22nd Century Group Inc (XXII) 2021 Q1 法說會逐字稿

Welcome to the 22nd Century Group's First 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. Please begin.

Thank you, Diego. Good morning, and welcome to 22nd Century's first 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 first quarter 2021. We'll start today's call with prepared remarks from Jim, Mike and John before moving into a Q&A session.

During our prepared remarks, we will be referring to slides, which are available for viewing in the webcast and posted in the Investors section of our website at xxiicentury.com under the Events subheading. We hope these slides will serve as a framework for management's prepared remarks, reinforce key takeaways and provide additional transparency and insight into our business, strategy and objectives.

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 will 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 those measures, please refer to our press release issued earlier today.

And with that, I'll turn the call over to Jim.

Thanks, Mei. Good morning, everyone, and thanks for joining 22nd Century's call today.

Before turning to the slides, let me start by saying that my energy level and excitement is really the highest it's been in my 35-year career based on what's happened for 22nd Century since our last earning call and what's on our doorstep. 2021 is off to an extremely exciting start.

First, let me again confirm that I remain absolutely confident in our MRTP authorization and that we are in the final stage. I also continue to believe that our stock and market cap are still tremendously undervalued. Regardless of the significant increase we've seen in the past quarter and especially with the recent pullback, based only on extremely favorable news, every turn of macro events that we could have possibly hoped for have gone in our favor, and they'll dramatically accelerate and expand the commercial opportunities for both our tobacco and hemp/cannabis franchises.

I'll speak more detail as the day goes on, but this includes federal and state administration changes; continued dialogue and signals from FDA regarding our MRTP authorization; new emphasis placed on a nicotine mandate in both the U.S. and New Zealand; FDA's commitment to advancing 2 new product standards; administration support for cannabis legalization and SAFE Banking, not to mention our pending rejoining of the Russell and eliminating all warrants in exchange for $11.8 million onto our balance sheet. In fact, it's been quite a quarter.

Now turning to Slide 3. A fundamental change underlying all of our efforts in recent news that the Biden administration is actively considering a reduced nicotine mandate, requiring all cigarettes to be made minimally or nonaddictive. This idea was promoted in the Obama administration and 4 former FDA commissioners recently supported the reduced nicotine mandate during a March panel discussion about the future of the FDA.

Xavier Becerra, the newly appointed Secretary of Health and Human Services, is a long time proponent of a reduced nicotine cap for cigarettes and tougher regulation in the tobacco industry. And the idea has momentum offshore as well. A reduced nicotine proposal was recently advanced in New Zealand, one of the bellwether countries for global tobacco and market regulations.

This all greatly reinforces our grand slam scenario we have discussed before and gives us an accelerated commercial opportunity offshore. The nicotine cap mandate is a potential game changer for our company. 22nd Century has the first and only reduced nicotine combustible cigarette product already authorized for sale by the FDA. Our pending MRTP authorization will unlock our home run scenario and our ability to market this product and educate smokers about its key characteristics.

The recent move by FDA to use its regulatory authority to aggressively address cigarette addiction and youth smoking initiation with a menthol product standard is also fantastic news for us and helps pave the way for the overall reduced nicotine standard as well. We believe VLN Menthol King cigarettes will remain on the market to help menthol smokers reduce their consumption of nicotine and quit highly addictive menthol cigarettes, while mitigating risk of illicit markets and product adulteration.

We're also seeing major progress on potential reform to the hemp/cannabis laws in recent weeks, with 36 states now legalizing cannabis in some form, house passage of the SAFE Act for a second time and senate majority leader Schumer's public statement of desire to pursue broader legislative changes on cannabis at the Senate level, federal legalization seems increasingly likely.

Turning to Slide 4. No matter how long the federal initiatives play out, our VLN product is poised to play a leading industry role upon MRTP authorization. Again, we remain highly confident we are in the final stage of authorization, but we continue advocating for authorization at the highest levels of multiple legislative, executive and administrative government offices and steadily increasing both the frequency and strength of those interactions.

We are fully prepared to launch sales of VLN in just 90 days after securing MRTP authorization and scale our proven manufacturing capabilities for a strong commercial launch. This is not a theoretical exercise. We have already produced significant quantities of variable nicotine content research cigarettes, enabling us to refine, improve our capabilities. Our current contract manufacturing operations provides rapid readiness to scale into full VLN production.

