UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
| ¨ | 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
(State of incorporation)
52-1402131
(IRS Employer Identification No.)
801 Liberty Way
Chester, VA 23836
(Address of Principal Executive Offices)
(804) 530-0535
(Registrant’s telephone number, including area code)
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 x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No ¨
As of May 3, 2004, there were 61,035,948 shares outstanding of the Registrant’s common stock, par value $.0001 per share.
1
2
PART I—FINANCIAL INFORMATION
| Item 1. | Financial Statements |
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
| March 31, 2004 |
December 31, 2003 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 7,709,982 | $ | — | ||||
| Accounts receivable, trade |
4,875,227 | 5,596,645 | ||||||
| Inventories |
3,475,019 | 3,991,425 | ||||||
| Prepaid expenses and other current assets |
813,885 | 835,691 | ||||||
| Deferred tax asset |
179,000 | 179,000 | ||||||
| Total current assets |
17,053,113 | 10,602,761 | ||||||
| Property, plant and equipment, net |
18,074,739 | 18,876,540 | ||||||
| Idle equipment |
1,160,208 | 1,160,208 | ||||||
| Intangibles, net of accumulated amortization |
959,251 | 974,836 | ||||||
| Deposits on property and equipment |
— | 151,500 | ||||||
| Other assets |
2,159,638 | 1,515,281 | ||||||
| MSA Escrow funds |
27,024,333 | 27,024,333 | ||||||
| Total Assets |
$ | 66,431,282 | $ | 60,305,459 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Bank Overdraft |
$ | — | $ | 465,212 | ||||
| Current maturities of long-term debt and capital lease obligations |
6,381,618 | 9,108,949 | ||||||
| Accounts payable, trade |
6,602,673 | 6,601,226 | ||||||
| Federal excise taxes payable |
2,594,908 | 2,626,736 | ||||||
| Accrued expenses |
2,443,685 | 817,937 | ||||||
| Total current liabilities |
18,022,884 | 19,620,060 | ||||||
| Notes payable, related party |
4,500,000 | 3,661,703 | ||||||
| Long-term debt and capital lease obligations, less current maturities |
37,033,891 | 27,175,719 | ||||||
| Deferred gain on sale-leaseback |
167,830 | 218,197 | ||||||
| Deferred tax liability |
337,140 | 581,000 | ||||||
| Total liabilities |
60,061,745 | 51,256,679 | ||||||
| Stockholders’ equity: |
||||||||
| Common stock(A) |
5,972 | 5,972 | ||||||
| Additional paid-in capital |
15,434,965 | 15,431,600 | ||||||
| Retained earnings (accumulated deficit) |
(6,471,400 | ) | (3,788,797 | ) | ||||
| Notes receivable, officers |
(2,600,000 | ) | (2,600,000 | ) | ||||
| Total stockholders’ equity |
6,369,537 | 9,048,780 | ||||||
| $ | 66,431,282 | $ | 60,305,459 | |||||
| (A) | $.0001 par value per share, 100,000,000 shares authorized, 59,719,480 shares issued and outstanding as of December 31, 2003 and March 31, 2004. |
See notes to condensed consolidated financial statements.
3
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | (Unaudited) | |||||||
| Net sales |
$ | 17,161,055 | $ | 26,027,976 | ||||
| Less: |
||||||||
| Cost of goods sold |
4,398,641 | 6,289,852 | ||||||
| Excise taxes on products |
9,866,303 | 11,160,413 | ||||||
| Gross profit |
2,896,111 | 8,577,711 | ||||||
| Operating expenses: |
||||||||
| Marketing and distribution |
2,443,766 | 2,872,878 | ||||||
| General and administrative |
3,785,993 | 4,796,498 | ||||||
| Depreciation |
602,374 | 62,156 | ||||||
| Research and development |
19,848 | 124,198 | ||||||
| Total operating expenses |
6,851,981 | 7,855,730 | ||||||
| Operating income (loss) |
(3,955,870 | ) | 721,981 | |||||
| Other income (expenses): |
||||||||
| Interest expense (net of interest income) |
(439,118 | ) | (337,576 | ) | ||||
| Other |
112,385 | 14,865 | ||||||
| Income (Loss) before income taxes |
(4,282,603 | ) | 399,270 | |||||
| Income tax (expense) benefit |
1,600,000 | (165,000 | ) | |||||
| Net income (Loss) |
$ | (2,682,603 | ) | $ | 234,270 | |||
| Basic: |
||||||||
| Income (Loss) per common share |
$ | (.04 | ) | $ | 0.00 | |||
| Diluted: |
||||||||
| Income (Loss) per common share |
$ | (.04 | ) | $ | 0.00 | |||
| Weighted average shares outstanding, basic |
60,862,337 | 59,741,480 | ||||||
| Weighted average shares outstanding, diluted |
60,862,337 | 60,291,438 | ||||||
See notes to condensed consolidated financial statements.
