UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-Q
———————
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the quarterly period ended:March 31, 2009 | |
or | |
|
|
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE |
| ACT OF 1934 |
For the transition period from: _____________ to _____________ |
———————
STELLAR PHARMACEUTICALS INC.
(Exact name of small business issuer as specified in its charter)
———————
ONTARIO, CANADA | 0-31198 | N/A |
(State or Other Jurisdiction | (Commission | (I.R.S. Employer |
of Incorporation) | File Number) | Identification No.) |
544 Egerton St
London, Ontario Canada N5W 3Z8
(Address of Principal Executive Office) (Zip Code)
(519) 434-1540
(Issuer’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
———————
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filero | Non-accelerated filer o | Smaller Reporting Companyþ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The number of outstanding common shares, no par value, of the Registrant at: March 31, 2009: 23,495,040
STELLAR PHARMACEUTICALS INC.
TABLE OF CONTENTS
PART I –FINANCIAL STATEMENTS
ITEM 1.
CONDENSED INTERIM FINANCIAL STATEMENTS
STELLAR PHARMACEUTICALS INC.
CONDENSED BALANCE SHEETS
(Expressed in Canadian Dollars)
|
| As at March 31, 2009 |
|
| As at December 31, 2008 |
| ||||
|
| (Unaudited) |
|
| (Audited) |
| ||||
ASSETS |
| |||||||||
|
|
|
|
|
|
|
|
| ||
CURRENT |
|
|
|
|
|
|
|
| ||
Cash and cash equivalents (Note 2) |
| $ | 2,340,735 |
|
| $ | 2,105,966 |
| ||
Accounts receivable, net of allowance $nil (2008 - $nil) |
|
| 317,936 |
|
|
| 549,055 |
| ||
Inventories (Note 3 |
|
| 607,409 |
|
|
| 364,551 |
| ||
Taxes recoverable |
|
| 215,603 |
|
|
| 212,445 |
| ||
Loan receivable |
|
| 18,369 |
|
|
| 18,369 |
| ||
Prepaid, deposits and sundry receivables (Note 4) |
|
| 236,799 |
|
|
| 130,515 |
| ||
|
|
| 3,736,851 |
|
|
| 3,380,901 |
| ||
PROPERTY, PLANT AND EQUIPMENT (Note 5) |
|
| 1,235,801 |
|
|
| 1,270,257 |
| ||
OTHER ASSETS (Note 6) |
|
| 72,112 |
|
|
| 65,495 |
| ||
|
| $ | 5,044,764 |
|
| $ | 4,716,653 |
| ||
|
| |||||||||
LIABILITIES |
| |||||||||
CURRENT |
|
|
|
|
|
|
|
| ||
Accounts payable |
| $ | 415,256 |
|
| $ | 173,812 |
| ||
Accrued liabilities |
|
| 270,032 |
|
|
| 186,201 |
| ||
Deferred revenues |
|
| 700 |
|
|
| 1,749 |
| ||
|
|
| 685,988 |
|
|
| 361,762 |
| ||
CONTINGENCIES AND COMMITMENTS(Note 10) |
|
|
|
|
|
|
|
| ||
|
| |||||||||
SHAREHOLDERS’ EQUITY |
| |||||||||
CAPITAL STOCK (Note 7) |
|
|
|
|
|
|
|
| ||
AUTHORIZED |
|
|
|
|
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|
|
| ||
Unlimited Non-voting, convertible, redeemable, and retractable preferred shares with no par value |
|
|
|
|
|
|
|
| ||
Unlimited Common shares with no par value |
|
|
|
|
|
|
|
| ||
ISSUED |
|
|
|
|
|
|
|
| ||
23,555,040 Common shares (2008 – 23,702,540) |
|
| 8,209,778 |
|
|
| 8,261,403 |
| ||
(60,000) Treasury shares (2008 – (147,500)) |
|
| (21,292 | ) |
|
| (51,625 | ) | ||
Additional paid-in capital for cancelled common shares |
|
| 2,329 |
|
|
| 2,329 |
| ||
|
|
|
|
|
|
|
|
| ||
Additional paid-in capital options - outstanding |
|
| 35,965 |
|
|
| 35,965 |
| ||
– expired |
|
| 722,372 |
|
|
| 722,372 |
| ||
|
|
| 8,949,152 |
|
|
| 8,970,444 |
| ||
DEFICIT |
|
| (4,590,376 | ) |
|
| (4,615,553 | ) | ||
|
|
| 4,358,776 |
|
|
| 4,354,891 |
| ||
|
| $ | 5,044,764 |
|
| $ | 4,716,653 |
| ||
|
|
|
|
|
|
|
|
| ||
See accompanying notes to condensed interim financial statements. |
|
|
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|
|
| ||
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Approved on behalf of the Board: |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| ||
/s/ Peter Riehl |
| /s/ Arnold Tenney |
|
|
|
| ||||
DIRECTOR |
| DIRECTOR |
|
|
|
|
1
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) AND DEFICIT
(Expressed in Canadian Dollars)
(Unaudited)
|
| For the Three Month Period Ended March 31, |
| |||||
|
| 2009 |
|
| 2008 |
| ||
|
|
|
|
|
|
| (Note 17) |
|
PRODUCT SALES (Note 15) |
| $ | 544,419 |
|
| $ | 329,456 |
|
COST OF PRODUCTS SOLD |
|
| 154,955 |
|
|
| 97,327 |
|
MARGIN ON PRODUCTS SOLD |
|
| 389,464 |
|
|
| 232,129 |
|
|
|
|
|
|
|
|
|
|
ROYALTY AND LICENSING REVENUES(Note 15) |
|
| 228,096 |
|
|
| 197,956 |
|
GROSS PROFIT |
|
| 617,560 |
|
|
| 430,085 |
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
| 578,052 |
|
|
| 490,991 |
|
Research and development |
|
| 5,608 |
|
|
| 53,818 |
|
Amortization (non-manufacturing property, plant and equipment) |
|
| 13,698 |
|
|
| 13,167 |
|
|
|
| 597,358 |
|
|
| 557,976 |
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS |
|
| 20,202 |
|
|
| (127,891 | ) |
INTEREST AND OTHER INCOME |
|
| 4,975 |
|
|
| 29,074 |
|
NET INCOME (LOSS) AND COMPREHENSIVE |
|
|
|
|
|
|
|
|
INCOME (LOSS) FOR THE PERIOD |
|
| 25,177 |
|
|
| (98,817 | ) |
|
|
|
|
|
|
|
|
|
DEFICIT,beginning of period |
|
| (4,615,553 | ) |
|
| (4,576,621 | ) |
DEFICIT,end of period |
| $ | (4,590,376 | ) |
| $ | (4,675,438 | ) |
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE (Note 8) |
| $ | 0.00 |
|
| $ | 0.00 |
|
WEIGHTED AVERAGE NUMBER OF |
|
|
|
|
|
|
|
|
COMMON SHARES OUTSTANDING(Note 8) |
|
| 23,527,318 |
|
|
| 23,822,540 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed interim financial statements.
