Q2 2022 22nd Century Group Inc Earnings Call
Ladies and gentlemen, thank you for your patience the conference will be starting in a few minutes, ladies and gentlemen, once again. Thank you for your patience the conference will be starting in just a few minutes.
[music].
Welcome to the 22nd century group's second quarter 2022 earnings conference call.
At this time all participants are in a listen only mode and the floor will be opened for questions. Following management's prepared remarks.
As a reminder, today's conference is being recorded.
At this time I would like to turn the call over to Joe Sheppard, Vice President of Communications and Investor Relations. Please begin.
Thank you Alex.
Good morning, and welcome to twenty-second Centurys second quarter earnings conference call joining.
Joining me on the call today are Jim Mitchell, our Chief Executive Officer, Hugh Kinsman, Our Chief Financial Officer, and John Miller, who leads our tobacco business earlier today, we issued a press release announcing our results for the second quarter 2022.
We will start today's call with prepared remarks from Jim John and Hugh before moving into a Q&A session.
During our prepared remarks, we will be referring to slides, which are available for viewing and the webcast and posted in the investors section of our website at X X II century dot com under the events sub heading we hope these slides will serve as a framework for managed.
In his prepared remarks reinforced key takeaways and provide additional transparency and insight into our business strategy and objectives also those of you joining by webcast you can submit questions through the online interface, which we may include during the Q&A section of todays call time permitting.
Yeah.
Slide two before we begin some of the statements made today are forward looking forward looking statements are subject to risks uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements additional information regarding these factors can be found in our annual quarterly.
And other reports filed with the SEC.
During this call. We also will discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest taxes, depreciation and amortization as adjusted for certain noncash and nonoperating expenses for more details on these measures. Please refer to our press release.
<unk> issued earlier today.
And with that I'll turn the call over to Jim beginning from slide three.
Yeah.
Thanks, Joe and good morning, everyone I'm really excited to be joined today for the first time by John Miller, the president of our tobacco business and who kinsman our CFO .
I welcome. These two leaders to deliver on our shareholders' requests for more detailed tobacco commercial updates and insight into the execution of our business fundamentals as we grow.
So if you listen carefully you're going to hear much more detail than in the past and help connect the dots.
The second quarter was a major transformation that included the most significant developments in the history of the company.
We continue to execute and deliver on our mission to improve human health through reduced nicotine content tobacco improved hemp cannabis plant technologies and advanced Heart plant science.
In fact, we had major success in two key areas.
First we launched our highly anticipated <unk> pilot program at more than 150, Chicago Land Circle K stores starting in early April .
We have exceeded our key market expectations and that was only through product distribution endpoint in store point of sale and general PR and media outreach supporting the launch.
We now have a baseline set on market share and are testing several targeted offers designed specifically to accelerate further growth.
In short we are off to the races on V O N and John will speak in much more detail on this topic.
Second we completed a major transaction on may 13th acquiring one of the top ingredients and CMO providers in the hemp derived active space <unk> Biopharma and.
In addition to doubling our revenue on an annualized basis and improving our margins GBP completes the vertical integration of our hemp cannabis business from receptor science in plant genetics, all the way to finished white label goods on shelves for consumers.
In addition to global scale facilities, and a new advanced extraction unit just about to come online. We also picked up a world class management team, including our new CFO Hugh.
Speak more about this.
I couldnt be more pleased are excited about the progress we made in the quarter and the continued growth of our legacy business, but we're just getting started.
Moving to slide four we now operate in three large alkaloid plant franchises, each with unique growth opportunities tobacco hemp cannabis and HOPPS.
In tobacco, we are building on the pilot program success, expanding our activities in Chicago and beyond.
The results of the pilot program drove our decision to accelerate our launch plans and I'm pleased to say that we're going into Colorado, where we can continue to increase our market footprint substantially while benefiting from the <unk> state excise tax rate that favors our <unk> products.
This is a $600 million market and just one state and we see a clear pathway forward as we continue to expand our reach again John will elaborate much more on this in just a few minutes.
For him cannabis the acquisition of GBP accelerates our path to profitability in this exciting market.
The new Oregon extraction facility will be coming online in the next few months with a commensurate scale up of volumes from the business.
We're also integrating our unique plant science to provide even higher yields and margins.
Currently we are actively investing in a number of business development activities to further scale. This business and have line of sight to rapid growth in cash positive operations.
And finally, our ops franchise is advancing well with our scientific teams now under the direction of Dr. Calvin treat who joined US earlier. This year, we're hitting key technical milestones in this large global market.
Right for disruption.
And with that I'll turn the call over to John Miller to talk about our reduced nicotine content tobacco products John .
Thanks, Jim and good morning, I'm pleased to be here on my first call with 20 <unk> century group.
I've been involved in the tobacco industry for more than 30 years and this is potentially the most disruptive and impactful product that I've seen in my career, a product that will help adult smokers to smoke less.
Moving to slide six.
Our Chicago pilot with circle K is going very well.
We started with an initial distribution launch in more than 150 stores selected to participate.
