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Star Scientific reports bigger loss and higher sales, discloses third lawsuit

Star Scientific reports bigger loss and higher sales, discloses third lawsuit

Sales at embattled supplement maker rose in 1Q; another lawsuit filed

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Star Scientific Inc. reported a larger loss but higher sales for its fiscal first quarter and also disclosed that a third person has filed a lawsuit claiming the company misled investors.

The lawsuit, filed this week in U.S. District Court in Richmond, makes claims similar to two lawsuits filed in March in Virginia and Massachusetts by two of the company’s former shareholders.

A Star Scientific spokeswoman said the company had no comment on the lawsuits, but previously the company has said the suits are “without merit” and that it would fight them.

The Henrico County-based company reported a loss of $8.2 million, or a loss of 5 cents per share, for the first three months of 2013, compared with a loss of $5.2 million, or a loss of 4 cents per share, for the same period of 2012.

Its revenue rose 135 percent to $2.5 million for the first quarter, compared with revenue of $1.06 million in the same period of 2012, on increased sales of its Anatabloc products, which include a dietary supplement and a face cream.

This quarter marked the first period since Star Scientific exited the tobacco business. Formerly a maker of discount cigarettes and smokeless tobacco products, the company announced in December plans to focus on dietary supplements, a business the company has been developing for several years.

The company and its CEO, Jonnie Williams Sr., have been enmeshed in controversy surrounding gifts from Williams to the family of Gov. Bob McDonnell and campaign contributions to McDonnell and Republican gubernatorial candidate, Attorney General Ken Cuccinelli.

Star Scientific said its increased loss for the first quarter was mostly attributable to higher sales and marketing costs, legal expenses, and research and development spending as its continues to fund clinical trials on its supplement products.

In filings with the U.S. Securities and Exchange Commission, the company said its legal expenses rose by about $1.7 million in the first quarter, mainly because of its response to subpoenas in a government investigation, and the company’s own internal investigation.

Star Scientific disclosed in a March regulatory filing that it had received subpoenas in January and February from the U.S. Attorney’s Office for the Eastern District of Virginia seeking documents. The investigation is related to the company’s securities transactions since 2006.

The lawsuits, which seek class-action status, claim the company failed to notify shareholders in a timely manner about the government investigation.

The lawsuits also claim the company misled investors about the nature and extent of Johns Hopkins University’s involvement in research on its dietary supplement products.

The lawsuit filed this week by an investor, Marty Cole, also claims the company “concealed the true nature and extent of its liquidity condition.”

Because of its recurring financial losses, Star Scientific has repeatedly raised money through private placements of stock.

The company also has repeatedly warned investors about its liquidity difficulties, and it did so again in its first-quarter report.

The company said it believes it has enough money to support its operations through the first quarter 2014, but it may need to raise additional capital.

Star Scientific said it could not assure investors that it would be able to raise capital at commercially favorable terms “particularly in light of the ongoing investigations and our recurring operational losses.”

The company also noted in its first-quarter report that its risk factors include media reports about “alleged relationships between our company and one of our executives and several Virginia elected officials.”

“These matters could cause damage to our company,” the filing said.

jblackwell@timesdispatch.com

(804) 775-8123

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