Attached files
file | filename |
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EX-32.2 - EX-32.2 - ROCK CREEK PHARMACEUTICALS, INC. | c19837exv32w2.htm |
EX-32.1 - EX-32.1 - ROCK CREEK PHARMACEUTICALS, INC. | c19837exv32w1.htm |
EX-31.1 - EX-31.1 - ROCK CREEK PHARMACEUTICALS, INC. | c19837exv31w1.htm |
EX-31.2 - EX-31.2 - ROCK CREEK PHARMACEUTICALS, INC. | c19837exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - ROCK CREEK PHARMACEUTICALS, INC. | Financial_Report.xls |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-15324
STAR SCIENTIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware | 52-1402131 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
4470 Cox Rd, Glen Allen, VA 23060 | (804) 527-1970 | |
(Address of principal executive offices) | (Registrants telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of Class)
Common Stock, $0.0001 par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of August 1, 2011, 135,055,505 shares of the registrants common stock, par value $0.0001 per
share, were outstanding.
TABLE OF CONTENTS
2
Table of Contents
CERTAIN DEFINITIONS
Unless the context requires otherwise, all references in this quarterly report on Form 10-Q,
or Report, to Star Scientific, Company, we, our, us, our company and similar terms
refer to Star Scientific, Inc. and its wholly owned subsidiaries Star Tobacco, Inc., a Virginia
corporation, and Rock Creek Pharmaceuticals, Inc., a Delaware corporation, which also may be
referred to in this Report as Star Tobacco and Rock Creek, respectively.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this Report other than purely historical information, including
estimates, projections, statements relating to our business plans, objectives, and expected
operating results, and the assumptions upon which those statements are based, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We have tried, whenever possible, to identify these forward-looking statements using
words such as anticipates, believes, estimates, continues, likely, may, opportunity,
potential, projects, will, expects, plans, intends and similar expressions to identify
forward-looking statements, whether in the negative or the affirmative. These statements reflect
our current beliefs and are based on information currently available to us. Accordingly, such
forward-looking statements involve known and unknown risks, uncertainties and other factors which
could cause our actual results, performance or achievements to differ materially from those
expressed in, or implied by, such statements. These risks, uncertainties, factors and contingencies
include, without limitation, the challenges inherent in new product development initiatives through
Star Tobacco and Rock Creek, the uncertainties inherent in the progress of scientific research, our
ability to raise additional capital in the future that is necessary to maintain our business,
potential disputes concerning our intellectual property, risks associated with litigation regarding
such intellectual property, uncertainties associated with the development, testing and regulatory
approvals of our low-TSNA tobacco, related tobacco products and pharmaceutical and nutraceutical
products, market acceptance of our new smokeless tobacco products and nutraceutical and
pharmaceutical products, competition from companies with greater resources than us, our dependence
on key employees and on our prior strategic relationships with Brown & Williamson Tobacco
Corporation in light of its combination with R.J. Reynolds Tobacco Company, Inc.
Forward-looking statements reflect our managements expectations or predictions of future
conditions, events or results based on various assumptions and managements estimates of trends and
economic factors in the markets in which we are active, as well as our business plans. They are not
guarantees of future performance. By their nature, forward-looking statements are subject to risks
and uncertainties. Our actual results and financial condition may differ, possibly materially, from
the anticipated results and financial condition indicated in these forward-looking statements.
There are a number of factors that could cause actual conditions, events or results to differ
materially from those described in the forward-looking statements contained in this Report. A
discussion of factors that could cause actual conditions, events or results to differ materially
from those expressed in any forward-looking statements appears in Part II Item 1A Risk
Factors of this Report and Part I Item 1A Risk Factors of our Annual Report on Form 10-K
for the year ended December 31, 2010, or Annual Report, filed with the Securities and Exchange
Commission, or SEC, on March 16, 2011.
Readers are cautioned not to place undue reliance on forward-looking statements in this Report
or that we make from time to time, and to consider carefully the factors discussed in Part II
Item 1A Risk Factors of this Report and Part I Item 1A Risk Factors of our Annual
Report in evaluating these forward-looking statements. These forward-looking statements are
representative only as of the date they are made, and we undertake no obligation to update any
forward-looking statement as a result of new information, future events or otherwise.
3
Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands except per share data)
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands except per share data)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 16,183 | $ | 13,193 | ||||
Trade accounts receivable, net |
62 | 52 | ||||||
Receivable from sale of licensing rights |
31 | 27 | ||||||
Inventories, net |
3,564 | 3,419 | ||||||
Prepaid expenses and other current assets |
79 | 350 | ||||||
Total current assets |
19,919 | 17,041 | ||||||
Property, plant and equipment, net |
2,470 | 2,169 | ||||||
Intangible assets, net of accumulated amortization |
602 | 627 | ||||||
Receivable from sale of licensing rights, less current maturities |
63 | 80 | ||||||
MSA escrow funds |
368 | 368 | ||||||
Total assets |
$ | 23,422 | $ | 20,285 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 2,497 | $ | 2,518 | ||||
Accounts payable, trade |
1,828 | 1,585 | ||||||
Accrued expenses |
762 | 424 | ||||||
Due to stockholders |
50 | 50 | ||||||
Total current liabilities |
5,137 | 4,577 | ||||||
Long-term debt, less current maturities |
3,811 | 5,049 | ||||||
Total liabilities |
8,948 | 9,626 | ||||||
Commitments and contingencies (note 6) |
| | ||||||
Stockholders equity: |
||||||||
Common stock(A) |
14 | 13 | ||||||
Additional paid-in capital |
196,232 | 181,336 | ||||||
Accumulated deficit |
(181,772 | ) | (170,690 | ) | ||||
Total stockholders equity |
14,474 | 10,659 | ||||||
Total liabilities and stockholders equity |
$ | 23,422 | $ | 20,285 | ||||
(A) | $0.0001 par value per share, 187,500,000 shares authorized, 135,055,505 and 127,119,323
shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively. |
See notes to condensed consolidated financial statements.
4
Table of Contents
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except per share data)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(Unaudited) | ||||||||||||||||
Net sales |
$ | 262 | $ | 335 | $ | 418 | $ | 484 | ||||||||
Less: |
||||||||||||||||
Product cost of goods sold |
533 | 745 | 972 | 1,214 | ||||||||||||
Federal excise taxes and USDA tobacco buyout
program assessment |
3 | 4 | 6 | 6 | ||||||||||||
Gross loss |
(274 | ) | (414 | ) | (560 | ) | (736 | ) | ||||||||
Operating expenses: |
||||||||||||||||
Marketing and distribution |
570 | 862 | 1,392 | 1,283 | ||||||||||||
General and administrative |
3,615 | 11,270 | 7,883 | 14,097 | ||||||||||||
Research and development |
478 | 885 | 1,128 | 2,161 | ||||||||||||
Total operating expenses |
4,663 | 13,017 | 10,403 | 17,541 | ||||||||||||
Operating loss |
(4,937 | ) | (13,431 | ) | (10,963 | ) | (18,277 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest income |
11 | 26 | 29 | 51 | ||||||||||||
Interest expense |
(69 | ) | (99 | ) | (143 | ) | (204 | ) | ||||||||
Miscellaneous income |
(3 | ) | 3 | (5 | ) | 4 | ||||||||||
Net loss before income taxes |
(4,998 | ) | (13,501 | ) | (11,082 | ) | (18,426 | ) | ||||||||
Income tax expense |
| | | | ||||||||||||
Net loss |
$ | (4,998 | ) | $ | (13,501 | ) | $ | (11,082 | ) | $ | (18,426 | ) | ||||
Net loss basic and diluted per common share |
$ | (0.04 | ) | $ | (0.11 | ) | $ | (0.08 | ) | $ | (0.16 | ) | ||||
Weighted average shares outstanding, basic and diluted |
134,556,823 | 119,497,993 | 131,948,382 | 114,847,257 |
See notes to condensed consolidated financial statements.
5
Table of Contents
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
($ in thousands except per share data)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
($ in thousands except per share data)
Additional | ||||||||||||||||||||
Common stock | Paid-In | Accumulated | ||||||||||||||||||
Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
Balances, December 31, 2010 |
127,119,323 | $ | 13 | $ | 181,336 | $ | (170,690 | ) | $ | 10,659 | ||||||||||
Stock issuance |
5,111,182 | | 9,999 | | 9,999 | |||||||||||||||
Warrant and option exercise |
2,825,000 | 1 | 3,159 | 3,160 | ||||||||||||||||
Stock-based compensation |
| | 1,738 | | 1,738 | |||||||||||||||
Net Loss |
| | | (11,082 | ) | (11,082 | ) | |||||||||||||
Balances, June 30, 2011 (unaudited) |
135,055,505 | $ | 14 | $ | 196,232 | $ | (181,772 | ) | $ | 14,474 | ||||||||||
See notes to condensed consolidated financial statements.
