22nd Century Group Inc (XXII) 2021 Q2 法說會逐字稿

Welcome to 22nd Century Group's Second Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

At this time, I would like to turn the call over to Mei Kuo, Director of Communications and Investor Relations. Thank you. Please begin.

Thank you, Diego. Good morning and welcome to 22nd Century's second quarter earnings conference call. Joining me today are Jim Mish, our Chief Executive Officer; Mike Zercher, our President and Chief Operating Officer; and John Franzino, our Chief Financial Officer.

Earlier today, we issued a press release announcing our results for the second quarter 2021. We'll start today's call with prepared remarks from Jim, Mike and John before moving into Q&A. During our prepared remarks, we will be referring to slides, which are available for viewing in the webcast and posted in the Investor section of our website at xxicentury.com under the Events subheading. We hope these slides will serve as a framework for management's prepared remarks, reinforce key takeaways and provide additional transparency and insight into our business, strategy and objectives.

Before we begin, some of the statements made today are forward-looking. Forward-looking statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly and other reports filed with the SEC.

During this call, we may also discuss non-GAAP financial measures, including adjusted EBITDA which we define as earnings before interest, taxes, depreciation and amortization as adjusted for certain noncash and nonoperating expenses. For more details on these measures, please refer to our press release issued earlier today.

And with that, I'll turn the call over to Jim beginning from Slide 3.

Thanks, Mei. Good morning, everyone, and thanks for joining 22nd Century's call today. Before I actually turn to my first slide, I really want to take a moment to let you know what headlines to listen for today. First and foremost, you'll hear new details regarding our MRTP application that we can now share. These new details continue to drive our high confidence and a successful outcome. You'll hear about us initiating the VLN launch process across numerous offshore countries that do not require MRTP. You'll also hear that we believe we will be in these target markets by Q1 2022.

You should also make note that the MRTP is the beginning and not the end game for us. It enables the U.S. launch and fuels additional launches in the remaining offshore countries that are contingent upon MRTP. Ultimately we'll also have a series of announcements with more detail immediately following the MRTP.

You'll hear more about our growing contract manufacturing, CMO business that broke company records in both Q2 and for our first half of 2021. You'll hear about the monetization of our hemp/cannabis that's coming out of the initial 2-year development cycle in the second half of 2021. You'll also hear about our operational network that is now complete and about our superior IP and technology to quickly bring disruptive plant lines to the market with our planned engineering and breeders, including our latest and keystone edition Extractas Bioscience. And you'll hear the exact date of the introduction of our third franchise and what to expect.

Now turning to the slide. The past quarter has been incredibly productive as we accelerated build-out for revenue growth in both tobacco and hemp/cannabis. I'm sure top of mind for everyone today is our MRTP authorization. We are in regular contact with FDA officials at many levels and through many channels, including very recent conversations at the uppermost level of CTP. We are highly confident that our application for VLN has completed the scientific review process and is in the report documentation phase, the final stage of the process.

I recognize that the delay by FDA in authorizing our VLN is incredibly frustrating for all of us. This process is taking far too long for a product FDA has itself said is critical to public health and begin to reduce the harm caused by smoking and the 1,300 deaths per day in the U.S. alone. I want to make it clear that we, 22nd Century, have the expertise to advance this far and we possess the expertise to navigate this to a successful conclusion, utilizing a balance of leveraging the FDA in collaboration.

As I said, VLN is 100% U.S. market ready. And while we continue to press FDA to act in the U.S. and with new capital on our balance sheet, we've initiated the launch process in several countries that do not require MRTP type of approval to go to market with a 95% less nicotine claim. These are well-recognized economies with established tobacco distribution channels and premium tobacco markets suitable for a product like VLN and we believe that we will be in these markets by the first quarter 2022.

In hemp/cannabis, we expect to monetize our lines and IP completing the first 2-year development cycle beginning in the second half of 2021 with upfront license fees from our Aurora IP partnership plus revenue from offtake commitments for our entire 2021 crop to be harvested this fall in our Colorado farm property. We're also accelerating our next-generation plant lines for 2022 and 2023 revenue as we leverage our highly disruptive breeding capabilities designed to give commercial customers a differentiated market advantage.

