Exhibit 10.1

 

Execution Copy

 

SEPARATION AND CONSULTING AGREEMENT

 

This Separation and Consulting Agreement (“Agreement”) is entered as of May 19,
2014 (“Separation Date”), by and between Star Scientific, Inc. (“Company”), a
Delaware corporation with its principal place of business at 2040 Whitfield
Ave., Sarasota, Florida 34243, and Paul L. Perito, Esquire (“Executive”), of
6219 Kennedy Drive, Chase City, Maryland, 20815. The Company and Executive are
individually referred to herein as a “Party” and collectively as the “Parties.”

 

INTRODUCTION

 

WHEREAS, Executive served as President, Chairman and/or Chief Operating Officer
of the Company from November 1999 to December 2013; and from May 2007 through
December 27, 2013 served as Chairman and CEO of the subsidiary Rock Creek
Pharmaceutical, Inc and is currently employed as Vice President and Senior
Counsel, Legal and Regulatory Affairs, pursuant to that certain Third Amended
and Restated Executive Employment Agreement between the Company and Executive,
dated as of March 14, 2011, and as amended as of December 28, 2012 and further
amended as of December 26, 2013 (“Executive Employment Agreement”);

 

WHEREAS, the Parties mutually desire to sever Executive’s Executive Employment
Agreement and employment relationship with the Company upon the terms and
conditions set forth herein;

 

WHEREAS, the Company desires that Executive be available to provide certain
consulting services to the Company, and Executive desires to provide such
services, pursuant to the terms set forth herein; and

 

WHEREAS, the Parties desire to memorialize the terms of Executive’s severance
and separation of employment and the terms pursuant to which Executive will
provide consulting services.

 

NOW THEREFORE, in consideration of the premises, covenants and undertakings set
forth herein, the Parties hereby agree as follows:

 

AGREEMENT

 

1.Separation Date; Termination of Executive Employment Agreement.

 

(a)Executive’s last day of employment with the Company shall be the Separation
Date. From and after the Separation Date, Executive will no longer be, and will
not represent himself as being, an employee, officer, attorney, affiliate, agent
or representative of the Company or any subsidiary thereof for any purpose,
other than in connection with the Consulting Services (as defined below).
Without limiting the foregoing, Executive and the Company each agree to promptly
update any and all of their directories, websites, filings and communication
accounts to reflect the fact that Executive is no longer employed by the
Company.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

(b)Except as otherwise set forth in this Agreement, the Separation Date will be
the employment termination date for Executive for all purposes, meaning that
from and after such date, Executive will no longer be entitled to any further
compensation, monies or other benefits from the Company, including coverage
under any benefits plans or programs sponsored by the Company, except for the
payments provided in this Agreement. Except as set forth in Section 5(i), all
costs and expenses of COBRA Coverage (as defined below), if elected by
Executive, shall be the sole responsibility of Executive and the Company shall
have no responsibility to contribute to such costs and expenses or reimburse
Executive for any such costs and expenses. The Executive Employment Agreement
will terminate upon the Separation Date and will have no further force and
effect, except with respect to those provisions thereof that survive termination
pursuant to the express provisions of this Agreement. For the avoidance of
doubt, this Agreement shall be the only agreement governing the relationship
between the Company and Executive from and after the Separation Date with
respect to the subject matter hereof. Notwithstanding the foregoing, the Company
shall reimburse Executive for all unreimbursed expenses incurred on behalf of
the Company in accordance with Company policy through the Separation Date.

 

(c)As a material inducement for Executive to enter into this Agreement, the
Company represents, acknowledges, and agrees that (i) the termination of the
Executive Employment Agreement and the termination of the Executive’s employment
with the Company does not constitute a termination for “Cause” within the
meaning of the Executive Employment Agreement, (ii) the Company does not, as of
the date of this Agreement, have knowledge of any acts or omissions by the
Executive that would constitute “Cause” within the meaning of the Executive
Employment Agreement and (iii) the Company does not, as of the date of this
Agreement, have knowledge of any acts or omissions by the Executive that the
Company knows would constitute or support a claim or action by the Company
against the Executive (and in the event that the Company has breached the
representation in this clause (iii) because of knowledge of a claim or action as
of the date of this Agreement, the Company hereby waives its right to pursue
such claim or action). As used in clause (ii) and (iii) of the preceding
sentence, the term “knowledge” and “knows” refers to and is limited to the
actual conscious awareness of Dr. Michael J. Mullan, Dr. Christopher Chapman,
Park Dodd, and each of the members of the Company’s board of directors as of the
date of this Agreement.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

2.Severance Payments.

 

(a)In consideration for entering into this Agreement, the Company shall pay to
Executive $2,500,000 minus the actual Insurance Costs (as defined below)
(“Aggregate Severance Payment”). The Company shall pay the Aggregate Severance
Payment to Executive in accordance with the payment, grant and vesting schedules
set forth in Appendix A.