We are expanding our VLN growing program, and upon our own initiative to achieve the highest standards, our internalizing nicotine content assessment capabilities to reduce costs by 90% and decrease the result window from weeks to less than a day. Again, I'll stress that, that was on our own initiative. And when a federal reduced nicotine mandate comes to fruition in addition to MRTP, we stand ready to facilitate full participation by every combustible manufacturer. This would position 22nd Century as the clear leader in reduced nicotine content combustible products for the U.S. cigarette market with a pathway to global market leadership through both GMO and non-GMO technologies.

We are also in continued discussions with global strategic partners based on the regulatory changes outside the U.S., including the recent exciting news of New Zealand proposal, reduced nicotine mandate on cigarettes sold in that country. On hemp/cannabis, we are moving to begin monetizing our assets by year-end. As changing regulations enable the market to open further, it will attract more capital, more competition and a greater need for differentiation as companies seek a competitive edge.

22nd Century is moving swiftly to become the critical link in cannabis production with our highly differentiated upstream capabilities. We have expanded and advanced our relationship with KeyGene, as we recently announced, and secured important capabilities with Cannametrics for high throughput testing and identification of key traits. I'll talk more about cannabis after Mike speaks to tobacco.

Turning to Slide 5. Our priorities for 2021 have not changed one bit. If anything, boost by federal and state governments in the first quarter indicate that we are exactly on track with these areas of focus. Securing MRTP authorization is our #1 priority. We will continue to increase our efficacy activities directed towards FDA and other influential audiences needed until we achieve success. Additionally, we believe the single most impactful action in public health would be the enactment of a mandate to require all combustible cigarettes to be made minimally or nonaddictive.

On hemp/cannabis, we are committed to monetizing the first portion of our existing hemp/cannabis IP portfolio before year-end. In addition, I'm announcing this morning that we are beginning our first grow of hemp/cannabis on the Colorado farm with customers already lined up for sales in Q4. I'll talk more about that in later slides.

Although we have not announced the identity yet, I can assure you that we are actively advancing work in our third plant-based franchise, a massive complementary market with far lower barriers to entry and commercialization, which we will announce in advance once we secure MRTP designation. And we remain committed to prudent operating decisions and financial stewardship, including the $11.8 million in additional balance sheet cash generated from warrant exercises in the first quarter.

With that framework in place, I'll pass you over to Mike for more detail about progress in our tobacco franchise, then come back to discuss our hemp/cannabis advancements in more detail. Mike?

Thanks, Jim, and good morning, everyone. On Slide 6, it's important to understand how critical combustible cigarette products are to the global tobacco market. This slide illustrates that while vaping and other alternative tobacco products may capture a lot of media attention, combustible cigarettes make up the lion's share of the market with 90% of the $800 billion global tobacco industry.

Any public health strategy addressing the enormous amount of death and illness caused by tobacco must address combustible cigarettes head on. 2/3 of smokers are trying to quit, but less than 10% are succeeding. It's clear that products available today simply do not get the job done. With 60% of smokers in our research telling us they'll use our product, we believe VLN will change the face of the tobacco industry forever.

We see the need for VLN and an enormous body of independent clinical research tells us what the benefits will be for smokers. Reduce nicotine exposure independence, fewer cigarettes smoked per day, an increased number of smoke-free days and all with minimal to no withdrawal symptoms or compensatory smoking. It's clear that removing nicotine from the equation will be a winning proposition for public health and most importantly, for smokers looking to take back control.

Turning to Slide 7. Every indication is that our application is in the final stages of review with the FDA, and there are no outstanding requests for information. We believe that a positive response to our MRTP application is one of the most important decisions FDA can make right now for public health. To that end, we continue to ramp up our outreach activity at the highest levels of the administration, Congress and the FDA, about VLN and a reduced nicotine mandate. We will continue to increase pressure as needed until we achieve success and will then advance to launching VLN within 90 days of securing our MRTP.

Slide 8 explains how we are launch-ready in both initial and subsequent markets. Our launch will enable us to test, measure and refine our marketing model to maximize our commercial success with VLN. We're in discussions with numerous major tobacco retailers for phases 1 and 2 of the launch as we look to introduce VLN to market and then expand availability across the country. VLN is being very well received with high interest from these potential partners who are ready to offer our product as soon as possible after MRTP authorization.

We're also fully prepared to produce enough VLN to secure our market position. We own and operate a fully licensed 62,000 square foot facility in North Carolina that currently makes conventional cigarettes and cigars for third parties as well as research cigarettes for the many clinical studies done using our reduced nicotine content cigarettes. Our manufacturing capacity is nearly 1% of U.S. cigarette market volume. And with minimal investment, we can triple that capacity.