6
Table of Contents
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands except per share data)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands except per share data)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
Operating activities: |
||||||||
Net loss |
$ | (11,082 | ) | $ | (18,426 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: |
||||||||
Depreciation and amortization |
185 | 135 | ||||||
Provision for bad debt |
(32 | ) | 6 | |||||
Provision for inventory obsolescence |
(42 | ) | 59 | |||||
Loss (gain) on asset disposal |
5 | | ||||||
Stock-based compensation |
1,738 | 8,490 | ||||||
Increase (decrease) in cash resulting from changes in: |
||||||||
Current assets |
190 | (1,080 | ) | |||||
Current liabilities |
581 | (427 | ) | |||||
Net cash flows from operating activities |
(8,457 | ) | (11,243 | ) | ||||
Investing activities: |
||||||||
Purchase of intangible assets |
(8 | ) | (54 | ) | ||||
Purchase of property and equipment |
(457 | ) | (929 | ) | ||||
Proceeds from sale of licensing rights |
13 | 14 | ||||||
Net cash flows from investing activities |
(452 | ) | (969 | ) | ||||
Financing activities: |
||||||||
Proceeds from issuance of common stock |
10,000 | 13,831 | ||||||
Proceeds from stock and warrant exercise |
3,158 | | ||||||
Payments on long-term debt and capital lease obligation |
(1,259 | ) | (809 | ) | ||||
Net cash flows from financing activities |
11,899 | 13,022 | ||||||
Increase in cash and cash equivalents |
2,990 | 810 | ||||||
Cash and cash equivalents, beginning of period |
13,193 | 12,360 | ||||||
Cash and cash equivalents, end of period |
$ | 16,183 | $ | 13,170 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 71 | $ | 194 | ||||
See notes to condensed consolidated financial statements.
7
Table of Contents
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
1. | Basis of Preparation |
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included. Operating results for the three and six
months ended June 30, 2011 and 2010 are not necessarily indicative of the results that may be
expected for the fiscal year. The balance sheet at December 31, 2010 has been derived from the
audited financial statements at that date, but does not include all of the information and
footnotes required by GAAP for complete financial statements. |
||
You should read these consolidated financial statements together with the historical consolidated
financial statements of the Company for the years ended December 31, 2010, 2009, and 2008
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, filed
with the Securities and Exchange Commission (SEC) on March 16, 2011 (the Annual Report). |
2. | Liquidity and Capital Resources |
The Company has been operating at a loss for the past nine years. The Companys prospects will
depend on its ability to generate and sustain increased revenue levels in future periods, which
will largely be dependent on the distribution and consumer acceptance of its new
CigRx® product, a non-nicotine, non-tobacco nutraceutical developed by the Companys
Rock Creek subsidiary to temporarily decrease the desire to smoke and increased distribution and
consumer acceptance of its low-TSNA smokeless tobacco products. CigRx® was introduced
into the market in August 2010. CigRx® is Rock Creeks first product introduction and
Rock Creek had no revenue stream prior to the introduction of CigRx® and little
revenue from CigRx® in 2010. In late February 2011, the Company began testing
CigRx® on a national basis through expanded infomercial airings, radio spots and selected
retail sales. The Companys prospects also will be dependent on Rock Creeks ability to develop
additional nutraceutical products, pharmaceuticals products and on the ability to generate
increased revenues from the sale of smokeless tobacco products. In 2010 the Company filed
applications with the Food and Drug Administration ( FDA), to have variants of its
ARIVA® and STONEWALL Hard Snuff®
low tobacco specific nitrosamine (TSNA) products
(Ariva-BDL and Stonewall-BDL) designated by the FDA as modified risk tobacco products under
the Family Smoking Prevention and Tobacco Control Act (FDA Tobacco Act). On March 17, 2011 the
FDA issued a decision holding that it currently does not have jurisdiction over the Ariva-BDL
and Stonewall-BDL products. The Company is now reviewing its manufacturing and marketing
opportunities related to these products. The Companys future prospects also will be dependent on
its ability to begin generating significant revenues through royalties from the patented tobacco
curing process for which it is the exclusive licensee. The ability to generate revenues through
royalty payments will be dependent on the success of the Companys ongoing patent infringement
lawsuit against R.J. Reynolds Tobacco Company, Inc. (RJR) which has been pending since 2001. In
that litigation a jury trial that took place between May 18, 2009 and June 16, 2009. At the conclusion of the trial,
the jury returned a verdict in favor of RJR holding that there was no infringement of the two
patents at issue in the case, and that the patents were invalid due to anticipation, obviousness,
indefiniteness and failure to disclose best mode. That decision has been appealed to the United
States Court of Appeals for the Federal Circuit and oral argument before a three-judge panel of
the Court was held on January 11, 2011. The Company is currently awaiting a ruling on the appeal
from the Federal Circuit Court of Appeals. On May 29, 2009 the Company filed a new complaint
against RJR for patent infringement during the period beginning 2003 and continuing to the filing
date of the new complaint. The new case has been stayed pending the outcome of the appeal to the
Federal Circuit and the prosecution of the new complaint will be dependent on the Company
achieving a reversal of the jury verdict of invalidity in the initial RJR action. |
||
As of June 30, 2011, the Company had a working capital surplus of approximately $14.8 million,
which included cash of approximately $16.2 million. Future anticipated cash needs during 2011
include: |
| remaining litigation costs in connection with the RJR patent infringement trial of
approximately $1.4 million; |
||
| monthly principal and interest payments of approximately $245 thousand in connection with
the repayment of the Companys long-term debt; and |
||
| funding of other aspects of the Companys current operations in light of continued
operating losses. |
8
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The Company expects to continue to incur losses in connection with the sale of its smokeless
tobacco products for the foreseeable future. Sales of smokeless tobacco have been stable over the
past several quarters but remain at low levels as the Company, beginning in 2009, restructured
the smokeless tobacco operations to reduce costs while concentrating sales efforts on a more
narrow geographic area and to selected regional and national retail chain customers.
Substantially increased sales would be required to reach a breakeven level for these products.
Rock Creek had no revenues prior to the introduction of CigRx® in August 2010. The
Company expects that Rock Creek will be deriving increased revenues from the sales of
CigRx® on a going forward basis as it expands distribution of CigRx®, but
the Company had only limited revenue from the sale of CigRx® to date. |
During the first six months of 2011, the Company received proceeds of $12.0 million through the
sale of 5,111,182 shares of common stock and new warrants to purchase up to 5,111,182 shares of
common stock as well as the exercise for cash of warrants to purchase 2,000,000 shares of common
stock and the issuance of new warrants to purchase up to 2,000,000 shares of common stock. See
Note 5 to the Companys consolidated financial statements included in this Report for details of
those transactions. During the first six months of 2011, stock options for 625,000 option shares
were exercised resulting in proceeds of $1.0 million and warrants for 200,000 warrant shares
were exercised resulting in an additional $0.2 million of proceeds. The total proceeds from
these transactions for the first six months ending June 30, 2011 was $13.2 million. Absent
exercise of additional outstanding warrants and options for cash or a substantial improvement in
revenues and/or royalties, the Company believes that it has sufficient funding to support its
operations through the first quarter of 2012, but that it will be necessary to pursue additional
sources of funds during the first quarter of 2012. Depending upon market conditions and the price
of its common stock, the Company may decide to seek additional funds before that time. There can
be no assurance that the Company will be successful in obtaining such funding at commercially
reasonable terms, if at all. |
The Company had a consolidated loss for the three and six months ended June 30, 2011 of
approximately $5.0 million and $11.1 million, respectively. |
3. | Inventories |
Inventories consist of the following as of June 30, 2011: |
$ thousands | ||||
Raw materials |
$ | 1,783 | ||
Packaging materials |
1,704 | |||
Work in process |
23 | |||
Finished goods |
619 | |||
Obsolescence allowance |
(565 | ) | ||
Total |
$ | 3,564 | ||
4. | Long-Term Debt |
Long-term debt consists of the following as of June 30, 2011: |
$ thousands | ||||
Notes payable to RJR in monthly installments of
principal at $208,000 until fully paid in December 2013
plus interest at prime plus 1% (4.25% at June 30, 2011) |
$ | 6,269 | ||
Vehicle note payable in monthly installments of $1,700
including interest at 1.9% annually for 36 months ending
April 2013 |
39 | |||
Total long term debt |
6,308 | |||
Less current maturities |
(2,497 | ) | ||
Long term portion of debt |
$ | 3,811 | ||
The future maturities of long-term debt are as follows: |
Twelve months ending March 31, | $ thousands | |||
2012 |
$ | 2,497 | ||
2013 |
2,518 | |||
2014 |
1,293 | |||
Total notes payable and long term debt |
$ | 6,308 | ||
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5. | Stockholders Equity |
Stock Option Plans: |
Prior to 2008 the Company adopted a 1998 Stock Option Plan and a 2000 Equity Incentive Plan, and
in September 2008 it adopted a 2008 Incentive Award Plan (the Plans). The Plans provide for
grants of options to those officers, key employees, directors and consultants whose substantial
contributions are essential to the continued growth and success of the Company. In the aggregate
the Plans provide for grants of both qualified and non-qualified stock options to purchase up to
14,000,000 shares at a purchase price equal to or greater than the fair market value on the date
of grant in the case of qualified options granted to employees. |
On January 31, 2011 the Companys Board of Directors approved option grants to certain officers
and employees for an aggregate of 604,000 shares at an exercise price of $2.00 per share. The
options were fully vested as of the grant date and have a ten-year term. The Company has recorded
an expense for the options of $779 thousand, as calculated using the Black-Scholes option pricing
model which is recognized by accounting principles generally accepted in the United States. |
On March 14, 2011, the Company entered into amended and restated executive employment contracts
with Jonnie R. Williams, Sr, the Companys Chief Executive Officer, Paul L. Perito, Esquire, the
Companys President, Chief Operating Officer and Chairman of the Board and Dr. Curtis Wright IV,
Rock Creeks Senior Vice President for Medical/Clinical affairs. The executive employment
agreements with Messrs. Perito and Williams provide for performance-based stock options that will
vest in such amounts and upon the achievement of the performance goals set forth in the
agreements, provided that such performance goals and vesting schedule is approved by the
Companys stockholders. The options are for a ten-year term from March 14, 2011 and have an
exercise price of $2.95 per share. Because the options issued to Messrs. Perito and Williams are
subject to stockholder approval and performance criteria, the Company has not recognized an
expense for the options during the first or second quarter. See the Companys Annual Report filed
with the SEC on March 16, 2011 for details of these agreements. |
The executive employment agreement with Dr. Wright provides Dr. Wright with performance based
options to purchase 300,000 shares of common stock under the Companys 2008 Incentive Award Plan.
