WARRANT EXCHANGE PROGRAM AND WARRANTS FOR COMMON STOCK | 12 Months Ended |
Dec. 31, 2013 |
Warrants For Common Stock [Abstract] | ' |
WARRANTS FOR COMMON STOCK | ' |
NOTE 10. - WARRANT EXCHANGE PROGRAM AND WARRANTS FOR COMMON STOCK |
|
WARRANT EXCHANGE PROGRAM |
|
The Company had 19,616,308 warrants for common stock outstanding at September 30, 2013. These warrants contain “down round” provisions and anti-dilution features that provide for adjustments to the exercise price and number of warrants outstanding if the Company issues common shares of stock of 22nd Century Group at a price that is less than the respective warrant exercise prices. These provisions require that these warrants be classified as derivatives for accounting purposes, which means they are reported as a liability and adjusted to fair value at each balance sheet date. On November 14, 2013, the Company initiated a warrant exchange program (the “Warrant Exchange Program”) with the goal of reducing the Company’s warrant liability. To that end, the Company offered financial inducements to certain warrant holders to (1) exercise their warrant on a cash basis, (2) exercise their warrant on a cashless basis, or (3) agree to have the “down round provision” or anti-dilution feature removed from their warrant in exchange for additional warrant coverage. The warrants holders also had the option to maintain the terms and conditions of their original warrant. Management and the Company’s Board of Directors were prohibited from participating in the Warrant Exchange Program. As a result of the cash and cashless exercise of warrants, there is a reduced number of outstanding warrants, and as a result of the removal of the “down round” provisions and anti-dilution features on other warrants, they are no longer required to be classified as a derivative liability. The Warrant Exchange Program that ended on December 12, 2013, generated gross proceeds of $3,559,763 and resulted in the issuance of 5,348,172 shares of the Company’s common stock from the cash exercise of warrants. The issuance of 156,197 shares of the Company’s common stock resulted from the exercise of 513,949 warrants that were exercised on a cashless basis. As an inducement for warrant holders to agree to remove their “down round” provision and anti-dilutions feature from their warrant, 138,666 additional warrants were issued. As a result of the Warrant Exchange Program, there are 6,732,088 warrants outstanding at December 31, 2013 that do not contain the “down round” provisions or anti-dilution features. The Company calculated the cost of inducement as the difference between the fair value of the warrants immediately after the Warrant Exchange Program was closed on December 12, 2013, less the fair value of the warrants immediately prior to Warrant Exchange Program completion. The Company estimated the total cost of inducement to be $3,736,313, and this expense has been recorded as an “Other Expense” on the consolidated statements of operations and as an increase to the derivative warrant liability, and subsequently reversed into capital. The Company paid $320,378 and issued 300,000 shares of the Company’s common stock to Chardan Capital Markets, LLC (“Chardan”) in conjunction with the Warrant Exchange Program. The fair value of the 300,000 shares issued to Chardan in the amount of $462,000 is included as a component of the total cost of inducement. |
|
WARRANTS FOR COMMON SOCK |
|
In connection with the January 25, 2011 Private Placement and reverse merger into a public company, the Company issued five year warrants (“January 25, 2011 Warrants”) to purchase shares of common stock of 22nd Century Group. These warrants contain “down round” provisions and anti-dilution features which provide for adjustments to the exercise price if the Company issues common shares of stock of 22nd Century Group at a price that is less than the respective warrant exercise prices. This provision and features require these warrants be classified as derivatives for accounting purposes, which means they are reported as a liability and marked to market at each balance sheet date. As a result of the equity securities issued during 2012, the “down round” provision and anti-dilution feature of the January 25, 2011 Warrants were triggered and the adjusted warrants outstanding as of December 31, 2012 were 5,482,055 with an exercise price of $2.73 per share and 3,947,232 with an exercise price of $1.39 per share. As a result of equity securities issued during the year ended December 31, 2013, the cashless conversion of 1,160,080 warrants during the third quarter of 2013, and the effects of the Warrant Exchange Program, the January 25, 2011 Warrants now amount to 3,455,039 warrants