2
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM STATEMENTS OF CASH FLOWS
(Expressed in Canadian Dollars)
(Unaudited)
|
| For the Three Month Period Ended March 31, |
| |||||
|
| 2009 |
|
| 2008 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES – |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 25,177 |
|
| $ | (98,817 | ) |
Items not affecting cash |
|
|
|
|
|
|
|
|
Amortization |
|
| 34,995 |
|
|
| 30,383 |
|
Unrealized foreign exchange (gain) loss |
|
| 1,394 |
|
|
| (13,150 | ) |
Issuance of equity instruments for services rendered |
|
| –– |
|
|
| 5,589 |
|
Change in non-cash operating assets and liabilities (Note 9) |
|
| 203,044 |
|
|
| (112,184 | ) |
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITES |
|
| 264,610 |
|
|
| (188,179 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN INVESTING ACTIVITES - |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
| (197 | ) |
|
| (15,906 | ) |
Increase in other assets |
|
| (6,957 | ) |
|
| (6,063 | ) |
CASH FLOWS USED IN INVESTING ACTIVITES |
|
| (7,154 | ) |
|
| (21,969 | ) |
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN FINANCING ACTIVITES |
|
|
|
|
|
|
|
|
Repurchase of common shares for cash (Note 7 (b)) |
|
| (21,292 | ) |
|
| –– |
|
CASH FLOWS USED IN INVESTING ACTIVITES |
|
| (21,292 | ) |
|
| –– |
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATES ON CASH HELD IN |
|
|
|
|
|
|
|
|
FOREIGN CURRENCY |
|
| (1,395 | ) |
|
| 13,150 |
|
CHANGE IN CASH AND CASH EQUIVALENTS |
|
| 234,769 |
|
|
| (196,998 | ) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,beginning of period |
|
| 2,105,966 |
|
|
| 3,211,126 |
|
CASH AND CASH EQUIVALENTS,end of period |
| $ | 2,340,735 |
|
| $ | 3,014,128 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed interim financial statements.
3
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
1.
BASIS OF PRESENTATION
These condensed interim financial statements should be read in conjunction with the financial statements for Stellar Pharmaceuticals Inc.’s ("the Company") most recently completed fiscal year ended December 31, 2008. These financial statements do not include all disclosures required in annual financial statements but rather are prepared in accordance with recommendations for interim financial statements in conformity with accounting principles generally accepted in the United States of America. These financial statements have been prepared using the same accounting policies, and methods as those used by the Company in the annual financial statements for the year ended December 31, 2008.
The unaudited condensed financial statements contain all adjustments (consisting of only normal recurring adjustments), which are necessary to present fairly the financial position of the Company as at March 31, 2009 and December 31, 2008, and the results of its operations and cash flows for the three month periods ended March 31, 2009 and 2008.
a)
The preparation of these financial statements has required management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities as at March 31, 2009 and 2008, and the revenue and expenses recorded for the quarters then ended. On an ongoing basis, the Company evaluates its estimates, including those related to provision for doubtful accounts, accrued liabilities, income taxes, stock based compensation, revenue recognition and intangible assets. The Company bases its estimates on historical experiences and on various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates. As adjustments become necessary, they are reported in earnings in the period in which they become known.
b) Fair Value
Effective January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 provides guidance on how to measure the fair value of financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels. SFAS 157 broadly applies to most existing pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements.
The adoption of SFAS 157 did not have a material impact on the Company’s shareholders’ equity and net income (loss) and comprehensive income (loss) for the period.
In February 2008, the FASB issued FSP SFAS 157-2 “Effective Date of FASB Statement No. 157” (FSP SFAS 157-2), which permits a one-year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS 157-2 did not have a material impact on the Company’s non-financial assets and non-financial liabilities for the period.
4
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
2.
CASH AND CASH EQUIVALENTS
|
| March 31, |
|
| December 31, |
| ||
|
| 2009 |
|
| 2008 |
| ||
Cash |
|
| (Unaudited) |
|
|
| (Audited) |
|
Short-term investments |
| $ | 840,470 |
|
| $ | 1,205,094 |
|
|
|
| 1,500,265 |
|
|
| 900,872 |
|
|
| $ | 2,340,735 |
|
| $ | 2,105,966 |
|
3.
INVENTORIES
|
| March 31, |
|
| December 31, |
| ||
|
| 2009 |
|
| 2008 |
| ||
|
|
| (Unaudited) |
|
|
| (Audited) |
|
Raw material |
| $ | 141,800 |
|
| $ | 135,315 |
|
Finished goods |
|
| 117,739 |
|
|
| 38,842 |
|
Packaging materials |
|
| 53,699 |
|
|
| 53,811 |
|
Work in process |
|
| 294,171 |
|
|
| 136,583 |
|
|
| $ | 607,409 |
|
| $ | 364,551 |
|
4.
PREPAID, DEPOSITS AND SUNDRY RECEIVABLES
5.
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
| March 31, 2009 |
| ||||
|
|
|
|
|
|
| (Unaudited) |
| ||||
|
|
|
|
|
| Accumulated |
|
| Net Carrying |
| ||
|
| Cost |
|
| Amortization |
|
| Amount |
| |||
Land |
| $ | 90,000 |
|
| $ | –– |
|
| $ | 90,000 |
|
Building |
|
| 586,954 |
|
|
| 123,475 |
|
|
| 463,479 |
|
Office equipment |
|
| 40,495 |
|
|
| 37,722 |
|
|
| 2,773 |
|
Manufacturing equipment |
|
| 1,099,988 |
|
|
| 495,208 |
|
|
| 604,780 |
|
Warehouse equipment |
|
| 13,750 |
|
|
| 4,479 |
|
|
| 9,271 |
|
Packaging equipment |
|
| 48,467 |
|
|
| 7,074 |
|
|
| 41,393 |
|
Computer equipment |
|
| 116,735 |
|
|
| 92,630 |
|
|
| 24,105 |
|
|
| $ | 1,996,389 |
|
| $ | 760,588 |
|
| $ | 1,235,801 |
|
5
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
5.