These options will vest ratably on an annual basis over a three year period subject to the
achievement of certain performance goals set forth in Dr. Wrights employment agreement. The
options are for a ten-year term from March 14, 2011 and have an exercise price of $2.95 per share.
The options were valued at $751 thousand, as calculated using the Black-Scholes option pricing
model which is recognized by accounting principles generally accepted in the United States. The
option value will be amortized over the vesting period. As of June 30, 2011, $165 thousand of the
option value has been recorded as an expense by the Company. |
On March 17, 2011, the Board of Directors elected Richard L. Sharp to the Board as an Independent
Director. Upon his election to the Board, Mr. Sharp was awarded a stock option grant in the
amount of 50,000 option shares. Those options have a strike price of $2.90 per share and
aggregate stock compensation of $123 thousand, which will be recognized in the financial
statements over the two year vesting period of the options. As of June 30 2011, $18 thousand of
the option value has been recorded as an expense by the Company. |
During the six months ended June 30, 2011, 625,000 stock options were exercised resulting in
proceeds to the company of $1.0 million with an intrinsic value of $1.8 million. |
At June 30, 2011, there were 8,045,200 options issued and outstanding with a weighted average
exercise price of $2.37 per share. |
A summary of the status of the Companys unvested stock options at June 30, 2011, and changes
during the six months then ended, is presented below. |
Weighted | ||||||||
Average | ||||||||
Fair Value at | ||||||||
Nonvested Stock Options (in thousands) | Shares | Grant Date | ||||||
Nonvested at December 31, 2010 |
100,000 | $ | 1.74 | |||||
Granted |
350,000 | 2.49 | ||||||
Vested |
| | ||||||
Forfeited |
| | ||||||
Nonvested at June 30, 2011 |
450,000 | $ | 2.32 | |||||
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As of June 30, 2011, there was $795 thousand of unrecognized compensation cost related to
unvested share-based compensation arrangements granted under the Plans, which will be amortized
to expense through March 2013. |
The intrinsic value of the exercisable options at June 30, 2011 was $16.4 million. |
Warrant activity: |
On February 28, 2011, the Company entered into a Securities Purchase and Registration Rights
Agreement (the February 28 Agreement) with an accredited investor who held previously issued
warrants (the Warrant Holder) for 2,000,000 shares of the Companys common stock, par value
$0.0001 per share, at an exercise price of $1.00 per share (the Prior Warrants). Pursuant to
the February 28 Agreement, the Warrant Holder exercised on the Prior Warrants and the Company
granted the Warrant Holder new warrants with an exercise price of $2.00 per share for the same
amount of shares of common stock as the Prior Warrants (the New Warrants). The February 28
Agreement resulted in gross proceeds to the Company of $2.0 million. The New Warrants are
exercisable immediately into an aggregate of 2,000,000 shares of common stock and expire on
February 28, 2016. |
On March 4, 2011, the Company entered into a Securities Purchase and Registration Rights
Agreement (the March 4 Agreement) with certain accredited investors (the March 4 Investors),
to sell 4,856,730 shares of common stock (the March 4 Shares) and warrants to purchase an
aggregate of 4,856,730 shares of common stock at an exercise price of $2.00 per share (the
Warrants) (collectively, the March 4 Offering). The March 4 Offering resulted in gross
proceeds to the Company of $9.0 million. The Warrants are first exercisable on September 4, 2011
and expire on September 4, 2016. |
On March 30, 2011, the Company entered into a Securities Purchase and Registration Rights
Agreement (the March 30 Agreement) with an accredited investor (the March 30 Investor), to
sell 254,452 shares of common stock (the March 30 Shares), and warrants to purchase an
aggregate of 254,452 shares of common stock at an exercise price of $4.00 per share (the
Warrants) (collectively, the March 30 Offering). The March 30 Offering resulted in gross
proceeds to the Company of $1.0 million. The Warrants are first exercisable on September 30, 2011
and expire on September 30, 2016. |
On June 4, 2011, 200,000 warrants were exercised resulting in proceeds to the Company of $0.2
million. |
As of June 30, 2011 the Company had 35,951,707 warrants outstanding with a weighted average
exercise price of $1.77 per share. |
Net Loss Basic and Diluted Per Common Share: |
Due to the Companys net losses, both basic and diluted loss per share were $(0.08) and $(0.11)
for the six months ended June 30, 2011 and 2010, respectively. An aggregate of 43,996,907 at June
30, 2011 and 31,730,816 at June 30, 2010 of stock options and warrants outstanding were excluded
from this computation because they would have had an anti-dilutive effect. |
6. | Commitments, Contingencies and Other Matters |
RJR Litigation: |
||
There has been no change in the status of this contingency since December 31, 2010. |
||
Virginia Sales and Use Tax Assessment: |
On July 14, 2011 the Company filed a complaint in the Circuit Court for Mecklenburg County,
Virginia seeking a determination that the purchase of the Companys curing barns was exempt from
Virginia sales and use tax and an abatement of all taxes and interest assessed against the
Company by Virginias Commissioner of Revenue. The Commonwealth of Virginia filed an answer to
the complaint on July 29, 2011. |
Employment Contracts |
The Company entered into amended and restated executive employment agreements on March 14, 2011,
with Jonnie R. Williams, Sr., the Companys Chief Executive Officer, Paul L. Perito, Esquire, the
Companys President, Chief Operating Officer and Chairman of the Board and Dr. Curtis Wright, IV,
Rock Creeks Senior Vice President for Medical/Clinical affairs. Additional
information relating to these executive employment agreements can be found in Item 9B, Other
Information, of the Companys Annual Report filed with the SEC on March 16, 2011. |
11
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Commitments |
The Company has commitments totaling $781 thousand as of June 30, 2011 for normal operating
expenses. |
7. | Related Party Transaction |
On March 4, 2011 Mr. Williams purchased 508,905 shares of our common stock at a price of $1.84
per share and, for a price of $0.125 per share, purchased warrants for an equal number of warrant
shares at an exercise price of $2.00 per share. In accordance with the Companys related party
transaction policy, Mr. Williams intention to purchase shares and warrant shares of the
Companys stock was considered and approved by the Audit Committee of the Board of Directors on
March 4, 2011. |
8. | Segment Information |
The Companys operating subsidiaries manufacture, distribute and sell two lines of consumer
products, dissolvable tobacco and dietary supplements. These products constitute the Companys
reportable segments. |
Star Scientifics chief operating decision maker reviews the income from the operating companies
to evaluate segment performance and allocate resources. The income from the Companys operating
segments excludes general corporate expenses and amortization of intangibles. Interest and other
debt expense, net, and provision for income taxes are centrally managed at the corporate level
and, accordingly, such items are not presented by segment since they are excluded from the
measure of segment profitability reviewed by the Companys chief operating decision maker. |
Six months ended June 30 | ||||||||
2011 | 2010 | |||||||
$ thousands | ||||||||
Revenues: |
||||||||
Dissolvable tobacco |
$ | 241 | $ | 484 | ||||
Dietary supplement |
177 | | ||||||
Total revenue |
418 | 484 | ||||||
Operating losses: |
||||||||
Dissolvable tobacco |
(1,443 | ) | (1,612 | ) | ||||
Dietary supplement |
(2,486 | ) | (3,439 | ) | ||||
Depreciation and amortization |
(184 | ) | (135 | ) | ||||
Corporate expenses |
(6,850 | ) | (13,091 | ) | ||||
Operating losses |
(10,963 | ) | (18,277 | ) | ||||
Interest (expense) income-net |
(114 | ) | (153 | ) | ||||
Miscellaneous (expense) income-net |
(5 | ) | 4 | |||||
Income tax benefit |
| | ||||||
Net losses |
$ | (11,082 | ) | $ | (18,426 | ) | ||
The following table provides allocation of assets by segment. |
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
$ thousands | ||||||||
Net assets: |
||||||||
Dissolvable tobacco |
1,623 | 2,039 | ||||||
Dietary supplement |
4,935 | 4,451 | ||||||
Corporateincludes $16,183 and $13,193 in cash, respectively |
16,864 | 13,795 | ||||||
Total net assets |
23,422 | 20,285 | ||||||
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
In preparing the discussion and analysis contained in this Item 2, we presume that persons
reviewing this Item have read or have access to the discussion and analysis contained in our Annual
Report, filed with the SEC on March 16, 2011. In addition, persons reviewing this Report should
read the discussion and analysis of our financial condition and results of operations in
conjunction with our consolidated financial statements and related notes included elsewhere in this
Report. The following results of operations include a discussion of the three and six months ended
June 30, 2011 as compared to the three and six months ended June 30, 2010.
