Paragon Pharmacies Limited
TSX VENTURE : PGN

Paragon Pharmacies Limited

April 27, 2007 21:23 ET

Paragon Pharmacies Limited Announces Results for the Three and Six Month Periods Ended February 28, 2007

KELOWNA, BRITISH COLUMBIA--(CCNMatthews - April 27, 2007) -

(NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA)

Paragon Pharmacies Limited ("Paragon") (TSX VENTURE:PGN) is pleased to announce that the interim unaudited consolidated financial statements of Paragon and its subsidiaries (collectively, the "Company") for the three and six month periods ended February 28, 2007 have been filed on SEDAR and are available for viewing at www.sedar.com.

Certain selected operational and financial information for the Company for the three and six months ended February 28, 2007 are set out below and should be read in conjunction with the Company's interim financial statements and management discussion and analysis filed on SEDAR.

Summary Discussion and Analysis for the Company

The following is a discussion of the consolidated financial condition and results of operations of the Company for the three month and six month periods ended February 28, 2007. This discussion and analysis should be read in conjunction with the Company's interim unaudited consolidated financial statements and accompanying notes for the three month and six month periods ended February 28, 2007. Certain accounts from the previous quarter have been changed to conform with the presentation of this quarter. The unaudited consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). All references to dollars are in Canadian funds unless otherwise indicated.

OVERVIEW

As at February 28, 2007, the Company owned and operated 19.5 stores (17.5 retail pharmacies and 2 home health care stores) in British Columbia and Alberta. 9.5 Super Drug Mart stores were acquired on April 28, 2006. Paragon Pharmacies Ltd. amalgamated with Rinoa Enterprises Ltd. to form Paragon Pharmacies Limited on October 31, 2006 and accordingly the financial results from the acquired assets are included from that date forward. The Company also owns a 26.56% interest in Catalyst Healthcare Ltd. (servicing the pharmacy needs of long term care service providers) and a 50% beneficial interest in a distribution centre.

OVERALL PERFORMANCE

The following provides a summary of the Company's overall performance for the three month and six month periods ended February 28, 2007 compared to the three month and six month periods ended February 28, 2006.

- Completed amalgamation with Rinoa Enterprises Ltd., a capital pool company, on October 31, 2006 to form Paragon Pharmacies Limited publicly traded on the TSX Venture Exchange (TSX VENTURE:PGN)

- Continued integration of the Super Drug Mart stores

- Completed private placement through Versant Partners Inc. for cash on February 16, 2007 (5,000,000 units at $0.80/unit)

- Second quarter total sales revenue of $16.827 million (2006: $7.690 million), an increase of 118.8%

-- Six month total sales revenue of $32.866 million (2006: $14.538 million), an increase of 126.1%

- Second quarter total gross margin of $5.494 million (2006: $2.055 million), an increase of 167.3%

-- Six month total gross margin of $10.715 million (2006: $4.115 million), an increase of 160.4%

- Second quarter total gross margin as a percentage of sales of 32.6% (2006: 26.7%)

-- Six month total gross margin as a percentage of sales of 32.6% (2006: 28.3%)

- Second quarter total operating expenses, excluding amortization, interest on long-term debt and stock-based compensation, of $4.680 million or 27.8% of sales versus $1.976 million or 25.7% of sales in 2006

-- Six month total operating expenses, excluding amortization, interest on long-term debt and stock-based compensation, of $9.035 million or 27.5% of sales versus $3.974 million or 27.3% of sales in 2006

- Second quarter EBITDA(1) of $0.813 million (2006: $0.080 million), an increase of 921.0%

-- Six month EBITDA(1) of $1.679 million (2006: $0.140 million), an increase of 1,096.8%

- Second quarter EBITDA margin(2) of 4.8% (2006: 1.0%), an increase of 366.6%

-- Six month EBITDA margin(2) of 5.1% (2006: 1.0%), an increase of 429.4%

- Second quarter net income of $0.082 million (2006: $0.637 million loss), an increase of 112.9%

-- Six month net loss of $0.004 million (2006: $0.907 million loss), an increase of 99.5%

- Second quarter purchases of capital assets of $0.199 million, compared to $0.096 million in 2006, an increase of 106.3%

-- Six month purchases of capital assets of $0.322 million, compared to $0.205 million in 2006, an increase of 57.2%

- Net debt of $4.575 million at February 28, 2007, compared to $9.490 million at August 31, 2006 (see table in the Financial Position section for calculation), a decrease of 51.8%

-- Net debt to equity of 0.20:1 at February 28, 2007, compared to 0.50:1 at August 31, 2006

(1) EBITDA defined as earnings before interest on long-term debt, income taxes, amortization, stock-based compensation, loss from discontinued operations, loss on equity investments and amalgamation costs greater than cash received. (See table in the Results of Operations for calculation of EBITDA).

(2) EBITDA margin defined as EBITDA divided by Revenue.

RESULTS OF OPERATIONS

The following table presents a summary of certain selected operating data and consolidated financial information for the Company.



----------------------------------------------------------------------------
3 Months Ended 6 Months Ended
----------------------------------------------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue 16,827,342 7,690,203 32,865,860 14,538,202
----------------------------------------------------------------------------
Cost of Goods Sold
& Other Operating
Expenses(1) 16,013,970 7,610,537 31,186,424 14,397,875
----------------------------------------------------------------------------
EBITDA(2) 813,372 79,666 1,679,436 140,327
----------------------------------------------------------------------------
Amortization 500,633 264,884 1,018,067 536,569
----------------------------------------------------------------------------
Stock-based compensation 0 345,528 0 345,528
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Operating income (loss)(3) 312,739 (530,746) 661,369 (741,770)
----------------------------------------------------------------------------
Interest on long-term debt 166,984 45,609 344,044 95,304
----------------------------------------------------------------------------
Income (loss) before other
items 145,755 (576,355) 317,325 (837,074)
----------------------------------------------------------------------------
Loss on equity investments (34,090) (61,157) (132,768) (69,105)
----------------------------------------------------------------------------
Amalgamation costs greater
than cash received (29,822) 0 (188,765) 0
----------------------------------------------------------------------------
Income from discontinued
operations 0 633 0 (802)
----------------------------------------------------------------------------
Net income (loss) 81,843 (636,879) (4,208) (906,981)
----------------------------------------------------------------------------
Per common share
- Basic net earnings $0.002 ($0.038) $0.000 ($0.053)
- Diluted net earnings $0.002 ($0.038) $0.000 ($0.053)
----------------------------------------------------------------------------

(1) Other operating expenses include selling, general and administration
expenses (excludes amortization, interest on long term debt and stock-
based compensation).
(2) EBITDA defined as earnings before interest on long-term debt, income
taxes, amortization, stock-based compensation, loss from discontinued
operations, loss on equity investments and amalgamation costs greater
than cash received.
(3) Operating income (loss) defined as income (loss) before interest on
long-term debt, taxes, loss on disposal of capital assets, loss on
equity investment, loss from discontinued operations and amalgamation
costs greater than cash received.