PROPERTY, PLANT AND EQUIPMENT (Continued)
|
|
|
|
|
|
| December 31, 2008 |
| ||||
|
|
|
|
|
|
| (Audited) |
| ||||
|
|
|
|
|
| Accumulated |
|
| Net Carrying |
| ||
|
| Cost |
|
| Amortization |
|
| Amount |
| |||
Land |
| $ | 90,000 |
|
| $ | –– |
|
| $ | 90,000 |
|
Building |
|
| 586,954 |
|
|
| 116,105 |
|
|
| 470,849 |
|
Office equipment |
|
| 40,495 |
|
|
| 36,801 |
|
|
| 3,694 |
|
Manufacturing equipment |
|
| 1,099,790 |
|
|
| 475,453 |
|
|
| 624,337 |
|
Warehouse equipment |
|
| 13,750 |
|
|
| 3,675 |
|
|
| 10,075 |
|
Packaging equipment |
|
| 48,467 |
|
|
| 5,840 |
|
|
| 42,627 |
|
Computer equipment |
|
| 116,735 |
|
|
| 88,060 |
|
|
| 28,675 |
|
|
| $ | 1,996,191 |
|
| $ | 725,934 |
|
| $ | 1,270,257 |
|
6.
OTHER ASSETS
|
|
|
|
|
|
| March 31, 2009 |
| ||||
|
|
|
|
|
|
| (Unaudited) |
| ||||
|
|
|
|
|
| Accumulated |
|
| Net Carrying |
| ||
|
| Cost |
|
| Amortization |
|
| Amount |
| |||
Patents |
| $ | 79,337 |
|
| $ | 7,225 |
|
| $ | 72,112 |
|
|
|
|
|
|
|
| December 31, 2008 |
| ||||
|
|
|
|
|
|
| (Audited) |
| ||||
|
|
|
|
|
| Accumulated |
|
|
| Net Carrying |
| |
|
|
| Cost |
|
| Amortization |
|
|
| Amount |
| |
Patents |
| $ | 72,380 |
|
| $ | 6,885 |
|
| $ | 65,495 |
|
7.
CAPITAL STOCK
(a)
Common Shares
During the three month period ended March 31, 2009, no Common Shares were issued by the Company. On April 1, 2008, the Company commenced a normal course issuer bid (the "NCIB") for its Common Shares. Pursuant to the terms of the NCIB, the Company may during the 12 month period commencing April 1, 2008 and ending March 31, 2009, purchase up to 1,191,127 Common Shares provided that the aggregate value of Common Shares so purchased, does not exceed $1,000,000. Purchases of Common Shares will be made in open market transactions, at market prices prevailing at the time of acquisition. All Common Shares purchased under the NCIB have effectively been cancelled.
Authorized: An unlimited number of Common Shares, with no par value.
|
| Number of Shares |
|
| Amount |
| ||
Balance, January 1, 2009 |
| $ | 23,702,540 |
|
| $ | 8,261,403 |
|
Shares purchased in buyback |
|
| 147,500 |
|
|
| (51,625 | ) |
Balance, March 31, 2009 |
| $ | 23,555,040 |
|
| $ | 8,209,778 |
|
6
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
7.
CAPITAL STOCK (Continued)
Treasury Shares
|
| Number of Shares |
|
| Amount |
| ||
Balance, January 1, 2009 |
| $ | (147,500 | ) |
| $ | (51,625 | ) |
Shares cancelled from buyback |
|
| 147,500 |
|
|
| 51,625 |
|
Shares purchased in buyback |
|
| (60,000 | ) |
|
| (21,292 | ) |
Balance, March 31, 2009 |
| $ | (60,000 | ) |
| $ | (21,292 | ) |
(b)
Purchases of Equity Securities
Pursuant to the terms of the NCIB, during the three month period ended March 31, 2009, the Company purchased 60,000, of its Common Shares at an average purchase price of $0.35. The total repurchase cost for these Common Shares for the three month periods ended March 31, 2009 was $21,292.
(c)
Paid-in Capital Options - Outstanding
For the three month period ended March 31, 2009 there were no changes to the paid-in capital options outstanding.
(d)
Paid-in Capital Options - Expired
For the three month period ended March 31, 2009 there were no changes to the paid-in capital options expired.
(e)
Stock Based Compensation
The Company’s stock based compensation program includes stock options in which some options vest based on continuous service while others vest based on performance conditions, such as profitability and sales goals. For those equity awards that vest based on continuous service, compensation expense is recorded over the service period from the date of grant. For performance-based awards, compensation expense is recorded over the remaining service period when the Company determines that achievement is probable.
During the three month period ended March 31, 2009, there were no options granted (March 31, 2008 – nil). The total number of options outstanding as at March 31, 2009 was 105,000 (March 31, 2008 – 355,000). All options previously granted have fully vested with no expense recorded during the three month period ended March 31, 2009 (2008 - $5,589).
As at March 31, 2009, the maximum number of options that may be issued under the plan is 4,629,452 (December 31, 2008 – 4,629,452).
The average fair value of options expensed during the period ended March 31, 2008 was estimated at $0.69 on the date of grant using the Black-Scholes option-pricing model with the following assumptions.
Risk-free interest rate | 3-5% |
Expected life | 3 years |
Expected volatility | 87-100% |
Dividend yield | 0% |
7
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
8.
EARNINGS (LOSS) PER SHARE
The treasury stock method assumes that proceeds received upon the exercise of all warrants and options outstanding in the period are used to repurchase the Company's shares at the average share price during the period. The diluted earnings per share is not computed when the effect of such calculation is anti-dilutive. The exercise price of all options outstanding at March 31, 2009, was out-of-the-money and therefore these stock options do not have a diluted effect on the earnings per share.
The following table sets forth the computation of earnings (loss) per share:
|
| 2009 |
|
| 2008 |
| ||
Numerator - net earnings (loss) available to common shareholders |
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
| $ | 25,177 |
|
| $ | (98,817 | ) |
Denominator – Weighted average number of Common Shares outstanding |
|
| 23,527,318 |
|
|
| 23,822,540 |
|
Earnings (loss) per share |
| $ | 0.00 |
|
| $ | (0.00 | ) |
9.
