UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ______________________.
COMMISSION FILE NUMBER 0-31198
STELLAR PHARMACEUTICALS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA N/A
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
544 EGERTON ST
LONDON, ONTARIO CANADA
N5W 3Z8
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(519) 434-1540
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [X] NO [ ]
THE NUMBER OF OUTSTANDING COMMON SHARES, NO PAR VALUE, OF THE REGISTRANT AT:
MARCH 31, 2008: 23,822,540
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
STELLAR PHARMACEUTICALS INC.
MARCH 31, 2008
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
CONTENTS
CONDENSED INTERIM FINANCIAL STATEMENTS
PAGE
CONDENSED BALANCE SHEETS 1
CONDENSED INTERIM STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS AND DEFICIT 2
CONDENSED INTERIM STATEMENTS OF CASH FLOWS 3
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS 4 - 12
STELLAR PHARMACEUTICALS INC.
CONDENSED BALANCE SHEETS
(EXPRESSED IN CANADIAN DOLLARS)
AS AT AS AT
MARCH 31, 2008 DECEMBER 31, 2007
-------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT
Cash and cash equivalents (Note 2) $ 3,014,128 $ 3,211,126
Accounts receivable, net of allowance $nil (2007 - $nil) 298,455 272,341
Inventories (Note 3) 328,280 305,040
Taxes recoverable 164,714 164,714
Prepaid, deposits and sundry receivables (Note 4) 50,743 44,066
-------------- -----------
3,856,320 3,997,287
PROPERTY, PLANT AND EQUIPMENT (Note 5) 808,554 822,692
OTHER ASSETS (Note 6) 61,154 55,430
LOAN RECEIVABLE 14,822 14,822
-------------- -----------
$ 4,740,850 $ 4,890,231
============== ===========
LIABILITIES
CURRENT
Accounts payable $ 230,649 $ 214,442
Accrued liabilities 122,102 192,364
Deferred revenues 8,475 10,573
-------------- -----------
361,226 417,379
-------------- -----------
CONTINGENCIES AND COMMITMENTS (Note 11)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 7)
AUTHORIZED
Unlimited Non-voting, convertible, redeemable, and retractable preferred
shares with no par value
Unlimited Common shares with no par value
ISSUED
23,822,540 Common shares (2007 - 23,822,540) 8,303,054 8,303,054
Additional paid-in capital- options - outstanding 128,591 123,002
- expired 623,417 623,417
-------------- -----------
9,055,062 9,049,473
DEFICIT (4,675,438) (4,576,621)
-------------- -----------
4,379,624 4,472,852
-------------- -----------
$ 4,740,850 $ 4,890,231
============== ===========
See accompanying notes to financial statements.
APPROVED ON BEHALF OF THE BOARD:
/s/ Peter Riehl /s/ Arnold Tenney
-------------------------- ---------------------------
DIRECTOR DIRECTOR
Page 1
STELLAR PHARMACEUTICALS INC.
CONDENSED INTERIM STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS AND DEFICIT
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
FOR THE THREE MONTH PERIOD
ENDED MARCH 31
2008 2007
------------- -------------
PRODUCT SALES (Note 8) $ 329,456 $ 328,931
COST OF PRODUCTS SOLD (excluding amortization of $17,216
(2007- $27,586) and other items shown below of $nil (2007 - $20,145)) 80,111 103,132
------------- -------------
MARGIN ON PRODUCTS SOLD 249,345 225,799
ROYALTY AND LICENSING REVENUES (Note 8) 197,956 90,765
WRITE-DOWN OF OBSOLETE INVENTORY -- (20,145)
------------- -------------
GROSS PROFIT 447,301 296,419
------------- -------------
EXPENSES
Selling, general and administrative 490,991 512,784
Research and development 53,818 38,612
Amortization 30,383 40,442
------------- -------------
575,192 591,838
------------- -------------
LOSS FROM OPERATIONS (127,891) (295,419)
INTEREST AND OTHER INCOME 29,074 34,029
------------- -------------
NET LOSS AND COMPREHENSIVE LOSS FOR THE PERIOD (98,817) (261,390)
DEFICIT, beginning of period (4,576,621) (4,429,180)
------------- -------------
DEFICIT, end of period $ (4,675,438) $ (4,690,570)
============= =============
LOSS PER SHARE (Note 9) $ 0.00 $ (0.01)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING (Note 9) 23,822,540 23,819,040
============= =============
See accompanying notes to financial statements.
Page 2
STELLAR PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
FOR THE THREE MONTH PERIOD
ENDED MARCH 31
2008 2007
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (98,817) $ (261,390)
Items not affecting cash
Amortization 30,383 40,442
Unrealized foreign exchange (gain) loss (13,150) 1,082
Issuance of equity instruments for services rendered 5,589 2,749
Change in non-cash operating assets and liabilities (Note 10) (112,184) (128,326)
------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITES (188,179) (345,443)
------------ ------------
CASH FLOWS INVESTING ACTIVITES
Additions to property, plant and equipment (15,906) (1,087)
Increase in other assets (6,063) --
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITES (21,969) (1,087)
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH HELD IN
FOREIGN CURRENCY 13,150 (1,082)
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS (196,998) (347,612)
CASH AND CASH EQUIVALENTS, beginning of period 3,211,126 3,515,193
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 3,014,128 $ 3,167,581
============ ============
See accompanying notes to financial statements.
