22nd Century Group (XXII) Q2 2021 Earnings Call Transcript

22nd Century Group (XXII -4.74%)
Q2 2021 Earnings Call
Aug 05, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to 22nd Century Group's second-quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode, and the floor will be opened for questions following management's prepared remarks. As a reminder, today's conference is being recorded. At this time, I would like to turn the call over to Mei Kuo, director of communications and investor relations.

Thank you. Please begin.

Mei Kuo -- Director of Communications and Investor Relations

Thank you, Diego. Good morning and welcome to 22nd Century's second-quarter earnings conference call. Joining me today are Jim Mish, our chief executive officer; Mike Zercher, our president and chief operating officer; and John Franzino, our chief financial officer. Earlier today, we issued a press release announcing our results for the second quarter of 2021.

We'll start today's call with prepared remarks from Jim, Mike, and John before moving into a Q&A. 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 files will serve as a framework for management's prepared remarks, reinforce key takeaways, and provide additional transparency and insight into our business, strategy, and objectives. Before we begin, some of the statements made today are forward-looking.

Forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in our annual, quarterly, and other reports filed with the SEC. During this call, we may also discuss non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, and amortization as adjusted for certain noncash and nonoperating expenses. For more details on these measures, please report -- refer to our press release issued earlier today.

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

Jim Mish -- Chief Executive Officer

Thanks, Mei. Good morning, everyone, and thanks for joining 22nd Century's call today. Before I actually turn in my first slide, I really want to take a moment to let you know what headlines to listen to for today. First and foremost, you will hear new details regarding our MRTP application that we can now share.

These new details continue to drive our high confidence and a successful outcome. You will hear about us initiating the VLN launch process across numerous offshore countries that do not require MRTP. You will also hear that we believe we would be in this target markets by Q1 2022. You should also make note that the MRTP is the beginning and not the end game for us.

It enables the U.S. launch and fuels additional launches in our remaining offshore countries that are contingent upon MRTP. Ultimately, we will also have a series of announcements with more detail immediately following the MRTP. You will hear more about our growing contract manufacturing, CMO business that broke company records in both Q2 and for our first half of 2021.

You will hear about the monetization of our hemp/cannabis that is coming out of the initial two-year development cycle in the second half of 2021. You will also hear about our operational network that is now complete, and about our superior IP and technology to quickly bring disruptive plant lines to the market with our plant engineering and breeders, including our latest in keystone addition, Extractas Bioscience. And you will hear the exact date of the introduction of our third franchise and what to expect. Now turning to the slide, the past quarter has been incredibly productive as we accelerated build-out for revenue growth in both tobacco and hemp/cannabis.

I'm sure top of mind for everyone today is our MRTP authorization. We are in regular contact with FDA officials at many levels and through many channels, including very recent conversations at the uppermost level of CTP. We are highly confident that our application for VLN has completed the scientific review process, and as in the report documentation phase, the final stage of the process. I recognize that the delay by FDA in authorizing our VLN is incredibly frustrating for all of us.

The process is taking far too long for a product FDA has itself said is critical to public health and begin to reduce the harm caused by smoking and the 1,300 deaths per day in the U.S. alone. I want to make it clear that we, 22nd Century, have the expertise to advanced this far, and we possess the expertise to navigate this to a successful conclusion, utilizing a balance of leveraging the FDA in collaboration. As I said, VLN is 100% U.S.

market-ready. And while we continue to press FDA to act in the U.S. and with new capital on our balance sheet, we have initiated the launch process in several countries that do not require MRTP type of approval to go to market with a 95% less nicotine claim. These are well-recognized economies with established tobacco distribution channels and premium tobacco markets suitable for a product like VLN.

And we believe that we will be in these markets by the first quarter 2022. In hemp/cannabis, we expect to monetize our lines in IP completing the first two-year development cycle beginning in the second half of 2021 with upfront license fees from our Aurora IP partnership plus revenue from off-take commitments for our entire 2021 crop to be harvested this fall on our Colorado farm property. We are also accelerating our next-generation plant lines for 2022 and 2023 revenue, as we leverage our highly disruptive breeding capabilities designed to get commercial customers, a differentiated market advantage. We have now secured four of the world's most expert alkaloid-based breeding partnerships in both the Northern and Southern hemispheres to support rapid commercial scale-up and year-round cultivation of disruptive plant lines.