Sales

Sales revenue is comprised of sales to customers of the Company's retail pharmacies, home health care stores and central fill pharmacies (only including September and October 2005 for Paragon Central Fill Ltd. that was disposed of October 31, 2005).

Sales in the second quarter were $16.827 million compared to $7.690 million for the same period last year, an increase of $9.137 million or 118.8%. Increases were a result of growth in same store sales and new sales from the recently acquired Super Drug Mart stores. Same store sales growth is attributed to growth in prescription sales and the addition/enhancement of giftware, cosmetics and home healthcare front store categories in certain locations.

- Sales for the six month period were $32.866 million compared to $14.538 million for the same period last year, an increase of $18.328 million or 126.1%. Increases were a result of growth in same store sales and new sales from the acquired Super Drug Mart stores. Same store sales growth is attributed to growth in prescription sales and the addition/enhancement of giftware, cosmetics and home healthcare front store categories in certain locations.

Cost of Goods Sold and Other Operating Expenses

Cost of goods sold is comprised of the cost of goods sold through the Company's retail pharmacies, home health care stores and central fill pharmacies (September 2005 and October 2005 only for Paragon Central Fill Ltd. that was disposed of October 31, 2005). Other operating expenses include general and administrative, selling, and corporate expenses, excluding stock-based compensation, amortization, bank charges and interest on long-term debt.

Total cost of goods sold and other operating expenses for the second quarter were $16.014 million compared to $7.611 million in the same period last year, an increase of $8.403 million or 110.4%. This was primarily a result of the acquisition of the Super Drug Mart stores, negotiating better supply contracts and introduction of higher margin product lines. Gross margin as a percentage of sales increased 592 basis points to 32.6% from 26.7% in the same period last year. Other operating expenses as a percentage of sales increased 212 basis points to 27.8% compared to the same period last year. This increase is primarily a result of increased corporate overhead costs to accommodate planned growth, public company costs and recognition of deferred compensation.

Total cost of goods sold and other operating expenses for the six month period were $31.186 million compared to $14.398 million in the same period last year, an increase of $16.789 million or 116.6%. This was primarily a result of the acquisition of the Super Drug Mart stores. Gross margin as a percentage of sales increased 430 basis points to 32.6% from 28.3% in the same period last year. Other operating expenses as a percentage of sales increased 15 basis points to 27.5% compared to the same period last year. This increase is primarily a result of increased corporate overhead costs to accommodate planned growth, public company costs and recognition of deferred compensation. The impact of the deferred compensation obligation resulted in a charge of $100,000 included in selling, general and administration expense in the statement of loss in the current period. The Company will expense the remaining $200,000 in the balance of the fiscal year.

Amortization

Amortization of capital and intangible assets in the second quarter was $0.501 million compared to $0.265 million in the same period last year, an increase of $0.236 million or 89.0%. This increase is primarily a result of the acquisition of the Super Drug Mart stores on April 28, 2006.

- Amortization of capital and intangible assets for the six month period was $1.018 million compared to $0.537 million in the same period last year, an increase of $0.481 million or 89.7%. This increase is primarily a result of the acquisition of the Super Drug Mart stores on April 28, 2006.

Operating Income

Operating income for the second quarter was $0.313 million compared to a loss of $0.531 million in the same period last year, an increase of $0.843 million or 158.9%. Second quarter operating margin increased 876 basis points to 1.9% compared to the second quarter of last year. EBITDA margin, defined as EBITDA divided by Sales, increased to 4.8% from 1.0% in the second quarter last year.

- Operating income for the six month period was $0.661 million compared to a loss of $0.742 million in the same period last year, an increase of $1.403 million or 189.2%. Six month operating margin increased 711 basis points to 2.0% compared to the same period last year. EBITDA margin, defined as EBITDA divided by Sales, increased to 5.1% from 1.0% in the same six month period last year.

Interest Expense

Interest expense, defined as interest on long-term debt and capital leases, for the second quarter was $0.167 million compared to $0.046 million in the same period last year, an increase of $0.121 million or 266.1%. This increase is a result of debt financing obtained for the Super Drug Mart acquisition.

- Interest expense, defined as interest on long-term debt and capital leases, for the six month period was $0.344 million compared to $0.095 million in the same period last year, an increase of $0.249 million or 261.0%. This increase is a result of debt financing obtained for the Super Drug Mart acquisition.

Loss on Other Items

The loss on equity investments resulted from the Company's share of losses recognized on its equity investments in Catalyst Healthcare Ltd. and 1036985 Alberta Ltd. (Cochrane Super Drug Mart).

For the second quarter, loss on equity investments was $0.034 million compared to $0.061 million in 2006, gain from discontinued operations was $Nil compared to $0.001 million in 2006, and amalgamation costs greater than cash received was $0.030 million compared to $Nil in 2006.

For the six month period, loss on equity investments was $0.133 million compared to $0.069 million in 2006, and loss from discontinued operations was $Nil compared to $0.001 million in 2005 and amalgamation costs greater than cash received was $0.189 million compared to $Nil in 2006.

Net Income

The net income for the second quarter was $0.082 million compared to a loss of $0.637 million in the same period last year, an increase of $0.719 million or 112.9%. On a diluted basis, earnings per share were $0.002 in the second quarter compared to ($0.038) in the same period last year.

- The net loss for the six month period was $0.004 million compared to a loss of $0.907 million in the same period last year, a decrease of $0.903 million or 99.5%. On a diluted basis, earnings per share were ($0.000) for the six month period compared to ($0.053) in the same period last year.

FINANCIAL POSITION

The following table provides a summary of certain information with respect to the Company's financial position at the end of the periods indicated.



