Edited Transcript of XXII.A earnings conference call or presentation 11-Mar-21 1:00pm GMT

Q4 2020 22nd Century Group Inc Earnings Call WILLIAMSVILLE Mar 11, 2021 (Thomson StreetEvents) —

Q4 2020 22nd Century Group Inc Earnings Call WILLIAMSVILLE Mar 11, 2021 (Thomson StreetEvents) — Edited Transcript of 22nd Century Group Inc earnings conference call or presentation Thursday, March 11, 2021 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * James A. Mish 22nd Century Group, Inc. – CEO * John E. Franzino 22nd Century Group, Inc. – VP of Administration & CFO * Mei Kuo 22nd Century Group, Inc. – Director of Communications & IR * Michael J. Zercher 22nd Century Group, Inc. – President & COO ================================================================================ Conference Call Participants ================================================================================ * James Patrick McIlree Bradley Woods & Co. Ltd., Research Division – Analyst ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Welcome to the 22nd Century Group’s Fourth Quarter 2020 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. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [2] ——————————————————————————– Thank you, Brock. Good morning, and welcome to 22nd Century’s Fourth 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 fourth quarter and full year. 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 is posted in the Investors section of our website under [email protected] 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, which include 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. ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [3] ——————————————————————————– Thanks, Mei. Good morning, everyone, and thanks for joining 22nd Century’s conference call today. 2020 was a tremendous year for 22nd Century Group. Since joining the company in June, we’ve really stressed communicating our strategic and tactical plan. The significant increase in our stock since reporting third quarter earnings is a testament to our commitment to our shareholders. Despite the recent volatility, and it’s been driven by the positive impact of all of our remaining warrants being exercised and sold off, plus general market conditions, we’ve done nothing but consistently communicate news regularly to our shareholders to build confidence and credibility. Today’s call is a continuation of more good news and what’s to come in 2021. If you turn to Slide 3 on the presentation, I’ll touch on a few key highlights. We’ve never been more excited about our tobacco franchise, and our prospects remain extremely high. Securing MRTP authorization for VLN and reducing the harm caused by smoking remains our #1 priority. We are highly confident that we are in the final stages of the application process with the FDA. As Mike, John and I continue to defer any variable pay until such time, our confidence level has only gone up based on the proactive efforts we have deployed over the last several months, and other strong signals, including the recent change of administration at the White House. We believe the democratic control of both the Senate and the House of Representatives will draw the much-needed focus on improving public health. The Biden Administration is already showing signs of placing public health as a top priority. Last week, President Biden issued a proclamation to strongly committing to improving the prevention and treatment of cancer. We believe the favorable political climate will influence the timing of our MRTP application, and even more importantly, the enactment of a mandate to require all combustible cigarettes to be made minimally or nonaddictive. The renewal of a nicotine mandate is a game changer for public health and is becoming more and more of a reality. This will be our grand slam. This has all led to a refreshed sales forecast and an expanded VLN growing program that we’ve announced previously. Since reporting third quarter earnings, we have refocused our hemp/cannabis strategy to target the upstream segment of the cannabinoid value chain. We have now secured and communicated new IP with KeyGene, and 4 of the 5 partnerships needed to maximize and support each component in the cannabinoid value chain. And we are in advanced discussions with strategic partners to support the fifth breeding component. This network of partners will enable us to dramatically increase the speed at which we develop and offer new disruptive hemp/cannabis plant lines in 2 years, a fraction of the time versus the current competitive options. We continue to demonstrate diligent financial execution. Our financial results were in line with our expectations for the year, and we continue to operate as efficiently as possible. Furthermore, our balance sheet is well-funded to support our current operations and strategy. The positive result of $11.8 million of additional cash generated from the exercise of previously issued warrants over the last couple of months provides us with even additional runway. I’m pleased to point out that following these transactions, our market cap has been liberated, and we are free from any warrants. Plus as we have consistently communicated, we have no need or plans to raise additional capital. On Slide 4, we have a pivotal year ahead of us, and we are excited to embark on it. Outlined on this slide are our priorities and key areas of focus for 2021. This is all consistent with our long-term business strategy. Again, securing MRTP authorization is our #1 priority. We are fully prepared and eager to launch VLN King and VLN Menthol King within 90 days of authorization. Furthermore, we will continue to support, advance and advocate for the FDA to enact its proposed reduced nicotine mandate. We look forward to monetizing a portion of our existing hemp/cannabis IP portfolio beginning this year, and we will continue to bring next-generation disruptive technology forward. Our third plant-based franchise is massive and has a natural intersection with our other 2 franchises. We are keen to turn our attention to the development of our third