EX-2 3 ex_2.htm FINANCIAL STATEMENTS FINANCIAL STATEMENTS
 
STELLAR PHARMACEUTICALS INC.
 
CONDENSED INTERIM FINANCIAL STATEMENTS
 
(Canadian Funds)
 
(Unaudited)
 
MARCH 31, 2006
 
 
STELLAR PHARMACEUTICALS INC.
 
MARCH 31, 2006
 
CONTENTS
 
 
 
 
CONDENSED BALANCE SHEETS
(Canadian Funds)
 
ASSETS
               
 
    
As at
 
 
As at
 
 
 
March 31, 2006
 
 
December 31, 2005
  
CURRENT
    
(Unaudited
)
  
(Audited
)
               
Cash and cash equivalents (Note 2)
  
$
1,595,824
  
$
2,108,755
  
Accounts receivable
    
179,226
    
157,749
  
Inventories (Note 3)
    
329,968
    
288,337
  
Tax recoverable
    
7,941
    
-
  
Prepaid, deposits, and sundry receivables (Note 4)
    
134,404
    
152,514
  
     
2,247,363
    
2,707,355
  
               
PROPERTY, PLANT, AND EQUIPMENT (Note 5)
    
928,941
    
959,999
  
               
OTHER ASSETS (Note 6)
    
45,848
    
46,187
  
   
$
3,222,152
  
$
3,713,541
  
 
LIABILITIES
               
CURRENT
              
Accounts payable
  
$
411,882
  
$
487,359
  
Accrued liabilities
    
64,772
    
122,999
  
Deferred revenues
    
600
    
43,397
  
     
477,254
    
653,755
  
 
SHAREHOLDERS’ EQUITY

CAPITAL STOCK (Note 7)
AUTHORIZED
Unlimited 
  Non-voting, convertible, redeemable, and retractable preferred
   shares with no par value
Unlimited 
  shares with no par value

ISSUED
              
23,472,690          Common shares (2005 - 23,470,190)
    
8,102,528
    
8,100,253
  
        Paid-in capital options and warrants - outstanding
    
581,906
    
545,025
  
 - expired
    
98,913
    
98,913
  
DEFICIT
    
(6,038,449
)
  
(5,684,405
)
     
2,744,898
    
3,059,786
  
   
$
3,222,152
  
$
3,713,541
  
 
See accompanying notes to financial statements.
 
              
Approved on behalf of the Board:
 		      
/s/ Peter Riehl     /s/ Arnold Tenney
DIRECTOR
    
DIRECTOR
 
Page1
 

CONDENSED INTERIM STATEMENTS OF OPERATIONS AND DEFICITS
(Canadian Funds)
 
(Unaudited)

 
    
For the Three Month Period 
Ended March 31
             
     
2006
    
2005
  
               
PRODUCT SALES (Note 8)
  
$
356,652
  
$
359,455
  
COST OF GOODS SOLD
    
130,770
    
94,033
  
MARGIN ON PRODUCT SOLD
    
225,882
    
265,422
  
               
ROYALTY AND LICENSING REVENUES
    
89,265
    
65,843
  
               
GROSS PROFIT
    
315,147
    
331,265
  
               
EXPENSES
              
Selling, general, and administrative
  
$
586,228
  
$
613,004
  
Research and development
    
55,777
    
193,235
  
Amortization
    
39,397
    
33,001
  
     
681,402
    
839,240
  
LOSS FROM OPERATIONS
    
(366,255
)
  
(507,975)
  
               
INTEREST AND OTHER INCOME
    
12,211
    
53,320
  
               
NET LOSS FOR THE PERIOD
    
(354,044
)
  
(454,655)
  
               
DEFICIT, beginning of period
    
(5,684,405
)
  
(3,943,911)
  
               
DEFICIT, end of period
  
$
(6,038,449
)
$
(4,398,566)
  
               
LOSS PER SHARE (Note 9)
    
(0.02
)
  
(0.02)
  
               
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
              
OUTSTANDING (Note 9)
    
23,472,329
    
23,019,240
  
 
See accompanying notes to financial statements.
 