 

(b)Payment of the Aggregate Severance Payment is made as a full and final
severance payment to Executive in satisfaction of all amounts otherwise due, or
alleged to be due, from the Company to Executive under the Executive Employment
Agreement or otherwise. Executive’s receipt of the Aggregate Severance Payment
is contingent on and subject to Executive delivering and not revoking an
executed form of the Release attached hereto as Appendix B, which revocation
will extinguish, among other things, any obligation for the Company to otherwise
pay Executive any Quarterly Severance Payment (as defined in Appendix A) under
this Agreement. In the event that such revocation occurs after the Company has
paid the first Quarterly Severance Payment to Executive, Executive shall
immediately return such payment to the Company in cash in immediately available
funds.

 

The Parties understand that all outstanding equity options, restricted equity
grants and similar rights held by Executive with respect to securities of the
Company granted to Executive on or prior to the Separation Date have previously
vested. To the extent that any grant to Executive is not fully vested as of the
Separation Date, all such options and equity grants shall vest and be
immediately exercisable as of the Separation Date but shall continue to be
subject to the terms, restrictions, and limitations of such options, grants, and
rights (including expiration and termination provisions thereof except as
hereinafter provided). The Company acknowledges that the exercise period of all
stock options held by the Executive has previously been extended pursuant to an
Amendment to Stock Option Award Agreement, dated December 26, 2013, between the
Company and the Executive.

 

3.Restrictive Covenants. In consideration for the Aggregate Severance Payment
and other benefits provided to Executive hereunder, and except as expressly set
forth below in connection with the Consulting Services, Executive hereby agrees:

 

(a)To comply with the restrictions on competition and solicitation set forth in
Section 5 of the Executive Employment Agreement (which Section is incorporated
herein by reference) for five (5) years from the Separation Date
(notwithstanding any shorter period indicated in the Executive Employment
Agreement).

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

(b)To maintain and use all Confidential Information (as defined in the Executive
Employment Agreement) as confidential in accordance with the terms and
conditions of Section 6.1 of the Executive Employment Agreement (which Section
is incorporated herein by reference) at all times after the Separation Date.

 

(c)Except as provided in Section 7(a), to return all Confidential Information
and Company property (including all automobiles, furniture, fixtures, computer
equipment, hardware and software), except any Transferred Assets (as defined
below), to the Company in accordance with Section 6.2 of the Executive
Employment Agreement (which Section is incorporated herein by reference) within
fifteen (15) days of the Separation Date. Upon expiration or earlier termination
of the Service Period (as defined below), Executive shall return any and all
newly acquired Confidential Information to the Company in accordance with
Section 6.2 of the Executive Employment Agreement.

 

(d)Not to make any disparaging comment or statement about the Company, its
officers, directors, employees, advisors, products, research or business,
including any statements that are intended to adversely affect the conduct of
the business of the Company, its plans, proposals, reputation or former or
current employees, officers, directors or affiliates; provided, that the
foregoing shall not prevent Executive from providing testimony in any judicial
or regulatory proceeding or inquiry. The term “disparaging comment or statement”
shall be limited to a statement that Executive knows or reasonably should know
is untrue and is intended by Executive or, Executive knows or should reasonably
know, would be likely to materially damage the Company.

 

(e)Except as otherwise expressly permitted by this Agreement, not to enter or
gain access to any of the Company’s premises except as expressly invited by the
Company’s Chief Executive Officer or President or as required to perform the
Consulting Services, but only with advance notice to the Chief Executive Officer
or President.

 

(f)Not to contact or communicate with any officer, director or employee of the
Company other than the President or Chief Executive Officer for purposes related
to the Company’s business, other than communications related to Executive’s
severance, ownership of stock in the Company, tax matters, or Consulting
Services or as otherwise authorized by the Chief Executive Officer or President.

 

(g)Not to make any public statements or purport to speak on behalf of the
Company in any capacity, or take any action seeking to commit, obligate or bind
the Company, including in connection with the Consulting Services.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

(h)Not to seek to obtain or gain access from the Company to any material,
non-public information concerning the Company or its business or prospects not
otherwise known to Executive as of the Separation Date and not necessary to
perform the Consulting Services.

 

(i)To notify any subsequent employer or any party to which Executive provides
consulting services of the restrictive covenants set forth in this Section 3(a)
and (b) and understands and acknowledges that the Company may provide a copy of
such restrictive covenants contained in Section 3(a) and (b) to third parties,
including but not limited to, Executive’s subsequent, anticipated or possible
future employers or consulting clients.

 

4.Restrictive Covenant Remedies. In the event of a breach or threatened breach
by Executive of any restrictive covenant set forth in Section 3 hereof, the
Executive hereby consents and agrees that monetary damages would be an
inadequate remedy and would be impossible to ascertain and that the Company
shall be entitled to, in addition to all other available remedies, a temporary
or permanent injunction or other equitable relief against such breach or
threatened breach from any court of competent jurisdiction, without the
necessity of showing any actual damages or that money damages would not afford
an adequate remedy, and without the necessity of posting any bond or other
security. The aforementioned equitable relief shall be in addition to, not in
lieu of, legal remedies, monetary damages or other available forms of relief.
Notwithstanding the foregoing, the Executive shall not be deemed to be in breach
of Section 3 of this Agreement unless and until the Company shall have first
notified the Executive in writing of the acts or conduct of the Executive which
is alleged to constitute the breach and, if such alleged breach is curable, the
Executive shall have failed to cure such breach within ten (10) calendar days of
the delivery of such written notice or for an alleged breach of Section 3(c )
through (i), following notice, the Executive ceases the conduct constituting a
breach.

