All share numbers and share prices presented in this Quarterly
Report on Form 10-Q have been adjusted to reflect the 1-for-10 reverse share split of Stellar Biotechnologies, Inc.’s
common shares effected on September 2, 2015.
Item 1. Financial Statements.
Stellar Biotechnologies, Inc.
Condensed Interim Consolidated Balance Sheets
(Unaudited)
(Expressed in U.S. Dollars )
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Assets:
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,961,727
|
|
|
$
|
3,955,503
|
|
Accounts receivable
|
|
|
10,436
|
|
|
|
157,597
|
|
Short-term investments
|
|
|
1,999,162
|
|
|
|
5,015,171
|
|
Inventory
|
|
|
543,463
|
|
|
|
557,280
|
|
Prepaid expenses
|
|
|
200,692
|
|
|
|
181,068
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
8,715,480
|
|
|
|
9,866,619
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
697,918
|
|
|
|
503,408
|
|
Deposits
|
|
|
15,340
|
|
|
|
15,900
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
713,258
|
|
|
|
519,308
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
9,428,738
|
|
|
$
|
10,385,927
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
442,764
|
|
|
$
|
656,685
|
|
Deferred revenue
|
|
|
173,333
|
|
|
|
173,333
|
|
Warrant liability
|
|
|
-
|
|
|
|
1,550,630
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
616,097
|
|
|
|
2,380,648
|
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common shares, unlimited common shares authorized,
|
|
|
|
|
|
|
|
|
no par value, 8,448,758 and 7,984,758 issued and
|
|
|
|
|
|
|
|
|
outstanding at March 31, 2016 and September 30,
|
|
|
|
|
|
|
|
|
2015, respectively
|
|
|
41,336,056
|
|
|
|
38,114,215
|
|
Accumulated share-based compensation
|
|
|
5,302,713
|
|
|
|
5,226,379
|
|
Accumulated deficit
|
|
|
(37,826,128
|
)
|
|
|
(35,335,315
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
8,812,641
|
|
|
|
8,005,279
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
9,428,738
|
|
|
$
|
10,385,927
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Stellar Biotechnologies, Inc.
Condensed Interim Consolidated Statements of Operations
(Unaudited)
(Expressed in U.S. Dollars )
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
326,335
|
|
|
$
|
142,627
|
|
|
$
|
782,495
|
|
|
$
|
295,288
|
|
Contract services revenue
|
|
|
-
|
|
|
|
45,000
|
|
|
|
32,000
|
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326,335
|
|
|
|
187,627
|
|
|
|
814,495
|
|
|
|
400,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales and contract services
|
|
|
268,901
|
|
|
|
243,115
|
|
|
|
580,964
|
|
|
|
339,040
|
|
Costs of aquaculture
|
|
|
79,249
|
|
|
|
66,881
|
|
|
|
164,162
|
|
|
|
148,057
|
|
Research and development
|
|
|
309,062
|
|
|
|
281,584
|
|
|
|
597,911
|
|
|
|
700,405
|
|
General and administration
|
|
|
765,066
|
|
|
|
785,681
|
|
|
|
1,874,755
|
|
|
|
1,727,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,278
|
|
|
|
1,377,261
|
|
|
|
3,217,792
|
|
|
|
2,915,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
|
226,764
|
|
|
|
(307,546
|
)
|
|
|
117,636
|
|
|
|
(468,658
|
)
|
Gain (loss) in fair value of warrant liability
|
|
|
-
|
|
|
|
1,061,776
|
|
|
|
(211,956
|
)
|
|
|
1,201,332
|
|
Investment income
|
|
|
8,169
|
|
|
|
18,240
|
|
|
|
14,004
|
|
|
|
31,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,933
|
|
|
|
772,470
|
|
|
|
(80,316
|
)
|
|
|
764,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax
|
|
|
(861,010
|
)
|
|
|
(417,164
|
)
|
|
|
(2,483,613
|
)
|
|
|
(1,750,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
9,000
|
|
|
|
7,200
|
|
|
|
18,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(861,010
|
)
|
|
$
|
(426,164
|
)
|
|
$
|
(2,490,813
|
)
|
|
$
|
(1,769,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.22
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
8,448,758
|
|
|
|
7,954,665
|
|
|
|
8,410,835
|
|
|
|
7,950,336
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Stellar Biotechnologies, Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in U.S. Dollars )
|
|
Six Months Ended
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash Flows Used In Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,490,813
|
)
|
|
$
|
(1,769,641
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68,732
|
|
|
|
77,602
|
|
Share-based compensation
|
|
|
167,329
|
|
|
|
198,927
|
|
Foreign exchange (gain) loss
|
|
|
(117,636
|
)
|
|
|
468,658
|
|
(Gain) loss in fair value of warrant liability
|
|
|
211,956
|
|
|
|
(1,201,332
|
)
|
|
|
|
|
|
|
|
|
|
Changes in working capital items:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
147,209
|
|
|
|
26,867
|
|
Inventory
|
|
|
13,817
|
|
|
|
(100,260
|
)
|
Prepaid expenses
|
|
|
(34,907
|
)
|
|
|
(27,037
|
)
|
Deposits
|
|
|
560
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
(213,773
|
)
|
|
|
(168,575
|
)
|
Deferred revenue
|
|
|
-
|
|
|
|
(86,667
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,247,526
|
)
|
|
|
(2,581,458
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(263,242
|
)
|
|
|
(57,694
|
)
|
Purchase of short-term investments
|
|
|
(2,005,818
|
)
|
|
|
(7,039
|
)
|
Proceeds on sales
and maturities of short-term investments
|
|
|
5,021,827
|
|
|
|
424,813
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
2,752,767
|
|
|
|
360,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants and options
|
|
|
1,368,260
|
|
|
|
28,719
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,368,260
|
|
|
|
28,719
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
132,723
|
|
|
|
(438,778
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
2,006,224
|
|
|
|
(2,631,437
|
)
|
Cash and cash equivalents - beginning of period
|
|
|
3,955,503
|
|
|
|
8,768,459
|
|
Cash and cash equivalents - end of period
|
|
$
|
5,961,727
|
|
|
$
|
6,137,022
|
|
|
|
|
|
|
|
|
|
|
Cash (demand deposits)
|
|
$
|
5,961,727
|
|
|
$
|
6,028,482
|
|
Cash equivalents
|
|
|
-
|
|
|
|
108,540
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,961,727
|
|
|
$
|
6,137,022
|
|
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Stellar Biotechnologies, Inc.