Most recently, we have secured Extractas Bioscience, which may not be a household name to you, but I can assure you is the single most experienced and expert alkaloid plant breeder in the world. I can also share that we will introduce our third franchise on August 30th. This will include detail on IP, market information, and competitive advantages, plus operation and commercial partnerships in this large growing $500 billion addressable global market opportunity that is not bound by the same level of regulatory and legal hurdles we face in tobacco and hemp/cannabis. I fully recognize the importance of MRTP and remain absolutely dedicated to winning that authorization.

All these efforts showcase how 22nd Century is building for long-term revenue growth and value creation across multiple franchises and global market opportunities. As part of that effort, we also have announced that we intend to uplist on the NASDAQ stock market with our first day of trading on August 16th. In fact, 22nd Century will be ringing the closing bell that day. I want to personally thank the NYSC for all of the support and people over there for the support to 22nd Century over the years.

While remaining dedicated to our primary mission to reduce the harm caused by smoking, uplisting to NASDAQ also aligns 22nd Century with other high achieving innovative and growth-oriented global science and technology companies. The company believes that joining the NASDAQ will enhance its visibility to a wide audience of institutional investors and increase our exposure to hemp/cannabis investors at this important time of industry progression toward mass production. With that, I will turn it over to Mike to detail our tobacco activities further, then I will come back to discuss our cannabis and third franchise actions with you. Mike.

Mike Zercher -- President and Chief Operating Officer

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

There remain no outstanding requests for information from the FDA, and as Jim mentioned, based on our recent discussions at the highest levels of CTP, we are highly confident that our MRTP is now in the documentation phase. The final phase before FDA announces a decision. Even with this encouraging news, we continue to escalate our efforts to ensure a positive outcome. More broadly, we believe adult smokers have a fundamental right to choose a cigarette that is nonaddictive.

To make such a choice, smokers need information about the products available to them, including their nicotine content. And we believe companies like ours have a right to communicate to their customers about products that could help reduce the harm caused by smoking. This is why our MRTP application is so critical and it is past time for FDA to act. We have all the knowledge, expertise, and resources needed to achieve success here.

We have come farther than anyone in the tobacco industry thought we could, and we will finish the job.Shifting to Slide 5. We are ready to initiate the pilot launch of VLN within 90-days of authorization. Our team has run a number of tobacco product launches, giving us critical insight into the importance of a well-planned market entry and solid supply chain. In our market research, most smokers tell us they are likely to use VLN.

Our pilot program will enable us to test, measure, and refine our marketing model to maximize our long-term commercial success with VLN, and then advance to full national rollout leveraging the most effective tools and messaging. Meanwhile, VLN continues to be very well received in our discussions with potential retail trade partners. Several are ready to go today, others are maintaining close dialogue with us and ready to engage upon MRTP authorization. We believe this is another indication of the market's recognition of the importance of reduced nicotine content cigarettes and the role they play in FDA's tobacco harm reduction plans.

Turning to Slide 6. To support our launch efforts, we are ready to scale VLN manufacturing at our North Carolina facility. Our Q2, tobacco contract manufacturing results support this fact, showing 30% growth in revenue and higher margins. Our CMO program accomplishes two important goals.

First, it demonstrates that we can indeed generate new business and produce large volumes of products readying us for VLN production. Second, it ensures that the assets needed to manufacture research cigarettes and VLN are ready and not only paying for themselves but also self-funding capital investments in added capacity and efficiency. For example, we have brought nicotine content testing in-house, reducing our testing costs by 90% and cutting turnaround times from weeks to hours, all with a payback of less than one year. Further readying ourselves for VLN production, 2021 looks to be the largest ever VLN crop.

And we are working to expand our VLN growing program by adding growers in the Southern hemisphere, allowing the company to grow our reduced nicotine content tobacco year-round. Advancing to Slide 7, given our ready readiness for manufacturing and increasing interest in VLN outside the U.S., we are initiating the launch process in key global markets. Accelerated by the proceeds from our capital raise in June. While the company has made efforts in the past to launch its RNC cigarettes in the EU regulations there made it difficult, if not impossible, to communicate with smokers about what makes VLN different from every other cigarette.

