Tribute Pharmaceuticals Canada (SLRXF) 10-Q 2010 Q2 Quarterly report

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: June 30, 2010
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

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. Yes þ No o

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 filer o	Accelerated filer o	Non-accelerated filer   o	Smaller Reporting Company þ
		(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). Yes o No þ

The number of outstanding common shares, no par value, of the Registrant at: June 30, 2010: 23,585,040

STELLAR PHARMACEUTICALS INC.

TABLE OF CONTENTS

	PART I – FINANCIAL STATEMENTS
Item 1.	Unaudited Condensed Interim Financial Statements	1
	Condensed Interim Balance Sheet	1
	Condensed Interim Statements of Operations, Comprehensive Income and Deficit	2
	Condensed Interim Statements of Cash Flows	3
	Notes to Condensed Interim Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Evaluation of Disclosure Controls and Procedures	18
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 1a.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other information	19
Item 6.	Exhibits	19

i

PART I –FINANCIAL STATEMENTS

ITEM 1. CONDENSED INTERIM FINANCIAL STATEMENTS

STELLAR PHARMACEUTICALS INC.

BALANCE SHEETS

(Expressed in Canadian dollars)

		As at June 30, 2010			As at December 31, 2009
		(Unaudited)
ASSETS
CURRENT
Cash and cash equivalents (Note 2)		$	1,799,486		$	2,325,212
Accounts receivable, net of allowance of $nil (2009 - $nil)			740,238			293,565
Inventories (Note 3)			687,203			721,061
Taxes recoverable			-			1,501
Loan receivable			15,814			15,818
Prepaids, deposits and sundry receivables (Note 4)			145,152			163,698
Total current assets			3,387,893			3,520,855
PROPERTY, PLANT AND EQUIPMENT, net (Note 5)			1,567,598			1,390,296
OTHER ASSETS (Note 6)			124,722			114,553
Total assets		$	5,080,213		$	5,025,704
LIABILITIES
CURRENT
Accounts payable		$	125,322		$	228,367
Accrued liabilities			89,300			175,637
Deferred revenues			7,237			2,890
Taxes Payable			1,917			-
Total current liabilities			223,776			406,894
CONTINGENCIES AND COMMITMENTS (Note 10)
SHAREHOLDERS’ EQUITY
CAPITAL STOCK
AUTHORIZED
Unlimited	Non-voting, convertible, redeemable and retractable
	preferred shares with no par value
Unlimited	Common shares with no par value
ISSUED (Note 7)
23,585,040	Common shares (December 31, 2009 – 23,480,040)		8,291,429			8,183,638
	Additional Paid-in capital options - outstanding		106,160			89,562
	Additional Paid-in capital options -  expired		724,127			724,127
			9,121,716			8,997,327
DEFICIT			(4,265,279	)		(4,378,517	)
Total shareholders’ equity			4,856,437			4,618,810
Total liabilities and shareholders’ equity		$	5,080,213		$	5,025,704

See accompanying notes to the condensed interim financial statements.

1

STELLAR PHARMACEUTICALS INC.

CONDENSED STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME AND DEFICIT

 (Expressed in Canadian Dollars)

(Unaudited)

