Q1 2022 22nd Century Group Inc Earnings Call
[music].
Welcome to the 22nd century group's first quarter 2022 earnings conference call. At this time, all participants are in a listen only mode and the floor will be opened for questions. Following management's prepared remarks.
As a reminder, today's conference is being recorded.
At this time I would like to turn the call over to make well director of communications and Investor Relations.
Thank you. Please go ahead.
Thank you Dana good morning, and welcome to 20, <unk> Century's first quarter earnings Conference call. Joining me today are Jim Besch, 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 first quarter 'twenty 'twenty. Two 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 up heading.
We hope besides will serve as a framework for management's prepared remarks reinforce key takeaway and provide additional transparency and insight into our business strategy and objectives.
And also those of you joining by webcast can submit questions through the online interface, which we made include during the Q&A session of today's call time permitting.
Before we begin some of the statements made today are forward looking.
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 FCC.
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 earlier today.
With that I'll turn the call over to Jim beginning from slide three.
Yeah.
Thanks, Mike Good morning, everyone and happy Cinco de Mayo.
As you know 20, <unk> century's focused on advanced plant biotechnology to improve human health.
This morning, we will provide an update across our three franchises reduced nicotine tobacco.
Hemp cannabis and hubs.
Based on recent activity, we will focus on tobacco, but we remain highly confident on the significant opportunities in all three of these franchises that.
It will generate substantial growth and value for the company.
Of course, let's begin with an update on the pilot launch a BLA in the first and only modified risk tobacco product approved by the FDA.
It's still early but the pilot is going extremely well.
We're absolutely thrilled that <unk> is on the shelves of our circle K pilot locations in Chicago, giving smokers for the first time ever and FDA authorized tobacco cigarette with 95% less nicotine.
Specifically to help them smoke less.
Our circle K pilot is designed to refine our marketing to maximize trial repeat purchase and advocacy as we ready for national launch.
But bear in mind, we very well may.
They accelerate and expand to additional markets prior to completion of the pilot.
This is even more compelling now that the FDA has advanced its proposed rule, making banning menthol is a characterizing flavor in cigarettes.
<unk> includes a process that specifically highlight to reduce nicotine menthol cigarettes as an example of a product it would be exempted from the rule.
We believe that Zealand mental king would be the only menthol cigarette lift on the market under this role and a cornerstone of the Fda's policy, providing menthol smokers the critical off ramp as the rule takes effect.
This is a $24 billion total addressable market.
And exactly as the FDA indicated in our <unk> authorization in December .
All of this is favorably impacting our strategic partner discussions.
Further we do not expect to wait for the route take full effect.
See the benefit.
Zealand Menthol King is already selling very well in our Chicago pilot as menthol smokers are showing strong interest.
The Fda's edition of the helps you smoke less claim Torre M. RTP authorization has been a significant win because it helps smokers immediately understand why <unk> is important.
Having that direct science based claim on our packaging means that every time, a smoker goes to the store to buy a pack of cigarettes are vlan signage and the deal impacts on the shelf.
Imminently remind them exactly why they should buy our product instead of a highly addictive alternatives and this is an audience looking for solutions to 70% of adult smokers, one equipped but haven't succeeded with current products, even after six to 10 or even more quit attempts.
The norm today, and we will change it.
The Vlan science shows that it can help smokers to take control of their nicotine consumption and helped to break the addiction cycle that so many smokers have found impossible to escape.
Smokers now have a choice that will help them to smoke less rather than reinforcing their nicotine addiction as every other tobacco product does.
Shifting to slide four the launch of Vela and opens up the doors to growth and strategic partnerships. The 20 <unk> century has never seen before.
We now have a premium priced highly disruptive FDA authorized products on store shelves.
Whether we are talking about the $80 billion U S tobacco market, a $24 billion menthol market or the $800 billion global market, capturing even a very small part of these markets will be transformative to 20 <unk> century.
It's important to remember that this process is not new to our team.
Our <unk> team has successfully executed this type of branded specialty launch before.