(the “Company”) is organized under the laws of British Columbia, Canada. The Company’s common shares are listed
on the Nasdaq Capital Market under the trading symbol “SBOT.” Prior to listing on Nasdaq effective November 5, 2015,
the Company’s common shares were quoted in the United States on the U.S. OTCQB Marketplace Exchange under the trading symbol
“SBOTF.” The Company’s common shares were previously listed in Canada on the TSX Venture Exchange as a Tier
2 issuer under the trading symbol “KLH.” The Company voluntarily delisted from the TSX Venture Exchange effective
close of business April 8, 2016.
In April 2010, the Company changed its name from CAG Capital, Inc. to Stellar Biotechnologies, Inc.
and
completed a reverse merger transaction with Stellar Biotechnologies, Inc., a California corporation, which was founded in September
1999, and remains the Company’s wholly-owned subsidiary and principal operating entity. The Company’s executive offices
are located at 332 E. Scott Street, Port Hueneme, California, 93041, USA, and its registered and records office is Royal Centre,
1055 West Georgia Street, Suite 1500, Vancouver, BC, V6E 4N7, Canada.
Nature of Operations
The Company’s business
is the aquaculture, research and development, manufacture and commercialization of Keyhole Limpet Hemocyanin (“KLH”).
The Company markets and distributes its KLH products to biotechnology and pharmaceutical companies, academic institutions, and
clinical research organizations primarily in Europe, the United States, and Asia.
Management Plans
For the six months ended March
31, 2016 and 2015, the Company reported net losses of approximately $2.4 million and $1.8 million, respectively. The most significant
factor in the fluctuations in net income and losses relates to noncash changes in the fair value of warrant liability, which was
a loss of $0.2 million and gain of $1.2 million for the six months ended March 31, 2016 and 2015, respectively. As of March 31,
2016, the Company had an accumulated deficit of approximately $37.8 million and working capital of approximately $8.2 million.
In the past, operations of the
Company have primarily been funded by the issuance of common shares, exercise of warrants, grant revenues, contract services revenue,
and product sales. Management believes these financial resources are adequate to support the Company’s initiatives at the
current level for at least 12 months. Management is also continuing the ongoing effort toward expanding the customer base for existing
marketed products, and the Company may seek additional financing alternatives, including nondilutive financing through grants,
collaboration and licensing arrangements, additional equity financing and debt financing.
The accompanying condensed interim
consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue in
operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal
course of business.
Functional Currency
The condensed interim consolidated
financial statements of the Company are presented in U.S. dollars, unless otherwise stated, which is the Company’s functional
currency.
The accompanying unaudited condensed
interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. They do not include
all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in
conformity with U.S. GAAP for complete financial statements. These condensed interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report
on Form 10-K for the year ended September 30, 2015.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
The accompanying condensed interim
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Stellar Biotechnologies,
Inc. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management,
all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results
of operations for the period presented have been included in the interim period. Operating results for the six months ended March
31, 2016 are not necessarily indicative of the results that may be expected for other interim periods or the year ending September
30, 2016. The condensed interim consolidated financial data at September 30, 2015 is derived from audited financial statements
included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2015, as filed on December 14, 2015
with the SEC.
The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ from these estimates.
|
3.
|
Significant Accounting Policies
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606)
, as
amended by ASU 2015-14
to defer the effective date. ASU 2014-09 creates a new topic in the Accounting Standards Codification (“ASC”) Topic
606 and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over
time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about
revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40,
Other Assets and Deferred Costs: Contracts
with Customers
, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling
a contract with a customer that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public
entities for annual reporting periods beginning after December 15, 2017, including interim periods
within
those years
. Early application is only permitted as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period.
The
Company has not yet determined the impact of ASU 2014-09 on its consolidated financial statements.