 

5.Consulting Services.

 

(a)Services. Company hereby retains the services of Executive during the Service
Period to provide consulting services to the Company on matters that may be
requested in writing by the Chief Executive Officer or President from time to
time, and that are reasonably acceptable to Executive based upon his
availability and ability to perform. Consulting Services will be in connection
with the Company’s legal, regulatory and litigation matters (collectively,
“Consulting Services”). The Parties agree that notwithstanding that Executive is
an attorney, no Consulting Service provided by Executive will constitute or be
considered by the Company as legal advice or a legal opinion and that the
Company will rely upon legal advisors other than Executive for all such legal
advice and opinions. Except as set forth in Section 5(i), Executive acknowledges
that the Company has no obligation to pay Executive any compensation or provide
any benefits in connection with the Consulting Services, except that any
Consulting Services provided, at the request of the Company, pursuant to a
Service Period Extension (as defined below) or in excess of 10 hours per month
in the initial consulting term shall be invoiced to the Company at a rate of
$300 per hour.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

(b)Time and Place of Services. Executive will devote reasonable efforts,
attention and time to promptly, fully and faithfully perform the Consulting
Services consistent with the reasonable requests and instructions from time to
time made or given by the Company’s Chief Executive Officer and President.
Notwithstanding the foregoing, Executive shall be available to perform the
Consulting Services not more than ten (10) hours per month, provided however,
that Executive shall not be obligated to perform any Consulting Services that
would cause Executive’s separation from the Company pursuant to this Agreement
to not be considered a “separation from service” under 409A (as defined below).
The Consulting Services shall be performed away from the Company’s premises,
except as contemplated by Section 5(e) or as otherwise authorized by the Chief
Executive Officer or President in advance.

 

(c)Service Period. Unless sooner terminated as provided in Section 5(f) hereof,
the period during which Executive will provide the Consulting Services (“Service
Period”) shall commence on the Separation Date and continue through December 31,
2014; provided, however, that the Company shall have the right, upon written
notice to the Executive, to extend the Service Period through up to December 31,
2015 (a “Service Period Extension”).

 

(d)Independent Contractor Status and Payment of Taxes. It is understood and
agreed, and it is the intention of the Parties, that Executive is an independent
contractor, and not an employee, agent, joint venturer or partner of the Company
for any purposes whatsoever. Executive will be solely responsible for the
payment of his applicable taxes in connection with the Consulting Services,
including without limitation, the employee obligations related to federal income
tax, employment taxes and any state and/or local taxes and shall indemnify the
Company for the same.

 

(e)Office Space; Executive Assistant. Executive may continue to use the office
space currently used by Executive at the Company’s premises in Washington, D.C.
through the seventh (7th) day before the end of the applicable office lease term
(the “Occupancy Period”) solely for the purpose of performing the Consulting
Services. Executive shall not be obligated to pay rent for use of any such
office space during such time. Executive shall receive reasonable executive
assistant support provided by his current executive assistant during the
Occupancy Period at the Company’s expense solely for the purpose of enabling the
Executive to perform the Consulting Services and commensurate the level and
amount of such services.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

(f)Termination of Section 5.

 

(i)Notwithstanding Section 5(c), this Section 5 and the Service Period shall
terminate early immediately upon the occurrence of

 

(1)the death of Executive, or

 

(2)the mental or physical Disability of Executive. “Disability” means a physical
or mental condition, verified by a physician designated by the Company, which
prevents Executive from carrying out one or more of the material aspects of the
Consulting Services for at least thirty (30) consecutive days, or for a total of
ninety (90) days within any twelve (12) month period during the Service Period.

 

(3)delivery by the Company to Executive of written notice terminating this
Section for Cause, which notice shall be supported by a statement of the
relevant facts and reasons for termination. “Cause” means (A) Executive shall
have (i) breached any restrictive covenant set forth in Section 3 hereof, (ii)
committed an act of dishonesty, fraud, embezzlement or theft or otherwise
engaged in misconduct with respect to the property, business or affairs of
Company, (iii) deliberately disregarded the rules, regulations and policies of
the Company, or (iv) committed any act that adversely affects the property,
business, reputation, operations or employees of the Company, in each case,
determined in the judgment of the Compensation Committee (“Compensation
Committee”) of the Board of Directors of the Company; (B) Executive is indicted
for, enters a plea of nolo contendere to, or is convicted of, any felony, (C)
Executive shall have materially breached any provision of this Section 5 and
such breach shall have continued uncured (if such breach is curable) for a
period of ten (10) days after delivery of written notice from the Company
specifying such breach; or (D) Executive shall have been grossly negligent in
the performance of his duties hereunder, intentionally not performed or
misperformed any of such duties, or refused to abide by or comply with the
lawful directives of the Chief Executive Officer or President, which action
shall have continued for a period of ten (10) days after delivery of written
notice from the Company demanding such action cease or be cured.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

(ii)Except with respect to Section 5(e) and 5(i), this Section 5 shall be
terminable by the Company for any reason upon thirty (30) days written notice to
Executive.