Page 3
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
1. BASIS OF PRESENTATION
These condensed interim financial statements should be read in conjunction
with the financial statements for Stellar Pharmaceuticals Inc. (the
"Company") most recently completed fiscal year ended December 31, 2007.
These financial statements do not include all disclosures required in
annual financial statements but rather are prepared in accordance with
recommendations for interim financial statements in conformity with
accounting principles generally accepted in the United States of America.
These financial statements have been prepared using the same accounting
policies, and methods as those used by the Company in the annual financial
statements for the year ended December 31, 2007.
The unaudited condensed financial statements contain all adjustments
(consisting of only normal recurring adjustments), which are necessary to
present fairly the financial position of the Company as at March 31, 2008
and December 31, 2007, and the results of its operations and cash flows
for the three month periods ended March 31, 2008 and 2007.
a) The preparation of these financial statements has required
management to make estimates and assumptions that affect the amounts
of assets and liabilities and disclosure of contingent liabilities
as at March 31, 2008 and 2007, and the revenue and expenses recorded
for the quarters then ended. On an ongoing basis, the Company
evaluates its estimates, including those related to provision for
doubtful accounts, accrued liabilities, income taxes, stock based
compensation, revenue recognition and intangible assets. The Company
bases its estimates on historical experiences and on various other
assumptions believed to be reasonable under the circumstances.
Actual results could differ from those estimates. As adjustments
become necessary, they are reported in earnings in the period in
which they become known.
b) FAIR VALUE
Effective January 1, 2008, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 157, "Fair Value Measurements"
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 defines fair value as the price received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
SFAS 157 provides guidance on how to measure the fair value of
financial instruments according to a fair value hierarchy that
prioritizes the information used to measure fair value into three
broad levels. SFAS 157 broadly applies to most existing
pronouncements that require or permit fair value measurements
(including both financial and non-financial assets and liabilities)
but does not require any new fair value measurements.
The adoption of SFAS 157 did not have a material impact on the
Company's shareholders' equity and net loss and comprehensive loss
for the period.
Page 4
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
In February 2008, the FASB issued FSP SFAS 157-2 "Effective Date of
FASB Statement No. 157" (FSP SFAS 157-2), which permits a one-year
deferral of the application of SFAS 157 for all non-financial assets
and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring
basis. The Company will adopt SFAS 157 for non-financial assets and
non-financial liabilities on January 1, 2009 and is currently
evaluating the impact of this adoption on its shareholders' equity
and net loss and comprehensive loss.
c) INVESTMENTS
Effective January 1, 2008, the Company adopted FASB Statement No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115"
(SFAS 159). SFAS 159 allows entities to choose, at specified
election dates, to measure eligible financial assets and liabilities
at fair value that are not otherwise required to be measured at fair
value. Following the election of the fair value option for an
eligible item, changes in the item's fair value in subsequent
reporting periods must be recognized as earnings. SFAS 159 also
establishes presentation and disclosure requirements designed to
draw comparisons between entities that elect different measurement
attributes for similar assets and liabilities.
Under the provisions of SFAS 159, the Company elected the fair value
option for its short-term investment.
The adoption of SFAS 159 did not have an impact on the Company's
shareholders' equity and net loss and comprehensive loss.
2. CASH AND CASH EQUIVALENTS
March 31, December 31,
2008 2007
----------- ------------
(Unaudited) (Audited)
Cash $ 377,767 $ 579,906
Short-term investments 2,636,361 2,631,220
----------- ------------
$ 3,014,128 $ 3,211,126
=========== ============
3. INVENTORIES
March 31, December 31,
2008 2007
----------- ------------
(Unaudited) (Audited)
Raw material $ 70,482 $ 111,752
Finished goods 29,579 17,652
Packaging materials 52,404 39,356
Work in process 175,815 136,280
----------- ------------
$ 328,280 $ 305,040
=========== ============
Page 5
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
4. PREPAID, DEPOSITS AND SUNDRY RECEIVABLES
March 31, December 31,
2008 2007
----------- ------------
(Unaudited) (Audited)
Prepaid operating expenses $ 47,102 $ 18,425
Deposit on manufactured goods -- 14,065
Interest receivable on investments 3,641 11,576
----------- ------------
$ 50,743 $ 44,066
=========== ============
5. PROPERTY, PLANT AND EQUIPMENT
March 31, 2008
(Unaudited)
Accumulated Net Carrying
Cost Amortization Amount
----------- ------------ ------------
Land $ 90,000 $ -- $ 90,000
Building 586,954 94,093 492,861
Office equipment 40,495 34,037 6,458
Manufacturing equipment 636,013 484,883 151,130
Warehouse equipment 28,327 2,608 25,719
Computer equipment 116,735 74,349 42,386
----------- ------------ ------------
$ 1,498,524 $ 689,970 $ 808,554
=========== ============ ============
December 31, 2007
(Audited)
Accumulated Net Carrying
Cost Amortization Amount
----------- ------------ ------------
Land $ 90,000 $ -- $ 90,000
Building 586,954 86,757 500,197
Office equipment 40,495 33,115 7,380
Manufacturing equipment 620,826 469,060 151,766
Warehouse equipment 27,608 1,216 26,392
Computer equipment 116,735 69,778 46,957
----------- ------------ ------------
$ 1,482,618 $ 659,926 $ 822,692
=========== ============ ============
Page 6
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
6. OTHER ASSETS
March 31, 2008
(Unaudited)
Accumulated Net Carrying
Cost Amortization Amount
-------- ------------ ------------
Patents $ 67,024 $ 5,870 $ 61,154
======== ============ ============
December 31, 2007
(Audited)
Accumulated Net Carrying
Cost Amortization Amount
-------- ------------ ------------
Patents $ 60,961 $ 5,531 $ 55,430
======== ============ ============
7. CAPITAL STOCK
(a) Common Shares
During the three month period ended March 31, 2008, the Company
issued no Common Shares.
