22nd Century Group, Inc. (XXII) Earnings Call Transcript & Summary

Welcome to 22nd Century Group's Annual Meeting of Stockholders. [Operator Instructions] As a reminder, this conference is being recorded. I would like to turn the meeting over to [Technical Difficulty] Przybyla, General Counsel and Corporate Secretary.

Thank you, Sydney, and good morning, everyone. As previously announced, in response to COVID-19, we made the decision to hold this meeting virtually in order to protect the health and safety of all meeting participants. In addition, we believe this format provides greater access to all of our stockholders and maximizes the ability of everyone to meaningfully engage with us. I'd now like to introduce those joining me today. We have Jim Mish, our Chief Executive Officer; Michael Zercher, our President and Chief Operating Officer; John Franzino, our Chief Financial Officer; and Mei Kuo, our Director of Investor Relations. I will act as Secretary of the meeting. We are also joined by our Director nominees, our other Directors and representatives from our registered accounting for Freed Maxick. Please remember that you may vote your shares online anytime during this meeting prior to the closing of the polls. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is needed. If you are a record holder and wish to change your vote or did not send in a proxy and wish to cast your vote now, or have not already cast your vote using our electronic voting system, you may cast your vote by electronic ballot at virtualshareholdermeeting.com/XXII2021 at this time or any time until the closing of the polls. You will notice a link to the voting site on your screen. We have allocated time after the adjournment of the formal part of this meeting for questions and answers. [Operator Instructions] We will not be answering questions that are irrelevant to 22nd Century's business or the conduct of its operations or that otherwise relate to confidential matters. If we're unable to get to your questions today, you may always e-mail us at [email protected]. We have 4 items of business to conduct at today's meeting. They are: The election of 2 Director nominees as Class 1 Directors to serve until the Annual Meeting of Stockholders in the year 2024; the approval of an advisory resolution on the company's 2020 executive compensation as reported in the 2021 proxy statement; number three, the approval of a new Omnibus incentive plan for the company; and number four, the ratification of the appointment of Freed Maxick CPAs, P.C. to serve as the company's independent registered public accounting firm for the year ending December 31, 2021. Before we vote on these proposed measures, Jim will provide an overview and update of the business. We have presentations to accompany this part of the meeting, which can be found on your screen and the Events section on our company's Investor Relations website at xxiicentury.com/investors. It is possible that some of this morning's comments or responses to your questions may contain forward-looking statements that are based on certain assumptions and are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to differ materially. I will now turn the floor over to Jim.