franchise once we secure MRTP designation. And finally, we will look to continuously improve our operating structure, identify areas of additional revenue opportunities and invest in growth initiatives where we see the greatest return on investment. But our opportunities only start here. On Slide 5, you can see that our 3 franchise provides us with a continuous rich pipeline of revenue opportunity for years to come. By leveraging our core strength and know-how in plant science, we’ll be able to create an extensive pipeline of high-value commercial opportunities beyond our near-term prospects and across all of our franchises. MRTP is only the beginning of our journey for our tobacco franchise. It serves as a catalyst for our VLN brand, including VLN 2.0, and tobacco franchise will launch our business prospects even further into international markets. Our work in tobacco just doesn’t end with reduced nicotine contact tobacco products. We will leverage our decades of research with the tobacco plant to develop additional tobacco based technologies for multiple applications across various end-use markets, including solutions for the pharmaceutical industry. The hemp/cannabis market is still early stage and underdeveloped. Our opportunity here starts with the monetization of a portion of our hemp/cannabis IP this year and the monetization of new disruptive next-generation hemp/cannabis plant lines in 2022. It is without a doubt that federal legalization of cannabis is in the near future. A list on cannabis prohibition will unlock enormous white space revenue opportunity for proprietary plant lines on IP, and we’ll be at the forefront to capitalize on this occasion. Just a reminder, when the alcohol prohibition ended in the U.S., it took 15 years to satisfy demand. Our third franchise is large, growing and a natural extension of our core strength and expertise. We’ve demonstrated a strong track record of successfully manipulating and developing new plant lines technology and IP. We believe we have a faster route to commercialization on our first 2 franchises as a third franchise operates in an industry that is not as highly regulated. We estimate that between our 3 franchises, we have more than $1.3 trillion of addressable market opportunity. Furthermore, I’d like to bring to light that there is a natural intersection of adjacencies across our 3 franchises, and even more opportunities than we can currently imagine. I’ll pass you over to Mike for more detail on our tobacco franchise. Mike? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [4] ——————————————————————————– Thanks, Jim, and good morning, everyone. Turning to Slide 6. It’s important for us to remind everyone of the massive global market opportunity there is for VLN, our proprietary reduced nicotine cigarettes, which contain 95% less nicotine than conventional cigarettes. In 2018, the global tobacco market was worth over $800 billion, with 90% of that being sales of highly addictive conventional cigarettes. There are more than 1 billion smokers around the world, with 34 million of those in the U.S. We know that more than 2/3 of adult smokers want to quit and 50% attempt to quit each year. Yet less than 10% of those quit attempts actually succeed. We know that smokers are actively seeking alternatives to addictive conventional cigarettes, and we are encouraged by data from our own consumer perception studies showing that 60% of current adult smokers are likely to use VLN. Despite vape and many other potential modified risk tobacco product alternatives coming to market in recent years, the CDC recently reported that the smoking rate appears to be up year-over-year. New research shows that more Americans have turned to cigarette smoking as they’ve struggled with boredom and the disruption of regular routines, another tragic outcome of the COVID-19 pandemic. Now is the time to address the enormous amount of death and disease caused by cigarette addiction by offering adult smokers a new and different alternative, a tobacco cigarette with drastically reduced nicotine levels. Because VLN is a cigarette made from tobacco, it tastes, smells and smokes like a conventional cigarette, but it contains just 0.5 milligrams of nicotine per gram of tobacco, an amount that FDA has said, based on clinical studies, is likely to be minimally or nonaddictive. This is the form factor adult smokers prefer, while also being a tobacco product intentionally designed to not create or sustain addiction. The first FDA commissioner to take on the tobacco industry, Dr. David Kessler, said in 2010, that,” If we reduce the level of the stimulus, meaning nicotine, we reduce the craving.” And he called reducing nicotine and cigarettes, “The ultimate harm reduction strategy.” Since 2011, 22nd Century has supplied millions of reduced nicotine content cigarettes to independent scientists and researchers around the world to conduct dozens of clinical studies that have shown over and over again that Dr. Kessler was right. Reducing the nicotine content of cigarettes is indeed the ultimate harm reduction strategy. We believe that, commercially, VLN has near-term blockbuster potential, while authorization of our application and the launch of VLN will serve as a vanguard for the FDA’s proposed reduced nicotine mandate. A positive response to our MRTP application is one of the most important decisions FDA can make right now for public health. We are eager and fully prepared to launch VLN post-MRTP authorization, and to offer adult smokers a new alternative to highly addictive conventional cigarettes. Turning to Slide 7. Our confidence remains high in securing an MRTP designation for VLN. It is, as Jim mentioned, our #1 priority. We believe our application is in the final stages of review with the FDA. At this time, there are no outstanding requests for information from the FDA, and we believe they have everything required to make a final decision about our application. We will continue to work with our legal advisers, regulatory consultants and government affair specialists through multiple channels to emphasize the