In
August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity's Ability to Continue as a Going Concern
. ASU 2014-15
provides guidance on determining management's responsibility to evaluate whether there is substantial doubt about an organization's
ability to continue as a going concern and to provide related footnote disclosures. The guidance in ASU 2014-15 is effective for
annual reporting periods beginning after
December 15, 2016
, including interim periods
within those years with early application permitted.
The Company has not yet determined the impact of
ASU
2014-15 on its
consolidated
financial statements.
In July 2015, FASB issued ASU 2015-11,
Inventory
(Topic 330): Simplifying the Measurement of
Inventory
. ASU 2015-11 indicates that an entity should measure inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The ASU does not apply to inventory measured using LIFO or the retail inventory method. It does apply
to all other inventory, including inventory measured using FIFO or average cost. The guidance in ASU 2015-11 is effective for public
entities for annual reporting periods beginning after December 15, 2016, including interim periods
within
those years
. The provisions should be applied prospectively with early application permitted as of the beginning of an interim
or annual reporting period.
The Company has not yet determined
the impact of ASU 2015-11 on its consolidated financial statements.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
In January
2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities
, which
primarily affects the
accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements
for financial instruments. In addition,
ASU 2016-01
clarified
guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale debt securities
.
The guidance is effective for public entities
for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted.
The Company has not yet determined the impact of
ASU 2016-01 on its
consolidated
financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which establishes a new lease accounting model for lessees.
The updated guidance requires an entity to recognize assets and liabilities on the balance sheet arising from a lease for both
financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective
for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years, with early
adoption permitted.
The Company has not yet determined the impact of
ASU 2016-02 on its
consolidated
financial statements.
In
March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
that clarifies how to apply revenue recognition guidance related to whether an entity
is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or
services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08
is the same as the effective date of ASU 2014-09
as
amended by ASU 2015-14
,
for annual reporting periods beginning after December 15, 2017, including interim periods
within
those years.
The Company has not yet determined the impact of
ASU 2016-08 on its
consolidated
financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
, which is part of the FASB's Simplification Initiative. The updated guidance simplifies the accounting for
share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows
. The amended guidance is effective for
public entities for fiscal years beginning after December 15, 2016, including interim periods within those years, with early adoption
permitted.
The Company has not yet determined the impact of
ASU 2016-09 on its
consolidated
financial statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing
, which provides further guidance on identifying performance obligations and improves
the operability and understandability of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the
effective date of ASU 2014-09
as
amended by ASU
2015-14
,
for annual reporting periods beginning after December 15, 2017, including
interim periods
within those years.
The Company has not yet determined the impact
of
ASU 2016-10 on its
consolidated
financial
statements.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Short-term investments consisted of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
US Treasury Bills
|
|
$
|
1,999,162
|
|
|
$
|
-
|
|
Mutual fund debt securities
|
|
|
|
|
|
|
5,015,171
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,999,162
|
|
|
$
|
5,015,171
|
|
US Treasury Bills are carried at amortized cost which approximates fair value and classified as held-to-maturity
investments. Mutual fund debt securities are carried at fair value using level 1 inputs.
Raw materials include inventory
of manufacturing supplies. Work in process includes manufacturing supplies, direct and indirect labor, contracted manufacturing
and testing, and allocated manufacturing overhead for inventory in process at the end of the period. Finished goods include products
that are complete and available for sale. At March 31, 2016 and September 30, 2015, the Company recorded work in process and finished
goods inventory only for those products with recent sales levels to evaluate net realizable value.
Inventory consisted of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
34,141
|
|
|
$
|
42,549
|
|
Work in process
|
|
|
205,233
|
|
|
|
137,021
|
|
Finished goods
|
|
|
304,089
|
|
|
|
377,710
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
543,463
|
|
|
$
|
557,280
|
|
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
|
6.
|
Property, Plant and Equipment, net
|
Property, plant and equipment, net consisted of the
following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Aquaculture system
|
|
$
|
126,257
|
|
|
$
|
124,529
|
|
Laboratory facilities
|
|
|
62,033
|
|
|
|
62,033
|
|
Computer and office equipment
|
|
|
88,860
|
|
|
|
78,936
|
|
Tools and equipment
|
|
|
768,782
|
|
|
|
714,764
|
|
Vehicles
|
|
|
10,997
|
|
|
|
10,997
|
|
Leasehold improvements
|
|
|
210,066
|
|
|
|
123,562
|
|
|
|
|
1,266,995
|
|
|
|
1,114,821
|
|
Less: accumulated depreciation
|
|
|
(712,224
|
)
|
|
|
(643,492
|
)
|
|
|
|
|
|
|
|
|
|
Depreciable assets, net
|
|
|
554,771
|
|
|
|
471,329
|
|
Construction in progress
|
|
|
143,147
|
|
|
|
32,079
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
697,918
|
|
|
$
|
503,408
|
|
Depreciation expense amounted to $68,732 and $77,602
for the six months ended March 31, 2016 and 2015, respectively.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Operating leases
The Company leases three buildings
and facilities used in its operations under sublease agreements with the Oxnard Harbor District. In June 2015, the Company exercised
its option to extend these sublease agreements for an additional five-year term beginning in October and November 2015. The Company
negotiated an option to extend the leases for two additional five-year terms.
