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Star Scientific Admits Legal Defeat, Warns Short on Cash

Stocks in this article: STSI RAI

GLEN ALLEN, Va. ( TheStreet) -- Star Scientific (STSI) finally admitted Friday that only $5 million in cash was received from the settlement of a long-running legal tussle with R.J. Reynolds Tobacco. Star also warned that current cash on hand would run out before the end of the first quarter 2013.

All in, Star Scientific's third-quarter financial results were both humiliating and humbling. The company's stock price has been cut in half since July and Friday's close of $2.56 (before third-quarter results) was the lowest in 10 months.

Star Scientific sued R.J. Reynolds, a division of Reynolds American (RAI), for violating patents covering a tobacco curing technology. The legal battle wound through multiple courts, decisions and appeals by both sides, but throughout, Star Scientific promised its shareholders victory that would force R.J. Reynolds to pay hundreds of millions of dollars in penalties plus ongoing royalties on future tobacco sales.

The case was settled on Sept. 21 with R.J. Reynolds paying just $5 million, although Star Scientific executives refused to acknowledge the disappointing result until Friday's 10-Q was filed.

Under terms of the settlement now disclosed, Star Scientific received a "one-time" payment of $5 million from R.J. Reynolds and will receive no other financial payment or royalties in the future.

The cash helped Star Scientific post a small profit for the third quarter despite sales of its nutritional supplements Anatabloc and Cig-Rx totaling just $1.6 million, flat sequentially. Excluding the R.J. Reynolds money, Star Scientific's operating loss was $6.7 million in the quarter.

Star Scientific had "working capital" of $10.2 million, including $9.5 million in cash at the end of the September quarter, which the company says is sufficient to "sustain operations into the first quarter 2013."

The company has still not explained the embarrassing retraction and correction of results from an inflammation study of Anatabloc.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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