Page2
 
 
CONDENSED INTERIM STATEMENTS OF CASH FLOWS
(Canadian Funds)
               
(Unaudited)
 
 
For the Three Month Period 
 
Ended March 31 
     
     
2006
    
2005
  
CASH FLOWS PROVIDED BY (USED IN)
              
OPERATING ACTIVITIES
              
Net loss for the period
  
$
(354,044
)
$
(454,655
)
Amortization
    
39,397
    
33,001
  
Issuance of shares and options for services rendered
    
36,881
    
53,085
  
     
(277,766
)
  
(368,569
)
               
Change in non-cash operating assets and liabilities
              
Accounts receivable
    
(21,477
)
  
(7,016
)
Inventories
    
(41,631
)
  
99,442
  
Tax recoverable
    
(7,941
)
  
26,082
  
Prepaid, deposits, and sundry receivables
    
18,110
    
(55,571
)
Accounts payable and accrued liabilities
    
(131,429
)
  
(31,151
)
Deferred revenues
    
(42,797
)
  
(38,424
)
     
(504,931
)
  
(375,207
)
INVESTING ACTIVITIES
              
Additions to property, plant and equipment
    
(8,000
)
  
(30,070
)
Additions to other assets
    
-
    
(4,492
)
     
(8,000
)
  
(34,562
)
FINANCING ACTIVITIES
              
Issuance of common stock
    
-
    
118,968
  
               
CHANGE IN CASH AND CASH EQUIVALENTS
    
(512,931
)
  
(290,801
)
               
CASH AND CASH EQUIVALENTS, beginning of period
    
2,108,755
    
3,172,870
  
               
CASH AND CASH EQUIVALENTS, end of period
  
$
1,595,824
  
$
2,882,069
  

See accompanying notes to financial statements.
 
Page3
 

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)
 
(Unaudited)
 
 MARCH 31, 2006

1.            
BASIS OF PRESENTATION
 
 
These condensed interim financial statements should be read in conjunction with the financial statements for the Company’s most recently completed fiscal year ended December 31, 2005. They 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 United States generally accepted accounting principles. 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, 2005.
 
 
The accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments), which are necessary to present fairly the financial position as at March 31, 2006 and December 31, 2005, and the results of operations and cash flows for the three month periods ended March 31, 2006 and 2005.
 
a)  
Cash and cash equivalents include cash and all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase. All cash and cash equivalents are under the custodianship of two major Canadian financial institutions.
 
b)  
The preparation of interim financial statements in conformity with United States generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the interim financial statements and the revenues and expenses during the reporting period. Actual results may differ from those estimates.
 
c)  
Statement of Financial Accounting Standards No. 130 (SFAS 130), “Reporting Comprehensive Income”, establishes standards for the reporting and display of comprehensive income and its components and requires restatement of all previously reported information for comparative purposes. For the three month periods ending March 31, 2006 and 2005, comprehensive income was the same as net earnings.
 
2.            
CASH AND CASH EQUIVALENTS

Consists of -
              
   
March 31,
    
December 31,
  
     
2006
    
2005
  
 
    
(Unaudited)
    
(Audited
)
               
Cash
  
$
67,525
  
$
169,974
  
Short-term investments
    
1,528,299
    
1,938,781
  
   
$
1,595,824
  
$
2,108,755
  
 
Page4

STELLAR PHARMACEUTICALS INC.
 
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)
 
(Unaudited)
 
March 31, 2006
3.             INVENTORIES
              
                     
           
March 31,
2006
 
 
December 31,
2005
  
 
          
(Unaudited)
 
 
(Audited)
 
                     
     Raw material
        
$
68,202
  
$
71,131
  
     Finished goods
          
50,052
    
44,331
  
     Packaging materials
          
24,882
    
27,457
  
     Work in process
          
186,832
    
145,418
  
         
$
329,968
  
$
288,337
  
4.             PREPAID, DEPOSITS AND SUNDRY RECEIVABLES
          
           
March 31,
2006
 
 
December 31,
2005
 
 
 
 
 
 
 
(Unaudited) 
 
 
(Audited) 
  
 Prepaid operating expenses
        
$
58,264
  
$
81,761
  
 Materials for use in clinical trials
          
43,139
    
47,138
  
 Interest receivable on investments
          
33,001
    
23,615
  
         
$
134,404
  
$
152,514
  
5.             PROPERTY, PLANT AND EQUIPMENT
          
                     
         