Number of $
Shares Amount
---------- -----------
Balance, January 1, 2008 23,822,540 $ 8,303,054
No shares were issued -- --
---------- -----------
Balance, March 31, 2008 23,822,540 $ 8,303,054
========== ===========
(b) Paid-in Capital Options - Outstanding
The changes to the paid-in capital options are as follows:
Balance, January 1, 2008 $ 123,002
Expense recognized for options issued to employees/ directors 5,589
---------
Balance, March 31, 2008 $ 128,591
=========
(c) paid-in Capital Options - Expired
The changes to the paid-in capital options are as follows:
Balance, January 1, 2008 $ 623,417
No options expired during the period --
---------
Balance, March 31, 2008 $ 623,417
=========
Page 7
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
7. CAPITAL STOCK (CONTINUED)
(d) Stock Options
During the three month period ended March 31, 2008, there were no
options granted (2007 - nil). The Company recorded $5,589 (2007 -
$2,749) as an expense for options issued to directors, officers and
employees for services. These options vest quarterly over an 18
month term and were recorded as selling, general and administrative.
The total number of options outstanding as at March 31, 2008 was
355,000 (2007 - 745,000)
As at March 31, 2008, the maximum number of options that may be
issued under the plan is 4,629,452 (December 31, 2007 - 4,629,452).
8. REVENUES
Revenue for the three month period includes products sold in Canada,
international sales of products, royalty revenues and raw materials sold
at cost to our European licensee. Revenue earned for the three month
period is as follows:
Unaudited
March 31,
2008 2007
--------- ---------
PRODUCTS SALES
Domestic sales $ 266,237 $ 297,372
International sales 62,123 30,563
Other revenue 1,096 996
--------- ---------
$ 329,456 $ 328,931
========= =========
ROYALTIES AND LICENSING REVENUE
Royalty payments $ 197,956 $ 90,765
========= =========
Page 8
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
9. LOSS PER SHARE
The treasury stock method assumes that proceeds received upon the exercise
of all warrants and options outstanding in the period are used to
repurchase the Company's shares at the average share price during the
period. The diluted earnings per share has not been calculated as the
Company is in a loss position and therefore the diluted earnings per share
would be anti-dilutive.
The following table sets forth the computation of loss per share:
2008 2007
----------- -----------
Numerator - net loss available to common shareholders
Loss from operations $ (98,817) $ (261,390)
=========== ===========
Denominator - Weighted average number of
Common Shares outstanding 23,822,540 23,819,040
=========== ===========
Loss per share $ 0.00 $ (0.01)
=========== ===========
10. STATEMENT OF CASH FLOWS
Changes in non-cash balances related to operations are as follows:
For the periods ended March 31 2008 2007
---------- ----------
Accounts receivable $ (26,114) $ 27,784
Inventories (23,240) 25,322
Prepaids, deposits and sundry receivables (6,677) (45,868)
Accounts payable and accrued liabilities (54,055) (134,664)
Deferred revenues (2,098) (900)
---------- ----------
$ (112,184) $ (128,326)
========== ==========
During the three month period ended March 31, 2008 there was no interest
paid (2007 - nil). During the three month periods ended March 31, 2008 and
2007 there was not taxes paid.
11. CONTINGENCIES AND COMMITMENTS
(a) Royalty Agreements
In September 2000, the Company entered into a royalty agreement for
sales of Uracyst(R) product. The agreement involves royalty
payments, which initially were based on 5% of the total sales of
Uracyst at a declining rate of 1% per year over a three year period,
declining to a 2% rate effective October 1, 2003. This royalty will
remain at 2% until the end of the agreement on September 30, 2008.
For the three month period ended March 31, 2008, royalty payments
were $938 (March 31, 2007 - $1,319).
Page 9
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
11. CONTINGENCIES AND COMMITMENTS (CONTINUED)
(b) License Agreements
There are no changes to the license agreements as disclosed in Note
15 (b) of the annual financial statements for the 2007 fiscal year.
(c) Distribution Agreement
There are no changes to the distribution agreements as disclosed in
Note 15 (c) of the annual financial statements for the 2007 fiscal
year.
(d) Manufacturing Agreement
There are no changes to the manufacturing agreements as disclosed in
Note 15 (d) of the annual financial statements for the 2007 fiscal
year.
(e) Leases
The Company presently leases office equipment under operating
leases. At March 31, 2008, the future minimum lease payments under
operating leases are $18,547 (December 31, 2007 - $19,822).
(f) Consulting Agreements
In May 2005, the Company entered into a research and development
agreement with a major United States University. This program is on
Bladder Urothelial research in interstitial cystitis and will cost
the Company US$235,923 for the period May 2005 to January 2008, to
be paid over the term of the agreement. During the three month
period ended March 31, 2008, the Company has recorded $6,135 (2007 -
$32,644) as research and development costs.
12. SIGNIFICANT CUSTOMERS
During the three month period ended March 31, 2008, the Company had two
customers that represented 47.5% of sales (March 31, 2007 one customer -
31.6%).
