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: September 30, 2012 | |
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.) |
151 Steeles Avenue East, Milton, Ontario, Canada L9T 1Y1
(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: September 30, 2012: 39,610,042
STELLAR PHARMACEUTICALS INC.
TABLE OF CONTENTS
PART 1 – CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
PART I – CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Item 1. | Unaudited Condensed Interim Consolidated Financial Statements | 3 | |||
(A) | Condensed Interim Consolidated Balance Sheets | 3 | |||
(B) | Condensed Interim Consolidated Statements of Operations, Comprehensive (Loss) Income and Deficit | 4 | |||
(C) | Condensed Interim Consolidated Statements of Cash Flows | 5 | |||
(D) | Notes to the Condensed Interim Consolidated Financial Statements | 6 | |||
Item 2. | Management’s Discussion and Analysis of Financial Conditions and Resultsof Operations | 20 | |||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 26 | |||
Item 4. | Evaluation of Disclosure Controls and Procedures | 26 | |||
PART II – OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | 27 | |||
Item 1a. | Risk Factors | 27 | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 | |||
Item 3. | Defaults Upon Senior Securities | 27 | |||
Item 4. | Submission of Matters to a Vote of Security Holders | 27 | |||
Item 5. | Other information | 27 | |||
Item 6. | Exhibits | 27 |
2
PART 1 – CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. | UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
(Unaudited)
As at September 30, 2012 | As at December 31, 2011 | |||||||
ASSETS | ||||||||
Current | ||||||||
Cash and cash equivalents (Note 3) | $ | 2,608,651 | $ | 2,227,973 | ||||
Accounts receivable, net of allowance of $nil (2011 - $nil) | 1,208,042 | 763,810 | ||||||
Inventories (Note 4) | 861,138 | 870,630 | ||||||
Taxes recoverable | 187,363 | 180,160 | ||||||
Loan receivable | 15,814 | 15,814 | ||||||
Prepaid expenses and other receivables (Note 5) | 348,955 | 124,101 | ||||||
Total current assets | 5,229,963 | 4,182,488 | ||||||
Property, plant and equipment, net (Note 6) | 1,174,888 | 1,207,462 | ||||||
Intangible assets, net (Note 7) | 10,394,006 | 10,409,744 | ||||||
Goodwill (Note 8) | 3,597,077 | 3,408,741 | ||||||
Debt issuance costs, net (Note 9) | 358,516 | - | ||||||
Total assets | $ | 20,754,450 | $ | 19,208,435 | ||||
LIABILITIES | ||||||||
Current | ||||||||
Accounts payable and accrued liabilities | $ | 3,075,183 | $ | 2,684,542 | ||||
Amount payable and contingent consideration due | 486,222 | 1,624,289 | ||||||
Current portion of long term debt (Note 9) | 1,183,514 | - | ||||||
Warrant liability (Note 10d) | 246,303 | 2,543 | ||||||
Total current liabilities | 4,991,222 | 4,311,374 | ||||||
Long term debt (Note 9) | 2,092,309 | - | ||||||
Deferred tax liability | 793,800 | 1,524,200 | ||||||
Total liabilities | 7,877,331 | 5,835,574 | ||||||
Contingencies and commitments (Note 13) | ||||||||
SHAREHOLDERS’ EQUITY | ||||||||
Capital Stock | ||||||||
Common shares (Note 10a) | 17,589,957 | 16,469,621 | ||||||
Additional paid-in capital options (Note 10b) | 1,738,162 | 1,277,830 | ||||||
Deficit | (6,451,000 | ) | (4,374,590 | ) | ||||
Total shareholders’ equity | 12,877,119 | 13,372,861 | ||||||
Total liabilities and shareholders’ equity | $ | 20,754,450 | $ | 19,208,435 |
See accompanying notes to the condensed interim consolidated financial statements.
3
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS,
COMPREHENSIVE (LOSS) INCOME AND DEFICIT
(Expressed in Canadian dollars)
(Unaudited)
For the Three Month Period Ended September 30 | For the Nine Month Period Ended September 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues | ||||||||||||||||
Licensed domestic product net sales | $ | 2,267,509 | $ | - | $ | 6,104,160 | $ | - | ||||||||
Other domestic product sales | 576,174 | 466,496 | 1,707,336 | 1,420,885 | ||||||||||||
International product sales | 369,816 | 217,368 | 1,193,219 | 960,799 | ||||||||||||
Royalty and licensing revenues | - | 5,298 | - | 14,226 | ||||||||||||
Total revenues (Note 17) | 3,213,499 | 689,162 | 9,004,715 | 2,395,910 | ||||||||||||
Operating costs and expenses | ||||||||||||||||
Licensor sales and distribution fees | 1,526,690 | - | 4,226,247 | - | ||||||||||||
Cost of products sold | 327,582 | 201,870 | 922,983 | 634,799 | ||||||||||||
Total cost of sales | 1,854,272 | 201,870 | 5,149,230 | 634,799 | ||||||||||||
Selling, general and administrative (Notes 15 and 18) | 2,131,379 | 621,641 | 6,240,007 | 2,024,640 | ||||||||||||
Amortization | 155,807 | 12,314 | 380,270 | 36,438 | ||||||||||||
Total cost and expenses | 4,141,458 | 835,825 | 11,769,507 | 2,695,877 | ||||||||||||
(Loss) from operations | (927,959 | ) | (146,663 | ) | (2,764,792 | ) | (299,967 | ) | ||||||||
Non-operating income (expenses) | ||||||||||||||||
Change in warrant liability (Note 10d) | 66,183 | 266,029 | 203,396 | 201,759 | ||||||||||||
Cost of extending the warrant expiration (Note 10d) | - | - | (135,157 | ) | - | |||||||||||
Change in fair value of contingent consideration (Note 10a) | - | - | 79,724 | - | ||||||||||||
Research and development | (6,590 | ) | (12,196 | ) | (14,916 | ) | (45,966 | ) | ||||||||
Accretion expense | (45,826 | ) | - | (100,193 | ) | - | ||||||||||
Interest expense | (103,551 | ) | - | (158,175 | ) | - | ||||||||||
Interest income | 12,150 | 5,091 | 12,150 | 11,945 | ||||||||||||
(Loss) income and comprehensive (loss) income before tax | (1,005,593 | ) | 112,261 | (2,877,963 | ) | (132,229 | ) | |||||||||
Current income tax recovery | 71,153 | - | 71,153 | - | ||||||||||||
Deferred income tax recovery | 215,800 | - | 730,400 | - | ||||||||||||
Net (loss) income and comprehensive (loss) income for the period | $ | (718,640 | ) | $ | 112,261 | $ | (2,076,410 | ) | $ | (132,229 | ) | |||||
Deficit, beginning of period | (5,732,360 | ) | (4,097,299 | ) | (4,374,590 | ) | (3,852,809 | ) | ||||||||
Deficit, end of period | $ | (6,451,000 | ) | $ | (3,985,038 | ) | $ | (6,451,000 | ) | $ | (3,985,038 | ) | ||||
Basic and Diluted (Loss) Earnings per share (Note 11) | $ | (0.02 | ) | $ | 0.00 | $ | (0.05 | ) | $ | (0.01 | ) |
See accompanying notes to the condensed interim consolidated financial statements.
