Q4 2021 22nd Century Group Inc Earnings Call
[music].
Greetings and welcome to the 20 <unk> century group's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen only mode and the floor will be opened for questions. Following management's prepared remarks. As a reminder, today's conference is being recorded at this time I'd like to turn the call over to make well.
Director of Communications and Investor Relations. Please begin.
Thank you Rob.
And welcome to 20, <unk> Centurys fourth quarter and full year earnings conference call joining.
Joining me today are Jim mesh, our Chief Executive Officer, Mike Starker, 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 investors section of our website at XXII century dot com under the events somehow.
We hope these slides will serve as a framework for management's prepared remark 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 noncash and nonoperating expenses for more details on these measures. Please refer to our press release issued earn.
Earlier today and with that I'll turn the call over to Jim beginning from slide three.
Thanks, Nate and good morning, everyone.
Hopes you smoke less.
This was the shot heard around the tobacco World on December 23rd.
The FDA authorized the first and only <unk> ever given to combustible cigarettes.
Our <unk> products.
And then added the <unk>.
Clinical evidence base claim helps you smoke less as a requirement on every single package.
These authorizations and claims are all exclusive to NASDAQ traded <unk> II.
Let me just unpack that for a second.
After 20 years in development.
10 years in clinical trials.
Leading even pharmaceutical timelines.
Chose to specifically highlight and its authorization that the extensive scientific data shows deal and reduced nicotine content cigarettes hopes you smoke less.
The addition of the helps you smoke less claim it 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 RVO in 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.
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 dollar U S tobacco market and.
In the almost 800 billion dollar 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.
Driving that effort is an incredible <unk> 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 Zealand 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 the product to help from smoke less.
From there we have the opportunity to rollout more than 7000 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 vlan.
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 glass.
With hundreds of issued pending and licensed patents and an IP moat around our reduced nicotine tobacco plants and biosynthesis processes.
In fact, our moat the big tobacco has said would take decades and $20 billion to replicate.
We are very well positioned to consider licensing our technology.
The joined us in the fight to reduce the harm caused by smoking.
But it just doesn't stop there.
I also wanted to acknowledge the increased momentum for the proposed menthol ban in combustible nicotine cigarettes policy that could leave our reduced nicotine cigarette is the only authorized menthol cigarette on the market.
As a critical off ramp to current menthol smokers.
The FDA is moving swiftly and is already center proposal rule to prohibit menthol cigarettes to the OMB.
Where do 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 20 <unk> 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 candidates and hops franchise actions with you.
I cannot be more excited about 2022.
And the future for 22nd century.
Mike.
Thanks, Jim and Hello, everyone.
Turning to slide five the news we were all waiting for came through on December 23rd when.
When the FDA granted its first <unk> authorization for our combustible tobacco product for our <unk> and King and BLA in 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 glass and requiring that we included on every pack of Neil N and on every advertisement to tell adult smokers exactly what <unk> for and how it can help them take.
A moment to think about that the FDA has required us to tell smokers that deal and as 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 do.
You take a close look at our <unk> application you will see that this claim was included in our supporting studies.
While our world class regulatory team took a conservative approach and requesting the claims that we did our team also knew that FDA would review all of the data it might grant us additional claims that we had not requested.
And that's exactly what they did here in granting us to help you smoke less claim and we cannot 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 R&D the cornerstone of Fda's tobacco policy plants.
We believe our <unk> authorization is underpinned by an important acknowledgment the smoking cessation tools available to smokers today are not enough.
Thats 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.
Addiction to nicotine is the primary reason that people smoke vlan reduces smokers exposure to and consumption of nicotine to non addictive levels at service satisfied the urge to smoke.
Helping smokers to smoke less onshore.
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 the links nicotine from smoking leading to a reduction in smoking.
The airline is destined to capture the attention and imagination of the hundreds of millions of adult smokers around the world who want to break the change of their addiction to smoking.
And because of that we believe <unk> will be the most disruptive new tobacco product to come to market in decades.