	For the Three Month Period Ended June 30						For the Six Month Period  Ended June 30
	2010			2009			2010			2009
PRODUCT SALES (Note 15)	$	811,752		$	914,126		$	1,361,262		$	1,458,545
ROYALTY AND LICENSING REVENUES (Note 15)		444,059			160,168			472,426			388,265
TOTAL REVENUES FROM ALL SOURCES		1,255,811			1,074,294			1,833,688			1,846,810
COST OF PRODUCTS SOLD		280,717			333,082			484,474			488,034
GROSS PROFIT		975,094			741,212			1,349,214			1,358,776
EXPENSES
Selling, general and administrative (Notes 7(a), (d) and 12)		592,585			562,941			1,160,517			1,140,996
Research and development (Note 10 (c))		9,683			1,803			35,954			7,411
Amortization (non-manufacturing property, plant and equipment)		13,660			13,703			27,320			27,401
		615,928			578,447			1,223,791			1,175,808
INCOME FROM OPERATIONS		359,166			162,765			125,423			182,968
INTEREST AND OTHER INCOME		1,610			1,929			3,123			6,903
LOSS ON DISPOSAL OF EQUIPMENT (Note 5)		-			-			(15,308	)		-
INCOME AND COMPREHENSIVE INCOME FOR THE PERIOD BEFORE INCOME TAXES		360,776			164,694			113,238			189,871
Current income tax expense (Note 13)		(29,300	)		-			(29,300	)		-
Future income tax recovery (Note 13)		29,300			-			29,300			-
NET INCOME AND COMPREHENSIVE INCOME FOR THE PERIOD		360,776			164,694			113,238			189,871
DEFICIT, beginning of period		(4,626,055	)		(4,590,376	)		(4,378,517	)		(4,615,553	)
DEFICIT, end of period	$	(4,265,279	)	$	(4,425,682	)	$	(4,265,279	)	$	(4,425,682	)
EARNINGS PER SHARE - basic (Note 8)	$	0.02		$	0.01		$	0.00		$	0.01
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC (Note 8)		23,485,535			23,495,040			23,482,802			23,816,387
EARNINGS PER SHARE - diluted (Note 8)	$	0.02		$	0.01		$	0.00		$	0.01
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED (Note 8)		23,487,751			23,495,040			23,483,571			23,816,387

See accompanying notes to condensed interim financial statements.

2

STELLAR PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS

(Expressed in Canadian dollars)

(Unaudited)

	For the Three Month Period Ended June 30						For the Six Month Period Ended June 30
	2010			2009			2010			2009
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES -
Net income for the period	$	360,776		$	164,694		$	113,238		$	189,871
Items not affecting cash
Amortization		30,794			33,118			57,579			68,112
Current income tax expense		(29,300	)		-			(29,300	)		-
Future income tax recovery		29,300			-			29,300			-
Loss on disposal of equipment		-			-			15,308			-
Issuance of equity instruments for services rendered (Note 7(a))		4,000			-			4,000			-
Stock-based compensation (Note 7(d))		17,443			-			51,390			-
Change in non-cash operating asset and liabilities    (Note 9)		(434,961	)		(593,295	)		(575,882	)		(390,251	)
CASH FLOWS (USED IN) OPERATING ACTIVITIES		(21,948	)		(395,483	)		(334,367	)		(132,268	)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES -
Additions to property, plant and equipment		(40,290	)		(43,938	)		(262,142	)		(44,135	)
Increase to other assets		(2,833	)		(19,274	)		(10,847	)		(26,231	)
Proceeds from sale of equipment (Note 5)		-			-			12,630			-
CASH FLOWS USED IN INVESTING ACTIVITIES		(43,123	)		(63,212	)		(260,359	)		(70,366	)
CASH FLOWS USED IN FINANCING ACTIVITIES -
Stock options exercised (Note 7(a))		69,000			-			69,000			-
Re-purchase of Common shares for cash		-			-			-			(21,292	)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES		69,000			-			69,000			(21,292	)
CHANGE IN CASH AND CASH EQUIVALENTS		3,929			(458,695	)		(525,726	)		(223,926	)
CASH AND CASH EQUIVALENTS,
Beginning of period		1,795,557			2,340,735			2,325,212			2,105,966
CASH AND CASH EQUIVALENTS,
End of period	$	1,799,486		$	1,882,040		$	1,799,486		$	1,882,040

See accompanying notes to condensed interim financial statements.

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STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

 (Unaudited)

JUNE 30, 2010

1. BASIS OF PRESENTATION

These condensed unaudited 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, 2009.  These condensed interim 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 condensed interim financial statements have been prepared using the same accounting policies, and methods as those used by the Company in the annual audited financial statements for the year ended December 31, 2009.