Our production readiness for reduced nicotine products is well established, shown most recently by the fulfillment of an order for 3.6 million variable nicotine content research cigarettes. These cigarettes are used in independent scientific studies funded by the FDA, NIH and other agencies to further validate the already well-established public health benefits of implementing a national standard, requiring all cigarettes to contain minimally or nonaddictive levels of nicotine, a level already achieved by 22nd Century's VLN.

We have also increased the planting of VLN tobacco for the 2021 crop year as part of a significant expansion of our VLN growing program in addition to our already sizable inventory. We are also looking at ways to enhance our production capabilities and improve efficiency ahead of a VLN launch and in anticipation of a positive FDA decision on our MRTP application. This includes a recent decision to bring our nicotine content testing capabilities in-house.

We estimate that with the installation of this new lab equipment, our testing costs will be reduced by 90%, and testing turnaround times will decrease from weeks to hours. We'll recoup our investment in this upgrade in less than one year, and we'll be able to move product to market much more quickly.

Closing out my tobacco comments today on Slide 9. MRTP designation is only the first step in our launch plans and will be a catalyst for both domestic and international markets. We are advancing our VLN 2.0 development program to enable additional tobacco blending capabilities as well as meet specific market expectations for certain flavor profiles and for general demand for non-GMO reduced nicotine tobacco.

Our factory is currently using our VLN 2.0 tobacco to develop and test non-GMO versions of our VLN cigarettes. We have confirmed successful application of our non-GMO technology to bright and burley varieties of tobacco and are applying this technology to introduce reduced nicotine traits into other varieties of tobacco, including oriental, further enabling our development of VLN 2.0.

We believe this combination of near-term U.S. drivers and longer-term global drivers creates a compelling and exciting opportunity within our tobacco franchise. Capturing just a fraction of the U.S. market with VLN will transform 22nd Century's income statement even before considering the additional opportunities to come from international sales and licensing of our technology as part of a broader industry transition.

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

Thanks, Mike. Let's turn to Slide 10. We believe the Biden administration will be more open to updating hemp and cannabis regulations at the federal level, including both medical and recreational uses, as more and more states have done across the country. We are now at 36 states that have legalized medical use of cannabis and 15 states so far that had approved recreational use, including an announcement by New York State a few weeks ago. Momentum is coming from both sides of the aisle and across the country as this slide illustrates. Legalization will increase competition, which will increase capital flowing into the market, which increases the need for highly differentiated products grown at scale, exactly where 22nd Century is uniquely focused.

Moving to Slide 11. Our vision about what we've been building and the fact that we believe that we are now positioned as the Monsanto of cannabis, [deepened] plant science and genetic IP critical to quickly transform the cannabis plant into a high-quality, large-scale and stable commercial asset. It is this plant science focus that will serve as the critical link to create the specific characteristics needed to optimize consumer products and generate the financial returns, consistency and quality necessary for success in highly competitive markets. We also believe the companies able to closely control the traits and consistency of the plants will be the all-time winners and will be able to command a premium price and margin in the markets.

On Slide 12, position 22nd Century in this Monsanto-like position, we have built an outstanding chain of partnerships to maximize our value in each component of the upstream hemp/cannabis market. The growing demand for hemp and cannabis products means the industry will increasingly face a key fundamental challenge. Growers require stable, consistent and predictable plant lines to scale commercial production and keep up with demand.

The five components on this slide enable us to identify a desirable plant profile through Cannametrics, feed that profile to KeyGene to bring out a small-scale clone and seed technology, scale up with breeders that we'll be announcing shortly, take that plant to the Colorado farm assets that is a state-of-the-art showpiece farm to demonstrate, and then can utilize Panacea's purification techniques to get distillates and isolates as needed for production of consumer products. Importantly, the combination of our core strength and plant science and vertically integrated capabilities will enable us to deliver new valuable plant lines and IP in two years, whether seeds, clones or licensed IP far, far faster than current breeding techniques.

We can take it even further. For example, through Cannametrics, we can identify specific genetic sequences that facilitate cannabis use in dermatological applications or create a better genetic sequence replications to the nervous system. Through KeyGene, we can select specific traits to maximize yield of a specific cannabinoid or to create certain taste or fragrance profile needed to make a consumer product more competitive in the marketplace.

