22nd Century (XXII) 9 Aug 222022 Q2 Earnings call transcript

Welcome to the 22nd Century Group's Second 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 Joe Schepers, Vice President of Communications and Investor Relations. Please begin.

Alex. you, Thank welcome call. and Century's quarter second Good to conference earnings morning XXnd

Joining Jim for and today Executive call release Earlier me the on a issued are; quarter leads Tobacco Kinsman, press XXXX. Chief today, we who our Officer; our Mish, second Financial Miller, Officer; results John announcing our Business. the Hugh Chief our

remarks Q&A We will into and a session. Hugh John start today's from call before Jim, with prepared moving

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

some Before forward-looking. today are statements made begin, of the we

to subject are by differ statements. factors contemplated and from uncertainties, actual results statements Forward-looking to that may materially these those other cause risks,

our these the Additional be information filed annual, factors quarterly reports found SEC. regarding other in and can with

During EBITDA, as amortization adjusted this financial which non-GAAP before call, adjusted taxes, we and depreciation and for expenses. also measures, we non-operating earnings including will discuss non-cash interest, define as certain

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

detailed our business; deliver two grow. commercial execution welcome first for updates business insight CFO. our of the the to morning and be our more Joe, Miller, Hugh and tobacco as on request really these today Tobacco I'm Kinsman, of fundamentals John by good excited for shareholders' we to and Thanks, President time into our leaders the to everyone. I joined

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quarter the was major that a included history significant transformation of the company. second most the The developments in

to health through reduced plant on advanced execute mission technologies We improved to and and our top continue deliver nicotine tobacco, plant Hemp/Cannabis science. content improve human

In fact, we key two success areas. major had in

our XXX Circle program starting VLN pilot launched Chicago early we highly land April. than in K more at First, stores anticipated

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Second, GVB transaction top on we the the completed and hemp-derived major in Biopharma. of XX, providers acquiring CDMO active ingredients May space, a one

our doubling an label business our science to Hemp/Cannabis addition genetics, improving In white and on consumers. annualized finished and GVB revenue from receptor completes basis integration margins, all the vertical way on for to our the shelves goods plant of

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now XXnd ingredients monetize on can We've including transaction, consistency be a intellectual taken perhaps in kilo completed our Slide It markets. Slide harvest, products will to to yield our and most Oregon, for to accelerates better drought should an plant and a through our CDMO deep property On in key square many this to capabilities platform a level. illustrating GVB revenue move to vertical new Century and the plant also CDMO site many path portfolio global XX,XXX which Prineville, verticalized a start out for very it new disrupt white to cannabinoid can and a hemp/cannabis in see in feel profitability disease margin at of best-in-class label resistance, industry. the gross basis, facility, addition our modulated and with able across characteristics resistance acquired as in the square XX,XXX we facility In and refinement can hemp/cannabis. products up XX the global quickly for you of nutraceutical foot our manufacturing foot positioned world-scale extraction familiar that XX,XXX end-use is exciting, capacity, now science, of This active pharmaceutical capability improved in upstream diverse we leading now products, Biopharma, help facilities we leader industries. integration gives doubled but and revenue fully profile we to be the global believe and a together leading annualized XX. the GVB far loaded. we XX May hemp-derived, finished leader now effective a consumer XX other you, we our acquisition purification finished make when manufacturing more ingredients ingredients XX, industry GVB servicing a ingredients forward. We're Slide capabilities, produce of of month facility. today. and GVB's the up hemp/cannabis bring bulk the can addition means you extraction, own fully this Slide range per that goods picked the illustrates products