Providing basic media support in store point of sale and for example, Clark training for in store promotions. Our goal was to set a baseline market share.
With the actual results exceeding our internal targets.
Due to a commercial need for confidentiality, we can't share the circle K numbers at this time. However, what we can share is that we are more than pleased with what we're seeing.
Feedback in the stores and from consumer focus groups has been overwhelmingly favorable and has reinforced our confidence that <unk> will be accepted and adapted by adult smokers through three key activities education.
Awareness and trial.
With helps you smoke glass as part of our FDA required label <unk>.
<unk> know exactly what our product is designed to do.
And given that 60% to 70% of smokers, who want to quit.
And have you been tried repeatedly to do so we feel a need where they are actively seeking new tools to reduce their nicotine consumption.
We are now in phase two of our pilot program deploying targeted offers to drive increased share by refining our approach. We will then be able to move into an expanded launch as part of the phase III rollout.
Given that we're talking about an 80 billion dollar U S retail market, capturing even a very small percentage of this market will be transformative for 20, <unk> century, and our revenue line.
Just extrapolating the math illustrate the initial opportunity we see within the total national market and you can pick your own numbers, but lets keep it really simple every half a share point achieved in the U S retail market would equate to our prostate and <unk> $400 million at retail sales.
Which is about $250 million and <unk> revenue the 22nd century.
That's the next starting as an exciting starting point for any company and obviously, we want to move well beyond that starting line markets outside the U S. Also provide exciting opportunities to drive further topline and bottomline growth and create further value.
Moving to slide seven.
How do we get there by expanding our launch.
The success of our Chicago pilot showed us that our marketing mix was highly effective already and so we've decided to accelerate our plans and launch our <unk> products in Colorado, which we expect to have in place as early as next month.
Colorado is the first of many exciting announcements, we expect to make all centered around organic organic expansion and adding to our market opportunities and I want to be clear.
None of these expansion opportunities we are presently looking at detract in any way from the ongoing expansion plans with circle K and any other drugstore channel partners. We've previously mentioned they are all additive and they're all accretive.
As well as being a large market with excellent partners for retail, Colorado has a $6 50 per carton state excise tax savings for <unk> TP authorized products. This excise tax savings can be used in comprehensive programs. For example to provide adult consumer incentives expand storm print and brand distribution or <unk>.
Fund additional marketing to raise awareness among adult smokers of our unique products.
As states actually offer this incentive in fact, Michigan recently approved a similar $5 per carton MLR TP state excise tax reduction. This is a good example of state actions that can benefit our market opportunity. Even ahead of federal action and recognizes the positive contributions RMR TP products can make the society by <unk>.
Helping people smoke less.
Key takeaway here is that Colorado was a $600 million market with a large number of adult smokers, who deal in <unk> can be a game changer.
Turning to slide eight.
With thousands of stores across the state carrying tobacco products, we have a great opportunity here, we've already identified 3000 stores in the state that we intend to service. This is sizeable considering that going national with a single change would be in the range of $4 to 5000 stores.
We are taking opportunities to open via all up to additional retail partners within the state.
By combining these additional distribution points with our learnings from our pilot program in Chicago, we will be able to deploy multiple initiatives to build education raise awareness and drive trial for the brand. Additionally, some of these retailers are well placed to further partner on the deal on expansion and distribution into other states.
To ensure we can support retailers and effectively stock stores of VR and AR. We are engaged with two top tier CPG distribution partners that want to carry our products.
The first is a large CPG distributor that coverage grocery convenience store and drug stores with a variety of brands, making it a great partner.
To distribute our products. The second is a more specialized distributor with expertise in CPG and the other tobacco products category, we're finalizing agreements and readying for launch and I look forward to sharing either further information with you all at that time.
Moving to slide nine.
We are also executing on our strategy to ramp up our growing and manufacturing operations to support demand. Our manufacturing facility is a key strategic asset where we have built the capabilities needed to produce high quality reduce content cigarettes.
As well as our current deal on production.
Already produce tens of millions of research cigarettes, using the independent clinical studies that underlie our helps you smoke less labor requirement.
As larger plans to ban menthol and require all cigarettes to be non addictive.
Given the increasing demand we anticipate our factory team is expanding capacity by 25%, including the addition of a new line and a second shift.
To meet anticipated demand for our <unk> products, we are working with highly experienced U S tobacco growers to produce our largest ever BLM tobacco crop in 2022. This crop includes the Companys second generation reduced nicotine tobacco plants.
Already this year, we are seeing higher yields enhanced quality leaf improve disease resistance and a reduction in nutrient inputs positive developments from both a commercial and sustainability perspective.
Harvest and leaf curing will occur throughout this fall.
Our CMO tobacco revenue has helped to cover the cost of our facilities to date looking ahead of zeal and expanded its rollout and ramp to volume we expect to transform this business into a high margin higher volume operation.
This includes the opportunity to license, our technology and capabilities to other brands that want to join us and the reduced nicotine Revolution helped.