Overview
We are a technology-oriented company with a mission to reduce the harm associated with the use
of tobacco at every level. We are primarily engaged in:
| the development, implementation and licensing of our proprietary technology for the
curing of tobacco so as to substantially prevent the formation of carcinogenic toxins
present in tobacco and tobacco smoke, primarily the tobacco-specific nitrosamines, or
TSNAs; |
||
| the manufacture, sales, marketing and/or development of very low-TSNA dissolvable
smokeless tobacco products that carry enhanced warnings beyond those required by the
Surgeon General, including ARIVA® compressed powdered tobacco
cigalett®
pieces, STONEWALL Hard Snuff® and modified risk
tobacco products; |
||
| the development of pharmaceutical products, particularly products that have a
botanical, tobacco-based component, that are designed to treat tobacco dependence and a
range of neurological conditions, including Alzheimers disease, Parkinsons disease,
schizophrenia and depression; and |
||
| the manufacture, sale, marketing and development of non-nicotine nutraceutical
products designed to assist individuals who are seeking a smoking alternative as well as
related nutraceutical products that are designed to promote the maintenance of a healthy
metabolism. |
Since the 1990s, we have sought to develop processes and products that significantly reduce
the levels of toxins, principally TSNAs, in tobacco compared to traditional smoked and smokeless
tobacco products. Our development of technology for reducing TSNA levels has led to our focus on
the development of tobacco-based pharmaceutical products and non-nicotine nutraceuticals that we
are pursuing through our Rock Creek subsidiary. Given our long-term focus on reducing the levels of
toxins in tobacco and the harm associated with tobacco use, we believe we are uniquely positioned
to pursue a range of very-low TSNA smokeless tobacco products as modified risk tobacco products
under both the provisions of the Family Smoking Prevention and Tobacco Control Act (FDA Tobacco
Act) and as tobacco products over which the FDA has not asserted jurisdiction under the FDA
Tobacco Act. We also believe that we are positioned to utilize our technology to produce a range of
non-nicotine nutraceuticals and tobacco-based pharmaceuticals furthering our mission to reduce the
harm associated with tobacco use at every level as well as to develop related products that are
designed to promote the maintenance of a healthy metabolism.
We currently are focusing our efforts on the manufacture and sale of CigRx®, our
new dietary supplement launched in a test market during August 2010, and ARIVA® and
STONEWALL Hard Snuff®, our dissolvable low-TSNA smokeless tobacco products.
CigRx®, a non-nicotine, non-tobacco dietary supplement manufactured and sold through our
Rock Creek Pharmaceutical subsidiary is designed to temporarily reduce the desire to smoke. Rock
Creek also continues to pursue the development of botanical based products for the treatment of
tobacco dependence, as well as products that would utilize certain Monoamine oxidase (MAO) agents
in tobacco to treat a range of neurological conditions, including Alzheimers disease, Parkinsons
disease, schizophrenia and depression and other non-nicotine nutraceutical products that may be
helpful to consumers in maintaining a healthy metabolism. Currently Rock Creek is working with the
Roskamp Institute in connection with a multi-site clinical trial of Rock Creeks RCP006 nutritional
supplement formula to examine the effect of RCP-006 on chronic inflammation in individuals who have
elevated blood levels of C-reactive protein (CRP). That study began in mid-May 2011 and is
ongoing at several sites. In connection with that work, Rock Creek also has developed a
nutraceutical, dietary supplement for anti-inflammatory support and expects to introduce this
product during the third quarter under the trade name Anatabloc. Our significant experience with
the proprietary technology related to the development of tobacco products with reduced levels of
toxins also has positioned us to seek approval to market variants of our very-low TSNA smokeless tobacco
products as modified risk tobacco products. In 2010 we filed applications with the FDA to have a
version of our low-TSNA products (Ariva-BDL and Stonewall-BDL) designated by the FDA as modified
risk tobacco products and we filed a similar application for a Stonewall Moist-BDL, a traditional
moist snuff product, on February 1, 2011. On March 17, 2011, the FDA issued a decision holding that
it currently does not have jurisdiction over the Ariva-BDL and Stonewall-BDL products. The
decision by the FDA clears the way for us to proceed with marketing of the Ariva-BDL and
Stonewall-BDL products without the regulatory restrictions applicable to tobacco products over
which the FDA has asserted jurisdiction and we are considering the manufacturing and marketing
opportunities related to these products. Our success in promoting the sale of our low-TSNA
dissolvable smokeless tobacco products and dietary supplements as well as our ability to continue
the research efforts by Rock Creek
will in large part depend on our working capital constraints, ability to procure funding for
these initiatives, and the successful outcome of our ongoing patent infringement litigation with
RJR.
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Over the last several years, we have expended significant time and resources on our ongoing
patent infringement litigation with RJR, the development of ARIVA® and STONEWALL Hard
Snuff®, our low-TSNA dissolvable smokeless tobacco products, the licensing of low-TSNA
products and the technology behind, our StarCured® tobacco curing process, and the
development efforts of Rock Creek, particularly with respect to our CigRx® dietary
supplement and related nutraceuticals. Our future success will largely depend on the successful
results of these initiatives. While product licensing royalties and smokeless tobacco sales have
been de minimis to date, we intend to continue our efforts to develop and sell our very-low TSNA
smokeless tobacco products, develop pharmaceutical products to treat tobacco addiction and a range
of neurological conditions, develop related non-nicotine nutraceutical products, and to pursue
licensing arrangements for those products and related technology.
Prospects for Our Operations
The recurring losses generated by our business continue to impose significant demands on our
liquidity. Product licensing royalties and smokeless tobacco sales have been de minimis to date. We
introduced CigRx® into test market in August 2010 as a non-nicotine, non-tobacco
nutraceutical product that temporarily reduces the desire to smoke. Sales of CigRx® have
also been de minimis to date. In late February 2011, we began testing CigRx® on a
national basis through expanded infomercial airings, radio spots and selected retail sales.
CigRx® sales have responded favorably to these national tests and we have significantly
increased our retail presence in the New England and mountain west states through arrangements with
distributors who have an active presence in these geographic areas. Rock Creek also is pursuing the
development of other, related non-nicotine nutraceutical products, as well as pharmaceutical
products that would utilize certain MAO agents in tobacco to treat a range of neurological
conditions, including Alzheimers disease, Parkinsons disease, schizophrenia and depression. Given
the typical long lead time for federal approval of pharmaceutical products, we do not expect that
Rock Creek will generate any revenues for the foreseeable future from the sale of pharmaceutical
products. Rather, in addition to the manufacture and sale of
CigRx®, Rock Creek will
focus in the near term on the development and market introduction of other non-nicotine
nutraceutical products and, on a longer-term basis, on the research and development aspects of a
range of pharmaceuticals, including tobacco-based drug products. In this respect, Rock Creek has
been developing a dietary supplement for anti-inflammatory support under the trade name Anatabloc.
We expect that Anatabloc will be introduced into the market during the third quarter in the
Richmond, Virginia area and through an interactive website.
Our future prospects are also dependent on the distribution and consumer acceptance of our
low-TSNA dissolvable smokeless tobacco products, our ability to support the expansion of the market
for these products and our continued development of new low-TSNA smokeless tobacco products, such
as modified risk tobacco products, independently and through alliances with other tobacco
manufacturers and pharmaceutical companies. Our future results of operations are also dependent on
our ability to begin generating significant revenues through royalties from the patented tobacco
curing process to which we are the exclusive licensee. However, our ability to generate revenues
through sales of our smokeless tobacco products as well as the licensing of such products and the
technology related to our patented curing process will substantially be dependent upon the
successful completion of our ongoing patent infringement lawsuit against RJR.
We
generated revenue of approximately $0.4 million for the six months ended June 30, 2011,
and an operating loss from continuing operations of approximately $11.1 million. The recurring
losses generated by operations continue to impose significant demands on our companys liquidity.
As of June 30, 2011, we had approximately $14.8 million of working capital, with approximately
$16.2 million of our current assets in cash and cash equivalents. Between January 1, 2011 and June
30, 2011, our company received proceeds of approximately $13.2 million through the sale of common
stock and the exercise of stock options and warrants. See Note 5 to our Consolidated Financial
Statements included in this Report. Absent the exercise of outstanding warrants and options for
cash, or a substantial improvement in sales and revenues and/or royalties, we believe that the
recent funding will support our operations through the first quarter 2012. However, depending upon
market conditions and the price of the common stock, we may decide to seek additional funds before
that date.