----------------------------------------------------------------------------
February 28, 2007 August 31, 2006
----------------------------------------------------------------------------
Cash and cash "in trust" $5,020,879 $1,586,331
----------------------------------------------------------------------------
Current portion of long-term debt
and capital leases 3,108,312 3,098,914
----------------------------------------------------------------------------
Long-term debt and capital leases 6,487,174 7,977,746
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Net debt 4,574,608 9,490,329
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Shareholders' equity 22,338,173 18,974,350
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Total capitalization 26,912,781 28,464,679
----------------------------------------------------------------------------
Net debt: Shareholders' equity 0.20:1 0.50:1
Net debt: Total capitalization 0.17:1 0.33:1
Net debt: EBITDA(1) 2.72:1 10.71:1(2)
EBITDA(1): Cash interest expense 4.88:1 4.72:1(2)
----------------------------------------------------------------------------

(1) EBITDA defined as earnings before interest on long-term debt, income
taxes, amortization, stock-based compensation, loss from discontinued
operations, and loss on equity investments, and amalgamation costs
greater than cash received.
(2) EBITDA computed, as defined above in Note 1, for the 6 months ended
August 31, 2006 is 886,418.


LIQUIDITY AND CAPITAL RESOURCES

For the six month period ended February 28, 2007, the ratio of current assets to current liabilities was 2.15:1 compared to 1.97:1 at August 31, 2006. Working capital was $9.643 million compared to $6.902 million at August 31, 2006.

The Company also had access to a $2.5 million operating line with a Canadian chartered bank as at February 28, 2007. The Company utilized $480,000 of the operating line for letter of credits.

The Company's principal capital requirements are to fund working capital needs, renovate existing stores and acquire new stores in connection with its expansion strategy. These capital requirements have generally been satisfied by a combination of cash flow from operations and borrowings under its term and operating loans and the issuance of common shares. Future expansion could result in additional debt and equity financings.

Operating Activities

For the second quarter, net cash flow generated from operating activities from continued operations was negative $0.093 million compared to $0.028 million in the same period last year. This decrease was primarily due to reductions in non-cash working capital items primarily in accounts payable and accrued liabilities.

For the six month period, net cash flow generated from operating activities from continued operations was $1.523 million compared to $0.512 million in the same period last year. This increase was primarily due to improved operations, better management of working capital, and the acquisition of the Super Drug Mart stores.

Investing Activities

For the second quarter, net cash flow from investing activities was negative $2.312 million compared to negative $0.842 million in the same period last year. This decrease relates primarily to cash advanced to a trust account.

For the six month period, net cash flow from investing activities was negative $0.658 million compared to negative $0.407 million in the same period last year. This decrease relates primarily to cash advanced to a trust account and purchase of capital assets.

Financing Activities

For the second quarter, net cash flow from financing activities was $2.952 million compared to negative $0.066 million in the same period last year. This increase relates primarily due to the issuance of share capital.

For the six month period, net cash flow from financing activities was $2.337 million compared to negative $0.229 million in the same period last year. This increase relates primarily due to the issuance of share capital.

As of February 28, 2007, the Company's long term debt financing includes Toronto Dominion Bank ($8,333,333); Third Party Loan Agreement ($1,000,000); CIT Financial Ltd. ($12,509); Microsoft Capital Corporation ($6,528); Ford Credit ($57,248); and Honda ($22,760). The term loan is secured by general security agreements against all existing and future acquired assets of the Company. In addition, the Company has entered into a general security agreement with McKesson Canada Corporation.

Canterbury Investment

On February 22, 2007 the Company entered into a subscription agreement with Canterbury Park Capital GP L.P., on behalf of private equity funds of which it is the general partner ("Canterbury") that, if completed, will result in Canterbury acquiring ownership and control of 3,750,000 units of Paragon. Each unit consists of one common share of Paragon and one-half of one common share purchase warrant. Each warrant entitles the holder to acquire one common share of Paragon at a price of $1.00 for a period of two years from the date of issue. The securities will be acquired by way of a private agreement between Canterbury and Paragon. Canterbury has agreed to pay $0.80 per unit on the private placement, for total consideration of $3,000,000.

In addition to the private placement of units, Paragon proposes to issue subordinated secured convertible debt in the amount of $20,000,000 to Canterbury, with a two-year term. The funds are to be held in escrow until such funds are utilized for permitted uses. In certain circumstances, at the option of Canterbury, the principal amount of the loan is convertible into 24,912,805 common shares at a rate of $0.8028 per common share. Interest, which is payable at the rate of 15% per annum or higher under certain circumstances, may also be paid in additional common shares based on the then market price in certain circumstances. The financing is subject to terms and conditions customary for transactions of this nature.

Future Liquidity

Based on current operating levels and available funds, there will be sufficient means to satisfy the Company's working capital needs and debt-service requirements for the coming fiscal year.
Any future acquisitions or Greenfield developments may require additional debt and equity financing while maintaining the existing covenants (see Financing Activities).

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

QUARTERLY INFORMATION

Summary of Quarterly Information

The fiscal year-end of the Company is August 31 with quarter end falling on the following dates: November 30 (Quarter 1); February 28 (Quarter 2); May 31 (Quarter 3); August 31 (Quarter 4). The following table provides a summary of certain selected consolidated financial information for the Company for each of the eight most recently completed fiscal quarters. The consolidated financial statements have been prepared by management in accordance with GAAP. All references to dollars are in Canadian funds unless otherwise indicated.



Second Quarter First Quarter
------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue 16,827,342 7,690,203 16,047,434 6,847,999
----------------------------------------------------------------------------
Income (loss) before other
items(1) 145,755 (576,355) 171,570 (260,719)
- Earnings (loss) per share
Basic $ 0.00 ($0.03) $ 0.01 ($0.03)
- Earnings (loss) per share
Diluted $ 0.00 ($0.03) $ 0.00 ($0.03)
----------------------------------------------------------------------------
Net income (loss) 81,843 (636,879) (86,051) (270,102)
- Net earnings (loss) per
share Basic $ 0.00 ($0.04) $ 0.00 ($0.03)
- Net earnings (loss) per
share
Diluted $ 0.00 ($0.04) $ 0.00 ($0.03)
----------------------------------------------------------------------------

Fourth Quarter Third Quarter
------------------------ ---------------------
2006 2005 2006 2005
----------------------------------------------------------------------------
Revenue 17,124,181 7,700,133 8,108,828 5,257,424
----------------------------------------------------------------------------
Income (loss) before other
items(1) (70,041) (63,805) (573,366) (403,014)
- Earnings (loss) per share - $ 0.00 ($0.01) ($0.02) ($0.04)
Basic
- Earnings (loss) per share -
Diluted $ 0.00 ($0.01) ($0.02) ($0.04)
----------------------------------------------------------------------------
Net income (loss) (66,102) (177,401) (649,396) (465,503)
- Net earnings (loss) per
share Basic $ 0.00 ($0.02) ($0.02) ($0.05)
- Net earnings (loss) per
share Diluted $ 0.00 ($0.02) ($0.02) ($0.05)
----------------------------------------------------------------------------

(1) Loss on disposal of capital assets in Q4-2005: $8,868; Loss on equity
investment in Q2-2007: 34,090; Q2-2006: $61,157; Q1-2007: 98,678;
Q1-2006; $7,948; Q4-2006: ($48,219); Q3-2006: $75,885; Loss from
discontinued operations of Q2-2006: ($633); Q1-2006: $1,435; Q4-2006:
$42,712; Q4-2005: $135,129; Q3-2006: $145; Q3-2005: $62,489;
Amalgamation costs greater than cash received of Q2-2007: $29,822;
Q1-2007: $158,943
(2) All information taken from Management prepared financial statements.