Helping even more adult smokers to smoke less all while driving top line growth.
Finally for me Slide 10.
The FDA has been clear about the critical role that reducing nicotine in cigarettes can play in tobacco harm reduction, which will bring even greater societal benefits and the proposed menthol ban.
DC survey a couple of years ago showed that high levels of support for reducing nicotine content in cigarettes, with 80% of adults, including 80% of smokers supporting reducing nicotine in cigarettes.
These facts and other data showed that the adult smoker understands the potential value and are probably the BLM, which can help them smoke less.
Obviously, we recognize that these policies won't happen overnight, but incremental progress.
It helps smokers take positive actions, even before the before the policies are fully realized.
This includes policies being implemented by the number of cities and states to move in this direction, even ahead of federal action.
As part of the public comment period, we have submitted our response to the FDA proposals and as we have stated before our position is that we are in favor of the proposed menthol ban and highly addictive cigarettes, regardless of whether the ultimate regulatory proposal for menthol survives the inevitable litigation, we anticipate from the tobacco industry, our FDA authorized.
<unk>, King and Vela and menthol King products are on the shelf today and will soon be even more accessible giving more adult smokers around the U S. A new tool to help them smoke less.
I hope you can see that we've been incredibly active and are excited to finally bring deal in the market.
Moving ahead to open even more stores, where smokers can buy these important products.
I'll now pass it back to Jim for an update on our hemp cannabis and hops franchises Tim.
Thanks, John It really has been an amazing second quarter in tobacco. When we are extremely excited for the path ahead.
Let's turn to slide 12, as we focus for a few minutes on our other two growth franchises, starting with the hemp cannabis.
We remain absolutely committed to building our leadership position in the cannabis industry by developing superior plant lines and now superior extraction ingredient and finished product capabilities.
Our original mission was to optimize the plant genetics and hemp cannabis to create stable improved varietals needed to move to this industry to true commercial scale.
In addition to better yield planned consistency for harvest disease resistance drought resistance and other key characteristics can be modulated to disrupt this industry.
We've now taking it to a new level.
On slide 13, we acquired GBP Biopharma effective may 13th.
<unk> is a global leader in the manufacturing of hemp derived active ingredients and finished products servicing the nutraceutical consumer products and pharmaceutical industries.
Acquisition position 22nd century, as the global leader in cannabinoid ingredients and leading CDM over white label products across many end use markets is.
We've completed our vertical integration platform through which we can now monetize our deep intellectual property portfolio in hemp cannabis, but also doubles our revenue on an annualized basis improved our gross margin profile and accelerates our path to profitability and hemp cannabis.
Slide 14 should be very familiar to many of you illustrating our upstream hemp cannabis capabilities.
You can quickly see the addition of GBP means we now own the extraction purification products capability with a global leading CDM O facility.
We are now fully fully verticalizing unable to bring together plant science best in class ingredients in finished goods capabilities to help move this industry forward.
Slide 15 gives you a feel for the facilities, we picked up in the transaction, including a 30000 square foot refinement facility, a 40000 square foot manufacturing site and perhaps most exciting a new world scale extraction facility in trying to Oregon, and we'll start out of the 20000 kilo per month capacity, but we believe we can.
Far more one fully loaded.
Slide 16 illustrates the diverse range of ingredients that make up the bulk of <unk> revenue today.
As a global leading cannabinoid API supplier 20, <unk> century, and GBP cover potentially the broadest spectrum of products in the industry all at exceptional levels of quality.
Finally, I want to update you on our steady progress in specialty hops for the global market.
This is a closely related alkaloid plant family, where we can leverage our alkaloid plant expertise and IP for new growth opportunities.
<unk> is an extremely large global market and we believe our unique knowhow in IP can bring exciting improvements to this industry.
We are hitting key technical milestones and working with strategic partners to transform a hops plant.
The development cycle to reduce cost risk and time required to create disruptive plant strains.
The addition of Dr. Calvin <unk> to our team, bringing world Class AG science experience getting to some of the largest players in food crops.
Our team accelerate and focus these efforts and I'm excited for the path forward in this large and underserved market.
I'll now pass you over to <unk> to review our financial performance.
Hugh.
Thanks, Tim and good morning to everyone.
Starting off on slide 20, with the quarterly results net sales increased by 73% year over year to $14 $5 million, primarily through the addition of a half quarter of GB revenue and improved CMO manufacturing next week.
We continue to generate new business and orders with additional customers plus are now manufacturing Zealand cigarettes for a pilot program and now Colorado.
Gross profit margin in the second quarter increased year over year to six 1% I would mentioned that that number as a result of the purchase price accounting and does not reflect.
Our projected gross margin for the business going forward, we expect to report a more typical gross margin starting next quarter now explain on slide 21.
And so we had a partial quarter for GDP. This slide should help level set and explain both revenue and gross margin more clearly.
First one on revenue tobacco revenue increased $10 million from $8 3 million for the second quarter year over year gain of 19%.
Gross margin on tobacco sales increased 10% through a combination of increased volume and favorable sales mix.