4
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(Unaudited)
For the Nine Month Period Ended September 30 | ||||||||
2012 | 2011 | |||||||
Cash flows from (used in) operating activities | ||||||||
Net (loss) | $ | (2,076,410 | ) | $ | (132,229 | ) | ||
Items not affecting cash: | ||||||||
Deferred income tax recovery | (730,400 | ) | - | |||||
Amortization | 412,490 | 78,889 | ||||||
Change in warrant liability (Note 10d) | (203,396 | ) | (201,759 | ) | ||||
Cost of extending the warrant expiration | 135,157 | - | ||||||
Change in fair value of contingent consideration | (79,724 | ) | - | |||||
Stock-based compensation (Note 10c) | 460,332 | 138,327 | ||||||
Unrealized foreign exchange | (54,378 | ) | - | |||||
Accretion expense | 100,193 | - | ||||||
Issuance of equity instruments for services rendered | - | 14,467 | ||||||
Change in non-cash operating assets and liabilities (Note 12) | (249,493 | ) | (686,148 | ) | ||||
Cash flows (used in) operating activities | (2,285,629 | ) | (788,453 | ) | ||||
Cash flows (used in) investing activities | ||||||||
Additions to property, plant and equipment | (32,489 | ) | (5,008 | ) | ||||
Increase in intangible assets | (32,270 | ) | (23,191 | ) | ||||
Cash cost of acquisition (Note 2) | (425,000 | ) | - | |||||
Cash flows (used in) investing activities | (489,759 | ) | (28,199 | ) | ||||
Cash flows from (used in) financing activities | ||||||||
Financing costs deferred | (343,934 | ) | - | |||||
Long term debt issued | 3,500,000 | - | ||||||
Share issuance costs | - | (24,243 | ) | |||||
Cash flows from (used in) financing activities | 3,156,066 | (24,243 | ) | |||||
Changes in cash and cash equivalents | 380,678 | (840,895 | ) | |||||
Cash and cash equivalents, beginning of period | 2,227,973 | 4,352,285 | ||||||
Cash and cash equivalents, end of period | $ | 2,608,651 | $ | 3,511,390 |
See accompanying notes to the condensed interim consolidated financial statements.
5
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
1. | Basis of Presentation |
These unaudited condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements for Stellar Pharmaceuticals Inc.’s ("Stellar" or the "Company") most recently completed fiscal year ended December 31, 2011. These condensed interim consolidated financial statements do not include all disclosures required in annual financial statements, but rather are prepared in accordance with recommendations for interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited condensed interim consolidated financial statements have been prepared using the same accounting policies, and methods as those used by the Company in the annual audited consolidated financial statements for the year ended December 31, 2011. These condensed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries, Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. All significant inter-company transactions and balances have been eliminated upon consolidation (see note 21 (a)). These unaudited condensed interim consolidated 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 September 30, 2012, and the results of its operations for the three and nine month periods ended September 30, 2012 and 2011 and its cash flows for the nine month periods ended September 30, 2012 and 2011. Note disclosures have been presented for material updates to the information previously reported in the annual audited consolidated financial statements. |
a) | Estimates The preparation of these condensed interim consolidated 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) | Recently Adopted Accounting Standards Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations. On January 1, 2012, the Company adopted the accounting standards set out below. In September 2011, the FASB issued new accounting guidance that simplified goodwill impairment tests. The new guidance states that a “qualitative” assessment may be performed to determine whether further impairment testing is necessary. This guidance was effective for periods beginning on or after December 15, 2011, which is the Company’s 2012 fiscal year. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations. In June 2011, the FASB issued an accounting standards update that eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and requires an entity to present items of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance also required an entity to present on the face of the consolidated financial statements, reclassification adjustments from other comprehensive income to net income. This guidance was effective for fiscal years beginning after December 15, 2011, which is the Company’s 2012 fiscal year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. In May 2011, the FASB issued an accounting standards update that clarified and amended the existing fair value measurement and disclosure requirements. This guidance was effective prospectively for interim and annual periods beginning after December 15, 2011, which is the Company’s 2012 fiscal year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. |
6
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
c) | New Accounting Standards Not Yet Adopted In July 2012, the FASB issued an accounting standards update that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. This guidance will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which will be the Company's fiscal year 2013, with early adoption permitted. The Company does not expect the adoption of the guidance will have a material impact on the Company's consolidated financial statements. |
2. | Acquisition On June 19, 2012, the Company closed an agreement with Theramed Corporation (“Theramed”), acquiring the exclusive rights to Collatamp G® for Canada. The initial term of the agreement to the exclusive Canadian rights ends March 31, 2018. The purchase of the exclusive rights was accounted for as a business combination. In connection with the purchase of the assets, the Company paid $425,000. The Company acquired assets with a fair value of $500,026, consisting of inventories of $101,690, intangible assets of $210,000 and goodwill of $188,336. Liabilities of $75,026 were assumed in connection with the purchase. |
3. | Cash and cash equivalents |
September 30, 2012 | December 31, 2011 | |||||||
Cash | $ | 2,608,651 | $ | 1,227,834 | ||||
Cash equivalents | - | 1,000,139 | ||||||
$ | 2,608,651 | $ | 2,227,973 |
4. | Inventories |
September 30, 2012 | December 31, 2011 | |||||||
Raw materials | $ | 311,708 | $ | 233,758 | ||||
Finished goods | 204,108 | 200,712 | ||||||
Packaging materials | 73,367 | 73,834 | ||||||
Work in process | 271,955 | 362,326 | ||||||
$ | 861,138 | $ | 870,630 |
7
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
5. | Prepaid Expenses and Other Receivables |
September 30, 2012 | December 31, 2011 | |||||||
Prepaid operating expenses | $ | 301,458 | $ | 95,411 | ||||
Manufacturing deposits | 42,547 | 23,882 | ||||||
Interest receivable on loan receivables | 4,950 | 4,808 | ||||||
$ | 348,955 | $ | 124,101 |
6. | Property, Plant and Equipment |
September 30, 2012 | ||||||||||||
Cost | Accumulated Amortization | Net Carrying Amount | ||||||||||
Land | $ | 90,000 | $ | - | $ | 90,000 | ||||||
Building | 618,254 | 231,245 | 387,009 | |||||||||
Office equipment | 61,315 | 43,096 | 18,219 | |||||||||
Manufacturing equipment | 1,103,523 | 523,874 | 579,649 | |||||||||
Warehouse equipment | 17,085 | 15,745 | 1,340 | |||||||||
Packaging equipment | 111,270 | 40,015 | 71,255 | |||||||||
Computer equipment | 96,895 | 69,479 | 27,416 | |||||||||
$ | 2,098,342 | $ | 923,454 | $ | 1,174,888 |
December 31, 2011 | ||||||||||||
Cost | Accumulated Amortization | Net Carrying Amount | ||||||||||
Land | $ | 90,000 | $ | - | $ | 90,000 | ||||||
Building | 618,254 | 208,060 | 410,194 | |||||||||
Office equipment | 44,308 | 42,186 | 2,122 | |||||||||
Manufacturing equipment | 1,094,168 | 498,569 | 595,599 | |||||||||