March 31, 2006
(Unaudited)
  
                   
         
Accumulated
    
Net Carrying
  
 
    
Cost
    
Amortization
    
Amount
  
 Land
  
$
90,000
  
$
-    
 
$
90,000
  
 Building
    
536,759
    
37,552
    
499,207
  
 Office Equipment
    
39,394
    
26,886
    
12,508
  
 Manufacturing Equipment
    
550,061
    
294,279
    
255,782
  
 Computer Equipment
    
108,454
    
37,010
    
71,444
  
   
$
1,324,668
  
$
395,727
  
$
928,941
  
                     
         
December 31, 2005 
  
         
(Audited)  
  
         
Accumulated
    
Net Carrying
  
 
    
Cost 
    
Amortization
    
Amount
  
 Land
  
$
90,000
  
$
-    
 
$
90,000
  
 Building
    
536,759
    
30,663
    
506,096
  
 Office Equipment
    
39,394
    
26,019
    
13,375
  
 Manufacturing Equipment
    
542,061
    
267,889
    
274,172
  
 Computer Equipment
    
108,454
    
32,098
    
76,356
  
   
$
1,316,668
  
$
356,669
  
$
959,999
  
 
Page5

STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)

(Unaudited)
 
MARCH 31, 2006

6.             OTHER ASSETS
                    
   
 March 31, 2006  
 
 
(Unaudited)
 
          
Accumulated
    
Net Carrying
  
 
    
Cost
    
Amortization
    
Amount
  
                     
         Patents
  
$
49,006
  
$
3,159
  
$
45,847
  
         Goodwill
    
1
    
-
    
1
  
   
$
49,007
  
$
3,159
  
$
45,848
  
 

 
 
 
 December 31, 2005   
   
 (Audited) 
 
          
Accumulated
 
 
  Net Carrying
 
 
 
 
Cost
 
 
Amortization
 
 
Amount
  
         Patents
  
$
49,006
  
$
2,820
  
$ 
46,186
  
         Goodwill
    
1
    
-
    
1
  
   
$ 
49,007
  
$
2,820
  
$ 
46,187
  
 
7.             CAPITAL STOCK
 
                 (a)  Common Shares
    
     
 
  
During the period ended March 31, 2006, the Company issued 2,500 Common Shares to a consultant for services rendered, with an average price per share of $0.91.
 
         
 
            
Number of
 
 
   $       
 
 
 
 
 
 
 
Shares
 
 
Amount
  
                     Balance, December 31, 2005
          
23,470,190
  
$
8,100,253
  
                     Issued for services
          
2,500
    
2,275
  
                     Balance, March 31, 2006
          
23,472,690
  
$
8,102,528
  
 
             (b)   Paid-in Capital Options and Warrants
    
           
                     The changes to the paid-in capital options and warrants are as follows:
      
                 Balance, December 31, 2005
$
545,025
  
                 Options issued to consultants/employees/directors
  
36,881
  
                 Balance, March 31, 2006
    
$
581,906
  
     
             (c)   Stock Options
    
 
  
During the three month period ended March 31, 2006, there were no stock options granted. The Company recorded $36,881 (March 31, 2005 - $53,085) for options granted in 2005
 
Page6
 
STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)

(Unaudited)
 
MARCH 31, 2006

7.              CAPITAL STOCK (continued)
 
  which vest quarterly over an 18 month term. Of these options the Company expensed $22,252 (March 31, 2005 - $0) to stock option - employee compensation for options issued to directors, officers and employees. The   remaining $14,629 (March 31, 2005 - $53,085) was related to options issued to consultants; these were expensed as consulting fees.
 
  The total number of options outstanding at March 31, 2006 was 1,540,000 (December 31, 2005 - 1,540,000).
 
 
On March 31, 2006, the maximum number of Common Share options that may be issued under the plan is 4,629,452 (December 31, 2005 - 4,629,452).
 
 
The average fair value of options expensed during the period ended March 31, 2006 was estimated at $0.28 on the date of grant using the Black-Scholes option-pricing model with the following assumptions.
                
