22nd Century Group (XXII) Q1 2022 Earnings Call Transcript

22nd Century Group (XXII -18.45%)
Q1 2022 Earnings Call
May 05, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the 22nd Century Group's first quarter 2022 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 go ahead.

Mei Kuo -- Director of Communications and Investor Relations

Thank you, Donna. Good morning, and welcome to 22nd Century's first quarter earnings conference call. Joining me today are Jim Mish, our chief executive officer; Mike Zercher, our president and chief operating officer; and Rich Fitzgerald, our chief financial officer. Earlier today, we issued a press release announcing our results for the first quarter 2022.

We'll start today's call with prepared remarks from Jim, Mike and Rich before moving into a Q&A session. During our prepared remarks, we will be referring to slides which are available for viewing in the webcast and posted in the investors section of our website at xxiicentury.com, under the events subheading. We hope these slides will serve as a framework for management's prepared remarks, reinforce key takeaways and provide additional transparency and insight into our business, strategy and objectives. Also, those of you joining by webcast can submit questions through the online interface, which we may include during the Q&A session of today's call time permitting.

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 non-cash and non-operating expenses.

For more details on these measures, please refer to our press release issued earlier today. And with that, I'll turn the call over to Jim, beginning from Slide 3.

Jim Mish -- Chief Executive Officer

Thanks, Mei. Good morning everyone and happy Cinco de Mayo. As you know, 22nd Century focused on advanced plant biotechnology to improve human health. This morning, we'll provide an update across our three franchises, reduce nicotine tobacco, hemp/cannabis and hops.

Now based on recent activity, we will focus on tobacco, but we remain highly confident of the significant opportunities in all three of these franchises that will generate substantial growth and value for the company. Of course, let's begin with an update on the pilot launch of VLN, the first and only modified risk tobacco product approved by the FDA. It's still early, but the pilot is going extremely well. We're absolutely thrilled that VLN is on the shelves at our Circle K pilot locations in Chicago, giving smokers for the first time ever an FDA authorized tobacco cigarette with 95% less nicotine designed specifically to help them smoke less.

Our Circle K pilot is designed to refine our marketing to maximize trial, repeat purchase and advocacy as we ready for national launch. But bear in mind, we very well may accelerate and expand to additional markets prior to completion of a pilot. This is even more compelling now that the FDA has advanced it proposed rulemaking banning menthol as a characterizing flavor in cigarettes. The rule includes a process that specifically highlights reduced nicotine menthol cigarettes as an example of a product that would be exempted from the rule.

We believe that VLN Menthol King would be the only menthol cigarette left on the market under this rule and a cornerstone of the FDA's policy, providing menthol smokers, a critical off-ramp as the rule takes effects. This is a $24 billion total addressable market and exactly as the FDA indicated in our MRTP authorization in December. All this is favorably impacting our strategic partner discussions. Further we do not expect to wait for the rule to take full effect to see the benefit.

VLN Menthol King is already selling very well in our Chicago pilot as menthol smokers are showing strong interest. The FDA's addition of the Helps You Smoke Less claim to our MRTP authorization has been a significant win as it helps smokers immediately understand why VLN is important. Having that direct science based claim on our packaging means that every time a smoker goes to the store to buy a pack of cigarettes, our VLN signage and the VLN packs on the shelf prominently remind them exactly why they should buy our product instead of the highly addictive alternatives. And this is an audience looking for solutions.

70% of adults smokers want to quit, but haven't succeeded with current products even after six, ten, or even lower quit attempts. That's the norm today and we will change it. The VLN science shows they can help smokers to take control of their nicotine consumption and help to break the addiction cycle that so many smokers have found impossible to escape. Smokers now have a choice that will help them to smoke less rather than reinforcing their nicotine addiction as every other tobacco product does.

Shifting to Slide 4, the launch of VLN opens up the doors to growth and strategic partnerships that 22nd Century has never seen before. We now have a premium priced highly disruptive FDA authorized products on store shelves. Whether we are talking about the $80 billion U.S. tobacco market, a $24 billion menthol market, or the $800 billion global market capturing even a very small part of these markets will be transformative to 22nd Century.