Warehouse equipment | 17,085 | 13,578 | 3,507 | |||||||||
Packaging equipment | 111,270 | 32,764 | 78,506 | |||||||||
Computer equipment | 90,762 | 63,228 | 27,534 | |||||||||
$ | 2,065,847 | $ | 858,385 | $ | 1,207,462 |
8
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
7. | Intangible Assets |
September 30, 2012 | ||||||||||||
Cost | Accumulated Amortization | Net Carrying Amount | ||||||||||
Patents | $ | 224,809 | $ | 25,333 | $ | 199,476 | ||||||
Licensing asset | 255,820 | - | 255,820 | |||||||||
Licensing agreements | 10,214,000 | 275,290 | 9,938,710 | |||||||||
$ | 10,694,629 | $ | 300,623 | $ | 10,394,006 |
December 31, 2011 | ||||||||||||
Cost | Accumulated Amortization | Net Carrying Amount | ||||||||||
Patents | $ | 192,539 | $ | 15,086 | $ | 177,453 | ||||||
Licensing asset | 255,820 | - | 255,820 | |||||||||
Licensing agreements | 10,004,000 | 27,529 | 9,976,471 | |||||||||
$ | 10,452,359 | $ | 42,615 | $ | 10,409,744 |
The Company has patents pending of $71,971 at September 30, 2012 (December 31, 2011 - $121,087) and licensing agreements of $7,874,000 (December 31, 2011 - $7,664,000) not currently being amortized.
8. | Goodwill |
Amount | ||||
Balance at December 31, 2011 | $ | 3,408,741 | ||
Collatamp G® acquisition (Note 2) | 188,336 | |||
Balance at September 30, 2012 | $ | 3,597,077 |
9
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
9. | Long Term Debt and Debt Issuance Costs On May 11, 2012, the Company entered into a loan and security agreement (the “Loan Agreement”) with MidCap Funding III, LLC (the “Lender”) for a 36 month term loan that is due May 11, 2015. The term loan allows for a total advancement of US$6,000,000 ($5,902,200). An amount of US$3,500,000 ($3,500,000) was drawn on execution of the Loan Agreement and the remainder will be advanced if the Company raises an amount of not less than US$6,000,000 ($5,902,200) from any combination of: an equity issuance; upfront payments associated with a pharmaceutical partnership; or upfront payments in conjunction with the acquisition or in-licensing of pharmaceutical products. Advancement of the remainder of the loan is available until March 31, 2013, and subject to Lender review. The Loan Agreement is secured by all assets of the Company and contains customary covenants that, among other things, generally restrict the Company’s ability to incur additional indebtedness. The Loan Agreement includes a financial covenant to raise not less than US$3,000,000 by March 31, 2013 in the form of an equity raise or cash from an upfront payment associated with a pharmaceutical partnership. As of the filing date of this quarterly report, the Company was in compliance with all Loan Agreement covenants. Payments are due monthly, with the first six (6) payments being interest-only, with principal and interest payments due thereafter. Interest is calculated at the higher of 4% or the thirty (30) day LIBOR plus 7%. In connection with the Loan Agreement, the Company granted warrants to purchase an aggregate of 750,000 common shares in the capital of the Company at an exercise price of US$0.56 ($0.55). The grant date fair value of the warrants was $312,000. Of this amount, $208,000 for 500,000 warrants was recorded as a warrant liability, with an equal amount recorded as a discount to the carrying value of the loan in the accompanying condensed interim consolidated financial statements. The remaining $104,000 was in respect of 250,000 warrants which were granted for compensation of the transaction and has been classified as debt issuance costs and recorded as a warrant liability. The discount to the carrying value of the loan is being amortized as a non-cash interest expense over the term of the loan using the effective interest rate method. The grant date fair value of the warrants was determined using the Black-Scholes model with the following assumptions: estimated volatility of 124.6%, a risk-free interest rate of 1.48%, an expected life of five years, and no dividend yield. During the nine month period ended September 30, 2012, the Company accreted $38,201 (2011 - $nil) in non-cash accretion expense in connection to the long term loan, which is included in accretion expense on the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit. The Company also incurred $344,452 in financing fees and legal costs related to closing the Loan Agreement. These fees and costs are classified as debt issuance costs, and are included in long-term assets on the condensed interim consolidated balance sheets. These assets are being amortized as a non-cash interest expense over the term of the outstanding loan using the effective interest rate method. During the nine month period ended September 30, 2012, the Company amortized $89,936 (2011 – $nil) in non-cash interest expense, which is included in amortization expense on the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit. |
10
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
During the fiscal year ending December 31, 2012, the Company will make principal payments of US$218,750 ($215,185) and interest payments of US$217,164 ($213,624) under the Loan Agreement. The Company is scheduled to make the following principal and interest payments over the next three years ended December 31: |
2013 | 2014 | 2015 | |||
Principal payments | US$1,312,500 ($1,291,106) | US$1,312,500 ($1,291,106) | US$656,250 ($645,553) | ||
Interest payments | US$298,776 ($293,906) | US$152,396 ($149,912) | UD$20,587 ($20,251) |
10. | Capital Stock |
a) | Common Shares As at December 31, 2011, the Company had recorded 2,000,000 common shares as a contingent liability. These shares were issued during the first quarter ended March 31, 2012. The difference between the fair value of these shares at December 31, 2011 and the fair value on the date of issuance was a credit of $79,724 which was recorded as a reduction of expense to change in fair value of contingent consideration on the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit. |
Number of Shares | Amount | |||||||
Balance, December 31, 2011 | 37,610,042 | $ | 16,469,621 | |||||
Shares issued to Tribute Shareholders (Note 13(a)) | 2,000,000 | 1,120,336 | ||||||
Balance, September 30, 2012 | 39,610,042 | $ | 17,589,957 |
b) | Additional Paid-in Capital Options The activities in additional paid in-capital options are as follows: |
Amount | ||||
Balance, December 31, 2011 | $ | 1,277,830 | ||
Expense recognized for options issued to employees/directors | 158,543 | |||
Balance, March 31, 2012 | 1,436,373 | |||
Expense recognized for options issued to employees/directors | 161,880 | |||
Balance, June 30, 2012 | 1,598,253 | |||
Expense recognized for options issued to employees/directors | 139,909 | |||
Balance, September 30, 2012 | $ | 1,738,162 |
11
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
c) | Stock Based Compensation The Company’s stock-based compensation program ("Plan") 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 and nine month periods ended September 30, 2012, there were 30,000 and 275,000 options granted to an officer and employees of the Company, respectively (2011 – nil and 305,000, respectively). The weighted average exercise price of these options is USD$0.54 ($0.53), with 195,000 of these options having quarterly vesting terms at 25% on each of March 31, June 30, September 30 and December 31, 2013, upon achieving certain financial objectives. There are 50,000 options exercisable at a rate of 25% per quarter beginning in the first full quarter after the date of grant. The remaining 30,000 options are exercisable at a rate of 25% per quarter beginning one year from the date of the first full quarter after the date of grant. 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 certain unvested awards for the purpose of calculating compensation expense. The weighted average grant date fair value of these options was an estimated $0.46 using the Black-Scholes option pricing model, based on the following weighted average assumptions: expected dividend yield of 0%; expected volatility of 126%; risk-free interest rate of 1.50%; and expected term of 5 years. For the three and nine month periods ended September 30, 2012, the Company recorded $139,909 and $460,332 respectively (2011 – $47,330 and $138,327, respectively) as compensation expense for options previously issued to directors, officers and employees based on continuous service. This expense was recorded as selling, general and administrative expense in the condensed consolidated interim statements of operations, comprehensive (loss) income and deficit. Due to the performance criteria not being met in 2011, 47,500 options issued to an officer and employees were not earned and therefore removed from the number of options issued in the first quarter ended March 31, 2012. |
