| STAR SCIENTIFIC INC Item 1A Risk Factors The Company’s business has been operating at a loss for the past three years and continues to use more cash than is being generated from operations; absent improving results of operations, we will need to raise additional capital in early 2007 to meet working capital and MSA escrow obligations The Company has been operating at a loss for the past three years |
| In addition, the Company is required to make annual MSA escrow payments that are not accounted for in working capital |
| The Company expects this year’s total escrow deposits (which are due in April 2006 for 2005 sales) to be approximately dlra1dtta5 million based on its prior payments, a decrease in total cigarette sales in 2005 and its efforts to limit sales in MSA states |
| Our future prospects are dependent, in the near term, on a significant improvement in the expected performance of our discount cigarette business and, in the longer term, on the distribution and consumer acceptance of our low-TSNA smokeless tobacco products as well as the continued development of new low-TSNA smokeless tobacco products, independently and through alliances with other tobacco manufacturers, and, in particular, on our ability to begin generating significant revenues through royalties from the patented tobacco curing process to which we are the exclusive licensee |
| However, our ability to generate revenues through such royalty payments will also be dependent upon the successful completion of our ongoing patent infringement lawsuit against RJR The recurring losses generated by our operations continue to impose significant demands on our liquidity |
| In 2005, we generated dlra18dtta0 million through the sale of our common stock by entering into certain securities purchase and registration rights agreements (“the Purchase Agreements”) and dlra7dtta6 million through exercise of warrants issued under the Purchase Agreements |
| In March 2006, we completed an equity sale for dlra6dtta0 million, dlra600cmam000 of which was paid at closing and the remainder of which is being paid in installments over a four month period |
| Also, we have outstanding warrants that we have issued pursuant to the Purchase Agreements for 1dtta7 million shares of common stock with an exercise price of dlra5dtta25 per share which expire in March 2006, warrants for 1dtta9 million shares of stock with an exercise price of dlra4dtta00 per share which expire in June 2006, and warrants for 2dtta0 million shares of stock with an exercise price of dlra3dtta00 per share which expire in June 2007 |
| If all of the warrants are exercised prior to their expiration, this will generate an additional dlra22dtta4 million, although any decision to exercise the warrants is not within our control and will depend primarily on the performance of our stock price during the exercise periods |
| With the proceeds of the Company’s financings in 2005 and the March 2006 dlra6dtta0 million stock sale, we anticipate that we will have sufficient funds to support our operations into early 2007, notwithstanding a significant downturn in sales of discount cigarettes the third and fourth quarters of 2005 attributable, in part, to the recent Gulf Coast hurricanes and continued competition in the non-MSA states |
| Based on sales of discount cigarettes in the third and fourth quarters of 2005, it is anticipated that sales in 2006 will continue to be negatively impacted by the recent events in the Gulf Coast states and by continued pressure on the deep discount cigarette market in the four non-MSA states |
| The Company has taken a number of steps to address the decline in cigarette sales volume, including limiting the amount of promotional spending, consolidating and revamping its sales force in Texas and, to a lesser extent, in Florida and Minnesota, and downsizing the workforce at our Petersburg, Virginia cigarette factory |
| However, absent the successful completion of our ongoing patent infringement lawsuit against RJR, the exercise of outstanding warrants, a substantial improvement in revenues and/or royalties from smokeless tobacco products, or a significant improvement of our expected volume of cigarette sales, we believe that it will be necessary to pursue additional sources of funds in early 2007 |
| However, depending upon market conditions and the price of our common stock, we may decide to seek additional funds before early 2007 |
| Our cigarette business, which has generated a substantial majority of our revenues in the past, continues to experience declines in shipments as well as increased market pressures and we may not be able to reverse this trend A substantial majority of our revenues historically has been derived from sales of our discount cigarettes which are sold though Star Tobacco, Inc |
| Since 2000, however, our discount cigarette business has experienced a significant decline in sales, partly caused by intensified pricing competition from foreign manufacturers (see “Competition from other tobacco companies has adversely affected us and may continue to do so”) |
| Despite our efforts to reenergize cigarette sales, shipments in 2005 and in 2006 to date have continued to decline compared to prior years and we face potential and actual increases in regulatory and excise tax costs |
| Accordingly, we cannot guarantee we will be able to reverse the downward trend in our discount cigarette business |