Sorry, for the technical glitch. This is Jim once again. And let me just say a few words on my opening again. But before turning to the slides, and on behalf of the Board of Directors, the entire operations team and myself, I, first, wanted to thank all the shareholders for your continued support. I certainly look forward to next year doing this live and being able to actually shake some hands. Just to set some expectations, our earnings call was a mere 2 weeks ago. So a lot of this information may be repetitive and a shareholders' meeting is not the typical venue for announcements. But the first thing I do want to repeat from last earnings call is, I wake up every day with the highest energy and excitement level in my 35-year career, and today's no different. In fact, it's even accelerated based on the opportunity to spend some time with you here this morning. So we'll go through the information and again, have plenty of time for Q&A. So going to Slide 4. We believe that 22nd Century is positioned for an incredible opportunity ahead. Let me say, 2020 and this year have been tremendous years for 22nd Century Group and we've really stressed transparency and communicating our strategic and tactical plans since I joined the company last June. The significant increase in our stock valuation since reporting third quarter 2020 earnings is a testament to our continued commitment to our shareholders. Still, as I've reiterated at recent earning calls, I continue to believe that our stock is woefully undervalued. This slide provides an overview of our addressable global market opportunity of $1.3 trillion across our 3 plant-based franchises, our platforms, go-to-market plan and financial strength. 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. These include, to name a few, federal and state administration changes, continued dialogue and signals from FDA regarding our MRTP authorization, in which I have continued absolute confidence. New emphasis placed on nicotine mandate both U.S. and New Zealand, FDA's commitment to advancing 2 new product standards, administration support for cannabis legalization and safe banking, and our expected rejoining onto the Russell in a few weeks. By leveraging our core strength and know-how and plant science, we now have an extensive pipeline of high-value commercial opportunities beyond our near-term prospects and across all of our franchises. Slide 5 summarizes our priorities and how we plan to continue creating value for our stockholders. We're executing on our differentiated operating model to maximize value in our assets. This is all consistent with our long-term business strategy. The moves by federal and state governments in the first quarter indicate that we are exactly on track with these areas of focus. I remain absolutely confident in our MRTP authorization and that we are on the final stage and securing it is our #1 priority. We will continue to increase our advocacy activities directed towards FDA and other influential audiences needed until we achieve success. For hemp/cannabis, we are committed to monetizing the first portion of our existing hemp/cannabis IP portfolio before year-end. In addition, I announced that the first quarter earnings call that we are beginning our first grow of hemp/cannabis on the Colorado Farm, with customers already lined up for sales in Q4. Although we have not announced the identity yet, I can assure you that we are actively advancing work in our third plant-based franchise, and added $500 billion of complementary market with far lower barriers to entry and commercialization, which we will announce in advance once -- and 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 for warrant exercises in the first quarter. With that framework in place, please turn to Slide 6. A fundamental change underlying all of our efforts in recent news is that the Biden administration is actively considering the reduced nicotine mandate requiring all cigarettes to be made minimally or nonaddictive. 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 regulations for 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. 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. Turning to Slide 7. No matter how long the federal initiatives play out, our VLN product is poised to play a leading industry role upon MRTP authorization. We continue advocating for authorization at the highest levels of multiple legislative, executive and administration -- administrative government offices and steadily increasing both the frequency and strength of those interactions. As I've said before, 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 contact -- contract research cigarettes, enabling us to refine and improve our capabilities. Our current contract manufacturing operations provides rapid readiness to scale into full VLN production, and we're expanding our VLN growing program and internal manufacturing capabilities, such as our testing investments. And when the federal reduced nicotine mandate comes to fruition, in addition to MRTP, we stand willing 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 clear pathway to global market leadership through both GMO and non-GMO technologies. 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. We're seeing major progress on potential reforms to hemp/cannabis laws in recent weeks as well. 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 lightly. Our vision for what we are building and believe that we are now uniquely positioned in cannabis genetics, steeped in plant science and genetic IP critical to quickly transform the cannabis plant into a high-quality, large-scale and stable commercial asset. We've expanded and advanced our relationship with KeyGene as we recently announced, and secured critical capabilities with Cannametrics for high throughput testing and identification of key traits. Now turning to Slide 8 and where we go from here. We continue our relentless approach to securing MRTP authorization and truly believe we are on the verge of a transformative tobacco franchise for manufacturing and product sales and licensing on a global scale. 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 such as pharmaceutical. 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 have built a network of strong 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, a 2-year cycle on average. We'll continue to work hard to execute on the strategic plans we've laid out. We will bring you more good news as we advance on all fronts. And with that, I'll pass you back to Steve.

Thank you, Jim. The Board of Directors has appointed Peter Descovich of Broadridge to serve as the Inspector of Elections for this meeting. He is present at the meeting today. As required by law, Mr. Descovich has taken and signed the oath of Inspector of Election. A certified list of the stockholders of record entitled to vote at today's meeting for purposes of sending the notice of meeting and proxy statement is available online, and I have an affidavit from Broadridge attesting to the delivery of the notice. Mr. Descovich has advised me that a majority of the company's outstanding voting shares held of record, as of the close of business on March 26, 2021, the record date for this meeting, are represented at today's meeting by proxy. I declare this meeting duly and lawfully convened and now open and ready for business. As mentioned, the first order of business is the election of 2 Director nominees named in the attached proxy statement as Class I Directors to serve for a 3-year period until the Annual Meeting of Stockholders in the year 2024. The nominees are: Richard Sanders and Michael Koganov. The second item of business for stockholder consideration at this meeting is the approval of the advisory resolution on the company's 2020 executive compensation as reported in the 2021 proxy statement. The third item of business for stockholder consideration at this meeting is the approval of the company's 2021 Omnibus incentive program, a copy of which is included in the company's 2021 proxy statement. And the final item of business for this stockholder consideration at this meeting is the ratification of the appointment of Freed Maxick CPAs, P.C. to serve as the company's independent registered public accounting firm for the year ending December 31, 2021. Now that all proposals to be voted on by the stockholders have been presented, I declare the polls open for voting on these 4 proposals. You must submit your electronic ballot in order for your votes to be counted. The Inspector of Election will not accept votes submitted after closing of the polls. Please note that any votes by electronic ballots submitted today will be subject to final verification by the Inspector of Elections. [Voting]

There being no further ballots, I hereby declare the polls are now closed at this time for voting on the items of business. All electronic ballots and proxies are now in the custody of the Inspector of Elections. We have received preliminary tabulation of the votes by our Inspector of Elections. All votes are subject to final count and certification by the inspector. Based on the vote, I declare that each of the proposals have been approved. And Mr. Sanders and Dr. Koganov have been elected to the Board. I declare the formal business of today's meeting concluded. The company will report the final vote and results on a Form 8-K filed with the SEC within 4 days of today's meeting. We would now like to turn the meeting over to Mei and open the meeting to questions.