public health importance of our MRTP application and to encourage a near-term authorization. We will never surrender, and we will continue to relentlessly pursue an MRTP designation for VLN. Turning now to Slide 8. We are fully prepared and eager for the commercial launch of VLN. Our company-owned and operated manufacturing facility has ample capacity to manufacture approximately 1% of U.S. cigarette market volume. And with minimal investment, we have the ability to triple our capacity. Based on early sales projections, and to meet the expected demand from adult smokers, in January, we announced the significant expansion of our VLN growing program and increase in the planting of VLN tobacco in the 2021 crop year. This new planting for VLN tobacco is in addition to our already sizable inventory. We expect initial rollout of VLN in select markets within 90 days of receiving MRTP authorization from the FDA and plan to position VLN in the premium segment of the cigarette market with corresponding margins expected. We are currently in advanced discussions with a number of independent, regional and national tobacco retailers and VLN continues to be received positively by the trade. The launch of VLN will be accompanied by a robust marketing campaign to generate brand and proposition awareness. We are deploying a thoughtful approach to product rollout to maximize success in the marketplace. Let’s move to Slide 9. Again, MRTP designation will serve as a catalyst for the VLN brand and our tobacco franchise. We plan to scale and build our business via multiple licensing and partnership opportunities in the U.S. and internationally. FDA authorization is considered by regulators around the world to be the gold standard in public health. With an MRTP designation in hand, we expect to garner much attention from potential commercial partners as well as regulatory agencies around the world. We believe that our next-generation non-GMO tobacco plant research is key to commercializing our reduced nicotine content tobacco and technology in international markets, where non-GMO products are preferred or GMO products are banned. We continue to make significant progress in our tobacco research. During the fourth quarter of 2020, we confirmed that we have successfully applied our non-GMO technology to bright and burley varieties of tobacco. We are also using our non-GMO technology to introduce reduced nicotine traits into oriental varieties of tobacco, further enabling our development of VLN 2.0, a next-generation non-GMO reduced nicotine content American blend cigarette. I’ll now patch back to Jim for an update on our hemp/cannabis franchise. Jim? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [5] ——————————————————————————– Thanks, Mike. Let’s turn to Slide 10. I want to remind everyone of the size of the prize of our hemp/cannabis franchise. The global legal cannabis market is projected to be more than $100 billion in just a few years. 90% of the legal cannabis market share is held in North America. With more and more states considering cannabis reform, legislation will transform the U.S. cannabis market. We believe that the existing hemp/cannabis plant lines have poor genetics, resulting in a low-quality and unreliable plant yield for large-scale commercial production. This is a common and widespread problem that is prevalent throughout the entire industry. Leveraging our decades-long experience and know-how in plant biotechnology, including genetic engineering, gene editing and modern plant breeding, we’ll be able to create new hemp/cannabis plant lines that have optimized plant profiles with stable genetics and higher yield for commercial use. We believe our technology will have broad-based appeal for various end-use markets. On Slide 11, we provided an illustration of the upstream segment of the cannabinoid value chain and visualize how our partnerships will maximize and support each component. Now that we secured 4 of the 5 key partnerships, we are well on our way to vertically integrating our hemp/cannabis capabilities. The combination of our core strength in plant science and our network of key partnerships will enable us to drive differentiation and value by delivering new valuable plant lines and IPs within 2 years. Our solutions for the hemp/cannabis industry will be tailored to the unique needs across a wide range of end-use markets, including, but not limited to, the life science, consumer product and pharmaceutical industry. We look forward to sharing more good news once we have secured the fifth component. I’ll now pass you over to John to review our financial performance. John? ——————————————————————————– John E. Franzino, 22nd Century Group, Inc. – VP of Administration & CFO [6] ——————————————————————————– Thanks, Jim, and good morning to everyone. In summary, on Slide 12, we had a great quarter and an excellent year. The actions we took in 2020 to optimize our contract manufacturing operations have been successful. Net sales and gross profit margin have improved year-over-year for the fourth consecutive quarter, demonstrating our ability to execute on the objectives and strategies we set for the business. We have provided a snapshot of our financials for the quarter and the year on Slide 13. I’ll now walk you through in a bit more detail. Net sales revenue for the fourth quarter increased by $46,000 and to $7.3 million. For the year, net sales revenue increased by $2.30 to $28.1 million. The increase in both periods was primarily driven by higher volume and increased pricing in the company’s contract manufacturing business. Gross profit for the fourth quarter improved by $364.000 to $588,000. For the year, gross profit improved by $1.4 million to $1.4 million. The improvement in gross margin was primarily the result of higher volume, price increases and lower labor and overhead costs driven by factory efficiencies implemented in 2020. Total operating expenses for the fourth quarter increased by $1.1 million. For the year, operating expenses improved by $3 million, driven by the following: R&D expense was favorable by $127,000 