These unique capabilities are important because the global legal cannabis market is still projected to be more than $100 billion dollars in just a few years, indicated here on Slide 13. We expect revenue from monetizing a portion of our existing IP library in Q3 to Q4 of this year as I've discussed before. As I indicated earlier in the conversation, additional revenue will now come in Q4 from existing plant lines that we are now beginning to grow in Colorado, and we have offset commitments in place in Q4. Then additional new plant lines coming through the development pipeline will expand growing and revenue generation next year.

These initial projects will demonstrate how 22nd Century can leverage our unique expertise to identify specialized plant strains with higher levels of specific cannabinoids for end products, develop those strains, then execute on revenue. We are now working with naturally grown products and strategic partners for outside of the U.S. markets to meet specific regulations around end-use consumer applications. European market is a good example, including their move to reset the requirements around use of cannabinoids in food and related products. We are participating in this activity.

In short, our cannabis portfolio is positioning 22nd Century to be the critical link between growers and product makers across this rapidly expanding market, and we have the first fruits of those efforts in sight later this year.

I'll now pass you over to John to review our financial performance. John?

Thanks, Jim, and good morning to everyone. The summary of our Q1 financial results are depicted on Slide 14. And overall, as Jim and Mike has stated, we've had a great quarter, a solid quarter, and that is essentially evidenced by the improved gross margin performance. The actions that we took in 2020 to optimize our contract manufacturing operations have been successful. While sales volume from the contract manufacturing business was impacted at the beginning of the quarter, in March, we fulfilled a large spectrum order that had dramatically higher margin. This demonstrated our ability to manage costs and meet our obligations to fulfill that order. The SPECTRUM cigarette order is similar to our reduced nicotine VLN cigarettes and for which we are ready to begin commercial-scale production immediately upon MRTP authorization.

A higher gross profit margin realized from the combination of SPECTRUM sales and cost containment measures was more than offset by costs incurred this quarter over the first quarter of last year due to higher SG&A costs associated with building a strong management team and the branding and launch readiness for VLN.

Net sales revenue for the first quarter decreased by $252,000 to $6.8 million. The decrease was primarily driven by lower volume in the earlier part of the quarter in our contract manufactured cigarette sales, and it was partially offset by the increase of volume in March driven by successfully completing the order for the SPECTRUM cigarettes and increasing pricing during the quarter in the company's contract manufacturing business.

Gross profit margin improved year over year for the fifth consecutive quarter, demonstrating our ability to execute on the objectives and strategies we set for the business. Gross profit for the first quarter increased by 540 basis points or $360,000 to $647,000. Improvement in gross margin was primarily the result of higher margin on SPECTRUM cigarettes, price increases, and lower labor and overhead costs, driven by factory efficiencies implemented in 2020, partially offset by lower overall volume in some contract manufactured cigarettes.

For the remainder of the year, we anticipate our gross profit margin percentage on the contract manufacturing volume to be similar to the full year 2020 mid-single-digit range. This contract manufacturing volume, I remind everyone, does not include any introduction of our VLN product, which would take place following authorization by the MRTP. We have a more detailed -- we have provided a more detailed comparison of our financials for the quarter on Slide 15.

Total operating expenses for the first quarter increased by $1.4 million, driven by $1.7 million of higher SG&A expenses, partially offset by $259,000 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 and the Chief Financial Officer, higher personnel insurance and consulting costs, and this increase was partially offset by lower legal fees. R&D expense was lowered by $259,000 driven by $137,000 of lower MRTP application costs and lower personnel licensing contract costs, partially offset by higher costs of patents and legal fees. MRTP application costs were related to expenses incurred in 2020 that were associated with the preparation of our TPSAC meeting, which occurred on February 14, 2020.

For the first quarter, operating loss of $5.2 million, an increase by $1 million over the first quarter of last year. Improved gross margin of $360,000 is more than offset by $1.4 million of total higher operating expenses. Net loss for the quarter increased by $1 million, representing a net loss per share of $0.03. Adjusted EBITDA decreased by $1.2 million for the quarter.

Net cash used in operating activities was $3.9 million. We believe the improvement of our -- in our quarterly cash burn rate, our healthy cash position of $30.9 million, which is 39% higher, and our continued initiatives to manage expenses provide us with additional runway to execute on our plans for the foreseeable future.

We announced on March 12, 2021, total net proceeds of $11.8 million from the completion of the cash exercise of warrants during February and March of 2021. The company is now free of any warrants outstanding.

