03/30/2017 Focused Stock Trader Team

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Company Overview:

22nd Century is a plant biotechnology company focused on technology, which allows the company to increase or decrease the level of nicotine in tobacco plants and the level of cannabinoids in cannabis plants through genetic engineering and plant breeding. The company’s primary mission in tobacco is to reduce the harm caused by smoking. The company’s primary mission in cannabis is to develop proprietary cannabis strains for important new medicines and agricultural crops. 22nd Century currently owns or exclusively controls more than 200 issued patents and more than 50 pending patent applications around the world. 

Investment Thesis:

The key for the shares remains monetization of the company's technology to control nicotine levels in tobacco. To exploit this opportunity, the company is pursuing multiple paths. One path is a reduced exposure FDA designation. Another path is the development of a low nicotine cigarette brand, MAGIC, and high nicotine brand, RED SUN.

Sales momentum is building for new cigarette brands MAGIC and RED SUN. While sales-to-date have been modest, staff is making progress in the US and international markets. Shipments to Australia and France are scheduled for September.

The financial position is strong. The company is fully funded for almost two years. Cash-on-hand has recently been at record levels. In October 2015, the company proved an ability to raise capital, doing $11.5 million.

22nd Century's IP is growing in value. Most recently, the technology has been advancing to become suitable for heat-not-burn products, which is a major area being pursued by industry leader Philip Morris International. Is Century’s IP a crown jewel? Or a reason for take-out potential? Perhaps.

The bull case on the stock is at least $3.50. This outlook is based on a sum of the parts analysis valuing X-22/Modified at $2.50 per share, the combined value of the potential BAT royalty stream and commercial products at $1.00 per share, and leaving the 25% ownership of Anandia as additional upside.

See the supplemental pages of this report for more key takeaways about 22nd Century Group Inc that support our investment thesis. 

Key Takeaways:

(i) Upcoming Colorado Hemp Expo. 22nd Century’s wholly-owned subsidiary, Botanical Genetics, will speak and present at the annual Colorado Hemp Expo at the Ranch Events Complex on March 31st and April 1st. The company’s VP of Plant Biotechnology and General Counsel will be attending. This is a great opportunity for the leadership team to build confidence with the market. In particular, the company has a number of exciting proprietary cannabis initiatives, including the development of THC-free industrial hemp plants and the propagation of medical marijuana strains that are selected for increased levels of medically-important cannabinoids, such as CBC and CBD.

(ii) Better Than Expected Recent Financial Performance. Q4 revenue of $3.3 million beat the expectations of some. This upside goes a long way toward covering overhead costs, but ultimately the company will need to ramp contract manufacturing sales by sometime later this year. The latest conference call transcript available on the company’s website is August 10, 2016 so we are eager for the next public forum briefing on expectations for financial performance.

(iii) University of Virginia Partnership Is An Eye Catcher. Over the next three years, the company will invest approximately $1.1 million in a major scientific collaboration with UVA. The goals of the research agreement include: (i) creating unique industrial hemp plants with guaranteed levels of THC below the legal limits (thus eliminating the risk to growers of having to destroy non-conforming hemp crops) and (ii) optimizing other desirable hemp plant characteristics to improve the plant’s suitability for growing in Virginia and in similar legacy tobacco regions. This deal says a lot about the company’s credibility and about leadership ability to grow strong community ties.

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