The total number of options outstanding as at September 30, 2012 was 3,202,952 (December 31, 2011 – 2,975,452). The maximum number of common shares subject to options that may be issued under the Plan is floating at an amount equivalent to 10% of the issued and outstanding common shares, or 3,961,004 shares as at September 30, 2012 (December 31, 2011 – 3,761,004). The weighted average fair value of options expensed during the three and nine month periods ended September 30, 2012 was estimated at $0.50 and $0.50, respectively (2011 - $0.93 and $0.85 respectively). |
12
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
d) | Warrants As at September 30, 2012, the following compensation warrants were outstanding: |
Expiration Date | Number of Warrants | Weighted Average Exercise Price | Fair Value @ September 30, 2012 | |||||||||
April 8, 2013 | 500,000 | $ | US1.47 | ($1.44) | $ | 3,443 | ||||||
April 8, 2013 | 500,000 | $ | US1.96 | ($1.93) | $ | 984 | ||||||
April 8, 2013 | 500,000 | $ | US2.46 | ($2.42) | $ | 492 | ||||||
May 11, 2017 | 750,000 | $ | US0.56 | ($0.55) | $ | 241,384 | ||||||
2,250,000 | $ | US1.50 | ($1.48) | $ | 246,303 |
In connection with a private placement offering in October 2010, the Company granted 1,500,000 warrants to the participants, each exercisable into one common share as follows: 500,000 at US$1.50 ($1.48), 500,000 at US$2.00 ($1.97) and 500,000 at US$2.50 ($2.46) each for a period of 18 months, which ended on April 8, 2012. On April 5, 2012, the Company granted a one year extension on these warrants and recorded $135,157 to cost of extending the warrant expiration on the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit. The fair value of these warrants on date of grant was estimated using the Black-Scholes option pricing model, based on the following assumptions: expected dividend yield of 0%; expected volatility of 107%; risk free interest rate of 1.43%; and expected term of 1 year. On May 11, 2012 the Company granted 750,000 warrants in connection with the long-term debt obligation (Note 9), at an exercise price US$0.56 ($0.55). Subsequently, the pro rata exercise price of the 1,500,000 warrants was adjusted due to the exercise rate of the 750,000 new warrants being lower than the original exercise price of the October 2010 warrants. The effect of this pro rata change was as follows: 500,000 at US$1.47 ($1.44), 500,000 at US$1.96 ($1.93) and 500,000 at US$2.46 ($2.42). The fair value of these warrants fluctuates based on the current stock price, volatility, the risk free interest rate, time remaining until expiry and changes in the exchange rate between the US and Canadian dollar. The fair value of the warrant liability at the date of grant of the 750,000 warrants was $312,000 and was estimated using the Black-Scholes option pricing model, based on the following assumptions: expected dividend yield of 0%; expected volatility of 124%; risk free interest rate of 1.48%; and expected term of 5 years. ASC 815 “Derivatives and Hedging” indicates that warrants with exercise prices denominated in a different currency than an entity’s functional currency should not be classified as equity. As a result, these warrants have been treated as derivatives and recorded as liabilities carried at their fair value, with period-to-period changes in the fair value recorded as a gain or loss in the condensed interim consolidated statement of operations, comprehensive (loss) income and deficit. The Company treated the warrants as a liability upon their issuance. At September 30, 2012, the fair value of the warrant liability of $246,303 (December 31, 2011 - $2,543) was estimated using the Black-Scholes option pricing model based on the following weighted average assumptions: expected dividend yield of 0%; expected volatility of 105%; risk-free interest rate of 1.16%; and expected term of 1.9 years. |
13
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
11. | 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 (loss) earnings per share is not computed when the effect of such calculation is anti-dilutive. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. Potentially dilutive securities, which were not included in diluted weighted average shares for the three and nine months ended September 30, 2012 and 2011 consist of outstanding stock options (3,202,952 and 1,029,500 at September 30, 2012 and September 30, 2011, respectively) and outstanding warrant grants (2,250,000 at September 30, 2012 and 1,500,000 at September 30, 2011). The following table sets forth the computation of (loss) earnings per share: |
For the Three Month Period Ended September 30 | For the Nine Month Period Ended September 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator: | ||||||||||||||||
Net (loss) earnings available to common shareholders | $ | (718,640 | ) | $ | 112,261 | $ | (2,076,410 | ) | $ | (132,229 | ) | |||||
Denominator: | ||||||||||||||||
Weighted average number of common shares | 39,610,042 | 24,610,042 | 39,018,801 | 24,599,144 | ||||||||||||
Effect of dilutive common shares | - | - | - | - | ||||||||||||
Diluted weighted average number of common shares outstanding | 39,610,042 | 24,610,042 | 39,018,801 | 24,599,144 | ||||||||||||
(Loss) income per share – basic and diluted | $ | (0.02 | ) | $ | 0.00 | $ | (0.05 | ) | $ | (0.01 | ) |
12. | Statement of Cash Flows Changes in non-cash balances related to operations are as follows: |
For the Nine Month Period Ended September 30 | ||||||||
2012 | 2011 | |||||||
Accounts receivable | $ | (444,232 | ) | $ | 128,578 | |||
Inventories | 111,182 | (289,232 | ) | |||||
Prepaid expenses and other receivables | (224,855 | ) | (21,615 | ) | ||||
Taxes recoverable | (7,203 | ) | (38,760 | ) | ||||
Accounts payable and accrued liabilities | 315,615 | (465,119 | ) | |||||
$ | (249,493 | ) | $ | (686,148 | ) |
14
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
13. | Contingencies and Commitments |
The Company has royalty, licensing and manufacturing agreements that have remained in effect for the Company during the quarter. In addition, there were no material changes to lease or executive termination agreements during the period. |