Moving to slide six authorization of our MLR TP 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 science 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 deal and quickly even with the widespread disruption of supply chain because of Covid.
We celebrated together as our first vlan cartons for the pilot launch rolled off the line in late January .
To further build and diversify our commercial capabilities.
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 BLM tobacco varieties, which is our largest planting a BLM tobacco ever.
Expanding our growing program to the southern hemisphere.
With <unk>.
With year round growing capabilities and the ability to rapidly scale, our <unk> 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 and investment that has already paid off as we brought in this year's BLA crop and started vlan cigarette production.
We are avoiding tens of thousands of dollars of third party testing lab fees and.
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.
We think we may have even found a new business opportunity kudos to our QA team.
On slide seven choosing Chicago for a part of our pilot launch was attractive for many reasons Chicago has a diverse population that will help us optimize our marketing for the many demographic psychographic segments of the adult smoker population, who we expect will find <unk> to be highly appealing.
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 priced markets as well as a large menthol SYGMA segment.
Chicago is the third largest city in the U S 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 as the name I'm sure. Many of you know circle K is the second largest convenience store chain in the U S with more than 7000 stores.
Our sales and marketing team has worked with circle K to identify more than 150 Metro area stores for the pilot.
But you 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.
<unk> will be on those stores shelves later this month with a premium position alongside Marlboro in 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 we'll introduce feel in two hundreds of.
<unk> 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 the L. N. So that we can move towards a national launch with confidence.
We're already in discussions to broaden our trade partnerships. So that we can get <unk> 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 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 Michigan and desire to help adult smokers.
Neil <unk> 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 were approximately one in three are smokers.
<unk> is very well aligned with the government's efforts there to reduce smoking.
South Korea is a premium priced market with a strong interest from smokers in innovative tobacco products, we expect <unk> 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 and marquee P type claims.
Now that we have the <unk> TP 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 <unk> with claims.
I'd like to take a moment here to thank our sales and marketing team at a time.
Tieless efforts to build these partnerships in South Korea, Chicago and elsewhere to create a launch platform for E. L F.
It's fantastic to see the many months of hard work and planning now coming to fruition as we look to finally launch dealing in just a matter of weeks.
Advancing to slide 10.
Authorization of our MLR TEP 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 non addictive level a level already achieved by V. L N 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.
Science shows that removing menthol and capping nicotine and highly addictive cigarettes will help smokers to more easily quick 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 MRM TP FDA has already given adult smokers, including menthol smokers.
To satisfy the urge to smoke, while allowing them to break away from nicotine.
In its press release authorizing our MRM TP, FDA said and I quote in reaching todays determination. The FDA considered both the current legal status of menthol cigarettes, and the available science demonstrating that these particular products.
But help addictive cigarette smokers reduce their nicotine consumption and a number of cigarettes smoked per day.
The FDA is committed to moving forward with the rulemaking process to ban menthol as characterized in flavor in cigarettes, and all characterizing flavors in cigars and remains on track to issue proposed rules in the spring of 2022 and quote.
We believe that under such a menthol ban our product 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 is 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 Miss 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 Calif when.
It is not as confirmation as FDA Commissioner Dr. Kalif, who is a cardiologist and knows firsthand the terrible toll of smoking has been clear about the importance of addressing the harm 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 are incredibly excited to finally bring <unk> to market and highly confident in its appeal to smokers. It has a potential to disrupt the tobacco market and its ability to reduce the harm caused by smoking.
Thank you for your time today and for your confidence in 20, <unk> century, I'll now pass you back to Jim for an update on our hemp cannabis and hops franchises Jim.
Thanks, Mike.
Today, we focused on tobacco for obvious reasons, because it's been an incredible few months and tobacco to say the least we.
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 to Q&A lines, We reported some excellent news on hemp cannabis as we build a pathway forward in that growing market opportunity.
From the very beginning our mission and hemp cannabis has been to maximize the consumer experience and confidence by developing scalable disruptive plant lines. The exhibit stable genetic profiles predictable agronomic trades.
And highly valuable user profiles necessary to fully commercialize the industry.