Thanks, Steve. Our first question. Does the FDA's recent movement on PMI's application have any impact on the company's MRTP application for VLN?

It's a great question. Thank you, Mei, and I'll address that. In fact, I'm going to be sending a letter out to the shareholders tomorrow with more information. But just to cover it in brief here, of course, we would have much preferred to hear about our -- decision about our MRTP authorization, but we still have absolute confidence in that. But nevertheless, we're still pleased with any news that involves forward movement on any MRTP applications for a number of reasons. It's certainly positive for public health. That shows the FDA is still committed to their comprehensive plan, which includes a reduced nicotine mandate and less harmful nicotine delivery products like IQOS 3. And more generally, the FDA continues to advance MRTP applications despite all the challenges for more than a year. So as I said, we have absolute confidence that our MRTP application is in the final stages of review. Forward movement on other companies' MRTP applications do not indicate that our MRTP is impacted or delayed or completely distinct. And certainly some differences to point out about our MRTP application that's different than PMI's is that PMI is clearly in the very early stages of the review process. So they've got years ahead of them. Our application, meanwhile, is in the final stages of review. The PMI application is also for an electronic device, which is dramatically different than our combustible low-nicotine cigarette and it's a different scientific review certainly with a different group within the CTP. So we think it's definitely favorable. We anxiously anticipate our announcement, but we're certainly in favor of it and moving forward. But as I said, I'm sending a letter out to the shareholders with more detail around that so that you have it and it's just in spirit of our continued transparent and ongoing communication.

Thanks, Jim. And our second question is, can you provide an update on any new cannabis partnerships such as the breeders we've mentioned?

Yes. Another great question. Thank you. So there's 2 components or 2 buckets that I would address. And one is within our supply chain, our value chain partnership networks, the only remaining things to lock down is in our breeder network, and paperwork is going back and forth as we speak with 2 separate breeders, one in the Southern Hemisphere and one in the Northern Hemisphere who have alkaloid-based expertise, really top-shelf expertise. And we expect both of those to get across the finish line, and we'll be coming forward with announcements, most likely within the next 30 to 45 days because we're in the final fine-tuning of those documents. And when we announce, that's going to be an exciting moment. That will lock down our entire value chain. Now, in addition to that, we get a lot of questions about monetizing and bringing commercial revenue stream from cannabis and hemp. And in that regard, we continue to make progress on monetizing our existing IP library. Again, paperwork is exchanging and we hope to announce that in that -- roughly that same time period. That's directing revenue -- licensing revenue in Q3 and Q4. In addition to that, we've got something right behind that as far as a new strain and a strategic partnership that is moving forward as well. Again, that could see revenue in Q3 and Q4 that we're anticipating. And then finally, we have everything locked down for our grow in Colorado this year. And everything that we are planting will depend on the precise yields, but all that has a home with agreements for offtake in Q4. So we will grow through October, harvest in late October to maximize the plant and then, begin commercialization in either the form of flower, distillate or isolate, depending on exactly what the customer wants. But the offtaker is all accounted for. So that's the way to think about continued progress in the cannabis/hemp area.

Thanks, Jim. And we have one last question. It seems like New Zealand is extremely interested in reducing the nicotine content in tobacco. Assuming this goes through, how long of an implementation period do you see there'd be?

I'm going to ask Mike Zercher, he's on the call, to address that because I think he's in a great position to address that question, or perhaps not. I mean we may be having technical difficulties again. So I'll address it. Positive news is everyone has seen that New Zealand is moving forward with a nicotine mandate. Again, that's a bellwether country. We anticipate that expanding into other former British Empire countries like Australia, Canada and ultimately, the United States. So it's certainly a frontrunner there. We've been in dialogue with New Zealand for quite some time and are really fully prepared to be able to deliver, quite frankly, their entire requirements if they would trigger the mandate tomorrow. So we have the capacity, has the size of the market to really support that fully if they were to go even within the next 24 hours, which is obviously not the case. So we're staying in continued dialogue with them. We want to see things moving forward on a pragmatic basis, on a commercial basis, but the good news is we could support that fully if they were to trigger it literally overnight. So we're excited about that and to get activity moving in parallel with everything going on here in the U.S.

Thanks, Jim, and that was our last question.

All right. Thank you. Okay. I want to just take the time to thank everyone for participating in today's meeting. As always, we look forward to updating you on our progress on our second quarter earnings call and the continued transparency and high level of communication. In the meantime, please reach out to Mei with any follow-up questions. And we wish you and your family's good health during these times. Thank you, and have a great day.

Thank you. This does conclude today's meeting. Have a wonderful day.