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from on $X.X for increased quarter increased to favorable increased and combination of Gross First to the XX%. XX% second revenue million $XX year-over-year, on sales volume margin sales gain through tobacco a mix. tobacco million of a revenue,

side, half due accounting from of step operations price a of the acquisition. Revenue tied XX. margin closing quarter million GVB's negative we for $X.X the was $X reported quarter million, gross a amortization half approximately to a On May to in we while recorded date the recorded up purchase

in one-time non-cash Slide reflected and XX% about purchase the GVB’s and forward. Excluding the operations was in typically particular certain that to is sections. in gross noted XX detail. portions charge, gross in margin price more purchase be of And It coming consolidated GVB's intangible accounting XX%. will XX% the margin this will the price illustrates be going goodwill quarters, be should accounting adjusted

few allocate and a acquisition. assumptions, date $XX using significant our more $XX to fair explains, VLN than million in at provisionally acquisition. know it to progress from are is preliminary assets, Also fair our in toward an total accelerate goodwill. our result, a focused and quarter-end of which in such And I of sheet. by company goodwill values property we cash highlights as help that was the taxes $XXX tobacco this inventory million our the cash selectively reflects allocation equipment, launch year key footnote our are in gross price areas me, includes million, the for the allocations reflecting the of estimates the meet note, both $XX the values our to additional for million using accelerate the GVB for valuations profitability. how XX-Q assets tobacco products cash completing of many last As you decrease capacity and continue The products. of from the the July, see capital we future. demand are you'll Century's offering And Slide purchase Of estimated will proceeds position expect in The the to as plans. and deferred as intangible and and determined supplemented balance and deploying XX, of manufacturing GVB's launch we change growth VLN, XXnd on these of are expand from on sales levels from organic of fiscal steady growing continued requirements and anticipated operations, to higher production invest hem cannabis through VLN increased XXXX operations. and required GVB's volume

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plus in integrated policies, revenue We're ready better tobacco to actions moving With the capture of and now two months the disruptive our enhances should, time doubles but plan go, it all just innovation platform as federal a companies hemp/cannabis of content in that GVB of as our been menthol we is our state ban there's nicotine in also the never for ahead. a reduced and and proposed fully products that not advance ahead to path profitability our on our products, to leverage new product. synergies

hemp/cannabis and for We that, to you. next in position a have And open framework to foundation, built the tobacco maximize of of please the the strategy we call phase execute strong Thank and our hops the business now potential and operator, full our the questions. with and are in future.

of Joe be you. time, conducting we from At question-and-answer We read analysts If take the Thank list time, a we'll session. Instructions] will a this question webcast. questions submitted [Operator the via was that will first. approved have

question line Azer Vivien with Cowen. first Our of the from comes

Hi, good morning.

Hi, Vivien, good morning.

velocity wanted K's I was just morning. VLN on with appreciate sensitive. start I metrics how Good average help like, offer some certainly if you. door just I Thank mainline content, Hi. to example. relative Circle you dimensionalize competitively that But a competitor? the would compared cigarette as combustible the context perhaps, an Chicago please. to one are pilot, Just wondering, could to performance.

set This way John own forth and KPIs different goals metrics. Miller. Vivian. The at is several morning, best looked we to through it Good internal put our is

is, One in introduction product performance obviously, do of them what similar new a of would space. historical

looked at also areas. stores in We different

our land if of look them. at have different market, all you as stores within variables So very some a Chicago

the of are churches, near in Some Coke them different whatever are County; schools, of regulation. them some

we which different the has is vary less some MRTP that drove as keys that were So basis than tax the then traditional learning focus different a our $X.XX does found did pricing, Illinois That taxes also that. to the set in of and what led beyond of than share product cigarettes. what Colorado, carton increased we some that about to move an decision targets and overall, in our we the But Illinois really, performance the favorable, of levels Coke and extremely that on sales expand into in there's based groups stores. through than the were actual other store of County neighborhood, our

new numbers provided into at those space achieved I’m in what took our that, the very, broad stores summary, different in a looking variables in through we're products, historical happy terms for Colorado. learnings with good, now has mean, results, I expanding and Illinois of very So of segment

you Thank average of solid are I age Understood. follow-up, that of out just enough or average could of recognizing, in But the in base that's any Thanks. Chicago for store that If attracted relative that the to VLN across call differences you consumer demographic of area. income course, could trends product? consumer the terms perspective. the