(a) | License Agreements On December 1, 2011, the Company acquired 100% of the outstanding shares of Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. ("Tribute") (see Note 2 of the Company’s December 31, 2011 10-K filing). Included in this transaction were the following license agreements: On June 30, 2008, Tribute signed a Sales, Marketing and Distribution Agreement with Actavis Group PTC ehf (“Actavis”) to perform certain sales, marketing, distribution, finance and other general management services in Canada in connection with the importation, marketing, sales and distribution of Bezalip® SR and Soriatane® (the “Products”). On January 1, 2010, a first amendment was signed with Actavis to grant Tribute the right and obligation to more actively market and promote the Products in Canada. On March 31, 2011, a second amendment was signed with Actavis that extended the term of the agreement, modified the terms of the agreement and increased Tribute’s responsibilities to include the day-to-day management of regulatory affairs, pharmacovigilance and medical information relating to the Products. Tribute pays Actavis sales and distribution fees up to an annual base-line net sales forecast plus an incremental fee for incremental net sales above the base-line. Tribute has agreed to a marketing budget for the first three years of not less than $3,750,000. On May 4, 2011, Tribute signed a Product Development and Profit Share Agreement with Actavis to develop, obtain regulatory approval of and market Bezalip SR in the USA. The Company shall pay US$5,000,000 to Actavis within 30 days of receipt of the regulatory approval to market Bezalip SR in the USA. On November 9, 2010, Tribute signed a license agreement (the "License Agreement") with Nautilus Neurosciences, Inc. (“Nautilus”) for the exclusive rights to develop, register, promote, manufacture, use, market, distribute and sell Cambia® in Canada. On August 11, 2011, Tribute and Nautilus executed the first amendment to the License Agreement and on September 30, 2012 executed the second amendment to the License Agreement. The payments under this agreement include: a) US$250,000 ($255,820) upfront payment to Nautilus upon the execution of this agreement; and b) the following milestone payments; i) US$750,000 to be paid upon the earlier of the first commercial sale of the product or six months after all regulatory approvals. As per the second amendment of the License Agreement, a payment of US$250,000 is due on or before October 15, 2012 and a second payment of US$500,000 is due either on or before February 1, 2013, if all approvals are obtained on or before December 31, 2012 or within 30 days following the date the last of such approvals is obtained; if not before December 31, 2012. Additional payments are due as follows: ii) US$250,000 the first year in which annual net sales exceed US$2,500,000, iii) US$500,000 the first year in which the annual net sales exceed US$5,000,000, iv) US$750,000 the first year in which the annual net sales exceed US$7,500,000, v) US$1,000,000 the first year in which the annual net sales exceed US$10,000,000, vi) US$1,500,000 the first year the annual net sales exceed US$15,000,000, and vii) US$2,000,000 the first year in which the annual net sales exceed US$20,000,000. Royalty rates are tiered and payable at rates ranging from 22.5-25.0% of net sales. The initial term of the agreement expires on September 30, 2025 but is subject to automatic renewals under certain circumstances. Cambia® received approval by Health Canada on March 16, 2012 and as a result, the Company issued 2,000,000 common shares to the Tribute shareholders, as per the Share Purchase Agreement dated December 1, 2011 (see Note 10(a)). In addition, as noted above, a milestone payment of US$250,000 was paid to Nautilus on October 15, 2012 and further US$500,000 is due on February 1, 2013, subject to approval. On December 30, 2011, Stellar signed a License Agreement to commercialize MycoVa in Canada with NexMed U.S.A. As of September 30, 2012, this product has not been filed with Health Canada and as at September 30, 2012, no upfront payments have been paid. Within 10 days of execution of a manufacturing agreement, Stellar is obligated to pay an up-front license fee of $200,000. Upon Health Canada approval, Stellar is obligated to pay an additional milestone of $400,000. Sales milestones payments of $250,000 each are based on the achievement of aggregate net sales in increments of $5,000,000. Royalties are payable at rates ranging from 20% to 25% of net sales. |
15
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
(b) | Executive Termination Agreements The Company currently has employment agreements with the provision of termination and change of control benefits with officers and executives of the Company. The agreements for the officers and executives provide that in the event that any of their employment is terminated during the initial term by the Company for any reason other than just cause or death, by the Company because of disability, by the officer or executive for good reason, or in the event of termination of the officers or executives employment by the Company or by the officer or executive for any reason or a change in control, the officer or executive shall be entitled to the balance of the remuneration owing for the remainder of the initial term of up to an aggregate amount of $1,474,167 as of September 30, 2012 (December 31, 2011 - $2,160,000) or if a change of control occurs subsequent to the initial term, while the officers or executives are employed on an indefinite basis, a lump sum payment of up to an aggregate amount of $1,520,000 (based on current base salaries). |
14. | Significant Customers During the three month period ended September 30, 2012, the Company had two significant wholesale customers that represented 54.4% of product sales, compared to 48.3% in the same period of 2011 (one major wholesaler – 37.8% and one international customer – 10.5%). During the nine month period ended September 30, 2012, the Company had two significant wholesale customers that represented 54.3% of product sales compared to one significant wholesale customer that represented 31.3% of product sales for the same period in the prior year. The Company believes that its relationships with these customers are satisfactory. |
15. | Related Party Transactions Fees were paid to LMT Financial Inc. ("LMT", a company beneficially owned by a director and former interim officer of the Company, and his spouse) for consulting services. For the three and nine month periods ended, September 30, 2012, the Company recorded and paid to LMT an aggregate of $37,500 and $112,500, respectively (2011 - $50,100 and $145,250, respectively) reflected as selling, general and administrative expense in the consolidated statements of operations, comprehensive (loss) income and deficit. During the three and nine month periods ending September 30, 2012, the Company paid $nil for various legal services (2011 – $41,574 and $62,586, respectively) to a law firm in which one of the directors of the Company is a partner, which have been recorded as selling, general and administrative expense in the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit. |
16. | Income Taxes The Company has no taxable income under Canadian Federal and Provincial tax laws for the three and nine month periods ended September 30, 2012 and 2011. The Company has non-capital loss carry-forwards at September 30, 2012 totaling approximately $4,909,000, which may be offset against future taxable income. If not utilized, the loss carry-forwards will expire between 2014 and 2031. The cumulative carry-forward pool of scientific research and experimental development (SR&ED) expenditures that may be offset against future taxable income, with no expiry date, is $1,798,300. The non-refundable portion of the tax credits as at September 30, 2012 was $341,300. |
16
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
17. | Segmented Information The Company is a specialty pharmaceutical company with a primary focus on the acquisition, licensing, development and promotion of healthcare products in Canada. The Company targets several therapeutic areas in Canada, but has a particular interest in products for the treatment of pain, dermatology and endocrinology/cardiology. Stellar also sells Uracyst® and NeoVisc® internationally through a number of strategic partnerships. Currently, all of the Company’s manufacturing assets are located in Canada. All direct sales take place in Canada. Licensing arrangements have been obtained to distribute and sell the Company’s products in various countries around the world. Revenue for the three and nine months ended September 30, 2012 and 2011 includes products sold in Canada and international sales of products. Revenue earned is as follows: |