The unaudited condensed interim 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 June 30, 2010, and the results of its operations and cash flows for the three  and six month periods ended June 30, 2010 and 2009.  Note disclosures have been presented for material updates to the information previously reported in the annual audited financial statements.

a) Estimates

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 assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period. 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

The Company follows Financial Accounting Standards Board (FASB) ASC 820-10-65-1 (formerly referred to as SFAS 157), “Fair Value Measurements” (SFAS 157). ASC 820-10-65-1 defines fair value, establishes a framework for measuring fair value and expands disclosures regarding fair value measurements. ASC 820-10-65-1 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. ASC 820-10-65-1 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. ASC 820-10-65-1 broadly applies to most existing pron ouncements 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.

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STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION (continued)

In February 2008, the FASB issued ASC 820-10-65-1 (formerly referred to as 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 ASC 820-10-65-1 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 ASC 820-10-65-1 as of January 1, 2009, did not have a material impact on the Company’s non-financial assets and non-financial liabilities for the period

.

2. CASH AND CASH EQUIVALENTS

	June 30,		December 31,
	2010		2009
Cash	$	798,508	$	824,558
Short-term investments		1,000,978		1,500,654
	$	1,799,486	$	2,325,212

3. INVENTORIES

	June 30,		December 31,
	2010		2009
Raw materials	$	215,128	$	182,123
Finished goods		117,050		113,531
Packaging materials		278,101		67,571
Work in process		76,924		357,836
	$	687,203	$	721,061

4. PREPAIDS, DEPOSITS AND SUNDRY RECEIVABLES

	June 30,		December 31,
	2010		2009
Prepaid operating expenses	$	124,308	$	161,140
Deposit on manufactured goods*		17,781		––
Interest receivable on investments		3,063		2,558
	$	145,152	$	163,698

*  Deposit on manufactured goods relates to a deposit required upon the issuance of the order for  manufacturing processes.

5

STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

5. PROPERTY, PLANT AND EQUIPMENT

				June 30, 2010
			Accumulated		Net Carrying
	Cost		Amortization		Amount
Land	$	90,000	$	––	$	90,000
Building		618,254		161,690		456,564
Office equipment		43,302		40,729		2,573
Manufacturing equipment		1,440,904		549,850		891,054
Warehouse equipment		17,085		8,454		8,631
Packaging equipment		110,120		12,998		97,122
Computer equipment		136,809		115,155		21,654
	$	2,456,474	$	888,876	$	1,567,598

During the six month period ended June 30, 2010, the Company disposed of $29,035 in assets from manufacturing equipment and recorded a reduction to accumulated amortization of $1,097 and ($15,308) to loss on disposal of equipment.

				December 31, 2009
			Accumulated		Net Carrying
	Cost		Amortization		Amount
Land	$	90,000	$	––	$	90,000
Building		618,254		146,236		472,018
Office equipment		43,302		40,338		2,964
Manufacturing equipment		1,219,490		522,959		696,531
Warehouse equipment		17,085		6,745		10,340
Packaging equipment		110,120		10,724		99,396
Computer equipment		125,116		106,069		19,047
	$	2,223,367	$	833,071	$	1,390,296

6. OTHER ASSETS

				June 30, 2010
			Accumulated		Net Carrying
	Cost		Amortization		Amount
Patents	$	133,640	$	8,918	$	124,722

				December 31, 2009
			Accumulated			Net Carrying
	Cost		Amortization			Amount
Patents	$	122,793		$	8,240	$	114,553

The Company currently has patents of $108,220 which are not being amortized as these patents are currently pending or have not been fully authorized.

6

STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

7. CAPITAL STOCK

(a) Common Shares

During the three and six month periods ended June 30, 2010, 100,000 (2009 – nil) Common Shares were issued by the Company for options exercised by officers and employees of the Company for gross proceeds of $69,000.  The Company issued 5,000 Common Shares to consultants valued at $4,000 based on the fair market value, as payment for services rendered, which was charged to the statement of operations as selling, general and administrative expense.