XX% education, at when that than the say doesn't the smoker, be going and I of is the built about understand what look would If is the message When to target VLN household the look is say continues be XX and million it consumer, will are looking different someone's identified pillars of. days look smoking. originally That to resonates. that we of That consumer. to who's critical attracting. pillars. to to the a test the that you I you as translate to people, like who need where That's quit what necessarily into learned can't at that's platforms the things that people smoker what off would can to a of numbers, tell program, three trial, Marlboro XX% them. target you of you of product. demographic It's is of be population this -- the for that. that say this this product you the I these this, I When interested. is in was are can't who XX awareness people and demographics But marketing cigarette million this quit the that's income smoker. smoking What trying I that those at though, tell are XX

it Marlboro it of quit, will smoker who to is, how store, the who sees our performs. That it we That's in attract. understands be target what product wants what demographic. Some understands the does, will

then That's question, Thank Colorado. please, helpful. to last Okay. pivoting just you. And

haven't or the advantage Some peers to savings. tax these of incentives MRTP some of had ability take tax of your larger

savings that those consumer does So the a that's mandate understanding mechanics tax you. tax of number you can drop it to initiatives, across curious that, of the law line? that of bottom law? where engagement goes? you some Can deploy Just savings Thank that different the

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things doubt bit room it. to still probably But be of than decisions operate. a about working are There's those those based We of out some will on on of us some no more channel and give anything else. it does

you much. very Thank Understood.

question? your answers that Does

It does. you. Thank

you. Thank

Aaron line Our proceed with Alliance next the question. Please Grey Global question comes from Partners. of with your

morning and you the question. thank for good Hi,

of while of versus So kind it's early consumer Chicago was giving can especially any trial any what Vivien said still appreciate of But as any Easter provide it well, exact maybe in of you piggyback dual without with I trends color you like little on cannot use retention exact VLN can you of how a terms with that the to terms type bit days, is want that in the to or patch numbers. saying data in you're give seeing, on cigarettes again, cigarettes? And given of or be seeing traditional Thanks. was a quit to some that types helpful? user conventional would terms you're looking what in then versus that

Aaron. Thanks, Sure.

previous to connection specific yet. very have of just terms In don't on that data purchase purchases, patterns, repeat we

One great industry. are the in -- retailer, of cases convenience a sophisticated especially the several

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importance So of product, times to mean, importance with purchase that, we're many understanding path certainly how things those the Reasons we stays the are understand consumer for the in the getting brand. stays the understand buys volume, to. the category, I all of

hoping help that we're get why that's will us expanding type So states of launch the into different information. going deeper

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you give And can terms Could I of numbers, the that. terms us Thank expectations. like I wonder, in Great. for trends. it Okay. let in your of exceeding you maybe just if just know

as then increase, uptake whether trended to an continuing initial exact there maybe it's Thanks. the down just have in was of is share as market sales, your giving continued or or in that see to will of helpful of you be upwards terms trend not well without terms kind So numbers? an large month-over-month,

that's weeks Pete, call certainly No, Certainly, the timeframe. our what first six we some trending of upwards. marketing Phase Yeah. X the as

As so every to what product now in, was, the things kick continues to more having understand and grow. it up, starting Phase that started consumers X ramp to we're do those started of store sales more certainly to

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

Thank you.

from with Partners. proceed next with the your Our question. line Brian comes Roth of question Please Capital Wright

any there's Is I –can to? as could those trials, initial on far as hoping, Thanks. Good along you like anything morning. you can I or some work kind following color was trials that like that? lines speak consumer think test or groups the of provide

clarify, studies to in-store saying the just research are or actual you feedback? Brian, about

feedback nature? initial in-store kind users or initial of – users Kind of of of that any anything following groups following or

We do now. that

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awareness use the key On completed, talking an education I feedback about side, test, when that trial, we again, was did gotten use in-home from which you start pillars And have research out came of preliminary and the it right, tobacco that. test, on smoking said, taste the that, product in-home provided from provided but people even satisfaction. said, People experience. the the tobacco feedback was great good it

group. interest and XX% What like was group you test, like fall seeing in two the the anything happened. end we acceptance weeks, first the the in-home things At people focus people really of Some focus the We still It here never focus we when participants in had got what like of this. of saw of XXX% some the people XX% was the out they invariably group. do intent use really, and an from week, purchase group. usage, great participants, of our said saw interesting stayed