We've now secured 4 of the world's most expert alkaloid based breeding partnerships in both the northern and southern hemispheres to support rapid commercial scale-up and year-round cultivation of disruptive plant lines. Most recently, we have secured Extractas Biosciences, which may not be a household name to you, but I can assure you is the single most experienced and expert alkaloid plant breeder in the world. I can also share that we will introduce our third franchise on August 30. This will include detail on IP, market information, competitive advantages, plus operation and commercial partnerships in this large growing $500 billion addressable global market opportunity that is not bound by the same level of regulatory and legal hurdles we face in tobacco and hemp/cannabis by fully recognizing the importance of MRTP and remain absolutely dedicated to winning that authorization. All these efforts showcase how 22nd Century is building for the long-term revenue growth and value creation across multiple franchises and global market opportunities.

As part of that effort, we also have announced that we intend to uplist on the NASDAQ stock market with our first day of trading on August 16. In fact, 22nd Century will be ringing the closing bell that day. I want to personally thank the NYSE for all of the support and the people over there for the support to 22nd Century over the years. While remaining dedicated to our primary mission to reduce the harm caused by smoking, uplisting to NASDAQ also aligns 22nd Century with other high achieving, innovative and growth-oriented global science and technology companies. Company believes that joining the NASDAQ will enhance its visibility to a wide audience of institutional investors and increase our exposure to hemp/cannabis investors at this important time of industry progression towards mass production.

With that, I'll turn it over to Mike to detail our tobacco activities further. Then I'll come back and discuss our cannabis and third franchise actions with you. Mike?

Thanks, Jim, and welcome to everyone joining our call today. Turning to Slide 4. Federal agencies have spent over $100 million studying the benefits of our reduced nicotine content cigarettes, which continue to play a central role in FDA's own tobacco harm reduction plan. FDA has also confirmed that our reduced nicotine content cigarettes are appropriate for the protection of public health and their positive decision authorizing our PMTA.

There remain no outstanding requests for information from the FDA. And as Jim mentioned, based on our recent discussions at the highest levels of CTP, we are highly confident that our MRTP is now in the documentation phase, the final phase before FDA announces a decision. Even with this encouraging news, we continue to escalate our efforts to ensure a positive outcome.

More broadly, we believe adult smokers have a fundamental right to choose a cigarette that is non-addictive. To make such a choice, smokers need information about the products available to them, including their nicotine content. And we believe companies like ours have a right to communicate to their customers about products that could help reduce the harm caused by smoking. This is why our MRTP application is so critical and it is past time for FDA to act. We have all the knowledge, expertise and resources needed to achieve success here. We have come farther than anyone in the tobacco industry thought we could and we will finish the job.

Shifting to Slide 5. We are ready to initiate a pilot launch of VLN within 90 days of authorization. Our team has run a number of tobacco product launches, giving us critical insight into the importance of a well-planned market entry and solid supply chain. In our market research, most smokers tell us they are likely to use VLN. Our pilot program will enable us to test, measure and refine our marketing model to maximize our long-term commercial success with VLN and then advance to full national rollout, leveraging the most effective tools and messaging.

Meanwhile, VLN continues to be very well received in our discussions with potential retail trade partners. Several are ready to go today, others are maintaining close dialogue with us and ready to engage upon MRTP authorization. We believe this is another indication of the market's recognition of the importance of reduced nicotine content cigarettes and the role they play in FDA's tobacco harm reduction plans.

Turning to Slide 6. To support our launch efforts, we are ready to scale VLN manufacturing at our North Carolina facility. Our Q2 tobacco contract manufacturing results support this fact, showing 30% growth in revenue and higher margins. Our CMO program accomplishes 2 important goals: First, it demonstrates that we can indeed generate new business and produce large volumes of product, readying us for VLN production; second, it ensures that the assets needed to manufacture research cigarettes and VLN are ready, and not only paying for themselves, but also self-funding capital investments in added capacity and efficiency.

For example, we have brought nicotine content testing in-house, reducing our testing costs by 90% and cutting turnaround times from weeks to hours, all with a payback of less than 1 year. Further readying ourselves for VLN production, 2021 looks to be the largest ever VLN crop and we're working to expand our VLN growing program by adding growers in the southern hemisphere, allowing the company to grow our reduced nicotine content tobacco year-round.