Smokeless Tobacco. Net sales were $0.2 million in the six months ended June 30, 2011, compared
to $0.5 million in the six months ended June 30, 2010. In 2010 we introduced new blends of Ariva®
into the market in the first half of the year, which accounted, in part, for the increased sales in
that period. Currently, STONEWALL Hard Snuff® represents a majority of our dissolvable
tobacco sales. We continue to work to increase the distribution and consumer acceptance of low-TSNA
smokeless tobacco products as well as the improvement of our existing very low-TSNA products, and
the development of other smokeless tobacco products, independently and through alliances with other
tobacco manufacturers. While our working capital constraints over the last several years have
limited both our direct marketing of smokeless products and our research and development efforts,
we introduced in the first quarter of 2010 three additional blends of our ARIVA®
low-TSNA smokeless tobacco product and a new packaging format (10-piece sleeves) for
ARIVA®.
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Modified risk tobacco products. In 2009 and 2010 we developed Ariva-BDL and Stonewall-BDL,
as variants of our ARIVA® and STONEWALL Hard Snuff® smokeless tobacco
products that have significantly lower levels of carcinogenic TSNAs as well as other toxins
compared to conventional tobacco products and which are at levels comparable to those found in
nicotine replacement therapy products. In 2010 we filed applications with the FDA to have these
products designated by the FDA as modified risk tobacco products. We also filed an application
for a Stonewall Moist-BDL product on February 1, 2011. On March 17, 2011, the FDA issued a
decision holding that it currently does not have jurisdiction over the Ariva-BDL and
Stonewall-BDL products. The decision by the FDA clears the way for us to proceed with marketing of
the Ariva-BDL and Stonewall-BDL products and we are now considering the manufacturing and
marketing opportunities related to these products. At the same time, the FDA has announced that it
will issue new proposed regulations in October 2011 relating to its authority over other products
that meet the definition of tobacco products under the FDA Tobacco Act which could further impact
the status of Ariva-BDL and Stonewall-BDL.
Introduction of CigRx® and Development of Tobacco-based Pharmaceutical Products and
other Nutraceuticals. In 2009, Rock Creek developed a non-nicotine, non-tobacco nutraceutical that
is intended to temporarily reduce the desire to smoke. CigRx® was introduced in August
2010 in the Richmond, Virginia area. We have been working jointly with InVentiv Health to develop
awareness for the CigRx® product through an outreach program involving visits to
physicians and other health care professionals and though direct advertising at the consumer level.
Also, in late February 2011, we began testing CigRx® on a national basis through
expanded infomercial airings, radio spots and selected retail sales and we have significantly increased
our retail presence in the New England and mountain west states through arrangements with
distributors who have an active presence in these geographic areas. Product sales of
CigRx®
have responded favorably to these efforts. Through Rock Creek we are exploring the
development of other related nutraceutical products that may assist in stabilizing metabolism,
pharmaceutical products with clinical claims, a relapse prevention product to assist smokers
during nicotine withdrawal, with the goal of higher quit rates, as well as pharmaceutical products
for the treatment of tobacco dependence, and a range of neurological conditions,
including Alzheimers disease, Parkinsons disease, schizophrenia and depression.
Licensing.
We have an exclusive, worldwide license from Regent Court Technologies
LLC (Regent Court) under 12 U.S. patents and
51 foreign patents as well as additional patents pending in the U.S. and foreign countries relating
to methods to substantially prevent the formation of TSNAs in tobacco, including the
StarCured® tobacco curing process and the production of very low-TSNA tobacco products.
The StarCured® tobacco curing process involves the control of certain conditions in
tobacco curing barns, and in certain applications, the use of microwave and/or electron beam
technology. The StarCured® process substantially prevents the formation in the tobacco
leaf of the carcinogenic TSNAs, which are widely believed by medical and scientific experts to be
among the most abundant and powerful cancer-causing toxins present in tobacco and in tobacco smoke.
Two of the patents under our license with Regent Court that relate to our method for producing
low-TSNA tobacco are the subject of our ongoing lawsuit against RJR. See Item 3 Legal Proceedings
for further details. In 2010, Rock Creek filed three patent applications relating to our
CigRx® product, and a patent application for a relapse prevention product. Rock Creek
also has several provisional patent applications pending that we expect to mature into one or more
non-provisional patent applications relating to the administration of anatabine, or an isomer or
salt thereof, for treating chronic inflammation that may be associated with disorders such as
thyroiditis, cancer, arthritis, Alzheimers disease, and multiple sclerosis. During the second
quarter of 2011, Rock Creek was issued a design patent for the CigRx® container by the
United States Patent and Trademark Office. This was the first patent issued to Rock Creek.
We continue to pursue means of collecting royalties for our curing technology through
licensing arrangements and through our patent infringement lawsuit against RJR. Any royalties
arising from the license of our curing technology will be dependent on the successful completion of
our patent litigation against RJR. While licensing of our exclusive patent rights is a major
potential source of additional revenue for us, full realization of this potential also will depend
on our ability to successfully defend and enforce our patent rights.
Federal and State Legislation Relating to Cigarettes and Smokeless Tobacco Products. The
manufacture and sale of cigarettes and other tobacco products are subject to extensive federal
governmental regulation in the United States and by comparable authorities in many foreign
countries. Under the FDA Tobacco Act, the Center for Tobacco Products within the FDA has broad
authority over the manufacturing, sale and distribution of cigarettes and smokeless tobacco
products including expanded control over the introduction of new tobacco products, warnings that
must be included on all tobacco products and the manner in which tobacco products may be marketed
and sold. On March 17, 2011, the FDA issued a decision holding that it currently does not have
authority to regulate our Ariva-BDL and Stonewall-BDL products since they do not fall within one
of the categories of tobacco products over which the FDA has assumed
jurisdiction. The FDA also has
announced that it intends to issue a proposed regulation in October 2011 relating to its authority
over products other than cigarettes, smokeless tobacco and snuff that meet the definition of
tobacco products under the FDA Tobacco Act. On
July 21 and 22, 2011, we made presentations to the
Tobacco Products Scientific Advisory Committee (TPSAC) on the issue of dissolvable tobacco.
Under the FDA Act, the TPSAC is required to consider and issue a
report to the FDA on the status of
dissolvable tobacco products by March 2012. In addition to federal statutes and regulations, many
states also require
manufacturers of tobacco products to obtain a cigarette license or a tobacco product license
in order to sell tobacco products. States also regulate the age at which adult consumers may
purchase tobacco products and the locations where tobacco products can be sold. Many states over
the past few years have placed increased restrictions on the purchase and use of tobacco products.
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Under the Food, Drug, and Cosmetic Act, the FDA has authority for reviewing and approving any
new drug product prior to its introduction into commerce. The FDA approval process involves, among
other things, successfully completing clinical trials under an Investigational New Drug Application
and obtaining a premarket approval after filing a New Drug Application, or NDA. The NDA process
requires a company to prove the safety and efficacy of a new drug product to the FDAs
satisfaction. The Dietary Supplement Health Education Act (DSHEA) provides the FDA with
authority over the production and marketing of dietary supplements. In certain cases DSHEA also
requires notification to the FDA before a company begins to market a dietary supplement. DSHEA does
not require prior approval by the FDA for the introduction of dietary supplements into the market,
but does require that nutraceutical products comply with the requirements of DSHEA prior to and
after their introduction into commerce. See Item 1. Business Government Regulation of our
Annual Report filed with the SEC on March 16, 2011 for more information relating to governmental
regulation of tobacco products, nutraceuticals and drug products.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Accounting principles generally accepted in the United States of America, or GAAP, require
estimates and assumptions to be made that affect the reported amounts in our companys consolidated
financial statements and accompanying notes. Some of these estimates require difficult, subjective
and/or complex judgments about matters that are inherently uncertain and, as a result, actual
results could differ from those estimates.
Results of Operations
Our companys unaudited condensed consolidated results for the three and six month periods
ended June 30, 2011 and 2010 are summarized in the following table:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
$ and shares in thousands except per share data | (Unaudited) | |||||||||||||||
Net sales |
$ | 262 | $ | 335 | $ | 418 | $ | 484 | ||||||||
Cost of goods sold |
533 | 745 | 972 | 1,214 | ||||||||||||
Federal excise tax and Department of Agriculture
payment |
3 | 4 | 6 | 6 | ||||||||||||
Gross loss |
(274 | ) | (414 | ) | (560 | ) | (736 | ) | ||||||||
Total operating expenses |
4,663 | 13,017 | 10,403 | 17,541 | ||||||||||||
Operating loss |
(4,937 | ) | (13,431 | ) | (10,963 | ) | (18,277 | ) | ||||||||
Net loss |
$ | (4,998 | ) | $ | (13,501 | ) | $ | (11,082 | ) | $ | (18,426 | ) | ||||
Basic and diluted net loss per common share |
$ | (0.04 | ) | $ | (0.11 | ) | $ | (0.08 | ) | $ | (0.16 | ) | ||||
Basic and diluted weighted average shares outstanding |
134,556,823 | 119,497,993 | 131,948,382 | 114,847,257 |
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Net Sales. For the three months ended June 30, 2011, net sales (gross sales less cash
discounts, product discounts and product return allowance) were $262 thousand compared to $335
thousand during same period in 2010. Our dissolvable tobacco revenue decreased $204 thousand from
the comparable period in 2010 during which we were introducing new blends of Ariva® into the
market. Sales of smokeless tobacco have been stable over the past several quarters but remain at
low levels as we continue to focus our sales efforts on a more narrow geographic area and to
selected regional and national retail chain customers. Sales of our CigRx® dietary supplement
contributed $131 thousand to the net sales figure for the current quarter. CigRx® was
not on the market during the comparable period in 2010.