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detail land much. the expansion kind Thank Chicago also Could on increased you a great of more you No, Chicago of that's provide little us area feedback. maybe just and stores so outside K or Illinois. the Circle

way of there? to what's Just any next kind about think

you press you starting the want and into his pulled We're front all national to product, on what launch I out we sourcing keep to saying there right? about additive any what tremendous of nicotine volume? like it, you is And Sure. right? about we explain are everything a but value out change consumers, product right? FDA? of where today, product, do. As presentation What's be we're happening seeing there's to put the have it. Joe We doubt bit, haven't things with get the We're of talked want that and continue within to How what's of been -- moving get a happening a in we no get go? know a to There's wanting consumers' a Since the what where launched low-content your what the amount you start understanding with the are What about volume, going brand. little PR to he's drivers is. are we in release, this forward. to These mean of to that Biden minds in environment, in this cigarettes. we we've to people What's happening from policies.

on to have educate this. get awareness We them,

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base what's you technology of a different working have some people. have real working, markets not You there look at what's to

that's moving people that You into are have Colorado. young energized of solution. looking a a for base There's this lot there there

about do out get for to quitting firm have talking plans, and And get our importance a to use is and happening all national be want national messaging. attitudes you did go answers for and slick. we're into you who I And smoking, about have it you know is what's happening, again, or the smart presence. a it. Brian an hope into a getting going you've penetrate to out. is people penetrate do that way, the working you seeing when metrics But what, it a -- have into we're the to an a some us able -- right for in with We to expression your understanding get the start understand market, get product deep being time it about market be certainly brand know to a that so which right again, does, deep, what towards I people this what's people what got oil this to flows understand well to have it market, with into -- we're a why additive oil you, the message market, to there

Yes. Thank very helpful. No, much. that's helpful. you so very Very,

with next question. the Jim proceed comes of from Our Dawson James. line with question your Please McIlree

you. Thank morning. Good

hearing trials over sounds nine to next six multiple to or Am seen pilots phase-ins correctly? before with Circle it you've you're -- or I that the that all to me K know, don't like go Given you trial, or you I going tests the, can go months national. regional

but that certain -- markets. MRTP move what oil oil different product we're we going national, I to it's things Jim, talk way since There also sort -- about a slick, to designation the we the is. in smart product not have only This well going not understand got and through are but people has been this that only nearly December. are again, of

along, that into makes it you states going solution, Marlboro, how to what they're of be that launching you're launching know to through, to country. last do that Don't sense problem connect could wants different hope is. launching people If has have understanding or everyone what is. There smokes What is, another the you're Snickers is. any Yes. what that bar, There is again, buy we here it Copenhagen line population to a people new moving this be launch or getting now product this the be XX have that Marlboro company, It's, have new of amd it hope doesn't has thinking knows someone to make flavor If When you momentum. product we we're understand get what VLN, we're that's going expand adult another they're additive. this pack sense. a a In on and learning line How a them to and and what VLN put we XX% we XX% is. base have a to awareness. can quit, you're my important across experience. to -- to the gaining with get with of I we consumer a old the were when pack sells. to to education right

mean article again to there have we're in cigarettes, was what's you smart York very see week, low about this and nicotine if this. about be another Times, will to happen. I starting momentum We was the this with saw New And another there happening it. article

So moving it forward. we're

just appreciate to Thank I was rollouts I trying that. of understand the proceed. more these timing how Yes. you.

been Colorado. then And Chicago into in So the as there -- you've expanding into talked are And since Q expanding Q and they remarks, the about in as at Illinois. least you well your says April.