For the Three Month Period Ended September 30 | For the Nine Month Period Ended September 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Product sales: | ||||||||||||||||
Domestic sales | $ | 2,830,118 | $ | 464,610 | $ | 7,773,046 | $ | 1,415,024 | ||||||||
International sales | 369,816 | 217,368 | 1,193,219 | 960,799 | ||||||||||||
Other revenue | 13,565 | 1,886 | 38,450 | 5,861 | ||||||||||||
Total | $ | 3,213,499 | $ | 683,864 | $ | 9,004,715 | $ | 2,381,684 | ||||||||
For the Three Month Period Ended September 30 | For the Nine Month Period Ended September 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Royalties and licensing revenue: | ||||||||||||||||
Royalty revenues | $ | - | $ | 5,298 | $ | - | $ | 14,226 | ||||||||
Licensing revenue | - | - | - | - | ||||||||||||
Total | $ | - | $ | 5,298 | $ | - | $ | 14,226 |
The Company currently sells its own products and is in-licensing other products in Canada. In addition, revenues include products which the Company out-licenses in Europe, the Caribbean, Austria, Germany, Italy, Lebanon, Kuwait, Malaysia, Portugal, Romania, Spain, South Korea, Turkey and the United Arab Emirates. The continuing operations reflected in the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit, includes Stellar’s activity in these markets. |
18. | Foreign Currency Gain (Loss) |
The Company enters into foreign currency transactions in the normal course of business. During the three and nine month periods ended September 30, 2012, the Company had a foreign currency gain of $184,319 and $105,281, respectively (2011 – $58,765 and $3,574, respectively). These amounts have been included in selling, general and administrative expenses in the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit. |
17
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
19. | Financial Instruments |
(a) | Financial assets and liabilities – fair values The carrying amounts of cash and cash equivalents, accounts receivable, certain other current assets, payables, accruals and contingent consideration are a reasonable estimate of their fair values because of the short maturity of these instruments. Warrant liability is a longer term financial liability where fluctuations in market rates will affect the fair value of this financial instrument. The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable,either directly or indirectly Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. Cash equivalents and warrant liability are classified as Level 2 financial instruments within the fair value hierarchy. |
(b) | Liquidity risk The Company generates sufficient cash from operating and financing activities to fund its operations and fulfill its obligations as they become due. The Company has sufficient funds available through its cash, cash equivalents, and financing arrangements, should its cash requirements exceed cash generated from operations to cover financial liability obligations. The Company’s investment policy is to invest excess cash resources into highly liquid short-term investments purchased with an original maturity of three months or less with tier one financial institutions. As at September 30, 2012, there were no restrictions on the flow of these funds nor have any of these funds been committed in any way, except as outlined in the detailed notes. |
(c) | Concentration of credit risk and major customers The Company considers its maximum credit risk to be $1,223,856 (December 31, 2011: $779,624). This amount is the total of the following financial assets: trade receivables and loan receivable. The Company’s cash and cash equivalents are held through various high grade financial institutions. The Company is exposed to credit risk from its customers and continually monitors its customers’ credit. It establishes the provision for doubtful accounts based upon the credit risk applicable to each customer. In line with other pharmaceutical companies, the Company sells its products through a small number of wholesalers and retail pharmacy chains in addition to hospitals, pharmacies, physicians and other groups. Note 14 discloses the significant customer details and the Company believes that the concentrations on the Company’s customers are considered normal for the Company and its industry. |
18
STELLAR PHARMACEUTICALS INC.
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in Canadian dollars)
(Unaudited)
(d) | Foreign exchange risk The Company principally operates within Canada; however, a portion of the Company’s revenues, expenses, and current assets and liabilities, are denominated in United States dollars and certain European currencies. The Company’s long term debt is repayable in U.S. dollars, which may expose the Company to foreign exchange risk due to changes in value of the Canadian dollar. As at September 30, 2012, a 5% change in the foreign exchange rate would increase/decrease the long term debt balance by $175,000 and would increase/decrease both interest expense and net loss by approximately $3,000 for the nine months ended September 30, 2012. The Company believes a near-term change in foreign exchange rates would not have a material adverse effect on the financial position or results of operations. Accordingly, the Company does not enter into financial hedging or other derivative contracts. |
(e) | Interest rate risk |
The Company is exposed to interest rate fluctuations on its cash and cash equivalents as well as its long term debt. The Company does not believe that the results of operations or cash flows would be materially affected to any significant degree by a sudden change in market interest rates relative to interest rates on the cash equivalents. At September 30, 2012, the Company had an outstanding long term debt balance of US$3,500,000 ($3,442,950), which bears interest monthly at the higher of 4% or the thirty day LIBOR rate plus 7%, which may expose the Company to market risk due to changes in interest rates. For the nine month period ended September 30, 2012, a 1% increase in interest rates would increase interest expense and net loss by approximately $6,000. However, based on current LIBOR interest rates, which are currently under the minimum floor set at 4% and based on historical movements in LIBOR rates, the Company believes a near-term change in interest rates would not have a material adverse effect on the financial position or results of operations. |
20. | Reclassifications |
Certain amounts in the prior period have been reclassified to be consistent with the current period presentation. |
21. | Subsequent Events |
(a) | On October 1, 2012, Stellar amalgamated with its two wholly owned subsidiaries, Tribute Pharmaceuticals Canada Ltd and Tribute Pharma Canada Inc., and became the successor company. |
(b) | A payment of US$250,000 ($244,600) was issued to Nautilus on October 15, 2012 for a milestone due upon the first commercial sale the product (see Note 13(a)). |
19
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS |
This document was prepared on November 1, 2012 and should be read in conjunction with the December 31, 2011 consolidated 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 hundredth dollar.
Forward-looking Statements
Readers are cautioned that actual results may differ materially from the results projected in any "forward-looking" statements (within the meaning of Section 27A of the Exchange Act, as defined below) 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", "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, 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 2011 Annual Report on the Form 10-K.
Recently adopted Accounting Pronouncements
Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations.
On January 1, 2012, the Company adopted the accounting standards set out below.