   
 Risk-free interest rate
2.93% - 3.89%
  
   
 Expected life
3 years
  
   
 Expected volatility
41.2% - 58.9%
  
   
 Dividend yield
0%
 
 
  (d)   
Paid in Capital Options
 
   
Paid in Capital Options includes outstanding stock options amounting to $581,906 and expired stock options of $98,913 at March 31, 2006 (December 31, 2005 - $545,025 and $98,913, respectively).
                
   
 
  
8.
        REVENUES
    
 
  Revenue for the period includes products sold in Canada, international sales of products and raw materials sold at cost to our European licensee. Revenue earned is as follows:
 
     
           March 31,
      2006      2005   
         Products sales
              
 Domestic sales
  
$
334,933
  
$
344,765
  
 International sales
    
20,819
    
13,890
  
 Other revenue
    
900
    
800
  
   
$
356,652
  
$
359,455
  
         Royalties & licensing revenue
              
 Royalty payments
  
$
89,265
  
$
65,843
  
 
Page7
 
STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)

(Unaudited)
 
MARCH 31, 2006

9.              LOSS PER SHARE
 
  Loss per share is calculated on the basis of the weighted average number of Common Shares outstanding for the three month period ended March 31, 2006 totaling 23,472,329 shares (March 31, 2005-23,019,240).
 
  The diluted loss per share is not computed when the effect would be anti-dulitive. The following table sets forth the computation of loss per share:
   
     
2006
    
2005
  
 
              
     Numerator for loss per share available to common shareholders
  
$
(354,044
)
$
(454,655
)
 
              
     Denominator for basic earnings (loss) per share - Weighted average shares outstanding
    
23,472,329
    
23,019,240
  
     Loss per share
  
$
(0.02
)
$
(0.02
)
 
10.           CONTINGENCIES AND COMMITMENTS
 
(a)  
Royalty Agreements
 
 In September 2000, the Company entered into a royalty agreement for sales of Uracyst® 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. In this quarter, royalty payments were $1,174  (March 31, 2005 - $831).
 
 In February 2002, the Company entered into a royalty agreement for products which were introduced to the Company by a consultant. The agreement involves royalty payments, which will be paid based on gross dollar sales. The schedule for royalty payments is presently calculated on SkeliteTM sales as follows:

First $1,000,000 in sales - 3%
Second $1,000,000 in sales - 2%
All sales over $2,000,000 - 1% out to the 5th year.
 
(b)   
License Agreements
 
 
                 There are no changes to the licensing agreements as disclosed in Note 13 (c) of the annual financial statements for the 2005 fiscal year.
 
  (c)   
Distribution Agreement
 
                 There are no changes to the distribution agreements as disclosed in Note 13 (d) of the annual financial statements for the 2005 fiscal year.
 
Page8
 
STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)
 
 (Unaudited)
 
MARCH 31, 2006

10.           
CONTINGENCIES AND COMMITMENTS (continued)
 
(d)  
Manufacturing Agreement
 
 
There are no changes to the distribution agreements as disclosed in Note 13 (e) of the annual financial statements for the 2005 fiscal year.
                   
(e)  
Leases
 
 
The Company presently leases office equipment under operating leases. At March 31, 2006, the future minimum lease payments under operating leases are $3,599 (December 31, 2005 - $4,429).
                        
11.          
SIGNIFICANT CUSTOMERS
    
  During the three month period ended March 31, 2006, the Company had one customer that represented 35.2% of sales (March 31, 2005 - 31.0%).
 
12.          
RELATED PARTY TRANSACTIONS
 
 The Company entered a fiscal advisory and consulting agreement with LMT Financial Inc. (a company beneficially owned by a director and his spouse) for services to be provided in 2006. This agreement is subject to TSX  Venture Exchange approval. Compensation under the agreement is $6,000 per month or $72,000 for fiscal 2006.
 