STATEMENT OF CASH FLOWS
Changes in non-cash balances related to operations are as follows:
For the periods ended March 31 |
| 2009 |
|
| 2008 |
| ||
Accounts receivable |
| $ | 231,119 |
|
| $ | (26,114 | ) |
Inventories |
|
| (242,858 | ) |
|
| (23,240 | ) |
Prepaids, deposits and sundry receivables |
|
| (106,284 | ) |
|
| (6,677 | ) |
Taxes recoverable |
|
| (3,158 | ) |
|
| –– |
|
Accounts payable and accrued liabilities |
|
| 325,274 |
|
|
| (54,055 | ) |
Deferred revenues |
|
| (1,049 | ) |
|
| (2,098 | ) |
|
| $ | 203,044 |
|
| $ | (112,184 | ) |
During the three month period ended March 31, 2009 there was no interest paid (2008 – nil). During the three month periods ended March 31, 2009 and 2008 there were no taxes paid.
10.
CONTINGENCIES AND COMMITMENTS
(a)
Royalty Agreements
In September 2000, the Company entered into a royalty agreement for sales of Uracyst®. The agreement involved royalty payments, which initially were based on 5% of the total sales of Uracyst at a declining rate of 1% per year over a three-year period, declining to a 2% rate effective October 1, 2003 until the end of the agreement on September 30, 2008, at which time this agreement ended. No further obligation for royalty payments are due in 2009 (2008 - $938). These amounts have been recorded as royalty expense in selling, general and administrative.
Royalty agreements were activated in November and December 2008 upon the signing of each of the European license agreements for sales of Uracyst® in the defined territories. These agreements involved royalty payments to be paid to the Consultants, who introduced the licensee to the Company. The royalty payments being issued to Consultants included 10% of the upfront fees received from the licensee and 10% to 50% of any future milestone payments received. In addition, royalty payments were also based on 4 to 5% of the total sales of Uracyst at a declining rate of 1% per year over a three to five year period, declining to a 1% rate effective in the final year. Expenses recorded in regards to licensing and royalty fees for the three month period ended March 31, 2009 were $32,061 (2008 - $nil). These amounts have been recorded as royalty expense in selling, general and administrative.
8
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
10.
CONTINGENCIES AND COMMITMENTS (Continued)
(b)
License Agreements
There are no changes to the license agreements as disclosed in Note 13 (b) of the annual financial statements for the 2008 fiscal year.
(c)
Distribution Agreement
There are no changes to the distribution agreements as disclosed in Note 13 (c) of the annual financial statements for the 2008 fiscal year.
(d)
Manufacturing Agreement
There are no changes to the manufacturing agreements as disclosed in Note 13 (d) of the annual financial statements for the 2008 fiscal year.
(e)
Leases
The Company presently leases office and warehouse equipment under operating leases. For the three month period ended March 31, 2009 the total expense related to leases was $1,274 (2008 - $1,274). At March 31, 2009, the remaining future minimum lease payments under operating leases are $13,451 (December 31, 2008 - $14,725).
(f)
Consulting Agreements
In May 2005, the Company entered into a research and development agreement with a university in the United States. This agreement was extended until January 2009, for additional research to be performed. The program is on Bladder Urothelial research in interstitial cystitis and cost the Company US$265,300 over the period May 2005 to January 2009. During the three month period ended March 31, 2009, the Company has recorded $3,536 (2008 - $6,135) as research and development costs.
11.
SIGNIFICANT CUSTOMERS
During the three month period ended March 31, 2009, the Company had two significant customers that represented 44.1% (one major wholesaler – 28.7%; and one international customer – 15.4%) of product sales (2008 – 40%; one major wholesaler one major wholesaler – 28%; and one international customer - 12%). The Company believes that its relationship with these customers is satisfactory.
12.
RELATED PARTY TRANSACTIONS
The Company entered a fiscal advisory and consulting agreement with LMT Financial Inc. (a company beneficially owned by a director and his spouse) for services to be provided in the normal course of business. Compensation under the agreement is $6,000 per month. For the three month period ended March 31, 2009, the Company recorded and paid $18,000 (2008 - $18,000) as selling, general and administrative costs.
9
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
13.
INCOME TAXES
The Company has had no taxable income under the Federal and Provincial tax laws for the three month periods ended March 31, 2009 and 2008. The Company has non-capital loss carry-forwards at March 31, 2009 totaling $2,332,200, which may be offset against future taxable income. If not utilized, the loss carry-forwards will expire between 2010 and 2029. As a result of FIN 48, “Accounting for Uncertainty in Income Taxes”, there was no material impact on the Company's financial statements.
The cumulative carry-forward pool of SR&ED expenditures that may be offset against future taxable income, with no expiry date, is $1,880,800.
The non-refundable portion of the tax credits as at March 31, 2009 was $335,000. All taxable benefits are fully allowed for because the realization of the assets is undeterminable.
14.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed,” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and non-financial) and will require enhanced disclosures. This standard is effective for periods ending after June 15, 2009. The Company is evaluating the impact that this standard will have on its financial position and results of operations.
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This standard is effective for periods ending after June 15, 2009. The Company is evaluating the impact that this standard will have on the Company’s financial position and results of operations.
15.
SEGMENTED INFORMATION
The Company is engaged in one line of business which is in the development and marketing of polysaccharide-based therapeutic products used in a treatment of osteoarthritis and certain types of cystitis. Currently, certain of the Company’s manufacturing assets are located in the United States, with a current net book value of approximately $113,680 (2008 - $124,282l), the Company’s remaining assets are located in Canada, and all direct sales take place in Canada. Licensing arrangements have been obtained to distribute and sell the Company’s products in various countries including the United States of America.
The Company is engaged in the sale of three lines of product:
|
| Unaudited March 31, |
| |||||
Products sales |
| 2009 |
|
| 2008 |
| ||
NeoVisc |
|
| 51.0 | % |
|
| 51.6 | % |
Uracyst |
|
| 18.5 | % |
|
| 8.9 | % |
BladderChek |
|
| 0.8 | % |
|
| 1.6 | % |
Subtotal |
|
| 70.3 | % |
|
| 62.1 | % |
Licensing & royalty fees |
|
| 29.5 | % |
|
| 37.5 | % |
Other |
|
| 0.2 | % |
|
| 0.4 | % |
10
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
MARCH 31, 2009
15.
SEGMENTED INFORMATION Continued)
Revenue for the three month period includes products sold in Canada, international sales of products, royalty revenues and raw materials sold at cost to the Company’s European licensee. Revenue earned for the three month period is as follows:
|
| Unaudited March 31, |
| |||||
Products sales |
| 2009 |
|
| 2008 |
| ||
Domestic sales |
| $ | 341,776 |
|
| $ | 266,237 |
|
International sales |
|
| 201,547 |
|
|
| 62,123 |
|
Other revenue |
|
| 1,096 |
|
|
| 1,096 |
|
|
| $ | 544,419 |
|
| $ | 329,456 |
|
|
|
|
|
|
|
|
|
|
Royalties and licensing revenue |
|
|
|
|
|
|
|
|
Royalty payments |
| $ | 219,206 |
|
| $ | 197,956 |
|
Licensing fees |
|
| 8,890 |
|
|
| –– |
|
Royalty payments |
| $ | 228,096 |
|
| $ | 197,956 |
|
The Company currently sells its own products and is in-licensingother products in Canada. In addition, revenues include products which the Company out-licenses in Europe, the Caribbean, Lebanon, Malaysia, Kuwait, Romania, the United Arab Emirates and Turkey. The continuing operations reflected in the statements of operations include the Companys’ activities in these markets.