On the <unk> side, we recorded approximately half a quarter of operations from the closing date of May 13th revenue recorded in half a quarter was $4 5 million.
We reported a negative gross margin due to a $1 million amortization step up type of purchase price accounting for the acquisition.
Excluding this onetime noncash charge GBS gross margin was about 22%.
And GDP gross margins typically at 20% to 25% and will be reflected in consolidated operations going forward.
Slide 22 illustrates the purchase price accounting in more detail. It should be noted that certain portions of the purchase price accounting will be adjusted in the coming quarters in particular, the goodwill and intangibles sections.
As the footnote <unk> explains this preliminary allocation reflects provisionally estimated fair values as of the date of the acquisition.
The fair values are determined using significant estimates and assumptions.
We're completing valuations required to allocate the purchase price in areas, such as property and equipment intangible assets deferred taxes and goodwill.
And as a result, we expect these allocations to change in the future.
And last for me on Slide 23, you'll see a few key highlights from our balance sheet.
Of note the total assets of more than $119 million included $44 million of goodwill from the GBP acquisition.
Also the $26 million of cash at quarter end was supplemented by an additional $35 million in gross proceeds from our offering in July which will help accelerate our BLM March clients.
I know that many of you are focused on our cash position and how we're using it to continue our steady progress towards profitability.
We are selectively deploying capital to accelerate the launch of the land expand tobacco manufacturing operations investments <unk> production capacity and increased inventory levels to meet growing demand for both perm candidates and tobacco products.
20, <unk> century's cash requirements are anticipated decrease.
Slightly higher sales volume for <unk> products in fiscal year 2023.
Organic growth of the GDP as operations.
As a result, the company has adequate liquidity from the current balance sheet to complete its strategic initiatives.
The acquisition of GBP was not only done at a very reasonable multiple of sales.
It also transforms 20, <unk> century's hemp cannabis business from a cost center to an organically expanding cash generating business.
We expect to be fully realized in 2023 happening investments, we're now making to meet market demand.
I'll now pass it back to Jim.
Thank you.
An exciting time for 20, <unk> century, as we accelerate our U S. <unk> launch with several major National C store and pharmacy change, placing our <unk> products in front of customers.
With our pilot exceeding our expectations and a massive market opportunity even a relatively small share of that market is transformational to us as John described.
With the proposed menthol ban moving ahead as it should plus state actions in advance of federal policies, there's never been a better time for a disruptive reduced nicotine content product.
We're ready to go not just on our innovation tobacco products, but also in our hemp cannabis products and new GBP platform that doubles, our revenue now that is fully integrated and enhances our path to profitability as we plan to capture and leverage all of the synergies of our two companies in the months ahead.
We have built the framework and foundation and we are in a strong position to execute the next phase of our strategy to maximize the full potential of our tobacco in hemp cannabis and cannabis business now and perhaps in the future.
And with that operator, please open the call for questions. Thank you.
Thank you.
At this time, we'll be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
As a reminder, you may submit questions via the web by using the ask a question feature on the side of your screen.
We will take questions from the approved list of analyst first.
If we have time, Joe will read a question that was submitted via the webcast.
Our first question comes from the line of Vivien <unk> with Cowen. Please proceed with your question.
Hi, good morning.
Hey.
Good morning, Good morning, So I wanted to start on it on in Chicago with the BLM pilot. Please I certainly appreciate that several key metrics are competitively sensitive I was wondering if you could just offer some some relative content context, perhaps like Hollywood velocity.
On an average store compare to mainline combustible cigarette competitor just as one example, but just to help dimensionalize the performance. Thank you.
Yeah.
Good morning, Vivien This is John Miller.
<unk>.
The best way to put it as you know we looked at our own internal.
<unk> set forth.
Through them, but several different kpis or metrics one of them is obviously historical performance of what new product introduction would do in a similar space.
We also looked at stores in different areas. So.
If you look at Chicago land market.
Market.
All of our stores have some very different variables within them.
Some of them are in Cook County, some of them are near.
Schools churches, whatever that a different regulation. So the actual performance of the product does vary based on store neighborhood pricing theres different taxes in Cook County, then on some of the other stores.
But overall.
We found that our sales and our share levels.
Increased beyond what we set as targets were extremely favorable and.
And really some of the keys of that we're also learning that we did in the focus groups about what drove that.
That led to our decision to expand through Illinois, and then move into Colorado, which are different than Illinois, as an MRI <unk> tax basis that is $6 50, a carton less than traditional cigarettes.
So I mean in summary.
The good broad segment of stores.
Different variables.
Our results.
Looking at historical numbers in terms of what the space is provided for new products very very happy with that.
It took those learnings and now we're expanding to Illinois and into Colorado.
Understood. Thank you for that perspective, if I could just follow up recognizing of course, the demographic differences across the store base and in the Chicago area, but.
Any.
The.
Trends that are solid enough that you could call out in terms of kind of average age of consumer or average relative income of consumers attracted to the mainland product. Thanks.
Yeah.
