Star Scientific (STSI) to Discontinue Ariva, Stonewall Hard Snuff Production and Sales

December 17, 2012 5:07 PM EST
On December 14, 2012, the Board of Directors of Star Scientific, Inc. (Nasdaq STSI) voted unanimously to discontinue the manufacturing, distribution and sale of our company’s dissolvable smokeless tobacco products, Ariva and Stonewall Hard Snuff as of December 31, 2012. With this change our Company will no longer be manufacturing or selling any tobacco products. The Board was motivated to take this action in light of the continued losses and low sales for our dissolvable tobacco products over the last several years. It was also motivated by the fact that restrictions under the Family Smoking Prevention and Tobacco Control Act which prohibit our Company from making any statements about the comparative safety of various types of tobacco products have made it extremely difficult to effectively market our dissolvable tobacco products, notwithstanding that they represent a less hazardous alternative to cigarettes and to traditional smokeless tobacco products. The Board’s action was further influenced by the fact that continuing to manufacture dissolvable tobacco products has had a negative impact on our ability to interest leading scientific and medical research centers in undertaking clinical research related to our anatabine compound in managing excessive inflammation. Our Company currently uses its anatabine citrate compound in its dietary supplements Anatabloc® and Anatabloc Unflavored and its anatabine-based cosmetic product, Anatabloc® Facial Crème.

Following the discontinuance of our dissolvable tobacco business, our Company will continue to look for licensing opportunities related to our dissolvable tobacco products and technology, including that relating to our Ariva BDL™ and Stonewall BDL™ modified risk tobacco products and the patented StarCured® tobacco curing process used in connection with the manufacturing of our low TSNA dissolvable tobacco products.

Our Company anticipates annual savings of approximately $1.1 million from the discontinuance of the dissolvable tobacco business. We will incur severance costs in the form of salary continuation payments and continued health benefit costs under COBRA of approximately $829,000, for employees transitioning from Star Tobacco, Inc. In addition our Company will issue stock awards under the Company’s 2008 Incentive Award Plan in the aggregate amount up to 350,000 shares to those employees transitioning form Star Tobacco, in recognition of their long-time service to our Company. We anticipate that the stock awards will have a total value of approximately $1.1 million as well as a gross up charge for taxes of approximately $0.4 million. The total cost in connection with the discontinuance of the Company’s dissolvable tobacco business is anticipated to be an aggregate of cash and non-cash items of approximately $2.8 million in the fourth quarter.

Following the discontinuation of the Star Tobacco, Inc. operations, the Company will have annual lease, real estate and insurance obligations for its manufacturing facility in Chase City, Virginia in the amount of approximately $79,200. The aggregate of these payments over the remaining nine and half years of a twenty year lease will be approximately $752,000, unless the lease is terminated or otherwise amended during the interim.

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