16
Table of Contents
Gross Profit (loss). Gross loss decreased $140 thousand in the three months ended June 30,
2011 to $274 thousand from $414 thousand for the same period in 2010. The decreased loss was
attributed to lower packaging, material and labor costs for our ARIVA®
dissolvable tobacco product due primarily to lower sales volumes compared to the same period
in 2010. Also, we had lower CigRx® manufacturing costs during the three months ended June 30, 2011
as compared to the same period in 2010, primarily related to increased costs associated with
initial product runs in preparation for the launch of CigRx®, which had higher material waste
costs.
Total Operating Expenses. Total operating expenses were approximately $4.7 million for the
three months ended June 30, 2011, a decrease of approximately $8.4 million, or 63.8%, from
approximately $13.0 million for the same period in 2010. General and administrative expenses
decreased by approximately $7.7 million, and marketing and distribution costs decreased by
approximately $0.3 million. Research and development costs decreased approximately $0.4 million.
Marketing and Distribution Expenses. Marketing and distribution expenses were approximately
$0.6 million for the three months ended June 30, 2011, a decrease of approximately $0.3 million, or
33.9%, from approximately $0.9 million for the same period in 2010. Our dissolvable tobacco
marketing expense decreased approximately $0.2 million in the second quarter 2011 consistent with
our efforts to concentrate sales efforts to a more narrow geographic area and to selected regional
and national retail chain customers. In addition, marketing costs for our CigRx®
dietary supplement product decreased $0.1 million from the
comparable period in 2010 when
we were incurring pre-launch marketing costs associated with the introduction of CigRx®.
General and Administrative Expenses. General and administrative expenses were approximately
$3.6 million for the three months ended June 30, 2011, a decrease of approximately $7.7 million, or
67.9%, from approximately $11.3 million for the same period in 2010. The decreased expenses
primarily reflected reduced stock based compensation costs. For the three months ended June 30,
2011, we had a non-cash charge of $0.7 million related to stock based compensation compared to a
charge of $8.2 million in 2010 associated with the issuance of stock options to officers, directors
employees and a consultant. In addition we had decreased legal costs of approximately $0.2 million
in the quarter ending June 30, 2011.
Research and Development Expenses. We expended approximately $0.5 million on research and
development in the second quarter 2011 compared to approximately $0.9 million in second quarter
2010 when we were incurring significant research costs associated with the development and
introduction of CigRx®. into the market. Our research and development cost in the
second quarter 2011 related primarily to the ongoing initiatives surrounding our RCP006 compound.
Interest Income and Expense. We had interest income of $11 thousand and interest expense of
$69 thousand for the three months ended June 30, 2011, for a net interest expense of $58 thousand
during the period. For the same period in 2010, we had interest income of $26 thousand and interest
expense of $99 thousand, for a net interest expense of $41 thousand. The lower interest expense for
the three months ended June 30, 2011 reflected the lower balance on our outstanding debt as well
as lower overall interest rates. The lower interest income during the
second quarter of 2011
reflected the comparable decrease in the prevailing rate of interest we received on our account
balances.
Net Loss. We had a net loss of approximately $5.0 million for the three months ended June 30,
2011 compared to a net loss of approximately $13.5 million for the same period in 2010. The
decreased net loss for the three months ended June 30, 2011 primarily reflected reduced cost in
2011 for stock based compensation ($0.7 million compared to $8.2 million), lower dissolvable
tobacco marketing costs of $0.2 million and lower research and development costs of $0.4 million .
At June 30, 2011, we had a basic and diluted loss per share of $(0.04) compared to a basic and
diluted loss per share of $(0.11) at June 30, 2010.
Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010
Net Sales. For the six months ended June 30, 2011, net sales (gross sales less cash discounts,
product discounts and product return allowance) were approximately $0.4 million compared to
approximately $0.5 million during same period in 2010. In 2010 we introduced new blends of Ariva®
into the market during the first half of the year and there were increased sales during that period
as a result of the new product introduction. Sales of smokeless tobacco have been stable over the
past several quarters but remain at low levels as we continue to focus our sales efforts on a more
narrow geographic area and to selected regional and national retail chain customers. Sales of our
CigRx® dietary supplement contributed $0.2 million during the first six months of 2011.
CigRx® was not on the market during the comparable period in 2010.
Gross Loss. Gross loss decreased by $0.2 million during the six months ended June 30, 2011 to
$0.5 million from $0.7 million for the same period in 2010. This change was attributable primarily
to the lower manufacturing, labor and packaging costs across all of our products lines in 2011 as
our dissolvable tobacco sales have decreased as we regularized our production operations for CigRx®
following the market introduction of that product in August 2010.
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Total Operating Expenses. Total operating expenses were approximately $10.4 million for the
six months ended June 30, 2011, a decrease of approximately $7.1 million, or 40.7%, from
approximately $17.5 million for the same period in 2010. General and administrative expenses
decreased by approximately $6.2 million and marketing and distribution costs increased by
approximately $0.1 million. Research and development costs decreased approximately $1.0 million.
Marketing and Distribution Expenses. Marketing and distribution expenses were approximately
$1.4 million for the six months ended June 30, 2011, an increase of approximately $0.1 million, or
8.5%, from approximately $1.3 million for the same period in 2010. During the first six months of
2011, there was a reduction of $0.3 million in connection with the product promotion for our
dissolvable tobacco products consistent with our efforts to concentrate our dissolvable tobacco
sales efforts to a more narrow geographic area and to selected regional and national retail chain
customers. That decrease was offset by increased marketing costs of $0.4 million related to the
expanded distribution and promotion of CigRx® that began in late February 2011.
General and Administrative Expenses. General and administrative expenses were approximately
$7.9 million for the six months ended June 30, 2011, a decrease of approximately $6.2 million, or
44.0%, from approximately $14.1 million for the same period in 2010. The decrease primarily
reflected reduced cost related to the issuance of stock options. During the six months ended June
30, 2011, we had a non-cash charge of $1.7 million for stock based compensation compared to a
charge of $8.2 million during the same period in 2010. This resulted in a net decrease of $6.5
million for the first six months of 2011. This decrease was offset, in part, by increased
executive travel of $0.2 million related to our CigRx® product marketing and continued product
development and research cost relating to our RCP006 compound.
Research and Development Expenses. During the six months ended June 30, 2011, we expended
approximately $1.1 million in connection with the refinement of our product formulation for CigRx®
and ongoing research directed to the effects of our RCP-006 compound on chronic inflammation in
individuals who have elevated blood levels of CRP and for other uses
of RCP-006. During the six
months ended June 30, 2010, Rock Creek incurred approximately $2.2 million primarily in connection
with the initial product development and premarket clinical testing of the dietary ingredients in
CigRx®. Given our working capital constraints, our ability to continue the research efforts of Star
Scientific and to advance the research and development activities of Rock Creek will depend on our
ability to obtain funding for these initiatives through improved revenues from our smokeless
tobacco sales and sales of our dietary supplements or from other funding sources. It will also
depend on the reversal of the jury verdict in favor of RJR in our ongoing patent litigation and
ultimately completion of that litigation in our favor.
Interest Income and Expense. We had interest income of $29 thousand and interest expense of
$143 thousand for the six months ended June 30, 2011, for a net interest expense of $114 thousand
during the period. For the same period in 2010, we had interest income of $51 thousand and interest
expense of $204 thousand, for a net interest expense of $153 thousand. The lower interest expense
for the six months ended June 30, 2011 reflected lower scheduled payments against the principal of
our outstanding long-term debt as a result of lower interest rates. The lower interest income
during the six months ended June 30, 2011 was primarily due to a decrease in prevailing interest
rates.
Income Tax Expense. During the six months ended June 30, 2010, we had no income tax obligation
due to our net operating losses.
Net Loss. We had a net loss of approximately $11.1 million for the six months ended June 30,
2011 compared to a net loss of approximately $18.4 million for the same period in 2010. The higher
net loss in 2010 was attributable primarily to increased charges for stock based compensation
awards to officers, employees, directors and consultants in 2010 of $8.2 million compared to a
charge of $1.7 million for the comparable period in 2011. Also, we had decreased expenses
associated with research and development, partially offset by increased marketing expenses for
CigRx® of $0.7 million.
For the six months ended June 30, 2011, we had a basic and diluted loss per share of $(0.08)
compared to a basic and diluted loss per share of $(0.16) for the six
months ended June 30, 2010.
Liquidity and Capital Resources
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We have been operating at a loss for the past nine years. Our future prospects will depend on
our ability to generate and sustain increased revenue levels in future periods, which will largely
be dependent on the distribution and consumer acceptance of our CigRx® non-nicotine,
non-tobacco nutraceutical that is designed to temporarily decrease
the desire to smoke, the
introduction of
other nutraceuticals and increased distribution and consumer acceptance of our low-TSNA smokeless
tobacco products. CigRx® was introduced into the market in August 2010 by Rock Creek.