I would say when you look at it I can't say that the Democrats, because you're only going to be different than the demographics. They give a cigarette smoker.
What I will tell you this though.
The smoker that is looking to quit smoking.
That 60%, 60% to 70% of that population of 34 to 40 million people that too this is attracting.
Hum.
90 days into the program I can tell you household income numbers things like that but I can tell you who is interested is that people who are trying to quit smoking that that was originally identified as the target consumer that continues to be the target consumer and Thats, where this message resonates. When you look at those three pillars of what we learned in the test.
These are the critical pillars.
When you look at education awareness and trial.
That is what the marketing platforms will be built off of.
That's what people need to understand about this product.
If someone's of Marlboro smoker, it doesn't necessarily translate that this product has for them. Some of them are a smoker, who wants to quit understands what the product is sees it in store understands what it does how it performs that.
That will be our target demographic, that's who we will track.
Okay. That's helpful. Thank you and then just pivoting our last question. Please.
Colorado some of your larger peers.
I haven't had the ability to take advantage of some of these March AEP tax.
Tax incentives or tax savings so understanding that you can deploy those savings across a number of different consumer engagement initiatives.
The law mandates that that's where that tax savings goal was Kenny you dropped some of it to the bottom line just curious the mechanics of that tax law. Thank you.
I'm not aware of it being mandated that it has to be put into any specific pricing or promotion or merchandising or whatever.
I'm not aware of the law, saying that.
Understanding the law and understand their benefit.
We've learned in the pilot or takeaways out of Chicago, what we've seen in our research moving forward.
Why in my comments I talked about specifically some things we can use that for.
That savings.
Certainly could be reflective in price could be reflective and additional education and awareness programs trial programs.
The enhanced margins for retailers for doing additional merchandising, we we're still working out some of those things and some of those decisions will be based probably important channel.
Than anything else.
But it does give us a bit of room to operate there is no doubt about it.
Understood. Thank you very much guys.
Thank you. Thank you.
Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question.
Hi, Good morning, and thank you for the question. So I wanted to piggyback a little bit off.
What I'm, saying.
<unk> of Chicago again can appreciate how you cannot give exact numbers.
But while it's still in the early days any color you can provide in terms of retention versus trial that youre seeing especially given it is a user that you said was looking to quit conventional cigarettes.
And then as well whether or not youre seeing in terms of like dual use with <unk> versus traditional cigarettes, or maybe count that on with some type of a patch or east three I've seen types of consumer trends without giving any exact date would be helpful. Thanks.
Sure. Thanks Darren.
In terms of very specific.
<unk> connection to data on repeat purchases.
Purchase patterns.
We just don't have that yet.
One of the great several cases already sophisticated retailer, especially in the convenience industry.
One of the best convenience marketers out there.
Do have some royalty programs, we're tying into their technology.
It's really what phase II has been about getting into their lift programs EVP programs kind of understanding how their consumers shop.
So we're trying to get some of that data right now, but again, we're looking at 150 store test and its hard was it causation correlation about multiple purchases were they in the right stores do they understand the test stores. These are all things we're working through.
So we understand the importance of that certainly understand the importance of understanding how many times a consumer buys the product stays in the category stays with the brand.
Reasons for purchase path to volume I mean, those are all things we're getting too.
So.
That's why we're hoping expanding the launch going deeper into different states will help us get that type of information.
In terms of dual use with a patch.
The.
The best I can tell you is that when you looked at the research 20, <unk> century provided the FDA and some of the research that came out of this was actually a.
Consumer and adult smoker that uses.
D O N E.
In combination with an NRT and whether thats gone patch whatever.
It seems to help both of them.
Both of those products get people off of nicotine.
So right now we don't have definitive data on a circle K shop are also buying nicorette, but we do know that through the data.
Both of those products work, well together, which is a very interesting strategy moving forward.
Okay.
Okay, great. Thank you for that and I'm.
I'm wondering if you could give numbers just in terms of exceeding your expectations could you just let us know.
In terms of maybe like the trends. So maybe month over month have you continued to see an increase or was there a kind of an initial large uptake.
Vince has trended down just in terms of whether or not it is continuing to trend upwards in terms of your sales as well as market share will be helpful without giving the exact numbers. Thanks.
No certainly trending upwards.
Certainly the first six weeks.
Some of the marketing piece, that's what we call our phase one timeframe as those things started to kick in consumers started to understand what the product was.
Ramp up.
Every store, having sales phase II now that we're starting to do more and more of it certainly continues to grow.
Okay, great. Thank you very much and I'll jump back in the queue.
Thank you.
Our next question comes from the line of Brian <unk> with Roth Capital Partners. Please proceed with your question.
Hey, Thanks, good morning.
I think or could you provide some color on consumer kind of trials as far as like following test groups or anything like that is it is the initial trials or if there is any work along those lines that you can.
Tim can speak to.
Brian just to clarify are you thinking about the research studies or actual in store.
Beck.
Kind of in store feedbacks.
Following kind of in full.
Following any initial users or groups of initial users or anything.