13. RELATED PARTY TRANSACTIONS
The Company entered a fiscal advisory and consulting agreement with LMT
Financial Inc. (a company beneficially owned by a director and his spouse)
for services in regards to investor and financial relation issues.
Compensation under the agreement is $6,000 per month. For the three month
period ended March 31, 2008, the Company has recorded $18,000 (2007 -
$18,000) as selling, general and administrative costs.
Page 10
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
14. INCOME TAXES
The Company has had no taxable income under the Federal and Provincial tax
laws for the three month periods ended March 31, 2008 and 2007. The
Company has loss carry-forwards at March 31, 2008 totaling $2,246,101 that
may be offset against future taxable income. If not utilized, the loss
carry-forwards will expire between 2008 and 2027. As a result of FIN 48,
there was no material impact on the Company's financial statements.
The cumulative carry-forward pool of SR&ED expenditures that may be offset
against future taxable income, with no expiry date, is $1,819,300.
The non-refundable portion of the tax credits as at March 31, 2008 was
$339,200.
All taxable benefits are fully allowed for because the realization of the
assets remains to be undeterminable.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non controlling Interests
in Consolidated Financial Statements" - An Amendment of ARB No. 51. SFAS
No. 160 establishes new accounting and reporting standards for the non
controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a non
controlling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of
net income attributable to the non controlling interest will be included
in consolidated net income on the face of the statement of operations.
SFAS No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its non controlling interest. SFAS No. 160 is
effective for fiscal years, and interim periods beginning after January 1,
2009. The Company is currently evaluating the impact that the SFAS No. 160
will have on its financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No.
133" ("FAS 161"). FAS 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to
provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and
cash flows. The guidance in FAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. This Statement encourages, but
does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently assessing the impact of FAS 161.
Page 11
STELLAR PHARMACEUTICALS INC.
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
(UNAUDITED)
MARCH 31, 2008
15. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations. SFAS No. 141(R) will significantly change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. It
also amends the accounting treatment for certain specific items including
acquisition costs and non controlling minority interests and includes a
substantial number of new disclosure requirements. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is
on or after January 1, 2009. The Company is currently evaluating the
impact that the SFAS No. 141(R) will have on its financial statements.
In April 2008, the FASB issued SFAS No. 142-3, Determination of the Useful
Life of Intangible Assets ("SFAS 142-3"). SFAS 142-3 requires entities,
upon estimating the useful lives of recognized intangible assets, to
consider historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, to consider
assumptions that market-participants would use about renewal or extension.
Market-participant assumptions used in the application of SFAS 142-3
should be consistent with SFAS 157's concept of "highest and best use" of
the asset. SFAS 142-3 also enhances certain disclosure requirements of
SFAS 142. SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the impact
that the SFAS No. 142-3 will have on its financial statements.
16. SEGMENTED INFORMATION
The Company is engaged in one line of business which is in the development
and marketing of polysaccharide-based therapeutic products used in a
treatment of osteoarthritis and certain types of cystitis. Currently, all
of the Company's assets are located in Canada, and all direct sales take
place from Canada. Licensing arrangements have been obtained to distribute
and sell the Company's products in various countries including the United
States of America.
The Company is engaged in the sale of three lines of product:
March 31,
Products Sales 2008 2007
-------------- ------- -------
NeoVisc 51.6% 60.6%
Uracyst 8.9% 16.4%
BladderChek 1.6% .3%
Other 37.9% 22.7%
Page 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
This document was prepared on May 9, 2008 and should be read in conjunction with
the March 31, 2008 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 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, including
those listed under "Risks and Uncertainties", any of which could cause actual
results to vary materially from current results or the Company's anticipated
future results. The Company assumes no responsibility to update the information
contained herein.
CRITICAL ACCOUNTING POLICIES
The SEC defines critical accounting policies as those that are, in management's
view, important to the portrayal of our financial condition and results of
operations and require management's judgment. Our discussion and analysis of our
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S. GAAP"). The
preparation of these statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses. We
base our estimates on experience and on various assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about our carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from those
estimates. Our critical accounting policies include:
Revenue Recognition.
Revenue is recognized in accordance with SEC Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition of Financial Statements" and EITF Issue 00-21,
"Revenue Arrangements with Multiple Deliverables." Accordingly, license fees
which are comprised of initial fees and milestone payments are recognized upon
achievement of the milestone and provided that collectibility is reasonably
assured. Revenue from the sale of products, net of trade discounts and
allowances, is recognized when legal title to the goods has been passed to the
customer and collection is reasonably assured. The Company has a "No Return"
policy on the sale of its goods.
Revenues associated with multiple-element arrangements are attributed to the
various elements, if certain criteria are met, including whether the delivered
element has stand alone value to the customer and whether there is objective and
reliable evidence of the fair value of the undelivered elements. Non-refundable
up-front fees for the transfer of methods and technical know-how, not requiring
the Company to perform additional research or development activities or other
Page 13
significant future performance obligations, are recognized at the time the
agreement is executed. Milestone payments are recognized into income upon the
achievement of the specified milestones when the Company has no further
involvement or obligation to perform services, as related to that specific
element of the arrangement. Up-front fees and other amounts received in excess
of revenue recognized are recorded as deferred income.
Royalty revenue is recognized when the Company has fulfilled the terms in
accordance with the contractual agreement and has no future obligation, the
amount of the royalty fee is determinable and collection is reasonably assured.