Authorized – Unlimited Common shares with no par value

	Number of Shares		Amount
Balance, January 1, 2010		23,480,040	$	8,183,638
Share transactions		––		––
Balance, March 31, 2010		23,480,040		8,183,638
Options exercised		100,000		69,000
Valuation allocation on exercise of stock options				34,791
Shares issued to consultants		5,000		4,000
Balance, June 30, 2010		23,585,040	$	8,291,429

(b) Paid-in Capital Options - Outstanding

	Amount
Balance, January 1, 2010	$	89,562
Expense recognized for options issued to employees/ directors		33,947
Balance, March 31, 2010		123,509
Valuation allocation on exercise of stock options		(34,792	)
Expense recognized for options issued to employees/ directors		17,443
Balance, June 30, 2010	$	106,160

(c) Paid-in Capital Options - Expired

For the three and six month periods ended June 30, 2010 there were no changes to the paid-in capital options expired.

(d) 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

7

STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

7. CAPITAL STOCK (continued)

During the three month and six month periods ended June 30, 2010, there were no options granted (2009 – nil). Since share based compensation is recognized only for those awards that are ultimately expected to vest, the Company has applied an estimated forfeiture rate (based on historical experience and projected employee turnover) to unvested awards for the purpose of calculating compensation expense.  For the three and six month periods ended June 30, 2010, the Company recorded $17,443 and $51,390, respectively (2009 – $nil) as compensation expense for options previously issued to directors, officers and employees based on continuous service.  This was recorded as selling, general and administrative expense.  The total number of options outstanding as at June 30, 2010 was 350,000 (December 31, 2009 – 105,000).

As at June 30, 2010, the maximum number of options that may be issued under the plan is 4,629,452 (December 31, 2009 – 4,629,452).  The weighted average fair value of options expensed during the six month period ended June 30, 2010 was estimated at $0.94 (2009 - $nil).

8. EARNINGS PER SHARE

The treasury stock method assumes that proceeds received upon the exercise of all dilutive warrants and stock options outstanding in the period would be used to repurchase the Company's shares at the average market price during the period, with the incremental number of shares being included in the denominator of the diluted earnings per share calculation. The diluted earnings per share is not computed when the effect of such calculation is anti-dilutive.

The following table sets forth the computation of earnings per share based on the treasury method:

For the periods ended June 30	For the Three Month Period					For the Six Month Period
	2010			2009		2010			2009
Numerator - net earnings available to common shareholders
Net earnings	$	360,776		$	164,694	$	113,238		$	189,871
Denominator - Weighted average # of Common Shares outstanding - basic		23,485,535			23,495,040		23,482,802			23,816,387
Dilutive effect of stock options		10,110			-		5,138			-
Repurchase of shares under treasury stock method		(7,894	)		-		(4,369	)		-
Denominator - Weighted average # of Common Shares outstanding - diluted		23,487,751			23,495,040		23,483,571			23,816,387
Earnings per share - basic	$	0.02		$	0.01	$	0.00		$	0.01
Earnings per share - diluted	$	0.02		$	0.01	$	0.00		$	0.01

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STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

9. STATEMENT OF CASH FLOWS

Changes in non-cash balances related to operations are as follows:

	For the Three Month Period						For the Six Month Period
For the periods ended  June 30	2010			2009			2010			2009
Accounts receivable	$	(427,915	)	$	(358,891	)	$	(446,673	)	$	(127,772	)
Inventories		(35,158	)		(43,887	)		33,858			(286,745	)
Prepaids, deposits and sundry receivables		2,665			(39,835	)		18,546			(146,119	)
Taxes recoverable		11,528			9,718			1,501			6,560
Loan receivable		4			-			4			-
Accounts payable and accrued liabilities		12,698			(163,550	)		(189,382	)		161,724
Taxes payable		1,917			-			1,917			-
Deferred revenues		(700	)		3,150			4,347			2,101
	$	(434,961	)	$	(593,295	)	$	(575,882	)	$	(390,251	)

Non-cash transactions for the three and six month periods ended June 30, 2010, for the purchase of manufacturing equipment were $NIL (2009 – $1,741). During the three and six month periods ended June 30, 2010 there was no interest or taxes paid (2009 – $nil).