Therefore, we are targeting countries where we believe regulations will allow us to go to market with claims today or with minimal interaction with regulators. Many of these markets also have a strong affinity for new reduced-risk tobacco products, and they all have adult smokers with large premium segments. Once we have our MRTP in hand, we can then leverage that FDA endorsement to initiate the launch process in additional countries where regulatory barriers may be higher. In closing my comments, we are 100% committed to the success of VLN because adult smokers have the right to choose a nonaddictive tobacco cigarette.

We have the plans and capabilities in place to launch quickly in the U.S., and we are accelerating to the launch of VLN in markets outside the U.S., where we see an opportunity to generate revenue and gain market experience with VLN. I will now pass you back to Jim for an update on our hemp/cannabis franchise. Jim.

Jim Mish -- Chief Executive Officer

Thanks, Mike. So, let's turn to Slide 8, which includes a recent photo from our Needle Rock Farms in progress off to the left-hand side. But continued acceptance of cannabis in the U.S. and other markets is driving increasing recognition of the need for plant genetics tailored for large-scale production.

It has been a productive few months for 22nd Century as we secured operational partnerships to complete our upstream capabilities, began growing these first lines of high CBD and high CBG plants at our farm property in Colorado for harvest later this year, and accelerated additional lines for 2022 and 2023 growing seasons. We are also advancing with strategic commercial partners building on the base we established with the world. We anticipate these will become tangible drivers in 2022 revenue. We are expanding our team and enhancing our international reach to do so, which will enable us to accelerate agreements with well-recognized pharma, food, nutrition, medical and recreational CPG customers that we are in continued dialogue with.

In short, our hemp/cannabis business is accelerating the revenue at a very rapid pace. On Slide 9, we believe 22nd Century now controls the most comprehensive and innovative upstream cannabinoid value chain in the industry and assets critical to unlocking commercial success for large-scale cultivation and this is rapid disruptive approach. Importantly, our breeding partners now including Extractas Bioscience in Tasmania in the Southern Hemisphere are the most expert alkaloid-based plant breeders in the world. They can support commercial scale-up in the cultivation of disruptive plant mines far beyond the capabilities of independent competitors or in-house breeding in consumer product companies.

We also made a number of advances in the existing elements of the value chain, starting with the recently signed lease for a research lab in Maryland very close to KeyGene facilities and key government regulatory constituents and important research and standards settings entirely directed and related to our scientific programs. I also want to take a moment to emphasize here just how favorable our transaction and conversion with Panacea was the 22nd Century. Effectively yielding valuable farm assets and over collateralized notes, and 91 million shares of common equity in Extractas that can be converted to cash. You can run the math for yourself, but in essence, every cent of appreciation is a million dollars of potential cash toward 22nd Century.

The Colorado Farm assets and this conversion are state-of-the-art showpieces, and we have access to advanced purification techniques to get distillates and isolates as needed for our customers. Before wrapping up my remarks, I also want to reiterate that we will be introducing our third franchise on August 30th, two weeks after the NASDAQ uplisting. The wait is over, as we are confident in our competitive position, and we will now begin filing IP that will be in the public domain for this large and well-known consumer market. Importantly, this market will leverage much of our existing infrastructure and working knowledge, but without the high regulatory and legal hurdles of tobacco and cannabis respectfully.

I cannot wait to get that into your hands come the 30th of this month. And with that, I will now pass you over to John to review our financial performance. John.

John Franzino -- Chief Financial Officer

Thanks, Jim, and good morning to everyone. Starting off in Slide 10, I'm sure many of you are excited to see that we'll uplist our common shares to NASDAQ on Monday, August 16, 2021, and continue to trade under our current symbol XXII. Transferring the listing to NASDAQ aligns the company with other innovative and growth-oriented global science and technology companies. Joining the NASDAQ will also enable the company to be more agile -- being a more agile organization in hemp/cannabis and draw more coverage interest and investments.