 

(iii)This Section 5 shall be terminable by Executive for any reason upon thirty
(30) days written notice to the Company.

 

(iv)Termination of this Section 5 by either Party shall not affect or otherwise
alter the Parties obligations under the remainder of this Agreement, including,
but not limited to, the Company’s obligation hereunder to reimburse expenses and
pay the Aggregate Severance Payment to Executive.

 

(g)Ownership. All work product developed by Executive in connection with the
Consulting Services shall be deemed “work made for hire,” and Executive shall
have no propriety interest or claim in or to any work product developed in
connection with performance of the Consulting Services. Executive hereby assigns
and agrees to assign to the Company, its successors, assignees, or nominees, all
of Executive’s right, title and interest, if any, in any patents, patent
applications, trade secrets, trademarks, copyrights, or other proprietary
information embodied in or relating to his work product under this Agreement. At
the request of the Company, Executive shall execute “Confidential Information
and Invention Assignment Agreements” necessary to give effect to the provisions
of this Section 5.

 

(h)Consulting Expenses. The Company shall reimburse Executive for reasonable
expenses incurred by Executive in performance of the Consulting Services,
provided, that the general purpose and approximate amount of such expenses are
approved in advance by the Chief Executive Officer or President.

 

(i)Insurance Benefits. The Company acknowledges that, prior to the Separation
Date, the Executive will have such medical and dental coverage as is set forth
in the Executive Employment Agreement. Nothing set forth in this Agreement shall
be deemed to affect the Executive’s right to elect to exercise Executive’s
rights to continue group medical and dental plan coverage for a limited period
(commonly referred to as “COBRA Coverage”) within the statutorily prescribed
time period commencing immediately following the Separation Date. The Company
shall pay for COBRA Coverage for Executive from the Separation Date through July
31, 2014 (such COBRA health insurance costs, the “Insurance Costs”).

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

6. Indemnification and Insurance Coverage. The Director Indemnification
Agreement by and between the Company and Executive, dated as of September 24,
1999, will terminate upon the Separation Date and will have no further force and
effect from and after such date. For a period of five (5) years from the
Separation Date, the Company agrees to indemnify Executive to the fullest extent
permitted by Section 145 of the General Corporation Law of the State of Delaware
and/or Article Tenth of the Company’s Ninth Amended and Restated Certificate of
Incorporation with respect to actions taken by Executive prior to the Separation
Date in his role as an employee, officer or director of the Company and
subsequent to the Separation Date for Consulting Services. Company agrees that
its obligation to indemnify Employee in accordance with said Article Tenth and
this Agreement shall not be diminished by any subsequent amendment or rescission
of said Article Tenth, and shall continue in full force and effect after this
Agreement terminates in whole or in part for any reason. The obligation to
indemnify shall apply in any suit or proceeding in which Employee is called as a
witness or is required to answer questions or respond to interrogatories whether
or not Employee is a named defendant. Employee’s right to indemnification
includes reasonable reimbursement for lost salary and expenses incurred in
connection with Employee’s participation in the type of matters described above.
Subject to the right to indemnification, Employee agrees to reasonably cooperate
with Company with respect to any current or future litigation and regulatory
matters and to assist the Company in defending against any such litigation and
in responding to any regulatory matters. To the extent that the Company
maintains directors’ and officers’ liability insurance for its current directors
and officers, and subject to the limitations and restrictions on coverage from
time to time set thereon, the Company shall, if permitted, include Executive as
a named insured therein with respect to matters for which Executive is entitled
to be indemnified for five (5) years from the Separation Date.

 

7. Company Property; Assignment of Intellectual Property.

 

(a)As of the Separation Date, the Company hereby transfers and conveys to
Executive the Company property listed on Schedule 7(a) attached hereto
(“Transferred Assets”). For the avoidance of doubt, the Transferred Assets shall
not include any Confidential Information or Company property the use of which
would cause Executive to breach Section 3(a) of this Agreement. Executive shall
cooperate with the Company to insure that any Confidential Information stored or
contained in any Transferred Assets is removed and transferred to a secure
medium controlled by the Company prior to or following the Separation Date.

 

(b)Executive hereby assigns to the Company, its successors, assignees, or
nominees, all of Executive’s right, title and interest in and to any patents,
patent applications, trade secrets, trademarks, copyrights, or other proprietary
information embodied in or relating to any work product, know-how, research or
development information or data concerning anatabine, Anatabloc® and all other
Company products and supplements vested in or owned by Executive, regardless of
how acquired, in existence on the Separation Date. At the request of the
Company, Executive shall execute any further instruments of assignment necessary
to give effect to the provisions of this Section 7(b).