Advancing to Slide 7. Given our readiness on manufacturing and increasing interest in VLN outside the U.S., we are initiating the launch process in key global markets, accelerated by the proceeds from our capital raise in June. While the company has made efforts in the past to launch its RNC cigarettes in the EU, regulations there made it difficult, if not impossible, to communicate with smokers about what makes VLN different from every other cigarette. Therefore, we are targeting countries where we believe regulations will allow us to go to market with claims today or with minimal interaction with regulators.

Many of these markets also have a strong affinity for new reduced risk tobacco products and they all have adult smokers with large premium segments. Once we have our MRTP in hand, we can then leverage that FDA endorsement to initiate the launch process in additional countries where regulatory barriers may be higher.

In closing my comments, we are 100% committed to the success of VLN because adult smokers have the right to choose a non-addictive tobacco cigarette. We have the plans and capabilities in place to launch quickly in the U.S. and we are accelerating the launch of VLN in markets outside the U.S. where we see an opportunity to generate revenue and gain market experience with VLN.

I'll now pass you back to Jim for an update on our hemp/cannabis franchise. Jim?

Thanks, Mike. So let's turn to Slide 8, which includes a recent photo from our Needle Rock Farm in progress, off to the left-hand side. The continued acceptance of cannabis in the U.S. and other markets is driving increasing recognition of the need for plant genetics tailored for large scale production. It's been a productive few months for 22nd Century as we secured operational partnerships to complete our upstream capabilities, began growing these first lines of high CBD and high CBG plants at our farm property in Colorado for harvest later this year, and accelerated additional lines for 2022 and 2023 growing seasons. We're also advancing with strategic commercial partners, building on the base we established with Aurora.

We anticipate these will become tangible drivers in 2022 revenue. We're expanding our team and enhancing our international reach to do so, which will enable us to accelerate agreements with well recognized pharma, food, nutrition, medical and recreation, and CPG customers that we are in continued dialogue with. In short, our hemp/cannabis business is accelerating to revenue at a very rapid pace.

On Slide 9, we believe 22nd Century now controls the most comprehensive and innovative upstream cannabinoid value chain in the industry, an asset critical to unlocking commercial success for large-scale cultivation. This is rapid disruptive approach. Importantly, our breeding partners, now including Extractas Biosciences in Tasmania in the southern hemisphere, are the most expert alkaloid based plant breeders in the world. They can support commercial scale-up and cultivation of disruptive plant lines far beyond the capabilities of independent competitors or in-house breeding in the consumer product companies.

We also have a number of -- made a number of advances in the existing elements of this value chain, starting with the recently signed lease free research lab in Maryland, very close to KeyGene's facilities and key government regulatory constituents. And important research and standard setting is entirely directed and related to our scientific programs.

I also want to take a moment to emphasize here just how favorable our transaction and conversion with Panacea was to 22nd Century, effectively yielding a valuable farm asset, an over collateralized note and 91 million shares of common equity in Exactas that can be converted to cash. You can run the math for yourself, but in essence every cent of appreciation is $1 million of potential cash towards 22nd Century. The Colorado farm assets in this conversion are state-of-the-art show piece and we have access to advanced purification techniques to get distillates and isolates as needed for our customers.

Before wrapping up my remarks, I also want to reiterate that we'll be introducing our third franchise on August 30, 2 weeks after the NASDAQ uplisting. The wait is over as we are confident in our competitive position and we'll now begin filing IP that will be in the public domain for this large and well-known consumer market. Importantly, this market will leverage much of our existing infrastructure and working knowledge, but without the high regulatory and legal hurdles of tobacco and cannabis respectively. I cannot wait to get that into your hands, come the 30th of this month.

And with that, I'll now pass you over to John to review our financial performance. John?

Thanks, Jim, and good morning to everyone. Starting off on Slide 10, I'm sure many of you are excited to see that we'll uplist our common shares to the NASDAQ on Monday, August 16, 2021 and continue to trade under our current symbol XXII. Transferring the listing to NASDAQ aligns the company with other innovative and growth-oriented global science and technology companies. Joining the NASDAQ will also enable the company to be more agile -- to be a more agile organization in hemp/cannabis and draw more coverage interest and investment. We've also crossed several momentous milestones this quarter, including new research coverage initiated by Vivien Azer, leading beverages, tobacco and cannabis senior analyst at Cowen & Company, and the addition of 22nd Century to the Russell 2000, Russell 3000 and Russell Global indexes.