CigRx® is Rock Creeks first product introduction and it had no revenue stream prior to
the introduction of CigRx® and little revenue from CigRx® in 2010. In late
February 2011, we began testing CigRx® on a national basis through expanded
infomercials, radio spots and selected retail sales. Our prospects also will be dependent on Rock
Creeks ability to develop additional nutraceutical products and
pharmaceutical products, and on
our ability to generate increased revenues from the sales of smokeless tobacco products. In 2010 we
filed applications with the FDA to have variants of our ARIVA® and STONEWALL Hard
Snuff® low-TSNA products (Ariva-BDL and Stonewall-BDL) designated by the FDA as
modified risk tobacco products. On March 17, 2011 the FDA issued a decision holding that it
currently does not have jurisdiction over Ariva-BDL and Stonewall-BDL. We currently are reviewing
our manufacturing and marketing opportunities related to these products. Our future prospects also
will be dependent on our ability to begin generating significant revenues through royalties from
the patented tobacco curing process to which we are the exclusive licensee. The ability to generate
revenues through royalty payments will be dependent on the success of our ongoing patent
infringement lawsuit against RJR which has been pending since 2001.
In that litigation a
jury trial that took place between May 18, 2009 and
June 16, 2009. At the conclusion of the trial, the jury returned a verdict in
favor of RJR holding that there was no infringement of the two patents at issue in the case and
that the patents were invalid due to anticipation, obviousness, indefiniteness and failure to
disclose best mode. That decision has been appealed to the United States Court of Appeals for the
Federal Circuit and oral argument before a three-judge panel of the Court was held on January 11,
2011. We currently are awaiting a ruling on the appeal. On May 29, 2009 we filed a new complaint
against RJR for patent infringement during the period beginning 2003 and continuing to the filing
date of the new complaint. The new case has been stayed pending the outcome of our appeal to the
Federal Circuit and the prosecution of the new complaint will be dependent on our achieving a
reversal of the jury verdict of invalidity in the initial RJR action.
As of June 30, 2011, we had a working capital surplus of approximately $14.8 million, with
approximately $16.2 million of our current assets in cash and cash equivalents. Future cash needs
during 2011 include:
| Remaining litigation costs in connection with the RJR patent infringement trial of
approximately $1.4 million; |
||
| monthly principal and interest payments of approximately $245 thousand in
connection with the repayment of our companys long-term debt; and |
||
| funding of other aspects of our companys current operations in light of continued
operating losses. |
We expect to continue to incur losses in connection with the sale of our smokeless tobacco
products for the foreseeable future. Sales of smokeless tobacco have been stable over the past
several quarters but remain at low levels. Beginning in 2009 we restructured our smokeless tobacco
operations to reduce costs while concentrating sales efforts on a more narrow geographic area and
to selected regional and national retail chain customers. Substantially increased sales would be
required to reach a breakeven level for these products. Rock Creek had no revenues prior to the
introduction of CigRx® in August 2010. We expect that Rock Creek will be deriving
increased revenues from the sales of
CigRx® on a going-forward basis as it expands
distribution of CigRx®, but we have had only limited revenue from the sale of
CigRx® to date.
During the first three months of 2011, our company received proceeds of $12.0 million through
the sale of 5,111,182 shares of common stock and new warrants to purchase up to 5,111,182 shares of
common stock as well as the exercise for cash of warrants to purchase 2,000,000 shares of common
stock and the issuance of new warrants to purchase up to 2,000,000 shares of common stock. See
Note 5 to our Consolidated Financial Statements included in this Report for details of
those transactions. During the first six months of 2011, 625,000 stock options for option shares were
exercised resulting in proceeds of $1.0 million and warrants for 200,000 warrant shares were
exercised resulting in an additional $0.2 million of proceeds. The total proceeds from these
transactions for the first six months ending June 30, 2011 was $13.2 million. Absent exercise of
additional outstanding warrants and options for cash or a substantial improvement in revenues
and/or royalties, we believe that we will have sufficient funding to support our operations
through the first quarter of 2012, but that it will be necessary to pursue additional sources of
funds during the first quarter of 2012. Depending upon market conditions and the price of its
common stock, we may decide to seek additional funds before that time. There can be no assurance
that we will be successful in obtaining such funding at commercially reasonable terms.
We expect to continue to pursue opportunities for licensing our low-TSNA smokeless tobacco
products, expanding the sales and marketing efforts for those products and continuing the work of
Rock Creek in developing other nutraceutical products and
pharmaceuticals. While we may seek to
obtain funds in the future through debt financing, there are significant limitations on our ability
to obtain new debt financing, including our agreements with Brown & Williamson Tobacco Corporation
(B&W). Moreover, our ability to raise future financings on terms acceptable to us (including
through the exercise of outstanding warrants) will depend on a
number of factors, including the performance of our stock price and our operational
performance. Any equity financing will be dilutive to our existing shareholders.
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Summary of Balances and Recent Sources and Uses
As of June 30, 2011, we had a working capital surplus of approximately $14.8 million, which
included cash of approximately $16.2 million.
Net Cash From Operating Activities. During the six months ended June 30, 2011, approximately
$8.5 million of cash was used in operating activities compared to approximately $11.2 million of
cash used in operating activities during the same period in 2010. Cash used in operations was
approximately $2.7 million lower during the six months ended June 30, 2011 as compared to the same
period in 2010. The increased cash usage for the first six months of 2010 related primarily to the
purchase of inventory related to the initial startup for CigRx® manufacturing and related research
and development costs.
Net Cash From Investing Activities. During the six months ended June 30, 2011, a total of $452
thousand of cash was used for investing activities, primarily for equipment purchases related to
the manufacturing of our CigRx® dietary supplement. The cash usage of $969 thousand of cash used
for investing activities during the same period in 2010 also related primarily to equipment
purchases for the production of CigRx®.
Net Cash From Financing Activities. During the six months ended June 30, 2011, we generated
net cash from financing activities of approximately $11.9 million, primarily through the sale of
common stock, stock options and warrants exercises for gross proceeds of approximately $13.2
million. During the same period in 2010, we generated net cash from financing activities of
approximately $13.0 million, primarily through the sale of common stock for gross proceeds of
approximately $13.8 million. During the six month periods ended June 30, 2011 and 2010, we repaid
debt in the amounts of $1.3 million and $0.8 million, respectively.
Net Cash Used in MSA Escrow Payments. Given the fact that we discontinued the sale of
cigarettes in June 2007, we did not make any deposits into escrow during the three months ended
June 30, 2011 and 2010 for the sale of cigarettes in the MSA states and we do not expect to have
any material MSA obligations in the future.
Cash Demands on Operations
During the six months ended June 30, 2011, we had losses from continuing operations that
totaled $11.1 million.
Contingent Liabilities and Cash Demands
B&W Agreements. Under the Restated Master Agreement with B&W, as amended by letter agreements
dated December 4, 2002 and August 14, 2003, we currently owe approximately $6.3 million on our
long-term tobacco curing barn loan. Interest began to accrue on this debt at prime plus 1% as of
January 1, 2006, and payment of principal and interest is due in 96 monthly payments that continue
until December 2013. The debt is unsecured.
Litigation Costs. We have entered into fee arrangements with counsel in several litigation and
related matters under which certain costs related to the litigation are being advanced by counsel
on our behalf. Given the contingent nature of these arrangements and the fact that a probability assessment of liability
cannot be made at this time, no accrual has been made for this contingent liability.
We have paid or accrued all existing obligations. Also, as part of our fee arrangements in
certain of these matters, we have agreed to pay counsel a percentage of any damage award, a
percentage of the resulting payments we actually receive in the event that the litigation is
resolved in our favor, or a result fee in return for a cap on fee payments during the litigation.
We are pursuing an appeal in the Federal Circuit Court of Appeals of the judgment entered by
the District Court in December 2009 in our RJR patent infringement litigation. We anticipate
incurring significant expenses in for legal fees and costs in connection with this appeal and
the RJR litigation for the foreseeable future.
In the past, we have maintained product liability insurance only with respect to claims that
tobacco products manufactured by or for us contain any foreign object, i.e. any object that is not
intended to be included in the manufactured product. We currently do not maintain such insurance
and as a result are self-insured for this risk. The product liability insurance that we previously
maintained did not cover health-related claims such as those that have been made against the major
manufacturers of tobacco products. We do not
believe that such insurance currently can be obtained. We have never been named as a defendant
in any legal proceedings involving claims arising out of the sale, distribution, manufacture,
development, advertising, marketing or claimed health effects relating to the use of our tobacco
products. While we may be named as a defendant in the future, we believe we have conducted our
business in a manner that decreases the risk of liability in a lawsuit relating to product
liability because we have:
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| attempted to consistently present to the public the most current information regarding
the health effects of long-term smoking and tobacco use; |
||
| always acknowledged the addictive nature of nicotine; |
||
| stated unequivocally that
smoking involves a range of serious health risks, is addictive,
and that smoked cigarettes products can never be produced in a safe fashion; and |
||
| ceased selling cigarettes in June 2007 in favor of our very low-TSNA dissolvable
smokeless tobacco products. |
Prior to the introduction of CigRx® we obtained product liability insurance for
CigRx® as a nutraceutical product. This insurance covers claims arising from product
defects or claims arising out of the sale, distribution and marketing of our CigRx®
product. There have been no claims asserted to date with respect to the manufacturer, sale or use of our
CigRx® product. If any such claims are asserted in the future and ultimately
result in liability that exceeds the limits of our insurance coverage, we would be liable for any
such excess amount.