SUBSEQUENT EVENTS

Acquisition

On March 1, 2007 the Company closed the acquisition of the pharmacy assets and business of Nordic Pharmacy Inc. located in The Pas, Manitoba, through its wholly owned subsidiary, Paragon Nordic Pharmacy Ltd., for aggregate cash consideration of $1,727,518 (subject to certain post-closing adjustments) and $600,000 in deferred payments. This represented $1,980,000 in goodwill and intangible assets, $306,818 in inventory, $40,000 in capital assets, and $700 in deposits.

Katz Group/Drug Trading

On March 6, 2007 the Company was notified that effective June 6, 2007, the banner agreements with Drug Trading Company Limited under which 8 of Paragon's 18.5 pharmacies (7 in British Columbia and 1 in Alberta) operate under the I.D.A. name and are supplied products and services would be terminated. The Company is currently pursuing new supply arrangements for such pharmacies. On April 5, 2007 the Company was named as a defendant in a statement of claim filed by Katz Group Canada Inc., Drug Trading Company Ltd., Pharmx Rexall Drug Stores Ltd. and Katz Group Canada Ltd., as plaintiffs. Management of the Company believes that the allegations raised in the statement of claim are without merit and the Company intends to vigorously defend the action to the full extent permitted under law.

OUTSTANDING SHARE DATA

The Company had 37,204,444 common shares outstanding at February 28, 2007. As at this same date, the Company had outstanding options to acquire 680,655 of its common shares and warrants to acquire 8,485,000 of its common shares. All options were exercisable with 130,155 at $0.20, 182,000 at $1.00 and 368,500 at $1.50. There were 2,000,000 warrants at $1.25 expiring August 2008, 2,500,000 warrants at $1.00 expiring in February 2009 and 3,985,000 warrants at $0.80 expiring in April 2008 (3,635,000) and February 2009 (350,000).

CHANGES IN ACCOUNTING POLICIES

There were no changes in accounting policies during the first quarter.

REGULATORY CHANGES THAT IMPACT THE COMPANY'S INDUSTRY

The roll-out of the Ontario Transparent Drug System for Patients Act, 2006 (the "Act") continues to create challenges for pharmacies in the province of Ontario. The Act received Royal Assent on June 20, 2006 and since then various professional organizations have been addressing the impact of the reforms to the provincial drug system.

The most significant changes are:

- the drug benefit price of generic products now cannot exceed 50% of the original brand price (whereas previously the first generic was set at 70% of brand price and subsequent generics at up to 90% of the first generic price)

- professional allowances paid to pharmacies are restricted to expenditures for direct patient care and capped at 20% of the total generic drug costs reimbursed by the Ontario Drug Benefit ("ODB") program

- the dispensing fee for ODB prescriptions increased from $6.54 to $7.00 while the permitted mark-up is to decline from 10% to 8% as of April 1, 2007

Currently, the Company does not own or operate any pharmacies in the Province of Ontario. Management is watching closely as other provinces consider similar measures to reduce drug program costs.

British Columbia has initiated an activity-based cost survey as a first step to changing its approach to compensating drug stores for delivery of its PharmaCare services, which will likely be addressed once the year-long Conversation on Health is concluded.

One of the four priorities of the new Minister of Health and Wellness in Alberta is implementing a new pharmaceutical strategy to assure the sustainability of that province's drug coverage for seniors and low-income citizens.

DISCLOSURE CONTROLS AND PROCEDURES

Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, requires the President and Chief Executive Officer ("CEO"), and the Chief Financial Officer ("CFO") of the Company, to file annual and quarterly certificates certifying that they are responsible for establishing and maintaining controls and procedures for the Company, and that they have designed such disclosure controls and procedures, or have caused them to be designed under their supervision, to provide reasonable assurance that material information relating to the Company is made known to them by others within the Company during the period in which the interim filings are being prepared. The CEO and CFO believe controls and procedures have been designed to provide reasonable assurance that all information is made known to them and the reliability of the financial reporting and the preparation of financial statements for external purposes.

RECENT ACCOUNTING PRONOUNCEMENTS

Beginning in fiscal year 2008, the Company will be required to adopt new CICA Handbook section 1530 "Comprehensive Income", section 3855 "Financial Instruments - Recognition and Measurement" and section 3865 "Hedges" as issued by the Canadian Institute of Chartered Accountants. Under these sections a new financial statement, "Consolidated Statement of Other Comprehensive Income", has been introduced that provides for among other things, that foreign currency translation adjustments and other amounts relating to changes in value be temporarily recorded outside the income statement. In addition, these new standards emphasize the use of fair value as the basis of accounting and disclosure. The Company is evaluating the impact of these new standards, but management does not anticipate that this will have a material impact on the Company's financial position or results of operations.

FORWARD LOOKING STATEMENTS

This discussion of the consolidated financial condition and results of operations of the Company contains forward-looking statements regarding, among other things, the Company's beliefs, plans, objectives, strategies, estimates, intentions and expectations, including as they relate to its operating and financial results, capital expenditures and the ability to execute on its operating, investing and financing strategies. Consequently, actual results and events may differ materially from those included in, contemplated or implied by such forward looking statements for a variety of reasons. Forward-looking statements are subject to inherent risks and uncertainties including, but not limited to, market and general economic conditions, certain property and casualty risks, the availability to attract and retain pharmacists, the availability and terms of financing, changes in the Company's relationship with its key suppliers, competitive factors, changes in regulatory environments affecting the Company's business, and the accuracy in management's assumptions. This list is not exhaustive of the factors that may affect any of the Company's forward-looking statements. Investors and others should carefully consider these and other factors and not place undue reliance on these forward-looking statements. In addition, these forward-looking statements relate to the date on which they were made and the Company disclaims and has no intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

NON-GAAP FINANCIAL MEASURES

The Company reports its financial results in accordance with Canadian GAAP. However, the foregoing contains references to non-GAAP financial measures, such as operating margin, EBITDA (earning before stock-based compensation, interest, taxes, depreciation and amortization, loss from discontinued operations, loss on equity investments and amalgamation costs greater than cash received), EBITDA margin and cash interest expense. Non-GAAP financial measures do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures presented by other reporting issuers.