Now turning to the financial results on Slide 11. As Jim and Mike had stated, we've had a great quarter. Net sales increased by more than 30% to $8.4 million through a combination of higher volume and price increases in our contract manufacturing cigarette business. This demonstrates our ability to generate new business and to scale up volumes ahead of launching our VLN cigarettes following the authorization of the MRTP. We are working with a number of potential opportunities to further scale this business.

Gross profit margin grew by 390 basis points, our sixth consecutive quarter of year-over-year improvement, demonstrating our ability to execute on the objectives and strategies we set to the business. Every incremental dollar of CMO contributions helps to cover our operating overhead and fund growth investment rather than utilizing our balance sheet cash to do so.

I also want to make clear the importance of our decision to position VLN as the premium cigarette brand and how it will affect our revenue model and margins after the launch. VLN will be priced as a premium brand, which will command higher revenue and margins. Initially, we'll use some of that to fund the launch, but in the midterm it will generate much greater revenue and margin per carton than our CMO business. In cost of production, the taxes and the other expense as they go into the production will be notably different from our contract business today, which means these additional dollars will result in higher gross margin and provide additional cash for investments in growth.

We have provided a more detailed comparison of our financials for the quarter on Slide 12. Total operating expenses for the first quarter increased by $2.3 million, driven by $2.7 million of higher SG&A expenses, partially offset by $215,000 of lower R&D expenses. The increase in SG&A included the addition of new members of the company's management team, including the Chief Executive Officer, the Chief Financial Officer and General Counsel; higher noncash personnel costs related to equity compensation; D&O insurance; financial and strategic consulting costs; and marketing costs as we move quickly to market readiness in both tobacco, hemp and cannabis.

R&D expenses was lower by $215,000 driven by lower personnel and contract costs, partially offset by higher tobacco field trial costs and patent fees. We expect to increase investments in R&D going forward as we continue to expand our activities across tobacco and cannabis, and add the third franchise. For the second quarter, operating loss of $6.6 million increased by $1.9 million over the second quarter of last year.

Improved gross margin of $385,000 is more than offset by $2.3 million of higher operating expenses. Total other income increased by $2.8 million. $2.5 million of that increase was the gain resulting from valuing our equity in Panacea Extractas investment to its public market price and further adjusting the arrangement to obtain the Needle Rock Farm as partial payment for the convertible note receivable previously in place.

Turning to our strength in balance sheet, with more than $60 million of cash at quarter end, we had the resources to fund the significant runway for growth as our reduced nicotine tobacco and cannabis franchises transition to commercial launch. We raised $40 million of growth capital through a transaction that was brought to us on very favorable terms. We intend to use the proceeds of that offering to accelerate our revenue progression in a number of ways, including VLN, U.S. launch readiness, commencing our international VLN market launches, accelerating the commercialization of our disruptive hemp/cannabis plant lines and IP, and launching our third franchise.

I'll now pass it back to James.

Thanks, John. So summarizing everything on Slide 13, our 2021 priorities have not changed since the year-end report. We now have made significant progress with even stronger tailwinds propelling us forward. We'll continue to escalate our actions to secure MRTP authorization, which will kick off the launch of our VLN products in the U.S. We are accelerating our international launch efforts, looking at multiple countries where we have exciting opportunities.

We now control the complete upstream cannabis capability we believe to be the best in the industry with first cannabis revenues coming later this year and our pending third franchise to be announced on August 30 should be generating revenue within 12 to 18 months after launch. Adding to those meaningful milestones in our operations, the strong balance sheet to fund growth programs across all 3 of our franchises and we are in an even stronger position than we were when we started the year.

And with that, Operator, please open the call for questions. Thank you very much.

(Operator Instructions) Our first question comes from Vivien Azer with Cowen.

My first question I just wanted to follow-up on your comment around your conversations with the senior-most leadership at CTP. Can you expand on that at all? Did they give you any indications around more concrete timing or any type of procedural next steps on their end?

Vivien, this is Mike. Yes, there's not a lot of detail we can provide about the call. These are generally confidential discussions. But we know from activities around other MRTP products that, in the documentation phase, FDA is generating essentially the public documents. So press release announcements and the team reports explaining their decision about the MRTP authorization. So it's our understanding from our conversations that these are the documents they are generating now leading up to an announcement decision.