It's important to remember that this process is not new to our team. Our VLN team has successfully executed this type of branded specialty launched before most notably with natural American spirit garnering significant market share and create an extraordinary value worldwide. Of course, we will always implement ways to accelerate this growth. Building from our Chicago pilot in 150 Circle K stores, we'll then roll out to their 7,000 stores nationwide, as well as other regional and national channel partners and even additional international markets beyond South Korea, where we made our first shipment in Q1.

I'll stop there and let Mike fill in some of the details of our pilot program and launch market. Then I'll briefly discuss our hemp/cannabis and hops franchise actions with you, but sincerely I could not be more excited about 22nd Century 2022 and the future of the company. Mike?

Mike Zercher -- President and Chief Operating Officer

Thanks, Jim. And good morning everyone. As of April 11 we officially entered the market with our VLN King and VLN Menthol King reduced nicotine content cigarettes and in, so doing past another major milestone for 22nd century and our shareholders. Immediately following the FDA's authorization of our MRTP two days before Christmas, we put our pilot launch plan into action with Circle K and our other marketing and distribution partners.

The final piece of the puzzle was the Illinois state attorney general registration that is required for every cigarette brand sold in the state. While this mandatory state-level process took some time to complete. Once we had it in hand on April 4, we began stamping and distributing VLN immediately that the very first retail sale of VLN coming just a week later. Our team on the ground has done an excellent job in the few weeks since then creating high visibility for VLN with the posting of our point-of-sale advertising in the more than 150 Chicagoland Circle K stores selected for the pilot.

During the weeks leading up to the launch, we also secured both a feature story in the Chicago Tribune about how VLN can help people to smoke less and support from the Chicago Medical Society, a group of 7,000 medical professionals in Chicago affirming the very exciting opportunity that medical professionals have with VLN to help their patients who are smokers. While we have been in market for just a few weeks now, initial sales results have been very good in our exceeding expectations. So far, this has been driven primarily by media exposure, support from the healthcare community and in store visibility. We'll be hitting our full stride in the coming weeks with our remaining marketing and promotional programs, which include direct mail and email, digital and print advertising, store clerk training and incentives, promotions delivered in store and through mobile, a branded website, including store locator and other powerful programs, all designed to generate trial, drive repeat purchase, and build word of mouth among adult smokers.

We believe the economic environment with consumer inflation running high will also be helpful to the VLN launch as smokers see the health and financial benefits of a cigarette that helps them smoke less. We look forward to providing you with more details about our pilot results in our future communications. Turning to Slide 7, the pilot is important to optimizing our marketing programs in mix so that we can maximize our investments as we look to a national launch. Today, we have already secured permission from state-level regulators in nine states and filed applications in all of the remaining states.

We expect to be permitted to sell VLN in most, and very likely all states by the end of third quarter this year. In addition to expanding our geographic scope, we are working already to expand the retail footprint of VLN beyond Chicago. Circle K is an ideal partner for this given their 7,000 plus stores across the country, as well as thousands of stores outside the U.S. They're poised to work with us here and abroad to help us make VLN widely available to adult smokers.

We have also advanced our discussions with other potential channel partners, including mass merchandise, pharmacy, and dollar stores, as well as wholesalers and strategic partners as part of this national launch planning. Underlying our planning is the belief that VLN is poised to become the most disruptive product to hit the tobacco industry in decades. And we'll capture the attention and interest of the hundreds of millions of adult smokers around the world who want the smoke less. We look forward to discussing our plans for the next phase of the VLN launch in future calls.

Turning to Slide 8, our manufacturing facility is a key strategic asset where we have built the capabilities needed to produce high quality, reduced nicotine content cigarettes, including the tens of millions of research cigarettes used in the independent clinical studies that underlay our FDA mandated helps you smoke less claim and FDA's larger plans to ban menthol and require all cigarettes to be non-addictive. We will be shipping another order for an additional three million research cigarettes, including menthols in the coming months to support this continuing federal research program. Given these capabilities, our factory team was able to begin manufacturing VLN quickly, despite the global supply chain constraints impacting every industry due to COVID. And we are ready to further scale our manufacturing as we move into additional markets.

As noted in today's press release, we are now installing an additional 1.5 million cigarette-making and packing line and making other improvements to expand our manufacturing capacity by 25%. We're also making a multimillion dollar investment in growing our largest crop of VLN tobacco ever. Based on the interest in VLN, we have seen from the retail trade, strategic partners, and most importantly, adult smokers in our market research and pilot market. With this year's VLN crop, we will literally be harvesting the results of the work done in the past few years by our stellar science team and our world-class plant research partners to create our non-GMO VLN tobacco varieties and much of the IP that makes up our deep moat in this area, which will enable us to bring to market a non-GMO American blend version of VLN made with bright and burly varieties of tobacco.