use kind build So seems it and again, like up period for a initial some campaigns into do to you're of city-wide rollout. national to time these going that or of state

period that X me, And trying out it some is to to X just to I'm that of to reasonable a again, months. figure XX Is assumption? maybe sounds time months, so, like it's X

we've out sense straight to working stores. say I to very in just built making continue that multiple hate mean it months of XXX it's out to that now. and keep it same it's it's We're see way Yes, time. be a the of at x only I be to market to before and a There going number to all markets else. pragmatic about Again, number -- something do we're penetration. rolling put might going this you

for test launched testing this, right? When now And a right, starting national. Not to Swedish went that packaging, brands that and So things, right. pricing for state for been out, Test what they ago, like it at match it, years flavors, to lot they there get a we're product, the a best out do while different quite and world tobacco new one right? Utah, there, a of testing products, Colorado this before X they while they that X, uncommon you have look move out tested for expand it. something like product, seeing in right? tobacco, the works were They're

it to that. goals, right things the like message especially understand seems product consumer it, now sure the we're tested expanding Now getting is, what consistent, to benefits, like go, we've making keeping they the the way and base

higher of versus your endeavor. about the the lower Thank cost this you. endeavor, type expectations it prior talk same? doing talk does. might a you Can you can cost is what what been. about yes, rollout And cost have of - It's the versus the This --

at started Yes. that from rate, I look we you with zero. you're ground so mean basically test this when starting

putting and things you’re So, are testing the apps, together denominations. you're you're building -- multiple websites, plans putting we're you all different coupon point-of-sale together building

did utilized So, of else don't throughout every things. more in there's We those it moving will this anything on store other We be to those some will point-of-sale not approved any in of had costs that forward? a markets. that than I the upfront the different all are that costly know launch. was that's mean, all six just K pieces work. way use we of Probably Circle things not. I lot

there's So, your the expensive. costs associated always most this, are but costs upfront with

because be on in things some our in expensive to of public ago. future that’s in resonates do say, packaging, to to to we sale. Joe, very things. mean and continuing of And years like I that like as traditional and not the about not messaging our Camel we're consumer, this our from exactly of that's things it. isn't point and a fine-tuning, see you this in have always just than it The look and tests right. We're in. pilot, It This you XXX And why with terms unique to very, this get Marlboro line The really our not. the launch done people is needs resonates extension, it getting we're unique. dialed brand. stores, we what very your seen XX,XXX why what can is trying elevate is This health, past, is traditional not expanding. all this to why get learning continue first resonates as like the is Absolutely think people We've XX This how be is Chicago? the a the understand is that. it do campaign understand will those very you I stores unique product a brand. Will I you in them, keep have the store more And programs much evolve you're that's a cigarette

Thank extraction you acquired that that a versus when for still online? just consolidated. ramp-up? upon Is the extraction talked talking impact on stand-alone dependent Is $XX things you facility million on coming couple a to revenues lower of the the were I that basis, have margins All good XX% what right. Oregon think capacity about? on online? it, a you John, million a that that that part higher big And And GVP you. a of gross XX% gross GVB, margin Is or not number? coming the is to does $XX in

go Yes, Jim. ahead,

The get the but Yeah. basis online but focus margins line figures, as comes on in the dramatic we're XXXX the impacted in either show run but case, in and expansion. by favorability the the I will on margins looking it those XXXX? unit rates we few unit take calendarized -- ballpark demand placing are, a it. in next extraction I certainly can plan rate's a improvement, with plan, doesn't -- in mean, up months still that on certainly, keep to that at the the side and XXXX or starting the it's run not

me. it That's for right, luck. lot. Thanks good. Good very All a

Sure.

proceed Please Our comes your next Capital Craig-Hallum question Group. Alex the line of from question. with with Berman

call I should years. early start to bit here marketing. you potentially cash more revenue you of maybe launch going spend the much of to think, what hundreds successful the for my requirements a give very of you're see we need product the and I zero millions a would mentioned clearly, just on happen, next to inventory I from over that couple on VLN launch, a to to can Wondering congratulations magnitude program. color to wanted little -- like when given of the ask something mean, decrease. taking dollars taking about of build of question and the very Thanks us Great. your on expected on, pilot sounds if about the that

things over to is become in perhaps couple closer then increase maybe next So there of to start the quarters the to cash a breakeven. short-term going burn flow cash little and not be more bit

help you've Just you statement on moving here, about to unpack would considering if got could cash requirements all helpful. going decreasing that very pieces the that be

Kinsman. Sure. is Hugh This

answer So that happy to I'm question.