Understand. That's helpful. And I appreciate your commentary on some of the regulatory constraints around potentially launching VLN in Europe. I think there are probably some obvious candidates that have lower regulatory requirements and the pension for reduced risk products. As you think about that kind of 2 staged execution, right, where an MRTP might improve the conversations that you have with regulators in the EU, how are you thinking about approaching kind of a global opportunity using third party partners? Are you looking for an exclusive global relationship or can you create a geographic path forward?

Yes, great question. The -- at this point, our strategy is likely to be focused on engaging partners that are strong in each of the local markets. And so while there are a couple of global tobacco companies, much of the world also has very strong, let's say, #3 and #4 players that we can potentially partner with. And those would be the folks that we're engaged with in discussions with at the present time. Of course, we're open to partnering with anybody that we believe can commercialize the product successfully and has the intent to do that.

That's helpful. And then just following up on the guidance for revenue generation from those efforts in the first quarter of 2022. Well, I think you said commercialization in the first quarter of 2022. Are we meant to understand that that's the first quarter of revenue recognition or might you be recognizing revenues in the fourth quarter as you ship those products out?

Yes. The timing is -- so we're referring to revenue recognition. In the situations where we're working with a local partner, then that would occur likely upon delivery of the product. And so that pushes us really into first quarter of next year.

Okay. Understood. Perhaps moving to the hemp/cannabis segment, please. You're calling for revenue contributions in the second half of '21. We are in the second half of '21. So can you be any more specific about how to think about the phasing from a quarterly perspective?

Yes, sure, Vivien. Thanks for the question. I'll take that up and it's consistent with what we've been saying over recent calls, which is we expect it coming first from 2 sources: A, upfront licensing revenue from our original legacy IP, the Anandia IP, in concert with our partnership with Aurora as we move that forward. And then also revenue stream from our initial crop grow. That's, as you saw in the photo, well along its way in Colorado, both of which we primarily anticipated more in Q4 than in Q3, although there still may be an opportunity to see some initial components of that coming in, in late Q3, but more likely consistent with what we said before Q4 of this year.

Got it. And then last one from me, please. As you think about that revenue ramp, perhaps it's not today, maybe it's more appropriate for the August 30 presentation. But how are you guys thinking about the potential for operating guidance?

Yes. We're working that through. I mean we don't give our guidance at the moment, but we do want to get as much information out there and be more transparent. So as we move through this quarter, we really hope to quantify this a bit better and to lay that out the next call. A big piece of it of course is based on the yields of the first grow in Colorado. And as I've said before, we have options of moving that as flower or further refining it and improving the margin on that product significantly. So we're trying to sort out exactly not only the timing, but the form it will move. And obviously, the further we can refine it, the more so we'll do that. So we hope to have a bit more information around that, either in between now and the next call, to share or certainly at the next call.

Our next question comes from Jim McIlree with Boston James.

Jim, I think in times past, you've talked about a couple, $3 million in revenue from the upfront licensing and maybe a similar amount for the initial crop grow. Is my memory correct or has anything changed to those values?

No, it's in the ballpark, Jim, and thanks for the question. Again the part we're trying to sort out in more detail is around the grow, in particular because it is our -- it is disruptive plant lines going in there. It is the first grow and some of that will depend on yields. And again more importantly, we've -- we're looking at refining the product as much as possible to make it truly differential and those commitments that we have lined up for that are open for that based on the market conditions. So we're trying to quantify that as best as possible, but those types of ranges is certainly what we're targeting.

Okay, great. And John, on the operating expenses, are we at a new higher level or was there something temporary in the increase this quarter that we should be aware of that might be coming out in subsequent quarters?

Can everyone hear me? I'm sorry.

Yes.

Yes, I'm sorry, I pressed the wrong button. Yes, thanks for the question. I think that overall we are anticipating a higher level of operating expenses, but they'll be characterized in different ways as we move forward. In the quarter, we've had higher operating expenses in this last year and having to do with the higher management costs and so on, which are characterized as being in the following half of the year that will be in place. But we do plan on increasing our investments in R&D and operating expenses around getting personnel in place with a third franchise and to further develop the business in both cannabis and tobacco as we move forward. So I'd anticipate that our operating expenses will carry forward at a comparable rate to where we are at now through the first half to the second half of the year.