| Notwithstanding the declining performance of our discount cigarette business, we will continue to focus our principal efforts on the sale of discount cigarettes in the four non-MSA states for the foreseeable future |
| At the same time, we will continue to evaluate the prospects for our cigarette business in general and in particular, sales in MSA states, given the additional regulatory and MSA burdens of operating in those states |
| 21 ______________________________________________________________________ [45]Table of Contents In addition, we must pay a substantial portion of our gross profits on cigarette sales into escrow in April of each year to meet our obligations under the MSA Because the funds deposited into escrow are not available to meet our other cash needs, even if we were able to generate net income from our cigarette business, we would not necessarily generate positive cash flow from operations, when taking into account these escrow payments |
| Additionally, beginning in January 2005 we have been required to make further payments pursuant to the tobacco farmer buyout program which were not required in previous years |
| This program has added a cost of approximately dlra0dtta50 to each carton of cigarettes sold by us effective January 1, 2005 and a comparable cost for smokeless products which will continue over the ten-year life of the program |
| As part of this program, we also will be subject to assessments for certain loan loss costs and administration costs |
| These assessments will be recorded when received and paid over several quarters, rather than over the life of the buyout program |
| We believe that it will take over a year to assess the affect the buyout may have on tobacco cultivation and sales |
| If we are not able to increase our revenues and gross profits from cigarette sales, our ability to earn net income and generate positive cash flow from operations will depend on our ability to grow our revenues from royalties and sales of our smokeless tobacco products, which have provided only de minimis revenues to date |
| Our prospects for success as a technology-oriented tobacco company with a mission to reduce toxins in tobacco leaf and tobacco smoke are dependent, over the long term, on the distribution and consumer acceptance of our very low-TSNA smokeless tobacco products, as well as the continued development of new very low-TSNA smokeless tobacco products, independently and through alliances with tobacco manufacturers and potentially other third parties We have previously announced our plan to concentrate our long-term efforts on our very low-TSNA smokeless tobacco products, our receipt of royalty fees for hard tobacco products and on licensing our patented technology for producing low-TSNA tobacco |
| Beginning in September 2001, we introduced three new smokeless tobacco products, Stonewall^® moist and dry snuffs and ARIVA^® hard tobacco cigalett^® pieces |
| Beginning in the second quarter of 2003, we began a commercial test market of a new, non-fermented spit-free^® “hard tobacco” product for moist snuff users, called STONEWALL Hard Snuff^® |
| By the end of 2004, STONEWALL Hard Snuff^® was available in approximately 7cmam000 locations that have significant sales of smokeless tobacco products |
| Given the Company’s decision to focus on hard snuff smokeless tobacco products, the Company has discontinued manufacturing Stonewall^® moist snuff and is not actively marketing Stonewall dry snuff |
| To date, sales of our smokeless products have been slower than expected, in part, we believe, due to the lack of consumer awareness of those products, particularly ARIVA^® and STONEWALL Hard Snuff^® and lack of sufficient capital to increase consumer awareness of and acceptance of those products |
| It is not certain whether our low-TSNA smokeless tobacco products will be accepted by the market in sufficient volume to support our operations |
| Adult tobacco users may decide not to purchase our products due to taste or other preferences, or because of the extensive health warnings contained on the packaging for our products |
| Our efforts to successfully market ARIVA^® and STONEWALL Hard Snuff^® will require the expenditure of substantial funds, which we will need to obtain from external financing, the availability of which cannot be assured, and ultimately these products may not be accepted in the national marketplace |
| If the Company is not successful in its efforts to offer very low-TSNA smokeless tobacco products to adults as alternatives to cigarettes and other smokeless products or generate revenue through the related technology to which we are the exclusive licensee, we will not have sufficient sales of other products to offset declining cigarettes revenues |
| This would adversely affect our sales volumes, operating income and cash flows, as well as our ability to pay our debts |
| The combination transaction between RJR and B&W may impact negatively upon the Company On July 30, 2004, RJR, a subsidiary of B&W, and certain of their affiliated tobacco businesses combined operations under the new publicly traded holding company, Reynolds American Inc, which is 42prca owned by British American Tobacco PLC, the parent company of B&W Star and B&W have been party to multiple, substantial commercial relationships for a number of years, and Star and RJR are currently involved in significant patent infringement litigation, the trial of which commenced in US District Court on January 31, 2005 |
