Star Scientific wants retail investors to believe a dire cash crisis has been averted by the generosity of its CEO Johnnie Williams and some long-term shareholders. In reality, the financing announced Friday is just another fleece job.
The peddler of over-the-counter nutritional supplements raised $20 million in much-needed cash through the exercise of warrants held by Williams and "several long term shareholders," Star Scientific said in a regulatory filing.
Williams will also reduce his salary to $1 per month until Star Scientific achieves profitability, the company said.
Last week, Star warned that its $10.5 million in working capital was only sufficient to keep the company afloat into the first quarter 2013. The $20 million infusion will probably keep Star's lights burning bright for an additional three or four quarters.
The financing, however, is a financial windfall for the select and unnamed shareholders involved. The exercise price of the warrants was cut drastically, which means millions of dollars that should have been deposited into Star Scientific's bank account ended up instead lining the pockets of these privileged shareholders.
The original exercise price of the 18.5 million warrants was $2.71 per share. Under terms of the financing announced Friday, the exercise price of these warrants was cut to $1 per share.
Instead of raising $50 million, Star Scientific raised $18.5 million when these warrants were exercised.
Even more egregious, the reduced $1-per-share price of the warrants is a 38 percent discount to Star Scientific's closing stock price of $1.61 per share on Thursday. That translates into an $11.3 million profit (on paper) for the investors who were able to exercise their warrants at the deeply discounted price.
Let's repeat: $11.3 million in profit-taking from Star Scientific and given to a select group of "long term shareholders," who by their actions, believe the company is worth $1 per share.
Star Scientific shares were up 9 percent to $1.78 in Friday's pre-market trading, which means the pile of money handed over to these very lucky shareholders has grown even larger.
As for Star Scientific's CEO Johnnie Williams, let's not shed a tear for his reduced salary since he was being paid $1 million per year in salary. Williams also exercised 1.5 million warrants priced at $1.50, or an 11 percent discount to the company's stock price at Thursday's close. Not exactly a hardship case for Williams.
—By TheStreet.com's Contributor Adam Feuerstein
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