We've also expanded our growing program to the southern hemisphere, providing us with year round growing capabilities to meet future demand for VLN. We continue to believe that VLNs appeal goes beyond the U.S. market, as noted on Slide 9. Even before the FDA authorized our MRTP, we committed to you that we would begin VLN sales outside the U.S.

in the first quarter. And we did that with our first shipment to South Korea in March with more to follow as our commercial partner proceeds with the retail launch there. We are excited about the commercial and public health opportunity for VLN in South Korea. We chose South Korea as our first international market because of its high smoking rate, especially among men where approximately one in three are smokers.

The country also has a large premium market and there is strong interest among adult smokers in low yield cigarettes and innovative tobacco products. Our partner is a new company forms specifically to bring VLN to market. The company's leadership team brings a wealth of professional knowledge and senior executive leadership experience, highly relevant to the venture, including the successful introduction of several new foreign products to the Korean market. The management of multi-location retail outlets, including in the convenience store channel, which is where most cigarettes are sold in Korea and experience with the branding and marketing of high end premium priced consumer products.

Our partners' professional backgrounds are as impressive as their passion for introducing VLN to their country to help adult smokers there. We believe this is a winning combination of mission and experience and we look forward to sharing more information about our progress with VLN in South Korea, as the business develops in the coming months. Elsewhere, we are advancing discussions with prospective partners in several other markets outside the U.S. where like South Korea regulations allow us to go to market today with claims with little or none of the regulatory complexity of the U.S.

With the first and only MRTP designation for a combustible cigarette from FDA, the enormous body of scientific evidence supporting that positions VLN very well for international expansion. Advancing to Slide 10. We applaud FDA's announcement last week of its plan to ban menthol in highly addictive combustible cigarettes. In authorizing VLN, FDA has given adult smokers, including menthol smokers, a tool to satisfy the urge to smoke while allowing them to reduce their consumption of highly addictive nicotine.

We are already seeing, as Jim mentioned, increased interest in VLN from menthol smokers who are looking to get ahead of the ban with a cigarette that will help them to smoke less. Menthol smokers are figuring out what the independent science clearly shows about reducing nicotine to non-addictive levels in cigarettes. Our products provide a critical off-ramp for adult smokers by helping them to smoke less. We believe this type of bold evidence based public health policy will continue to be the direction FDA heads in advancing its mission to reduce the harm caused by tobacco and several public statements, including most recently when announcing the menthol ban, Dr.

Califf, the recently appointed Head of FDA has been clear about the critical role that reducing nicotine in cigarettes can play in tobacco harm reduction, which has even greater potential than a menthol ban to reduce the harm caused by smoking. Obviously, we recognize these policies will not happen overnight, but FDA knows as do we that having our VLN products on the market now provides an opportunity for adult smokers to choose a cigarette that helps them to smoke less, while also showcasing how effective these policies can be. Wrapping up, we're incredibly excited to finally bring VLN to market. Our goal is to make VLN available to as many adult smokers around the world as quickly as possible.

We're highly confident and to appeal to adult smokers, its ability to help them to smoke less and ultimately in its potential to change the tobacco industry for good. I thank you for your time today and for your confidence in 22nd Century. I'll now pass you back to Jim for an update on our hemp cannabis and hops franchises. Jim?

Jim Mish -- Chief Executive Officer

Thanks Mike. It's really been an incredible first quarter in tobacco and we're excited for the path ahead, especially with the national rollout of VLN and working to support the FDA and their comprehensive plan. In fact, every catalyst that we could have asked for has worked and is working in our favor and is positioning us for substantial growth. So we're very excited about that.

Let's now turn to Slide 12 as we focus for a few minutes on our other two growth franchises, starting with hemp cannabis. This is a transformative year for hemp cannabis, and we continue to deliver as promised. We remain absolutely committed to this franchise to maximizing the consumer experience and confidence with hemp cannabis products, by developing superior plant lines, to provide the inputs going into those products. We do this by developing proprietary, scalable plant lines that exhibits stable genetic profiles, predictable agronomic traits, and highly valuable yield profiles necessary to fully commercialize the industry.