MSA Escrow Obligations. Since June 2007 we have been focusing our activities on the sale of
smokeless tobacco products, as opposed to cigarettes. As a result, we do not anticipate incurring
MSA escrow obligations for cigarette sales in 2011 or thereafter.
Virginia Sales and Use Tax Assessment. On July 14, 2011 we filed a complaint in the Circuit
Court for Mecklenburg County, Virginia seeking a determination that the purchase of our companys
curing barns was exempt from Virginia sales and use tax and an abatement of all taxes and interest
assessed against our company by Virginias Commissioner of Revenue. The Commonwealth of Virginia
filed an answer to our complaint on July 29, 2011.
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Item 3. Qualitative and Quantitative Disclosures About Market Risk
We have not entered into any transactions using derivative financial instruments or derivative
commodity instruments and believe that our exposure to market risk associated with other financial
instruments (such as investments and borrowings) and interest rate risk is not material.
Our outstanding long-term debt of $6.3 million bears interest at a rate of prime plus 1%. As a
result, our company is subject to interest rate exposure on this obligation.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act management has evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this Report. Disclosure
controls and procedures refer to controls and other procedures designed to provide reasonable
assurance that information required to be disclosed in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the rules and forms of the SEC. Disclosure controls and procedures include, without limitation,
controls and procedures designed to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding our required disclosure. In designing and
evaluating our disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management was required to apply its judgment in
evaluating and implementing possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on this
evaluation, that as of June 30, 2011, the end of the period covered by this Report, our disclosure
controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
Management has evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, whether any changes in our internal control over financial reporting that
occurred during our last fiscal quarter have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. Based on the evaluation we
conducted, management has concluded that no such changes have occurred.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
In May 2001, we filed a patent infringement action against RJR in the United States District
Court for Maryland, Southern Division, or District Court, to enforce our companys rights under
U.S. Patent No. 6,202,649 (649 Patent), which claims a process for substantially preventing the
formation of TSNAs in tobacco. On July 30, 2002, we filed a second patent infringement lawsuit
against RJR in the District Court based on a new patent issued by the U.S. Patent and Trademark
Office on July 30, 2002 (Patent No. 6,425,401). The new patent is a continuation of the 649
Patent, and on August 27, 2002 the two suits were consolidated.
In April 2003, the parties filed dispositive Motions for Summary Judgment. After appointment
of a Special Master to prepare Reports and Recommendations, or R&Rs, for the District Court on six
of the Summary Judgment Motions, the District Court adopted without modification the Special
Masters R&Rs, which collectively recommended that the District Court deny RJRs Summary Judgment
Motions, and that our Motion for Summary Judgment on claim construction and definiteness be granted
in part and denied in part. The District Court also issued an order denying RJRs other Motion for
Summary Judgment seeking to limit our damages claim.
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On August 17, 2004, the case was transferred from Judge Alexander Williams to Judge Marvin J.
Garbis. Judge Garbis over the next several months issued a series of orders concerning various
aspects of the case and ordered that RJRs defense of inequitable conduct before the patent
office be bifurcated from the remaining issues and tried before Judge Garbis beginning on January
31, 2005. That portion of the case was tried during the period January 31, 2005 to February 8,
2005. At the conclusion of the bench trial, the District Court advised the parties that it would
take the matter under advisement, and expected to rule on this portion of the case at the same time
that it ruled on the two additional Summary Judgment Motions that were filed by RJR on January 25,
2005. On January 19, 2007, the District Court granted RJRs Motions for Summary Judgment in part
and denied these motions in part. On RJRs Motion for Summary Judgment on the Effective Filing Date
of the patents, the District Court established September 15, 1999 as the effective filing date, but
denied RJR Summary Judgment of Invalidity with regard to the patents-in-suit. On RJRs Motion for
Summary Judgment on Indefiniteness, the District Court granted the motion on the basis that the
term anaerobic condition was indefinite. On June 26, 2007 the District Court issued its ruling on
RJR inequitable conduct defense. In its ruling the District Court held the two patents
unenforceable due to inequitable conduct in their procurement and a final judgment against our
company was docketed on June 27, 2007. We immediately filed a notice of appeal as to the rulings
issued in January 2007 and as to the ruling on the inequitable conduct defense with the United
States Court of Appeals for the Federal Circuit, or Court of Appeals.
Following briefing and oral argument, the Court of Appeals on August 25, 2008 issued a
unanimous opinion reversing the rulings by the District Court that had found the patents at issue
in the RJR litigation invalid because of inequitable conduct during the prosecution of the patents
and because the patents were indefinite. As part of its opinion, the Court of Appeals ordered that
the case be remanded to the District Court for further proceedings on the infringement complaint.
Following remand from the Court of Appeals, the case was tried to a jury in the District Court
between May 18, 2009 and June 16, 2009. At the conclusion of the trial, the jury returned a verdict
in favor of RJR holding that there was no infringement of the two patents at issue in the case and
that the patents were invalid due to anticipation, obviousness, indefiniteness and failure to
disclose best mode. On July 7, 2009, we filed a motion with the District Court for Judgment as a
Matter of Law or, in the Alternative, for a New Trial. That motion was denied on December 21, 2009
and judgment was entered on the jury verdict that day. We filed a Notice of Appeal to the United
States Court of Appeals for the Federal Circuit Court of Appeals on December 22, 2009. After full
briefing, oral argument on the appeal was held before a three-judge Panel of the Federal Circuit
Court of Appeals on January 11, 2011. We are currently awaiting a decision from the Federal Circuit
Court of Appeals on the appeal.
On November 30, 2009, RJR filed a motion for a bill of cost for $442 thousand. RJR also filed
a motion requesting the District Court to determine that this is an exceptional case under 35
U.S.C. § 285 and award attorneys fees of approximately $35 million under that provision and/or
under 28 U.S.C. § 1927 on the basis that attorneys fees were unreasonably multiplied during the
litigation. As part of the Orders issued on December 21, 2009, the District Court stayed the motion
for attorneys fees until after a ruling on the pending appeal and the reexamination before the
U.S. Patent and Trademark Office. The Court on January 8, 2010 stayed any further briefing on the
renewed petition for a bill of cost that RJR filed on December 30, 2009. Any potential award of
attorneys fees should be eliminated if the Court of Appeals for the Federal Circuit overturns the
jury verdict. Also, such claims should be eliminated because the U.S. Patent and Trademark Office,
in March 2011, determined that the claims at issue in the RJR case were properly issued. Because the likelihood of an unfavorable ruling on the fee motion and bill of cost is not
determinable at this time and the amount of any potential assessment cannot be reasonably
estimated, no amounts have been accrued for these items in the accompanying condensed consolidated
financial statements.
On May 29, 2009, we filed a new complaint against RJR for patent infringement during the
period beginning 2003 through the filing date of the complaint. In an Order dated January 8, 2010,
the Court stayed any further action in this case until after a ruling on the appeal in the initial
infringement action against RJR. The future prosecution of the new complaint will be dependent on
our achieving a reversal of the jury verdict of invalidity in our
initial RJR lawsuit.
On December 31, 2008 and January 2, 2009, RJR filed requests in the U.S. Patent and Trademark
Office to reexamine the two patents that are the subject of the patent infringement litigations
described above. In February and March 2009, the Patent and Trademark Office granted the
reexamination requests, agreeing to review the patentability of the subject matter of claims 4, 12
and 20 of the 649 patent and claim 41 of the 401 patent. On March 10, 2011, the Patent and
Trademark Office confirmed the validity of each of the claims of the 649 and 401 patents that
were under reexamination and closed each of the reexamination proceedings.
We entered into fee arrangements with counsel in several litigation and related matters under
which certain costs related to the litigation are being advanced by counsel on our companys
behalf. Given the contingent nature of these arrangements and the fact that a probability assessment of liability cannot
be made at this time, no accrual has been made for this contingent liability. We have paid or
accrued all existing obligations. Also, as part of our fee arrangements in certain of these
matters, we have agreed to pay counsel a percentage of any damage awards, a percentage of the
resulting payments we actually receive, or a result fee in the event that the litigation is resolved
in our favor, in return for a cap on fee payments during the litigation.
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Item 1A. Risk Factors
There are no material changes from risk factors previously disclosed in Part I Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on March
16, 2011.
Item 6. Exhibits
(a) Exhibits
Number | Description | |||
3.1 | Sixth Amended and Restated Certificate of Incorporation of Star Scientific, Inc.(1) |
|||
3.2 | Amended and Restated Bylaws of Star Scientific, Inc.(2) |
|||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. § 1350, as created by Section
906 of the Sarbanes-Oxley Act of 2002(3) |
|||
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. § 1350, as created by Section
906 of the Sarbanes-Oxley Act of 2002(3) |
(1) | Incorporated by reference to Current Report on Form 8-K filed on December 15, 2010. |
|
(2) | Incorporated by reference to Current Report on Form 8-K filed on December 21, 2006. |
|
(3) | This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C. §
1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and is not to be incorporated by reference into any filing of the Company, whether
made before or after the date hereof, regardless of any general incorporation language in such
filing. |
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