Summary Below:
Court rejected Crede’s motion for preliminary injunctive relief and preliminary declarative relief for 22nd Century to deliver 2,077,555 shares to Crede so the shares could be sold and the proceeds placed in escrow while suit between Crede and 22nd Century was resolved.
The Court went further and stated it believed “ I don't think I can say on this record that the plaintiff has demonstrated a likelihood of success on the merits,” suggesting the case against 22nd Century was on shaky grounds.
In his testimony, CEO Henry Sicignano III pointed up multiple value creators for the company including:
Modified risk approval by year end or early 2017.
Payments from BAT for the research license
Patents worth over $200 million.
Discussions with four strategic pharma companies to fund phase three clinical trials.
Seven or eight figure upfront payment from an Indian customer for purchase of raw tobacco leaf.
Crede v 22nd Century
In March 22nd Century repudiated the exchange right of the Tranche 1A warrants that would have allowed Crede to exchange its Tranche 1A warrants for a maximum of 5 million shares. 22nd Century maintains Crede violated an activities restriction provision of the securities purchase agreement between Crede and 22nd Century.
Crede filed frivolous suit against XXII on April 26, 2016 alleging:
Breach of Contract- Failure to Pursue China Joint Venture
Breach of Contract- Repudiation of SPA (Share purchase agreement)
Breach of Contract- Failure to Honor Tranche 1A Warrant Exchange Right
Tortious Interference with Contract
Permanent Injunction
On May 19th Crede filed a “motion for preliminary injunctive relief and preliminary declarative relief directing defendant 22nd Century Group, Inc. (“22nd Century”) to deliver immediately 2,077,555 shares (which happened to be the EXACT short interest at that time…hmmm) of 22nd Century common stock to Crede”
A hearing on this injunction was held in the Southern District of New York before the Honorable Katherine Polk Failla on June 14, 2016.
June 14, 2016 hearing
Crede’s position. Asked for 2,077,555 shares from 22nd Century. It would then sell the shares and put the funds in escrow.
22nd Century’s position: Crede violated the “activity restrictions” provision of the agreement and is due nothing.
22nd Century introduced 6 e-emails from Peizer addressed to 22nd Century’s CEO and others claiming these showed Peizer’s violations of the activity restrictions provision of the agreement. Crede’s lawyers maintain Peizer did not interfere and was simply “giving advice by e-mail,” and this “was consistent with his role as a consultant,” to 22nd Century.
Early on the Court questioned this interpretation. On page 30, the Court asked, “As consultant he should be suggesting changes to management in the manner that he did?” When counsel for Crede suggested Peizer was only relaying China National Tobacco’s impression of 22nd Century management with not very flattering words, the Court interjected, “I have a different recollection of the substance than you. It sounded a lot nastier when I was reading it,” and again the Court questioned Crede’s counsel regarding Peizer’s emails, “doesn't it transcend his job as consultant? I would have thought he'd be a little bit more circumspect as a consultant than making attacks at these times.”
The Court saw through Crede’s claim of irreparable harm and stated, “I am concerned that in citing irreparable harm, you're actually going to be asking me to cause irreparable harm.”
When XXII began its argument the judge asked if XXII should have responded early to Peizer’s emails.
page 79 Questioning of Peizer begins.
Counsel for 22nd Century was persistent in trying to get Peizer to admit he was seeking changes in management. Peizer denies he asked for changes in management, instead asserting he merely was relaying information that China National Tobacco wanted someone else in charge of 22nd Century and offered suggestions on how to allay CNTC’s fears.
page 127 Henry Sicignano III was called to the stand.
To dispute the irreparable harm claim of Crede without the preliminary injunction Henry Sicignano III pointed out its historical ability to raise capital when necessary based on the strength of its assets. He stated believed by the end of this year or early next,
“We believe we'll be the first company in the world authorized by FDA to actually market our cigarettes as a modified-risk tobacco product,”
“We have a research license with British American tobacco that extends through October 2017. Any time before October 2017, BAT could pay us an additional $7 million”
“We believe the patents are worth more than $200 million,”
“We are in a due diligence phase of discussions with four pharma companies now exploring the rights to -- well, to essentially fund our phase three clinical trial and to make it a prescription drug,”
When asked about the options for financing the business after October of 2016, Mr. Henry Sicignano III responded:
THE WITNESS: “There are several. One, going on the pharmaceutical proposals, we're asking for $30 million. Approximately 24-and-a-half million would be for the phase three trials. About 5-and-a-half million would be for GNA expenses. So if we were to sign a deal in the next three months, that precludes a financing. BAT could pay us that $7 million at any point. It could be this week, this month, next month, anytime in the next between now and October 2017
THE COURT: And you're expecting that at some point between today and October of 2017 they will?
THE WITNESS: Yes.
And I can also state that I'll be in India two weeks from now meeting with four different very large tobacco companies in India who have interest in purchasing our raw tobacco. Such a purchase would involve a substantial, if not eight-figure upfront payment, at least a seven-figure upfront payment for our raw tobacco leaf.
Mr. Henry Sicignano III also indicated in the past few weeks he has received multiple offers to fund the company included a $3 million offer from a shareholder “approximately two weeks ago.”
Henry Sicignano III also suggested Peizer wanted to drive the stock price down in order to take over the company.
Decision
In its decision, The Court stated of Peizer, “It is significant that plaintiff has held his position. It is significant that he has explained to me the strategy that he has. But whether he was planning all along to take over the company or short the stock, again, I'm not entirely sure that it matters.
Regarding the injunction, the Court stated: “I am going to deny the request for preliminary injunctive relief, principally because I have not found that plaintiff has demonstrated a likelihood of irreparable harm; and secondarily, because I don't believe that the plaintiff has demonstrated a likelihood of success on the merits or serious questions, plus a balance of the hardships that tips decidedly in its favor.”
Regarding the case at large: “Let me then talk about the likelihood of success on the merits. I think there are a lot of very interesting issues. It's where I've focused the most attention. But I don't think I can say on this record that the plaintiff has demonstrated a likelihood of success on the merits. Rather, I think what I can say is perhaps there is a significant question, maybe a serious question, but not one that is accompanied by a demonstrated balance of hardships favoring plaintiff.”
“I think there is a likelihood that the plaintiff violated the activities restrictions that are contained in Section 1(h). Mr. Peizer has been very careful in his testimony today, but to say that something was a suggestion as distinguished from a request, I think of it -- even if I didn’t think of it as a plan or proposal, which I think it very much comes close to, I think it's an action. And I think, therefore, it qualifies.”