Share-Based Compensation
Share-based compensation is estimated at the date of grant based on the fair
value of the award and is recognized as an expense over the requisite service
period of the award. Determining the appropriate fair value model and
calculating the fair value of the stock based awards on the grant date requires
considerable judgment, including estimating stock price volatility, expected
option life and forfeiture rates. The Company developed estimates based on
historical data. If factors change and different assumptions are employed in
future periods, the compensation expense that we record may differ significantly
from what we have recorded in the current period. A small change in the
estimates used may have a relatively large change in the estimated valuation.
The Company uses the Black-Scholes pricing model to value stock option awards.
Fair Value
Effective January 1, 2008, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157 defines fair value as
the price received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. SFAS
157 provides guidance on how to measure the fair value of financial instruments
according to a fair value hierarchy that prioritizes the information used to
measure fair value into three broad levels. SFAS 157 broadly applies to most
existing pronouncements that require or permit fair value measurements
(including both financial and non-financial assets and liabilities) but does not
require any new fair value measurements.
The adoption of SFAS 157 did not have a material impact on the Company's
shareholders' equity and net loss and comprehensive loss for the period.
In February 2008, the FASB issued FSP SFAS 157-2 "Effective Date of FASB
Statement No. 157" (FSP SFAS 157-2), which permits a one-year deferral of the
application of SFAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The Company will adopt SFAS 157 for
non-financial assets and non-financial liabilities on January 1, 2009 and is
currently evaluating the impact of this adoption on its shareholders' equity and
net loss and comprehensive loss.
Investments
Effective January 1, 2008, the Company adopted FASB Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115" (SFAS 159). SFAS 159 allows entities to
choose, at specified election dates, to measure eligible financial assets and
liabilities at fair value that are not otherwise required to be measured at fair
value. Following the election of the fair value option for an eligible item,
changes in the item's fair value in subsequent reporting periods must be
recognized as earnings. SFAS 159 also establishes presentation and disclosure
requirements designed to draw comparisons between entities that elect different
measurement attributes for similar assets and liabilities.
Page 14
Under the provisions of SFAS 159, the Company elected the fair value option for
its short-term investment.
The adoption of SFAS 159 did not have an impact on the Company's shareholders'
equity and net loss and comprehensive loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, "Non controlling Interests in
Consolidated Financial Statements" - An Amendment of ARB No. 51. SFAS No. 160
establishes new accounting and reporting standards for the non controlling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a non controlling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent's equity. The amount of net income attributable to
the non controlling interest will be included in consolidated net income on the
face of the statement of operations. SFAS No. 160 also includes expanded
disclosure requirements regarding the interests of the parent and its non
controlling interest. SFAS No. 160 is effective for fiscal years, and interim
periods beginning after January 1, 2009. The Company is currently evaluating the
impact that the SFAS No. 160 will have on its financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently assessing the impact of FAS 161.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations. SFAS No. 141(R) will significantly change the accounting for
business combinations. Under SFAS No. 141(R), an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. It also
amends the accounting treatment for certain specific items including acquisition
costs and non controlling minority interests and includes a substantial number
of new disclosure requirements. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after January 1,
2009. The Company is currently evaluating the impact that the SFAS No. 141(R)
will have on its financial statements.
In April 2008, the FASB issued SFAS No. 142-3, Determination of the Useful Life
of Intangible Assets ("SFAS 142-3"). SFAS 142-3 requires entities, upon
estimating the useful lives of recognized intangible assets, to consider
historical experience in renewing or extending similar arrangements or, in the
absence of historical experience, to consider assumptions that
market-participants would use about renewal or extension. Market-participant
assumptions used in the application of SFAS 142-3 should be consistent with SFAS
157's concept of "highest and best use" of the asset. SFAS 142-3 also enhances
certain disclosure requirements of SFAS 142. SFAS 142-3 is effective for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is prohibited. The Company is currently evaluating the
impact that the SFAS No. 142-3 will have on its financial statements.
Page 15
OVERVIEW
Stellar founded in 1996, is a Canadian pharmaceutical company involved in the
development and commercialization of high quality, polysaccharide-based
therapeutic products used in the treatment of osteoarthritis and certain types
of cystitis. Stellar also markets a test kit that confirms the existence of
bladder lining defects in interstitial cystitis ("IC") (an inflammatory disease
of the urinary bladder wall) patients and helps identify those patients who
should respond positively to the Company's proprietary therapeutic product.
Stellar's product development strategy focuses on seeking novel applications for
its product technologies in markets where its products demonstrate true,
cost-effective therapeutic advantages. Stellar is also building revenues through
in-licensing products for Canada that are focused on similar niche markets and
out-licensing to international markets.
Stellar has developed and is marketing three products in Canada based on its
core polysaccharide technology:
(i) NeoVisc(R), for the treatment of osteoarthritis;
(ii) Uracyst(R); for the treatment of IC; and
(iii) Uracyst(R)Test Kit, Stellar's patented technology for the
diagnosis of IC. Stellar also has acquired the exclusive
Canadian marketing and distribution rights for:
Matritech's, NMP22(R) BladderChek(R) ("BladderChek"), a
proteomics-based diagnostic test for the diagnosis and
monitoring of bladder cancer. Stellar began selling
BladderChek in Canada in October 2004. BladderChek has had
a small impact on sales to date in 2008, but is expected to
play a larger part in the sales mix going forward as
reimbursement issues are resolved.
On December 28, 2001, the Company entered into a license agreement with G.