The Company leases facilities
used for executive offices and laboratories. The Company must pay a portion of the common area maintenance. In July 2014, the Company
exercised its option to extend this lease for a two-year term.
The Company leases undeveloped
land in Baja California, Mexico to assess the potential development of an additional aquaculture locale and expansion of production.
The lease term is three years from June 2015 with options to extend the lease for 30 years. The Company may terminate early with
30 days’ notice. The first two years of rent under the lease totaling $74,606 were prepaid in June 2015, and are not included
in the future minimum lease payments below. The Company has a related agreement with the lessor to collaborate on the design, expansion
and development of marine aquaculture resources and KLH production facilities on the leased property. Under that agreement, the
Company is responsible for certain leasehold improvements including construction of structures and a power-generating facility,
which will be owned by the Company. The Company will reimburse the lessor for local operational support. The collaboration agreement
expires in June 2018, unless terminated earlier.
Future minimum lease payments
are as follows:
|
|
March 31,
|
|
|
|
2016
|
|
For The Year Ending September 30,
|
|
|
|
|
2016
|
|
$
|
70,000
|
|
2017
|
|
|
143,000
|
|
2018
|
|
|
106,000
|
|
2019
|
|
|
106,000
|
|
2020
|
|
|
106,000
|
|
Thereafter
|
|
|
6,000
|
|
|
|
|
|
|
|
|
$
|
537,000
|
|
Rent expense on these lease
agreements amounted to approximately $116,000, and $91,000 for the six months ended March 31, 2016 and 2015, respectively.
Purchase obligations
The Company has commitments
totaling approximately $381,000 at March 31, 2016 for signed agreements with contract research organizations and consultants. The
Company also has agreements to pay time and materials to contractors, which are estimated at approximately $5,000 at March 31,
2016. All purchase obligations are expected to be fulfilled within the next 12 months.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Supply agreements
The Company has two commitments
under certain supply agreements with customers for fixed prices per gram on a non-exclusive basis except within that customer’s
field of use. One amended and restated supply agreement replaced two prior agreements that automatically renewed each year. This
agreement is effective March 2015 through March 2020 and is renewable for one-year terms upon written request of the customer.
The other customer supply agreement is effective October 2014 through October 2019 and is renewable for one-year terms upon written
request of the customer.
Licensing fees
In July 2013, the Company acquired
the exclusive, worldwide license to certain patented technology for the development of human immunotherapies against
Clostridium
difficile
infection (“C. diff”). The license agreement required an initial, non-refundable license fee of $25,000,
which was paid in fiscal August 2013, and payment of an aggregate of $200,000 in delayed license fees, which were paid in fiscal
August 2014. Beginning September 2014, the terms also require a license fee of $20,000 to be paid annually, creditable against
royalties due, if any. Royalties are payable for a percentage of related net sales, if any. License fees are also payable for a
percentage of related non-royalty sublicensing revenue, if any. No royalties have been incurred to date. The Company also reimbursed
patent filing costs of approximately $11,000 and $30,000 in the six months ended March 31, 2016 and 2015, respectively, and will
reimburse certain future patent filing, prosecution, and maintenance costs. License fees and patent cost reimbursements have been
accounted for as research and development expense in the accompanying condensed interim consolidated statements of operations.
The license agreement expires
when the last valid patent claim licensed under the license agreement expires, which is currently 2030. Prior to that time, the
license agreement can be terminated by the licensor upon certain conditions. The Company will have 30 days after written notice
from the licensor to cure the problem prior to termination of the license agreement. The Company can terminate the agreement with
three months’ prior written notice.
Upon execution of the license
agreement, the Company issued 37,120 common shares and warrants to purchase up to 27,840 of the Company’s common shares to
the licensor. The warrants expired on January 23, 2015 and were not exercised. The value of the shares and warrants were recorded
as research and development expense.
The license agreement provides
for the Company to pay up to an aggregate of $6,020,000 in milestone payments to the licensor upon achievement of various financing
and development targets up to the first regulatory approval. Remaining contingent milestone payments to the licensor totaling $57,025,000
are related to achievement of sales targets. A financing milestone was met during the year ended August 31, 2014, and accordingly,
the Company made a milestone payment of $100,000. No other milestones have been met to date and there can be no assurance that
any of the remaining milestones will be met in the future.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Retirement savings plan 401(k)
contributions
The Company sponsors a 401(k)
retirement savings plan that requires an annual non-elective safe harbor employer contribution of 3% of eligible employee wages.
All employees over 21 years of age are eligible beginning the first payroll after 3 consecutive months of employment. Employees
are 100% vested in employer contributions and in any voluntary employee contributions. Contributions to the 401(k) plan were approximately
$32,000 and $33,000 for the six months ended March 31, 2016 and 2015, respectively.
Related party commitments
Patent
r
oyalty agreement
On August 14, 2002, through
its California subsidiary, the Company entered into an agreement with a director and officer of the Company, whereby he would receive
royalty payments in exchange for assignment of his patent rights to the Company. The royalty is 5% of gross receipts from products
using this invention in excess of $500,000 annually. The Company’s current operations utilize this invention. Royalty expense
incurred during the six months ended March 31, 2016 was approximately $13,000. There was no royalty expense incurred during the
six months ended March 31, 2015.