We have also crossed several momentous milestones this quarter, including new research coverage initiated by Vivien Azer, leading beverages, tobacco, and cannabis senior analyst at Cowen and Company, and the addition of 22nd Century to the Russell 2000, Russell 3000, and Russell Global Indexes. Now, turning to the financial results on Slide 11. As Jim and Mike had stated, we have had a great quarter. Net sales increased by more than 30% to 8.4 million through a combination of higher volume and price increases in our contract manufacturing cigarette business.

This demonstrates our ability to generate new business and to scale up volumes ahead of launching our VLN cigarettes, following the authorization of the MRTP. We were working with a number of potential opportunities to further the scale up this business. Gross profit margin grew by 390 basis points a sixth consecutive quarter of year-over-year improvement, demonstrating our ability to execute on the objectives and strategies we set for the business. Every incremental dollar of CMO contributions helps to cover our operating overhead and fund growth investment rather than utilizing our balance sheet cash to do so.

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

We have provided a more detailed comparison of our financials for the quarter on Slide 12. Total operating expenses for the first quarter increased by $2.3 million, driven by $2.7 million of higher SG&A expenses, partially offset by $215,000 of lower R&D expenses. The increase in SG&A included the addition of new members of the company's management team, including the chief executive officer, the chief financial officer, and the general counsel, higher noncash personnel costs related to equity compensation, E&O insurance, financial institution consulting costs and marketing costs as we move quickly to market readiness in both tobacco and hemp and cannabis. R&D expenses were lowered by $215,000, given by lower personnel and contract costs, partially offset by higher tobacco field trial costs and patent fees.

We expect to increase investments in R&D going forward, as we continue to expand our activities across tobacco and cannabis and adding the third franchise. For the second quarter, operating loss of $6.6 million increased by $1.9 million over the second quarter of last year. Improved gross margin of $385,000 is more than offset by $2.3 million of higher operating expenses. Total other income increased by $2.8 million.

$2.5 million that increased with the gain resulting from valuing our equity Panacea, Extractas investment to a public market price and further adjusting the arrangement to obtain the Needle Rock Farms partial payments to the convertible note receivable previously in place. Turning to our strength and balance sheet with more than $60 million of cash at quarter-end, we have the resources to fund a significant runway for growth that are -- as our reduced nicotine tobacco and cannabis franchises transition to commercial launch. We made $40 million of growth capital through a transaction that was brought to us on very favorable terms. We intend to use the proceeds of that offering to accelerate our revenue progression in a number of ways, including VLN, U.S.

launch readiness, commencing international VLN market launches, accelerating the commercialization of our disruptive hemp/cannabis plant lines and IP, and launching our third franchise. I will now pass it back to Jim.

Jim Mish -- Chief Executive Officer

Thanks, John. So summarizing everything on Slide 13. Our 2021 priorities have not changed since the year-end report. We now have made significant progress with even stronger tailwinds propelling us forward.

We'll continue to escalate our actions to secure MRTP authorization, which will kick off the launch of our VLN products in the U.S. We're accelerating our international launch efforts, looking at multiple countries where we have exciting opportunities. We now control the complete upstream cannabis capability we believe to be the best in the industry with first cannabis revenues coming later this year. Our pending third franchise is to be announced on August 30th to be generating revenue within 12 months to 18 months after launch.

I think that there are meaningful milestones in our operations with a strong balance sheet to fund growth programs across all three of our franchises and we are in an even stronger position than we were when we started the year. With that operator, please open the call for questions. Thank you very much.

Questions & Answers:

Operator

Thank you. And at this time we will be conducting our question-and-answer session. [Operator instructions] Our first question comes from Vivien Azer with Cowen. Please state your question.

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

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

Mike Zercher -- President and Chief Operating Officer

Good morning, Vivian. This is Mike. Thanks for the question. There is not a lot of detail we can provide about the call, these are generally confidential discussions.

But we know from activities around other MRTP products that in the documentation phase, FDA is generating essentially the public documents. So, press releases announcements, and the team reports explaining their decision about the MRTP authorization. So, it is our understanding from our conversations that these are the documents they are generating now leading up to an announcement decision.

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

Understand. That's helpful. And I appreciate your commentary on some of the regulatory constraints around potentially launching VLN in Europe. I think there are probably some obvious candidates that have lower regulatory requirements and the pension for reduced-risk products.