with an exercise price of $2.21 per share, 3,062,665 warrants with an exercise price of $1.96 per share, 110,336 warrants with an exercise price of $1.20 per share and 374,007 warrants with an exercise price of $1.27 per share outstanding as of December 31, 2013. As a result of the Warrant Exchange Program, 3,437,072 of these warrants no longer contain the “down round” provision and anti-dilution feature. The warrants affected by the Warrant Exchange Program resulted in a reduction of the warrant liability and an increase in capital in the amount of $4,612,263 after inducement. The cashless exercise of the 1,160,080 warrants resulted in a reduction of the warrant liability and an increase in capital in the amount of $482,654. |
|
During 2012, 193,200 warrants at an original exercise price of $1.50 were issued upon partial conversion of the December 14, 2011 Convertible Notes, which include “down round” provisions and resulted in a derivative liability upon issuance of approximately $152,000. Due to subsequent issuance of common stock and instruments convertible into common stock, and the effects of the Warrant Exchange Program, the number of warrants issuable and their exercise price has been adjusted. As of December 31, 2013, warrants issued during 2012 related to partial conversion of the December 14, 2011 Convertible Notes now amount to 180,047 warrants outstanding with an exercise price of $1.15 per share. These outstanding warrants have retained their “down round” provision and anti-dilution feature. The warrants affected by the Warrant Exchange Program resulted in a reduction of the warrant liability and an increase in capital in the amount of $158,919 after inducement. |
|
Between January 2, 2013 and February 6, 2013 Convertible Notes issued on December 14, 2011 with a carrying value of $1,408,750 (together with accrued interest) were converted into 2,035,720 shares of common stock and five-year warrants to purchase 2,662,769 shares of common stock at $1.50 per share. The number of warrants issued upon conversion includes 219,909 lock-up warrants with the same rights as the December 14, 2011 Convertible Notes warrants. These warrants include a “down round” provision and resulted in a derivative liability upon conversion of $1,445,091. As a result of equity securities issued in 2013 and the effects of the Warrant Exchange Program there are now 802,215 warrants outstanding with an exercise price of $1.38 per share. As a result of the Warrant Exchange Program these warrants no longer contain their “down round” provision or anti-dilution feature. The warrants affected by the Warrant Exchange Program resulted in a reduction of the warrant liability and an increase in capital in the amount of $7,637,813 after inducement. |
|
In May 2012, the Company issued 1,710,833 five-year warrants to purchase common stock in a private placement with an original exercise price of $1.00. These warrants contain a “down round” provision and anti-dilution feature and resulted in a derivative liability upon issuance of approximately $1,841,000. The Company issued 124,217 lock-up warrants to the holders of May 2012 private placement warrants with the same rights as the warrants originally issued. The exercise price of the May 2012 warrants and lock-up warrants was adjusted as a result of subsequent equity securities issued at a lower price than the original exercise price. As a result of the Warrant Exchange Program and the cash exercise of 275,000 warrants during the third quarter of 2013, there remains 974,201 warrants with an exercise price of $0.60 per share outstanding as of December 31, 2013. As a result of the Warrant Exchange Program these warrants no longer contain their “down round” provision and anti-dilution feature. The $165,000 cash exercise of the 275,000 warrants resulted in a reduction of the warrant liability and an increase in capital in the amount of $421,817. The warrants affected by the Warrant Exchange Program resulted in a reduction of the warrant liability and an increase in capital in the amount of $3,013,587. |
|
Convertible notes issued in August 2012 entitled the holders to at least 185,500 warrants and up to 371,000 warrants (five-year warrants with an exercise price of $1.00 per share), which resulted in a derivative liability of $92,750 recorded at the time the notes were issued. In connection with the conversion of the August 9, 2012 convertible notes during August 2013, the Company issued 371,000 five-year warrants with an exercise price of $1.00 per share. These warrants include a “down round” provision and resulted in a derivative liability upon conversion of $731,662. As a result of equity securities issued in 2013 and the effects of the Warrant Exchange Program, there are now 184,047 warrants outstanding with exercise prices of $0.96. These outstanding warrants have retained their “down round” provision and anti-dilution feature. The warrants affected by the Warrant Exchange Program resulted in a reduction of the warrant liability and an increase in capital in the amount of $555,165 after inducement. |