Okay. Along those lines, Mike, do you need to increase either physical resources, human resources, anything else for the international launch of VLN?

Yes, Jim. At the moment, we're not planning to increase any personnel resources. Our strategy is to work with local partners in each country. And so we have the personnel already in the company to manage those relationships and develop them. All of the manufacturing resources and tobacco inventory that we need is also sufficient to launch the international market. So right now, as we have it planned, we can leverage all the resources and the assets that we have today to launch these markets.

Got it. And Jim, on the third franchise, should we expect there to be some upfront licensing fees or some sort of IP acquisition or asset acquisition? Do we need to expect that when you announce the franchise on the 30th?

The same business model that we were applying really on the hemp/cannabis side will apply to the third franchise. So it will have us optionally open towards upfront licensing fees to refine and develop a disruptive new strains with commercial partners, utilizing our operational partnership network that already exists. We got CannaMetrix, KeyGene and the breeders. So the business model will stay the same for upfront revenue stream for large programs and then royalty streams off of that. So we'll quantify that as we move forward, but it will be kind of a 2-phased approach.

There's also opportunities as we're working in hemp/cannabis to drive it out as an ingredient in some form and that we're considering as well. But I'd say the first revenue stream that will come in for that franchise more than likely will be upfront licensing fees to secure these particular programs and strains, and then quickly develop them into royalty streams and/or ingredient sales.

I was asking more on your potential payments to license holders or IP holders?

No, we'll work the same. It's all captured in the same network. So certainly the same type of relationship we have with KeyGene in particular will be duplicated in the third franchise. So we don't expect any significant upside payments for that required. That's why we've built a network that is adjacent within these alkaloid plants in order to take full advantage of that. Now if we happen to see additional opportunities that can accelerate this, then I wouldn't rule it out. But right now, we don't feel that is necessary to make significant progress in the franchise.

And on the hemp/cannabis side, you've built out this soup-to-nuts network in order to address that market. Are there any holes that you need to fill when the third franchise is complete?

No, there's not because the activity that goes on at CannaMetrix can also be applied to the third franchise. In fact, they're already doing it. Likewise, with KeyGene, likewise with the breeders, they're already heavily engaged in this franchise as we've been working it through. So haven't remained idle. We've certainly kept it behind the confidentiality shield for protection. But all these components have been active, even the ones that we've secured recently by -- on the paperwork, such as Extractas, has been engaged in that the third franchise.

So no, there's really no holes to plug. It's more about, again, keeping our eyes open for ways to accelerate to revenue if we find some new technology that applies or a new partnership that may allow for that.

Our next question comes from Aaron Grey with Alliance Global.

Two quick ones from me. So first off, you guys talked about the global hemp and cannabis breeders. Just if you could give some additional commentary there, maybe how you look for those to be differentiated for them to be value-add to your clientele?

Sure. I think what's most important, and I think some folks fail to recognize as the marketing has developed, is that at the end the hemp/cannabis from a plant biotechnology is really in a nascent phase. It's a start-up phase, where as it has expanded, the breeding expertise that has primarily found its way into large consumer-based products, Canadian LPs, MSOs, et cetera, have tapped into the smaller scale breeders that have had wonderful success of bringing artisanal based plants to bear, but at relatively small-scale in greenhouses under very expensive costly conditions.

The requirements in order to get to large commercial scale for the mass markets, whether it's in Canada or the U.S. or what have you, really requires a much more in-depth knowledge around the alkaloid plant approach itself. It is a very challenging plant to modulate. And especially what's been happening I think over the past several years that we've been following it is that there have been improvements in the plant strains to get them to scale. But they've been incremental, I wouldn't call them disruptive on, for example, the levels of cannabinoids or the yields of cannabinoids or even some of the disease protection around the hemp/cannabis.

They've been incremental and they have taken quite some time. A lot of people are working on it. It's moving in the right direction, but it is incremental steps and taking years and years to get there. What we've assembled in this network are these breeders who are not household names, but they have spent their entire legacy of the companies, Extractas over 70 years alone, perfecting ways to modulate the alkaloid plant species, including hemp/cannabis and others. And that expertise tremendously consolidates the time to get truly disruptive technologies and strains to the market.