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

8.Expenses. Each Party shall pay its own respective costs and expenses incurred
in connection with the preparation, negotiation and execution of this Agreement
(including the Appendices attached hereto); provided, however, that the Company
shall within thirty (30) days after the Separation Date pay the reasonably
documented out of pocket legal expenses of Executive, subject to a maximum
amount equal to $25,000, paid in connection with the preparation, negotiation
and execution of this Agreement. In the event the Company fails to pay any
amounts due pursuant to this Agreement, Executive shall be reimbursed by the
Company for all reasonable expenses, including legal fees, incurred by Executive
in collecting such consideration or enforcing this Agreement.

 

9.Material Non-public Information. Subsequent to the Separation Date, except
with advance notice to and written consent from Executive, the Company will not
provide Executive with any material non-public information relating to the
Company.

 

10.Representation; Voluntary Execution of Agreement. Executive acknowledges that
he has reviewed this Agreement in its entirety, including all Appendices
attached hereto, is not a party to any agreements which conflict with this
Agreement or such Appendices, has had an opportunity to obtain the advice of
separate legal counsel prior to executing this Agreement, fully understands all
provisions of this Agreement, and is fully aware of the legal and binding effect
of this Agreement.

 

11.Assignment; Binding Effect. Executive understands that the Consulting
Services to be performed by Executive pursuant to Section 5 of this Agreement
are personal in nature. Executive agrees, therefore, that he cannot assign or
delegate all or any portion of his performance of the Consulting Services.
Executive may not assign, transfer, hypothecate or dispose of any interest in
this Agreement without the Company’s prior written consent. Subject to the
foregoing, this Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the Parties and their respective heirs, legal representatives,
successors, and assigns.

 

12.Entire Agreement. This Agreement and the terms of the Executive Employment
Agreement incorporated herein, contain the entire and only agreement between the
Parties with respect to Executive’s termination as an employee of Company and
supersede any other oral or written representations, assurances, agreements or
understandings regarding Executive’s termination as an employee of the Company,
which shall have no force and effect. Executive agrees that this Agreement
resolves all matters between Executive and Company with respect to Executive’s
employment and termination of employment with the Company.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

13.Governing Law; Jurisdiction and Venue. This Agreement, for all purposes,
shall be construed in accordance with the laws of the State of Florida without
regard to conflicts of law principles thereof. Any action or proceeding by
either of the Parties to enforce this Agreement shall be brought only in any
state or federal court located in Sarasota County or Hillsborough County,
Florida. The Parties hereby irrevocably submit to the non-exclusive jurisdiction
of such courts and waive the defense of inconvenient forum to the maintenance of
any such action or proceeding in such venue.

 

14.Section 409A. This Agreement is intended to comply with Section 409A of the
Internal Revenue Code of 1986, as amended (“Section 409A”) or an exemption
thereunder and shall be construed and administered in accordance with Section
409A. Notwithstanding any other provision of this Agreement, payments provided
under this Agreement may only be made upon an event and in a manner that
complies with Section 409A or an applicable exemption. Any payments under this
Agreement that may be excluded from Section 409A either as separation pay due to
an involuntary separation from service or as a short-term deferral shall be
excluded from Section 409A to the maximum extent possible. For purposes of
Section 409A, each installment payment provided under this Agreement shall be
treated as a separate payment. Any payments to be made under this Agreement upon
a termination of employment or cessation of service shall only be made upon a
“separation from service” under Section 409A. Notwithstanding the foregoing, the
Company makes no representations that the payments and benefits provided under
this Agreement comply with Section 409A and in no event shall the Company be
liable for all or any portion of any taxes, penalties, interest or other
expenses that may be incurred by the Executive on account of non-compliance with
Section 409A.

 

15.Modification and Waiver. No provision of this Agreement may be amended or
modified unless such amendment or modification is agreed to in writing and
signed by Executive and the Company. No waiver by either of the Parties of any
breach by the other Party hereto of any condition or provision of this Agreement
to be performed by the other Party hereto shall be deemed a waiver of any
similar or dissimilar provision or condition at the same or any prior or
subsequent time, nor shall the failure of or delay by either of the Parties in
exercising any right, power or privilege hereunder operate as a waiver thereof
to preclude any other or further exercise thereof or the exercise of any other
such right, power or privilege.

 

16.Severability. In any event, should one or more of the provisions of this
Agreement be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provisions
hereof, and if such provision or provisions are not modified as provided above,
this Agreement shall be construed as if such invalid, illegal or unenforceable
provisions had not been set forth herein.

 

 

 

 

Exhibit 10.1

 

Execution Copy

 

17.Notices. Any notice required to be delivered to the Company under this
Agreement shall be in writing and addressed to the [Chief Executive Officer] of
the Company at the Company’s principal corporate offices. Any notice required to
be delivered to Executive under this Agreement shall be in writing and addressed
to Executive at the address set forth in the introductory paragraph of this
Agreement. Either Party may designate another address in writing (or by such
other method approved by the Company) from time to time.