| During the pending patent litigation described above, RJR took the position that the new operating entity resulting from the combination of RJR and B&W, assumed all of the rights and obligations under the agreements previously entered into between Star and B&W, and moved to dismiss our patent infringement case on this basis |
| After full briefing the Court denied RJR’s motion to dismiss, and found that B&W had attempted to assign the Star/B&W agreements to the new subsidiary, and that Star had not consented to the assignment |
| The Court further found that the de facto merger doctrine did not apply |
| In its ruling the Court did leave open the question of what impact, if any, the combination may have on the future licensing arrangements with RJR, but noted that those considerations did not impact on the claims asserted in the present litigation |
| 22 ______________________________________________________________________ [46]Table of Contents We have had important relationships with B&W Prior to the combination of B&W and RJR, we had important business relationships with B&W, including licensing and royalty agreements relating to the purchase of StarCured^® tobacco and other low-TSNA tobacco as well as the financing of curing barns |
| Under our Restated Master Agreement with B&W, as amended by letter agreements dated December 4, 2002 and August 14, 2003, we owe B&W approximately dlra20 million of long-term debt |
| Beginning January 1, 2006, interest began accruing on the debt at prime plus 1prca and we began making payments on the principal balance of the debt |
| These payments are due in 96 monthly installments |
| The debt is secured by tobacco leaf inventory and a portion of our tobacco curing barns |
| Once the outstanding loan balance is reduced to dlra10 million, the collateral will be released by B&W As of the end of 2005, we also had another note payable obligation to B&W in the amount of dlra4cmam961cmam743 |
| Payments on this obligation began in January 2005 and are due in monthly principal payments of dlra250cmam000 plus monthly interest payments at prime plus 1prca on the outstanding balance |
| Pursuant to a Hard Tobacco Agreement entered into with B&W in April 2001, B&W began to test market a hard tobacco product named Interval^® in Louisville, Kentucky on December 15, 2003, and a similar dissolvable hard tobacco product in the summer of 2004 |
| In December 2004, Star was notified by RJR that the test market was not successful and that, as a result, the Hard Tobacco Agreement was terminated |
| In the past, B&W has purchased significant quantities of StarCured^® tobacco from us, which we in turn purchased from our participating StarCured^® farmers |
| B&W has not purchased tobacco from us since 2004 and we have advised our StarCured^® farmers that while they could continue to use the barns, they would need to find other buyers for their tobacco |
| In the future, we would like to resume purchasing tobacco directly from our participating StarCured^® farmers, although our agreement with B&W does not require B&W to purchase StarCured^® tobacco from us in the future |
| In recent years, B&W has granted us a number of concessions under our agreements, including deferring interest and principal payments, consenting to our incurrence of additional indebtedness and agreeing to modify the Hard Tobacco Agreement to allow us to pursue similar licensing arrangements with third parties |
| B&W’s failure to grant us similar concessions in the future could have a number of adverse consequences, including restricting our pursuit of business opportunities with B&W or third parties, limiting our ability to raise funds through debt financing and requiring payment of our obligations to them in circumstances where we may not have sufficient funds available to do so |
| We are dependent on the domestic tobacco business All of our revenue for discount cigarette sales since 2000 was derived from sales in the United States |
| The US cigarette market has been contracting in recent years and pricing pressures in the discount cigarette business have been increasing |
| As the US cigarette market continues to contract, this trend could adversely affect our sales volumes, operating income and cash flows |
| The market for smokeless products is much smaller than the market for smoked tobacco products, and all of our revenue from smokeless tobacco product sales to date has been derived from sales in the United States, except for de minimis amounts of ARIVA^® sold in Bermuda, Turkey and Norway |
| Accordingly, we do not currently have access to foreign markets to offset the impact of the declining US cigarette market |
| Competition from other tobacco companies could adversely affect us The tobacco industry is highly competitive |
| Our primary competition for conventional cigarettes has been the “major” cigarette manufacturers, each of which has substantially greater financial and operating resources than we do |
| We have encountered significant competition from several other smaller US manufacturers of cigarettes, as well as importers of cigarettes manufactured in foreign countries |
| Many of these manufacturers and importers have substantially greater financial, manufacturing, marketing and other resources than we do |