So our strains as they're coming through the development pipeline and coming out of the back end of the first 2-year cycle are not tens of basis points higher in cannabinoids, but hundreds of basis points of active cannabinoids or higher -- much higher yields are much more protective from a disease perspective. So those are what we're trying to bring to the commercial scale in this 2-year development cycle. So the speed of our network and the disruptive technology that can come from that is where we have carved out a space for ourselves. And that's what's enticing the conversations with commercial partners based on this operational partner network that we have created. Otherwise, there's breeding going on within all these companies. But as you can see, for the past several years, the improvements have been fairly incremental.

That's really helpful. And then just kind of switching gears to MRTP and the potential launch, I think you said pilot launched within 90 days after that's received on very low nicotine. I just wondering now if you could perhaps provide some incremental color in terms of planned efforts to kind of get in front of consumer through those pilot efforts either through you'd be able to do marketing or kind of how to get consumer initial adoption from whether it be cigarettes or other nicotine products?

Aaron, this is Mike. So our plans here, as we mentioned or as I mentioned in my comments, it's a pilot launch. This will be in a limited number of geographies where we can't -- we will be testing all of the marketing tools available to us. So that will include digital marketing, direct mail as well as advertising at the point of sale. And we'll be testing all of those programs to see where we get the best ROI and we'll also be testing various messaging options. So how we go about explaining to smokers what VLN, how it's -- what it is, how it's different from what they're buying and smoking today, and why they should be considering it and purchasing it.

We'll also be using different tools to generate trial, probably some couponing, probably some activities at the point-of-sale to talk directly with smokers. So essentially all the tools available to us, which are compared to many consumer products are rather limited because it is a tobacco product. But nevertheless we know from our prior experience with other tobacco products as a team that there are good tools available to us. And so really that will be the emphasis on pilot. We'll then take that learning as we plan to scale up the distribution and the sales of the brand nationally and same process internationally, learning and then scaling.

I'll now turn the floor back over to Mei Kuo.

Great. Our first question for Mike. How fast can you generate revenue in these overseas markets? How big are these international markets you referenced today? And are any of the early markets you alluded to meaningful in size?

Yes. And thanks to the audience for the question. Good questions here. There's several of them, so I'll unpack each of them. So we're looking at several markets, at least half a dozen, that we're evaluating and zeroing in on the details. Our goal is to launch at least 2 by first quarter next year. All of the markets that we're looking at are recognizable, they're well-developed countries. Many of you have probably even visited these places. They are markets where we believe we can go to market with MRTP type claims, including a 95% less nicotine claim, right out of the gate on day 1 without any regulatory review or there are countries where we believe with minimal interaction with the regulatory authorities, we can go to market with claims. So less onerous, more permissive regulations in these markets than what we have in the U.S. or the EU.

These are also all markets with established tobacco distribution channels. They have well-developed premium market segments and they have smokers, in many cases, that have shown a great interest in reduced risk products. And so while the U.S. is, after China, the largest market in the world and the most profitable, these are also -- these are the international markets we're looking at, in many cases are large markets. They are sizable and they can be meaningful contributors to revenue and gross margin in post-launch and hopefully in 2022 in terms of margin contribution.

However, we're not launching these markets lightly. Our objective is to launch and then achieve profitability as soon as we can. And so as the plans develop, we'll have a -- we'll be able to comment more on revenue recognition and margin contribution as the plans develop. So as background, this is work that I did for many years on the American Spirit business, a brand and a business that I worked on for about 15 years. So this is a familiar area to me as it is to a number of folks and our team, including John, our CFO. So we've got a high level of confidence in our ability to be successful here.

Next question is for Jim. Jim, can you elaborate on what makes our cannabis strains unique or special in the market compared to the synthetic cannabinoids or other approaches to generating higher cannabinoid or THC content?

Yes. And look, I'll first start by saying I'm a big proponent. Of all the various technologies that are out there, the synthetic cannabinoids that I help found -- co-found, that technology is wonderful chemistry put up by really the leader on API base as Purisys. But it's really primarily dedicated to the ultra-high purity pharmaceutical industry based on some of its restrictions.

