Chardan: 22nd Century Group, Inc. (XXII): Remain Positive on Company Progress
We believe 22nd Century is likely to exceed its $1.5 million revenue
guidance for Q2 as well as the $5 million it has guided for the year.
Since early May the company has added distribution in the US, expanded
the number of retail outlets it is serving, received approval to
distribute in all 50 states and the District of Columbia, has been
granted both a Cigarette Stamping Agent license and a
Wholesale Cigarette Dealer license in the important New York state
market, initiated a brand ambassador program to drive acceptance at
the end-user level, launched MAGIC in the UK, and bolstered the
balance sheet with a $6 million offering.
The catalysts for the shares this year remain the roll-out of RED SUN
in the US, MAGIC in Europe and contract manufacturing. Other pivot
points for the stock include 22nd Century's pursuit of multiple JVs in
Asia (China, Japan, and South Korea) and it intends on consummating at
least one of them this year. In addition, the company is hoping to
close a deal to fund a phase 3 study for X-22. We have not built the
latter two events into our estimates.
In the US, there are over 280 REDSUN retail outlets listed on the
company's website but that only captures a subset of the total
retailers selling the product. At the middle of May there were 170
stores listed on the company's website. The goal was 500 stores by the
end of the Q2, which we believe the company achieved. More will come
as the year progresses and distributors
expand into existing markets. Beginning June 1st, Rich & Rhine, a
Portland-based distributor, doubled RED SUN's retail base, adding 200
independently owned retail stores.
22nd Century has deployed about a dozen "brand ambassadors" in key
markets focusing on about 340 events during the remainder of the year
to increase consumer awareness of the product.
MAGIC is also proceeding well. At launch the company had pre-orders
from 900 stores in Spain, and currently has orders from 1,100 outlets
and expects 2,500 by year-end. Late in in May the company launched
MAGIC 0.0 in the UK. By year-end 22nd Century also hopes to have MAGIC
available in four more countries including Belgium, Italy and France.
The take-up rate, is still an unknown. To date sales have been made to
distributors but the real success of the product depends on end-user
demand. Early indications probably won't be available until the end of
Q3. At that point, re-orders by retailers, to distributors, will
indicate how successful the company has been in the initial launch
phase. It will take time to build demand and for that reason we have
modeled modest growth this year for both RED SUN and MAGIC.
At the end of Q1 the company had $3.8 million in cash but was set to
receive $1 million through August in settlement of a legal dispute. In
addition, a $6 million registered direct offering in late May added to
the company's cash.
Other catalysts for the shares include an application for modified
risk cigarettes, X-22 and the China JV. 22nd Century is seeking a
pharmaceutical partner to fund a phase 3 study of its Brand A very-low
nicotine cigarette. A handful of studies can be presented to the FDA,
supplemented with a consumer perception study, reducing the time and
expense required to get modified risk designation from the FDA. The
company is also seeking a pharmaceutical partner to fund a phase 3
study for X-22. The China JV remains the biggest upside to our
estimates since its contribution could quickly dwarf contributions
from RED SUN, MAGIC and contract manufacturing.
We remain positive on the shares given near-term revenue generation
for multiple sources but clearly the story has taken longer to develop
than we expected. We believe there is a good chance the company will
exceed our revenue estimates and there is significant upside possible
from its Asian joint venture. Our $9 price target is driven by a
sum-of-the-parts methodology comprised of the discounted present value
of the projected BAT license revenue, the discounted value of
commercial product sales, RED SUN and MAGIC, and a value for the
company's modified risk and X-22 initiatives.
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