| STONEWALL Hard Snuff^® competes with major smokeless manufacturers, and ARIVA^® competes with traditional cigarette manufacturers, because ARIVA^® is positioned as an alternative to cigarettes in situations where adult cigarette users cannot or choose not to smoke |
| Those companies generally have substantially greater financial and operating resources than we do |
| Also, these companies have a more established presence in the smokeless tobacco industry than we do |
| 23 ______________________________________________________________________ [47]Table of Contents Tobacco companies may use low-TSNA tobacco that does not infringe on the technology to which we are the exclusive licensee or may develop technology for low-TSNA tobacco that could make our technology obsolete Virtually all flue-cured tobacco grown in the United States since 2001 has been cured in a manner to reduce the levels of TSNAs |
| At least one other tobacco company has begun to incorporate low-TSNA tobacco into its cigarettes products and others have begun to purchase low-TSNA tobacco and are expected to incorporate that tobacco in their products |
| If competitors produce low-TSNA tobacco that does not infringe on the technology to which we are the exclusive licensee, or develop other tobacco products with less toxins that can compete with our very low-TSNA products, this could adversely affect our operating income and cash flows |
| Additionally, competitors may develop new technology for low-TSNA tobacco that could make our current technology obsolete |
| The tobacco industry is subject to substantial and increasing regulation and taxation Various federal, state and local laws limit the advertising, sale and use of cigarettes and smokeless tobacco products, and these laws have proliferated in recent years |
| If this trend continues, it may have material and adverse effects on our sales volumes, operating income and cash flows |
| In addition, cigarettes and smokeless tobacco products are subject to substantial and increasing excise taxes |
| The federal excise tax on cigarettes rose from $ |
| The federal excise tax on smokeless tobacco products is substantially lower (dlra0dtta585 per pound) |
| A number of states have recently considered an increase in state excise taxes on smoked and smokeless tobacco products |
| While several states have no excise tax on smokeless products, tax rates in other states vary considerably |
| For example, the states of Alabama and North Dakota tax smokeless products at a rate of 1dtta5 cents per ounce and 16 cents per ounce, respectively, while the states of North Carolina and Oregon impose an excise tax of 2prca and 65prca of wholesale cost, respectively |
| Present state excise taxes for cigarettes range from dlra0dtta30 per pack in Kentucky to dlra2dtta46 per pack in Rhode Island |
| Increased excise taxes may result in declines in sales volume for the industry as a whole |
| This result could adversely affect our operating income and cash flows |
| In addition, several states have imposed additional fees on cigarettes sold by manufacturers who are not signatories to the MSA or who have not previously entered into settlements with the non-MSA states |
| Such additional fees could adversely impact on our sales volumes and cash flows |
| Also, a number of states have passed statutes or regulations requiring that cigarettes meet prescribed fire safety standards |
| We have decided that it would not be economically feasible to develop a separate cigarette for sale in these states, and we will no longer sell cigarettes in those states once such statutes and regulations go into effect |
| We currently have licenses from the TTB to manufacture cigarettes and smokeless tobacco products |
| To the extent that we are unable to maintain our current licenses or to obtain any additional licenses required by the TTB, this could materially and adversely affect our operations |
| In 1996, the FDA promulgated regulations governing the sale and advertising of tobacco products |
| These regulations were designed primarily to discourage the sale to, and consumption by, adolescents and children |
| The authority of the FDA to promulgate such regulations was challenged in the federal courts |
| On March 21, 2000, the United States Supreme Court in a five to four decision held that the Congress has not given the FDA authority to regulate tobacco products as customarily marketed |
| Given the decision by the Supreme Court it is unclear whether Congress will act to grant such authority to the FDA, although legislation that would create such authority has been introduced previously in Congress |
| In late 2004, tobacco quota buyout legislation was enacted into law which requires all tobacco manufactures to pay for the cost of the buyout over the next ten years |
| Beginning in January 2005, with the exception of the assessment noted below, we have been required to make payments of approximately dlra0dtta50 per carton for our cigarette products and a comparable cost for smokeless tobacco products |
| As part of the program, we also will be subject to assessments for certain loan loss costs and administrative costs |
| These assessments will be recorded when received and paid over several quarters, rather than over the life of the buyout program |
| The Company, and other tobacco manufacturers have increased prices to cover the cost of the buyout program |