10.	CONTINGENCIES AND COMMITMENTS
	(a)	Royalty Agreements
		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 to consultants 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 and six month periods ended June 30, 2010 were $44,177 and $45,004, respectively  (2009 - $10,959 and $43,0 20, respectively).  These amounts have been recorded as royalty expense in selling, general and administrative.
	(b)	Leases
		The Company presently leases office and warehouse equipment under operating leases. For the three and six month periods ended June 30, 2010 the total expense related to leases was $1,274 and $2,548 (2009 - $1,274 and $2,548, respectively).   At June 30, 2010, the remaining future minimum lease payments under operating leases are $7,080 (December 31, 2009 - $9,629) due over the next two and a half years.
	(c)	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.  The Company has approved an extension until August 2010 for ongoing work in regards to this research. During the three month period ended June 30, 2010, no expense was recorded (2009 - $nil). During the six month period ended June 30, 2010, the Company has recorded $1,224 (2009 - $3,536) as research and development costs.
	(d)	Executive Termination Agreement
		The Company’s President and Chief Executive Officer is the only officer who currently has an employment agreement with the Company with a change of control provision.  The agreement provides that in the event that the employment is terminated by the Company other than for cause, for good reason or within six months of a change of control of the Company, then the officer is an entitled to (i) a lump sum payment equal to $383,600 (based on current base salary), (ii) all outstanding and accrued regular and vacation pay and expenses and (iii) the immediate vesting of his options which shall continue to be available for exercise for a period of 30 days following the date of termination.

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STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

11. SIGNIFICANT CUSTOMERS

During the three month period ended June 30, 2010, the Company had two significant customers that represented 54% (one major wholesaler – 22%; and one international customer – 32%) of product sales (2009 - three significant customers that represented 57% (one major wholesaler – 21%; and two international customer – 15% and 21%). During the six month period ended June 30, 2010, the Company had two significant customers that represented 49% (one major wholesaler – 27%; and one international customers –22%) of product sales (2009 –  49%; three significant customers that represented (one major wholesaler – 21%; and two international customers – 12% and 16%).   The Company believes that its relationship with these customers is satisfactory.

12. RELATED PARTY TRANSACTIONS

The Company entered a fiscal advisory and consulting agreement in February 2010 with LMT Financial Inc. ("LMT") (a company beneficially owned by a director and his spouse) for, among other things, services to be provided for a one year period.  Compensation under the new agreement has been recorded at $6,600 per month or $79,200 annually (2009 - $72,000).  For the three and six month periods ended June 30, 2010, the Company recorded and paid $19,800 and $39,000, respectively (2009 - $18,000 and $36,000, respectively) as selling, general and administrative costs.

13. INCOME TAXES

The Company has non-capital loss carry-forwards at June 30, 2010 of approximately $2,343,400, which may be offset against future taxable income.  If not utilized, the loss carry-forwards will expire between 2010 and 2029.  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 June 30, 2010 was $335,000.  All taxable benefits are fully allowed for because the realization of the assets is undeterminable.

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STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

14. RECENT ACCOUNTING PRONOUNCEMENTS (continued)

Recent accounting pronouncements followed by the Company under U.S. GAAP are summarized below.

In September 2009, the FASB Emerging Issues Task Force, or EITF, reached a consensus on ASC Update 2009-13 (Topic 605), Multiple-Deliverable Revenue Arrangements, or ASC Update 2009-13. ASC Update 2009-13 applies to multiple-deliverable revenue arrangements that are currently within the scope of ASC 605-25.  ASC Update 2009-13 provides principles and application guidance on whether multiple deliverables exist and how the arrangement should be separated and the consideration allocated. ASC Update 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables, if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price.  The update eliminates the use of the residual method and requires an entity to allocate revenue using the re lative selling price method and also significantly expands the disclosure requirements for multiple-deliverable revenue arrangements.  ASC Update 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  As a result, ASC Update 2009-13 will be effective for the Company no later than the first quarter of fiscal 2011.  The adoption of ASC Update 2009-13 may have a material impact on the Company’s financial position or results of operations for future collaborations arrangements.  The Company is currently evaluating the impact on its financial statements.

ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.