It took a major step forward in the school with our first harvest in the fourth quarter from our first lines of high CBD and high CPG with low THC points.
Half of our biomass went to customers and half went into production of high purity distillate utilizing a new purification technology.
We also delivered our first IP agreement three way deal with Aurora cannabis in Kronos group.
The use of our shared and Andy IP that addresses the production of biosynthetic cannabinoids.
This gives 22nd century has strong position in both disruptive natural and biosynthetic technologies.
We're accelerating additional line 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 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 plans tailored to commercial needs and far shorter timeframe unless costly method and traditional breeding.
We recently secured organic certification for needle rock farms, facilitating a premium opportunity for plants in biomass cultivated there. We're also ramping up our year round growing capabilities in tobacco and hemp cannabis dramatically expanded our capabilities and reach.
Slide 13 highlights the major breakthrough and trade secrets that will expand our bandwidth implant development. This is leading edge successful expressions of plant transformation in hemp cannabis, which greatly expands our bandwidth to create commercialized highly tailored plant lines.
Plant transformation as a means of inserting highly targeted DNA controlling desirable trades from one plant into the genome of a high value target crop.
Using plant transformation and this way you can improve commercially critical traits in hemp cannabis such as cannabinoid content yield flavor of Roma 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 germ plasm genome database marker assisted rapid cycle molecular breeding immuno Genesis all supported by key genes World class bioinformatics and genome sequencing capabilities.
These tools cut our already rapid developments like cycle time, even further and are typically only used by the largest plant science companies such as buyer Monsanto and.
Syngenta.
Now there'll be used by 20, <unk> century to create valuable proprietary hemp cannabis plants at a fraction of the time and cost of traditional breeding methods.
That brings me to our newest franchise the global hops market on slide 15.
I'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 US 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 rely 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. The hops companies that work with us.
Stay tuned as we will detail more of this market as we move ahead.
I'll now pass you over to rich to review our financial performance.
Thanks, Jim and good morning to everyone.
Starting off on slide 17, with the quarterly results net.
Net sales increased by 9% to $8 million with three months ended December 31, 2021 through a combination of higher volume and price increases in our contract manufacturing cigar in cigarette business, we continue to generate new business and orders with additional customers on boarded during the second half of 2021.
And are now manufacturing feline cigarettes for a 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.
249% compared with 8% due to product mix shifts in product mix supply chain delays in the absence of a favorable one time boost to volumes that benefited the prior year fourth quarter.
Every incremental dollar of CMO contribution helped to cover our operating overhead and fund growth investments 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 wheel in manufacturing as part of our 90 day pilot market launch effort.
<unk> 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 BLM volumes through the pilot and into our National and O U S launches.
Some of that benefit will be reinvested to initially fund launch activities, but in the midterm that will generate much greater revenue and margin per carton, then our CMO business.
The cost of production taxes, and other expenses that go into the production of <unk> will not be notably different from our contract manufacturing business today, which means that those additional dollars flow directly through its incremental cash for future growth and investment.
Total operating expenses for the fourth quarter increased by $2 6 million driven by a $2 9 million.
By $2 9 million of higher SG&A expenses, partially offset by a year over year reduction in R&D expenses of <unk> 3 million. The increase in SG&A SG&A included higher personnel insurance Investor Relations corporate communications expense strategic consulting expense IP license fees and marketing costs.
As we move forward towards market readiness in both tobacco and <unk> candidates.
For the fourth quarter operating loss was $9 million.
<unk>, an increase of $2 $8 million over the fourth quarter operating loss of $6 2 million in the prior year.
SG&A spending of $2 9 million compared to combined with reduced gross margin due to product mix combined to drive.
Our higher 2021 fourth quarter operating loss.
Other income expense for the fourth quarter of 2021 includes the noncash unrealized loss of $5 million.
<unk> 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 to $7 6 million increase in net loss was driven primarily by the $5 1 million unrealized loss.
2.9.
$9 million increase in SG&A.
For the fourth quarter.
Turning to shifting to full year results on slide 18.