Of that nature.
Right right, we do it now we have.
Two different things I can kind of report out one is anecdotal feedback that we received back from the store personnel or the occasional consumer we are people may have run into but.
That feedback obviously very positive.
From some of our brand ambassadors that I've worked for store personnel getting people to understand what this product is having them try it that's been very positive.
On the research side.
We did an in home use test.
<unk> was completed.
I've gotten the preliminary feedback from that and again when you start talking about education awareness trial.
Key pillars that came out of that but even the feedback on the product from the in home use test right people said it was a great smoking experience people said it provided good tobacco taste provided tobacco satisfaction. Some people said things like they never saw anything like this.
We got like 93% interest and purchase intent from focus group participants.
Great acceptance and usage.
When you do it in home use test in.
Invariably some of the people fall out of the group what we saw here was our first week, 100% of the participants stayed in the focus group.
At the end of two weeks, we had 96% of the people still in the focus group.
It was it was really really interesting seeing what happened now again as we stated alright excuse me as I already stated. This is a group of consumers that is interested in stopping smoking.
This is a group of interested I want to get away from cigarettes. So that's why we know as we move deeper into these markets and we continue to pursue this education awareness and trial.
Platform, that's how we're going to get people to use the product the.
The other research we have going so that was all in home use test. The other one we have going is what's called a capstone project.
Which is more of a perception post trial, but that that research is still being done.
And I haven't gotten the results of that back yet again.
About 90 days into this but.
We know how important it is to understand this about the consumer we know how important it is to understand why they're using it whether or not it's working and what their perception is of the product.
No that's great feedback. Thank you. So much could you also maybe provide us a little more details on kind of the.
The increase Chicago circle, K stores or expansion outside of the Chicago land area in Illinois.
Any way to kind of think about what's next there.
Sure.
Any launch of a product right.
As you get into it you started understanding.
Where do you want to go what are the drivers of the volume how are you sourcing your volume where the consumers right we.
Haven't pulled back from wanting to be a national brand.
No doubt about it I mean, everything we talked about today, what we put in that presentation and the press release all of that is additive to what we'd want to do.
These are the things we're going to continue to keep moving forward.
We're seeing a change in the environment rate since we've launched this product has been a tremendous amount of PR.
On what's happening within low content nicotine cigarettes, what's happening with the FDA whats happening with Joe Biden.
What he's saying about his policies. So we're starting to get out in front of consumers minds, a little bit, but we know we have to get out there and explain to people. What this product is we have to educate them get awareness on this so we're going to move through Illinois, where we already have a foothold we're going to be moving into Colorado, which makes sense it'll be our first M. RTP tax state and we have multi.
All other things that we're working on right now, which I'm just.
Don't want to announce right here on this call, but they are in process. The plans are being made.
We're going to continue this is a there's a lot of momentum behind this product right now in our activities to expand.
<unk> quick.
No that sounds great.
There are a lot more stores in Chicago is it too early to talk about kind of the next kind of tranche of those stores and kind of how to think about the size on that.
US investors, we loved number so.
Any help with what something like that would be great.
I totally understand it I understand for your modeling and things like that.
I'd, rather not put a hard number on Illinois, just yet.
Because we are working on some things that.
You just don't feel comfortable to announce.
But.
Illinois is a fantastic. So there is some stuff that's come in and we just got to be patient I got it okay. Thanks.
Yes, I just wanted to be able to announce it but I mean to your point about Illinois.
There's a lot of stores there theres a lot of.
There's a lot of interest in the product now I mean, it's I think Illinois, the number 14 state in terms of sheer volume.
Very good change you know in addition to circle K very good customers.
So we're moving forward there.
Colorado again, it's the 24th biggest state now not the biggest.
There's some very interesting things that go on in Colorado, and there's a reason why we picked it.
Not only the <unk> tax savings, but also you have Denver, Colorado Springs, do you have some different markets there to look at whats working whats not working.
<unk>.
A real technology based on people, who have a young energized base there that's moving into Colorado Theres a lot of people there that are looking for this solution.
We have a firm out there we're working with they did some metrics for us about attitudes towards quitting smoking understanding that.
Well it was right into our messaging.
And again, what we're seeing is the importance is to get be able to penetrate a market get into a market get the message out I use the expression all the time about being an oil well or an oil slick and for this product for people to understand what it does you have to get into a market and penetrate it and go deep.
Which is why we're again when you start talking about additive to your plans.
Certainly want to be a national have a national presence, but you know what you've got to do it smart and you have to do in the right way. So people know what's happening what's happening with this grand going deep into a market.
Getting people understand it.
I hope that answers your front end.
Yeah, No. That's very helpful. Very helpful. Thank you so much.
Yeah.
Yeah.
Our next question comes from the line of Jim Mchenry with Dawson James. Please proceed with your question.
Thank you good morning.
Given all that you've seen with the circle K trial can you.
It sounds to me.
Like Youre going to go.
Multiple regional tests or trials or pilots or phase ins over the other.