Our foundation is solid, and we believe we can support our current operations, including our contract manufacturing operations and our growth initiatives for both our tobacco and hemp/cannabis franchises.

I'll now pass you back to Jim.

Thanks, John. Now turning to Slide 16. Our investment summary has not changed since the year-end report, but we now have even stronger tailwinds propelling us forward. Our market opportunity is more than $1.3 trillion across 3 exciting franchises and well-established growth opportunities layered in from now and for the next several years. We continue our relentless approach to securing MRTP authorization and truly believe we are in the verge of a transformative tobacco franchise with both product sales and licensing on a global scale.

The recent and significant move on a reduced nicotine mandate makes our reduced nicotine contact technology even more important, positioning 22nd Century to become a clear leader in this category. Our research in tobacco extends beyond just VLN and our reduced nicotine content technology. We look forward to developing more tobacco-based technologies for various high-value end use markets.

In addition, we are well-positioned as the potential linchpin technology provider in the upstream segment of the cannabinoid value chain as that industry makes the turn to mass production. We will begin to monetize a portion of our hemp/cannabis IP this year and have built a network of partnerships, giving us a unique and disruptive capability to accelerate the development of new disruptive hemp/cannabis plants and IP on a highly accelerated basis. As always, we will continue to work hard to execute on the strategic plans we've laid out and to continue to communicate regularly on our successes.

And with that, operator, please open the call for questions.

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

So my first question is on the tobacco side, please. So appreciate the conversation around VLN, it's certainly encouraging from your perspective, but I'm just curious to understand how much capacity you really think there is at the agency, given that they are going to be pursuing menthol, and there's a pretty heavy lift on the PMTA process on e-cigarettes as well.

Vivien, this is Mike. It's a great question. Clearly, those are all major undertakings when you're talking about 2 product standards, and the PMTA applications that they're processing. Our understanding is that FDA had geared up ahead of time on the PMTA, staffed up in anticipation of that. And from our -- all of our indications are that, that's not impacting the work that's being done to move the nicotine mandate forward, nor the work being done on our MRTP application. So we believe FDA has got the capabilities to manage all of those.

Okay. That's helpful. Thank you for that perspective. And then just on the cannabis side, I think I heard the word likely in terms of regulatory -- that was for regulatory change. And certainly the commentary from majority leader, Schumer, is encouraging. But can you just be a little bit more specific about how you guys are kind of thinking about the timing? I think at Cowen, we're taking a slightly more conservative approach given that the Democrats don't seem inclined to get rid of the filibuster.

Yeah. So the way -- great question Vivien, and the way we look at it is, there's 2 compartments. There's the hemp component, which, even with the farm bill, there's still some uncertainty and confusion out there. And we believe, at the very least, that will be clarified in the relatively short term, certainly this year. That will help, at least on the consumer products side. And I think it will set the stage for advancements on the consumer product side in the U.S.

The legalization on the recreational and medical use, that will go through a process, but that's where we're focusing our attention offshore, to get the new strains into countries where it has legalization in the appropriate manner.

So our initial strains, we've got a combination of the new strains. We've got a combination of such things as high CBG level strains, higher cannabinoid level strains in general. But even with the clarification and the movement on the hemp side in the U.S., we think we can move quickly. And we're in dialogue with several strategic partners in the U.S. to advance that, that are encountering these quality issues.

And then right behind that, we do think that legalization on the recreational side federally, we think, will take place. That's going to take some more time to play out, but in that meantime, we're active on higher-quality THC strains offshore and getting those into the hands of strategic partners where the legalization has occurred on a country basis. So for example, the Canadian region.

So that's the way we're looking at it, but we will be fully prepared when the U.S. moves on the recreational side to have these strains available. And there's no doubt that the more we have these dialogues with the strategics, the combination of quality and scale, really everywhere around the world on the recreational side is becoming more and more of a problem with the strains that they're growing out there.

Our next question comes from Jim McIlree with Dawson James.

John, is the G&A at a new good level going forward or is there some unusual things, one-time things in there that would suggest it's too high or too low for the rest of the year?

Thank you for the question, Jim. Essentially, the -- we did pull forward some expenses related to developing brand strategies around VLN. Anticipate that for the balance of the year, we had it budgeted well out and that discretionary -- some of the expenses are discretionary as we would pursue it. But overall, we'd be focusing on cash burn and to maintain a cash burn rate, which was similar to the first quarter of about $1.3 million a month, which, given our cash resources, would sustain us over a period of time. There may be some shifting around with the G&A expenses. But overall, we anticipate that we'll manage them accordingly with the cash burn and with the margin we gained from contract manufacturing at this point.