These non-GAAP financial measures have been included in this Management's Discussion and Analysis as they are measures which management uses to assist in evaluating the Company's operating performance against its expectations and against other companies in the retail drug store industry. Management believes that non-GAAP financial measures assist in identifying underlying operating trends.

These non-GAAP financial measures, particularly EBITDA and EBITDA margin, are also common measures used by investors, financial analysts and rating agencies. These groups may use EBITDA and other non-GAAP financial measures to value the Company and assess the Company's ability to service its debt.



PARAGON PHARMACIES LIMITED
Interim Consolidated Statement of Income (Loss) and Deficit
Three Month Periods and Six Month Periods Ended February 28, 2007 and 2006
(Note 1)
----------------------------------------------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
(3 months) (3 months) (6 months) (6 months)
$ $ $ $
----------------------------------------------------------------------------

REVENUE 16,827,342 7,690,203 32,865,860 14,538,202

COST OF SALES 11,333,745 5,634,809 22,151,251 10,423,394
-------------------------------------------------------
GROSS PROFIT 5,493,597 2,055,394 10,714,609 4,114,808
-------------------------------------------------------
EXPENSES
Selling, general and
administration 4,648,099 1,962,223 8,963,084 3,948,687
Amortization 500,633 264,884 1,018,067 536,569
Bank charges and
interest 32,126 13,505 72,089 25,794
Interest on
long-term debt 166,984 45,609 344,044 95,304
Stock-based
compensation (Note 9) - 345,528 - 345,528
-------------------------------------------------------
5,347,842 2,631,749 10,397,284 4,951,882
-------------------------------------------------------
INCOME (LOSS) BEFORE
OTHER ITEMS 145,755 (576,355) 317,325 (837,074)

OTHER ITEMS
Amalgamation costs
greater than cash
received (Note 2) (29,822) - (188,765) -
Loss on equity
investments
(Note 10) (34,090) (61,157) (132,768) (69,105)
-------------------------------------------------------
NET INCOME (LOSS)
FROM CONTINUING
OPERATIONS 81,843 (637,512) (4,208) (906,179)

-------------------------------------------------------
LOSS FROM
DISCONTINUED
OPERATIONS - 633 - (802)
-------------------------------------------------------
NET INCOME (LOSS) 81,843 (636,879) (4,208) (906,981)

DEFICIT, BEGINNING
OF PERIOD (4,986,300) (3,547,872) (4,900,249) (3,651,356)

Disposition of
Paragon Central
Fill Ltd. - - - 373,586
-------------------------------------------------------
DEFICIT, END OF
PERIOD (4,904,457) (4,184,751) (4,904,457) (4,184,751)
-------------------------------------------------------
-------------------------------------------------------
INCOME (LOSS) PER
SHARE
BASIC $ 0.00 ($0.04) $ 0.00 ($0.05)
DILUTED $ 0.00 ($0.04) $ 0.00 ($0.05)


Interim Consolidated Balance Sheets
February 28, 2007 and August 31, 2006
----------------------------------------------------------------------------
February 28, August 31,
2007 2006
$ $
-------------------------
ASSETS
CURRENT
Cash and cash equivalents 3,287,799 86,331
Cash held in trust (Note 13) 1,733,080 1,500,000
Accounts receivable 2,350,293 2,828,929
Inventory 9,840,823 8,826,745
Prepaid expenses and deposits 510,401 165,449
Due from related parties (Note 5) 323,167 597,684
-------------------------
18,045,563 14,005,138

Deferred costs 433,805 367,533
Capital assets (Note 3) 1,428,900 1,368,903
Intangible assets (Note 4) 4,726,337 5,457,545
Investment in private companies (Note 10) 372,468 435,445
Goodwill, at cost 12,420,709 12,420,709
-------------------------
37,427,782 34,055,273
-------------------------
-------------------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 5,194,121 4,004,263
Current portion of deferred compensation (Note 8) 100,000 -
Current portion of long-term debt (Note 6) 3,038,243 3,037,853
Current portion of capital leases (Note 7) 70,070 61,061
-------------------------
8,402,434 7,103,177

Deferred compensation (Note 8) 200,000 -
Long-term debt (Note 6) 6,394,135 7,891,608
Capital leases (Note 7) 93,040 86,138
-------------------------
15,089,609 15,080,923
-------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 9) 26,310,170 22,939,536
Contributed surplus (Note 9) 932,460 935,063
Deficit (4,904,457) (4,900,249)
-------------------------
22,338,173 18,974,350
-------------------------
37,427,782 34,055,273
-------------------------
-------------------------


