While the usage of cigarettes has declined dramatically over the last several decades, the fact remains that there are still 5.3 trillion cigarettes sold annually, world-wide, which translates into 265 billion packs. The average price today is $6.65 per pack, which generates annual revenues, world-wide, of $1,762 trillion.
E-cigarettes have been marketed as a safer alternative to regular cigarettes. However, the fact is that vaping products do contain Nicotine, which of course, is very addictive. E-cigarettes have been linked to increased blood pressure, heart disease, gum infection, lung disease, as well as brain development effects. And yet, according to a recent Gallop Poll, 20% of people age 18-29 vape, compared to 9% in the 30-49 age bracket. According to the World Health Organization, 41 million people used e-cigarettes in 2018 and it is projected that this number will grow to an estimated 55 million by next year.
World-wide vaping sales reached $15 billion in 2018, and are projected to reach $40 billion by 2023.
Source: The Lancet, 2019
A Possible Alternative May Be On The Way
What if there was a product that provided the user with the real feel of a cigarette but without Nicotine and without Tobacco? What if such a product would be available at the same or possibly lower price than both cigarettes and E-cigarettes, but without the negative side effects of either? Would such a product be successfully received in the marketplace? One of the reasons that Beyond Tobacco may be available at a lower cost than combustible cigarettes is that the product will not be burdened with the level of government sanctioned taxes that are contributing over $200 billion to government treasuries around the world.
Las Vegas and Vancouver based Taat Lifestyle and Wellness Ltd. (OTCQB:TOBAF) is arguing that such a product will, in fact, be successfully accepted in the market place.
Beyond Tobacco, which has been developed by Taat, will be marketed as an alternative to cigarettes and E-cigarettes without the negative side effects of both Nicotine and Tobacco. The current calendar calls for the company to launch Beyond Tobacco during Q4 of the current year which begins on October 1.
To assure success in the marketing of this possibly revolutionary product, the company apparently has raided the ranks of Philip Morris (MO) to guide it through the process of introducing it to the smoking public. On August 24, the company announced that it has added Tim Corkum as the company’s Chief Revenue officer. At Philip Morris, Mr. Corkum held various positions in sales, trade marketing, corporate affairs, and business development. He was a Director of Philip Morris’s Reduced Risk Products category with its Caribbean affiliates and in the Dominican Republic, and then transitioned to the Canadian market in 2018.
On July 31, 2020, the company announced that it had appointed Setti Coscarella as its Chief Executive Officer to provide expert leadership as it begins to launch its Beyond Tobacco products. At Philip Morris, Mr. Coscarella had created a dedicated business unit for Reduced Risk products which today is one of Philip Morris’ fastest-growing business units.
On September 2, Taat announced that it has secured commercial-scale production capacity for its cigarettes with a manufacturer in North America that also produces on a contract basis for global and regional brands of both tobacco and hemp cigarettes. Under the terms of the agreement with the company, the Manufacturer’s name cannot be publicized. The agreement provides terms for production for an initial one year period, with pricing that is lower than tobacco industry averages for full-service cigarette production. Renewal of these positive pricing terms are conditional upon the company meeting a first year production quota. The Manufacturer will also warehouse Beyond Tobacco cigarettes after they are produced, while also providing outbound logistics services by coordinating the shipment of Beyond Tobacco pallets to the company’s distributors.
Since Beyond Tobacco cigarettes material is to be processed by Taat in-house before being sent to the Manufacturer for production, Taat’s trade secrets remain secure.
Tap here to review Taat’s most recent July investor presentation outlining the benefits associated with their new Beyond Tobacco cigarette.
In July, Taat undertook a test production run with its manufacturing partner which confirmed initial production estimates of one million sticks per day. While an allocation from this test run was reserved for market research purposes, the balance was offered to a number of select retail stores in Nevada that had participated in the company’s initial retail market testing in May of this year. The inventory was sold out after 72 hours at price points aligned with the company’s planned pricing strategy. Feedback by users was very positive.
Given what we know at this time, I calculated first full year revenues by annualizing daily production of 50,000 packs to an annual production capacity of 18 million. Assuming a cost per pack of $5.00, first year revenues would approach $90 million assuming the product is, in fact, as successful as early market testing seems to indicate.
Risks and Other Issues
As with any start-up, the failure to execute the plan has to be on top of the list.
On September 11, the company announced that it had closed the second and final tranche of its non- brokered private placement by issuing 2,385.272 Units at a price of $0.70 per Unit generating $1,669.690. Each Unit consists of one common share and one half of a warrant. Each warrant entitles the warrant holder to purchase one share of the common stock at $1.00 per share for a period of one year. However, we need to be cognizant of the fact that, no doubt, additional equity financing must be factored into our investment decision. Shareholder dilution during the initial two year period of introducing the product to the market must be expected.
While the product is both Nicotine and Tobacco free, it is not smoke free. The possibility that other health related issues may be raised that could negatively affect the growth momentum of Beyond Tobacco cannot be ruled out.
The company has a patent pending for the material process of the Beyond Tobacco cigarette, with the operative word being “pending”. There apparently is no reason why the patent will not be awarded, but until it is, the issue must remain on the Risk side of the ledger.
The Compliance Departments of some brokerage firms will not accept an unsolicited order to buy Taat, presumably because of the fact that it is a Hemp based product. This issue will, hopefully, not be a major stumbling block as more information on this company is being disseminated among the investment community and as Congress, at some point, may take on the legalization of marijuana.
The company has this past week been uplifted from the Pink Market to the OTCQB Exchange. It is also traded in Canada as well as in Frankfurt.
Finally, it would come as no great shock if global governments would start taxing Beyond Tobacco cigarettes, albeit at lower levels than conventional cigarettes.
In September of 2019, Altria and Philip Morris walked away from merger negotiations with Juul Labs after Juul was facing scrutiny as a result of a surge in usage of E-cigarettes by teenagers. Juul has since ceased all advertising in the United States. The potential amount involved in the merger was $187 billion. Previously, Altria had invested $12.8 billion to purchase a 35% stake in Juul in December 2018, valuing Juul at $38 billion. In January of 2020, it has written down the value of its stake to $4.5 billion.
Could Taat’s fortune come to a more positive conclusion? Obviously, everything has to fall into line without any major negative developments. At today’s closing price of $1.47, I argue that the probability of success outweighs the potential for failure. First, an experienced marketing team from Philip Morris is guiding the company in its initial and most important effort to introduce the product to its market.
While health related issues cannot be ruled out entirely, they are likely not to be as serious as those of conventional or E-cigarettes.
Taat absolutely must be categorized as a disruptor in its attempt to gain traction in both the cigarette and e-cigarette market.
An investment analysis in a recent edition of the German newspaper Die Welt argues that Taat may have the potential to ultimately generate a ten -fold return on investment. It would appear to me that before Taat were to reach double digits, it may well be absorbed by a rival such as Philip Morris or other tobacco giant to give that company a strong asset in their Reduced Risk division which they need to continue to grow as the volume of combustible cigarettes continues to decline.
Assuming that the first year of operations is considered successful, the stock may easily move to the $5.00-$7.00 level within the next 12 months.
Disclosure: I am/we are long TOBAF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.