As you think about that kind of two-stage execution, right, where an MRTP might improve the conversations that you have with regulators in the EU. How are you thinking about approaching kind of a global opportunity using third-party partners? Are you looking for an exclusive global relationship or can you create a geographic patchwork? Thanks.

Mike Zercher -- President and Chief Operating Officer

Yeah, great question. The -- at this point, our strategy is likely to be focused on engaging partners that are strong in each of the local markets. And so while there are a couple of global tobacco companies, much of the world also has very strong -- let's say number three, and number four players that we can potentially partner with. And those would be the folks that we are engaged with -- in discussions with at the present time.

Of course, we are open to partnering with anybody that we believe can commercialize the product successfully and has the intent to do that.

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

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

Mike Zercher -- President and Chief Operating Officer

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

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

OK. Understood. Perhaps moving to the hemp/cannabis segment please, that you're calling for revenue contribution in the second half of 2021. We are in the second half of 2021.

So, can you be any more specific about how to think about the phasing from a quarterly perspective? Thank you.

Jim Mish -- Chief Executive Officer

Yeah, sure, Vivian. Thanks for the question. I will take that up. And it is consistent with what we have been saying on recent calls, which we expect to come first from two sources: A, upfront licensing revenue from our original legacy IP, in genetic IP in concert with our partnership with Aurora as we move that forward.

And then also a revenue stream from our initial crop grow that is on the photo well long its way in Colorado. Both of which we primarily anticipated more in Q4 than Q3. Although there still may be an opportunity to see some initial components of that coming in late Q3. But more likely consistent with what we said before Q4 of this year.

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

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

Jim Mish -- Chief Executive Officer

Yeah, we're working that through. I mean, we don't give out guidance at the moment. But we do want to get as much information out there and be more transparent. So, as we move through this quarter, we really hope to quantify this a bit better and to lay that out the next call.

A big piece of it, of course, is based on the yields of the first grow in Colorado. And as I said before, we have options of moving that as flour or further refraining it and improving the margin on that product significantly. So, we are trying to sort out exactly, not only the timing, but the form it will move. And, obviously, the further we can refine it, the more so we will do that.

So, we hope to have a bit more information around that either in between now and the next call to share or certainly at the next call.

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

Perfect. Thanks very much and congrats on the NASDAQ listing.

Jim Mish -- Chief Executive Officer

Thank you very much, Vivien. Thank you.

Operator

Thank you. Our next question comes from Jim McIlree with Dawson James. Please state your question.

Jim McIlree -- Dawson James Securities -- Analyst

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

Jim Mish -- Chief Executive Officer

No, it is in the ballpark, Jim, and thanks for the question. Again, the part we are trying to sort out in more detail is around the grow in particular, because it is disruptive plant lines going in there. It is the first grow and some of that will depend on yields. And again, more importantly, we are looking at refining the product as much as possible to make it truly differential.

And the commitments that we have lined up for that are open for that based on the market conditions. So, yeah, we're trying to quantify that as best as possible, but those types of range is certainly what we are targeting.

Jim McIlree -- Dawson James Securities -- Analyst

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

John Franzino -- Chief Financial Officer

Can anyone hear me?

Jim McIlree -- Dawson James Securities -- Analyst

Yep.

John Franzino -- Chief Financial Officer

Yeah, thank you. I guess I press the wrong button. Yeah, thanks for the question. I think that overall, we are anticipating a higher level of operating expenses, but they will be characterized in different ways as we move forward, you know, in the quarter.

You know, we've had higher operating expenses and, you know, having to do with the higher management costs and so on, which are characterized as being in the following half of the year and that will be in place. But we do plan on increasing our investments in R&D and operating expenses around getting personnel in place for the third franchise and to further develop the business in both cannabis and tobacco as we move forward. So, we anticipate that our operating expenses will carry forward at a comparable rate to where we are at now through the first half to the second half of the year.

Jim McIlree -- Dawson James Securities -- Analyst

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

Mike Zercher -- President and Chief Operating Officer

Yeah. Good morning, Jim. At the moment, we are not planning to increase any personnel resources. Our strategy is to work with local partners in each country.