Interim Consolidated Statement of Cash Flows

----------------------------------------------------------------------------
February 28, February 28, February 28, February 28,
2007 2006 2007 2006
(3 months) (3 months) (6 months) (6 months)
$ $ $ $
---------------------------------------------------
CASH FLOWS RELATED TO
THE FOLLOWING ACTIVITIES:
OPERATING
Net income (loss) from
continuing operations 81,843 (637,512) (4,208) (906,179)
Adjustments for:
Amortization 500,633 264,884 1,018,067 536,569
Stock-based compensation
(Note 9) - 345,528 - 345,528
Loss on equity
investment 34,090 61,157 132,768 69,105
---------------------------------------------------
616,566 34,057 146,627 45,023
Changes in non-cash
working capital and
other non-cash items:
Accounts receivable 964,518 269,579 478,636 78,819
Inventory 25,541 112,395 (1,014,078) 148,550
Prepaid expenses and
deposits (193,870) 10,154 (244,952) 72,374
Accounts payable and
accrued liabilities (1,507,645) (410,470) 1,156,857 91,404
Income taxes receivable 1,484 (451) - (451)
---------------------------------------------------
Operating cash flow from
continuing operations (93,406) 15,264 1,523,090 435,719
---------------------------------------------------
Net income (loss) from
discontinued operations - 633 - (802)
Current assets - 53,455 - 238,289
Current liabilities - (41,037) - (161,656)
---------------------------------------------------
Operating cash flow from
discontinued operations - 13,051 - 75,831
---------------------------------------------------
(93,406) 28,315 1,523,090 511,550
---------------------------------------------------
FINANCING
Advances (repayment)
from related parties (3,763) 204,723 274,517 (81,358)
Cash from Rinoa (Note 2) 585,982 585,982
Deposits received in
advance for issuance
of shares - (250,000) - -
Issuance of share
capital, net of share
issuance costs 3,081,777 204,520 3,006,870 204,520
Repayment of long-term
debt,net (690,767) (99,239) (1,497,083) (141,230)
Repayment of capital
leases (21,535) 6,131 (33,699) (210,882)
---------------------------------------------------
2,951,694 (66,135) 2,336,587 (228,950)
---------------------------------------------------
INVESTING
Cash held in trust (233,080) (500,000) (233,080) (500,000)
Cash received (advanced)
from trust account (1,500,000) - - 250,000
Proceeds on disposition
of Paragon Central
Fill Ltd. - - - -
Purchase of Prairie
Supply Co-op shares - - (69,789) (280)
Purchase of interest in
Catalyst Healthcare Ltd.
(Note 10) - (17) -
Deferred investment costs (414,618) (220,370) (66,272) (220,370)
Intangible assets 1,392 (25,150) - (25,150)
Proceeds on disposal of
capital assets - - - 294,145
Purchase of capital
assets and intangibles (198,997) (96,460) (322,070) (204,861)
Non cash investing
working capital 33,002 - 33,002 -
---------------------------------------------------
(2,312,301) (841,997) (658,209) (406,516)
---------------------------------------------------
NET (DECREASE) INCREASE
IN CASH 545,987 (747,547) 3,201,468 (123,916)
CASH, BEGINNING OF
PERIOD 2,741,812 1,040,907 86,331 417,276
---------------------------------------------------
CASH, END OF PERIOD 3,287,799 293,360 3,287,799 293,360
---------------------------------------------------
---------------------------------------------------

Notes to the Interim Consolidated Financial Statements
Three Month Periods and Six Month Periods Ended February 28, 2007 and 2006
----------------------------------------------------------------------------


1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and follow the same accounting policies and methods of application with those used in the preparation of the audited annual consolidated financial statements for the year ended August 31, 2006, and include all adjustments necessary to present fairly the results for the interim periods. Certain information and disclosure included in the year end consolidated financial statements have been condensed or omitted. Certain accounts from the previous quarter have been changed to conform with the presentation of this quarter. These financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended August 31, 2006.

Paragon Pharmacies Limited (the "Company") is comprised of one single operating segment which is drug store operations focusing on the customer and communities in which they are located. In addition, the pharmacies offer supplemental services such as Canada Post outlets, lottery tickets and transit pass sales.

These interim consolidated financial statements also reflect the amalgamation of Rinoa Enterprises Ltd. ("Rinoa") and Paragon Pharmacies Ltd. ("Paragon") on October 31, 2006 to create Paragon Pharmacies Limited (Note 2).

Deferred Costs

Deferred costs represents amounts expended directly and incrementally for the acquisition and financing described in Note 12. Upon finalization of the acquisition, these costs ($84,862) will be recognized as part of the total cost of the acquisition. Upon finalization of the financing, these costs ($348,943) will be recognized as part of the total cost of the financing.

2. AMALGAMATION WITH RINOA ENTERPRISES LTD.

On October 13, 2006 the respective shareholders of Paragon Pharmacies Ltd. ("Paragon") and Rinoa Enterprises Ltd. ("Rinoa") approved the amalgamation of both companies. On October 31, 2006, the Amalgamation was completed. The terms of the Amalgamation involved the reverse take over of Rinoa by Paragon to create a new company under the name Paragon Pharmacies Limited (the "Company").

Pursuant to the Amalgamation, all outstanding securities of both Paragon and Rinoa were exchanged for the Company's securities on a one for one basis. On November 2, 2006, the TSX Venture Exchange ("the Exchange") approved the amalgamation as Rinoa's Qualifying Transaction. As a result, on November 3, 2006, Rinoa ceased to be a Capital Pool Company and its common shares were delisted from trading on the Exchange. Also on November 3, 2006, in accordance with Exchange Policy 2.5, the common shares of Paragon Pharmacies Limited commenced trading on the Exchange.

As Paragon was deemed to be the acquirer for accounting purposes, the Company's assets and liabilities are included in the interim consolidated financial statements at their carrying value.

As the shareholders of Paragon obtained control of Rinoa reverse takeover accounting was applied. The amalgamation transaction costs of $188,765 in excess of cash received have been charged to the consolidated statement of loss.

The consolidated interim financial statements of the combined entities are considered a continuation of the financial statements of Paragon Pharmacies Limited.

The accounting for the reverse take-over reflects the fair value of Rinoa's assets acquired, after reflecting the business combination with Paragon as follows:



---------
$
---------
Current assets 3,896
Current liabilities (79,815)
---------
(75,919)
Cash acquired 585,982
---------
510,063
---------
---------


3. CAPITAL ASSETS

----------------------------------------------------------------------------
February 28, 2007 August 31, 2006
----------------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
----------------------------------------------------------------------------

Furniture and fixtures 702,182 379,199 322,983 282,674
Automotive 180,427 82,401 98,026 83,644
Nursing home and pharmacy
equipment 54,173 14,346 39,827 10,598
Computer equipment 615,600 361,624 253,975 224,147
Computer software 136,809 111,389 25,421 60,827
Assets under capital lease 230,292 45,614 184,678 163,907
Leasehold improvements 1,130,787 626,797 503,990 543,106
----------------------------------------------------------------------------
3,050,270 1,621,370 1,428,900 1,368,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. INTANGIBLE ASSETS
----------------------------------------------------------------------------
February 28, 2007 August 31, 2006
----------------------------------------------------------------------------
Accumulated Net Book Net Book
Cost Amortization Value Value
$ $ $ $
----------------------------------------------------------------------------

Prescription files 7,245,104 2,887,802 4,357,302 4,975,005
Pre-operating costs 27,823 4,232 23,591 26,098
Operating leases 466,551 180,836 285,715 391,109
Loan financing fees 71,396 11,667 59,729 65,333
----------------------------------------------------------------------------
7,810,874 3,084,537 4,726,337 5,457,545
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. DUE FROM (TO) RELATED PARTIES
----------------------------
February 28, August 31,
2007 2006
$ $
----------------------------

ACO Super Drug Mart Ltd. (177,351) (67,392)
Catalyst Healthcare Ltd. - 96,904
1036985 Alberta Ltd. (Cochrane Super Drug Mart) 362,297 184,058
Super Drug Mart Partnership 138,221 384,114
----------------------------
323,167 597,684
----------------------------
----------------------------

The amounts due from (to) related parties are non-interest bearing,
unsecured with no fixed terms of repayment. The parties are related as they
have common shareholders.