Our revenue increased 10% for the year to $30 9 million driving a gross profit of $2 1 million or six 7% compared with a gross margin of five 1% 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 $9 million.
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 forward toward market readiness in both tobacco and 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 BLA launch also included in our operating cost is noncash stock based compensation totaling approximately $4 million for the full year of 2021.
Other income expense for 2021 of $4 2 million includes noncash unrealized net loss of $4 4 million for.
For the year related to the fair value adjustments of our investments in a war Canada's 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 noncash stock based compensation.
Also impacting 2021, what's the net $4 4 million increase related to noncash expenses related to the decline in valuation of our Aurora cannabis stock warrants a panacea common stock investment.
Our press release provides an adjusted EBITA measure that we believe is a useful tool in evaluating the operating performance of our business on an ongoing basis.
Moving the effect of onetime and noncash expenses on an adjusted EBITDA basis, we reported a net loss of 20.
$23 1 million in 2021 versus 16.
In 2022.
Turning to our strengthened 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 a reduced nicotine tobacco and cannabis franchises I want to reiterate that our launch strategies emphasize using current resources and leveraging our partnership opportunities to drive <unk>.
Rather than focusing on a high cost launch strategy a strategy that would require additional capital from the outset.
I also want to emphasize that our balance sheet is adequate for our launch plans.
<unk> emphasized that partner driven marketing.
Other than costly time consuming internal branding teams scale up.
This is tailored to our unique BLM product claims as well as the distinct regulatory environment around tobacco products.
I'll now pass pass you back to Jim.
Thanks, Rich the summary on slide 20 showcases just how transformative the past few months have been and where we're going in 2022.
We're going to market in the U S with our BLA and reduced nicotine cigarettes, along with a major claim of helps you smoke less.
We're 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 <unk> products in front of customers.
And launching our first international market South Korea.
The proposed mental ban is gaining traction as it should and may well leave us with 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 an even more lines and volume coming in 2022 and 2023.
We achieved a major industry breakthrough in plant transformation that broadens our capabilities.
And ops, we're advancing rapidly to deploy our alkaloid knowledge in this large market for the benefit of our partners.
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 three capital light partner driven strategy, taking us the 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 orientations in tobacco, which is one of the most heavily regulated products on the market today.
We're can't directly promote our one of a kind product.
We will promote our mission in tobacco harm reduction and our technology that can possibly improve public health in the U S and worldwide.
We'll use all of our tools to make people aware of our exciting New Zealand product help smokers smoke less and get this product and as many hands as smokers as possible as fast as possible.
And with that operator, please open the call for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the Q4.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
My first question comes from Vivien <unk> with Cowen and company. Please proceed with your question.
Hi, good morning.
Good morning, Good morning Bill.
So exciting times in terms of the pilot rollout I know thats still underway, but.
Given kind of the nature of this product launch is there anything that you can offer in terms of helping us from a modeling perspective and thinking about the ramp from a top line.
Rollout for Illinois, and then I'll follow up with the margin question. Thank you.
Okay.
Good morning, Vivien This is Mike thanks for the question.
It's a.
In terms of its size its relatively modest we're working through 150 stores. They sell about 10 million packs a year so as far as revenue ramp goes really to the.
The important information for modeling purposes will likely come out of out of the end of the pilot.
Sure.
Okay understood just in terms of assessing velocity.
Yes, assessing velocity as well as.
Anticipated total market share.
Got it okay.
Helpful. And then you called out in your press release.
That you would expect margins to be.
Comparable to the premium price are consistent with the premium price positioning for.
Thank.
You call out a lot of marketing effort. So I'm, just trying to kind of reconcile that because.
It's probably not reasonable at all to T is perhaps like ultra and snowmobile segment is an EBIT margin benchmark, but how should we think about the magnitude of that.
Thank you.
Okay.
Yes, that's a great question I think.
The premium margins, we believe will be.
B, where this product.
We will deliver in the longer term, but in the near term as we launch the product will be in certainly in an investment phase and.
So a lot of those profits will be put back into.
Into the marketing.