and by $2.3 million for the quarter and year, respectively. This was primarily driven by a reduction in personnel expense, lower license and contract costs and the absence of a onetime impairment charge taken on research, tobacco and leaf inventory in the prior year. R&D expense related to our MRTP application was favorable by $205,000 and $1.6 million in the quarter and year, respectively. This favorability was primarily the result of expenses incurred in 2019 that were associated with the preparation of our TPSAC meeting earlier this year. SG&A increased by $1.3 million for the quarter. This was driven primarily by higher insurance and consulting costs and personnel expenses, partially offset by lower legal fees. For the full year 2020, SG&A increased by $2 million that was a primarily — driven primarily by insurance expenses, consulting and professional services and the addition of new members to our management team. The increase was partially offset by a decrease in onetime severance and equity compensation expenses that occurred in 2019. Additionally, legal expenses were lower along with travel and entertainment savings. Impairment of intangible assets increased by $30,000 and decreased by $966,000 for the quarter and the year, respectively. The decrease year-over-year was related to an intellectual property portfolio rationalization in 2019 that resulted in higher impairment charges. For the fourth quarter, the operating loss of $6.2 million increased by $696,000. The improved gross margin of $364,000 was more than offset by $1.1 million of higher operating expenses. Higher operating expenses were primarily driven by higher selling and administrative costs, partially offset by lower R&D expenses and MRT-related costs from 2019. For the full year 2020, operating loss improved by $4.4 million. This was driven by the combination of higher gross profit of $1.4 million and lower total operating expenses of $3 million. The decrease in operating expenses were primarily driven by lower R&D expenses related to the MRTP application in 2019, a reduction in personnel expense and an intellectual property portfolio rationalization that resulted in higher impairment in the prior year. Net loss for the quarter increased by $207,000, representing a net loss per share of negative $0.05. For the full year, net loss improved by $6.8 million, representing a net loss per share of negative $0.14. In addition to the improvement in operating loss of $4.4 million, other income and expense improved by $2.5 million, primarily due to a $1.9 million litigation expense from 2019 and a reduction in the unrealized loss on Aurora warrants that was recorded in the prior year. This was partially offset in the current year by an impairment charge related to the Panacea stock warrant investment. Adjusted EBITDA decreased by $1.3 million for the quarter and improved by $1.8 million for the year. For the 12 months of 2020, net cash used in operating activities was approximately $15.6 million. We do not have any plans or need to raise capital at this time. We believe the improvement in our quarterly cash burn rate and ongoing reduction in costs, a healthy cash position and the addition of $11.8 million to our balance sheet from exercise on previously issued stock warrants should provide us with additional runway to execute for the foreseeable future. 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. Jim? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [7] ——————————————————————————– Thanks, John. Now I’ll turn to Slide 14. In summary, we have a tremendous global market opportunity of more than $1.3 trillion across our 3 franchises. In fact, we give a bit more of a hint on the third franchise, valuing it at $500 billion. We will continue to take a relentless approach to securing MRTP authorization and truly believe we are on the verge of a home run and possibly a grand slam of our tobacco franchise. My confidence in the MRTP authorization is absolute. We are eager and fully prepared to launch VLN within 90 days of receiving authorization. Our MRTP designation will serve as a catalyst for licensing and partnership opportunities in the U.S. and internationally. 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 to capitalize on the various opportunities in the upstream segment of the cannabinoid value chain. In 2021, we’ll begin to monetize a portion of our hemp/cannabis IP, and we look forward to a network of partnerships working in concert to accelerate the development of new disruptive hemp/cannabis plants and IP for the life science, consumer product and pharmaceutical industry. And lastly, we believe there are potential legislative tailwinds, including the enactment of a reduced nicotine mandate, and the legalization of cannabis that would open up even greater revenue opportunity for 22nd Century. It’s truly an exciting time for our company and our shareholders, and I truly hope that you share in our enthusiasm. We will continue to work hard to execute on the strategic plans we have laid out. We will continue to communicate regularly and frequently and provide as much transparency as we can. We will bring more good news as we advance on all fronts. And with that, operator, please open up the call for questions. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) Our first question today comes from Jim McIlree of Bradley Woods. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [2] ——————————————————————————– John, a couple of questions for you. I just want to verify the share count as of today or after the warrant exchange is somewhere around 146 million, is that right 146 million, 147 million? ——————————————————————————– John E. Franzino, 22nd Century Group, Inc. – VP of Administration & CFO [3] ——————————————————————————– Yes, that’s correct. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [4] ——————————————————————————– Okay. Great. And then the G&A increase is fairly large. Is that — is there a lot of noncash in there or onetime? So I guess 2 questions on the increase. One, is it a permanently higher level? And then second, how much of the increase was noncash? ——————————————————————————– John E. Franzino, 22nd Century Group, Inc. – VP of Administration & CFO [5] ——————————————————————————– Well, in response to the quarter-over-quarter increase in G&A, in this quarter, we did accrue approximately $2 million for cash benefits, cash bonuses, which would be paid out over the course of next year. Of course, major part of our accounting requires us to accrue even the bonus list for myself, Jim and Mike, even though they are at this point now deferred until such time as the payments would be deferred until such time as we would have the MRTP in place. The other piece that was included in there was about $500,000 through the year of additional costs that we had pertaining to readiness for VLN. This included some development of our advertising and commercial areas and this advertising commercial strategies that we would have in there as well as some consulting costs and bringing on consultants to help us with the marketing efforts. Anticipate that ex that amount, the balance would probably continue as we go forward at the rate of what we had booked in the past year. Although with timing, of course, it gets to where the bonuses are accrued at year-end. And so that’s where you see the large lift in the fourth quarter. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [6] ——————————————————————————– Great. That’s helpful. You also mentioned an impairment charge for the Panacea warrants. Are those — do those now have a positive value? Or are those written down to 0? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [7] ——————————————————————————– We actually wrote those down to 0, predominantly because, at this point, we — it was part of wrap into an exchange of assets that we have in place with our note receivable with Panacea. And at this stage, we don’t have the intention to exercise those warrants moving forward. And we still — we still maintain on our books the value of our preferred stock, which we strongly believe is of that value and marking it to — we didn’t have to take any provisions on that. But at this stage, we reflected on our books the value of the warrants that’s well explained in our Form 10-K, reflecting the value of our Panacea investment, which would be post the intent that we have with our nonbinding letter of intent that we have in place right now. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [8] ——————————————————————————– All right. And just one last one for you, John. When is the K getting filed? I’m not saying it yet. Is it coming soon? ——————————————————————————– John E. Franzino, 22nd Century Group, Inc. – VP of Administration & CFO [9] ——————————————————————————– I believe it was filed this morning at 7 a.m. all right. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [10] ——————————————————————————– Well, just a correction there. The K will be filed shortly. ——————————————————————————– John E. Franzino, 22nd Century Group, Inc. – VP of Administration & CFO [11] ——————————————————————————– Okay. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [12] ——————————————————————————– Okay. Great. Mike, can you talk about the MRTP timing relative to other MRTPs and relative to what FDA guidelines are, that is you’ve gone this many months, and this is the number of months it took for a prior MRTP? Or this is the number of months that the FDA suggest it should take. Can you just refresh us on on that time line? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [13] ——————————————————————————– Yes, Jim, thanks for the question. So FDA guides that MRTP review will take 360 days, although that is not binding on FDA. There have been just 2 other MRTPS authorized. Those — there were — there’s varying time periods there. There are several milestones in the process that we look at, including TPSAC meeting and closing a public comment period. So we’re within the window there based on those other products. There, of course, are some unusual circumstances given COVID-19 and the impact that, that has had on the FDA. And so we do know that FDA has acknowledged publicly that some of their folks have been assigned to other federal agencies to help with COVID-19. We don’t know if that’s affected the Center for Tobacco Products at FDA, which is the center that reviews MRTP applications. But we have seen that they continue to work on other applications. We know that they continue to work on ours given our dialogue with them. But clearly, COVID-19 has had some impact on FDA overall. And we fully expect now that, with the election behind us, the presidential election behind us and the transition well underway that FDA is paying close attention to our application and all of their work around tobacco. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [14] ——————————————————————————– And remind me, when was your application submitted? And I think you amended it. So when was the amended application was submitted? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [15] ——————————————————————————– Well, there have been there have been several amendments over time. Those don’t necessarily reset the clock. In fact, I think we would begin really the key timing point is the closing of the public comment period. But the application itself was filed in December of 2019. And then there were some applications in the first part of — or some amendments in the first part of 2020. Or I’m sorry. Okay. Yes. I might be confusing the timing with the PMTA. So… ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [16] ——————————————————————————– Right. But I just wanted to make sure I’m looking at the same time line, and that’s what I kind of have, too. So we’re at that sort of 365 days, plus or minus, but we have to remember, like you said, COVID has an impact — could have an — probably has an impact. And who knows what that is, but okay? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [17] ——————————————————————————– Yes. And I’ll note that there are other MRTP applications for other products that are still under review. It’s not just VLN. So there’s no hard and fast time line. It’s the bottom line. ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [18] ——————————————————————————– Right. I understand that the FDA is not obligated to stick to that 365-day. And Jim, on the hemp/cannabis, I guess 2 questions here. One, in your final comments, you talked about commercialization or revenue generation, I’m not sure which phrase you used for hemp this year, I think you said that. I just wanted to verify that, that’s the case. And then secondly, on cannabis, it’s — my assumption is that you’re really not going to get any revenue generated from your cannabis work until you get a federal change of cannabis on the DEA schedule. So the first part, hemp this year, yes? And then the second part no cannabis until we get that action. Is that correct? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [19] ——————————————————————————– So the — yes, the — let me address the first part. We expect revenue from the existing library of work that’s been done over the past 2 years. So the company, with the work in KeyGene and other partnerships, developed advanced technology. It’s not the optimum technology that we have targeted for later generations, but it’s certainly further down the road than existing plant lines. We’re in discussions with strategic partners to license that technology, the hemp-based technology out there has — they’re more stable lines, higher cannabinoid content, et cetera. So we anticipate revenue stream from that work that’s been done over the past 2 years. And then we have additional plant lines coming through in the pipeline as well that we’ll start to see revenue generation as early as next year as the license work goes on and people want to capture a piece of that upfront with upfront payments, et cetera. So we have a good pipeline of that moving ahead. On the cannabis, marijuana front, let’s say, the — that component of it, we’re conducting R&D offshore in the Netherlands on next-generation plant lines that are much more stable, higher levels of cannabinoids. And we’re going to be positioned for the legalization of that in order to generate licensing opportunities there. So that will come with the legislative actions. But based on what the Biden Administration has said in the past, and based on just the momentum going, legalization across federal lines, we believe is going to happen. They may need to work on that before the midterms in order to get that pushed through. So that potentially is a time line there. And when it happens, we’ll be ready with those plant lines that have gone way down the value chain and development and then could be transferred and licensed pretty quickly. There may be some early opportunities, but it all really ties down to how fast these things can move through legislation. Does that answer your question? ——————————————————————————– James Patrick McIlree, Bradley Woods & Co. Ltd., Research Division – Analyst [20] ——————————————————————————– It does. Appreciate it. And good luck with everything. ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [21] ——————————————————————————– And I just — I did want to make a point there, just to add on to Mike’s commentary and I think it’s important for people to understand on the MRTP timing. Our connectivity and our dialogue with FDA has gone up. Certainly, since the last earnings call, other touch points, other data points that we get connected to the FDA have also gone up. And we have a multitude of additional data points that has raised our confidence in the timing of the MRTP that Mike’s alluded to, to answer your question, Jim. So again, the confidence level has gone up, and we’re focusing our attention to the launch sequence to make sure we’ve got that ready to go, and we’re confident in that as well. So I just wanted to put my two cents in there on the MRTP timing. Thank you, Jim, for the questions. And Mei, if we have time, can certainly open it up for additional. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [22] ——————————————————————————– Sorry. Yes. So Jim, your first question that we have is with VLM 2.0 prototype be subject to a new MRTP application process? Or would it still fall under the current MRTP application? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [23] ——————————————————————————– I’ll ask Mike to address that. Please? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [24] ——————————————————————————– Sure. We — again, there’s only been 2 MRTP applications for other products authorized by FDA. So there’s not a lot of precedent here. But based on the precedent that exists, we believe that it would not require a new MRTP, that it would fall under the current MRTP application, although, perhaps, requiring an additional submission within that application. So we think it will be a relatively straightforward process to bring that to market. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [25] ——————————————————————————– Thanks, Mike. Our second question is, does VLN 2.0 give smokers the same taste and smell they are accustomed to? What is the difference between 1.0 and 2.0? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [26] ——————————————————————————– So, yes, I’ll take that. The — yes. So 2.0 is meaningful because it’s using a blend of tobacco varieties. So typically, most cigarettes sold in the United States and in many parts of the world are referred to as American blend cigarettes. And they constitute — they are usually made of 3 types of tobacco, bright, burley and Oriental. And it is that blend of tobacco that gives it the typical American blend flavor characteristics. And so that is what we’re targeting in the development of VLM 2.0. Mostly that’s important because it’s a non-GMO technology, which is key to opening up international markets for us. We don’t think that based on our sensory studies with smokers that there’s a significant difference between 1.0 and 2.0, but it is an important point for international markets being the non-GMO status. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [27] ——————————————————————————– All right. Our next question is, does the company have a backup plan in the event that the MRTP application is denied or delayed? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [28] ——————————————————————————– Yes. I’ll start off and maybe ask Mike to join in as well. I mean we’re absolutely committed in collaborating with the FDA to get this MRTP done. We’re just not going to concede anything less than that. And the reduced harm and the impact that this could make is just too important. So plan A, B and C is to use whatever means necessary to drive this to completion. There are different levels of that, but right now, we believe we’re in a very good position, very collaborative position, and we need to let the process run its course. But there is — to make it clear, VLN is the brand. The 95% less nicotine is the claim. And we’re focusing our entire attention to that and driving that forward. And I’ll let Mike comment on it as well or ask him to comment on it as well. ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [29] ——————————————————————————– Sure. Thanks, Jim. Yes, I think it’s important to point out that the product itself has already been authorized by FDA as FDA has basically already decided that the product itself meets the standard to put a new product on to market. So basically, there’s a standard. It is that the product must be appropriate for the protection of public health. And our PMTA application, which was authorized some time ago, was basically FDA’s decision agreeing that the product is appropriate for the protection of public Health. The only question that remains with the MRTP, as Jim alluded to, is the name VLN for the product and the headline claim 95% less nicotine, also appropriate for the protection of public health. We believe that it is. We believe there’s no reason that FDA would find otherwise. And I’d add, we believe that it’s actually — smokers have a right to know that there’s a product available to them that has 95% less nicotine in it, which is the addictive chemical in tobacco that keeps people — that addicts first time smokers initially and keeps smokers coming back to smoking. And so we believe that — very firmly that smokers have a right to know about this. And that once they do know about it, that many of them will choose to smoke a cigarette without nicotine and find ways to help them — find ways to use that to help them to reduce their exposure to nicotine. So again, we’re extremely confident that we’ll have a positive decision on this, and we’ll continue to push this very hard until we get that. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [30] ——————————————————————————– Thanks, Mike. Our next question is, how will VLN be successful when Big Tobacco has the most to lose from it? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [31] ——————————————————————————– Sure. I can take that question. The — so certainly, Big Tobacco is reliant on the profits that they generate from the sale of addictive conventional cigarettes. But we also see that these same companies are moving as quickly as they can, in many cases, to transition their business to less harmful, noncombustible products like vape and IQOS and so on. We think there’s an enormous opportunity in that in all of these companies aligning with FDA’s plan to make all cigarettes nonaddictive. And in doing so, actively migrate smokers to less harmful forms of nicotine consumption or to quit smoking entirely. So clearly, I think commissioner Gottlieb, when he first announced the comprehensive plan for nicotine, called reducing nicotine in cigarettes the cornerstone of the plan. And so we believe that our interests and the industry’s interests are aligned. The entire industry embraces the concept of harm reduction and the continuum of risk when it comes to smoking and nicotine products. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [32] ——————————————————————————– Thanks, Mike. Jim, this is a question for you. Did the new partnerships like Cannametrics and new breeders mentioned require additional capital? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [33] ——————————————————————————– Thanks for the question. Very minimal capital. And let me take the time to explain what Cannametrics really is all about because I’ve seen and heard some questions around that. In essence, when you take a look at bringing disruptive plant lines to bear, the first thing you want to do is identify what consumer benefit do you want to have? What patient benefit do you want to have? You talk with large pharmaceutical companies. You talk with large consumer product companies. You get an understanding of what’s the benefit that you want to create? What’s the consumer benefit from the finished product? And once you understand that, the Cannametrics technology allows you to very quickly profile the plant composition that will give you just that benefit. They’ve been utilizing this technology in pharmaceutical, very sophisticated pharmaceuticals and dermatological products for years, and that’s why we targeted it and that’s why we wanted to get access to it and to control it. In essence, that’s what it does. So now we can profile the plant very quickly and use that road map to feed it into KeyGene for them to create it at the small scale. The capital requirement for Cannametrics is relatively very small and already accounted for. And the partnerships that we’re in dialogue with are true strategic partnerships, where they’re putting skin in the game as well as us in either resources or actual dollars. So from a capital perspective, from our side, we can execute on a strategy with minimal investment, and John has already accounted for that in our plans for 2021 and what we’ve already put into it. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [34] ——————————————————————————– Thanks, Jim. And then as a follow-up to that question, can you speak to how our partnership with Panacea has evolved? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [35] ——————————————————————————– Yes, and I think it’s worthwhile drilling into. So the original strategy was more based on a roll-up of finished products, finished goods into the hemp/cannabis industry. And although the choice of Panacea was not a bad choice, that strategy is extremely challenging to implement because of the market landscape, fractured landscape — competitive landscape. And we’ve turned our attention, of course, to the upstream value chain. There were gems within Panacea’s network that we saw as — and continue to see as high value, specifically the farm, the Needlerock Farm Asset is state-of-the-art. It can be a showpiece for the cannabis world. That location happens to be voted as the — or identified as the best place to grow cannabis in the United States. And we saw that as a big value. And under our management, under our ownership, and under our drive of getting new disruptive plant lines into that farm to act as a showpiece and it demonstrate the scale-up on the outside on a farming basis, we view it as a high strategic fit. So we’ve moved under the LOI to control and own that farm. The other component in Panacea was their extraction and purification technology and techniques, asset and techniques. Those as well are included in the LOI and fit within the upstream value chain. So you saw in the presentation those 5 components now takes us to an original concept to identifying a profile of a plant through Cannametrics, feeding that into KeyGene to bring out small-scale clone and seed technology, scaling that up with the breeders that we’ll be announcing shortly with strategic partnerships. And then taking that to the Panacea assets that we’ve now turned our attention to and a state-of-the-art showpiece farm that could demonstrate where it can be grown and then transferred all around the world as necessary. And also utilize purification techniques to get isolates out of it as necessary and gives us the option of either selling as seeds, clones, finished ingredients, not finished products, but finished ingredients or licensing the entire dossier out to strategic partners to run with. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [36] ——————————————————————————– Thanks, Jim. And our last question is, why are you licensing VLM to strategic partners as your primary business model? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [37] ——————————————————————————– Mike, could you take that? ——————————————————————————– Michael J. Zercher, 22nd Century Group, Inc. – President & COO [38] ——————————————————————————– Yes. Yes. So our plans are to — initially to launch VLN into test market. During the test market phase, we’ll be looking to essentially refine our messaging and communication tools, essentially learning how to optimize the investments that we make in VLN as we scale it. Scaling any product on a national basis, any CPG product on a national basis requires a lot of resources to build out a route to market. There are a number of companies that already have established routes to market for cigarettes, they’re tobacco companies. And so to minimize risk and chances of success and ROI, it makes sense to partner with one or more existing tobacco companies that have routes to market to — and globally. So that is a — it’s a typical strategy for a new CPG product launch. It makes sense for VLN as well. And so those are the reasons we’re pursuing it. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [39] ——————————————————————————– Thanks, Mike. And just one last question. Jim, this one’s for you. How will you be able to convince hemp/cannabis growers and manufacturers to license 22nd Century’s technology? ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [40] ——————————————————————————– Yes. Great question, thank you. And we’ve already are in the process of doing this. We’re having discussions with strategic partners that are strong players in this industry. They recognize that as they have tried to scale up high-quality lines that have been successfully growing at smaller scale, that as they scale it up, the quality drops down dramatically, the yields dropped down dramatically. They know that they’ve got an issue, and they’re open to these kind of discussions and understanding the technology and moving in that direction. So the timing is perfect, and their recognition of an industry issue is absolute. So it’s not a matter of convincing them to get interested in the technology, it’s a matter of identifying the exact strains that they want to optimize, making sure that it’s valuable for 22nd Century to focus on that and putting that through the newly established network that’s already demonstrated the capability of modulating the plants. So the objective is all the same, and that is to bring high-quality and artisanal type of lines that can be grown now at small-scale in greenhouses and small farms to the large scale so you can have large brands out there that have high-quality and then could be dominant from a consumer benefit perspective. So we’re already in discussions with them. They’re already convinced that this is all workable. It’s just a matter of identifying the exact plant lines, and that’s what we’re in the process of doing it. ——————————————————————————– Mei Kuo, 22nd Century Group, Inc. – Director of Communications & IR [41] ——————————————————————————– That’s it. ——————————————————————————– James A. Mish, 22nd Century Group, Inc. – CEO [42] ——————————————————————————– We’re out of time. So just to wrap up, as always, thanks, everyone, for your time and really the thoughtful questions and most importantly, your continued support of 22nd Century, and we’re all on this mission together. We believe in it. Ultimately, on the tobacco side, the reduction of harm will save lives. And it’s a — that’s what’s of most criticality to us as we go through this together. So thank you for everything. And if you have any further questions following the call, please reach out to Mei at [email protected] And we’ll be sure to try to answer them as quickly as we can. Thank you, and have a great day. ——————————————————————————– Operator [43] ——————————————————————————– Thank you. This does conclude today’s call. You may now disconnect.