Collaboration agreement
In December 2013, the Company
entered into a collaboration agreement with a privately-held Taiwanese biopharmaceuticals manufacturer which expired in December
2015. Under the terms of the agreement, the Company was responsible for the production and delivery of GMP grade KLH for evaluation
as a carrier molecule in the collaboration partner’s potential manufacture of OBI-822 active immunotherapy. The Company was
also responsible for method development, product formulation, and process qualification for certain KLH reference standards. The
collaboration partner was responsible for development objectives and product specifications. The agreement provided for the collaboration
partner to pay fees for certain expenses and costs associated with the collaboration. Subject to certain conditions and timing,
the collaboration also provided for the parties to negotiate a commercial supply agreement for Stellar KLH™ in the future.
However, there can be no assurance that any such negotiations will lead to successful execution of any further agreements related
to this collaboration.
The privately-held Taiwanese biopharmaceuticals manufacturer is a beneficial owner of over 5% of the Company’s
common shares. In addition, a member of the Company’s Board of Directors currently serves as the manufacturer’s general
manager and chair of its board of directors.
On September 2, 2015, the Company effected a share consolidation (reverse split) of the Company's common
shares at a ratio of 1-for-10. As a result of the reverse split, every ten shares of the issued and outstanding common shares,
without par value, consolidated into one newly-issued outstanding common share, without par value. Each fractional share remaining
after the reverse split that was less than one-half of a share was cancelled and each fractional share that was at least one-half
of a share was changed to one whole share. The reverse split reduced the number of common shares outstanding from 79,847,550 to
7,984,758 after fractional share rounding. The number of warrants, broker units, and options were proportionately adjusted by the
split ratio and the exercise prices correspondingly increased by the same split ratio. All historical shares and exercise prices
are presented on a post-split basis in these
condensed
interim consolidated financial statements.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
The Company
had the following transactions in share capital:
|
|
Six Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Number of common shares issued
|
|
|
464,000
|
|
|
|
12,680
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
$
|
1,368,260
|
|
|
$
|
938
|
|
Transfer to common shares on exercise of warrants
|
|
|
1,853,581
|
|
|
|
426
|
|
Proceeds from exercise of options
|
|
|
-
|
|
|
|
27,781
|
|
Transfer to common shares on exercise of options
|
|
|
-
|
|
|
|
27,619
|
|
Share-based compensation
|
|
|
167,329
|
|
|
|
198,927
|
|
Performance
shares
There were 1,000,000 common
shares allotted as performance shares to be issued to certain officers, directors and employees of the Company based on meeting
milestones related to completion of method development for commercial-scale manufacture of KLH, compilation and regulatory submittal
of all required chemistry, manufacturing and control data and completion of preclinical toxicity and immunogenicity testing of
products under a performance share plan. Share-based compensation was recorded over the estimated vesting period ending in August
2012.
At March 31, 2016, there are
383,838 performance shares reserved for issuance.
Black-Scholes option valuation
model
The Company uses the Black-Scholes
option valuation model to determine the fair value of warrants, broker units and share options. Option valuation models require
the input of highly subjective assumptions including the expected price volatility. The Company has used historical volatility
to estimate the volatility of the share price. Changes in the subjective input assumptions can materially affect the fair value
estimates, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s
warrants, broker units and share options.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Warrants
A summary of the Company’s warrants activity
is as follows:
|
|
Number of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance - September 30, 2015
|
|
|
1,022,761
|
|
|
|
CDN $12.12
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
|
CDN $ 4.00
|
|
Exercised
|
|
|
(424,000
|
)
|
|
|
CDN $ 4.00
|
|
Expired
|
|
|
(40,000
|
)
|
|
|
CDN $ 4.00
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2016
|
|
|
598,761
|
|
|
$
|
13.33
|
|
As a result of the exercise
and expiration of warrants in the quarter ended December 31, 2015, there are no outstanding warrants with exercise prices denominated
in Canadian dollars at March 31, 2016.
The weighted average contractual
life remaining on the outstanding warrants at March 31, 2016 is 5.4 months.
The following table summarizes information about
the outstanding warrants at March 31, 2016:
Exercise Price
|
Number of
Warrants
|
Expiry Date
|
|
|
|
|
|
$13.50
|
470,190
|
September 9, 2016
|
|
$10.50
|
20,000
|
September 9, 2016
|
Broker warrants
|
$13.50
|
95,238
|
September 20, 2016
|
|
$10.50
|
13,333
|
September 20, 2016
|
Broker warrants
|
|
|
|
|
|
598,761
|
|
|
Warrant liability
All warrants with exercise prices
denominated in Canadian dollars were exercised or expired. Therefore there is no outstanding warrant liability at March 31, 2016.