We completed our first harvest of high CBD and high CBG, low THC plants of Needle Rock Farms in the fourth quarter, selling biomass at that time and holding a portion of the harvest for potential of a high purity distillate, utilizing a new purification technology that we sold in this quarter. We're also able to generate revenue since Q4 from our first IP agreement, a three-party deal with Aurora Cannabis and Cronos Group for use of our shared and anti-IP that addresses the production of biosynthetic cannabinoids. Looking at 2022, we're excited to continue scaling and developing our proprietary plant technologies as we work to revolutionize the industry, much was done decades ago with other major crops like corn, wheat and soybeans. We're now preparing hemp plant lines for an expanded 2022 growing program at our USDA organic certified Needle Rock Farms.

All of which is pre-sold. We're also advancing our science as we move new plant lines forward, having achieved an industry's first breakthrough in hemp cannabis plant transformation with our partner KeyGene, expanding the company's capabilities and modifying the principle genes, controlling cannabinoid biosynthesis in the plant. We have also shipped our transformative next-generation seeds to extract us for breeding and scale up. There's more big news to come in this franchise.

In the global hops market on Slide 14, we continue to leverage our alkaloid plant expertise and IP to apply our capabilities. And as closely related alkaloid plant family, while hops is a $500 billion a year, global market, the industry still relies mainly on costly multi-year and high risk traditional breeding techniques. We believe our unique know-how and IP can bring exciting improvements to this industry, transforming the hops plant development cycle to reduce cost, risk and time required to create a tailored plant variety as we are doing with hemp and cannabis. We can dramatically cut the current decades plus development cycle through our advanced breeding capabilities, giving a major competitive advantage to hops companies that work with us.

Finally, I'm very excited to note that Dr. Calvin Treat will join the company as its chief scientific officer starting in late May. This further enhances our deep expertise in plant-based technology and intellectual property across all three plant franchises. Dr.

Treat has led global plant biotechnology programs at Bayer and Monsanto, including corn, soybean, and cotton crop technologies. He is now joining 22nd Century to do the same in key alkaloid plant families. I'll now pass you over to Rich to review our financial performance.

Rich Fitzgerald -- Chief Financial Officer

Thanks, Jim, and good morning, everyone. Starting off with Slide 16 and our quarterly results. Net sales increased by 33% year-over-year to $9 million through a combination of higher volume and price increases within our contract manufacturing cigar and cigarette business. We continue to generate new business in orders with additional customers and are also now manufacturing VLN cigarettes for our pilot launch in both the U.S.

and international markets. We continue to closely monitor certain supply shortages that are affecting our industry, but our team in North Carolina is managing through those quite effectively. Gross profit margin for the first quarter declined year-over-year to 5% due to product mix, supply chain delays and in MSA settlement assessment. The largest factor of this margin impact was that in the prior first – prior year first quarter, we completed a notable research cigarette quarter at higher margin.

Whereas in current year, a comparable research cigarette order was deferred by the customer into the second quarter of 2022. It's important to note that our investment in the CMO business is now paying dividends as we were well-positioned to promptly commence VLN manufacturing as part of our 90-day pilot market launch effort. As VLN exits the pilot phase and begins to scale its positioning as a premium brand will command higher revenue and margins when compared to our third-party CMO manufacturing business. This is a net positive to our revenue and gross margin profile as we progress national and U.S.

launches of VLN. Some of the early enhanced margin benefit will be reinvested to initially fund launch activities, but in the mid-term, it will generate much greater revenue and margin per carton than our legacy CMO third-party business. Turning to total operating expenses for the first quarter, they increased by $2.8 million. As we continue to advance our go-to-market plans and scale the business to support our VLN launch.

The increase in operating cost was driven by a $0.3 million increase in R&D spending versus the prior year and an increased SG&A spending of $2.5 million, increases in SG&A spending were driven by higher strategic consulting costs, stock-based compensation, legal and insurance costs. Operating loss for the quarter was $8.1 million, compared to an operating loss of $5.2 million the prior year. Net loss for the quarter was $8.9 million compared to $5 million in the prior year's first quarter. Our press release earlier this morning provides an adjusted EBITDA measure that we believe is a useful tool in evaluating the operating performance of the business on a ongoing basis.

