22nd Century Group, Inc. (NYSEMKT:XXII) Q3 2018 Earnings Conference Call November 8, 2018 4:00 PM ET
Thomas James - VP, General Counsel & Secretary
John Brodfuehrer - CFO & Treasurer
Henry Sicignano - President, CEO & Director
John Cloud - PRIMECAP Management Company
Irvin Rosenfeld - Newbridge Securities
Good day, and welcome to the 22nd Century Third Quarter 2018 Business Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom James. Please go ahead, sir.
Thank you. Good afternoon, everyone, and thank you for joining our call. My name is Thomas James, the General Counsel of the company. And thank you for bearing with us while I read the obligatory legal safe harbor text. The statements made on today's call that are not based on historical information are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding our company's business strategy, future plans and objectives and future results of operations or that may predict, forecast, indicate or imply future results, performance or achievements. The words estimate, project, intend, forecast, anticipate, plan, expect, believe, will, will likely, should, may or the negative of such words or words of similar expressions or similar meanings are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, and all such forward-looking statements involve risks and uncertainties, many of which are beyond our company's ability to control. Actual results may differ materially from those expressed or implied by such forward-looking statements as a result of various factors, including, but not limited to, the risk factors disclosed in our company's most recent Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 7, 2018. 22nd Century does not undertake, and it disclaims any obligation to update any forward-looking statements or to announce revisions to any of the forward-looking statements.
During this conference call, we will also disclose certain non-GAAP financial measures, including adjusted EBITDA, which we define as earnings before interest, taxes, depreciation and amortization, as adjusted by 22nd Century for certain noncash and nonoperating expenses, as described in our company's earnings press release for the quarter ended September 30, 2018, as publicly issued yesterday on November 7, 2018, and which is available on our company's website.
And with that, I'll turn it over to our Chief Financial Officer, John Brodfuehrer.
Thank you, Tom. Good afternoon, everyone. Thank you for dialing in to the 22nd Century Third Quarter 2018 Business Update Call. My name is John Brodfuehrer, and I am the Chief Financial Officer of 22nd Century Group. Today's conference will be 1 hour in duration and will conclude at 5:00 p.m. Eastern Time. We will take questions at the end of the presentations as time permits. This afternoon, I will provide you with a summary of the company's financial results for the 3 and 9 months ended September 30, 2018.
Before I address the usual quarterly financial metrics, I want to discuss some positive transactions that occurred during the third quarter of 2018 that propels 22nd Century into a net income position for both the 3 and 9 months ended September 30 of 2018.
The three distinct but related transactions are as follows. Number one, on August 8, 2018, our 14.8% equity investment in Anandia was acquired by Aurora Cannabis, a publicly-traded Canadian company. As a result of this transaction, 22nd Century received 1,947,943 shares of Aurora common stock and a warrant to purchase 973,971 shares of Aurora common stock. We recorded a realized gain on this transaction of $4,516,000 during the third quarter of 2018.
The second transaction was subsequent to this - the Aurora/Anandia transaction, we sold the Aurora common stock, resulting in net cash proceeds in the amount of $13,052,000, and we reported a realized gain on the sale for GAAP accounting purposes in the amount of $3,830,000. It should be noted, however, that we realized a tax gain of more than 800% on the sale of the Aurora common stock since our original equity investment in Anandia of approximately $1.4 million, consisting of cash and common stock for 22nd Century. For further emphasis, we originally invested approximately $1.4 million or $0.73 per share in Anandia and sold the resulting 1,947,000 shares of Aurora common stock for $13,052,000 or $6.70 per share, a tax gain on the transaction of $5.97 per share or approximately $11.65 million.
The third part of the transaction, the warrants to purchase 974,000 shares of Aurora common stock have a 5-year term at an exercise price of CAD 9.37 per share is considered an equity security and is recorded at fair value on our financial statements. We recorded the fair value of the Aurora common stock warrant of $6,731,000 at September 30, 2018, and as such, recorded an unrealized gain on the warrant in the amount of $3,923,000 during the 3 months ended September 30, 2018. At future quarter-end dates, and if the warrant is still owned by us at that time, we will record the fair value of the warrant at that time, and an unrealized gain or loss will be included in net income or loss for the quarter. These transactions will be referenced during the remainder of my presentation.
Next, I would like to discuss our net sales revenue generated from sales of products. As reported in our Form 10-Q as filed with the SEC yesterday and as stated in yesterday's press release, net sales revenue for the 3 and 9 months ended September 30 was $6,260,000 and $19,291,000, respectively, as compared to net sales revenue for the 3 and 9 months ended September 30, 2017, of $4,531,000 and $10,660,000, respectively.