I don't know next six to nine months before you go National Am I hearing that correctly.
Yeah.
Jim.
It's not it's not that we're definitely not going national.
Our going in <unk>.
<unk> sort of way to to move through different markets.
There are there are certain things that you know.
And again when I talk about the oil while oil slick, but also people have to understand what this product is.
This product has only been you know we only got the M. R. T P designation since December .
If youre launching another Marlboro line or Youre launching another Copenhagen line or Youre launching a new snickers bar everyone knows what that is.
Okay. My old company, we could launch a new flavor in.
Across the country don't have any problem with people understanding what the with the product as well.
What we're learning here is we have to get people to understand what this product is there has to be awareness. There has to be education on what this is if someone were to buy a zeal and a pack of V. O N thinking there getting a pack of Marlboro, they're going to have a different experience. When we have when we can connect with the 60% to 70% of that adult population that smokes that wants to quit.
And we get them the solution, that's how we're going to be gaining momentum.
Yeah, I hope that makes sense. It's it's it's again additive how do you expand through what you know is important to the consumer base.
And moving along.
It doesn't make sense right now to put it into 50 states and hope itself, we have to be very smart about this.
And the momentum will happen.
We're starting to see it.
If you saw this week there was another article in New York Times. There was another article again about low nicotine cigarettes, what's happening with it so.
We're moving it forward.
Yeah.
Yes. Thank you I appreciate that I was just more trying to understand the timing of how these rollouts proceed so.
<unk> been in Chicago since April and.
At least the Q says they are expanding there as well as into Illinois.
And then the Q and in your remarks, you talked about expanding into Colorado. So again it seems like.
Youre going to do these.
State or city wide kind of.
Initial campaigns for some period of time and use that to build up into a national rollout and so I'm just trying to figure out.
At some period of time is.
Again to me it sounds like six to nine months, maybe six to 12 months is that is that a reasonable assumption.
Yeah, I hate to put it to just the number.
Say that it's going to be X.
X number of months before you see something else I mean, it's we're going to continue to keep rolling this out and it's making sense to do it.
In a very pragmatic straight way about market penetration.
Multiple markets at the same time.
We're working all of that out now again, we've only about 150 stores.
So now we're starting to move this out and expand it.
<unk>.
And for the tobacco tobacco world for new product.
No.
Different products right that had been out there when you look at something like Zen that Swedish match had they tested quite a while in one state.
Utah, Colorado test or they launched that seven to eight years ago.
We're there for a while testing things right. They are testing pricing flavors product packaging seeing what works best before they went national.
Not not in common for a lot of brands to do this right tested get a right now we've tested it and now we're expanding it.
<unk>.
It seems like the right way to go, especially keeping the message consistent getting to the consumer base, making sure they understand what the product is benefits.
Goals things like that.
And can you talk about it and so of course lots of yeah. It does thank you can you talk about the cost of doing this type of <unk>.
Rollout versus what.
Versus what your prior expectations might have been this is a.
This is a higher cost and Debra this is a lower cost endeavor.
The same.
Yeah, I mean when you.
When you look at this test that we started with rates so you're starting basically from ground zero. So you're building all the things that you are building websites you, putting together apps youre, putting together point of sale plans.
We're testing multiple different coupon.
So nominations.
So there's some costs that are upfront on this that will be utilized throughout all of the other markets I don't know that it was any more costly than anything else to launch.
Did a lot of things you know we had six different pieces of point of sale are proven.
And circle K, well, we use all of those in every store moving forward.
Probably not I mean, that's just not the way those things work so.
There is cost associated with this but the upfront costs are always our most expensive that first that first store is always much more expensive than your 50000 store just because you're trying to get it right. We are fine tuning, we're getting things dialed in.
And that's why you do pilots on try to do test and that's why you keep expanding.
Yeah.
Well the future programs look like exactly like the 150 stores in Chicago.
Absolutely not I mean, as we continue to evolve and understand our learning of the consumer what the message needs to be and how we get to them.
This is not a traditional cigarette brand and I think.
People have to understand that this is like I say this is not a marlboro line extension.
This isn't the Joe the Campbell campaign from 20 years ago. This is a very very unique product that is really all about public health.
As you can see it and it resonates in our brand that resonates in our packaging resonates in our point of sale. This will not be a traditional launch in terms of what people have seen in the past.
This is very unique.
Some very unique things with it and we're continuing to.
To elevate those things.
Alright. Thank you just a couple of things on GDP.
When you acquired it I think you were talking $45 million to $50 million in revenues.
For <unk> on a standalone basis not consolidated.
Is that still a good number and is that dependent upon the Oregon extraction.
Facility coming online is that a big part of the ramp up and.
What impact does that have on gross margins, but the extraction capacity coming online is that a higher or lower gross margin versus the 20% to 25 that you talked about.
Yes.
Gentlemen.
Oh, you mean, the run rates in line.
On the on those figures we are still in place.
Placing.
Our focus on the 'twenty three plan are starting to get looking at 'twenty three plan, but the run rates in that ballpark.