Removing the effect of one time in non-cash expenses on an adjusted EBITDA basis, we reported a loss of $6.6 million in the first quarter of 2022, compared to a $4.4 million loss in the same period a year ago. Now going to Slide 17 and reviewing our strength and balance sheet, we had $38.6 million of cash at the quarter end, and we have the resources to fund a runway for the commercial launch and growth of our reduced nicotine tobacco business and our hemp/cannabis franchises. I want to highlight that our launch strategies emphasize using current resources and leveraging our partnership opportunities to drive scale rather than focusing on a high cost launch strategy that would require additional capital from the outset. It's important to note that our balance sheet is adequate for the launch plans and we – where we will continue to emphasize partner driven marketing rather than costly time consuming organizational scale.

This is tailored to the unique product claims of VLN, as well as the unique regulatory environment our product enjoys. With that, I'll now pass you back to Jim.

Jim Mish -- Chief Executive Officer

Thanks, Rich. It's an exciting time for us as we go-to-market in the U.S. with Circle K as our pilot partner, which will ultimately lead to the several major national C store and pharmacy chains placing our VLN products in front of customers. With a proposed menthol ban gaining traction as it should, we may well be the only combustible menthol cigarette in the market as a tool to help smokers transition away from traditional menthol products targeted by the proposed FDA ban.

We're moving ahead with our first year international launches as well. We're ready to go. Every catalyst, as I indicated before has worked in our favor and is in our pockets and are position us for strong growth. And so we're ready to go, not just on our innovation tobacco products, but also in our hemp/cannabis products and with our emerging research and global hops market.

We really look forward to the year ahead and talking again soon. And with that operator, please open the call for our questions.

Questions & Answers:

Operator

Thank you. The floor is now open for questions. [Operator instructions] The first audio question today is coming from Vivien Azer of Cowen. Please go ahead.

Harrison Vivas -- Cowen and Company -- Analyst

Hi, thanks so much for taking the questions. This is Harrison Vivas on for Vivien. So just to start off, can you try and – can you just dimensionalize the dollar benefit you got from your shipments to South Korea in the quarter?

Jim Mish -- Chief Executive Officer

Yes. Again, this like the pilot in Chicago is a small initial order to go through regulatory clearance there and it did not rise to the level where we would separately disclose it.

Harrison Vivas -- Cowen and Company -- Analyst

OK, understood. So kind of transitioning to Chicago, can you just talk about initial sell through trends relative to your initial expectations and maybe comment on retail inventory days on hand versus the initial launch. Thanks.

Mike Zercher -- President and Chief Operating Officer

Yes. Harrison, this is Mike. I can respond to that question. We've been in the market for about three weeks now.

We've got so far two weeks of reporting data. So the sales data so far does exceed our expectations. But it's still very early days to two data points do not make a trend line. So – but the anecdotal evidence on the ground is all very positive and we look forward to reporting more details about the sales results and inventories on hand, as we – through the coming weeks as the sales date develops.

Harrison Vivas -- Cowen and Company -- Analyst

OK, that's helpful. Last one for me. Just as it relates to the nine new states, can you sort of provide maybe some line of sight into the timing that you're expecting? Are there key milestones that you're looking to hit in Chicago before expanding? And if so – what are those milestones, if you can provide any color on those nine additional states, that'd be helpful. Thank you.

Jim Mish -- Chief Executive Officer

Yes. Our key metric will be essentially share of market in stores where we're selling and that will be one of the key decision points as the pilot develops the geographic scope and the timing of the – next phase of the launch is still in planning. And we'll be happy to provide more details about that as we firm up those plans.

Harrison Vivas -- Cowen and Company -- Analyst

Great. Thanks very much. I'll jump back in the queue.

Operator

Thank you. The next question is coming from Brian Wright of ROTH Capital Partners. Please go ahead.

Brian Wright -- ROTH Capital Partners -- Analyst

Thanks. Good morning. Happy Cinco de Mayo and congrats on all the progress. My first question is, did you give us the exact numbers for us in the Chicago pilot other than over 150? I just wanted to make sure I might have missed that.

Jim Mish -- Chief Executive Officer

It's up 159 stores to be exact.

