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Here's Why This Tobacco and Marijuana Stock Plunged as Much as 16%

By Sean Williams - Oct 9, 2017 at 3:24PM

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Shoring up the balance sheet by selling stock comes with a price.

What happened

Shares of 22nd Century Group (XXII -5.65%), a plant-biotechnology company focused on controlling the levels of nicotine and nicotinic alkaloids in tobacco plants and cannabinoids in cannabis plants, tumbled as much as 16% during Monday's trading session. The culprit? Look no further than the announcement of a registered direct share offering before the opening bell.

So what

The early-morning press release from 22nd Century notes that the company entered into an agreement with institutional investors to receive $54 million in gross proceeds from the sale of 20.57 million shares at $2.625 per share. Unfortunately, 22nd Century Group closed on Friday, Oct. 6, at $3.41 a share. That's a 23% discount to the previous closing price, and the main reason that this tobacco and marijuana stock is getting clobbered today.

A businessman placing $100 bills into the outstretched hands of another person

Image source: Getty Images.

However, as the press release notes, the cash raise will give the company more than $60 million in cash on its balance sheet, which it believes should be more than enough capital to fund its operations for "more than five years." Having cash concerns put to rest might be worth the short-term hiccup from offering shares to institutional investors at a 23% discount.

"We are very pleased to announce that, as a result of this no-warrant financing, 22nd Century will have more than 5 years of operating cash on hand," said president and CEO Henry Sicignano III. The company plans to use the proceeds to improve its negotiating position with potential licensing and strategic partners in the tobacco and cannabis industries.

Now what

With the company's valuation up well over 100% since late July, 22nd Century Group has been a hot name lately among investors. It received a major boost because of commentary from the Food and Drug Administration on July 28 that called for a new comprehensive plan on tobacco and nicotine regulation. The quick summary of the FDA's press release: It called for a reduction in nicotine in cigarettes to non-addictive levels, which would play right into the hands of 22nd Century Group, as a biotech company focused on reducing nicotine levels in tobacco.

A young man smoking a cigarette

Image source: Getty Images.

The company has also been lifted by the expansion of marijuana throughout North America, including the legalization of medical cannabis in Mexico. Cannabinoids are of particular interest in formulating medicines, so there's excitement in the rapidly growing marijuana industry over what the company could bring to the table.

Unfortunately, the excitement surrounding 22nd Century Group hasn't translated into profits. Despite a 38% increase in net sales in the second quarter to $3.9 million, as a result of a new filtered-cigar manufacturing agreement that commenced in mid-May, the company's net loss widened by 16% to $3.4 million. In other words, this is a story stock at the moment; the company hasn't demonstrated it can translate its vision of controlling nicotine and cannabinoid levels into actual sales and profits. This isn't to say that its efforts will fail, so much as to suggest that investors are playing with fire by buying shares without knowing all the facts. I'd suggest sticking to the sidelines until 22nd Century Group gets its feet wet.

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