Equity offerings conducted by
the Company in prior years included the issuance of warrants with exercise prices denominated in Canadian dollars. The Company’s
functional currency is the U.S. dollar. As a result of having exercise prices denominated in other than the Company’s functional
currency, these warrants met the definition of derivatives and were therefore classified as derivative liabilities measured at
fair value with adjustments to fair value recognized through the consolidated statements of operations. As these warrants were
exercised, the fair value of the recorded warrant liability on date of exercise was included in common shares along with the proceeds
from the exercise. When these warrants expired, the related decrease in warrant liability was recognized in profit or loss, as
part of the change in fair value of warrant liability. There was no cash flow impact as a result of this accounting treatment.
The fair value of the warrants
was determined using the Black-Scholes option valuation model at the end of each reporting period. Upon exercise of the warrants,
the fair value of warrants included in derivative liabilities was reclassified to equity.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
The fair value of warrants exercised
was determined using the Black-Scholes option valuation model, using the following weighted average assumptions:
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
0.48
|
%
|
|
|
1.12
|
%
|
Expected life (years)
|
|
|
0.04
|
|
|
|
0.01
|
|
Expected share price volatility
|
|
|
92
|
%
|
|
|
97
|
%
|
The fair value of warrants granted
was determined using the Black-Scholes option valuation model, using the following weighted average assumptions:
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
Risk free interest rate
|
|
|
0.52
|
%
|
Expected life (years)
|
|
|
0.01
|
|
Expected share price volatility
|
|
|
91
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
There were no warrants granted
during the six months ended March 31, 2015.
Broker units
The Company granted broker units
as finders’ fees in conjunction with equity offerings in prior years. Broker units are fully vested when granted and allow
the holders to purchase equity units. Each unit consists of one common share and one warrant to purchase a common share.
A summary of broker units activity is as follows:
|
|
Number of
Units
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2015
|
|
|
46,600
|
|
|
|
CDN $ 2.50
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,000
|
)
|
|
|
CDN $ 2.50
|
|
Expired
|
|
|
(6,600
|
)
|
|
|
CDN $ 2.50
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
There were no broker units granted
during the six months ended March 31, 2016 and 2015.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
Options
The Company has a fixed share
option plan adopted in 2013 (the “Plan”) administered by the Board of Directors, which has the discretion to grant
up to an aggregate of 1,000,000 options. The exercise price of an option is set at the closing price of the Company’s common
shares on the date of grant. Share options granted to directors, officers, employees and consultants are subject to the following
vesting schedule:
|
(a)
|
One-third shall vest immediately;
|
|
(b)
|
One-third shall vest 12 months from the date of grant;
and
|
|
(c)
|
One-third shall vest 18 months from the date of grant.
|
Share options granted to investor
relations consultants vest over a period of not less than 12 months as to 25% on the date that is three months from the date of
grant, and a further 25% on each successive date that is three months from the date of the prior vesting.
Options have been granted under
the Plan allowing the holders to purchase common shares of the Company as follows:
|
|
Number of Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Balance - September 30, 2015
|
|
|
557,638
|
|
|
|
CDN $ 6.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
47,700
|
|
|
$
|
7.24
|
|
Expired
|
|
|
(6,667
|
)
|
|
$
|
18.30
|
|
Expired
|
|
|
(41,501
|
)
|
|
|
CDN $5.38
|
|
|
|
|
|
|
|
|
|
|
Balance - March 31, 2016
|
|
|
557,170
|
|
|
|
CDN $6.99
|
|
The weighted average contractual
life remaining on the outstanding options is 3 years.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
The following table summarizes
information about the options under the Plan outstanding and exercisable at March 31, 2016:
Number of Options
|
|
|
Exercisable at
March 31, 2016
|
|
|
Range of exercise prices
|
|
Expiry Dates
|
|
292,110
|
|
|
|
292,110
|
|
|
CDN$0.01 - 5.00
|
|
Apr 2017-Dec 2019
|
|
146,360
|
|
|
|
143,027
|
|
|
CDN$5.01 - 10.00
|
|
Oct 2017-Jun 2022
|
|
47,700
|
|
|
|
15,900
|
|
|
$5.01 - 10.00
|
|
Dec 2022
|
|
21,500
|
|
|
|
17,667
|
|
|
CDN$15.01 - 20.00
|
|
Nov 2018-Nov 2021
|
|
49,500
|
|
|
|
49,500
|
|
|
$15.01 - 20.00
|
|
Nov 2020
|
|
557,170
|
|
|
|
518,204
|
|
|
|
|
|
The estimated fair value of
the share options granted during the six months ended March 31, 2016 and 2015 was determined using a Black-Scholes option valuation
model with the following weighted average assumptions.
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
1.05
|
%
|
|
|
1.71
|
%
|
Expected life (years)
|
|
|
7
|
|
|
|
7
|
|
Expected share price volatility
|
|
|
108
|
%
|
|
|
116
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average fair value
of share options awarded during the six months ended March 31, 2016 and 2015 was CDN$9.42 and CDN$13.43, respectively.
As of March 31, 2016, the Company
had approximately $162,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period of
1.25 years.