In September 2011, the FASB issued new accounting guidance that simplified goodwill impairment tests. The new guidance states that a “qualitative” assessment may be performed to determine whether further impairment testing is necessary. This guidance was effective for periods beginning on or after December 15, 2011, which is the Company’s 2012 fiscal year. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In June 2011, the FASB issued an accounting standards update that eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and requires an entity to present items of net income and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance also required an entity to present on the face of the consolidated financial statements, reclassification adjustments from other comprehensive income to net income. This guidance was effective for fiscal years beginning after December 15, 2011, which is the Company’s 2012 fiscal year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
20
In May 2011, the FASB issued an accounting standards update that clarified and amended the existing fair value measurement and disclosure requirements. This guidance was effective prospectively for interim and annual periods beginning after December 15, 2011, which is the Company’s 2012 fiscal year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
New Accounting Standards Not Yet Adopted
In July 2012, the FASB issued an accounting standards update that gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. This guidance will be effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, which will be the Company's fiscal year 2013, with early adoption permitted. The Company does not expect that the adoption of the guidance will have a material impact on the Company's consolidated financial statements.
Overview
Stellar Pharmaceuticals Inc. ("Stellar" or the "Company") is an emerging Canadian specialty pharmaceutical company with a primary focus on the acquisition, licensing, development and promotion of healthcare products in Canada. The Company targets several therapeutic areas in Canada, but has a particular interest in products for the treatment of pain, urology, dermatology and endocrinology/cardiology. Stellar also sells Uracyst® and NeoVisc® internationally through a number of strategic partnerships. On December 1, 2011, the Company acquired 100% of the outstanding shares of Tribute Pharmaceuticals Canada Ltd. and Tribute Pharma Canada Inc. (together herein referred to as "Tribute"), creating a North American specialty pharmaceutical company. As a result, Stellar has gained access to a portfolio of existing products, as well as certain rights to the future development and distribution of therapeutic products within the Canadian and US marketplace, as well as an experienced management team that has held senior management positions at large pharmaceutical companies in those markets.
On June 20, 2012, Stellar announced it had acquired the Canadian rights to Collatamp G® from Theramed Corporation. Collatamp G® is approved in over 50 countries for the local haemostasis of capillary parenchymatous in areas with a high risk of infection and has been shown to reduce post-operative infections across a range of surgical disciplines.
On July 18, 2012, Stellar together with Apricus Bio participated in a pre- New Drug Submission ("NDS") meeting with Health Canada, the agency responsible for approving drugs in Canada. Based on the agency's review of the submitted data package for MycoVa™, Health Canada concurred that the re-analysis of existing Phase 3 development program data by disease severity is acceptable to support an NDS filing and review in Canada. In multiple Phase 3 clinical studies, MycoVa™ successfully demonstrated its ability to kill nail fungus and improve the appearance of the nail, but it did not meet its primary endpoint: complete cure. Given these results, Health Canada has agreed to review in the NDS the use of these successful secondary endpoints re-analyzed by disease severity to demonstrate the efficacy of MycoVa™. Stellar expects that the NDS for MycoVa™ will be submitted to Health Canada in the second half of 2013 once the accelerated stability is completed at its new manufacturer.
On August 23, 2012, Stellar announced that it had entered into an exclusive promotional agreement with Pfizer Canada Inc. (“Pfizer”), to promote Gelfoam® in Canada. Gelfoam® is a medical device approved in Canada and the United States for use in surgical procedures as a haemostatic agent, when control of capillary, venous, and arteriolar bleeding by pressure, ligature, and other conventional procedures is either ineffective or impractical. Under the terms of the promotional agreement, Stellar is granted the exclusive Canadian promotional rights to Gelfoam® by Pfizer. Throughout the term of the agreement, Stellar will act on behalf of Pfizer in the promotion, sales and marketing of Gelfoam® to surgeons and other health care practitioners in Canada. Pfizer will continue to be responsible for all distribution, regulatory affairs and medical related activities.
21
Stellar’s current portfolio of assets includes eleven products: NeoVisc®, NeoVisc® Single Dose, Uracyst®, BladderChek®, Bezalip® SR, Soriatane®, Cambia®, Daraprim®, Collatamp G®, Gelfoam®, and MycoVa™. Each of these products has received regulatory approval in Canada, with the exception of MycoVa.
Stellar markets its products in Canada through its own sales force and currently has licensing agreements for the distribution of select products in 27 countries, and continues to expand this footprint including the recent agreement with Medicure of Egypt for the exclusive distribution rights to Stellar’s proprietary product, NeoVisc. The Company’s focus on business development is twofold: utilizing in-licensing and out-licensing for immediate impact on its revenue stream, as well as product development for future growth and stability.
The Company is now actively engaged on numerous fronts to grow its business through business development activities. There remain a number of key geographical territories globally where NeoVisc and Uracyst are not currently being marketed. In particular, both of these products remain available for licensing in the United States. Stellar intends to focus its efforts to find partners to market its brands in international territories where the Company does not have a direct commercial presence.
Stellar met with the FDA in the United States in March 2012 to discuss the US approval of Bezalip SR. Bezalip SR is approved in over 40 countries world-wide but not in the United States. Stellar recognizes that the US rights to develop Bezalip SR is an important asset to the Company in the largest market in the world, and will continue to seek to maximize the opportunity.
On October 1, 2012, Cambia was launched in Canada and is now widely available to migraine patients in Canada. Cambia is the only non-steroidal anti-inflammatory drug (“NSAID”) available in Canada or the United States that is approved for the treatment of acute migraine with or without aura in adults over 18 years of age. The migraine market is estimated at $150 million dollars in Canada and Cambia is the first novel product approved for migraine treatment since the first triptan was approved in 1995.
Stellar also received its second patent in Canada issued July 10, 2012, as Canadian Patent No. 2,515,512 entitled "Cystitis Treatment with High Dose Chondroitin Sulfate," The new patent for Stellar’s proprietary product Uracyst is valid through 2024.
Results of Operations for the Three and Nine Month Periods Ended, September 30, 2012
For the three month period ended September 30, 2012, total revenues from all sources increased by 366% to $3,213,500, compared to $689,200 in the same period during 2011. This increase is mainly due to licensed domestic product net sales of $2,267,500, compared to $nil in the prior year as a result of the acquisition of Tribute. International product sales increased by 70% to $369,800 for the three months ending September 30, 2012 compared to $217,400 for the same period during 2011. There was also an increase in other domestic product sales for the three month period ending September 30, 2012 of 24% to $576,200 compared to $466,500 the same period in 2011 due in part to sales of newly acquired Collatamp G.
For the nine month period ended, September 30, 2012, total revenues from all sources increased by 276% or $6,608,800, to $9,004,700 compared to $2,395,900 for the same period in 2011.
The Company’s net loss for the three month period ended September 30, 2012, was $718,600 compared to net income of $112,300 during the same period in 2011. This loss was mainly due to a significant investment in the expansion of the Company’s sales force and marketing expenses to grow its existing products, marketing and sales expenses related to the launch of Cambia® on October 1, 2012, as well as an increase in business development activities.