16.
FOREIGN CURRENCY GAIN (LOSS
The Company enters into foreign currency transactions in the normal course of business. During the three month period ended March 31, 2009, the Company had a foreign currency gain (loss) of ($1,395) (2008 – $13,150). These amounts have been included in selling, general and administrative expenses.
17.
COMPARATIVE FIGURES
Certain comparative figures in 2008 have been reclassified to conform to the current year's presentation, in accordance with generally accepted accounting principles of the United States.
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
This document was prepared on June 4, 2009 and should be read in conjunction with the March 31, 2009 financial statements of Stellar Pharmaceuticals Inc. ("Stellar" or the "Company"). All amounts are stated in Canadian dollars and have been rounded to the nearest one hundredthdollar.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that actual results may differ materially from the results projected in any "forward-looking" statements included in this report, which involve a number of risks or uncertainties. Forward-looking statements are statements that are not historical facts, and include statements regarding the Company’s planned research and development programs, anticipated future losses, revenues and market shares, planned clinical trials, expected future expenditures, the Company’s intention to raise new financing, sufficiency of working capital for continued operations, and other statements regarding anticipated future events and the Company’s anticipated future performance. Forward-looking statements generally can be identified by the words "expected", "intends", "anticipates", "feels", "continues", "planned", "plans", "potential", "w ith a view to", and similar expressions or variations thereon, or that events or conditions "will", "may", "could" or "should" occur, or comparable terminology referring to future events or results.
The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including those listed under "Risks and Uncertainties", any of which could cause actual results to vary materially from current results or the Company's anticipated future results. The Company assumes no responsibility to update the information contained herein.
CRITICAL ACCOUNTING POLICIES
The United States Securities and Exchange Commission ("SEC") defines critical accounting policies as those that are, in management’s view, important to the portrayal of our financial condition and results of operations and require management’s judgment. The Company’s discussion and analysis of our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of these statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. Stellar’s management basis its estimates on experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for management’s judgments about Stellar’s carrying values of assets and liabilities that are not read ily apparent from other sources. Actual results may differ from those estimates. The Company’s critical accounting policies include:
Revenue Recognition.
Revenue is recognized in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition of Financial Statements" and EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables." Accordingly, license fees, which are comprised of initial fees and milestone payments, are recognized upon achievement of the milestone, provided that collectibility is reasonably assured. Revenue from the sale of products, net of trade discounts and allowances, is recognized when legal title to the goods has been passed to the customer and collection is reasonably assured. The Company has a "No Return" policy on the sale of its goods.
Revenues associated with multiple-element arrangements are attributed to the various elements, if certain criteria are met, including whether the delivered element has stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered elements. Non-refundable up-front fees for the transfer of methods and technical know-how, not requiring the Company to perform additional research or development activities or other significant future performance obligations, are recognized at the time the agreement is executed. Milestone payments are recognized into income upon the achievement of the specified milestones when the Company has no further involvement or obligation to perform services, as related to that specific element of the arrangement. Up-front fees and other amounts received in excess of revenue recognized are recorded as deferred income.
Royalty revenue is recognized when the Company has fulfilled the terms in accordance with the contractual agreement and has no future obligation, the amount of the royalty fee is determinable and collection is reasonably assured.
Share-Based Compensation
Share-based compensation is estimated at the date of grant based on the fair value of the award and is recognized as an expense over the requisite service period of the award. Determining the appropriate fair value model and calculating the
12
fair value of the stock based awards on the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data. If factors change and different assumptions are employed in future periods, the compensation expense recorded may differ significantly from that recorded in the current period. A small change in the estimates used may have a relatively large change in the estimated valuation. The Company uses the Black-Scholes pricing model to value stock option awards.
Fair Value
Effective January 1, 2008, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 provides guidance on how to measure the fair value of financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels. SFAS 157 broadly applies to most existing pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements.
The adoption of SFAS 157 did not have a material impact on the Company’s shareholders’ equity and net loss and comprehensive loss for the period.
In February 2008, the FASB issued FSP SFAS 157-2 “Effective Date of FASB Statement No. 157” (FSP SFAS 157-2), which permits a one-year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS 157-2 did not have a material impact on the Company’s non-financial assets and non-financial liabilities for the period.
Investments
Effective January 1, 2008, the Company adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. Following the election of the fair value option for an eligible item, changes in the item’s fair value in subsequent reporting periods must be recognized as earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparisons between entities that elect different measurement attributes for similar assets and liabilities.
Under the provisions of SFAS 159, the Company elected the fair value option for its short-term investment.
The adoption of SFAS 159 did not have an impact on the Company’s shareholders’ equity and net loss and comprehensive loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, “Non controlling Interests in Consolidated Financial Statements” - An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non controlling interest will be included in consolidated net income on the face of the statement of operations. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non controlling interest. SFAS No. 160 is effective for fiscal years, and interim periods beginning after January 1, 2009. The Company d oes not use consolidated financial statements for reporting its financial position as it currently does not have subsidiary companies. Accordingly, there was no impact on the Company's condensed consolidated financial position or results of operations upon adoption.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This
13
Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company has adopted this standard as of January 1, 2009. The Company does not use derivatives to hedge operating performance or its financial position. Accordingly, there was no impact on the Company's condensed consolidated financial position or results of operations upon adoption.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. SFAS 141R will have an impact for any businesses acquired after the effective date of this pronouncement.
In April 2008, the FASB issued SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (“SFAS 142-3”). SFAS 142-3 requires entities, upon estimating the useful lives of recognized intangible assets, to consider historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market-participants would use about renewal or extension. Market-participant assumptions used in the application ofSFAS 142-3 should be consistent with SFAS 157’s concept of “highest and best use” of the asset. SFAS 142-3 also enhances certain disclosure requirements of SFAS 142. SFAS 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. FSP 142-3 is effective prospectively for intangible assets acquired or received after January 1, 2 009. SFAS 142-3 will have an impact for any intangible assets acquired after the effective date of this pronouncement.