 

18.Captions; Appendices. Captions and headings of the sections and paragraphs of
this Agreement are intended solely for convenience and no provision of this
Agreement is to be construed by reference to the caption or heading of any
section or paragraph. The Appendices attached hereto are hereby incorporated
into this Agreement by reference.

 

19.Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original but all of which together will constitute one and
the same instrument. Counterpart signature pages to this Agreement transmitted
by facsimile transmission, by electronic mail in portable document format (.pdf)
will have the same effect as physical delivery of the paper document bearing an
original signature.

 

In witness whereof the Parties hereto have executed this Separation and
Consulting Agreement as of the date first written above.

 

/s/ Paul L. Perito

Paul L. Perito

 

STAR SCIENTIFIC, INC.

 

By:    /s/ Michael J. Mullan     Michael J. Mullan, Chairman and     Chief
Executive Officer  

 

 

 

 

Appendix A

 

Severance Payment and Stock Grant Terms

 

The following terms apply to the Aggregate Severance Payment awarded to
Executive pursuant to Section 2 of the Agreement. Capitalized terms that are
used but not defined in the Agreement or in this Appendix A have the meaning
ascribed to them in the Plan.

 

1.Payment, Grant and Vesting Schedules (Section 2).

 

(a)The Company shall pay the Aggregate Severance Payment to Executive in eight
(8) equal quarterly installments (each a “Quarterly Severance Payment”) as set
forth below, but only so long is the Executive is not then in material breach of
his obligations under Section 3(a) or 3(b) of the Agreement:

 

(i)The Company shall pay the first Quarterly Severance Payment, which shall be
an amount equal to $312,500, to Executive in cash in immediately available funds
on the fifth (5th) business day following the Separation Date, less the actual
Insurance Costs in the amount of $2,276.06, for a net payment of $310,223.94;
and

 

(ii)The Company shall pay the seven (7) remaining Quarterly Severance Payments
to Executive in, at the Company’s option, cash or in shares of common stock of
the Company. Such remaining Quarterly Severance Payments shall be made on the
last business day of each calendar quarter commencing on June 30, 2014 (June 30,
2014 is the 2nd installment Grant Date) and continuing through December 31, 2015
(December 31, 2015 is the 8th installment Grant Date) (each, a “Grant Date”). In
the event that the Company elects to pay a Quarterly Severance Payment in shares
of Company common stock, each such grant of shares of Company common stock (each
a “Severance Grant”, and the common stock of the Company granted pursuant
thereto, “Stock”) shall vest immediately on the applicable Grant Date, and the
number of shares of Stock to be granted to Executive on each Grant Date shall be
equal to (i) the amount of the Quarterly Severance Payment due on such Grant
Date ($312,500) divided by (ii) the closing per-share bid price of the Company’s
common stock on the Trading Market on the first trading day immediately
preceding the Grant Date; provided, however, that, notwithstanding the foregoing
schedule, all remaining Quarterly Separation Payments shall be payable and vest
on the tenth (10th) business day following a Change in Control (as defined in
Section 409A) of the Company. In the event that the Company elects to pay a
Quarterly Severance Payment with a Severance Grant of Stock in lieu of cash,
such Stock will, except as provided in following paragraph (b), be granted under
the Company’s 2008 Incentive Award Plan or any other general stock award plan
hereafter adopted by the Company under which the Executive is an eligible award
recipient (the “Plan”), in which case such Stock granted under the Plan will be
issued without restrictive legend and shall be freely tradable.

 

 

 

 

(b)To the extent that the shares issuable pursuant to a Severance Grant (A)
would exceed the limitations set forth in the Plan concerning (i) the aggregate
number of shares of common stock of the Company that may be awarded to all
persons under the Plan at the time of the Severance Grant or (ii) the aggregate
number of shares of common stock of the Company that may be awarded to any one
person in one (1) calendar year at the time of the Severance Grant, or (B)
cannot otherwise be issued under the Plan and the Company’s Registration
Statement on Form S-8 due to the rules and regulations of the Securities and
Exchange Commission or the NASDAQ, then the Severance Grant may, at the option
of the Company, instead be issued in the form of shares of Company common stock
that are “restricted securities” under Rule 144 under the Securities Act of
1933, as amended, and the certificates therefor shall bear an appropriate legend
(“Restricted Securities”).

 

2.Restrictions. Subject to any exceptions set forth in the Agreement or the
Plan, during the period prior to grant and vesting, neither the Stock nor the
rights relating thereto may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by Executive. Any attempt to assign,
alienate, pledge, attach, sell or otherwise transfer or encumber the Stock or
the rights relating thereto during the period prior to grant and vesting shall
be wholly ineffective. With respect to any shares that constitute “restricted
securities” as described in Section 1(b) of this Appendix A, Executive
represents that he is familiar with the limitations imposed by federal and state
securities laws with respect to such shares.