Most notably with natural American spirit, garnering significant market share and create an extraordinary value worldwide.
Of course, we will always implement ways to accelerate this growth.
Building from our Chicago pilot in 150 circle K stores well.
Then rollout to their 7000 stores nationwide as well as other regional and National Channel partners and even additional international markets beyond South Korea, where we made our first shipment in Q1.
I'll stop there and let Mike fill in some of the details of our pilot program and launch market, then I'll briefly discuss our hemp cannabis and hops franchise actions with you.
But sincerely I could not be more excited about 22nd century.
2022, and the future of the company.
Mike.
Thanks, Jim and good morning, everyone.
As of April 11th we officially entered the market with RVO and King.
Paul King reduced nicotine content cigarettes, and in so doing passed another major milestone for 20, <unk> century, and our shareholders.
Immediately following the Fda's authorization of our <unk> TP two days before Christmas.
Put our pilot launch plan into action with circle, K, and our other marketing and distribution partners.
Final piece of the puzzle was the Illinois State Attorney General registration that is required for every cigarette brand sold in the state.
While this mandatory state level process took some time to complete once we had it in hand on April 4th we began stamping and distributing dealing immediately.
The very first retail sale.
Just a week later.
Our team on the ground has done an excellent job in the few weeks since then creating high visibility per vlan with the posting of our point of sale of advertising in the more than 150, Chicago inch circle K stores selected for the pilot.
During the weeks leading up to the launch we also secured both a feature story in the Chicago Tribune.
V O N about how <unk> can help people to smoke glass and support from the Chicago Medical Society.
<unk> of 7000 medical professionals in Chicago, affirming the very exciting opportunity that medical professionals have with <unk> to help their patients who are smokers.
While we have been in market for just a few weeks now initial sales results have been very good and are exceeding expectations.
So far this has been driven primarily by media exposure support from the health care community and in store visibility.
We'll be hitting our full stride in the coming weeks with our remaining marketing and promotional programs, which include direct mail and E Mail digital and print advertising store clerk training and incentives promotions delivered in store and through mobile branded website, including store locator and other powerful pro.
Brands, all designed to generate trial drive repeat purchase and build word of mouth amongst adult smokers.
We believe the economic environment with consumer inflation running high will also be helpful to the BLA launch.
As smokers seat of health and financial benefits of a cigarette that helps them smoke less we look forward to providing you with more details about our pilot results and our future communications.
Turning to slide seven the pilot is important to optimizing our marketing programs and mix. So that we can maximize our investments as we look to a national launch.
To date, we have already secured permission from state level regulators in nine states and cloud applications in all of the remaining states, we expect to be permitted to sell dealing in most in most and very likely all states by the end of third quarter of this year.
In addition to expanding our geographic scope, we are working already to expand the retail footprint of <unk> beyond Chicago Circle K is an ideal partner for this given there are 7000 plus stores across the country as well as thousands of stores outside the U S.
They are poised to work with us here and abroad to help us make deal and widely available to adult smokers.
We have also advanced our discussions with other potential channel partners, including mass merchandise pharmacy, and dollar stores as well as wholesalers and strategic partners as part of this national launch planning.
Underlying our planning is the belief that <unk> is poised to become the most disruptive product hit the tobacco industry in decades.
We'll capture the attention and interest of the hundreds of millions of adult smokers around the world who want to smoke glass we.
We look forward to discussing our plans for the next phase of the Vela and launch in future calls.
Turning to slide eight our manufacturing facility is a key strategic asset where we have built the capabilities needed to produce high quality reduced nicotine content cigarettes, including the tens of millions of research cigarettes used an independent clinical studies that underlie our FDA mandated helps you smoke less.
<unk>.
And FDA is larger plans to ban menthol and require all cigarettes to be non addictive.
We'll be shipping another order for an additional $3 million research cigarettes, including Menthols in the coming months to support this continuing federal research program.
Given these capabilities are factory team was able to begin manufacturing dealing quickly despite the global supply chain constraints.