And so we have the personnel already in the company to manage those relationships and develop them. All of the manufacturing resources and tobacco inventory that we need are also sufficient to launch the international markets. So, right now, as we have it planned, we can leverage all the resources and the assets that we have today to launch these markets.

Jim McIlree -- Dawson James Securities -- Analyst

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

Jim Mish -- Chief Executive Officer

The same business model that we are applying, you know, really on the hemp/cannabis side, we'll apply to the third franchise. So, it will, you know, have us optionally open toward upfront licensing fees to refine and develop any disruptive new strains with commercial partners. Utilizing our operational partnership network that already exists, CannaMetrix, KeyGene, and the breeders. So the business model will stay the same for an upfront revenue stream for large programs and then royalty streams off of that.

So we will quantify that as we move forward. But it will be kind of a two-phased approach. There are also opportunities as we're working in hemp/cannabis to drive it out as an ingredient in some form, and that we are considering as well. But I would say the first revenue streams that will come in for that franchise more than likely will be upfront licensing fees to secure these particular programs and strains and then quickly develop them into royalty streams and/or ingredient sales.

Jim McIlree -- Dawson James Securities -- Analyst

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

Jim Mish -- Chief Executive Officer

That'll be -- we will work the same, it is all captured in the same networks. So, certainly, the same type of relationship we have with KeyGene, in particular, will be duplicated in the third franchise. So, we don't expect any significant upside payments for that required. That is why we have built a network that is adjacent within these alkaloid plants in order to take full advantage of that.

Now, if we happen to see additional opportunities, they can accelerate this and I wouldn't rule it out. But, right now, we don't feel that is necessary to make significant progress in the franchise.

Jim McIlree -- Dawson James Securities -- Analyst

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

Jim Mish -- Chief Executive Officer

No, there is not because the activity that goes on at CannaMetrix can also be applied to the third franchise, in fact, they are already doing it. Likewise with KeyGene. Likewise with the breeders. They are already heavily engaged in this franchise, as we have been working it through.

So, they haven't remained idle. We have certainly kept it behind the confidentiality field for protection. But all these components have been active. Even the ones that we have secured recently by on the paperwork such as Extractas has been engaged in the third franchise.

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

Jim McIlree -- Dawson James Securities -- Analyst

OK. Fantastic. Thanks a lot. Good luck with everything.

Jim Mish -- Chief Executive Officer

Sure, thanks, Jim.

Operator

Our next question comes from Aaron Grey with Alliance Global. Please state your question.

Aaron Grey -- Alliance Global Partners -- Analyst

Hi, thanks for the questions. Two quick ones for me. So first off, you guys talked about the global hemp/cannabis breeders, could you just give some additional commentary there about maybe how you look for those to be differentiated and how for them to be a value add to your clientele? Thanks.

Jim Mish -- Chief Executive Officer

Sure. And thanks for the question, Aaron. Happy to address it. I think what is most important and I think some folks fail to recognize as the marketing has developed is that, in the end, the hemp/cannabis from plant biotechnology is really a nascent phase.

It is in the start-up phase whereas it has expanded the breeding expertise that has primarily found its way into large consumer based products, you know, Canadian LPs, MSOs, etc., have tapped into the smaller scale breeders but had a wonderful success of bringing artisanal based plants to bear but at a relatively small scale in greenhouses under very expensive, costly conditions. The requirements in order to get to a large commercial scale for the mass markets, whether it is in Canada or the U.S. or what have you, really require a much more in-depth knowledge around the alkaloid plant approach itself. It is a very challenging plant to modulate, especially what is been happening I think over the past several years that we have been following it is that there have been improvements in the plant strain to get them to scale.

But they have been incremental. I wouldn't call them disruptive. For example, the levels of cannabinoids or the yields of cannabinoids, or even some of the disease protection around the hemp/cannabis. They have been incremental, and they have taken quite some time.

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

So, our strains as they are coming through the development pipeline and coming out of the back end of the first two-year cycle, are not tens of basis points higher in cannabinoids, but hundreds of basis points of active cannabinoids or much higher yields or much more protected from a disease perspective. So, those are what we are trying to bring to the commercial scale in this two-year development cycle. So, the speed of our network and the disruptive technology that could come from that is where we have carved out a space for ourselves, and that is what is enticing the conversations with the commercial partners based on this operational partner network that we have created. Otherwise, there is breeding going on within all these companies.

