk04: Thank you.
spk03: Our next question is from Jim McRae with Dawson James. Please proceed with your question.
spk06: Thank you. Good morning. You characterized the marketing as partner-driven marketing. I was hoping you could elaborate on the division of labor or tasks that you've agreed to with Circle K. So what is it that they're driving in this partner-driven marketing, and what is it that you're responsible for?
spk07: Yeah, Jim, thanks for the question. Good morning. So the tobacco space, as you know, is highly regulated. A lot of the communication with happens at the point of sale. And many of these retailers, especially chain retailers like Circle K, have established programs to market to consumers, and not just in the tobacco space, but across all of the products that they sell. And so we're taking advantage of and able to access and operate in in these programs with BLN. So that's the partner component of it, but we are, of course, designing the content that goes into the programs, making the decisions about how those programs are used, and then also running a number of programs that are outside of the partners' programs to help drive traffic to Circle K and also to increase smokers' awareness of and understanding of the whole proposition underlying VLN, which is that it's a 95% less nicotine cigarette that helps them smoke less. So there will be a number of programs that are run independently of Circle K that will accomplish those objectives.
spk06: And do you think that the additional partners that you've referred to a couple of times will be similar in that partner-driven marketing, or will the nature of those new partners require more or less effort on your part?
spk07: Most chains do have programs like Circle Ks. They may not be exactly the same. But most chains, you know, that are competitive in the tobacco space, which is all of the national chains and most of the regional chains do have these sort of programs. So it will be a similar sort of effort, which is why this is a good pilot for us.
spk06: And is the timing of the additional partners, is that – going to be coincident with the pilot and rollout at Circle K, or is it going to be sequential, that is Circle K first and then Partner B second and then Partner C third, et cetera?
spk07: We'll be working exclusively with Circle K during the pilot, and then we'll make the determination about how to sequence other partners as we move through the pilot and
spk06: firm up the the national launch plans okay that's helpful and then lastly on south korea um i just want to make sure i understand it so this is an existing commercial entity or because it kind of sounds like it kind of sounds like it i thought you said both things that it's new but it's but it's established so it is this a new commercial entity or is this a an established commercial entity, but it's, it's, this is its first entree into the cigarette market.
spk07: This is a new commercial entity entity that's, um, owned and managed by, um, several individuals, um, that are in the, that are Korean South Korean nationals that live and work, uh, in South Korea that come from various industries that are related to, um, to media, uh, and tobacco retail channels, uh, and have also worked, uh, with regulators on, on, um, on regulated products in, in South Korea. So this is a group of people who, um, who see the potential for VLN to help their, their, uh, you know, their, their fellow citizens in South Korea and, uh, are investing their own time and money, uh, in forming a company to, to bring VLN to market there. And they believe that they have the, and we believe that they have the capabilities and the network to, uh, to do this successfully.
spk06: And is 22nd century an investor in that entity or obligated to become an investor or have the option to become an investor?
spk07: We are not an investor. There is an opportunity to become one, but no obligation to.
spk06: All right. That's it for me. Thanks a lot, and good luck with everything.
spk07: Thank you, Jim.
spk03: Our next question is from Aaron Gray with Alliance Global Partners. Please proceed with your question.
spk01: Thanks for the question. Just one for me regarding VLN and the pilot program in Chicago with Circle K. You guys talked about the shelf positioning, you know, premium right below Marlboro that you'll be testing out. I just wanted to know in terms of what you guys are going to do in terms of maybe putting it in different shelf positioning, maybe not so premium as well as marketing in some stores versus others just to kind of better extrapolate how the product might perform. on a national level where you might not have the same type of partnership with Circle K? Thank you.
spk07: Yeah, good morning, Aaron. Thanks for the question. It's a great question. There are at least a dozen different marketing programs that will be operating and testing as part of this pilot. We will be doing A-B testing on each of them so that we can understand what works and what doesn't work in, in every potential situation that we may face in a, in a national launch. So yes, we will be in, in some stores, you know, using that premium positioning and then other stores you know, potentially even not, you know, having it on the shelf, but putting it behind the counter where it's not visible, but still supported by POS. So, so there are a lot of a lot of, a lot of variables there and we'll be testing all of them or as many of them as we possibly can during the pilot.
spk01: Okay. All right. Great. Thanks for the call.