Packaging every industry due to Covid and we are ready to further scale, our manufacturing as we move into additional markets.
As noted in today's press release, we are now installing an additional one $5 million cigarette, making impacting lives and making other improvements to expand our manufacturing capacity by 25%.
Also making a multimillion dollar investment in growing our largest crop <unk> tobacco ever based on the interest in <unk> and we have seen from the retail trade strategic partners and most importantly, adult smokers and our market research and pilot market.
With this year's VLA crop, we will literally be harvesting the results of the work done in the past few years by our stellar science team.
And our World Class plant research partners to create our non GMO <unk> and tobacco varieties and much of the IP that makes up our deep moat in this area, which will enable us to bring to market a non GMO American blend version of BLM made with bright and Burley varieties of tobacco.
We have also expanded our growing program to the southern hemisphere, providing us with year round growing capabilities to meet future demand.
Okay.
We continue to believe that <unk> appeal goes beyond the U S market as noted on slide nine.
Even before the FDA authorized our <unk> TP, we committed to you that we would begin.
And sales outside the U S in the first quarter.
Did that with our first shipment to South Korea in March with more to follow as our commercial partner proceeds with the retail launch there.
We are excited about the commercial and public health opportunity for <unk> in South Korea.
We chose SaaS Korea, as our first international market because of its high smoking rate, especially among men where approximately one in three are smokers. The country also has a large premium market and there is strong interest among adult smokers and low yield cigarettes and innovative tobacco products.
Our partner is a new company formed specifically to bring deal into market. The company's leadership team brings a wealth of professional knowledge and senior executive leadership experience highly relevant to the venture including the successful introduction of several new form products to the Korean market the management of multi location.
Retail outlets, including in the convenience store channel, which is where most cigarettes are sold in Korea and experienced with the branding and marketing of high end premium priced consumer products.
Our partners professional backgrounds are as impressive as their passion for introducing <unk> into their country to help adult smokers there.
We believe this is a winning combination of mission and experience and we look forward to sharing more information about our progress with <unk> in South Korea as the business develops in the coming months.
Elsewhere, we are advancing discussions with prospective partners and several other markets outside the U S, where like South Korea regulations allow us to go to market today with claims with little or none of the regulatory complexity of the U S.
With the first and only <unk> TP designation for a combustible cigarette from SBA enormous body of scientific evidence supporting that.
Positions.
<unk> very well for international expansion.
Okay.
Advancing to slide 10, we applaud Fda's announcement last week of its plan to ban menthol and highly addictive combustible cigarettes.
And authorizing BLA in FDA has given adult smokers, including menthol smokers, a tool to satisfy the urge to slow while allowing them to reduce their consumption of highly addictive nicotine.
We are already seeing as Jim mentioned increased interest in VL incremental smokers, who are looking to get ahead of the band with a cigarette that will help them to smoke less menthol smokers are figuring out what the independent science clearly shows about reducing nicotine to non addictive levels in cigarettes, our products provide a crew.
<unk>, all cramps for adult smokers by helping them to smoke glass.
We believe this type of bold evidenced based public health policy will continue to be the direction FDA heads and advancing its mission to reduce the harm caused by tobacco.
Several public statements, including most recently when announcing the menthol ban Dr. Calif. The recently appointed head of FTA, we've been clear about the critical role that reducing nicotine in cigarettes can play in tobacco harm reduction, which.
Which has even greater potential than a menthol ban to reduce the harm caused by smoking.
Obviously, we recognize these policies will not happen overnight, but FDA knows as do we that having our BLM products on the market now provides an opportunity for adult smokers to choose a cigarette that helps them to smoke less while also showcasing how effective these policies can be.
Wrapping up we are incredibly excited to finally bring deal in the market. Our goal is to make <unk> available to as many adult smokers around the world as quickly as possible.
We're highly confident in its appeal to adult smokers its ability to help them to smoke less and ultimately and its potential to change the tobacco industry for good.