|
In November 2012, the Company issued 1,619,000 five-year warrants to purchase common stock in a private placement with an original exercise price of $1.00. These warrants contain “down round” provision and anti-dilution feature and resulted in a derivative liability upon issuance of $353,747. The Company issued 53,950 lock-up warrants to the holders of November 2012 private placement warrants with the same rights as the warrants originally issued. The exercise price of the November 2012 warrants and lock-up warrants was adjusted as a result of subsequent equity securities issued at a lower price than the original exercise price. As a result of the Warrant Exchange Program and the cashless exercise of 63,000 warrants in the third quarter of 2013, 1,518,600 warrants with an exercise price of $0.60 per share remain outstanding as of December 31, 2013. As a result of the Warrant Exchange Program these warrants no longer contain their “down round” provision and anti-dilution feature. The cashless exercise of the 63,000 warrants resulted in a reduction of the warrant liability and an increase in capital in the amount of $111,468. The warrants affected by the Warrant Exchange Program resulted in a reduction of the warrant liability and an increase in capital in the amount of $3,661,718. |
|
The Company issued 6,250,000 warrants to purchase common stock in the January 2013 Series A-1 Preferred Stock private placement, including 4,166,666 Series A Warrants, which are five-year warrants with an exercise price of $0.72 per share and 2,083,334 Series B Warrants, which are one-year warrants with an exercise price of $0.60 per share. These warrants include a “down round” provision and an anti-dilution feature and resulted in a derivative liability upon issuance. The fair value of the Series A Warrants, Series B Warrants and the lock-up warrants issued to the May and November 2012 private placement warrant holders in conjunction with the January 2013 Series A-1 Preferred Stock private placement amounted to $6,022,319. Further, 2,083,334 Series C Warrants are issuable upon exercise of the Series B Warrants. During June and July of 2013, 982,300 and 1,101,034 Series B Warrants, respectively, were exercised on a cash basis. The exercise of these Series B Warrants triggered the issuance of a like amount of Series C Warrants totaling 2,083,334 Series C Warrants. The Series C Warrant shares outstanding are exercisable at $0.72 and include a “down round” provision, which results in a derivative liability upon issuance. The fair value of the 982,300 Series C Warrant shares issued in June 2013, and the fair value of the 1,101,034 Series C Warrants issued in July 2013, amounted to $711,675 and $1,622,069, respectively. On August 1, 2013, the Company entered into a Warrant Exercise Agreement (see Note 3 for a more detailed description of the Agreement) with holders of its Series A Warrants and Series C Warrants for such holders to exercise a portion of such Series C Warrants to acquire an aggregate of 1,666,666 shares of the Company’s common stock for a cash payment to the Company of $1,000,000. In exchange for the cash exercise of such portion of the Series C Warrants, the Company reduced the exercise price of all of the Series A Warrants and Series C Warrants to $0.60 per share. The reduced exercised price resulted in an increase in the warrant liability associated with the Series A Warrants and Series C Warrants and a corresponding reduction in capital in the amount of $626,328. The Series C Warrant holders exercised the cash option on August 5, 2013. In addition, between August and December 2013, the Series A and Series C Warrant holders exercised on a cashless basis at $0.60 per share 4,166,666 and 416,668 Series A and Series C Warrants, respectively. There are no Series A Warrants, Series B Warrants or Series C Warrants outstanding at December 31, 2013. |
|
The Company estimates the value of warrant liability upon issuance of the warrants and at each balance sheet date using the binomial lattice model to allocate total enterprise value to the warrants and other securities in the Company’s capital structure. Volatility was estimated based on historical observed equity volatilities and implied (forward) or expected volatilities for a sample group of guideline companies and consideration of recent market trends. The following table is a roll-forward summary of the warrant liability: |