| While the increased cost could have a negative impact on purchases of cigarettes by consumers, the impact of this added cost is expected to be proportional across the industry |
| We have substantial obligations under state laws adopted under the Master Settlement Agreement Pursuant to the terms of the Master Settlement Agreement, we have an obligation to deposit into escrow accounts a base amount equal to dlra3dtta35 per carton in 2005-2006 and dlra3dtta77 per carton each year thereafter, for sales of cigarettes occurring in the prior year in each MSA Settling State |
| A cumulative inflation adjustment is also added to these deposits at the higher of 3prca or the Consumer Price Index each year |
| The failure to place such required amounts into escrow could result in severe penalties to us and potential restrictions on our ability to sell tobacco products within particular states |
| Because of this escrow requirement, a substantial portion of our net income from operations has been unavailable for our use and the amount required to be placed in escrow for each carton sold may exceed the net cash flow generated by each carton sold |
| As a result, we have experienced negative cash flows from operations, which, among other things, has affected our ability to apply the capital generated from our present cigarette sales to the further scientific development of less toxic and potentially less hazardous tobacco products and to the growth of our business |
| In addition, the escrow obligations will impede our ability to distribute dividends to our stockholders |
| 24 ______________________________________________________________________ [48]Table of Contents We have tried to mitigate the costs of the MSA by focusing our field sales force and our efforts on increasing market share in states that were not participants in the MSA, among other approaches |
| The MSA States have taken the position that the Company is responsible to escrow funds for any sales in MSA States whether made by ST directly or by a third party to whom ST has sold product |
| The Company is in full compliance for escrow obligations through 2005 and currently has approximately dlra37dtta3 million in escrow |
| In addition, most of the MSA states have enacted statutes that require non-participating manufacturers to certify that they are in full compliance with the escrow requirements of the MSA as a condition to being permitted to sell cigarette products in those states |
| While the Company has recently focused its sales in the four states that are not part of the MSA, failure to comply with these statutes would negatively impact on the Company’s ability to sell cigarettes in those MSA states, notwithstanding our substantial payments into escrow |
| We may be assessed additional sales and use taxes by the Commonwealth of Virginia In a letter dated October 7, 2004, the Company received notification from the Commonwealth of Virginia that an adverse decision had been made by the Commissioner of Taxation with respect to the sales and use tax assessment previously issued to the Company and that the sales and use tax assessment plus penalties and interest together, as of October 7, 2004, totaled approximately dlra988cmam000 |
| The Company continues to challenge this assessment and has filed a request for reconsideration with the Commissioner of Taxation, and is prepared to file a judicial action if the administrative action is not favorable |
| The filing of the request for reconsideration stays any collection of the tax assessment, although interest continues to accrue |
| While the Company is optimistic that its request for reconsideration will be accepted based on prior rulings in similar cases, if the assessment is not reversed, the Company will be required to pay the tax, penalties and interest due |
| Lawsuits may affect our profitability; we have limited insurance coverage We are not, nor have we ever been, named as a defendant in any legal proceedings involving claims arising out of the sale, distribution, manufacture, development, advertising, marketing and claimed health effects relating to the use of our tobacco products |
| While we believe that the risk of being named a defendant in such a lawsuit is relatively low, we may be named as a defendant in the future as there has been a noteworthy increase in the number of these cases pending |
| Punitive damages, often in amounts ranging into the hundreds of millions, or even billions of dollars, are specifically pleaded in a number of these cases in addition to compensatory and other damages |
| In the past, we maintained product liability insurance only with respect to claims that tobacco products manufactured by or for us contained any foreign object, ie any object that is not intended to be included in the manufactured product |
| The product liability insurance we previously maintained did not cover health-related claims such as those that have been made against the major manufacturers of tobacco products |
| We do not believe that such insurance currently can be obtained |
| Accordingly, our inclusion in any of these actions or any future action could have a material and adverse effect on our financial condition |
| In addition, beginning in 2001, we embarked on the test market and distribution of new smokeless tobacco products |