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, it's really been an incredible first quarter in tobacco and we're excited for the path ahead, especially with the national rollout of BLA in and working.
To support the FDA and their comprehensive plan in.
In fact every catalyst that we could have asked for.
Has worked and is working in our favor and.
And its positioning us for substantial growth. So we're very excited about that.
Let's now turn to slide 12, as we focus for a few minutes on our other two growth franchise, starting with hemp cannabis.
This is a transformative year for him cannabis and we continued to deliver as promised.
We remain absolutely committed to this franchise to maximizing the consumer experience and confidence with hemp cannabis products by developing superior plant lines to provide the inputs going into those products.
We do this by developing proprietary scalable plant lines exhibit stable genetic profiles predictable agronomic trades and highly valuable yield profiles necessary to fully commercialize the industry.
We completed our first harvest of high CBD and <unk> low THC plants with <unk> farms in the fourth quarter selling biomass at that time and holding a portion of the harvest for potential of a high purity distillate utilizing a new purification technology that we sold in this quarter.
We're also able to generate revenue since Q4 from our first IP agreement a three party deal with Aurora cannabis in Kronos group for use of our shared and Andy IP that addresses the production of biosynthetic cannabinoid <unk>.
Looking into 2022, we're excited to continue scaling and developing our proprietary plant technologies as we work to revolutionize the industry much as was done in decades ago with other major crops like corn wheat and soybeans.
We're now preparing him plant lines for an expanded 2022 growing program program at our USDA organic certified needle rock farms, all of which is pre sold.
We're also advancing our science as we move new plant lines forward, having achieved an industry first breakthrough in hemp cannabis plant transformation with our partner key gene expanding the company's capabilities and modifying the principal genes controlling cannabinoid biosynthesis and the <unk>.
Plant.
We've also shipped our transformative next generation seats to extract this for breeding and scale up.
There is more big news to come in this franchise.
And the global hops market on slide 14, we continue to leverage our alkaloid plant expertise and IP to apply our capabilities and is closely related alkaloid plant family.
Perhaps as a 500 billion dollar a year global market the industry still relies mainly on costly multi year in high risk traditional breeding techniques we.
We believe our unique know how and IP can bring exciting improvements to this industry transforming the ops plant development cycle to reduce cost risk and time required to create a tailored plant variety as we are doing with hemp and cannabis.
It can dramatically cut the current decades, plus development cycle through our advanced breeding capabilities, giving a major competitive advantage to hops companies that work with us.
Finally, I'm very excited to note that Dr. Calvin will join the company as its chief Scientific officer, starting in late May.
This further enhances our deep expertise in plant based technology and intellectual property across all three plant franchises.
Okay treat has led global plant biotechnology programs at buyer and Monsanto, including corn soybean and cotton crop technologies is now joining 20 <unk> century do the same in key alkaloid plant families.
Okay.
I'll now pass you over to rich to review our financial performance.
Yeah.
Thanks, Jim and good morning to everyone.
Starting off with slide 16, and our quarterly results net sales increased by 33% year over year to $9 million.
Through a combination of higher volume and price increases within our contract manufacturing cigar in cigarette business.
We continue to generate new business on orders with additional customers.
And also now manufacturing deal and cigarettes for a pilot launch in both the U S and international markets.
We continue to closely monitor certain supply shortages.
<unk> our industry, but our team in North Carolina is managing through those quite effectively.
Gross profit margin for the first quarter declined year over year to 5% due to product mix supply chain delays.
MSA settlement assessment.
A larger factor.
This margin impact was that in the prior first part of your first quarter. We completed a notable research cigarette quarter at higher margin.
Whereas in the current year.
Comparable research cigarette order was deferred by the customer into the second quarter of 2022.
It is important to note that our investment in the CMO business is now paying dividends as we were well positioned to promptly commence BLM manufacturing as part of our 90 day pilot.
Market market launch effort.
As Vienna as V O N exit the pilot phase and begins to scale its positioning as a premium brand will command higher revenue.
And and margins.
When compared to our third party CMO manufacturing business. This is.