6. LONG-TERM DEBT
----------------------------
February 28, August 31,
2007 2006
$ $
----------------------------

Toronto Dominion Bank (1)
Loan payable bearing interest at tiered rates
from prime plus 0.50% to prime plus 1.50% per
annum, repayable in monthly instalments of
$166,667 plus interest, due April 2011,
secured by a general security agreement,
first charge on all the assets of the Company
including its subsidiaries, with a specific
first charge on the inventory of the Company,
and unlimited guarantees of advances executed
by the Company and its subsidiaries 8,333,333 9,333,333

Third Party Loan Agreement
Non-interest bearing loan, repayable in
monthly instalments of $83,333, due February
2008. 1,000,000 1,500,000

CIT Financial Ltd.
Loan bearing interest at prime plus 4.9%,
secured by a general security agreement, a
general assignment of book debts and
personal guarantees, repayable at $823 per
month, including interest 12,509 16,887

Microsoft Capital Corporation
Loan payable bearing interest at 2.567% per
annum, payable in blended monthly instalments
of $941, due September 2007, secured by
certain capital assets, a general security
agreement covering all assets and
undertakings of Black Mountain Pharmacy (1979)
Ltd. 6,528 12,046

(1) The Company has entered into a General Security Agreement with a
supplier, who is an arms length third party. This General Security
Agreement is subordinated to the Toronto Dominion bank loan


----------------------------
February 28, August 31,
2007 2006
$ $
----------------------------

Ford Credit
Non-interest bearing loan, repayable in monthly
instalments of $450, due May 2009, secured by
a general security agreement covering all
assets and undertakings of the Company 11,699 14,400

Non-interest bearing loan, repayable in monthly
instalments of $463, due November 2010,
secured by a general security agreement
covering all assets and undertakings of the
Company 20,362 23,601

Non-interest bearing loan, repayable in monthly
instalments of $572, due November 2010, secured
by a general security agreement covering all
assets and undertakings of the Company 25,187 29,194

Honda Canada
Loan bearing interest at 4.9%, repayable in
monthly instalments of $442, due January 2012,
secured by a general security agreement
covering all assets and undertakings of the
Company 22,760 -

--------------------------
9,432,378 10,929,461

Less current portion 3,038,243 3,037,853
--------------------------
6,394,135 7,891,608
--------------------------
--------------------------

Principal payments required in each of the next five twelve month periods
ended February 28 are as follows:

-----------
$
-----------

2008 3,038,243
2009 2,021,197
2010 2,017,051
2011 346,244
2012 4,244


7.CAPITAL LEASES

-----------
$
-----------

Period ending February 28, 2008 81,429
2009 45,818
2010 26,773
2011 16,529
2012 12,844
-----------

Total minimum lease payments 183,393

Less amount representing interest at rates ranging from 3% - 18.2% 20,283
-----------

Balance of obligation 163,110

Less current portion 70,070
-----------
93,040
-----------
-----------


8. DEFERRED COMPENSATION OBLIGATION

As part of the agreed upon terms of the purchase of the assets of Super Drug Mart Partnership Group the Company incurred a deferred compensation obligation with respect to two employees. The obligation requires an annual payment of $100,000 on each of April 28, 2007, 2008, and 2009. Accordingly, the deferred compensation obligation is adjusted each period with a corresponding charge to compensation expense to reflect the fair value of the amount owed to the employees.



9.SHARE CAPITAL

----------------------------------------------------------------------------
Number of
Common Amount
Shares Issued $
----------------------------------------------------------------------------

Authorized
Unlimited number of common voting shares
Unlimited number of first and second preferred
shares, issuable in series, rights to be
determined by directors

Issued
Balance, August 31, 2006 26,884,599 24,525,924

Shares issued to the shareholders of Rinoa on
the acquisition of Rinoa by Paragon (Note 2) 5,299,825 510,063
Issuance of common shares on exercise of agent
options 20,020 6,607
Issuance of common shares on private placement
for cash 5,000,000 4,000,000
-----------------------------
Balance, February 28, 2007 37,204,444 29,042,594
-----------------------------
-----------------------------

February 28, August 31,
2007 2006
$ $
-----------------------------
Shares issued 29,042,594 24,525,924
Share issuance costs (2,146,442) (1,586,388)
Share issuance costs - Rinoa (note 2) (585,982) -
-----------------------------
Share capital 26,310,170 22,939,536
-----------------------------
-----------------------------


Granting of options

During the six month period ended February 28, 2007 the Company issued nil options (twelve month period ended August 31, 2006 - Nil) with a weighted average exercise price of $Nil (August 31, 2006 - $Nil).

28,825 Rinoa agent options were exercised prior to October 31, 2006 with a weighted average exercise price of $0.20. 250,000 Rinoa directors' options were exercised on October 31, 2006 with a weighted average exercise price of $0.20.

20,020 options with a weighted average exercise price of $0.20 were exercised during the six month period ended February 28, 2007 (twelve month period ended August 31, 2006 - Nil) and 35,000 options (twelve month period ended August 31, 2006 - Nil options) with a weighted average exercise price of $1.00 (August 31, 2006 - $Nil) were cancelled.

The options outstanding at February 28, 2007 were as follows:



----------------------------------------------------------------------------
Number of
Options Exercise Price
Date Issued Outstanding $ Expiry Date
----------------------------------------------------------------------------

February 27, 2004 182,000 1.00 February 27, 2009
December 10, 2004 118,500 1.50 December 10, 2009
June 30, 2005 250,000 1.50 June 30, 2010
------------
550,500

November 3, 2005 130,155 0.20 November 3, 2007
(Outstanding options of
Rinoa at February 28, 2007)
------------
680,655
------------
------------


The weighted average exercise price of the options outstanding and all exercisable at February 28, 2007 is $1.12 (August 31, 2006 - $1.31).

Subsequent to period end, options totalling 90,000 expired and therefore were cancelled.

Subsequent to period end, options totalling 990,000 with a term of 5 years were granted to officers and directors at an exercise price of $0.80.