spk03: Our next question is from Brian Wright with Roth Capital Partners. Please proceed with your question.
spk08: Thanks. Good morning. On South Korea, could you give us a little bit more info to kind of figure out the market opportunity there? If one-third of adult men in Korea are smokers, are we talking about 20 million kind of individuals? And then what's the kind of annual sales that would be associated with that?
spk07: Yeah, you know, I don't have the total number of smokers listed. at hand but i can definitely get you that that information um the um you know projection it's hard to also to project right now since um chicago and south korea will be the first markets that were that were launching vln but certainly um we'll be paying close attention to the outcomes and you know both of those places as we form our our expansion plans both across the us and globally
spk08: Okay, I'll follow up with you on kind of the TAM and South Korea then. And then I was just kind of curious if you could help us just better understand a little bit on the breakthrough with key gene and just kind of, you know, what are we specifically kind of targeting or what part of the genome that was targeted that there was success with so that we could just have a little bit more kind of a better understanding of that because it sounds, you know, it sounds, you know, it sounds significant.
spk05: Yeah, Brian, great question. I'll try to answer that. This is, you know, this is really high technology and quite frankly, we, it was challenging to communicate this because it is such, you know, so advanced and so leading edge. But I think the better way to look at it is that, you know, the focus on that keyword transformation, you know, to date in, you know, in crossbreeding, you don't transform the plant per se. Even with the, you know, the tools as we built them with key gene in the gene editing side, you began certainly to modulate them. But this is, you know, this is much more sophisticated in a plant transformation itself. which I think gets lost in the technology. We're going to issue a much more detailed technological paper on it so that we can really drill into it. But where we have focused our initial efforts is into the broadest need for the plant in order to truly transform it. And the best example I can give you is taking the low THC-based genomes and and advancing that into transformation. There's multiple reports coming out about crops being pulled up or burned because of them going hot in the field. These are hemp plants. And I've heard numbers as high as sometimes 40 plus percent of these hemp plants are being burned in the field as DEA catches up. We have a solution for that. And part of this transformative breakthrough is to take the genome that really modulates transformatively the low THC genome in the plant and can take that forward. We already were onto that with some of our CBD and CBG lines in Colorado. This focus on the transformative technology is going to be focused on this to really go after the broadest issue, which are these hemp lines going hot in the field. More of them would be burned, quite frankly. I just don't think the DEA has the resources to catch up with everybody but we have plant strains far along that can drive a solution towards this. And the first focus is on the transformation of the plant, which is the next evolution of our science is on in that area. There's others behind it around disease resistance. You start to take a look at, you know, those types of opportunities and then, you know, the cannabinoid content itself. So that's, you know, That's kind of a broad summary of where we're focusing our initial efforts and the criticality of that word transformation is really what people need to hone in on. We've modulated plants, which has been very successful on a two-year time period. Now we can actually transform the plant itself for much more stable and much more faster strain development. And where we're focusing our efforts is in one area, in the low THC, to rectify what's going on out there, which is just a tremendous amount of products being burned because they've gone hot in the growth season.
spk08: And then is it safe to say that this would be characterized as a GMO product, or is it like you do it first with introducing from other plant genes, and then that's the first step, and then the second step is using gene editing for the plant's natural capabilities to produce something like that? Or just kind of curious as to how that develops over time? Yeah.
spk05: It's non-GMO, absolutely non-GMO, and the sequence of events in many cases you just described is spot on. So you start out with these gene editing tools that we developed in partnership with Keygene, and we own the IP around it with regards to cannabis, and then you take that further in the plant strain itself to literally transform it at that point. All of these tools...
spk04: our absolutely non-GMO approach. Great. Perfect. Thank you so much. Sure. Thank you. Great question.
spk03: We've reached the end of the question and answer session. I would now like to turn the call back over to Jim Misch for closing comments.
spk05: Thank you. And thanks to everyone for joining us today and the great questions. Appreciate them. And stay tuned for our next updates as we continue to execute on our plans. We're laser focused on that. continue to deliver results, particularly on our USVLN launch. And we'll be presenting at the upcoming Roth Conference in March, and hope to see many of you there. And also, we look forward to our next update as we join you. Thank you very much, and have a great day.
spk03: Thank you. This does conclude today's call. You may now disconnect your lines, and we thank you for your participation.
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