In April 2009, the FASB issued FSP SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed,” (“FSP FAS 157-4”). FSP FAS 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and non-financial) and will require enhanced disclosures. This standard is effective for periods ending after June 15, 2009. The Company is evaluating the impact that this standard will have on the Company’s financial position and results of operations.
In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements. This standard is effective for periods ending after June 15, 2009. The Company is evaluating the impact that this standard will have on the Company’s financial position and results of operations.
OVERVIEW
Stellar, founded in 1996, is a Canadian pharmaceutical company involved in the development and commercialization of high quality, polysaccharide-based therapeutic products used in the treatment of osteoarthritis and certain types of cystitis. Stellar also markets a test kit that confirms the existence of bladder lining defects in interstitial cystitis ("IC") (an inflammatory disease of the urinary bladder wall) patients and helps identify those patients who should respond positively to the Company’s proprietary therapeutic product. Stellar’s product development strategy focuses on seeking novel applications for its product technologies in markets where its products demonstrate true, cost-effective therapeutic advantages. Stellar is also building revenues through in-licensing products for Canada that are focused on similar niche markets and out-licensing to international markets.
Stellar has developed and is marketing three products in Canada based on its core polysaccharide technology:
(i)
NeoVisc®, for the treatment of osteoarthritis;
(ii)
Uracyst®; for the treatment of IC; and
(iii)
Stellar also has acquired the exclusive Canadian marketing and distribution rights for: Matritech’s, NMP22® BladderChek® ("BladderChek"), a proteomics-based diagnostic test for the diagnosis and monitoring of bladder cancer. Stellar began selling BladderChek in Canada in October 2004.
14
On December 28, 2001, the Company entered into a license agreement with G. Pohl-Boskamp GmbH & Co. ("Pohl-Boskamp"), to grant the exclusive rights and license to use the methods and technical know-how for the purposes of manufacturing, marketing and selling Uracyst-S products in specified territories in Europe. In consideration, the Company received a combination of non-recurring, non-refundable license fees and royalty payments. In April 2007, the Company terminated its license agreement with G. Pohl-Boskamp GmbH & Co. ("Pohl-Boskamp"), which provided for the sale of Uracyst products in Europe. Pohl-Boskamp disputed the basis on which the Company terminated the agreement and the consequences that result from such termination. The parties attended mediation in September 2007 in which an agreement was reached and a settlement made. Under the terms of the settlement, the parties agre ed that the license agreement would remain in full force and effect until March 31, 2008.
In June 2003, Stellar entered into distribution agreements with BurnsAdler Pharmaceuticals to sell Stellar’s products in Latin America and the Caribbean. Sales have been ongoing in the Dominican Republic and Bahamas, two of the smaller territories included in the territory, but progress has been slow in the major Latin American markets due to competitive pricing issues.
In October 2003, the Company entered into an exclusive agreement with a company in the United States to manufacture and distribute bladder cancer test kit products within the field and territory as defined in the agreement, for a five year period commencing January 1, 2004, in consideration for a technology access fee of US$10,000 and an initial order. This agreement was renewed in December 2008, for an additional three years, until December 2011.
In June 2004, Stellar entered into a NeoVisc licensing agreement with Triptibumis Sdn. Bhd. (“Triptibumis”) for Malaysia, Singapore and Brunei. Triptibumis has obtained reasonable success in this small, competitive market. New areas of the territory however, have been slow in receiving regulatory approval. The term of this agreement has been extended until June 30, 2010.
In August 2005, the Company entered into a distribution agreement with Technimed for the sale of NeoVisc in Lebanon and Jordan.
In September 2005, the Company entered into a licensing agreement with Shanghai Ya Jun Medical ("Shanghai") for the sale of Uracyst in China. All product specifications have been approved by the Chinese regulatory body ("SFDA") and the final document submission was delivered to the SFDA in June 2007. Although the Company anticipated this registration would have occurred in 2007, to-date such approval has not been granted. The Company has been in discussions with an associate of Shanghai in regards to regulatory documents that have been requested by the SFDA. At this time it is uncertain as to if or when approval will be received from the SFDA.
In December 2005, the Company entered into a licensing agreement with Megapharm Ltd. for the sale of Uracyst in Israel. While Uracyst has received regulatory approval from the ministry of health, Uracyst still lacks approval on the reimbursement formulary. Sales for Uracyst in this market are expected to remain slow until reimbursement status is received. At this time it is uncertain as to if or when reimbursement status will be received.
In July 2006, a licensing agreement was signed with Bio-Technic Romania Srl ("Bio-Technic") for NeoVisc in Romania. Since receiving approval for sale in late February 2007, Bio-Technic has consistently increased their product orders period over period.
In August 2006, the Company received its CE Mark for NeoVisc in Europe. As a result, NeoVisc is now approved for sale in the 27 member countries of the European Community plus a number of non-member countries.
The Company signed a licensing and supply agreement with Watson Pharma, Inc. ("Watson") in December 2006 for Uracyst in the United States market. Under this agreement, Watson was granted an exclusive license to develop, market and sell Uracyst in the United States. In addition to an upfront payment made to the Company upon signing, this agreement will provide Stellar with milestone payments and an ongoing royalty stream from future sales of Uracyst in the United States. Watson will be responsible for conducting clinical trials and obtaining regulatory approvals for Uracyst in the United States. Watson has completed a Canadian-based, placebo controlled, pilot clinical study in IC patients, which will be presented in the later part of 2009. The results of this study will be utilized in designing the pivotal Phase III safety and efficacy trial, the data from which will be submitted to the United States Food and Drug Admin istration (FDA) in support of marketing approval.
In November of 2007, the Company signed a licensing agreement with Torrex Chiesi Pharma GmbH, based in Vienna, Austria for the distribution and sale of NeoVisc in Eastern Europe. The territory covers a number of countries, including
15
Austria, Czech Republic, Slovakia, Croatia, Serbia, Montenegro, Macedonia, Bosnia, Herzegovina, Poland, Hungary, Russia and the Commonwealth of Independent States.
The Company received its CE Mark for Uracyst in June 2008, which provided immediate potential for licensing Uracyst in the 27 member countries of the European Community plus a number of non-member countries. In October 2008, the Company completed a distribution agreement for Uracyst with EIP Eczacibasi Ilac Pazarlama, for Turkey and the Turkish Republic of Northern Cyprus. In December of 2008 Stellar entered into three distribution agreements: Galen Limited, for the United Kingdom and the Republic of Ireland, EuroCept B. V. for the Netherlands, Belgium and Luxembourg and VitaFlo Scandinavia AB, for Denmark, Finland, Iceland, Norway and Sweden. These agreements provided upfront payment made to the Company upon signing plus milestone payments and an ongoing royalty stream from future sales of Uracyst in these European markets.