But we will cross point or cross a line there were.
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.
I understood. That's helpful. Thank you and then just moving on to the cannabis side of the business great great to see that you you generated some revenues in the quarter. It was pretty materially below what we were anticipating but again, it's really hard to have any kind of.
High conviction.
Estimates there so any incremental detail you guys could offer around the monetization of the IP.
Sharing deal with Kronos and that might be helpful. Thank you.
Yes, great question I'll take that.
I think well two.
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 they were we're off to a good start there.
Even though the initial payments in December where we are the first ones that again, all the agreements the licensing deal has milestone payments.
Biomass sales and of course selling at the isolate at the at the higher premiums we're still tabulating so.
We had a good run and get.
Look forward to ramping up here and as the year progresses with a much much larger gross season.
Then last year, and then also hitting additional milestone payments from the licensing revenue as the year progresses.
Understood and I apologize for jumping back and forth, but I do have one last one on <unk>.
On the LNG side of the business. Please.
In terms of the.
The South Korea.
Yes.
Can you offer any detail on how youre partnering with from a distribution standpoint. Thanks.
Yes. It is.
The company, we're working with as a new company that's been formed specifically to commercialize <unk>.
Oh, okay. So they don't have existing route to market capabilities.
They they have existing relationships with the channels and and media and government. So I think they're a very strong partner.
Okay understood I'll hop back in the queue. Thank you.
Yeah.
Okay.
Our next question is from Jim Mccleary with Dawson James. Please proceed with your question.
Thank you and good morning.
You characterized.
The marketing is partner driven marketing.
Was hoping you could elaborate on the division of labor are tasks that you're you either.
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 that you are responsible for.
Okay.
Yes, Jim Thanks for the question good morning.
So.
Tobacco space as you know is highly regulated a lot of the communication with smokers happens at the point of sale.
And many of these retailers, especially chain retailers like circle K.
We 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.
Enable to access.
And operate in.
In these programs with feel and so that's 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 or helped drive traffic to circle K.
And also to incur.
Increase smokers awareness of an understanding of the whole proposition underlying deal in which is that it's a it's a 95% less nicotine cigarette that helps them to smoke less so there'll be a number of programs that are run independently of circle K.
That will accomplish those objectives.
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.
Most chains do have programs like circle K as they may not be exactly the same.
And but most chains that are competitive.
In the tobacco space, which is all of the national chains in most of the regional change do have these sort of programs. So it'll be a similar sort of effort, which is why this is a good.
Pilot for us.
And as the.
It is the <unk>.
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 as circle K first and then partner be second and then partner third et cetera.
We'll be working exclusively with with circle K during the pilot.
And then we'll make that determination about.
How to sequence other partners as we as we move through the pilot.
Firm up the national launch plans.
Okay. That's helpful and then lastly on South Korea.
I just wanted to make sure I understand it. So this is an existing commercial entity.
Or does 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 is.
Is this a new commercial entity or is this an.
And established commercial entity, but it's this is its first entre into the cigarette market.
This is a new commercial energy entity, that's owned and managed by <unk>.
Several individuals.
That are in that are Korea, South Korean nationals that live and work.
In South Korea that come from various industries that are related to.
To media.
And tobacco retail channels.
<unk> also worked.
With regulators on.
Unregulated products in South Korea.
So this is a group of people who.
Who see the potential for <unk> to help there.
There are.
Their fellow citizens in South Korea.
Our <unk>.
Investing their own time and money.
In forming a company to bring <unk> to market, there and they believe that.
We believe that they have the capabilities and the network to do this successfully.
And is 22nd century, and investor in that entity or obligated to become an investor or have the option to become an investor.
We are not an investor.
There is an opportunity to become one but no obligation to.
Yeah.
Alright.
That's it for me Thanks, a lot.
Good luck with everything.
Thank you Tim.
Our next question is from Aaron Grey with Alliance Global Partners. Please proceed with your question.