But as you can see for the past several years, the improvements have been fairly incremental.

Aaron Grey -- Alliance Global Partners -- Analyst

Thanks for that color. That is really helpful. And then just kind of shifting gears to the MRTP and the potential launch. You said pilot launch within 90 days after that's received on very low nicotine.

I'm just wondering if you could perhaps provide some incremental color in terms of, you know, planned efforts kind of get in front of consumers through those pilot efforts through, you know, you would be able to do marketing or kind of how to get consumer initial adoption from whether it be cigarettes or other nicotine products. Thank you.

Mike Zercher -- President and Chief Operating Officer

Good morning, Aaron, this is Mike. Thanks for the question and for joining us. So, our plans here, as we mentioned, or as I mentioned in my comments, is a pilot launch. This will be in a limited number of geographies where we can -- we will be testing all the marketing tools available to us.

So, that will include digital marketing, direct mail, as well as advertising at the point of sale. And, we'll be testing all of those programs to see where we get the best ROI. And we'll also be testing various messaging options. So, how we go about explaining to smokers what VLN -- what it is, how it is different from what they are buying and smoking today, and why they should be considering it and purchasing it.

We will also be using different tools to generate trials. Probably some couponing. Probably some activities at the point of sales to talk directly with smokers. So, essentially all the tools available to us, which are compared to many consumer products are rather limited because it is a tobacco product.

But nevertheless, we know from our prior experience with other tobacco products as a team that there are good tools available to us. And so, really, that will be the emphasis of the pilot, we will then take that learning as we plan to scale up the distribution and the sales of the brand nationally and the same process internationally,  learning and then scaling.

Aaron Grey -- Alliance Global Partners -- Analyst

OK, great. Thank you so much for the color.

Operator

Thank you. I will now turn the floor back over to Mei Kuo. Thank you.

Mei Kuo -- Director of Communications and Investor Relations

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

Mike Zercher -- President and Chief Operating Officer

Yeah. Thanks, Mei, and thanks to the audience for the question. Good questions here. There are several of them, so I unpack each of them.

So, we are looking at several markets at least half a dozen that we are evaluating and zeroing in on the details. Our goal is to launch it -- these two by the first quarter of next year. All of the markets that we are looking at are recognizable. They are well-developed countries.

Many of you have had probably even visited these places. They are markets where we believe we can go to market with MRTP type planes, including a 95% less nicotine claim right out of the gate on day one without any regulatory review, or there are countries where we believe with minimal interaction with the regulatory authorities we can go to market with claims. So, less onerous, more permissive regulations in these markets and what we have in the U.S. or the EU.

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

However, we are not launching these markets slightly. Our objective is to launch and then keep profitability as soon as we can. And so, as the plans develop, we will have a comment more on revenue recognition and margin contribution as the plans develop. So, as background, this is work that I did for many years on the American Spirit business, a brand and a business that I worked on for about 15-years.

So, this is a familiar area to me as it is to a number of folks on our team, including John our CFO. So, we have got a high level of confidence in our ability to be successful here.

Mei Kuo -- Director of Communications and Investor Relations

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

Jim Mish -- Chief Executive Officer

Yeah, thanks for the question. And look, I will first start by saying I'm a big proponent of all the various technologies that are out there, the synthetic cannabinoids that I helped found, co-found. The technology is wonderful chemistry put up by really the leader on API basis, Purisys. But it is really primarily dedicated to the ultra-high purity pharmaceutical industry based on its -- based on some of its restrictions.

We are also very optimistic, for example, on the biosynthetic approach. We are partnered with Aurora on the original and then in the IP. But the biggest part of the market today and as it moves forward on a volume and ultimate profit base is to serve all these consumer and used markets is the natural basis. So, that is why we have turned our attention primarily to the natural growth in process.What makes us unique, again, is the -- certainly, the keystone of it is what happens within KeyGene the ability to modulate the plant quickly and disruptively.