The intrinsic value of the options
exercised during the six months ended March 31, 2015 was CDN$11.50. There were no options exercised during the six months ended
March 31, 2016. The intrinsic value of the vested options at March 31, 2016 was CDN$1.78.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
|
9.
|
Supplemental Disclosure of Cash Flow and Non-Cash
Transactions
|
Supplemental disclosure of cash
flow information follows:
|
|
Six Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
7,200
|
|
|
$
|
18,800
|
|
Supplemental disclosure of noncash
financing and investing activities follows:
|
|
Six Months Ended
|
|
|
|
March 31
|
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Transfer to common shares on exercise of warrants
|
|
$
|
1,853,581
|
|
|
$
|
426
|
|
Transfer to common shares on exercise of options
|
|
|
-
|
|
|
|
27,619
|
|
|
10.
|
Fair Value of Financial Instruments
|
The Company uses the fair value
measurement framework for valuing financial assets and liabilities measured on a recurring basis in situations where other accounting
pronouncements either permit or require fair value measurements.
Fair value of a financial instrument
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The carrying value of certain financial instruments such as accounts receivable, short-term investments
in US Treasury Bills, accounts payable, accrued liabilities, and deferred revenue approximates fair value due to the short-term
nature of such instruments.
The Company follows the fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. There are three levels of inputs that may be used to measure fair value:
|
Level 1:
|
Quoted prices in active markets for identical or similar assets and liabilities.
|
|
Level 2:
|
Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.
|
|
Level 3:
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
The Company records its short-term
investments in mutual fund debt securities at fair value using Level 1 inputs in the fair value hierarchy. The Company records
its warrant liability at fair value using Level 2 inputs using the Black-Scholes option valuation model and assumptions disclosed
in Note 8.
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
The following table summarizes
fair values for those assets and liabilities with fair value measured on a recurring basis. There are no short-term investments
in mutual fund debt securities or warrant liability at March 31, 2016.
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Instruments (Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in
mutual fund debt securities
|
|
$
|
5,015,171
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,015,171
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability, current portion
|
|
|
-
|
|
|
|
1,550,630
|
|
|
|
-
|
|
|
|
1,550,630
|
|
|
11.
|
Concentrations of Credit Risk
|
Credit risk is the risk of an
unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments
that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents, mutual fund
debt securities and accounts receivable. The Company estimates its maximum credit risk at the amount recorded on the balance sheet.
Management’s assessment
of the Company’s credit risk for cash and cash equivalents is low as they are held in major financial institutions believed
to be credit worthy and US Treasury Bills with an original maturity of 90 days or less. The Company limits its exposure to credit
loss for short-term investments by using US Treasury Bills with an original maturity of over 90 days and a mutual fund that invests
in high-quality, U.S. dollar-denominated short-term fixed-, floating- and variable-rate debt securities that have received either
a minimum short-term rating of at least A-1 (or its equivalent) or a minimum long-term rating of A minus (or its equivalent), by
one or more Nationally Recognized Statistical Ratings Organizations, or, if unrated, that are deemed by the fund to be of comparable
quality at the time of purchase. Based on credit monitoring and history, the Company considers the risk of credit losses due to
customer non-performance on accounts receivable to be low.
The Company had the following
concentrations of revenues by customers:
|
|
|
Six Months Ended
|
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Product sales and contract services revenue
|
|
|
90% from 5 customers
|
|
|
|
82% from 3 customers
|
|
Stellar Biotechnologies, Inc.
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
(Expressed in U.S. Dollars)
The Company had the following
concentrations of revenues by geographic areas:
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Europe
|
|
|
45
|
%
|
|
|
33
|
%
|
Asia
|
|
|
39
|
%
|
|
|
55
|
%
|
U.S.
|
|
|
16
|
%
|
|
|
12
|
%
|
The Company had the following
concentrations of accounts receivable:
|
|
|
Six Months Ended
|
|
|
|
Year Ended
|
|
|
|
|
March 31,
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
80% from 2 customers
|
|
|
|
91% from 2 customers
|
|
Certain reclassifications have been made to the prior
period to conform with the current period’s presentation. These include the Company’s reclassification of a mutual
fund investing in short-term debt securities from cash equivalents to short-term investments and reclassification of costs related
to aquaculture to present such costs separately from costs of sales and contract services. There was no impact on total assets,
total shareholders’ equity, accumulated deficit, total expenses or net income (loss) resulting from these reclassifications.
The statement of cash flows reflects the mutual fund activity as cash flows from investing activities rather than changes in cash.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following management’s discussion
and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed interim
consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q as of March
31, 2016 and our audited consolidated financial statements for the year ended September 30, 2015 included in our Annual Report
on Form 10-K, filed with the Securities and Exchange Commission on December 14, 2015.
This Quarterly Report on Form 10-Q contains
forward-looking statements. When used in this report, the words “expects,” “anticipates,” “suggests,”
“believes,” “intends,” “estimates,” “plans,” “projects,” “continue,”
“ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,”
“may,” “will,” “should,” “could,” “would” and similar expressions are
intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual
results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks
described in this report, the risks described in our Annual Report on Form 10-K for the year ended September 30, 2015 and other
reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking
statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update
any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes
in our expectations, except as required by law.
The discussion and analysis of our financial
condition and results of operations are based on our unaudited condensed interim consolidated financial statements as of March
31, 2016 and September 30, 2015, and for the six months ended March 31, 2016 and 2015 included in Part I, Item 1 of this Quarterly
Report on Form 10-Q, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of
these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues
and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described
in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or
conditions.