Warrants

The following warrants were issued entitling the holder thereof to purchase one common share of the Company as described below:



----------------------------------------------------------------------------
Number Number
Number of of
Date of Warrants Warrants
Issued Warrants Exercised Expired
----------------------------------------------------------------------------
September 15, 2004 15,787 - 15,787
December 1, 2004 9,200 - 9,200
December 15, 2004 32,000 - 32,000
February 28, 2006 2,000,000 - -
April 28, 2006 3,635,000 - -
February 16, 2007 2,500,000 - -
February 16, 2007 350,000 -
-------------------------------------------------
8,541,987 - 56,987
-------------------------------------------------
-------------------------------------------------

----------------------------------------------------------------------------
Total Exercise
Date Warrants Price Expiry
Issued Outstanding $ Date
----------------------------------------------------------------------------
September 15, 2004 - 1.50 September 15, 2006
December 1, 2004 - 1.50 December 1, 2006
December 15, 2004 - 1.50 December 15, 2006
February 28, 2006 2,000,000 1.25 August 25, 2008
April 28, 2006 3,635,000 0.80 April 28, 2008
February 16, 2007 2,500,000 1.00 February 16, 2009
February 16, 2007 350,000 0.80 February 16, 2009
-------------
8,485,000
-------------
-------------


The weighted average exercise price of the warrants outstanding and exercisable at February 28, 2007 is $0.96 (August 31, 2006 - $0.97). The weighted average exercise price of the warrants issued during the six month period ended February 28, 2007 was $0.98 (twelve month period ended August 31, 2006 - $0.96). The weighted average exercise price of the warrants exercised and expired during the six month period was $Nil and $1.50, respectively (twelve month period ended August 31, 2006 - $Nil and $1.28, respectively).

In conjunction with the Company's private placement on February 16, 2007 of 5 million units, a total of 2.5 million warrants were issued with the units and 350,000 warrants were issued to the agent, each exercisable into a common share at $1.00 and $0.80 per common share, respectively.

The fair value of each warrant granted was estimated to be $0.12 to $0.19, respectively, on the date of grant using the Black-Scholes option-pricing model with weighted average assumptions as follows:



Warrants
Discount rate - equivalent to 1- to 3-year bond 4%
Expected lives (years) 2 years
Expected volatility 36.57%
Expected dividends 0


Stock-based compensation

The Company recorded compensation expense totalling $nil (February 28, 2006 - $345,528) using a fair-value based method for stock options and warrants granted to directors, executives, employees and consultants in the consolidated financial statements.

Contributed surplus results from the recording of stock-based compensation as follows:



---------
$
---------
Contributed surplus, August 31, 2006 935,063
Exercise of Agents Options (2,603)
---------
Contributed surplus, February 28, 2007 932,460
---------
---------


10. INVESTMENT IN PRIVATE COMPANIES AND LOSS ON EQUITY INVESTMENTS

1036985 Alberta Ltd. (operating as Cochrane Super Drug Mart)

On April 28, 2006, the Company purchased 50% beneficial interest in the outstanding shares in 1036985 Alberta Ltd. ("Cochrane Super Drug Mart") for $350,025, an equity investment. The Company has recognized its portion of loss of $60,123 and income of $12,775, in the consolidated statements of loss and in its investment on the consolidated balance sheet at February 28, 2007 and August 31, 2006, respectively.

11. SUPPLEMENTAL CASH FLOW INFORMATION



February February February February
28, 2007 28, 2006 28, 2007 28, 2006
Cash and cash equivalents (3 months) (3 months) (6 months) (6 months)

Cash 670,582 293,360 670,582 293,360
Term Deposits 2,617,217 - 2,617,217 -
------------------------------------------------
Cash and cash equivalents 3,287,799 293,360 3,287,799 293,360
------------------------------------------------
------------------------------------------------

Cash - continuing
operations 3,287,799 290,206 3,287,799 290,206
Cash - discontinued
operations - 3,154 - 3,154
------------------------------------------------
3,287,799 293,360 3,287,799 293,360
------------------------------------------------
------------------------------------------------

Interest paid 199,110 59,114 416,134 121,098
------------------------------------------------
------------------------------------------------


12. CONTINGENCY

On April 5, 2007 the Corporation was named as a defendant in a statement of claim filed by Katz Group Canada Inc., Drug Trading Company Ltd., Pharmx Rexall Drug Stores Ltd. and Katz Group Canada Ltd., as plaintiffs. Management of the Corporation believes that the allegations raised in the statement of claim are without merit and the Corporation intends to vigorously defend the action to the full extent permitted under law.

13. SUBSEQUENT EVENTS

Canterbury Investment

On February 22, 2007 the Company entered into a subscription agreement with Canterbury Park Capital GP L.P., on behalf of private equity funds of which it is the general partner ("Canterbury") that, if completed, will result in Canterbury acquiring ownership and control of 3,750,000 units of Paragon. Each unit consists of one common share of Paragon and one-half of one common share purchase warrant. Each warrant entitles the holder to acquire one common share of Paragon at a price of $1.00 for a period of two years from the date of issue. The securities will be acquired by way of a private agreement between Canterbury and Paragon. Canterbury has agreed to pay $0.80 per unit on the private placement, for total consideration of $3,000,000.

In addition to the private placement of units, Paragon proposes to issue subordinated secured convertible debt in the amount of $20,000,000 to Canterbury, with a two-year term. The funds are to be held in escrow until such funds are utilized for permitted uses. In certain circumstances, at the option of Canterbury or Paragon, the principal amount of the loan is convertible into 24,912,805 common shares at a rate of $0.8028 per common share. Interest, which is payable at the rate of 15% per annum or higher under certain circumstances, may also be paid in additional common shares based on the then market price in certain circumstances.

The financing will be subject to terms and conditions customary for transactions of this nature.

Acquisition

On March 1, 2007 the Company closed the acquisition of the pharmacy assets and business of Nordic Pharmacy Inc. located in The Pas, Manitoba, through its wholly owned subsidiary, Paragon Nordic Pharmacy Ltd., for aggregate cash consideration of $1,727,518 (subject to certain post-closing adjustments) and $600,000 in deferred payments. This represented $1,980,000 in goodwill and intangible assets, $306,818 in inventory, $40,000 in capital assets, and $700 in deposits. The Company had deposited in its legal counsels trust account $1,733,080 at February 28, 2007.

The TSX Venture Exchange does not accept responsibility for the adequacy or accuracy of this release and has neither approved nor disapproved the contents of this press release.

Contact Information

  • Paragon Pharmacies Limited
    Craig Cameron
    President and Chief Executive Officer
    (250) 491-3936