Brian Wright -- ROTH Capital Partners -- Analyst

OK, great. Thanks. And then are you willing to – you did mention that the menthol sales in Chicago were outpacing the non-menthol sales. Is there – I know it's early, but is there – is it like a meaningful difference? Is it like 55, 45, 60, 70 or any color on that just out of curiosity?

Jim Mish -- Chief Executive Officer

Yes. So I don't know if they're outpacing, menthol is outpacing non-menthol but certainly menthol is over indexing relative to share of market across other brands. We think that's positive sign about menthol smokers' interest in this.

Brian Wright -- ROTH Capital Partners -- Analyst

Great. Great. And then just last one, you mentioned that the three – that there's a three million R&D shipment and that's going to come in the second quarter then, as far as revenue recognition.

Rich Fitzgerald -- Chief Financial Officer

Yes, three million. Yes. There are three million research cigarettes being manufactured and shipped. That I don't know the exact timing that likely is second quarter, but could slide into third quarter depending on the delivery processes basically.

Brian Wright -- ROTH Capital Partners -- Analyst

OK. And it's all or nothing. So it's either second quarter or third quarter, would it be like a mix of both?

Mike Zercher -- President and Chief Operating Officer

It depends on the manufacturing schedule. Sometimes, we ship them in parts.

Brian Wright -- ROTH Capital Partners -- Analyst

OK. OK, great. Thank you.

Mike Zercher -- President and Chief Operating Officer

Thank you.

Operator

Thank you. The next question is coming from Jim McIlree of Dawson James. Please go ahead.

Jim McIlree -- Dawson James Securities -- Analyst

Thank you. Good morning, everyone. Jim, in your opening comments, you talked about possibly expanding to additional markets, while the trial is underway. Would that be with Circle K or would that be with somebody else? Or can you say...

Jim Mish -- Chief Executive Officer

It could be a combination. We're watching this every day and making sure that we're doing everything we can to simultaneously refine our marketing collateral. Yet at the same time, accelerate revenue and growth. And we're letting that play out, but that very well, as I said, may open up opportunities to move into these other markets prior to the end of the pilot.

That could be in part with Circle K, that could be in part with others as well. So we're watching that very carefully. And as I said before, as well, it becomes that much more compelling and we paying that much more attention to it based on the FDA's activity and how the menthol mandate is progressing. So it could be – to answer your question though, Jim, it could be with Circle K and others.

Jim McIlree -- Dawson James Securities -- Analyst

Got it. Got it. Thanks. And Mike, you've mentioned some of the factors that you are evaluating as this trial progresses.

I was hoping you could prioritize what you think, let's say, the two or three most important metrics that that you are looking at as this trial goes forward.

Mike Zercher -- President and Chief Operating Officer

Yes, I mean, ultimately the biggest question in the pilot is share of store sales. And the reason that's important is primarily because that's the key variable in planning for a national launch. And so the size of the revenue in the national launch will drive all of our planning from there. And so the share store sales is the key – the key metric in developing that plan.

That's what determines what revenue we can expect, what margin we can expect as a result of that, what profit we can expect as a result of that and what size the marketing programs need to be to drive that. So we're looking at share of market and then secondarily cost of acquisition – consumer acquisition, as the key variables in that national plan.

Jim McIlree -- Dawson James Securities -- Analyst

Got it. And it's – so I'm assuming that you have some expectation or range of expectations about market share over the life of the trial, and you're just tracking that relative to the actual results. Is that a good a way to look at it?

Mike Zercher -- President and Chief Operating Officer

That's right. Yes. As Jim said before it's a relatively low bar. Any premium – new premium offering in the cigarette category is a new thing.

We think we're well positioned to succeed as a premium offering. And so it's relatively low bar for us to be profitable here, even capturing relatively small numbers in terms of market share. But our objective is to obviously capture as much share as we can as quickly as we can.

Jim McIlree -- Dawson James Securities -- Analyst

OK. OK. And Mike for you again. I think that you mentioned during your commentary two sources of spending coming up and I didn't write it down fast enough.

But I thought one of them was an expansion of capacity. And then the second was planting a new crop. Can you just repeat that and maybe expand on that in terms of the total amount of dollars required and the timeframe for spending those dollars?

Mike Zercher -- President and Chief Operating Officer

Yes. So I did mention, we're spending $1.5 million on installing an additional making and packing line at the manufacturing facility. So that'll allow us to expand the VLM sales, as well as maintain and grow the contract manufacturing business at the same time. And then the other investment I mentioned was a multi-million dollar investment in our new – in our, in this year's VLM crop.

