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Star Scientific Files First Quarter Financial Report, Announces Licensing Agreement

Posted on: Thursday, 10 May 2007, 18:00 CDT

Star Scientific, Inc. (NASDAQ:STSI) filed its quarterly financial report on Form 10-Q today with the Securities and Exchange Commission. The company reported an operating loss for the first quarter totaling $4.5 million compared with $3.1 million for the same period in 2006. Sales for first quarter 2007 totaled $4.4 million compared with $8.5 million for first-quarter 2006. Cigarette sales have been negatively impacted by continued pressure in the discount market segment in the four non-MSA states, and by the $1.00 per-pack increase in the excise tax on cigarettes in Texas, which became effective January 1, 2007.

As a result of the company's March 14, 2007 sale of the interest income and reversionary interest in its MSA escrow accounts, which generated total cash proceeds of approximately $11.6 million, the net loss for the first quarter totaled $26.5 million. Star has been required to deposit funds into escrow accounts, based on sales of cigarettes, since 1999 in accordance with its status as a non-participating manufacturer under the Tobacco Master Settlement Agreement (MSA). Those funds were classified as assets on the company's balance sheet, and the company received interest on the escrowed funds. However, it would have had no access to the funds until 25 years after the date of deposit, and then only if the funds had not been used to satisfy judgments or settlements with the MSA states. While the funds remain in the company's name and will be available to satisfy any such judgment or settlement, Star wrote off the asset since it no longer has the right to the interest or to future releases of the escrowed funds. As of March 31, 2007 the company's working capital totaled $20 million.

Star also announced that on May 10 it executed an exclusive seven-year license agreement with Tantus Tobacco LLC (Tantus) for the company's three cigarette trademarks: Sport®, Main Street® and GSmoke®. The agreement included a provision under which inventoried cases of cigarette product bearing the trademarks will be sold to the licensee. Tantus made an initial payment of $600,000 on May 10, under the terms of the agreement, and then will make monthly payments of $100,000 for 24 months. Thereafter the licensee will make $3000 monthly payments for the duration of the agreement. Star Tobacco will retain the ability to manufacture and sell cigarettes, although the company has stated in recent press releases its intent to focus on the manufacture and sale of its very low-TSNA dissolvable smokeless tobacco product, Ariva ® and Stonewall Hard Snuff®.

Dissolvable smokeless tobacco sales have accounted for a minimal portion of the company's revenue over time. However, first quarter 2007 sales of Ariva® and Stonewall Hard Snuff® increased 136% compared with sales for first-quarter 2006, and the company continues to explore licensing opportunities for those products with other tobacco companies. Star believes that singular focus on the expansion of dissolvable smokeless distribution and sales can result in measurable increases in revenue from those sources. The continuing publication of research addressing the risk reduction that can result from smokers transitioning from cigarettes to a low-TSNA smokeless product also is encouraging and, the company believes, will complement its efforts to broaden consumer education and awareness. For example, broadcast and print media outlets currently are reporting on the May, 2007 issue of the medical journal The Lancet, which includes two studies and an editorial piece that discuss the reduction in relative risk associated with switching from smoking to reduced-TSNA smokeless tobacco.

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company has tried, whenever possible, to identify these forward-looking statements using words such as "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. These statements reflect the Company's current beliefs and are based upon information currently available to it. Accordingly, such forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and contingencies include, without limitation, the challenges inherent in new product development initiatives, particularly in the smokeless tobacco area, the uncertainties inherent in the progress of scientific research, the Company's ability to raise additional capital in the future necessary to maintain its business, potential disputes concerning the Company's intellectual property, risks associated with litigation regarding such intellectual property, potential delays in obtaining any necessary government approvals of the Company's low-TSNA tobacco products, market acceptance of the Company's new smokeless tobacco products, competition from companies with greater resources than the Company, the Company's decision not to join the Master Settlement Agreement ("MSA"), the effect of state statutes adopted under the MSA and any subsequent modification of the MSA, and the Company's dependence on key employees and on its strategic relationships with Brown & Williamson Tobacco Corporation in light of its combination with RJ Reynolds Tobacco Company, Inc. The impact of potential litigation, if initiated against or by individual states that have adopted the MSA, could be materially adverse to the Company.

See additional discussion under "Factors That May Affect Future Results" in the Company's Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 16, 2007, as amended by its Form 10-KA filed with the SEC on April 30, 2007, and other factors detailed from time to time in the Company's other filings with the Securities and Exchange Commission, available at www.sec.gov. The Company undertakes no obligation to update or advise upon any such forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

About Star Scientific

Star Scientific is a technology-oriented tobacco company with a toxin reduction mission. It is engaged in the development of dissolvable smokeless tobacco products that deliver fewer carcinogenic toxins (principally tobacco specific nitrosamines, or TSNAs), through the utilization of the innovative StarCured® tobacco curing technology, and in sublicensing that technology to others. Star Scientific has a Corporate and Sales Office in Petersburg, VA, an Executive, Scientific & Regulatory Affairs office in Bethesda, MD, and manufacturing and tobacco processing facilities in Chase City, VA and in Petersburg, VA.

See Star's website at: http://www.starscientific.com

Source: Business Wire

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