So, in other words, you know, moving a THC level or a CBD level, from 20% to 22%, or 24% is an incremental gain that could take years in order to achieve. Our technology focuses on -- with modulation in KeyGene and then accelerants and combining all these new pieces --  breeders, CannaMetrix on the targeting side, the farms, etc., one-stop shop. By bringing all this together creates this two-year cycle to give you not incremental gains of 2% to 4%, the disruptive gains of 10% to 20% so you could be yielding CBD levels in the 30 percentages and 40 percentages. So, that is what -- the combination of that along with the speed is our value proposition throughout this entire network.

We, 22nd Century, control the IP, we own the IP, we are utilizing and driving this from the highest level. But, obviously, setting up win-win partnerships to make sure everyone is heavily engaged and incentivized to move these things through as quickly as possible toward the commercialization with commercial partners. That is why our position is unique. That is why this network is unique.

And it is really set up to establish a leadership role both on thought leadership with cannabinoids, in general, but on production and disruptive commercial level with this entire network in place, which, again, we direct and we control the IP.

Mei Kuo -- Director of Communications and Investor Relations

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

Mike Zercher -- President and Chief Operating Officer

Yeah. Thanks for the question. You know, I'll respond, and then maybe Jim would like to weigh in as well because it is a great question. I'm glad that it was asked, and it is a key strategic question.

You know, I will say, we have -- you can be sure that we have explored all the options, including the ones suggested here, and we continue to explore those.And while they certainly sound appealing, given the frustration that we have, and I'm sure many of the listeners here have about FDA's glacial pace, there are certainly downsides negative consequences to many of these options that take more of a confrontational approach. And, you know, such an approach is likely to change our relationship with the FDA from one that is collaborative to one that is adversarial and counterproductive.And so, for now, at least, we prefer to maintain that collaborative relationship with FDA. And we think that is the best way -- the best thing for smokers, in the long run, is to work with FDA to get the right information to market and be able to communicate and educate adult smokers about how VLN could help them reduce their exposure to nicotine. So, again, while we are evaluating all the options, we still have a high level of confidence in the approach that we have been taking so far, which is the collaborative approach.

Jim, I'm not sure if you want to weigh in here.

Jim Mish -- Chief Executive Officer

Yeah, no, just to add to that, I think the way I look at it is, we are in this for both the short-term and the long-term, right? So we are doing everything possible to take a look at the short-term gains, which means launching offshore in countries that do not require this MRTP to get moving now, and we have got booked everything ready to go for the VLN launch in the U.S. So, we are getting moving on that for the short-term. The MRTP ultimately is going to be required in these other offshore countries to do it in the most impactful way and probably the most profitable way. But, in the U.S., we are in this for the long term.

And the upside opportunity, the profitability toward the organization and the growth opportunities are tremendously higher, taking the patience, to make sure that we are doing everything with the FDA, but launch again in collaboration with them and all the work that they have done on the scientific basis and clinical basis to make the most impact on the harm reduction. So, we don't want to let them off the hook on it. And if we thought for a moment, this is going to take a longer period of time, and we keep all of our options open, but all signs are pointing toward this moving forward on a very collaborative basis. And that will tremendously drive the upside potential, and not only for the short-term but the longer term as well.

So, we have the luxury of a good mix year as we have gotten ourselves organized, both on the short-term offshore launches and still staying in a very collaborative basis with FDA, which ultimately will drive things forward. Because remember behind VLN 1.0, there is also VLN 2.0, and the impact of that with the new strains coming out, the new non- GMO based strain, the ability to blend -- doing that in collaboration with MRTP for the long term in the U.S. is our driving force. There, we want to make sure that is a long-term play and it adds to Mike's comments as well.

But that is all I have got to add to it.

Mei Kuo -- Director of Communications and Investor Relations

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

Jim Mish -- Chief Executive Officer

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

Thank you and have a great day.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Mei Kuo -- Director of Communications and Investor Relations

Jim Mish -- Chief Executive Officer

Mike Zercher -- President and Chief Operating Officer

John Franzino -- Chief Financial Officer

Vivien Azer -- Cowen and Company -- Managing Director and Senior Research Analyst Specializing in Tobacco, Cannabis, and Beverages Sectors

Jim McIlree -- Dawson James Securities -- Analyst

Aaron Grey -- Alliance Global Partners -- Analyst

More XXII analysis

All earnings call transcripts