Chardan Capital Bullishness on 22nd Century (XXII) Reaffirmed Following Management Conf. Call

November 26, 2014 7:00 AM EST
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Price: $3.91 +1.03%

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Chardan Capital affirms 22nd Century Group (AMEX: XXII) at Buy with a price target of $9 following a recent conference call with management.

Analyst James McIlree noted that Chardan's price target was based on a sum-of-the-parts methodology, which was 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.

McIlree commented:

The company’s focus in the near term is revenue generation and it expects a minimum of $5 million in revenue in 2015 from the sale of RED SUN in the US, MAGIC in Europe and contract manufacturing. Revenues from all three sources are expected to begin in January next year. Distribution of RED SUN was delayed while the company received approval by the states to sell in those jurisdictions. Twelve states have granted approval, 22 are expected to approve soon and another 16 states will receive applications in December and approval is expected in January. MAGIC was delayed by the decision to change packaging in Spain so it would comply with all European regulatory requirements. The company needs NAAG approval to sell cigarettes manufactured for Smoker Friendly and hopes to receive this soon, but as NAAG approval for the MSA shows, the process is not in the company’s control.

For 2015 we have revenue of $2 million projected from these three sources, far below the company’s expectation of $5 million (minimum), so there is plenty of room for upside to our estimates. We
have modeled a gradual ramp in sales, with Q1 revenue of $125 thousand and Q4 of $875 thousand. Our gross margin is modeled at 50%, but this will depend on the mix. Contract manufacturing has much lower margins than sale of proprietary products so if contract sales are a big portion of the mix, our gross profit estimate would be too high, and vice versa.

X-22 and modified risk remains areas of focus for the company. It is still seeking a partner for X-22 trials and recently met with FDA on a potential modified risk application. Revenue this year and next are not likely, but potential catalysts (partnerships, modified risk applications) are possible next year.

We have a $1.5 million milestone payment built into our model for Q3 of next year. The company, however, pointed out BAT controls when a research milestone is met and when/if it enters into a commercial license agreement. Because of this, the company is reluctant to project a milestone payment this year, although it remains confident of the agreement’s progress.

Tobacco is currently in China for testing and if successful could result in an order next year. However, testing will be extensive and could delay planting, which would take place in the spring. If the company manages to complete testing in time for a spring planting, the crop would be harvested in late summer, cured and process and shipped in December. China is a very large opportunity, and could exceed the revenue from other sources in a very short order. 22nd Century indicated the size of China orders are in the $10’s of million to $100’s millions range.

Botanical Genetics, the subsidiary dealing with cannabis is (in our words) a science project for now. We think the opportunity in the long-run is large, but it will take time for the legal and regulatory frameworks to change before the path is clear for the company to generate significant revenue from this source.

We remain bullish on the shares given near-term revenue generation for multiple sources, the likelihood the company will exceed our revenue estimates and the significant upside possible from its Asian joint venture.

For an analyst ratings summary and ratings history on 22nd Century Group click here. For more ratings news on 22nd Century Group click here.

22nd Century Group closed at $1.93 yesterday.

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Chardan Capital Markets, James McIlree