Okay. That's great. Jim, you talked about revenue in the second half from the hemp business, and I was wondering if you could put ranges around that. Are we talking small amounts, like less than $1 million for the second half? And then in 2022, are you thinking it's $1 million to $5 million? Or is it larger than that?

Thanks for the question, Jim. There's 2 components. There's monetization of the existing library of IP through an upfront license fee that we're in advanced dialogue with. That will come, as I said, in Q3 to Q4. And it's tough to put an exact figure around it, but it's substantive and I'd say in the $2 million to $3 million range. But that all drops to the bottom -- obviously drops to the bottom line.

But in addition to that, based on how we've been resetting things in our network, and this is what I announced earlier, we are starting our first grow of hemp/cannabis with our higher strain -- plant line strain of CBG and CBD-CBG combination. So we're putting about 5 separate lines in the ground. As we speak, the seedlings are en route, and we're beginning that growing process.

It will all depend on the exact yields as we get into the October timeframe and harvest. And you try to push that time period as far as you can because the later you harvest, the higher these cannabinoid levels go. So we're going to push that to the optimum levels and then harvest. And we have offtake agreements for that biomass -- as biomass for the most part in Q4.

That range, again, it's going to be dependent on yields, but could be in that $2 million to $3 million range in that time period. Some of it could spill into Q1 of 2022 based on the needs of perhaps distillates or isolates if we need to process it that far. But that's putting a framework around it. It's modest, but it's our first grow and these are highly profitable, high-margin strains, and offtake commitments that we've got to put in place.

Okay. And those license fees you're talking about, those are one-time fees. Those are not annual fees, is that correct?

Yeah. The first bucket that I was talking about is a one-time with that particular strategic partner. Now that could be expanded because it's not exclusive. But that particular one is a one-time for that strategic partner.

Right. Okay. And Mike, I was hoping you could help me understand, what you think the implications of the menthol ban would have on your VLN application as it relates to menthol? I mean it seems like it's possible that the FDA says, wait until -- they said, you wait until menthol is figured out or...

Yes. Jim, it's a great question. Sorry. I didn't mean to interrupt you there. We don't believe it will impact our application for a couple of reasons.

One, the FDA has been working on this issue of a menthol ban for many years. Going back to the Tobacco Control Act when they were first granted authority to regulate tobacco. So it's not a new issue for them. Despite that, they did authorize our PMTA application, as you know, for both the menthol and nonmenthol versions of our reduced nicotine cigarette.

So the product -- the PMTA product is exactly the same product as the MRTP product. So we don't -- they've already decided that a menthol, very low nicotine cigarette, is appropriate for the protection of public health. That's the regulatory standard that a PMTA product has to meet. And we don't see that equation or that analysis changing simply because they've announced their intention to put a menthol ban into place.

And then secondarily, there's a solid body of science using menthol-reduced nicotine cigarettes to understand what differences there might be between menthol and nonmenthol-reduced nicotine cigarettes. And the results are consistent across both products, whether menthol or nonmenthol, that smoking consumption is reduced, quit attempts increased. It doesn't change the compensatory smoking or withdrawal symptoms.

So the public health benefit is there based on the science. And so while clearly a rule or even a proposed rule hasn't been published yet around menthol, we would expect ultimately for our product to -- our menthol VLN cigarette to be included in the MRTP approval and for it to be accepted from the -- from any menthol ban that might come in the future.

And similar to the prior questioner asking about capacity at the FDA. Is it the same group at the FDA that's tasked with the menthol ban as it is with evaluating or approving the MRTP?

My understanding -- again, this is based from multiple pieces of information. But my understanding based on that body of information is that the groups responsible for drafting product standards, reviewing comments that are submitted in response to proposed rules is a different group than the group that handle -- that does the bulk of the work on an MRTP application. So I don't think there's any overlap -- any significant overlap, I should say, as it relates to our application. I don't think it slows things down.

Okay. And then my last one, the K talks about the restructuring of your agreement with Panacea, if you can just say, is there anything that has occurred since the end of the quarter that is useful to know? Or where are you on that restructuring?

We continue down the same path that we've been working towards. It has been very collaborative and really a win-win approach with Panacea. We're turning our attention to the farm. And we've talked through that already. And then also kind of working with them on the extraction and isolation equipment. So we continue to work on really papering that up. And at the same time, working with them to help promote their finished products into the marketplace with the concept of these higher strains and more valuable strains coming through.