Hi, Thanks for the question just one for me regarding VL and the pilot program in Chicago with Circle K, you guys talked about the shelf positioning premium right below Marlboro that youll be testing out I just wanted to know in terms of what are you guys going to do in terms of maybe putting it in different shelf positioning.
Not so premium as well as marketing and some stores versus other just 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.
Yes, good morning, Erinn. Thanks for the question it's.
Great question.
You know there are at least a dozen different marketing programs that will be operating a testing as part of this pilot.
We will be doing a b testing.
And each of them so that we can understand.
What works and what doesn't work.
In every potential situation that we may face in our international launch so yes, we will be in some stores using.
Using that premium positioning in other stores.
Potentially even not having it on the shelf, but putting it behind the counter where it's not visible but still supported by PFS. So.
There are a lot of.
A lot of.
A lot of variables, there and we'll be testing all of them all of them or as many of them as we possibly can during the pilot.
Okay, alright, great. Thanks for the color.
Our next question is from Brian Wright with Roth Capital Partners. Please proceed with your question.
Thanks, Good morning.
On South Korea could you give us a little bit more in Peru, and kind of figure out the market opportunity. There. If one part of adult men are career 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.
Yes.
I don't have the total number of smokers.
At hand, but I can definitely gets you that that information.
Projection its hard to also the project right now since Chicago, and South Korea will be the first markets that we're that we're launching VL and but certainly we'll be paying close attention to the outcomes in both of those places as we form our.
Our expansion plans both across the U S and globally.
Yes.
Okay. Okay.
Okay.
Ill follow up with you on kind of the Tam in South Korea 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.
What are we specifically kind of targeting or what part of the genome that was targeted that there was success with so we could just have a little bit more kind of a better understanding of that because it sounds.
It sounds.
It sounds significant.
Yes, Brian Great question I'll try to answer that.
This is really high technology.
Quite frankly, we.
Challenging to communicate this because it is such so advanced and so leading edge, but I think the better way to look at it.
Is that.
The focus on that keyword transformation.
To date and.
Cross breeding you don't transform the plant per se.
Even with the the tools.
As we've built them with key gene.
In the gene editing side, you began certainly to modulate them.
But this is this is much more sophisticated.
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.
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 advancing that into transformation.
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 D catches up.
We have a solution for that and part of this transformative breakthrough is to take the genome that really modulates transformative Lee the low THC Gino in the plant and can take that forward. We already were on to that with some of our CBD in CPG lines in Colorado.
This is 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.
But we have planned streams are 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 is others behind it.
Disease resistance, you start to take a look at.
Those types of opportunities and then the cannabinoid content itself. So that's.
That's kind of a broad summary of where we're focusing our initial efforts and the criticality of that where transformation is really what people need to hone in on.
We've modulator plants.
Which has been very successful on a two year time period now we can actually transform the plant itself.
We're much more stable and much more faster strain development and where we're focusing our efforts.
<unk>.
In one area and the low THC to rectify what's going on out there, which is just a tremendous amount of products being burned.
Because of their they've gone hot in the grocery <unk> season.
Susan.
And then is it safe to say that this is a.
This would be characterized as the jumbo product or or is it like you do it first with introducing from other plant genes and then you did that's the first step and then the second step is using gene editing for the plants natural capabilities to produce something like that.
Or just kind of curious as to how that develops over time.
It's non GMO, absolutely non GMO and the sequence of events and in many cases you. Just described is spot on so let's say.
You start out with these gene editing tools.
That we developed in partnership with key gene and we own the IP around it with regards to cannabis.
And then you take that further.
The plant strain itself to literally transform it at that point.
All of these tools are absolutely non GMO approach.
Great perfect. Thank you so much.
Sure. Thank you great question.
We've reached the end of the question and answer session I would now like to turn the call back over to Jim Mitchell for closing comments.
Thank you and thanks to everyone for joining us today and the great questions I appreciate them and stay tuned for our next updates as we continue to execute on our plans we're laser focused on that kantar.
Continue to deliver results, particularly on our U S <unk> launch and will be.
<unk> 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.
Thank you. This does conclude today's call you may now disconnect your lines and we thank you for your participation.