A 50 patient Canadian, community based, clinical trial demonstrated positive results for Uracyst. These results were formally published in the September 2008 volume of The British Journal of Urology and are believed to have had a positive impact on Uracyst sales in all current markets.
Stellar markets its products in Canada through its own direct sales force of commissioned and salaried sales people. The Company’s focus on product development continues to be both in-licensing and out-licensing for immediate impact on the revenue stream allowing Stellar to fund its own in-house product development for future growth and stability.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2009
For the three month period ended March 31, 2009, total operating revenues from all sources increased by 46.5% to $772,500 compared to $527,400 in the same period during 2008. During the first quarter international sales were up 224.0% showing strong growth from both NeoVisc and Uracyst licensing agreements. Domestic sales for NeoVisc were up by 23.9%, a noteworthy increase given the highly competitive Canadian viscosupplement market. Uracyst sales were also up 59.6% as its efficacy in treating GAG deficient cystitis is resulting in incrased market share. BladderChek sales decreased 28.7%, due mainly to orders expected in March that were not recorded until April.
Overall, sales for international and domestic markets were well ahead of target for the first quarter. The Company expects, although it can not be certain, this trend to continue into the second quarter, as agreements with new licensees in European markets, continue to increase market penetration for Stellar’s products. As well, sales and marketing initiatives in the Canadian market are expected to improve market share for NeoVisc, Uracyst and BladderChek.
The Company’s net income for the first quarter of 2009 was $25,200 compared to a loss of ($98,800) in the same period in 2008.
Gross Profit and Cost of Sales
Gross profit for the first quarter of 2009 was $617,600 up 43.6% compared to a gross profit of $430,100 in the same period in 2008, as the Company’s strategic focus of the past years begins to become reality.
Cost of goods sold for the three-month period ended March 31, 2009 decreased as a percentage of sales, due to a change in the estimation of equipment amortization, as noted in the 2008 year end financial statement notes.
Research and Development
Stellar continues to invest in research, of its products in Canada and in international markets. In the three month period ended March 31, 2009, the Company incurred $5,600 in research and development compared to $53,800 in research costs in the same period in 2008. This difference was associated with product development costs of $46,200 for a single dose injection HA product being developed in 2008. No expenses were recorded in 2009 for the single dose injection HA product.
In 2009, Stellar continued to work with Dr. Robert Hurst from the University of Oklahoma on Uracyst and its treatment of GAG deficient cystitis. Although there can be no assurance, Dr. Hurst’s work is expected to further enhance Uracyst treatment of this bladder defect.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period ended March 31, 2009 were up 17.6% to $578,100, compared to $491,000 for the same period in 2008. This increase was mainly driven by increased professional fees, (up 116.4% over the same period in 2008) associated with out-licensing agreements, plus business development
16
cost (up 726% over the same period in 2008) associated with assisting Stellar’s new European licensees to commence marketing activities for Uracyst. There were also increased marketing expenditures on new campaigns for NeoVisc and Uracyst in the Canadian market (up 52.2% over the same period in 2008). Stellar continues to pursue business development activities associated with out-licensing Stellar’s current products in other international markets, in-licensing products for the Canadian market and developing additional products.
INTEREST AND OTHER INCOME
Interest and other income during the first quarter of 2009 was $5,000 compared to $29,100 during the same period in 2008. These amounts include interest received on short-term investments for both period in 2009 and 2008. Cash continues to be maintained in liquid investments.
SUMMARY OF QUARTERLY RESULTS
Quarter Ended |
| Revenues |
|
| Net income (loss) |
|
| Earnings (loss) per share |
| |||
|
|
|
|
|
|
|
|
|
| |||
March 31, 2009 |
|
| 772,500 |
|
|
| 25,200 |
|
|
| 0.00 |
|
December 31, 2008 |
|
| 903,000 |
|
|
| 196,000 |
|
|
| 0.00 |
|
September 30, 2008 |
|
| 481,100 |
|
|
| (60,300) |
|
|
| 0.00 |
|
June 30, 2008 |
|
| 647,900 |
|
|
| (68,000) |
|
|
| 0.00 |
|
March 31, 2008 |
|
| 527,400 |
|
|
| (98,800) |
|
|
| 0.00 |
|
December 31, 2007 |
|
| 657,700 |
|
|
| (123,000) |
|
|
| 0.00 |
|
September 30, 2007 |
|
| 615,400 |
|
|
| 135,400 |
|
|
| 0.01 |
|
June 30, 2007 |
|
| 554,500 |
|
|
| (88,600) |
|
|
| 0.00 |
|
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $2,340,700 at March 31, 2009 as compared with $2,106,000 at December 31, 2008.
As at March 31, 2009, the Company did not have any outstanding indebtedness.
The Company may seek additional funding, primarily by way of one or more equity offerings, to carry out its business plan and to minimize risks to its operations. The market for equity financing for companies such as Stellar is challenging and there can be no assurance that additional funding will become available by way of equity financing. Any additional equity financing may result in significant dilution to the existing shareholders at the time of such financing. The Company may also seek additional funding from other sources, including technology licensing, co-development collaborations, and other strategic alliances. Such funding, if obtained, may reduce the Company’s interest in its projects or products. Regardless, there can be no assurance that any alternative sources of funding will be available.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
RELATED PARTY TRANSACTIONS
The Company entered a fiscal advisory and consulting agreement with LMT Financial Inc. (a company beneficially owned by a director and his spouse) for services to be provided in the normal course of business. Compensation under the agreement is $6,000 per month. For the three month period ended March 31, 2009, the Company recorded and paid $18,000 (2008 - $18,000) as selling, general and administrative costs.
CAPITAL STOCK
The Company has authorized an unlimited number of Common Shares, without par value. There are no other classes of shares issued. During the three month period ended March 31, 2009, there were no Common Shares issued by the Company. As at the date of this report, the Company had 23,495,040 Common Shares outstanding.
On April 1, 2008, the Company commenced a normal course issuer bid ("NCIB") for its Common Shares. Pursuant to the terms of the NCIB, the Company during the 12 month period commencing April 1, 2008 and ending March 31,
17
2009, had the right to purchase up to 1,191,127 Common Shares provided that the aggregate value of shares so purchased, did not exceed $1,000,000. Purchases of Common Shares were made in open market transactions, at market prices prevailing at the time of acquisition. All Common Shares purchased under NCIB were deemed cancelled. The details in regards to the purchases made during the three month period ended March 31, 2009 are set forth under the heading ‘Purchases of Equity Securities.’