 

3.Rights as Shareholder; Dividends. After grant and vesting, Executive shall be
the record owner of the number of shares of common stock issued on the grant and
vesting date until such shares of common stock are sold or otherwise disposed
of, and Executive shall be entitled to all of the rights of a shareholder of the
Company with respect to such shares including, without limitation, the right to
vote such shares and receive all dividends or other distributions paid with
respect to such shares. The Company may issue stock certificates or evidence of
Executive’s interest by using a book entry account with the Company’s transfer
agent.

 

4.No Right to Continued Service. Neither the Plan nor the Agreement shall confer
upon Executive any right to be retained in any position, as an employee,
consultant, agent, representative or director of the Company.

 

 

 

 

5.Adjustments. If any change is made to the outstanding common stock of the
Company or the capital structure of the Company, if required, the shares of
Stock shall be adjusted or terminated in any manner as contemplated by Section
11 of the Plan.

 

6.Tax Liability and Withholding. Executive shall be required to pay to the
Company, and the Company shall have the right to deduct from any compensation
paid to Executive pursuant to the Plan, the amount of any required withholding
taxes in respect of the Stock and to take all such other action as the Company
deems necessary to satisfy all obligations for the payment of such withholding
taxes. The Executive will be permitted to satisfy any federal, state or local
tax withholding obligation by any of the following means, or by a combination of
such means:

 

(a)tendering a cash payment.

 

(b)selling a sufficient number of shares from any award of stock to satisfy
Executive’s tax obligations and to remitting such funds to Company promptly
after such sale.

 

(c)By such other means as approved by the Compensation Committee in its sole
discretion.

 

Notwithstanding any action the Company takes with respect to any or all income
tax, social insurance, payroll tax, or other employee-based tax-related
withholding (“Tax-Related Items”), the ultimate liability for all Tax-Related
Items is and remains Executive’s responsibility (except for the employer’s share
of any payroll taxes) and the Company makes no representation or undertakings
regarding the treatment of any Tax-Related Items in connection with the award or
vesting of the Stock or the subsequent sale of any shares and does not commit to
structure the Stock to reduce or eliminate Executive’s liability for Tax-Related
Items. The Executive agrees to indemnify and hold harmless the Company from and
against any and all liability and expenses arising from or relating to the
Tax-Related Items. If the Company elects to make a Severance Grant of Stock in
lieu of paying a Quarterly Severance Payment in cash, the Company’s obligation
to make such Severance Grant will be contingent on the Executive paying to the
Company such amounts as are necessary to satisfy the Company’s minimum federal,
state, or local tax withholding obligations arising from such Quarterly
Severance Payment (the “Withholding Amount”), provided, however, that if the
Severance Grant is made in Restricted Shares and if the Executive does not then
hold sufficient unrestricted shares of Company common stock received from a
prior Severance Grant of Stock that can immediately be sold to fund the entire
Withholding Amount, then an amount equal to the portion of the Withholding
Amount that cannot be satisfied with the proceeds from the sale of unrestricted
shares of a prior Severance Grant of Stock will be paid in cash by the Company
in lieu of Stock.

 

7.Compliance with Law. The issuance and transfer of shares of Stock shall be
subject to compliance by Executive with all applicable requirements of federal
and state securities laws and with all applicable requirements of the NASDAQ. No
shares of Stock shall be issued or transferred unless and until any then
applicable requirements of state and federal laws and regulatory agencies have
been fully complied. Except with respect to the Plan, Executive understands that
the Company is under no obligation to register the shares of common stock with
the Securities and Exchange Commission, any state securities commission or any
stock exchange to effect such compliance.

 

 

 

 

8.Legends. A legend may be placed on any certificate(s) or other document(s)
delivered to Executive only in the event that Restricted Securities are issued
to Executive under Section 1(b) of this Appendix.

 

9.Stock Subject to Plan. With respect to any Stock granted under the Plan
hereunder, this Agreement is subject to the Plan as approved by the Company’s
shareholders. The terms and provisions of the Plan as it may be amended from
time to time are hereby incorporated herein by reference. In the event of a
conflict between any term or provision contained herein and a term or provision
of the Plan, the applicable term or provision of the Plan will govern. Executive
acknowledges that the Plan is discretionary and may be amended, cancelled or
terminated by the Company at any time, in its discretion. The grant of the Stock
in this Agreement does not create any contractual right or other right to
receive any stock or other awards in the future.

 

10.Acceptance. Executive hereby acknowledges receipt of a copy of the Plan and
the Agreement. Executive has read and understands the terms and provisions
thereof, and accepts the Stock award subject to all of the terms and conditions
of the Plan and the Agreement. Executive acknowledges that there may be adverse
tax consequences upon the grant or vesting of the Stock or disposition of the
underlying shares and that Executive has been advised to consult a tax advisor
prior to such grant, vesting or disposition.

 

11.Trading Market. For purposes hereof, the term “Trading Market” means the
Nasdaq Global Market; provided, however, that in the event the Company’s common
stock is no longer listed on the Nasdaq Global Market, then it will mean Nasdaq
Capital Market, the New York Stock Exchange, any marketplace of OTC Markets
Group Inc., the OTC Bulletin Board, or any other market or exchange on which the
Company’s common stock is then listed or quoted.