15.           SEGMENTED INFORMATION

Revenue for the three and six month periods ended June 30 2010 and 2009 includes products sold in Canada and international sales of products.  Revenue earned is as follows:

The Company is engaged in the sale of three lines of product:

	June 30
	Unaudited
	For the Three Month Period						For the Six Month Period
Product Sales	2010			2009			2010			2009
NeoVisc		44.6	%		67.4	%		51.5	%		60.6	%
Uracyst		18.7	%		16.4	%		21.4	%		17.2	%
BladderChek		1.1	%		1.1	%		1.1	%		1.0	%
Subtotal		64.4	%		84.9	%		74.0	%		78.8	%
Licensing & Royalty Fees		35.4	%		14.9	%		25.8	%		21.0	%
Other		0.2	%		0.2	%		0.2	%		0.2	%

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STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS

15.   SEGMENTED INFORMATION (continued)

Royalty and licensing revenues for the three and six month periods ended June 30, 2010 and 2009 includes royalties earned during these periods, as well as license fee milestones.  Revenues earned are as follows:

	June 30
	Unaudited
	For the Three Month Period				For the Six Month Period
Product Sales	2010		2009		2010		2009
Domestic sales	$	554,722	$	503,794	$	933,203	$	845,570
International sales		254,767		409,186		423,916		610,733
Other revenues		2,263		1,146		4,143		2,242
Total Product Sales	$	811,752	$	914,126	$	1,361,262	$	1,458,545
Royalties & Licensing Revenues
Licensing fees	$	403,792	$	157,480	$	403,792	$	376,687
Royalty payments		40,267		2,688		68,634		11,578
Total Royalty & Licensing Revenues	$	444,059	$	160,168	$	472,426	$	388,265

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, Italy, Lebanon, Malaysia, Kuwait, Romania, the United Arab Emirates and Turkey.  The continuing operations reflected in the statements of operations include the Company’s 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 and six month periods ended June 30, 2010, the Company had a foreign currency (gain) loss of ($4,765) and $15,475, respectively (2009 – ($19,128) and ($20,523), respectively).  These amounts have been included in selling, general and administrative expenses on the statement of operations.

17.          SUBSEQUENT EVENTS

Subsequent to June 30, 2010, the Company has received from the United States Patent and Trademark office Notice of Issue of a Patent for its Uracyst® product.  Issuance of this patent triggers a milestone payment of US$1,300,000 from our USA based marketing and distribution partner.

Subsequent to June 30, 2010, the Company signed a license agreement for the distribution and sale of Uracyst® in Spain.  Under the terms of the agreement, Stellar will receive an upfront license fee in addition to a specified transfer price in exchange for the rights to an exclusive agreement for this territory.  The agreement has an initial five-year term with additional three year renewal periods.

Subsequent to June 30, 2010, the Company issued a total of 615,000 stock options to its directors and officers. The exercise price of these options has been set at $0.95, with quarterly vesting terms over a three year period.

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ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

This document was prepared on August 4, 2010 and should be read in conjunction with the June 30, 2010 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", "cont inues", "planned", "plans", "potential", "with 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

There have been no material changes to the Company’s Critical Accounting Policies and Assumptions filed in the Company’s 2009 Annual Report on the Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2009, the FASB Emerging Issues Task Force, or EITF, reached a consensus on ASC Update 2009-13 (Topic 605), Multiple-Deliverable Revenue Arrangements, or ASC Update 2009-13.  ASC Update 2009-13 applies to multiple-deliverable revenue arrangements that are currently within the scope of ASC 605-25. ASC Update 2009-13 provides principles and application guidance on whether multiple deliverables exist and how the arrangement should be separated and the consideration allocated.  ASC Update 2009-13 requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables, if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price.  The update eliminates the use of the residual method and requires an entity to allocate revenue us ing the relative selling price method and also significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. ASC Update 2009-13 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  As a result, ASC Update 2009-13 will be effective for the Company no later than the first quarter of fiscal 2011.  The adoption of ASC Update 2009-13 may have a material impact on the Company’s financial position or results of operations for future collaborations arrangements.  The Company is currently evaluating the impact on its financial statements.

ASU No. 2010-13 was issued in April 2010, and will clarify the classification of an employee share based payment award with an exercise price denominated in the currency of a market in which the underlying security trades.  This ASU will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted.