Pohl-Boskamp GmbH & Co. ("Pohl-Boskamp"), to grant the exclusive rights and
license to use the methods and technical know-how for the purposes of
manufacturing, marketing and selling Uracyst-S products in specified territories
in Europe. In consideration, the Company received a combination of
non-recurring, non-refundable license fees and royalty payments. In April 2007,
the Company terminated its license agreement with G. Pohl-Boskamp GmbH & Co.
("Pohl-Boskamp"), which provided for the sale of Uracyst products in Europe.
Pohl-Boskamp disputed the basis on which the Company terminated the agreement
and the consequences that result from such termination. The parties attended
mediation in September 2007 in which an agreement was reached and a settlement
made. Under the terms of the settlement, the parties agreed that the license
agreement would remain in full force and effect until March 31, 2008. Further,
Pohl-Boskamp agreed to pay Stellar the sum of (euro)200,000 (Cdn$283,920),
payable in two equal installments of (euro)100,000 on September 20, 2007 and
December 31, 2007. In 2007, the Company recorded the $283,920 in the following
manner: 1) $210,220 as an offset for expenses incurred in regards to the
termination and mediation processes which was recorded as a reduction to
selling, general and administration expense; and 2) the remaining $73,700 was
recorded as Interest and other income.
In June 2003, Stellar entered into distribution agreements with BurnsAdler
Pharmaceuticals to sell Stellar's products in Latin America and the Caribbean.
Sales have been ongoing in the Dominican Republic and Bahamas, two of the
smaller territories included in the territory, but progress has been slow in the
major Latin American markets due to competitive pricing issues.
In October 2003, the Company entered into an exclusive distribution agreement
with Matritech, Inc., to sell BladderChek in the Canadian market. In October
2004, Stellar commenced selling BladderChek in Canada.
In June 2004, Stellar entered into a NeoVisc licensing agreement with
Triptibumis Sdn. Bhd. ("Triptibumis") for Malaysia, Singapore and Brunei.
Triptibumis has obtained reasonable success in this small, competitive market.
New areas of the territory however, have been slow in receiving regulatory
approval. Although there can be no assurance, it is expected that some of these
territories should receive approval in the first half of 2008. The term of this
agreement has been extended until June 30, 2010.
Page 16
In July 2005, the Company entered into a license agreement with Innogen Ilac for
the sale of NeoVisc in Turkey. In August 2005, the Company entered into a
distribution agreement with Technimed for the sale of NeoVisc in Lebanon and
Jordan.
In September 2005, the Company entered into a licensing agreement with Shanghai
Ya Jun Medical for the sale of Uracyst in China. All product specifications have
been approved by the Chinese regulatory body ("SFDA") and the final document
submission was delivered to the SFDA in June 2007. Although the Company
anticipated this registration would have occurred in 2007, to-date such approval
has not been granted. The Company is hopeful that final approval by SFDA will be
received in the first half of 2008.
In November 2005, the Company entered into a license agreement with Al-Mohab
Trading & Contracting for the sale of NeoVisc in Kuwait.
In December 2005, the Company entered into a licensing agreement with Megapharm
for the sale of Uracyst in Israel. While Uracyst has received regulatory
approval from the ministry of health, Uracyst still lacks approval on the
reimbursement formulary. Sales for Uracyst in this market are expected to remain
slow until reimbursement status is received.
In July 2006, a licensing agreement was signed with Bio-Technic Romania Srl
("Bio-Techinc") for NeoVisc in Romania. Since receiving approval for sale in
late February 2007, Bio-Technic has consistently improved their product orders
over each period.
In August 2006, the Company received its CE Mark for NeoVisc in Europe. As a
result, NeoVisc is now approved for sale in the 27 member countries of the
European Community plus a number of non-member countries.
The Company signed a licensing and supply agreement with Watson Pharma, Inc.
("Watson") in December 2006 for Uracyst in the United States market. Under this
agreement, Watson was granted an exclusive license to develop, market and sell
Uracyst in the United States. In addition to an upfront payment made to the
Company upon signing, this agreement will provide Stellar with milestone
payments and an ongoing royalty stream from future sales of Uracyst in the
United States. Watson will be responsible for conducting clinical trials and
obtaining regulatory approvals for Uracyst in the United States. Watson has
commenced a Canadian-based, placebo controlled, pilot clinical study in IC
patients, which is expected to end in early 2008. The results of this study will
be utilized in designing the pivotal Phase III safety and efficacy trial, the
data from which will be submitted to the United States Food and Drug
Administration (FDA) in support of marketing approval.
In November of 2007, the Company signed a licensing agreement with Torrex Chiesi
Pharma GmbH, based in Vienna, Austria for the distribution and sale of NeoVisc
in Eastern Europe. The territory covers a number of countries, including
Austria, Czech Republic, Slovakia, Croatia, Serbia, Montenegro, Macedonia,
Bosnia, Herzegovina, Poland, Hungary, Russia and the Commonwealth of Independent
States. The first order of product is expected to be shipped at the end of May.
Interim results of a 50 patient Canadian, community based, clinical trial with
Uracyst is showing positive results. The Company anticipates these results to be
formally published or presented by the fourth quarter of this year and although
there can be no assurance, believes that this will have a positive impact on
Uracyst sales in all sectors.