And it doesn't it doesn't.
It's not impacted by the extraction unit expansion.
Margins favorability certainly are but we are.
We can keep up with the demand side in either case, but certainly the margins show dramatic improvement.
As that unit comes online in the next few months and you don't want to calendarize basis in 'twenty three.
Yeah.
Alright, very good that's it for me, Thanks, and I'll talk to you soon.
Sure.
Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.
Great. Thanks, very much for taking my question and congratulations on what sounds like very successful early launch of the pilot program.
Wanted to ask about something that.
That you mentioned on the call about your cash requirements expected to decrease I'm wondering if you can give us a little bit more color on when we should start to see that happen I I would think just given the magnitude of the VL N launch potentially taking a product here from zero two.
Maybe hundreds of millions of dollars of revenue over the next couple of years, I mean, clearly youre going to need to build inventory and spend on marketing.
So.
Is there not going to be a little bit more maybe short term increase in the cash burn over the next couple of quarters, and then things perhaps start to become <unk>.
Closer to cash flow breakeven just just considering all the moving pieces you've got going on here, if you could help to unpack that.
Statement about about cash requirements decreasing that'd be very helpful.
Sure.
You can't events I'm happy to answer that question.
So yeah, I mean, we're obviously going to use the cash that's on hand, right now too.
We will heavily invest.
The vast majority of those proceeds into.
Continuous launch of the <unk> product.
So much on Capex, but obviously.
That was in distribution channels.
Most of what John just alluded to.
There'll be some portion of those proceeds will be used to just build up the working capital for Ggp's operation.
You bet.
Ancillary spelling out the next day.
The perpetual market demand, so there'll be a need for Marshall amount of money to build up that permanent working capital base permanent inventory levels.
GBP.
Standalone basis was actually AWS self sufficient in 2020.
Later, just because of our continued organic growth.
And so you're right there'll be a substantial amount of cash initially stat.
Going through the wash process and a progressive rollout strategy.
For the <unk> product, but.
Yes.
Third point in time, and particularly if we reach certain accelerated sales level.
The overall enterprise becomes somewhat self sufficient.
For the next 12 to 18 months.
Have the adequate resources to meet the strategic goals and complete the corporate initiatives.
Okay. That's really helpful. Then so putting that all together I mean, if we think about the $8 million adjusted EBITDA loss in Q2, when we when we start to layer in the full quarter for GDP and the acceleration of the VL and launch I mean should we expect.
The loss in Q3, and Q4 to be greater than that and then start to improve next year is that is that kind of a reasonable timeline to think about.
Yeah, that's probably the right way to think about it just because of a simultaneous investments in both businesses in particular, the BLM that.
That probably is the right approach.
Okay. That's really helpful. Thank you.
Sure.
Our final question is a follow up from Vivien <unk> with Cowen. Please proceed with your question.
Yeah.
Hi, Thanks for taking the follow up.
Just circling back to reveal in Chicago, the retail footprint opportunity is clearly much much bigger than what you guys have done in the Chicago area. Today I'm curious are you thinking about priorities.
Do you want to kind of replicate C store models, you've got apples to apples comparator is or is that outside of your control entirely in and that's going to be a joint decision with your distribution partner. Thank you.
Oh.
Yes, thanks for taking the follow up.
There's no doubt Chicago has.
And I know, Illinois.
A stores.
We are not married to a specific channel.
Terms of our willingness to want to market. This to adult consumers, who are looking for a solution to smoking I'm quite honestly, there's some very very good.
Channels outside of just convenience for this product that is all being evaluated.
It's going to be driven off of consumer demand will be driven off of.
Where consumers live shop, all those things so it's a yes to your point we are looking at.
Expanding this through multiple channels.
Multiple partners and having much more of a statewide presence there.
Yeah.
Hope that answer your question. It does thank you.
Yeah.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to James <unk> for closing remarks.
Thanks, operator, and thanks, everyone for joining us today and thanks for the great questions.
Tie a bow around some things what you heard today is that all of the recent announcements are in addition to our original strategy and the acceleration and expansion of the O&M increases and that's what you heard from John today become efficient with that and to reach our objectives, which is to get this product into the hands of educated consumers as quickly as.
Possible is really what you heard of today, we're gonna be sharing more and more of that over the next coming weeks and laying out even more detail to that but we are truly often running.
And despite all of the headwinds in the macroeconomics and in spite of all the challenges of this tobacco industry.
We are on a very successful pathway with the <unk> expansion and rollout not to mention everything we're doing on the cannabis and hemp as well so stay tuned for our next updates in press releases that will be coming shortly.
We continue to expand or BLM launch in the U S and move ahead on our opportunities with GCB and hemp cannabis.
And we will be present in a number of investor and industry events coming this fall you'll hear more about that as well.
I'd like to arrange a meeting please reach out to our Investor Relations team noted on the press release with that I. Thank you again. Thank you for your support and continued interest and we'll speak soon have a great day.
Thank you. This does conclude today's call you may now disconnect.
Okay.
Yeah.
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