| To the extent the sale and distribution of such products results in any health-related claims, such claims could have a material and adverse effect on our financial condition |
| We may not properly manage our growth If we are successful in increasing market acceptance for our products, we will be required to manage substantial volume from our customers |
| To accommodate any such growth and compete effectively, we will be required to attract, integrate, motivate and retain additional highly skilled sales, technical and other employees |
| We face competition for these people |
| Our ability to successfully manage such volume also will be dependent on our ability to scale up our tobacco processing and production operations |
| There can be no assurance that we can overcome the challenge of scaling up our processing and production operations or that our personnel, systems, procedures and controls will be adequate to support our future operations |
| Any failure to implement and improve our operational, financial and management systems or to attract, integrate, motivate and retain additional employees required by future growth, if any, could have a material and adverse effect on our business and prospects, financial condition and results of operations |
| We may not be successful in protecting our intellectual property rights Our success in commercially exploiting our licensed tobacco curing technology and low-TSNA smokeless tobacco products depends in large part on our ability to defend issued patents, to obtain further patent protection for the technology in the United States and other jurisdictions, and to operate without infringing upon the patents and proprietary rights of others |
| 25 ______________________________________________________________________ [49]Table of Contents Additionally, we must be able to obtain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur, both in the United States and in foreign countries |
| Patent positions are uncertain and involve complex legal and factual questions for which important legal principles are unresolved |
| Any conflicts resulting from third party patent applications and patents could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection |
| If patents are issued to other companies that contain competitive or conflicting claims, we may be required to obtain licenses to these patents or to develop or obtain alternative technology |
| Such licensing agreements, if required, may not be available on acceptable terms or at all |
| If such licenses are not obtained, we could be delayed in or prevented from pursuing the development or commercialization of our products |
| Litigation, which could result in substantial cost, may also be necessary to enforce any patents to which we have rights, or to determine the scope, validity and unenforceability of other parties’ proprietary rights which may affect our rights |
| There are always risks in any litigation |
| US patents carry a presumption of validity and generally can be invalidated only through clear and convincing evidence |
| We may also have to participate in interference proceedings declared by the US Patent and Trademark Office to determine the priority of an invention, which could result in substantial cost to the Company |
| In particular, we are currently prosecuting patent infringement claims against RJR in a consolidated action in the United States District Court for the District of Maryland |
| In the coming months, we anticipate increases in general and administrative costs in connection with the continued prosecution of our patent infringement lawsuits |
| Moreover, the mere uncertainty resulting from the institution and continuation of any technology-related litigation or interference proceeding could have a material and adverse effect on our business and prospects |
| We may also rely on unpatented trade secrets and know-how to maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and others |
| There can be no assurance that these agreements will not be breached or terminated, that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors |
| We depend on key personnel We depend upon the continued services of our senior management team for our continued success |
| The loss of any one of the Company’s Chief Executive Officer, Jonnie R Williams, the Company’s Chairman, President and Chief Operating Officer, Paul L Perito, the Vice President of Sales and Marketing, David M Dean, the Company’s Chief Financial Officer, Christopher G Miller or the Company’s General Counsel, Robert E Pokusa, could have a serious negative impact upon our business and operating results |
| The Company’s success depends in large part on its ability to attract and retain, on a continuing basis, consulting services from highly qualified scientific, technical, management, financial and marketing personnel |
| Competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain the personnel necessary for the development and operation of our business or that given the losses that the Company has suffered over the past three years that we will have the financial ability to do so |
| The loss of the services of key personnel or the termination of contracts with independent scientific and medical investigators could have a material and adverse effect on the Company’s business |