As a net positive to our revenue and gross margin profile as we progress national and O U S launches a BLA.
Some of the early enhanced margin benefit will be reinvested to initially fund launch activities, but in the midterm it will generate much greater revenue and margin per carton that our legacy CMO third party business.
Yeah.
Turning to total operating expenses for the first quarter. They increased by $2 8 million as we continue to advance our go to market plans and scale the business to support our BLA in March the increase in operating costs was driven by a $1 $3 million increase in R&D spending.
Versus the prior year and increased SG&A spending of $2 5 million increases in SG&A spending were driven by higher strategic consulting costs stock based compensation legal and insurance costs.
Operating loss for the quarter was $8 1 million compared to an operating loss of $5 2 million in the prior year.
Net loss for the quarter was $8 9 million compared to $5 million in the prior year's first quarter.
Our press release.
Earlier. This morning provides an adjusted EBITDA measure that we believe is a useful tool in evaluating the operating performance of the business on an ongoing basis, removing the effect of onetime and noncash expenses.
On an adjusted EBITDA basis, we reported a loss of $6 6 million in the first quarter of 2022 compared to a $4 $4 million loss in them.
Same period a year ago.
Yeah.
Now going to slide 17.
Reviewing our strengthened balance sheet, we had three.
$38 6 million of cash at quarter end.
And we have the resources to fund our runway for the commercial launch and growth of a reduced nicotine tobacco business and our hemp cannabis franchises.
I want to highlight that our launch strategy to 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.
It is important to note that our balance sheet is adequate for the launch plans and where we will continue to emphasize partner driven marketing rather than costly time consuming organizational scale.
Yeah.
This is tailored.
To the unique product claims.
As well as the unique regulatory environment, our product enjoyed it.
With that I'll now pass you back to Jim.
Thanks Rich.
It's an exciting time for us as we go to market in the U S with circle K as our pilot partner, which will ultimately lead to the several major national C store and pharmacy change, placing our BLA products in front of customers.
With the proposed menthol ban gaining traction.
As it should.
We may well be the only combustible menthol cigarette in the market as a tool to help smokers transition away from traditional menthol products targeted by the proposed FDA ban.
And we're moving ahead.
With our first international launches as well.
We're ready to go.
Every catalysts as I indicated before is.
Has worked in our favor and is in our pockets in our position us for strong growth.
And so we're ready to go not just on our innovation tobacco products, but also in our hemp cannabis products and with our emerging research and global ops market. We really look forward to the year ahead and talking to you again soon.
Operator, please open the call for your questions.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants participating on the webcast you may use the ask question box located on the side and then click submit to and to your question.
Once again Thats star one via the phone and using the ask a question box on the web platform.
First audio question today is coming from 15 ASR of Cowen. Please go ahead.
Hi, Thanks, so much for taking the questions. This is Harrison vivas on for Vivien.
So just to start off.
Can you try and can you just dimensionalize. The dollar benefit you got from your shipments to South Korea in the quarter.
Yes.
Yes again this this like the pilot in Chicago is a.
Small initial order to go through regulatory clearance, there and it did not rise to a level, where we would separately disclose it.
Okay understood.
So kind of transitioning to Chicago can you just talk about initial sell through trends relative to your initial expectations.
And maybe comment on retail inventory days on hand versus the initial launch.
Thanks.
Yes. This is Mike I can I can respond to that question we've been in the market for about three weeks now we've got so far two weeks of reporting data so.
The sales data so far does.
They exceed our expectations.
It's still very early days to two data points did not make a trend line. So.
But.
The anecdotal evidence on the ground is all very positive and we.
Look forward to reporting more details about the sales.
Results and inventories.
On hand.
As we.
Through the coming weeks.
As the sales state and develops.
Yeah.
Okay. That's helpful last one for me.
Just as it relates to the nine new states can you sort of provide maybe some some line of sight into the timing that youre expecting are there key milestones that you're looking to hit in Chicago before expanding.