Accordingly, net sales revenue increased $1,729,000, or 38.2%, and $8,631,000, or 81%, for the 3 and 9 months ended September 30 of '18 as compared to the same period of 2017. The net sales revenue increase is primarily the result of additional net sales revenue generated from our contract manufacturing of cigarettes and filtered cigars during 2017.
Next, I will address gross profit and - or loss on product sales. Our factory in North Carolina continued to utilize additional production capacity due to increased net sales revenue, as just discussed. As a result, we generated gross profit on net sales revenue for the 3 and 9 months ended September 30, 2018, in the amount of $151,000 and $384,000, respectively. In comparison, we experienced a gross loss in net sales revenue for the 3 and 9 months ended September 30 of 2017 in the amounts of $340,000 and $779,000, respectively. The positive change from the gross loss to gross profit amounted to $491,000 and $1,163,000 for the 3 and 9 months ended September 30 '18 as compared to the same periods for 2017. This improvement is primarily the result of increased factory utilization.
Next, we'll take a look at our operating expenses. Our net cash operating expenses are up for both the third quarter of 2018 and for the 9 months ended September 30 of '18 as compared to the same periods in 2017. The increase was primarily due to temporarily increased expenses attributed to our Modified Risk Tobacco Product application with the FDA for our BRAND A Very Low Nicotine cigarettes. Our expenses relating to the MRTP application amounted to $3,135,000 and $7,155,000 for the 3 and 9 months ended September 30 of 2018, respectively.
So our net cash operating expenses that exclude noncash equity-based compensation and amortization and depreciation increased during the 3 months ended September 30, 2018, by $3,095,000 or 126.8% from $2,440,000 for the 3 months ended September 30 of 2017 to $5,535,000 for the 3 months ended September 30, 2018. Our net cash operating expenses increased during the 9 months ended September 30, 2018 by $7,467,000 or 100% from $7,470,000 for the 9 months ended September 30 of 2017 to $14,937,000 for the 9 months ended September 30 of 2018.
Now I will discuss our net income and loss. As mentioned above, we generated net income for both the 3 and 9 months ended September 30 of 2018. We generated net income of $6,305,000 or $0.05 per share for the 3 months ended September 30 of 2018 as compared to a net loss of $3,317,000 or a negative $0.03 per share through the 3 months ended September 30 of 2017. This positive change from a net loss through the 3 months ended September 30 of '17 to net income for the 3 months ended September 30 of '18 amounted to an increase of $9,622,000 or 290.1%. This positive change for the net loss to net income of $9,622,000 was primarily attributable to realized gains on the Anandia/Aurora transactions possessed previously in the amount of $8,346,000; the unrealized gain on the fair value of the Aurora stock warrant in the amount of $3,923,000, also discussed previously; an increase in net interest income of $235,000; an increase in the gross profit of product sales of $491,000, all partially offset by an increase in cash, operating expenses of $3,095,000; an increase in equity-based compensation of $213,000; and an increase in our depreciation and amortization expense of $117,000.
We generated net income of $952,000 or $0.01 per share for the 9 months ended September 30 of '18 as compared to a net loss of $9,294,000 or a negative $0.10 per share for the 9 months ended September 30 of 2017. The positive change from the net loss for the 9 months ended September 30 of '17 to net income for the 9 months ended September 30 amounted to an increase of $10,246,000 or 110.2%. This positive change from the net loss to net income of the $10,246,000 was primarily attributable to realized gains, again, on the Anandia/Aurora transaction discussed previously in the amount of $8,346,000; the unrealized gain on the fair value of the Aurora common stock warrant in the amount of $3,923,000; the unrealized gain on the Anandia investment in the amount of $6,147,000 from the first quarter of this year; an increase in interest income - net interest income of $710,000; and an increase in gross profit on product sales of $1,164,000, all partially offset by an increase in our net cash operating expenses of $7,467,000, an increase in equity-based compensation of $2,137,000 and an increase in depreciation and amortization expense of $251,000.
Next, I will discuss our adjusted EBITDA. Our adjusted EBITDA, a non-GAAP financial metric, previously defined by Tom James in his opening remarks, for the 3 months ended September 30, 2018, was a negative $5,384,000 or negative $0.04 per share as compared to a negative $2,780,000 or negative $0.03 per share for the 3 months ended September 30 of 2017, an increase in the negative adjusted EBITDA of approximately $2,604,000 or 93.7%. This increase is primarily a result of the previously discussed increase in our net cash operating expenses of $3,095,000 that's partially offset by an improvement in our gross profit on product sales of $491,000.
