Liquidity and Capital Resources

6 Months Ended

Jun. 30, 2011

Liquidity and Capital Resources [Abstract]

Liquidity and Capital Resources

		The Company has been operating at a loss for the past nine years. The Company’s prospects will depend on its ability to generate and sustain increased revenue levels in future periods, which will largely be dependent on the distribution and consumer acceptance of its new CigRx^® product, a non-nicotine, non-tobacco nutraceutical developed by the Company’s Rock Creek subsidiary to temporarily decrease the desire to smoke and increased distribution and consumer acceptance of its low-TSNA smokeless tobacco products. CigRx^® was introduced into the market in August 2010. CigRx^® is Rock Creek’s first product introduction and Rock Creek had no revenue stream prior to the introduction of CigRx^® and little revenue from CigRx^® in 2010. In late February 2011, the Company began testing CigRx^® on a national basis through expanded infomercial airings, radio spots and selected retail sales. The Company’s prospects also will be dependent on Rock Creek’s ability to develop additional nutraceutical products, pharmaceuticals products and on the ability to generate increased revenues from the sale of smokeless tobacco products. In 2010 the Company filed applications with the Food and Drug Administration ( “FDA”), to have variants of its ARIVA^® and STONEWALL Hard Snuff^® low tobacco specific Nitrosamine (“TSNA”) products (Ariva-BDL™ and Stonewall-BDL™) designated by the FDA as “modified risk tobacco products” under the Family Smoking Prevention and Tobacco Control Act (“FDA Tobacco Act”). On March 17, 2011 the FDA issued a decision holding that it currently does not have jurisdiction over the Ariva-BDL™ and Stonewall-BDL™ products. The Company is now reviewing its manufacturing and marketing opportunities related to these products. The Company’s future prospects also will be dependent on its ability to begin generating significant revenues through royalties from the patented tobacco curing process for which it is the exclusive licensee. The ability to generate revenues through royalty payments will be dependent on the success of the Company’s ongoing patent infringement lawsuit against R.J. Reynolds Tobacco Company, Inc. (“RJR”) which has been pending since 2001. In that litigation a jury trial that took place between May 18, 2009 and June 16, 2009. At the conclusion of the trial, the jury returned a verdict in favor of RJR holding that there was no infringement of the two patents at issue in the case, and that the patents were invalid due to anticipation, obviousness, indefiniteness and failure to disclose best mode. That decision has been appealed to the United States Court of Appeals for the Federal Circuit and oral argument before a three-judge panel of the Court was held on January 11, 2011. The Company is currently awaiting a ruling on the appeal from the Federal Circuit Court of Appeals. On May 29, 2009 the Company filed a new complaint against RJR for patent infringement during the period beginning 2003 and continuing to the filing date of the new complaint. The new case has been stayed pending the outcome of the appeal to the Federal Circuit and the prosecution of the new complaint will be dependent on the Company achieving a reversal of the jury verdict of invalidity in the initial RJR action.

		As of June 30, 2011, the Company had a working capital surplus of approximately $14.8 million, which included cash of approximately $16.2 million. Future anticipated cash needs during 2011 include:

	•		remaining litigation costs in connection with the RJR patent infringement trial of approximately $1.4 million;

	•		monthly principal and interest payments of approximately $245 thousand in connection with the repayment of the Company’s long-term debt; and

	•		funding of other aspects of the Company’s current operations in light of continued operating losses.

The Company expects to continue to incur losses in connection with the sale of its smokeless tobacco products for the foreseeable future. Sales of smokeless tobacco have been stable over the past several quarters but remain at low levels as the Company, beginning in 2009, restructured the smokeless tobacco operations to reduce costs while concentrating sales efforts on a more narrow geographic area and to selected regional and national retail chain customers. Substantially increased sales would be required to reach a breakeven level for these products. Rock Creek had no revenues prior to the introduction of CigRx^® in August 2010. The Company expects that Rock Creek will be deriving increased revenues from the sales of CigRx^® on a going forward basis as it expands distribution of CigRx^®, but the Company had only limited revenue from the sale of CigRx^® to date.

During the first six months of 2011, the Company received proceeds of $12.0 million through the sale of 5,111,182 shares of common stock and new warrants to purchase up to 5,111,182 shares of common stock as well as the exercise for cash of warrants to purchase 2,000,000 shares of common stock and the issuance of new warrants to purchase up to 2,000,000 shares of common stock. See Note 5 to the Company’s consolidated financial statements included in this Report for details of those transactions. During the first six months of 2011, stock options for 625,000 option shares were exercised resulting in proceeds of $1.0 million and warrants for 200,000 warrant shares were exercised resulting in an additional $0.2 million of proceeds. The total proceeds from these transactions for the first six months ending June 30, 2011 was $13.2 million. Absent exercise of additional outstanding warrants and options for cash or a substantial improvement in revenues and/or royalties, the Company believes that it has sufficient funding to support its operations through the first quarter of 2012, but that it will be necessary to pursue additional sources of funds during the first quarter of 2012. Depending upon market conditions and the price of its common stock, the Company may decide to seek additional funds before that time. There can be no assurance that the Company will be successful in obtaining such funding at commercially reasonable terms, if at all.

The Company had a consolidated loss for the three and six months ended June 30, 2011 of approximately $5.0 million and $11.1 million, respectively.