And if so what what are those milestones. If you can provide any color on those nine additional states would be that'd be helpful. Thank you.
Okay.
Our key metric will be essentially share of market in the stores, where we're selling and.
That will that will be one of the one of the key decision points.
The pilot develops the.
The geographic scope and the timing of the.
This phase of the launch.
Still in planning and we will.
I'd be happy to provide more details about that as we firm up those plants.
Great. Thanks, very much I'll jump back in the queue.
Thank you. The next question is coming from Brian Wright of Roth Capital Partners. Please go ahead.
Thanks, Good morning, happy Cinco de Mayo and congrats on all the progress.
My first question.
First question is.
Did you give the exact numbers for us in the Chicago pilot other than over 150, I just wanted to make sure I might have missed that.
It's up 159 stores to be exact.
Okay, great. Thanks, and then.
Or are you willing to you did mentioned that the medical sales in Chicago, we're outpacing the non menthol sales.
Is there I know.
It's early but is there is it like a meaningful difference is it like 50, 545, 60 70 or did.
And any color on that to just out of curiosity right.
Yes so.
I don't know if they are outpacing menthol is outpacing non menthol, but certainly menthol is over indexing relative to share of market across other brands and we think that's a positive sign.
Okay Menthol smokers interesting.
Yes.
Great Great and then just last one you mentioned that the three there's a $3 million R&D shipment and that's going to come in the second quarter then.
As far as revenue correct.
Yes, 3 million, yes, there are 3 million research cigarettes being manufactured and shipped.
<unk> debt.
No the exact timing.
Likely in the second quarter, but could could slide in the third quarter depending on.
On the.
Delivery processes basically.
Okay, and it's all or nothing so it's either second quarter third quarter, when you do like up.
And next about.
It depends on the manufacturing schedule, sometimes we ship them in parts.
Okay. Okay, great. Thank you.
Thank you.
Thank you. The next question is coming from Jim Mcilroy of Dawson James. Please go ahead.
Thank you good morning, everyone.
Jim in your opening comments you talked about.
Possibly.
Spanning two additional markets while.
While the trial is underway.
Would that be with circle, K or would that be with somebody else or.
Can you say.
It could be a combination.
Sure.
Washington, This everyday and.
Making sure that we're doing everything we can to simultaneously refining our marketing collateral.
Yet at the same time accelerate revenue and growth.
<unk>.
And we're letting that play out, but thats very well as I said.
Open up opportunities to move into these other markets.
Prior to the end of the pilot that could be in part with circle K that could be important with others as well.
So we're watching that very carefully and as I said before as well.
It becomes that much more compelling and paying that much more attention to it based on the fda's activity and how the menthol mandate is is progressing so it.
It could be and to answer your question, though Jim it could be with circle K and others.
Got it got it thanks.
And Mike you've mentioned some of the factors that you're evaluating as this trial progresses I was hoping you could prioritize what you think.
Let's say that the two or three most important metrics that that.
That you are looking at as this is just trials thus forward.
Yes, I mean ultimately.
The biggest question in the pilot is.
Sure.
Store sales.
And the reason that's important is primarily because.
That's the key variable in planning for a national launch.
And so the size of.
Revenue in the National launch will drive all of our our planning from there.
And so the share of store sales is the key the key metric in developing that plan that's what.
Determines what revenue we can expect what margin we can expect as a result of that our profit. We can expect as a result of that and what size the marketing programs.
We need to be to drive that so we're looking at.
Share of market and then secondarily cost.
Of acquisition.
Consumer acquisition.
As the key variables in that in that in that Nashville.
National plan.
Got it and and it's.
So im assuming that you have some.
Expectation or range of expectations about.
Market share over the life of the trial and you're just.
Tracking that relative to the actual results does that.
That is correct that a good way to look at it okay. Okay great.
And Mike said before it.
So it's a relatively low bar.
Any premium new premium offering in the in the.
Cigarette category.
Is.
<unk> is a new thing, we think we're well positioned.
<unk> is a premium offering.