We are also very optimistic, for example, on the biosynthetic approach where we're partnered with the Aurora on the original Anandia IP. But the biggest part of the market today and as it moves forward on a volume and ultimate profit basis to serve all these consumer end-use markets is the natural basis. So that's why we have turned our attention primarily to the natural grow and process. What makes us unique again is the -- certainly the keystone of it is what happens within KeyGene, the ability to modulate the plant quickly and disruptively. So in other words, moving a THC level or a CBD level from 20% to 22% or 24% is an incremental gain that could take years in order to achieve.

Our technology focuses on with the modulation of KeyGene and then accelerants in combining all these new pieces: breeders, CannaMetrix on the targeting side, the farms, et cetera. One-stop shop by bringing all this together creates this 2-year cycle to give you not incremental gains of 2% to 4%, but disruptive gains of 10%, 20% so you could be yielding CBD levels in the 30 percentages and 40 percentages. So that's what -- the combination of that along with the speed is our value proposition. Throughout this entire network, we, 22nd Century, control the IP. We owned the IP. We're utilizing and driving this from the highest level, but obviously setting up win-win partnerships to make sure everyone is heavily engaged and incentivized to move these things through as quickly as possible towards the commercialization with commercial partners. That's why our position is unique. That's why this network is unique, and it's really set up to establish a leadership role, both on a thought leadership with cannabinoids in general, but in a production and disruptive commercial level with this entire network in place, which again we direct and we control the IP.

And our last question before concluding remarks is for Mike. Why not launch the VLN in the U.S. given FDA's existing PMTA and lack of timeliness on the MRTP or take FDA to court for a decision?

Yes. I'll respond and then maybe Jim would like to weigh in as well because this is -- it's a great question. I'm glad it was asked and this is a key strategic question. I will say we have -- you can be sure that we've explored all the options, including the ones suggested here, and we continue to explore those. And while they certainly sound appealing given the frustration that we have, and I'm sure many of the listeners here have, about FDA's glacial pace, there are certainly downsides or negative consequences to many of these options that take more of a confrontational approach.

And such an approach is likely to change our relationship with the FDA from one that's collaborative to one that's adversarial and counterproductive. And so for now, at least we prefer to maintain that collaborative relationship with FDA. And we think that's the best way -- the best thing for smokers in the long run is to work with FDA to get the right information to market and be able to communicate and educate adult smokers about how VLN can help them reduce their exposure to nicotine. So again, while we're evaluating all the options, we still have a high level of confidence in the approach that we've been taking so far, which is the collaborative approach. But Jim, not sure if you want to weigh in here as well.

Yes, just to add to that, I think the way to look at it is, look, we're in this for both the short term and the long term, right? So we're doing everything possible to take a look at the short-term gains, which means launching offshore in countries that do not require this MRTP to get moving now that we've got everything buttoned up and ready to go for the VLN launch in the U.S. So we're getting moving on that for the short term. The MRTP ultimately is going to be required in these other offshore countries to do it in the most impactful way and probably the most profitable way.

But in the U.S., we're in this for the long term. And the upside opportunity, the profitability towards the organization and the growth opportunities are tremendously higher, taking the patients to make sure that we're doing everything with the FDA, but once you're getting collaboration with them and all the work that they've done on the scientific basis and clinical basis to make the most impact on the harm reduction.

So we don't want to let them off the hook on that. And if we thought for a moment this is going to take a longer period of time and we keep all of our options open, but all signs are pointing towards this moving forward in a very collaborative basis and that will tremendously drive the upside potential not only for the short term, but the longer term as well. So we have the luxury of a good mix here as we've gotten ourselves organized, both on the short-term offshore launches and still staying in a very collaborative basis with FDA, which ultimately will drive things forward. Because remember behind VLN 1.0, there's also VLN 2.0. And the impact of that with the new strains coming out, the new non-GMO the strain, the ability to blend, doing that in collaboration with MRTP for the long term in the U.S. is our driving force. There we want to make sure that that is a long-term play and it adds to Mike's comments as well. But that's all I've got to add to it.

Thanks, Jim, and that was our -- we ran out of time for questions. So we'll just wrap it up here. If you want to say any concluding remarks.

No, I just want to thank everybody again for their great questions. We'll follow-up with more of them offline that have come in as best as we can. Thank you again for the time. It's a real privilege to always talk to you and look forward to the next get-together and the news that will come in between now and then. Thank you and have a great day.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.