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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’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®, 3 injection treatment for osteoarthritis;

(ii)   NeoVisc® Single Dose, a single injection treatment for osteoarthritis; and

(iii)   Uracyst®; for the treatment of interstitial cystitis (IC)

Stellar also has acquired the exclusive Canadian marketing and distribution rights for:  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.

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.

Stellar currently has out-licensing agreements for NeoVisc and Uracyst in 58 countries.  For an overview of these out-licensing agreements refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

RESULTS OF OPERATIONS FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2010

For the three month period ended June 30, 2010, total revenues from all sources increased by 16.9% to $1,255,800 compared to $1,074,300 for the same period in 2009.  This differential was impacted by licensing revenues of $403,800 for the quarter, compared to licensing revenues of $157,500 recorded for the same quarter in 2009.  During the second quarter of 2010, international sales were down by 37.7% due to a decline in NeoVisc sales related to the negative economic situation in Eastern Europe.  The situation is expected to improve in the second half of 2010, however the degree of improvement is difficult to project at this time. International Uracyst sales (including royalties) for the second quarter of 2010, increased by 41.8% over the same period of 2009 as our European licensees continue to increase m arket share.  Canadian sales for NeoVisc were basically unchanged for the quarter, which is viewed as a favourable result given the highly competitive Canadian viscosupplement market.  Uracyst sales were up 67.7% as continued positive results in treating GAG deficient cystitis are positively influencing this market.  BladderChek’s sales increased 19.0% for the quarter, which is an encouraging sign for future trends.

For the six month period ended June 30, 2010, total revenues from all sources decreased by 0.7% to $1,833,700 compared to $1,846,800 for the same period in 2009.  This decrease was mainly due to a weak first quarter performance in 2010, but the stronger second quarter recovered most of the decline.  During the six month period ended June 30, 2010, international sales (including royalties) were down by 30.6%, again driven by the decline in NeoVisc sales related to the negative economic situation in Eastern Europe. International Uracyst sales (including royalties) for the six month period ended June 30, 2010, increased by 43.6% over the same period of 2009.  Domestic sales for the first six months of 2010 were up 10.6% compared to the same period in 2009, with NeoVisc sales up 3.9%, Uracyst sales up 41.0% an d BladderChek up 7.7%.

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Solid growth for Uracyst in both the Canadian and international markets, combined with the revenues from licensing income, resulted in the Company showing a profit for the three month period ended June 30, 2010, of $360,800 and $113,200 for the year-to-date. The Company anticipates , although it can not be certain, that the second half of 2010 will continue these positive results.

Gross Profit and Cost of Sales

Gross profit for the second quarter of 2010 was $975,100 up 31.6% compared to a gross profit of $741,200 in the same period in 2009.  Gross profit for the six month period ending June 30, 2010 was $1,349,200 down 0.7%, compared to $1,358,800 for the same period in 2009.

For the three and six month periods ended June 30, 2010, cost of products sold, as a percentage of product sales, was 34.6% and 35.6%, respectively, compared to 36.4% and 33.5%, respectively, during the same periods in 2009.  These fluctuations in cost of sales are due to the change in ratio of Canadian market sales compared to international markets sales which generate lower gross margins.

Research and Development

Stellar continues to invest in the research of its products in Canada and in international markets.  In the three and six month periods ended June 30, 2010, the Company incurred $9,700 and $36,000, respectively, in research and development compared to $1,800 and $7,400, respectively, for the same period in 2009.  During 2010, the Company will continue its development of manufacturing processes to improve yields from both Uracyst and NeoVisc production.  This work is an ongoing task allowing Stellar to improve its manufacturing processes while remaining competitive in the global market.