And so it's relatively low bar for us too.
To be profitable here, even capturing relatively small numbers in terms of market share, but our objective is to obviously capture as much share as we can as quickly as we can.
Okay. Okay.
And Mike for you again.
I think that you mentioned during your commentary.
Q2.
Two sources of.
Of spending.
Coming up and I didn't write it down fast enough, but I thought one of them was an expansion of capacity and then the second was planting a new crop can you just repeat that and maybe expand on that in terms of the total amount of dollars.
Required in the timeframe for spending those dollars.
Yes, So I did mentioned, we're spending a million and half dollars on installing.
An additional making and packing line at the manufacturing facility, so that will allow us to expand the BLM sales.
Well as maintain and grow the contract manufacturing business at the same time.
And then the other investment I mentioned was a multimillion dollar investment in R&D and are in this year's crop.
We haven't publicly we haven't disclosed the amount that we're investing there for competitive reasons, but it is.
The largest crop of Zealand, we've ever planted by a sizable margin and.
And we're doing that with the confidence that the.
If the demand for BLA will be significantly as we head into national launch and build out the international markets.
Okay and so both of those are our 2022.
Of that event.
Thats correct alright.
Alright.
And you said on the second one on the on the BLM crop.
Is that crop going to be harvested this year as well.
Yes that would be harvested yes. This year late summer early fall.
Yeah.
So it's going into the ground as we speak.
Got it okay.
I think that'll do it for me. Thanks, a lot guys take care ocular soon thanks, Jim.
Jim.
Thank you at this time, we will address submitted questions from the web.
Thank you.
First question is what barriers, but keep big tobacco companies from coffee in excess I low nicotine technology as soon as regulations demand.
<unk>.
Jim do you want to take that.
Yeah go ahead John .
Yeah, So we've been working.
For a number of years on on creating these.
Ease of reduced nicotine tobacco plants, there are dozens of patents.
We own or control related to nicotine biosynthesis in the tobacco plant.
In recent years, our research has been focused on using non GMO methods of creating these plants, which has allowed us to produce.
Different varieties of tobacco basically introducing these nicotine content traits into different varieties of tobacco.
Which we think are important core.
For a number of reasons one.
Non GMO approach allows us to access.
Many international markets, where gmos or are not allowed or not accepted by consumers.
Also allows us to create is it basically make any variety of tobacco non GMO and that allows us to work closely with.
Any number of manufacturers, who may be thinking combustible tobacco products, including cigars.
To convert their proprietary lines into reduced nicotine lines, so that opens up a number of.
Strategic opportunities. So all of this is protected by a very wide and deep moat.
Pension dozens of patents.
And and the big tobacco companies have in the process of the rulemaking around the reduced nicotine mandate publicly commented about.
The strength of our IP.
And how difficult it would be for them to develop these plants themselves over time, but it would take 10.
10, or 20 years and multi billions of dollars for them to do this research. So that's that's where our confidence lies.
And in addition, just to add on to that in addition, you have double protection because not only would they have to do that but they would have to seek PMT a an MLR TP authorization.
Which would take quite some time so we've got.
Deep and wide moat now across all of these varietals.
Nicotine levels.
And then doubly protected with the timeliness of getting <unk> through the through the system.
Thanks, Tim.
Our next question is does the variable nicotine research cigarettes, I mean, not the future of uncles nicotine maybe variable that the FDA will allow.
It's a good question.
The.
That remains to be seen but based on the current independent clinical science, it's unlikely that the levels will be variable.
So we make the variable research cigarettes, so that FDA and researchers can answer that very question.
There have been a number of studies done already by independent researchers to address that question.
And one of the largest being essentially the equivalent of a phase III study with over 1000 patients that clearly showed was that.
A sort of a variable approach or a step down approach.
Is is not is not the best way to address it because in those middle levels of nicotine you actually see.
Increased consumption and it's a phenomenon similar to what has been seen with light and ultra light cigarettes, low tar cigarettes in the past where smokers end up smoking more in the case of very low levels of nicotine like we haven't deal in.