| Management and significant stockholders can exercise influence over the Company Based upon stock ownership as of December 31, 2005, our executive officers, directors and their associates, own an aggregate of approximately 30dtta5prca of our outstanding shares |
| As a result, these persons acting together may have the ability to control matters submitted to our stockholders for approval and to control the management and affairs of the Company |
| This concentration of ownership may have the effect of delaying or preventing a change in control of the Company, impede a merger, consolidation, or takeover or other business combination, or discourage a potential acquirer from attempting to obtain control |
| This concentration of control could also have a negative effect on the market price of our shares |
| Our stock price has been and may continue to be volatile and an investment in our common stock could suffer a decline in value The trading price of the shares of our common stock has been and may continue to be highly volatile |
| Since 2004, our stock has traded at prices ranging from dlra1dtta70 on January 14, 2004, to dlra7dtta10 on February 4, 2005, and dlra2dtta35 on December 30, 2005 |
| We receive only limited attention by securities analysts and may experience an imbalance between supply and demand for our common stock resulting from low trading volumes |
| The market price of our common stock may fluctuate significantly in response to a variety of factors, most of which are beyond our control, including the following: • developments related to our patents or other proprietary rights, including developments in our litigation against RJR; 26 ______________________________________________________________________ [50]Table of Contents • developments in our efforts to market smokeless tobacco products; • announcements by us or our competitors of new products, technological innovations, contracts, acquisitions, financings, corporate partnerships or joint ventures; • negative regulatory action or regulatory approval with respect to our products or our competitors’ products; and • market conditions for the tobacco industry in general |
| The stock market has, from time to time, experienced extreme price and volume fluctuations, which have particularly affected the market prices for small companies and which have often been unrelated to their operating performance |
| These broad fluctuations may adversely impact the market price of our common stock |
| In addition, sales of substantial amounts of our common stock in the public market could lower the market price of our common stock |
| Future sales of our common stock would have a dilutive effect on current stockholders If we issue additional shares of our common stock for sale in future financings, our stockholders would experience dilution |
| Our research & development efforts may not result in commercially viable products and may continue to be curtailed by our lack of available research funds Consistent with our efforts to cut costs, the Company deferred certain research projects beginning in the last half of 2003 |
| We expect our spending on research for 2006 to be at a de minimis level, while we continue to concentrate our efforts and resources on our ongoing patent infringement lawsuit against RJR Presently, our research focus is directed to assessing the impact that products with reduced toxin levels may have on the range of serious health hazards associated with the use of conventional smoked and smokeless tobacco products |
| While our research work has been deferred as a result of the lack of available working capital, the Company has designed several additional scientific studies to assess, among other things, whether a reduction in TSNAs can be equated with a reduction in health risk, biomarker differences that can be equated to levels of various toxins in smoked versus smokeless tobacco, and the impact of the decline in TSNA exposure in low-TSNA smokeless tobacco compared to traditional cigarette products |
| However, because of monetary constraints we are not moving forward with these studies at this time |
| When we initiate these studies, they will be conducted by independent laboratories and universities |
| We hope to renew our research and development efforts in 2006, subject to the availability of funds |
| However, such research may not result in new products reaching the market, or in any improvements to our current products |
| This could occur for a number of reasons, including if potential new products: • fail to receive any necessary regulatory approvals on a timely basis or at all; • are precluded from commercialization by proprietary rights of third parties; or • are uneconomical or fail to achieve market acceptance |
| Failure to develop new products or to improve our current products could have a material and adverse impact on our net sales, operating income and cash flows |
| If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, as a result, current and potential stockholders could lose confidence in our financial reporting, which could harm our business and our stock price The Company has previously determined that its internal control over financial reporting is effective and our outside auditors have issued a report concurring in that assessment |
| If the Company fails to maintain its internal controls over financial reporting, this could cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price for our stock |