So we're in the process really of heading down the same path we've been talking about, just a matter of papering everything up. But it's -- continues to be a great relationship, and it's very much going in the right direction. And the end result is also -- Panacea will undoubtedly have stronger channels to market. And it will be able to truly get their finished products moving in the right directions. We're helping to coordinate that as well.

So I would think that sometime in the next -- this quarter -- current quarter, we hope to button everything down, and we'll communicate when that's all complete, but it's still heading down in the same path we've been talking about.

(Operator Instructions) I'll now pass it to Mei Kuo to go through some web questions.

Thanks, Diego. Our first question is, can you elaborate on the genetic modifications you're making to the cannabis plant? And how and why there would be incentive for growers and dispensaries to be using your products? What is preventing you from bringing some of your current developed cannabis strains to market in the U.S. or elsewhere?

Mei, I'll take that. It's a great question. Let me just create the foundation again that the real critical challenge in the entire industry right now, and you can go talk with major Canadian LPs, you can talk with MSOs or everywhere around the world, is that as they go into mass production, the quality and stability of the plant strains that they are growing basically are imploded. They're very problematic. The level of cannabinoids are not consistent. They fluctuate from batch to batch. And it just yields a poor consumer experience.

So this is Monsanto approach we've been talking about. I give Monsanto the gold standard as being able to modulate plants and work in these strategic partnerships in a rapid basis at scale at high quality. We're a boutique version of that. We're only focused on 3 plant lines, all alkaloid, in fact. We've talked about tobacco, hemp and a third plant line that we'll soon announce. That's really our specialty.

So the opportunity is to address that large-scale production. Now we have several new strains, one of which is ultra-high-end THC, one of which is ultra-high-end cannabinoids in general, in particular CBG, and one of which is modulated terpenes lower to impact the fragrance profile and the flavor profile. And we're continuing to move those forward. In fact, the CBG line is one of the ones we're putting in the ground over the next several weeks because CBG, in particular, in plant strains with CBG, stable plant strains are kind of a hot property going into the second half of this year and at the beginning of next year.

So we are, in fact, moving forward with existing plant lines. We'll then turn our attention as the next generation, as I've always said, that this existing plant lines, although was a great proof-of-concept and better than what's on the marketplace today, is still not anywhere near optimized. So we will continue to do that with the next strains coming through and hopefully growing in this roughly 2-year cycle that we've talked about.

Thanks, Jim. Our next question is, do you have any fear that big tobacco has a solution for if, when a nicotine mandate is implemented? They've stated publicly that they are decades away, but what if they are just saying this to prevent the government from taking action and they have actually identified a way to produce low nicotine tobacco?

Mei, thanks for the questions. A great question from one of our listeners here. So the -- we do know -- so we're not afraid here that there's an -- that there are alternative technologies. We do know that one other way that a reduced nicotine cigarette could be produced would be simply by extracting the nicotine from tobacco plants using well-known extraction processes.

The -- in fact, there was a product -- a cigarette on the market back in the '80s called Next. It was a -- it was referred to as a denicotinized cigarette, and it was launched by Philip Morris. It achieved about 1% market share before they yanked it from the market, realizing that, that wasn't a path that made sense for them to go down as a company that profits from nicotine addiction.

But they did -- they built a $250 million extraction facility to produce that tobacco. Now one of the problems that they also had with the product was that the smokers didn't really like the taste of it. And the reason for that is because when you extract nicotine, you extract a lot of other things from the plant, including flavor and aroma compounds. And so really, what you end up with in that process is something that's more akin to a paper or saw dust than it is tobacco because you've taken out all of the flavor alongside the nicotine.

And so we believe our technology, where we're growing tobacco without nicotine as opposed to extracting nicotine, is a far superior technology, simply because it will be more acceptable to smokers. It is -- we do believe it's true that it will take years for Big Tobacco to try to duplicate what we've done if they were to use genetic editing technology, but we have a very strong intellectual property portfolio, really a very deep and wide moat around all of the genes related to nicotine biosynthesis in the tobacco plant.

And so while they may be able to use certain tools to create tobacco, they can't commercialize those because of our patents. And the industry has acknowledged all of this in their public comments to the ANPRM around the proposed nicotine mandate, and we're quite comfortable in our position that we've got the leading technology to meet the mandate and that other tobacco companies will want to use our technology to comply with the mandate as well.

