Star Scientific Files Second Quarter Financial Report, Details Concentrated Focus on Dissolvable Tobacco Products

PETERSBURG, Va.--(BUSINESS WIRE)--Star Scientific, filed its second- quarter financial report on Form 10-Q today with the Securities and Exchange Commission. The company reported a $4.0 million loss from continuing operations for the quarter ended June 30, compared with a $2.9 million loss from continuing operations for the same period in 2006. The net loss incurred for the second quarter, $3.0 million, included a loss of $1.4 million from discontinued operations relating to the May, 2007 licensing agreement with Tantus Tobacco LLC, and a $2.4 million gain on the sale of licensing rights from the Tantus agreement. The company incurred a net loss of $2.3 million for the same period in 2006. Under the Tantus agreement, Star continues to have legal ownership of the licensed trademarks (Main Street®, Sport® and GSmoke®). However, since the license granted is non-cancellable, includes a fixed fee for trademark rights, and Star is not obliged to provide services beyond maintenance of the trademarks, the company has classified the discount cigarette business as a discontinued operation beginning in second quarter 2007, and results of operations and cash flows are reported separately. The licensing agreement also has provided Star the opportunity to fulfill its publicly stated goal of transitioning from cigarette sales to a singular focus on distribution and sales of its very low-TSNA dissolvable smokeless tobacco products.
The discount cigarette business operated by the company's wholly owned subsidiary, Star Tobacco, Inc., has experienced a significant decrease in sales volume during the last year. A $1.00 per-pack increase in the Texas cigarette tax that became effective January 1, 2007, in a state that represented the majority of cigarette sales, further stiffened intense competition among discount manufacturers. These factors contributed significantly to the losses incurred in the first two quarters of 2007, as well as to losses during 2006. However, the licensing agreement with Tantus provides Star a total of $3.2 million positive cash flow over the life of the agreement, $600,000 of which was paid during the second quarter and $2.4 of which will be generated during the next twenty-four months, in contrast to the losses incurred on cigarette sales in past quarters.
The revenues generated by sales of Ariva® and Stonewall® have been minimal when compared to total company revenue. However, the company is pleased with steadily increasing shipments to wholesalers on a quarter-to-quarter basis, and net sales of dissolvable tobacco for the second quarter increased roughly 109% over sales for the same period in 2006. In mid-June Walgreens, one of the three largest drug store chains in the United States, began carrying Ariva® in all of its stores. While net profit margins have not improved, the company believes that this is influenced in part by its investments in both the launch of the Stonewall "Natural" blend in March 2007, and in increased product marketing and distribution efforts. The pattern of repeat purchasing during 2007 also continues to be positive, as 41% of direct chain and wholesaler customers have reordered two or more times.