For the nine month period ending September 30, 2012, the net loss was $2,076,400 compared to a prior year net loss of $132,200.
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Gross Profit and Cost of Products Sold
Gross profit for the third quarter of 2012 was $1,359,200, up 179%, compared to a gross profit of $487,300 in the same period in 2011. The improved gross profit in 2012 was due mainly to the licensed domestic product net sales, less associated cost of these sales, representing a gross profit of $740,800.
For the nine month period ended September 30, 2012, gross profit was $3,855,500, up 119% compared to a gross profit of $1,761,100 for the same period in 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period ended September 30, 2012 were $2,131,400, compared to $621,600 for the same period in 2011 for an increase of $1,509,800 or 243%. The increase is due primarily to the expansion of the Company’s sales force and Cambia® pre-launch expenses. Additionally, there was an increase of $92,600 in stock-based compensation expense in the third quarter.
For the nine month period ended September 30, 2012, selling, general and administrative expenses was $6,240,000 compared to $2,024,600 in the same period of the prior year.
Interest Expense
Interest expense during the three and nine month periods ended September 30, 2012 was $103,600 and $158,200, respectively (2011 – $nil). The interest expense is due to the new long term debt facility.
Summary of Quarterly Results
Quarter Ended | Revenues | Net Income (loss) | Earnings (loss) per share | |||||||||
September 30, 2012 | $ | 3,213,500 | $ | (718,600 | ) | $ | (0.02 | ) | ||||
June 30, 2012 | 2,891,100 | (731,400 | ) | (0.02 | ) | |||||||
March 31, 2012 | 2,900,000 | (626,300 | ) | (0.02 | ) | |||||||
December 31, 2011 | 1,474,000 | (389,600 | ) | (0.01 | ) | |||||||
September 30, 2011 | 689,200 | 112,300 | 0.00 | |||||||||
June 30, 2011 | 1,072,700 | 58,400 | 0.00 | |||||||||
March 31, 2011 | 634,000 | (302,900 | ) | (0.01 | ) | |||||||
December 31, 2010 | $ | 666,700 | $ | (968,400 | ) | $ | (0.03 | ) |
Liquidity and Capital Resources
The Company currently manages its capital structure and makes adjustments to it, based on cash resources expected to be available to the Company, in order to support its future business plans.
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The Company’s cash and cash equivalents position amounted to $2,608,700 at September 30, 2012 compared with $2,228,000 at December 31, 2011. The increase was due to the new long term debt facility offset by losses from operations and the acquisition of the exclusive rights to Collatamp G® for Canada.
Cash used by operations for the nine month period ended September 30, 2012 was $2,285,600 (2011 - $788,500) mainly as a result a significant investment in the expansion of the Company’s sales force and marketing expenses to grow its existing products, to prepare for the launch of Cambia® which occurred on October 1, 2012, as well as an increase in business development activities. Also included are changes in non-cash operating assets and liabilities, which decreased to $249,500 for the period (2011- $686,100).
Cash provided by financing activities related to a new long term debt facility for $3,500,000, less financing costs of $343,900.
Cash used in investing activities for the nine month period ended September 30, 2012 was $489,800, which relates to the acquisition of the license rights to Collatamp G® with the balance attributable to intangible assets and fixed asset purchases.
On May 11, 2012, the Company entered into a loan and security agreement (the “Loan Agreement”) with MidCap Funding III, LLC (the “Lender”) for a 36 month term loan that is due May 11, 2015. The term loan allows for a total advancement of US$6,000,000. An amount of US$3,500,000 ($3,488,000) was drawn on execution of the Loan Agreement and the remainder will be advanced if the Company raises an amount of not less than US$6,000,000 from any combination of: an equity issuance; upfront payments associated with a pharmaceutical partnership; or upfront payments in conjunction with the acquisition or in-licensing of pharmaceutical products. Advancement of the remainder of the loan is available until March 31, 2013, and subject to Lender review. The Loan Agreement is secured by all assets of the Company and contains customary covenants that, among other things, generally restrict the Company’s ability to incur additional indebtedness. The Loan Agreement includes a financial covenant to raise not less than US$3,000,000 by March 31, 2013 in the form of an equity raise or cash from an upfront payment associated with a pharmaceutical partnership.
Payments are due monthly, with the first six (6) payments being interest-only, with principal and interest payments due thereafter. Interest is calculated at the higher of 4% or the thirty (30) day LIBOR plus 7%.
In connection with the Loan Agreement, the Company granted warrants to purchase an aggregate of 750,000 common shares of the Company common stock at an exercise price of US$0.56 ($0.55). The fair value of the warrants was $312,000. Of this amount, $208,000 for 500,000 warrants was recorded as a warrant liability, with an equal amount recorded as a discount to the carrying value of the loan in the accompanying interim consolidated financial statements. The remaining $104,000 (250,000 warrants) were granted for compensation of the transaction and has been classified as debt issuance costs.
The Company believes that the debt facility will provide the necessary funds to ensure continued investment in selling and marketing expenses to grow its existing products, the pending launch of Cambia®, plus increased business development activities.
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.
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Related Party Transactions
Fees were paid to LMT Financial Inc. ("LMT", a company beneficially owned by a director and former interim officer of the Company, and his spouse) for consulting services. For the three and nine month periods ended, September 30, 2012, the Company recorded and paid an aggregate of $37,500 and $112,500, respectively (2011 - $50,100 and $145,200, respectively) as selling, general and administrative expense in the consolidated statements of operations, comprehensive (loss) income and deficit.
During the three and nine month periods ending September 30, 2012, the Company paid $nil for various legal services (2011 – $41,600 and $62,600, respectively) to a law firm in which one of the directors of the Company is a partner, which have been recorded as selling, general and administrative expense in the condensed interim consolidated statements of operations, comprehensive (loss) income and deficit.
Significant Customers
During the three month period ended September 30, 2012, the Company had two significant wholesale customers that represented 54.4% of product sales, compared to 48.3% in the same period of 2011 (one major wholesaler – 37.8% and one international customer – 10.5%).
During the nine month period ended September 30, 2012, the Company had two significant wholesale customers that represented 54.3% of product sales compared to one significant wholesale customer that represented 31.3% of product sales for the same period in the prior year.
The Company believes that its relationships with these customers are satisfactory.
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 nine month periods ended September 30, 2012, the Company issued nil and 2,000,000 common shares, respectively (2011 – nil and 25,002, respectively).
As of the date of this report, the Company had 39,610,042 common shares issued and outstanding.
As of the date of this report, the Company had 3,202,952 common share options outstanding with an average exercise price of $0.65 per option.
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ITEM 3. | QUANTITIVE 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 |
(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 performing 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 Stellar make available free of charge through its website, www.stellarpharma.com, its 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 the Company files 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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STELLAR PHARMACEUTICALS INC.
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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