Our adjusted EBITDA for the 9 months ended September 30 of 2018 was a negative $14,553,000 or a negative $0.12 per share as compared to a negative $8,249,000 or a negative $0.09 per share for the 9 months ended September 30, 2017, an increase in the negative adjusted EBITDA of approximately $6,304,000 or 76.4%. This increase is primarily the result of previously discussed increase in our net cash operating expenses of $7,467,000 that's partially offset by an improvement in our gross profit and product sales of $1,164,000.
Finally, I will discuss the company's cash position at September 30, 2018. We continue to be in a strong cash position with a total of cash and short-term investment securities totaling $26.1 million at September 30 of 2018, an amount we believe will be adequate to cover normal - I'm sorry, $62.1 million. I'm sorry. That's the key number. I apologize for that. $62.1 million at September 30, 2018, an amount we believe will be adequate to cover normal monthly operating expenses of approximately $850,000 and to meet all current obligations as they tend to do for a number of years. Separately, but on a related topic, we expect to incur approximately $4 million in additional expenses relating to our Modified Risk Tobacco Product application with the FDA over approximately the next 3 to 6 months.
That concludes my remarks. Thank you for your time, consideration and continued interest in 22nd Century Group.
I will now turn the remainder of this conference over to our President and CEO, Henry Sicignano, who will provide you with a business review and update. Thank you very much.
Thanks, John. Good afternoon, and thank you again to our conference call participants for joining us. I would like to begin my remarks today with an overview of our Modified Risk Tobacco Product, or MRTP, application for our Very Low Nicotine Content cigarettes that contain at least 95% less nicotine as compared to the highly addictive tobacco contained in conventional cigarettes.
Although assembling a robust MRTP application is a major undertaking, I am pleased to report that we remain on schedule for a December filing with the FDA. Our particular MRTP application has required the assembly of significant amounts of clinical research results, a large body of data related to the technical properties of our product and substantial, additional documentation relating to a wide array of topics such as environmental impact, product ingredients and analyses, manufacturing specifications and tolerance ranges, consumer perception studies and so on. The application will contain the results of more than 100 published, independent clinical trials and studies relating to our company's proprietary Very Low Nicotine tobacco. The team of internal staff and expert consultants that we have talked - or tasked to assemble and complete our MRTP application includes highly talented scientists, toxicologists, regulatory experts, manufacturing experts, and unfortunately, but of course, necessarily, a bevy of attorneys. This massive effort has been the primary focus of 22nd Century for more than a year. All in, our company's MRTP application will be more than 100,000 pages in length at a cost of more than $10 million.
As we speak, our company-sponsored consumer perception studies conducted in support of our MRTP application are in their final stages. Separately, our "abuse liability studies" that were commissioned to identify any possible negative consequences related to VLN cigarette use are already showing that VLN cigarettes have a much lower propensity for abuse than conventional cigarettes. Further, our separate 6-week study that converts smokers from their usual brand of cigarettes to our Very Low Nicotine cigarettes is also nearing completion. We anticipate that the result of this particular study will show that smokers of VLN cigarettes consume fewer cigarettes per day and show reduced biomarkers of exposure to nicotine and to other smoke components.
Our MRTP application will reference all the collected data and the results of these important company-sponsored studies, along with the results of more than 100 independent studies. Through it all, we are proud of the work the team has done and look forward to submitting our MRTP application to the FDA before the end of this year.
For any of our listeners who are not familiar with the approval process for an MRTP product, I should point out that our application actually consists of 2 distinct parts. The first part is the premarket tobacco product application or PMTA. Upon approval of the PMTA by the FDA, we would technically be able to begin selling our VLN cigarettes in the U.S. market. However, the PMTA does not allow us to say what makes our product so special, i.e. the remarkably low nicotine content of our BRAND A cigarettes. Therefore, a PMTA itself is not enough, which is what leads us to the second and most critical part of our filing, the MRTP application itself. Upon FDA approval of the actual Modified Risk Tobacco Product application, we will be able to make the informative, reduced-exposure claims that are ultimately allowed by the FDA relating to our Very Low Nicotine cigarettes.
Together, the PMTA and the MRTP application will allow 22nd Century to begin selling and making specific reduced-exposure claims about the world's lowest nicotine tobacco cigarette.