And so we've been very clear that we're willing to license our technology across the industry if a mandate were to be put into place. And therefore, that makes it possible for FDA to implement such a mandate. FDA does have to take into consideration whether or not industry can comply. But because we're willing to help the industry comply, that's not a consideration at the end of the day for FDA in considering a mandate.

So in short, we're in a very solid position to support the FDA's implementation of a mandate and to help the industry to comply with it and to monetize our IP in the process of doing that.

Thanks, Mike. And speaking of the FDA, was the new equipment to measure nicotine levels in-house a strong suggestion by the agency of installing testing and calibrating it, a factor in the slow action on the MRTP?

It was not a suggestion at all from the FDA. This was a decision -- an idea that was brought forward by our team -- our operations team, and we made the decision to make this investment based simply on the fact that it reduces our costs quite significantly, 90% approximately around testing and also really speeds things up when it comes to testing. So we need to -- we want to and need to test tobacco when it comes in from the farms to make sure that it's the right nicotine levels and to know what we have in our inventory. And then we test it at every step of the processing manufacturing chain.

And so there's a lot of testing that's involved in that. We want to ensure that every product that leaves our factory is compliant with what we've said it would be. And so we test it every step along the way. That's a lot of testing. It has been costly when we do the research cigarette manufacturing orders, and so this simply reduces our costs and allow us to do all of this much more quickly, which will become of critical importance when we go to market with VLN, and so we made this investment in anticipation of that positive decision on the MRTP coming soon.

Thanks, Mike. And we have time left for a couple of questions here. There have recently been some news reports about possible IP waiver for COVID-19 vaccines. Are there any similar concerns for 22nd Century or VLN IP protection?

I can take that.

Yes. I can take that.

Go ahead, Jim.

Go ahead, Mike, please.

Yes, sure. I think, obviously, this is big news this morning with COVID-19 IP, there's really no similarities between these 2 -- that situation and our IP related to tobacco. COVID is a global pandemic that is raging in other parts of the world, while tobacco is certainly an epidemic, there are -- it's a well-studied thing, and we have the solution. And we've made it clear to the FDA and other regulatory bodies around the world, we're willing to license this technology. So unlike some of the COVID vaccine manufacturers who've fought against licensing.

So there's really no comparison there. And ultimately, growing our tobacco and making it into reduced nicotine cigarettes is virtually the same process as it would be for conventional tobacco and conventional cigarettes. So unlike vaccines with specialized processes, there's no concerns around that either. So at the end of the day, we're willing to license our IP, and we will do that at any point in time that the government asks us to do it.

Thanks, Mike. And just one last question. I want to make sure we touch on the cannabis side of the business. You raised this idea of a Monsanto of cannabis. Are there other companies with similar approaches? What about large growers? Why can't they move faster than 22nd Century to achieve this?

There are really just a few pathways to get to improved product lines. There is a purely synthetic approach, which I helped develop prior to coming to 22nd Century, but that's very expensive and really targeted towards the clinical pharmaceutical use. There's a biosynthetic approach, fermentation, but there's been a lot of fluff and -- without substance on that approach. And we continue to believe that's at least 5 to 7 years just in development. And what you get out is a single cannabinoid, CBD or CBG.

So they are -- those companies have not been hitting their milestones. Then there's the standard breeding approach, which is like shooting in the dark. And it's clear that, that -- to get strains that are high quality, high scale and quick is at least a 7- to 10-year adventure. And that's been documented very much.

I just had a call with KeyGene yesterday again. I continue to be amazed with what they can really do and the speed at which they can work. And we apply a different type of science. It's very much like what a Monsanto does in the more commodity products like soy and corn. They do not participate in the cannabis/hemp space or the alkaloid plants that we're honed in on. But we are certainly learning off of that gold standard type of approach.

And our technology approach is very unique with KeyGene in and of itself. Then when you combine that with Cannametrics and the specific alkaloid specialist breeders we're going to be using in this particular area, plant-based biotechnology that is alkaloid based into large end-use markets. I can assure you, there is no one else doing it this way and where we have a 2-year cycle, the closest, nearest competitor is in the standard breeding approach, which is realistically 7 to 10 years.

Thanks, Jim. I think we ran out of time for questions, but if you have any closing remarks?

I just wanted to thank everybody for their time. We continue to have high levels of optimism across all 3 of our franchises. And we look forward to communicating more and moving things forward. So thank you all for your time, and we'll be talking soon.

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