Page 17
Stellar markets its products in Canada through its own direct sales force of
commissioned and salaried sales people. The Company's focus on product
development continues to be both in-licensing and out-licensing for immediate
impact on the revenue stream allowing Stellar to fund its own in-house product
development for future growth and stability.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2008
For the three month period ended March 31, 2008, total operating revenues from
all sources increased by 25.7% to $527,400 compared to $419,700 in the same
period during 2007. Domestic sales for both NeoVisc and Uracyst were down by
7.5% and 28.7% respectively, due to a price increase which occurred in the first
quarter of 2007. The price increase in 2007, resulted in a heavier than normal
stocking by customers for both NeoVisc and Uracyst, which did not occur in the
first quarter of 2008. International sales increased by 103.3% to $62,100
compared to $30,600 in the same period during 2007, due to increased NeoVisc
sales to Europe. With a number of new partners beginning to sell NeoVisc,
Stellar expects, although there can be no assurance, this trend to build going
forward. Royalty and licensing revenue increased by 118.1% to $198,000 in the
first quarter of 2008 compared to $90,800 in the same period during 2007, due to
increased sales of Uracyst in the European market.
BladderChek sales for the quarter were up over 604% to $8,600 compared to $1,200
for the same period in 2007 and even though the dollar impact is small, this
product is expected to be a bigger part of Stellar's sales going forward, as
more clinics and physicians are starting to sell the product directly to
patients as they feel BladderChek is an effective tool to improve bladder cancer
diagnosis.
The Company's operating loss for the first quarter of 2008 was reduced by 56.7%
to $127,900 compared to a loss of $295,400 in the same period in 2007, as the
Company keeps its focus on cost effective expenditures.
GROSS PROFIT AND COST OF SALES
Gross profit for the three month period ended March 31, 2008 (exclusive of
amortization of $17,200 (2007 - $27,600) increased by 50.9% to $447,300 compared
to $296,400 for the same period in 2007. Cost of goods sold for the three-month
period ended March 31, 2008, was $80,100 or 24.3% of product sales compared to
$103,100 (without the effect of the $20,200 for write-downs) or 31.4% of product
sales in 2007. Improvements included reductions in the cost of materials used in
the manufacturing process, as well as increased production yields.
WRITE-DOWN OF OBSOLETE INVENTORY
The Company had no obsolete inventory write-downs which was written down in the
first quarter of 2008 (2007 - $20,200).
RESEARCH AND DEVELOPMENT
Stellar continues to invest in research, which is essential to advancing the use
of its products in Canada and in international markets. In the three month
period ended March 31, 2008, the Company incurred $53,800 in research costs
compared to $38,600 in the same period in 2007.
In 2008, Stellar continued to work with Dr. Robert Hurst from the University of
Oklahoma on Uracyst and its treatment of GAG deficient cystitis. Although there
can be no assurance, Dr. Hurst's work is expected to further enhance Uracyst
treatment of this bladder defect.
Page 18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three month period ended
March 31, 2008 were $491,000, compared to $512,800 for the same period in 2007.
This decrease includes a reduction in costs related to investor relations
expenses of $25,000, to $6,000 compared to $31,000 for the same period in 2007.
During this period, the Company paid fees to its board of directors totaling
$9,500 (2007 - $10,500).
Stellar is pursuing a number of business development activities associated with
out-licensing Stellar's current products in other international markets,
in-licensing products for the Canadian market and developing additional
products.
INTEREST AND OTHER INCOME
Interest and other income during the first quarter of 2008 was $29,100 as
compared to $34,000 during the same period in 2007. These amounts include
interest received on short-term investments for both such period in 2008 and
2007. Cash will be maintained in liquid investments.
SUMMARY OF QUARTERLY RESULTS
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
NET INCOME EARNINGS
QUARTER ENDED REVENUES (LOSS) (LOSS) PER SHARE
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
March 31, 2008 527,400 (98,800) 0.00
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
December 31, 2007 657,700 (123,000) (0.01)
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
September 30, 2007 615,400 135,400 0.01
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
June 30, 2007 554,500 (88,600) 0.00
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
March 31, 2007 419,700 (261,400) (0.01)
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
December 31, 2006* 3,061,600 2,120,300 0.09
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
September 30, 2006 429,900 (278,800) (0.01)
- ------------------------------------------------- ------------------------------ ------------------ ---------------------
June 30, 2006 440,300 (232,300) (0.01)
- --------------------------------------------------------------------------------------------------- ---------------------
- ------------
* Includes one-time license fee income of US$2.2 million
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $3,014,100 at March
31, 2008 as compared with $3,211,100 at December 31, 2007.
As at March 31, 2008, the Company did not have any outstanding indebtedness.
While the Company has generated royalty revenue and revenue from the
distribution of pharmaceutical products in Canada, this revenue has been
insufficient to fund the Company's research, development and marketing
activities. Contributing to this decrease in cash was:
o Capital expenditures of $15,900 related to property, plant and
equipment
o Expenditures of $10,700 related to building enhancements
o Research and development costs of $53,800
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
Page 19
financing. The Company may also seek additional funding from other sources,
including technology licensing, co-development collaborations, and other
strategic alliances. Such funding, if obtained, may reduce the Company's
interest in its projects or products. Regardless, there can be no assurance that
any alternative sources of funding will be available.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which are
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
RELATED PARTY TRANSACTIONS
The Company entered a fiscal advisory and consulting agreement in December 2005,
with LMT Financial Inc. ("LMT") (a company beneficially owned by a director and
his spouse) for, among other things, services to be provided in 2006 and 2007.