Because we anticipate that 22nd Century VLNC cigarettes will be the first and perhaps the only combustible cigarette to receive an MRTP marketing order from the FDA, we will likely have several choices for how we bring our product to market. We may choose simply and directly to launch our Very Low Nicotine MRTP cigarettes unilaterally by employing the network of distributors and independent retailers that we have already developed through our contract manufacturing business or we may choose to license our VLNC cigarettes to more and more third-party Big Tobacco companies. In either case, we expect to have many partners for distribution and sale of our new, highly differentiated, premium Very Low Nicotine cigarettes. Not since the American Spirit brand launched more than 20 years ago has there been a successful, profitable, highly differentiated, super premium cigarette in the United States.
We're going to prove MRTP products, our VLNC cigarettes, would sit alone at the top of the market as the only combustible cigarette available with minimally or nonaddictive levels of nicotine.
Indeed, this product concept is so powerful and potentially so beneficial to the efforts of public health officials to break smokers' addiction to nicotine and to help prevent youth from becoming addicted to combustible cigarettes that FDA Commissioner, Dr. Scott Gottlieb, has announced that the FDA intends to mandate that every cigarette sold in the United States contains only minimally or nonaddictive levels of nicotine. Of course, 22nd Century stands ready to make feasible the FDA sweeping policy change.
To pave the way for the FDA's national nicotine reduction mandate, we believe the agency should allow our MRTP cigarettes on the market in advance of implementing a reduced nicotine rule for the entire U.S. tobacco industry. In this way, 22nd Century's Very Low Nicotine cigarettes will provide the FDA with an indisputable example of how VLN cigarettes are both feasible to bring to market and beneficial for public health.
While we are focused intensely on advancing our Very Low Nicotine cigarettes and our MRTP application, we are also continuing to expand 22nd Century's very important work with cannabis sativa. With the national legalization of cannabis in Canada, many companies have already chosen to jump into the Canadian cannabis market. Of course, 22nd Century has been involved in cannabis research since 2014. Four years ago, we provided startup funding to Anandia Laboratories in Canada and consequently obtained the exclusive U.S. rights to Anandia's intellectual property that gives us the ability to manipulate the production of cannabinoids into the cannabis sativa plant. We continue to focus our efforts on developing unique cannabis sativa plants with elevated concentrations of high-value medicinal cannabinoids and other plant varieties with highly desirable agronomic traits. We anticipate that our unique cannabis sativa plants will greatly reduce the cost for big pharma to extract cannabinoids for medical purposes, and our proprietary technology will greatly improve commercial yields for industrial growing.
On all these fronts, we look forward to the continued evolution of federal laws and state regulations that will make possible the acceleration of our commercial efforts in the cannabis sativa-related industry.
At the same time, 22nd Century's expanding the company's efforts to develop international partnership collaborations to take advantage of more liberal laws abroad and to gain access and IP rates to unique cannabis plants that we can import and develop for the U.S. market, in full compliance with all applicable U.S. laws.
This is precisely the strategy we followed when 22nd Century invested $1.4 million in Anandia Labs in 2014. Some 4 years later, when Aurora Cannabis purchased Anandia, we took a hard look at our investment and our choices to exploit 22nd Century's net profit of more than $11.6 million. Given the extreme volatility of Aurora's share price, and given 22nd Century's focus on developing and exploiting our own technology, we decided to sell the Aurora common stock that we received following the Anandia buyout. As John explained, our sales of the Aurora shares generated more than $13 million of cash for 22nd Century, which, I am pleased to report, is more than enough to fund our entire MRTP application. What's more, we continue to hold a warrant to buy an additional 974,000 shares of Aurora common stock any time over the next 4.5 years.
It is also important to note and to emphasize that even after Aurora's purchase of Anandia, 22nd Century retains all of our rights to the research and intellectual property developed in collaboration with Anandia. Our exclusive sublicense to intellectual property developed by Anandia's principles that allows us to regulate the genes in the cannabis plant that produce cannabinoids remains intact. We still have rights to our zero-THC hemp plants and to other important cannabis sativa plant lines developed by our company in partnership with Anandia. What's more, we are in discussions with Anandia regarding the continuation and expansion of our scientific collaboration.
So let's take a back - a step back and review what has been reported. 22nd Century has just realized a gain of more than 800% on our investment in Anandia. We are about to submit an application to the FDA for what we believe will be the world's first combustible cigarette authorized as a Modified Risk Tobacco Product.
Using the peer-reviewed public results from numerous independent studies completed with 22nd Century's proprietary SPECTRUM cigarettes, the commissioner of the FDA has announced the agency's plan to mandate that all cigarettes sold in the U.S. contain only very low nicotine tobacco. And last but not least, 22nd Century has more than $62 million in the bank, which is enough to fund all company operations for a number of years.