 

12.Successors and Assigns. This Appendix will be binding upon and inure to the
benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer set forth herein, this Appendix will be binding upon
Executive and Executive’s beneficiaries, executors, administrators and the
person(s) to whom the Stock may be transferred by will or the laws of descent or
distribution.

 

 

 

 

Appendix B

 

General Release and Waiver

 

For and in consideration of the payments and other benefits due to Paul L.
Perito (“Executive”) pursuant to the Separation and Consulting Agreement, dated
as of May 9, 2014 (“Agreement”), by and between Star Scientific, Inc.
(“Company”) and Executive, and for other good and valuable consideration,
Executive hereby, for and on behalf of Executive, and his spouse, children,
heirs, beneficiaries, devisees, executors, administrators, attorneys, personal
representatives, successors and assigns, fully and forever releases, discharges
and covenants not to sue the Company, or any of its divisions, affiliates,
subsidiaries, parents, branches, predecessors, successors, assigns, and, with
respect to such entities, their officers, directors, trustees, employees,
agents, shareholders, administrators, general or limited partners,
representatives, attorneys, insurers and fiduciaries, past, present and future
(“Released Parties”) from any and all claims of any kind arising out of, or
related to, his employment with the Company, its affiliates and subsidiaries
(collectively, with the Company, the “Affiliated Entities”) and/or Executive’s
separation from employment with the Affiliated Entities, which Executive now has
or may have against the Released Parties, whether known or unknown to Executive,
by reason of facts which have occurred on or prior to the date that Executive
has signed this Release, except for (i) any contractual or statutory rights to
indemnification to which Executive is entitled, (ii) rights with respect to any
outstanding stock option, stock grant or warrant, and (iii) rights under the
Agreement. Such released claims include, without limitation, any and all claims
relating to the foregoing under federal, state or local laws pertaining to
employment, including, without limitation, the Age Discrimination in Employment
Act, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C.
Section 2000e et. seq., the Fair Labor Standards Act, as amended, 29 U.S.C.
Section 201 et. seq., the Americans with Disabilities Act, as amended, 42 U.S.C.
Section 12101 et. seq. the Reconstruction Era Civil Rights Act, as amended, 42
U.S.C. Section 1981 et. seq., the Rehabilitation Act of 1973 , as amended, 29
U.S.C. Section 701 et. seq., the Family and Medical Leave Act of 1992, 29 U.S.C.
Section 2601 et. seq., and any and all state or local laws regarding employment
discrimination and/or federal, state or local laws of any type or description
regarding employment, including but not limited to any claims arising from or
derivative of Executive’s employment with the Affiliated Entities, as well as
any and all such claims under state contract or tort law. Executive hereby
waives, and agrees not to seek, any right to monetary damages that may be
obtained by any agency or other entity or individual on his behalf and Executive
further agrees that he will never individually or with any other person file, or
commence the filing of, any lawsuits, complaints or proceedings of any kind with
any state or federal court against the Company, except with respect to claims
related to (i) any contractual or statutory rights to indemnification to which
Executive is entitled, (ii) rights with respect to any outstanding stock option,
stock grant or warrant, and (iii) rights under the Agreement.

 

 

 

 

The Executive has read this Release carefully, acknowledges that the Executive
has been given at least twenty-one (21) days to consider all of its terms and
has been advised to consult with an attorney and any other advisors of the
Executive’s choice prior to executing this Release, and the Executive fully
understands that by signing below the Executive is voluntarily giving up any
right which the Executive may have to sue or bring any other claims against the
Released Parties, including any rights and claims under the Age Discrimination
in Employment Act. Executive also understands that Executive has a period of
seven (7) days after signing this Release within which to revoke this agreement,
and that neither the Company nor any other person is obligated to make any
payments or provide any other benefits to Executive pursuant to the Agreement
until seven (7) days have passed since Executive’s signing of this Release
without Executive’s signature having been revoked. Executive has not been forced
or pressured in any manner whatsoever to sign this Release, and Executive agrees
to all of its terms voluntarily.

 

This Release is final and binding and may not be changed or modified except in a
writing signed by both parties.

 

Date:  May 20, 2014 /s/ Paul L. Perito   Paul L. Perito        Date: 20th May
2014 STAR SCIENTIFIC, INC.         By:   /s/ Michael J. Mullan     Michael J.
Mullan, Chairman and     Chief Executive Officer

  

 

 

 

Schedule 7(a)

 

Transferred Assets

 

1.All furniture, art, memorabilia, wall hangings and rugs located in Mr.
Perito’s personal office at the Company’s premises in Washington, D.C. (provided
that Mr. Perito shall pay for the moving of such items from the Company’s office
prior to the end of the Occupancy Period).

2.Mr. Perito’s personal cell phone (provided that the Company shall make a copy
of all data thereon and shall have the right to remove Company applications or
Company-licensed applications therefrom).

3.Mr. Perito’s personal computer, laptop and mobile device (provided that the
Company shall make a copy of all data thereon and shall have the right to remove
Company applications or Company-licensed applications therefrom).