The Company has continued under the terms of this agreement in 2008, until the
settlement of a new agreement. Compensation under the agreement has been
recorded at $6,000 per month or $72,000 for 2008. 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.
CAPITAL STOCK
The Company has authorized an unlimited number of Common Shares, without par
value. There are no other classes of shares issued. During the three month
period ended March 31, 2008, there were no Common Shares issued by the Company.
As at the date of this report, the Company had 23,742,540 Common Shares
outstanding.
As of the date of this report, the Company had 355,000 Common Share options
outstanding at various exercise prices and expiry dates.
SIGNIFICANT CUSTOMERS
During the three month period ended March 31, 2008, the Company had two
significant customers, a national wholesaler, and an international licensee
which represented 47.5% of product sales, compared to one customer who
represented 31.6% in the same period for 2007.
OUTLOOK
As at March 31, 2008, the Company is debt free and had working capital of
$3,495,100. 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.
Page 20
RISKS AND UNCERTAINTIES
Stellar is subject to risks, events and uncertainties, or "risk factors",
associated with being both a publicly-traded company operating in the
biopharmaceutical industry, and as an enterprise with several projects in the
research and development stage. Such risk factors could cause reported financial
information to not necessarily indicate future operating results or future
financial position. The Company cannot predict all of the risk factors nor can
it assess the impact, if any, of such risk factors on its business, or the
extent to which any factor, or combination of factors, may cause future results
or financial position to differ materially from those reported or those
projected in any forward-looking statements. Accordingly, reported financial
information and forward-looking statements should not be relied upon as a
prediction of actual future results.
Some of the risks and uncertainties affecting the Company, its business,
operations and results include, but are not limited to: the Company's dependence
on a few customers and a few suppliers, the loss of any of which would
negatively impact the Company's operations; the need to develop and
commercialize new products which will require further time-consuming and costly
research and development, the success of which cannot be assured; the Company's
dependency on third parties for manufacturing, materials and for research,
development and commercialization assistance and support; the Company's
dependency on assurances from third parties regarding licensing of proprietary
technology owned by others; government regulation and the need for regulatory
approvals for both the development and commercialization of products, which are
not assured; uncertainty that the Company's products will be accepted in the
marketplace; rapid technological change and competition from pharmaceutical
companies, biotechnology companies and universities, which may make the
Company's technology or products obsolete or uncompetitive; the need to attract
and retain skilled employees; risks associated with claims of infringement of
intellectual property and of proprietary rights; risks inherent in manufacturing
(including up-scaling) and marketing; product liability and insurance risks;
risks associated with clinical trials, including the possibility that trials may
be terminated early, delayed or unsuccessful; exchange rate fluctuations;
political, economic and environmental risks; the need for performance by buyers
and suppliers of products; the Company's dependency on performance by its
licensees regarding the sale of our licensed-out products, NeoVisc and Uracyst;
and the risk of unanticipated expenses or unanticipated reductions in revenue,
or both, any of which could cause the Company to reduce, delay or divest one or
more of its research, development or marketing programs.
In addition to the foregoing, the industry in which the Company operates is very
competitive. Many of our competitors and potential competitors have
substantially greater product development capabilities, experience conducting
clinical trials and financial, scientific, manufacturing, sales and marketing
resources and experience than the Company. The pharmaceutical industry is an
industry of innovation and change, which can change the competitive landscape
rapidly. This could result in a material adverse affect on the financial
condition of the Company.
The Company currently outsources the manufacturing of its products to a third
party contract manufacturer, located in Toronto, Ontario. Although the Company
has taken several measures to control the quality and on-time delivery of its
products by this manufacturer, Stellar is unable to control all aspects of its
third party manufacturer's operations. If a supplier of a product or component
discontinued or restricted such supply, the Company's business may be harmed by
the resulting delays. This could result in a material adverse affect on the
financial condition of the Company.
While management has some experience conducting business activities with
international accounts, the Company is subject to a number of risks associated
with international accounts that may increase the Company's costs, lengthen
sales cycles, and require significant management attention. International
accounts carry certain risks associated with foreign currency fluctuations;
exchange controls; uncertainties of laws and enforcement relating to the
protection of intellectual property; and other factors, depending on the country
involved. There can be no assurance that the Company will not experience these
factors in the future, or that they will not have a material adverse affect on
the Company's business, results of operations or financial condition.
Page 21
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to provide reasonable assurance
that all relevant information is gathered and reported to senior management,
including the Company's Chief Executive Officer and Chief Financial Officer, on
a timely basis so that appropriate decisions can be made regarding public
disclosure.
For the quarterly period ended March 31, 2008, management of the Company, with
the participation of the Chief Executive Officer and the Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and
procedures as required by United States and Canadian securities laws. Based on
that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that as of March 31, 2008, the disclosure controls and procedures
were effective to provide reasonable assurance that information required to be
disclosed in the Company's annual filings and interim filings and other reports
filed or submitted under the United States and Canadian securities laws is
recorded, processed, summarized and reported within the time periods specified
by those laws and that material information is accumulated and communicated to
management of the Company, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
ADDITIONAL INFORMATION
Additional information relating to the Company is available on SEC at
www.sec.gov, SEDAR at www.sedar.com or visit Stellar's website at
www.stellarpharma.com.
Page 22
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.
Date: April 28, 2008
STELLAR PHARMACEUTICALS INC.
/s/ Peter Riehl
--------------------------------
Name: Peter Riehl
Title: Chief Executive Officer
Page 23