All in all, I think our growing company has done remarkably well over the last year and has even greater prospects going forward. However, we are still a microcap, and operations are not yet profitable. For these reasons, it appears we seem to represent a target for nefarious investors who make their living at the expense of regular investors. As I'm sure you're aware, 22nd Century has recently received some negative attention in the form of highly misleading articles written by anonymous short-sellers who profit when they convince unsuspecting or naïve investors to sell their shares of 22nd Century. We encourage investors to ignore the false and misleading short and distort hit pieces written by short-sellers. Rather, we encourage all investors to do their own due diligence. Spending just a few minutes with a quick and simple Google Search will reveal a treasure trove of published scientific research results and news on 22nd Century's proprietary Very Low Nicotine tobacco plant and technology.
I ask you, how many other companies can you name that have a technology that serves as the foundation for a national mandate planned by the FDA? How many other microcaps can aspire to save hundreds of thousands of American lives each year, to save billions of dollars annually in health care costs and to help prevent underaged youth from ever becoming addicted to cigarettes? 22nd Century is the only company that enjoys such notoriety.
In conclusion, I want to say that 22nd Century, your company and mine, is a team of enormously talented, accomplished and hard-working women and men who are absolutely devoted to our important mission and our unrivaled technology. First and foremost, we believe that 22nd Century's Very Low Nicotine cigarettes will prove tremendously disruptive to the entire tobacco industry. And on top of our enviable position in tobacco, 22nd Century's strategic investments and intellectual property in cannabis are rapidly expanding. There's never been a more exciting time for our shareholders.
Thank you so much for joining us today and for your continued interest in our extraordinary company. At this time, I'm going to open up the call to your questions. [Operator Instructions].
We will conclude this call at 5:00 p.m. Operator, if there are any questions, feel free to patch them in.
[Operator Instructions]. The first question will come from Manuel Harnish [ph] with Birch Capital.
So you mentioned a strong cash position, which is certainly great, and congratulations on the sale of the Aurora shares. But could you elaborate a little bit on the rationale on the timing and why you chose to do that rather than just keeping investment and seeing where it goes?
Well, we're not a mutual fund, and I don't think investors want us to be gambling with securities of other companies' common stock. So our thought was to liquidate our shares in a ratable way of the Aurora stock, and we're going to hold on to the warrants and enjoy the upside of the warrant.
The next question will come from John Cloud with PRIMECAP Management.
Specifically, I wanted to ask about the MRTP application. It seems like your company, given the amount of studies the government - several government agencies have done with your cigarettes, that you guys are somewhat aligned with the government already and they know your product well. Are you anticipating that it's only 12-months period to review your MRTP application? Or without putting a guess [indiscernible], do you think it could happen sooner than that?
Well, if experience is any guide, when we submitted a preliminary application to the FDA in December of 2015, we heard back from the agency very quickly and wound up in the Maryland headquarters in January, actually, in consultation with the FDA. After that initial meeting, things seemed to slow down a bit. But our expectation now - at least, my expectation is because Very Low Nicotine cigarettes seem to be such an important topic on the FDA agenda now, I would expect that our MRTP application will be reviewed much, much quicker than it was in 2016. So I'm not sure if that is exactly what you're looking for, but I would be surprised if we didn't have feedback in the first quarter.
[Operator Instructions]. The next question will come from Robert Branciford [ph] with Morgan Stanley.
First, very quickly, I just want to say that I'm a professional investor for about 40 years, and I'm very, very committed in the future of the company. But even I get weak knees when I read these short articles. So I very much appreciate the pushback. It was exactly what I wanted to hear. So next, just a logical timeline. I don't mean to be speculative here, but I'm just trying to think logically. The FDA probably is waiting for the results of this 2 or 3 - the third study that's almost complete. But when those results are in, there wouldn't be any chance of them coming out with their mandate before the MRTP. I mean, I'm assuming that a logical rule would be, they then wait. They get the results from the study. It proves the science. You follow your MRTP. They accept the MRTP. And then the mandate would be proffered. Is that something like the dream timeline?