|
Fair value at December 31, 2011 | | $ | 550,000 | |
Fair value of warrant liability upon partial conversion of December 14, 2011 Notes | | | 152,100 | |
Fair value of warrant liability upon issuance – May 15, 2012 | | | 1,841,000 | |
Fair value of warrant liability related to minimum warrants issuable upon maturity of | | | 92,750 | |
August 9, 2012 convertible notes |
Fair value of warrant liability upon issuance – November 9, 2012 | | | 353,747 | |
Loss as a result of change in fair value | | | 1,183,543 | |
Fair value at December 31, 2012 | | $ | 4,173,140 | |
Fair value of warrant liability upon conversion of remaining December 14, 2011 | | | 1,445,091 | |
Notes -– Q1 2013 |
Fair value of warrant liability upon issuance – Q1 2013 | | | 6,022,319 | |
Fair value of warrant liability upon issuance – Q2 2013 | | | 711,675 | |
Fair value of warrant liability upon issuance – Q3 2013 | | | 1,622,069 | |
Fair value of warrant liability upon conversion of August 9, 2012 Notes -– Q3 2013 | | | 731,662 | |
Fair value of warrant liability upon reduction of exercise price of Series A and Series | | | 626,328 | |
C warrants – Q3 2013 |
Reclassification of warrant liability to equity upon exercise of warrants – Q2 2013 | | | -204,513 | |
Reclassification of warrant liability to equity upon exercise of warrants – Q3 2013 | | | -6,542,904 | |
Reclassification of warrant liability to equity upon exercise of warrants – Q4 2013 | | | -7,712,170 | |
Cost of inducement from Warrant Exchange Program – Q4 2013 | | | 3,274,313 | |
Reclassification of warrant liability to equity resulting from Warrant Exchange Program | | | -19,639,465 | |
– Q4 2013 |
Loss as a result of change in fair value | | | 19,271,977 | |
Fair value at December 31, 2013 | | $ | 3,779,522 | |
|
The aggregate net loss as a result of the Company’s warrant liability for the year ended December 31, 2013 amounted to $19,271,977 which is included in other income (expenses) as part of “warrant liability loss - net” in the accompanying consolidated statements of operations. The loss for the year ended December 31, 2013, also includes a charge to other income (expense) in the amount of $4,330,734, as a result of (i) warrant liabilities issued in connection with the Series A-1 Preferred Stock in excess of net proceeds raised in the amount of $3,987,655 in January 2013, and (ii) warrant liabilities issued in connection with the July 2013 issuance of 1,101,034 Series C Warrants in excess of the sum of the net proceeds received upon exercise and the reclassification of the warrant liability to capital, in the amount of $343,079. Warrant liabilities issued in connection with the December 14, 2011 Convertible Notes and the August 9, 2012 convertible notes converted to common stock in excess of the conversion amount by $17,386 and $509,062, respectively, were recorded as additional interest expense. |
|
ASC 820 - “Fair Value Measurements and Disclosures” establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: |
|
| ⋅ | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | | |
| ⋅ | Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. | | |
| ⋅ | Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. | | |
|
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The warrant liability is measured at fair value using certain estimated factors such as volatility and probability which are classified within Level 3 of the valuation hierarchy. Significant unobservable inputs are used in the fair value measurement of the Company’s derivative warrant liabilities include volatility. Significant increases (decreases) in the volatility input would result in a significantly higher (lower) fair value measurement. |
|
The following table summarizes the warrant activity since December 31, 2011: |
|
| | Number of Warrants | | |
| | | | |
Warrants outstanding at December 31, 2011 | | 8,668,701 | | |
Warrants issued | | 3,523,033 | | |
Additional warrants due to anti-dilution provisions | | 780,930 | | |
Warrants exercised during 2012 | | - | | |
Warrants outstanding at December 31, 2012 | | 12,972,664 | | |
Warrants issued | | 11,570,274 | | |
Warrants issued as part of Warrant Exchange Program | | 138,666 | | |
Additional warrants due to anti-dilution provisions | | 1,665,400 | | |
Warrants exercised during 2013 | | -9,831,414 | | |
Warrants exercised as part of Warrant Exchange Program | | -5,862,121 | | |
Warrants outstanding at December 31, 2013 | | 10,653,469 | | |
| | | | |
Composition of outstanding warrants: | | | | |
Warrants containing anti-dilution feature | | 3,921,381 | | |
Warrants with anti-dilution feature removed | | 6,732,088 | | |
| | 10,653,469 | | |
| | | | |