As of the date of this report, the Company had 105,000 Common Share options outstanding at an exercise price of $0.69.
PURCHASES OF EQUITY SECURITIES
Pursuant to the terms of the NCIB, during the three month period ended March 31, 2009, the Company purchased 60,000, of its Common Shares at an average purchase price of $0.35.
Pursuant to the terms of the NCIB, the total cost associated with such purchases for these Common Shares during the three month period ended March 31, 2009 was $21,292..
Purchases of Equity Securities
Period |
| Total # of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total # of Shares Purchased as Part of Publicly Announced Plan |
|
| Maximum # of Shares that May Yet Be Purchased Under the Plan | ||||
January 1 to 31, 2009 |
|
| 25,000 |
|
| $ | 0.32 |
|
|
| 25,000 |
|
|
| 893,627 |
March 1 to 31, 2009 |
|
| 35,000 |
|
| $ | 0.37 |
|
|
| 35,000 |
|
|
| 858,627 |
Total |
|
| 60,000 |
|
| $ | 0.35 |
|
|
| 60,000 |
|
|
| 858,627 |
As of the date of this report, the Company had 105,000 Common Share options outstanding at an exercise price of $0.69 per option.
SIGNIFICANT CUSTOMERS
During the three month period ended March 31, 2009, the Company had two significant customers that represented 44.1% (one major wholesaler – 28.7%; and one international customer – 15.4%) of product sales (2008 – 40%; one major wholesaler one major wholesaler – 28%; and one international customer - 12%). The Company believes that its relationship with these customers is satisfactory.
OUTLOOK
As at March 31, 2009, the Company is debt free and had working capital of $3,007,800. Management remains confident that it can continue to fund its ongoing operations from several sources, including the sale of its products, milestone payments and royalty income resulting from out-licensing agreements for at least the next 12 months.
As discussed above under the heading "Liquidity and Capital Resources," the Company may seek additional funding, primarily by way of one or more equity offerings, to carry out its business plan and to minimize risks to its operations.
RISKS AND UNCERTAINTIES
Stellar is subject to risks, events and uncertainties, or "risk factors", associated with being both a publicly-traded company operating in the biopharmaceutical industry, and as an enterprise with several projects in the research and development stage. Such risk factors could cause reported financial information to not necessarily indicate future operating results or future financial position. The Company cannot predict all of the risk factors nor can it assess the impact, if any, of such risk factors on its business, or the extent to which any factor, or combination of factors, may cause future results or financial position to differ materially from those reported or those projected in any forward-looking statements. Accordingly, reported financial information and forward-looking statements should not be relied upon as a prediction of actual future results.
Some of the risks and uncertainties affecting the Company, its business, operations and results include, but are not limited to: the Company’s dependence on a few customers and a few suppliers, the loss of any of which would negatively impact the Company’s operations; the need to develop and commercialize new products which will require further time-consuming and costly research and development, the success of which cannot be assured; the Company’s
18
dependency on third parties for manufacturing, materials and for research, development and commercialization assistance and support; the Company’s dependency on assurances from third parties regarding licensing of proprietary technology owned by others; government regulation and the need for regulatory approvals for both the development and commercialization of products, which are not assured; uncertainty that the Company’s products will be accepted in the marketplace; rapid technological change and competition from pharmaceutical companies, biotechnology companies and universities, which may make the Company’s technology or products obsolete or uncompetitive; the need to attract and retain skilled employees; risks associated with claims of infringement of intellectual property and of proprietary rights; risks inherent in manufacturing (including up-scaling) and marketing; product liability and insurance r isks; risks associated with clinical trials, including the possibility that trials may be terminated early, delayed or unsuccessful; exchange rate fluctuations; political, economic and environmental risks; the need for performance by buyers and suppliers of products; the Company’s dependency on performance by its licensees regarding the sale of our licensed-out products, NeoVisc and Uracyst; and the risk of unanticipated expenses or unanticipated reductions in revenue, or both, any of which could cause the Company to reduce, delay or divest one or more of its research, development or marketing programs.
In addition to the foregoing, the industry in which the Company operates is very competitive. Many of our competitors and potential competitors have substantially greater product development capabilities, experience conducting clinical trials and financial, scientific, manufacturing, sales and marketing resources and experience than the Company. The pharmaceutical industry is an industry of innovation and change, which can change the competitive landscape rapidly. This could result in a material adverse affect on the financial condition of the Company.
The Company currently outsources the manufacturing of its products to a third party contract manufacturer, located in Toronto, Ontario. Although the Company has taken several measures to control the quality and on-time delivery of its products by this manufacturer, Stellar is unable to control all aspects of its third party manufacturer's operations. If a supplier of a product or component discontinued or restricted such supply, the Company’s business may be harmed by the resulting delays. This could result in a material adverse affect on the financial condition of the Company.
While management has some experience conducting business activities with international accounts, the Company is subject to a number of risks associated with international accounts that may increase the Company's costs, lengthen sales cycles, and require significant management attention. International accounts carry certain risks associated with foreign currency fluctuations; exchange controls; uncertainties of laws and enforcement relating to the protection of intellectual property; and other factors, depending on the country involved. There can be no assurance that the Company will not experience these factors in the future, or that they will not have a material adverse affect on the Company's business, results of operations or financial condition.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Stellar is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
ITEM 4.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company’s Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.
As at the end of March 31, 2009, management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as required by United States and Canadian securities laws. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Internal Control Over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer of the Company are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
19
Management conducted an evaluation of the effectiveness of its controls over financial reporting on a risk based approach using the elements of the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our assessment and those criteria, our management concluded that our internal control over financial reporting was e ffective as of March 31, 2009.
This Report does not include an attestation report of Stellar’s independent registered public accounting firm regarding internal control over financial reporting. Stellar’s management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit Stellar to provide only management’s report in this Report.
ADDITIONAL INFORMATION
Additional information relating to the Company is available on SEC at www.sec.gov, SEDAR at www.sedar.com or visit Stellar’s website at www.stellarpharma.com.
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PART II. OTHER INFORMATION
ITEM 1.
None.
ITEM 1A.
RISK FACTORS.
Stellar is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5.
OTHER INFORMATION.
ITEM 6.
EXHIBITS
Exhibit No. |
| Description |
| Certificate of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
| STELLAR PHARMACEUTICALS INC. | |
|
|
|
|
|
|
| By: | /s/ PETER RIEHL |
|
| Peter Riehl Chief Executive Officer |
|
|
Date: June 4, 2009
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