I think the - even though the products are related, I think they're independent processes. So we're waiting right now, everyone is waiting for the notice of proposed rulemaking that most folks believe the FDA will issue before the end of the calendar year. So that's separate, distinct from our MRTP filing. But we believe that when our MRTP application is filed, that our application will add fuel to the fire, I think, and will hasten the progress that's being made already on the national nicotine reduction mandate. So that is what we expect. We expect to see another proposed rulemaking. Hopefully, by the end of this calendar year, we'll be submitting our own MRTP by the end of this calendar year. We would expect in the first quarter to have some sort of feedback from the FDA on our application. And well, major public health organizations have called on the FDA to issue its final rule by March of '19. Now I'm not sure that they'll be quite as aggressive as that, but the American Heart Association and American Lung Association and 39 other major public health organizations are calling on the FDA to actually issue its formal, final rule this spring. So I guess, fingers crossed, we'll see what happens. But my expectation is that we will receive an authorized MRTP before the final nicotine reduction rule. Is that helpful?
Okay. Yes, it's very helpful. Just I don't mean to dominate, but another question. From what I've been reading, all the studies that have been done with VLNs have used your cigarettes. Am I correct in that? Are there any other companies that have been used in these tests? Any other company cigarette?
None. None that I'm aware of. So yes, that's why when detractors make comments, and it boggles the mind because the FDA has used all of the science and all the studies done with our Very Low Nicotine cigarettes to issue a planned mandate that all cigarettes sold in the country are very low nicotine. To me, that's unassailable. But - so I appreciate your question. I think they're very good ones. I am glad you gave us the chance to respond.
Your next question will come from Marion Green [ph], a private investor.
So far, everything is in the right direction. All good news. But - and with one thing that you have done that I was very pleased with, it was - I think it was the Washington Observer, there was an editorial there.
Okay, I think we...
Are the [indiscernible] safer?
Well, that's an excellent point. And to be honest with you, we'd like to do more of that. And I think it's been a big undertaking for our small company to compile 100,000 pages for this MRTP application. But my expectation is that when that application is filed, that all of our folks will have much more time to devote to op-eds like that. We plan to do much more of that in the new year in support of Very Low Nicotine cigarettes generally. So thank you for your observation, and I think you're spot on.
Our next question will come from Irvin Rosenfeld with Newbridge Securities.
I appreciate the update. Had 2 quick questions. You mentioned cannabis sativa. What about cannabis indica?
We refer to the total genus. So that's all plant derivative from it.
Okay, good. That's what I wanted to make sure. Number two, my other question is, when do you expect revenue coming from the - from your license that - your discovery of the zero-THC for CBD?
We don't give future financial projections in that regard. Just know that we have it, and we're making use of it. But we're keeping control of it with our collaborations.
And we should - I'll comment, too. I'll mention, what we're doing - I mean, we're not just putting it on the shelf and sitting on it. We're actually working in collaboration with the University of Virginia to optimize that plant for the tobacco belt. So I mean, there's actually a lot of work and a lot of spending going on right now around the plants. And I expect that when we have the variety that we're happy with, especially for the tobacco belt, I think you'll see a lot more activity there.
Next question will come from John Keller [ph], a private investor.
Henry and all, I - my question would be this hemp bill that they're working to pass currently, what would that mean for us with our hemp technology?
Well, I think you're referring to the Farm Bill. And the 2014 Farm Bill expired and lapsed. 2018 Farm Bill is scheduled now that the midterm elections are done to be taken up by both houses of Congress and passed before the end of the year because it includes a lot of things like subsidies for farmers for normal crops. The benefit for hemp is that Mitch McConnell, the leader of the Senate, and from the state of Kentucky, where he wants to be the #1 hemp-growing state in the country, is pushing hemp to be treated in the new Farm Bill like any other agricultural crop: corn, soybean, wheat, the rest of that. No more DEA problems, and that includes extract. So we're very hopeful that it's passed quickly and will be greatly beneficial for us and the entire industry.
Greatly beneficial for us when that passes. Is that what you said?
Okay. One last thing. Marion [ph] commented on your editorial. My feeling is with the savings - well, first of all, with Big Tobacco misleading the general public for so many years and costing the general public so many dollars with us footing the bill for all the medical expenses, it seems like we could capitalize on our angle of saving so much money. And perhaps, we could pick up some investors if we pursued that a little bit more.
Well, I think you're right. And we are bringing on, in just a few short months, a new head of regulatory science. And one of his first charges is going to be to engage those kinds of efforts. We'd like to get more and more pieces out in the press, expressing exactly that view.
The next question comes from John Shaw with Wilshire Partners [ph].