You don't see that compensatory smoking you don't see an increase in smoking, but of course, rather a decrease of smoking, which is why we have the claim on the pack that Neil and helps you smoke glass and so what we would expect based on science.
Is that the FDA will mandate an immediate reduction in nicotine levels two to very low levels.
Basically to the level that that our product is today.
Thanks, Mike. Our next question is given the very large market for menthol cigarettes in the U S will the company be able to satisfy the market once the FDA banned all other menthol cigarettes.
Yes, yes, good question.
Go ahead rich.
Go ahead Mike.
I was just pointing out that with the expansion, we will be able to satisfy 1% of the.
U S market Thats, an $80 billion market.
We have the capacity to expand that up to 3%. So clearly with the North Carolina facility and the ability to module we expand it.
We can step up to 123% of the U S market, which would be a very.
Good penetration given that it's an $80 billion market.
Like do you have any yes, yes. Those are those are those are great points.
And those are that increased two 3% of market as an investment.
With minimal investments and can be done.
And we've done very quickly.
As we.
<unk> a final rule, our SBA approaches a final rule of course, we have a bit of time to plan for that.
We're looking at manufacturing alternatives, there to be able to address the larger market, but one of the key assumptions in any kind of analysis is like this is.
Where do mental slipped to menthol smokers too and so fda's.
Expectations of course is that some smokers.
Quit and that's one of the reasons.
FDA.
It looks favorably upon.
Nicotine cigarettes, and <unk> as well as because this is something that helps.
Helps them not only the small class, but potentially helps them to wean themselves for combustible cigarettes and so.
Menthol smokers will quit some menthol smokers will switch to less harmful forms of nicotine delivery like vapor and E cigarettes.
That's fully expected in a menthol little and then some smokers may decide that they want to continue to consume cigarettes with high levels of nicotine, but without menthol and so they might migrate away from menthol addictive menthol.
Our high nicotine menthol cigarettes so.
The entire medical market is not what we need to supply it will be something.
Some subset of that but we're well positioned to be able to do that we have the time to increase.
Our suppliers and our manufacturing capacity to be able to do that but we would also expect.
To be working with strategic partners, who are already in the industry to be able to provide.
The demand from their customers as well.
Thanks, Mike and we have time for two more questions.
Investors are asking a mail order or online sales as the online booking available.
Mail order sales or not current are basically prohibited by federal law.
Although in time, we think there's a good case to be made to make an exception to that rule for <unk>.
And that's not something that we can do today.
But if that's something that.
You'd like to see it encourage you to contact your federal Carla.
Congress people in U S senators encourage them to.
To look at a change like that.
And federal law.
Thanks, Mike and our last question is is the online currently exempt or expect it to be exempt from any state excise tax and our MSA payment.
Yes, there are a handful of states already were.
<unk> has a reduced.
State tax rate state excise tax rate.
Being that it is an <unk> TP product in those states are high on our on our list.
We look at rolling out the national launch.
We think there is some benefit there potentially to smokers as well as to our bottom line.
And.
And we we are looking at the possibilities of that.
Sort of benefit expanding to other states as well.
Federal excise tax.
MSA payments is an interesting question.
Something thats set by.
And industry agreement with the various states who are parties to that settlement agreement. So.
It's unlikely that that we could renegotiate a 20 plus year old settlement agreement like that but certainly the.
Reduced excise taxes.
Go a long way towards helping.
Ross.
Thanks, Mike I'll turn it over to Ken for closing comments.
Thank you may appreciate all the great questions and.
Look forward to reconnecting again in next quarter, whereas Mike indicated well have a much more data to share and trend information as well. So thank you for all your time and attention 22nd century as I said before we're excited across all three franchises.
We got all the catalysts in our pockets and we're poised for growth.
Finally focused on execution across these three franchises, obviously with the nearest term focus on our tobacco franchise and BLA. So thank you for your time and we'll talk the talk soon.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time or log off the webcast and enjoy the rest of your day.
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