In 2010, Stellar continues 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 and six month periods ended June 30, 2010 were up 5.3% and 1.7% to $592,600 and $1,160,500 respectively, compared to $562,900 and $1,141,000 respectively, for the same periods in 2009.  This increase for the six month period ended June 30, 2009, was mainly driven by $45,000 in royalty license fees paid out to consultants in regards to the European license agreements (2009 - $17,400). 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 three and six month periods ended June 30, 2010 was $1,600 and $3,100, respectively (2009 - $1,900 and $6,900, respectively).  These amounts include interest received on short-term investments for both 2010 and 2009.  In 2010, interest earned on the Company’s short-term investments was an average of 0.37% compared to an average of 0.84% in 2009, resulting in a decrease in interest income in 2010.

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SUMMARY OF QUARTERLY RESULTS

Quarter Ended	Revenues		Net Income (loss)			Earnings (loss) per share
June 30, 2010	$	1,255,800	$	360,800		$	0.02
March 31, 2010		577,900		(247,500	)		(0.01	)
December 31, 2009		907,600		23,200			0.00
September 30, 2009		826,900		25,900			0.00
June 30, 2009		1,074,300		164,700			0.01
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

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $1,799,500 at June 30, 2010 as compared with $2,325,200 at December 31, 2009.

At June 30, 2010, the Company did not have any outstanding indebtedness.

Although there can be no assurance, the Company expects to remain in a profitable status in 2010, thereby funding its future growth from the sale of its products, milestone payments and royalty income resulting from out-licensing agreements for at least the next 12 months.

Cash utilization during 2010 included (but was not limited to):

● Capital expenditures in the amount of $262,100 related to property, plant and equipment; and

● Capital expenditures of $10,800 related to patent filings

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 av ailable to the Company.

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 in February 2010 with LMT Financial Inc. ("LMT") (a company beneficially owned by a director and his spouse) for, among other things, services to be provided for a one year period.  Compensation under the agreement has been recorded at $6,600 per month or $79,200 annually (2009 - $72,000).  Pursuant to this agreement, LMT assists and will continue to assist the Company in assessing available methods of financing the operations of the Company and the impact on the market for Common Shares in the United States created by developments in Stellar’s business.

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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 and six month periods ended June 30, 2010, the Company issued an aggregate of 105,000 Common Shares (2009 – nil).  100,000 (2009 – nil) Common Shares were issued by the Company for options exercised by officers and employees of the Company, while the remaining 5,000 Common Shares were issued to consultants as payment for services rendered.

As of the date of this report, the Company has 23,585,040 Common Shares issued and outstanding.

As of the date of this report, the Company had 942,500 Common Share options outstanding with an average exercise price of $0.93 per option.

SIGNIFICANT CUSTOMERS

During the six month period ended June 30, 2010, the Company had two significant customers that represented 49% (one major wholesaler – 27%; and one international customers – 22%) of product sales (2009 –  49%; three significant customers that represented (one major wholesaler – 21%; and two international customers – 12% and 16%).  The Company believes that its relationships with these customers are satisfactory.

OUTLOOK

As at August 4, 2010, the Company is debt free and had working capital of $3,040,700.  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

This quarterly report and the documents incorporated or deemed to be incorporated by reference in this quarterly report contain statements concerning our future results and performance and other matters that are "forward-looking" statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  The words "believe," "expect," "anticipate," "intend," "plan," "project," "may," "will," and variations of such words or similar expressions are intended, but are not the exclusive means, to identify forward-looking statements.  Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.

A description of our risk factors can be found in Item IA of our Annual Report on Form 10-K for the year ended December 31, 2009.  There were no material changes to those risk factors during the six months ended June 30, 2010.

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.

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ITEM 4.   EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

(a)           Evaluation of Disclosure Controls and Procedures

Based on an evaluation of the Company’s disclosure controls and procedures performed by the Company’s Chief Executive Officer and Chief Financial Officer as of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

As used herein, “disclosure controls and procedures” means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms issued by the SEC.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and its chief financial officer, or persons perform ing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

(b)           Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ADDITIONAL INFORMATION

We make available free of charge through our website, www.stellarpharma.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission (“SEC”).

The public may read any of the items we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC at http://www.sec.gov.

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PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

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 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.

None.

ITEM 6.    EXHIBITS.

Exhibit No.	Description
31.1	Certificate of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certificate of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certificate of the Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certificate of the Chief Financial Officer pursuant 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: August 12, 2010

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