We haven't publicly, or we haven't disclosed the amount that we're investing there for competitive reasons. But it is the largest crop of VLM that we've ever planted by a sizable margin. And we're doing that with the confidence that that the demand for VLM will be significantly as we head into national launch and build out the international markets.

Jim McIlree -- Dawson James Securities -- Analyst

OK. And so both of those are 2022 events?

Jim Mish -- Chief Executive Officer

That's correct.

Jim McIlree -- Dawson James Securities -- Analyst

All right. And you said on the second one on the – on VLN crop, is that crop going to be harvested this year as well?

Jim Mish -- Chief Executive Officer

Yes. That would be harvested yes, this year, late summer, early fall. So it's going into the gram as we speak.

Jim McIlree -- Dawson James Securities -- Analyst

Got it. OK. I think that's all for me. Thanks a lot guys.

Take care. Talk to you soon.

Jim Mish -- Chief Executive Officer

Thanks, Jim.

Operator

Thank you. At this time, we will address submitted questions from the web.

Mei Kuo -- Director of Communications and Investor Relations

Thank you. First question is what barriers would keep big tobacco companies from copying XXII low nicotine technology, as soon as regulations demand it.

Mike Zercher -- President and Chief Operating Officer

Jim, do you want me take that?

Jim Mish -- Chief Executive Officer

Yes, go ahead. I can chime in.

Mike Zercher -- President and Chief Operating Officer

Yes. So we've been working for a number of years on creating these varieties of reduced nicotine tobacco plants. There are dozens of patents that we own or control related to nicotine biosynthesis in the tobacco plant. In recent years, our research has been focused on using non-GMO methods of creating these plants, which have allowed us to produce different varieties of tobacco, basically introducing reduced nicotine content traits into different varieties of tobacco, which we think are important for a number of reasons.

One, the non-GMO approach allows us to access many international markets where GMOs are not allowed or not accepted by consumers. It also allows us to create, is it basically make any variety of tobacco non-GMO, and that allows us to work closely with any number of manufacturers, maybe making combustible tobacco products, including cigars to convert their proprietary lines into reduced nicotine lines. So that opens up a number of strategic opportunities. So all of this is protected by a very wide and deep mode, as I mentioned of dozens of patents.

And the big tobacco companies have in the process of the rule making around the reduced nicotine mandate, publicly commented about the strength of our IP and how difficult it would be for them to develop these plants themselves overtime that it would take 10 years or 20 years and multi billions of dollars for them to do this research. So that's where our confidence lies.

Jim Mish -- Chief Executive Officer

And in addition, just to add on to that, in addition, you have double protection, because not only would they have to do that, but they would have to seek, PMTA and MRTP authorization, which would take quite some time. So, we've got a deep and wide IP mode now across all these varietals at the low nicotine levels and then doubly protected with the timeliness of getting PMTAs and MRTPs through the through the system.

Mei Kuo -- Director of Communications and Investor Relations

Thanks, Jim. Our next question is, does the variable nicotine research cigarettes mean that the future levels of nicotine may be variable that the FDA will allow?

Mike Zercher -- President and Chief Operating Officer

That's a good question. The – that remains to be seen, but based on the current independent clinical science, it's unlikely that the levels will be variable. So, we make the variable research cigarettes so that FDA and researchers can answer that very question. There have been a number of studies done already by independent researchers to address that question.

One of the largest being essentially the equivalent of Phase 3 study with over a 1000 patients and what that clearly showed was that a sort of a variable approach or a step down approach is, is not the best way to address it, because in those middle levels of nicotine, you actually see increased consumption. And it's a phenomena similar to what has been seen with light and ultra-light cigarettes, low-tar cigarettes in the past, where smokers end up smoking more in the case of very low levels of nicotine like we have in VLN. You don't see that compensatory smoking you don't see an increase in smoking, but of course rather a decrease of smoking, which is why we have the claim on the pack that VLN helps you smoke less. And so what we would expect based on science is that FDA will mandate an immediate reduction in nicotine levels to very low levels basically to the level that our product is today.

Mei Kuo -- Director of Communications and Investor Relations

Thanks, Mike. Our next question is given the very large market for menthol cigarettes in the U.S., will the company be able to satisfy this market once the FDA bans all other menthol cigarettes?