4
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004
| Common stock |
Additional Paid-In Capital |
Retained Earnings |
Notes Receivable, Officers |
Total |
||||||||||||||||
| Shares |
Amount |
|||||||||||||||||||
| Balances, December 31, 2003 |
59,719,480 | $ | 5,972 | $ | 15,431,605 | $ | (3,788,797 | ) | $ | (2,600,000 | ) | $ | 9,048,780 | |||||||
| Issuance of common stock options |
— | — | 3,360 | — | — | 3,360 | ||||||||||||||
| Repayment of Officer Loan |
— | — | — | — | — | — | ||||||||||||||
| Net Loss |
— | — | — | (2,682,603 | ) | — | (2,682,603 | ) | ||||||||||||
| Balances, March 31, 2004 (unaudited) |
59,719,480 | $ | 5,972 | $ | 15,434,965 | $ | (6,471,400 | ) | $ | (2,600,000 | ) | $ | 6,369,537 | |||||||
See notes to condensed consolidated financial statements.
5
STAR SCIENTIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (Unaudited) | (Unaudited) | |||||||
| Operating activities: |
||||||||
| Net income |
$ | (2,682,603 | ) | $ | 234,370 | |||
| Adjustments to reconcile net income to net cash flows from operating activities: |
||||||||
| Depreciation and amortization |
647,496 | 194,662 | ||||||
| Increase (decrease) in deferred income taxes |
1,600,000 | — | ||||||
| Other non-cash charges |
125,165 | 13,614 | ||||||
| Stock-based compensation expense |
3,360 | 28,362 | ||||||
| Increase (decrease) in cash resulting from changes in: |
||||||||
| Current assets |
1,015,770 | (1,516,113 | ) | |||||
| Current liabilities |
(503,132 | ) | 4,083,380 | |||||
| Other assets |
— | 8,954 | ||||||
| Net cash flows from (used in) operating activities |
206,056 | 3,047,129 | ||||||
| Investing activities: |
||||||||
| Repayment of Officer Note |
— | 800,000 | ||||||
| Net cash flows from (used in) investing activities |
— | 800,000 | ||||||
| Financing activities: |
||||||||
| Proceeds from revolving line of credit |
— | 826,777 | ||||||
| Repayment of Bank Overdraft |
(465,212 | ) | ||||||
| Proceeds from related party borrowing |
838,299 | — | ||||||
| Convertible Debentures |
9,000,000 | — | ||||||
| Payments on notes payable and capital leases |
(1,869,159 | ) | (1,299,737 | ) | ||||
| Net cash flows from (used in) financing activities |
7,503,926 | (472,960 | ) | |||||
| MSA Escrow fund |
— | — | ||||||
| Increase in cash and cash equivalents |
7,709,982 | 3,374,169 | ||||||
| Cash and cash equivalents, beginning of period |
— | 13,968 | ||||||
| Cash and cash equivalents, end of period |
$ | 7,709,982 | $ | 3,388,137 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
| Cash paid during the period for: |
||||||||
| Interest |
$ | 439,118 | $ | 336,208 | ||||
| Income tax refunds received |
1,372,423 | $ | — | |||||
See notes to condensed consolidated financial statements.
6
| 1. | Accounting Policies: |
The condensed consolidated financial statements of Star Scientific, Inc. and its subsidiary, collectively (“Star Scientific”, “Star” or the “Company”), and notes thereto should be read in conjunction with the financial statements and notes for the year ended December 31, 2003.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods presented have been included. The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results for a full year.
The Company had a net loss during the first quarter of 2004, and generated net income during the first quarter of 2003. Potential common shares outstanding are excluded from the calculation of diluted loss per share if their effect is anti-dilutive. Dilutive loss per share is the same as basic loss per share in 2004 as the effect of all options outstanding is anti-dilutive. For periods which generated net income, diluted earnings per share assumes conversion of outstanding common stock options and warrants.
In 1999, the Company adopted the accounting provisions of Statement of Financial Accounting Standards No. 123—Accounting for Stock-Based Compensation (“FAS 123”), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (warrants and options).
| 2. | Obligations under Master Settlement Agreement—MSA Escrow Fund and Recent Developments |
In November 1998, 46 states, the District of Columbia (the “Settling States”) and several U.S. territories entered into the tobacco Master Settlement Agreement (the “MSA” or “Master Settlement Agreement”) to resolve litigation that had been instituted against the major tobacco manufacturers. The Company was not named as a defendant in any of the litigation matters and chose not to become a participating manufacturer under the terms of the Master Settlement Agreement. As a non-participating manufacturer, the Company is required to satisfy certain escrow obligations under statutes that the Master Settlement Agreement required participating states to pass, if they were to receive the full benefits of the settlement. The so-called “level playing field” statutes, or “qualifying statutes”, require non-partic