Henry and everyone, three hopefully quick questions. The first one concerns - and I missed the acronym for the designation for how you would introduce the VLN without being able to make some specific product claims to the benefits of Very Low Nicotine. But my question is - it's big picture. It's like Botox was enormously successful as an off-label in a drug long before - years before it kind of approved. Wouldn't doctors who have patients who smoke and can't or won't quit say, even though it's not FDA labeled, I want you to try these VLN cigarettes and inform consumers, as I've always been, who just want that choice. Why is the company pleased not to pursue that kind of a market?
Well, that's an excellent question. And the problem is we wouldn't even be allowed to tell the doctors those benefits. So that's precisely the problem. I mean, an off-label indication would be great, but we need to communicate that and we would be prohibited from communicating any benefits or any "lower than" attributes of our cigarette relative to others without FDA authorization. So we're really trying our best to work in partnership with FDA, and we don't really want to get cross-wise with the agency by doing something that they wouldn't approve of. That's the best answer.
Yes. No, understood, and I want to be brief, so thank you for that. Number two is when we talk about the FDA issuing a sweeping mandate that all cigarettes be VLN, to me - and we're not biotech experts, but that seems so enormously sweeping that, A, if that was even a possibility, the stock would already be trading in the high 5 digits. I mean, it would be extremely valuable. So what is the more likely outcome? Is it that they would come in and phase in kind of like MPG standard for cars, they would phase it in over a number of years or they would mandate that - and I know I'm asking you for a guess. Or that they would mandate that companies, the Big Tobacco, sell not less than 10% of the cigarettes or that all the Big Tobacco companies at a certain level would be required to at least offer a VLN? What is the realistic, not best case, but middle-case scenario for what an FDA mandate really looks like?
What you say sounds very practical, and I appreciate the thought that you're putting in. But to be perfectly clear here, the FDA has announced that it plans to mandate that every single cigarette sold in the U.S. is minimally or nonaddictive. So - and the question that you just asked about a phase-in, that's a question the FDA asked. And frankly, the question was asked and answered with the study, the 1,250-patient study that was published in JAMA in September, the Journal of American Medical Association, that study basically showed the difference between a gradual reduction in nicotine levels and immediate drop. And it became very clear, as we take a look at that study, that gradual reduction doesn't help. It doesn't serve as a public health benefit. You need an immediate drop to very low nicotine, and you need it to be across the board. But one of the most important things that the FDA is trying to do is to prevent underaged smokers from becoming addicted to combustible cigarettes, right? So helping people to quit, that's, of course, important. But even more important, the FDA has said, is preventing a new generation of smokers from becoming addicted to combustible cigarettes.
So the FDA reasons that if they make every single combustible ticket sold in the U.S. only minimally or nonaddictive then they can save - I think the numbers are something like 2,500 underaged smokers every single day become addicted to cigarettes. That's over 900,000 young people every year are becoming addicted to combustible cigarettes now. The FDA wants to nip that in the bud. So I think that real answer to your question is not if, but when. Now why is our stock where it is? Because obviously people are gaming. There is this, "hey, this isn't going to happen for two years or it's not going to happen for four years. I guess, those are estimations that everyone needs to make of their own accord. We believe strongly that it's going to happen. The question is when. The American Medical Association, the American Heart Association, the American Lung Association, they are pushing for this to happen with a final rule, a final rule to be issued this spring and for that rule to become effective 12 months later.
Third question is, if I may, very different subject. I was in Thailand last month, and I hadn't been in 20 years. And I was - I really noticed how much less smoking I saw around the country. I was in 4 cities. And vaping, which didn't exist when I was there 20 years ago, I'm not talking about cannabis but just tobacco or nicotine-flavored vaping, was so outlawed that you could not buy a vape battery, a cartridge, anything in the country. And there was like no black market because they support their laws in a very serious way. Why - and again, I apologize if this has been addressed in recent calls. Why is the company not marketing to - in countries that clearly have very strong pro-health care, anti-tobacco bias? Or can they all be waiting for the FDA? Because it seems that the science will be compelling for a country with that kind of a bias.
Well, that's another very thoughtful question. And I think the short answer is that many countries don't have "FDA" of their own. And so many of them do look to the United States FDA for leadership. So we've heard that many times. But at the same time, even though our cigarette is very low nicotine, it is still a combustible cigarette. And so there are very different laws in every country all around the world about combustible cigarettes. Suffice to say that we've been in discussions with many of these countries, and we know that at least 4 of them are exploring Very Low Nicotine cigarette mandates or encouragements of their own, each in a different way. There's tax policy that some are exploring. There are brand offerings that some are exploring. And then there are mandates that some are exploring. So all of these things are being explored. My guess is that when the FDA moves, everyone else will follow soon thereafter. I'm just - we're going to take the next call, but I just want to mention there are 7 minutes remaining. We have a hard stop at 5:00. So I'll be happy to answer the questions until we have to stop.