Mike Zercher -- President and Chief Operating Officer

That's a good question. Oh, go ahead. Rich.

Rich Fitzgerald -- Chief Financial Officer

Well, Mike, I was just pointing out that, with the expansion, we'll be able to satisfy 1% of the U.S. market. That's an $80 billion market. And we have the capacity to expand that up to 3%.

So clearly we've with the North Carolina facility and the ability to marginally expand it. We can step up to, 1% to 3% of the U.S. market, which would be a very good penetration given that it's an $80 billion market. Mike, do you have anything?

Mike Zercher -- President and Chief Operating Officer

Yes, those are great points. That, and those are, that increase to 3% of market is an investment, with this – with minimal investments and can be done very quickly. As we, approach a final rule or as FDA approaches a final rule, of course we do have a bit of time plan for that. We're looking at manufacturing alternatives there to be able to address the larger market, but one of the key assumptions in any kind of analysis is like, this is where do menthols, what do menthol smokers do? And so FDA's expectations of course, is that some smokers will quit.

And that's one of the reasons, why FDA looks favorably upon reduced nicotine cigarettes in VLN as well because this is something that, helps them not only to smoke less, but potentially helps them to wean themselves from combustible cigarettes. And so some menthol smokers will quit. Some menthol smokers will switch to less harmful forms of nicotine delivery like vape in e-cigarettes that's fully expected in a menthol rule. And then some smokers may decide that they want to continue to consume cigarettes with high levels of nicotine but without menthol.

So they might migrate away from menthol addictive menthol or high nicotine menthol cigarettes. So, the entire menthol market is not what we need to supply. It will be something, some subset of that, but we're well-positioned to be able to do that. We have the time to increase our supplies and our manufacturing capacity to be able to do that.

We would also expect to be working with strategic partners, who are already in the industry to be able to provide and meet the demand from their customers as well.

Mei Kuo -- Director of Communications and Investor Relations

Thanks Mike. And we have time for two more questions. Few investors are asking, if mail order or online sales of VLN will be available?

Mike Zercher -- President and Chief Operating Officer

Mail order sales are not current are basically prohibited by Federal law. Although in time we think there's a good case to be made to make an exception to that rule for VLN. But that's not something that we can do today. But if that's something that you'd like to see, I'd encourage you to contact your Federal Congress people and U.S.

senators encourage them to look at a change like that in Federal law.

Mei Kuo -- Director of Communications and Investor Relations

Thanks Mike. And our last question is VLN currently exempt or expected to be exempt from any state or federal excise tax and or MSA payments?

Mike Zercher -- President and Chief Operating Officer

Yes. There are a handful of states already where VLN has a reduced state tax rate, state excise size tax rate being that it is an MRTP product, and those states are high on our list, when we look at rolling out the national launch. I think there's some benefit there, potentially the smokers as well as to our bottom line. And we are looking at the possibilities of that sort of benefit expanding to other states, as well as to the federal excise tax.

MSA payments, is an interesting question. That's something that's set by an industry agreement with the various states who are parties to that settlement agreement. So it's unlikely that, that we could renegotiate a 20 plus year old settle agreement like that, but certainly the reduced excise taxes go a long way toward helping the cost.

Mei Kuo -- Director of Communications and Investor Relations

Thanks, Mike, I'll turn it over to Jim for closing comments.

Jim Mish -- Chief Executive Officer

Thank you, Mei. Appreciate all the great questions and look forward to reconnecting again in the next quarter. Whereas Mike indicated we'll have much more data to share and trend information as well. So thank you for all your time and attention 22nd Century.

As I said before, we're excited across all three franchises. We've got all the catalysts in our pocket and we're poised for growth, and we're finally focused on execution across these three franchises, obviously with the nearest term focus on our tobacco franchise and VLN. So thank you for your time and we'll talk soon.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Mei Kuo -- Director of Communications and Investor Relations

Jim Mish -- Chief Executive Officer

Mike Zercher -- President and Chief Operating Officer

Rich Fitzgerald -- Chief Financial Officer

Harrison Vivas -- Cowen and Company -- Analyst

Brian Wright -- ROTH Capital Partners -- Analyst

Jim McIlree -- Dawson James Securities -- Analyst

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