13.          
RECONCILATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")

 These financial statements were prepared in accordance with GAAP in the United States. The Company has included the significant differences which would result if the Canadian GAAP were applied in the preparation of the Condensed Interim Statements of Operations, the Condensed Balance Sheets and the Condensed Interim Statements of Cash Flows. These statements are as follows:

Condensed Interim Statements of Operations
            
For the Three Month Period Ended March 31
  
2006
    
2005
  
Net income (loss), as reported under United States GAAP
$
(354,044
)
$
(454,655
)
Adjustments to arrive at Canadian GAAP
            
Research and development expense
  
-
    
188,207
  
Amortization expense
  
(67,447
)
  
(17,990
)
Net income (loss) based on Canadian GAAP
$
(421,491
)
$
(284,438
)
Earnings per share   - United States GAAP net loss
    
 
  
$
(0.02
)
$
(0.02
)
- Impact on accounting change
          
0.00
    
0.01
  
- Canadian GAAP net loss
        
$ 
 (0.02
) 
$ 
(0.01
)
 
Page9
STELLAR PHARMACEUTICALS INC.

NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)
 
(Unaudited)
 
MARCH 31, 2006

13.           RECONCILATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
    
         ACCOUNTING PRINCIPLES ("GAAP") (continued)
    
                                       
                                       
        Condensed Balance Sheets
                      
                                       
 As at March 31
          
2006
                
2005
        
   
United States
 
 
Increase
 
 
Canadian
 
 
United States
 
 
Increase
 
 
Canadian
 
 
 
 
GAAP     
   
(Decrease
)
  
GAAP  
   
GAAP     
   
(Decrease
)
  
GAAP
  
                                       
 Current assets
  
$
2,247,363
    
-
  
$
2,247,363
  
$
3,493,355
    
-
  
$
3,493,355
  
 Property plant and equipment
  
928,941
    
-
    
928,941
    
949,244
    
-
    
949,244
  
 Other assets
    
45,848
    
1,113,413
    
1,159,261
    
20,608
    
995,945
    
1,016,553
  
   
$
3,222,152
  
$
1,113,413
  
$
4,335,565
  
$
4,463,207
  
$
995,945
  
$
5,459,152
  
                                       
 Current liabilities
    
477,254
    
-
    
477,254
    
526,872
    
-
    
526,872
  
 Shareholders’ equity
  
2,744,898
    
1,113,413
    
3,858,311
    
3,936,335
    
995,945
    
4,932,280
  
   
$
3,222,152
  
$
1,113,413
  
$
4,335,565
  
$
4,463,207
  
$
995,945
  
$
5,459,152
  
                                       
Condensed Interim Statements of Cash Flows
            
                                       
For the Period Ended March 31
            
2006
    
2005
  
                                       
Cash flows for operating activities, as reported under United States GAAP
     $ 
(504,931
)
 $ 
(375,207
)
Development costs deferred for Canadian GAAP purposes
      
-
    
188,207
  
Cash flows for operating activities, Canadian GAAP
     $ 
(504,931
)
 $ 
(187,000
)
Cash flows for investing activities, as reported under United States GAAP
     $ 
(8,000
)
 $ 
(34,562
)
Development costs deferred for Canadian purposes
      
-
    
(188,207
)
Cash flows for investing activities, Canadian GAAP
     $
(8,000
)
 $ 
(222,769
)
Cash flows for financing activities, as reported under United States GAAP
      
-
  
$
118,968
  
Change in cash and cash equivalents
      
(512,931
)
  
(290,801
)
Cash and cash equivalents, opening
      
2,108,755
    
3,172,870
  
Cash and cash equivalents, closing
    
$
1,595,824
  
$
2,882,069
  
 
Amortization of certain other assets is being provided for on the straight-line basis as noted below:

Asset Classification
Useful Life
Deferred development costs - products available for sale
5 years
Incorporation expenses
10 years

Research and development costs relate to the development of the products, of which $1,358,593 were available for sale for the period ended March 31, 2006 (2005 - $369,455). For the period ended March 31, 2006, the Company did not incur any additional manufacturing development costs associated with the development of products. Costs associated to deferred manufacturing development costs for Canadian GAAP purposes can not be capitalized under United States GAAP. Amortization in regards to these development costs starts once the product is ready for sale in the market.
 
Page10
 
STELLAR PHARMACEUTICALS INC.
 
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
(Canadian funds)
 
(Unaudited)
 
MARCH 31, 2006

14.           COMPARATIVE FIGURES
 

     Certain comparative figures have been reclassified to conform to the current period presentation.

Page11