Next question will come from John Elgot [ph], a shareholder.
Henry, this is just a follow-up to the last question, actually. Everything we talked about, obviously, has been pretty much domestic, a little bit north of the border. And I appreciated the last question because I wanted to ask that relative to the Very Low Nicotine cigarettes. But is there anything that you can share with us in terms of the cannabis sativa or indica that also might be going on outside of the U.S.?
Nothing that we can talk about, but we are exploring partnerships in both cannabis and in tobacco internationally. So that's all I can say is that we're certainly aware of the opportunities, and we're certainly working on the opportunities and not only on this continent.
Next question will come from Rex Wiggin [ph], a private investor.
Yes, Henry, good job. I just had one quick question. From all your prior experience in the tobacco industry, upon approval of an MRTP, what would be your personal quotes for percentage of market share for [indiscernible] on your own?
Well, that's a good question. I think, today, demonstrated by American Spirit, which has a value of between $8 billion and $10 billion domestically, as calculated by a very respected Wall Street analyst, was about 2.5% market share. So what that suggests is that every percent market share is worth about $4 billion in market cap. I believe that Very Low Nicotine cigarette as a modified risk product without the mandate, I believe that 6% to 10% market share is absolutely feasible and absolutely possible. So I mean, you can do the math, and you could figure out what the market cap of the company could be if we had, say, 6% market share. I guess it'd be slightly different than American Spirit because presumably people would smoke fewer Very Low Nicotine cigarettes, and hopefully, many people will stop smoking altogether. But at discount - if we discount $24 billion in potential market cap from 6% share, if you discount that by, I don't know, you want to discount it by half, then you're down to a $12 billion market cap. So I think there's plenty of upside, and that's why this is so tremendously exciting for us.
The final question will come from John Cloud with PRIMECAP Management.
Just a follow-up. So Henry, based on all the information you gave us today with respect to FDA time lines, MRTP time lines, final ruling, all the information you shared with us, it seems to be widely known if you look for it. Big Tobacco companies certainly must be aware of all this same time lines, same sort of information that you've been talking about. So short of telling us anything nonpublic, what is their plan to deal with Very Low Nicotine tobacco? I mean, do they have a product they can compete? Or at some point, are they going to have to knock on your door for license or something else?
I think that it only makes sense that Big Tobacco's primary strategy is to delay, to do whatever they can to delay the mandate because it will, obviously, cut their market caps probably by more than 50%. So that's - the first priority is to delay, if they can and to the degree that they can. But as they all know that it's an inevitable and it is coming, you can rest assure that they all are working on a Plan B for when, in fact, the mandate does become effective. So all I can say is that, of course, I can't divulge nonpublic information, but you have to realize that they have to have a Plan B.
And is it your opinion, do they have a Very Low Nicotine plan internally? I mean, can they produce it themselves, I guess, is a good question?
Well, that's an excellent question, and I'm happy to say that, yes, Big Tobacco knows how to chemically strip nicotine out of tobacco. Absolutely, 100%, for sure, they know how to chemically - Philip Morris has said so publicly, and they launched a product in 1987 called Next. It was a chemically stripped cigarette. They spent, I believe, a couple hundred million dollars on a factory in Virginia that enabled them to chemically strip nicotine out of tobacco. The problem with the product, it generated 1% in test market sales back in the late 1980s. The problem was it didn't smell very good, and it tasted terrible. Still, they generated - at a time when people really weren't thinking about nicotine, they generated 1% market share in those test markets. More recently, a director of, I think, public policy at PMI explained that it would take Philip Morris International 20 years to genetically modify the tobacco as we have done, or if they chemically stripped the tobacco, it would cost $10 billion to $12 billion a year in the European Union alone to be able to comply with the rule if the FDA rule would find its way over to Europe.
So if you do a little bit of math and back of the envelope kind of calculation, that means that their cost of products would go up by something like 50%. So technically, yes. Big Tobacco knows how to chemically strip tobacco to make a virtually nicotine-free tobacco. They cost 50% more, taste bad and smells bad. So I'll give them that. They can do that but if they want a Very Low Nicotine cigarette to taste good, smells good and the only cost will be a very low royalty to 22nd Century shareholders, then our doors will be wide open. Thank you, everyone, for joining us on the call. We look forward to speaking with you in a few more months.
Thank you, ladies and gentlemen. This concludes today's call. You may now disconnect your lines. Have a great evening.