-- XXXX, the mean we're to There'll John market obviously, beat going launch channels, of to build so mine build demand, heavily portion be use a levels. working because amount on we'll and on inventory vast eventually up invest and the stand-alone need majority to the a not just of what GDP into that's those VLN continuous working product, obviously capital but be used I the those just right to. much for capital a basis Do for to become the their operations? in base there continued self-sufficient later organic selling GDP's growth. marginal permanent will the you will up permanent perpetual out of sales on of cash proceeds so much to So CapEx, alluded some will distribution now just into just proceeds of hand be

somewhat have XX we self-sufficient XX initiatives. be VLN complete there'll a these you're the accelerated cash certain so months right, over through enterprise the adequate launch process if strategy time, amount substantial rollout to initially point meet level, of after But certain becomes And for overall goals reach the a the corporate to and that's and product. we the particularly next progressive going a spent strategic resources and the in sales

That's really then. helpful Okay.

QX line loss start all reasonable in of improve about? think to and the launch, acceleration the the in I be then about kind So full QX, start next of the I that adjusted $X Is when we quarter for if to time mean, year? layer greater and together, and a that putting should that in EBITDA we we mean, the loss to to QX expect million GVB think than VLN

right the of investments both in to probably businesses that's VLN. think Yes, way because just particularly and about it simultaneous

approach. the So right that is probably

really Thank That’s helpful. Okay. you.

Sure.

question final from follow-up Please Vivien question. with is Azer with your Cowen. a proceed Our

Hi, thanks the taking follow-up. for

to date. in much, the Just circling the you thinking to in you Chicago about or going you've of replicate control partner? you area that you. kind what have that's entirely Chicago, back clearly a footprint apples-to-apples Do Thank C-store your with in to and your much so is guys is distribution than you are curious, model, competitors to outside I'm priorities? done bigger of joint want a opportunity got retail be VLN decision

there's no and has the -- for of follow-up. Vivien Yes, no, no, thanks doubt stores. Yes, thousands Chicago

consumers it terms married for not are build to smoking. specific honestly, solution to in channels outside will to this consumers to good It's of We shop, very, want there's to looking this our of of be willingness are all very evaluated. channel just a driven-off demand, to live product. who going market being all those where of for some That's convenience things. driven-off Quite a be consumer

So to to multiple presence your it's -- are this yes, question Hope your at having Vivien? a looking answers – there. of a we much that more point, statewide multiple partners and standing

Thank you. Thank you. does. It

Yes.

to Thank end turn now call we you. remarks. gentlemen, session. James question-and-answer over the have Ladies for of I closing to the will the and reached Mitch

joining thanks for questions. everyone, great and for operator, the thanks, Thanks, today, and us

efficient weeks more more sharing to macroeconomics challenges with to and the successful And that educated you increases. mention to pathway recent heard the VLN be strategy heard of you laying this around of and the really We're get of objectives, today expansion John hemp well. today, very spite the tobacco into hands possible and and the to our all in we're quickly consumers on rollout. this and out bow today. with and heard as what to to that running. we despite we some from headwinds everything reach the an and But expansion That's as original of a a become product even doing in that. that truly the and is which what tie What the detail industry, going things. are cannabis to as is addition in all Just accelerating all of announcements next on you is Not of our coming more for off are are VLN

So and releases that stay will coming press tuned shortly. be for our updates next

present in GVB VLN the industry move this our expand investor opportunities our And fall. with coming be to continue of and hemp/cannabis. we events launch US a in As we and number and ahead on will

as more hear that You'll about well.

thank reach If great your to the a day. for you team please Investor and on press support our and that, range we'll speak you With Thank you'd like out Have soon. to noted continued a release. interest, meeting, again. Relations

does This conclude today's you. Thank call.

disconnect. You may now