Overview
Stellar Biotechnologies, Inc. (“Stellar,”
the “Company,” “we,” “our” and “us”) is a biotechnology company engaged in the
aquaculture, research and development, manufacture and commercialization of Keyhole Limpet Hemocyanin, or KLH, protein. KLH is
a high molecular weight, immune-stimulating protein with an extensive history (over 40 years) of safe and effective use in immunological
applications.
KLH can be used as an active pharmaceutical
ingredient (“API”) and combined with a disease-targeting agent to create immunotherapies targeting cancer, immune disorders,
Alzheimer’s disease, and inflammatory diseases, or it can be used as a finished, injectable product in the immunodiagnostic
market for measuring immune response in patients and research settings. Our mission is to become the world leader in the sustainable
manufacture of KLH and use our unique, proprietary methods and intellectual property to serve the growing demand for KLH in immunotherapeutic
and immunodiagnostic markets.
Voluntary Delisting from TSX Venture Exchange
At our request, our common shares were
voluntarily delisted from the TSX Venture Exchange (the “TSX-V”) in Canada and were no longer trading on the TSX-V
as of the close of business on April 8, 2016.
Significant Accounting Policies and Estimates
For a discussion of our significant accounting policies and estimates, refer to Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2015, as filed with the Securities and Exchange Commission (the “SEC”) on December 14, 2015.
There are no material changes in our significant accounting policies and estimates from the disclosure provided in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2015.
Results of Operations
Comparison of Six Months Ended March 31, 2016 and 2015
Our net loss was $2,490,813, or $0.30 loss
per basic share, for the six months ended March 31, 2016 compared to $1,769,641, or $0.22 loss per basic share, for the six months
ended March 31, 2015. The increase in net loss was primarily due to fluctuations in noncash gain/loss in fair value of warrant
liability.
Total revenues were $814,495 and $400,228
for the six months ended March 31, 2016 and 2015, respectively. The increase in revenues for the six months ended March 31, 2016
was due to greater product sales volume including sales under supply agreements and custom manufactured products. Our product sales
were $782,495 and 295,288 for the six months ended March 31, 2016 and 2015, respectively. Contract services revenue was $32,000
for the six months ended March 31, 2016, as compared to $105,000 in the for the six months ended March 31, 2015. The decrease over
the prior period was due to the successful conclusion of a collaboration agreement mid-December 2015 and completion of services
related to a supply agreement in December 2014.
Total expenses were $3,217,792 and $2,915,336
for the six months ended March 31, 2016 and 2015, respectively. Costs of sales and contract services were $580,964 and $339,040
for the six months ended March 31, 2016 and 2015, respectively. Our research and development expenses were $597,911 for the six
months ended March 31, 2016, as compared to $700,405 for the six months ended March 31, 2015. The decrease over the prior period
was a result of the continued realignment of our focus from internal research and process development to manufacturing our Stellar
KLH™ products in response to increased customer demand, and was partially offset by increased costs related to our aquaculture
feasibility assessment in Baja Mexico. Our administration expenses were $1,874,755 for the six months ended March 31, 2016, as
compared to $1,727,834 for the six months ended March 31, 2015. The increase over the prior period resulted from a combination
of increased corporate expenses, including our Nasdaq listing fees; compensation increases; and increased investor relations activity;
partially offset by a reduction in business development travel and decreased share based compensation, which is affected by the
timing of option grants and assumptions used in the valuation model.
Other income (loss) was an overall loss of $80,316 for the six months ended March 31, 2016, as compared
to a gain of $764,207 for the six months ended March 31, 2015. The change in the six months ended March 31, 2016 as compared to
the prior period resulted primarily from the noncash gain/loss in fair value of warrant liability, which fluctuated to a loss of
$211,956 for the six months ended March 31, 2016 from a gain of $1,201,332 in the prior period. These fair value gains and losses
occur in inverse relation to changes in our share price that affect the valuation model. This increased loss was partially offset
by a foreign exchange gain of $117,636 for the six months ended March 31, 2016, as compared to a foreign exchange loss of $468,658
for the six months ended March 31, 2015. The change was due primarily to favorable exchange rates for our Canadian cash and cash
equivalents. The portion of foreign exchange loss realized in cash was $12,141 and $7,968 for the six months ended March 31, 2016
and 2015, respectively.
Comparison of Three Months Ended March 31, 2016 and 2015
Our net loss was $861,010, or $0.10 loss
per basic share, for the three months ended March 31, 2016 compared to $426,164, or $0.05 loss per basic share, for the three months
ended March 31, 2015. The increase in net loss over the prior period was primarily due to fluctuations in noncash gain/loss in
fair value of warrant liability and noncash foreign exchange gain/loss.
Total revenues were $326,335 and $187,627 for the three months ended March 31, 2016 and 2015, respectively.
The increase in revenues for the three months ended March 31, 2016 was due to an increase in customers and greater product sales
volume including sales under supply agreements. Our product sales were $326,335 and $142,627 for the three months ended March 31,
2016 and 2015, respectively.
Total expenses were $1,422,278 and $1,377,261
for the three months ended March 31, 2016 and 2015, respectively. Costs of sales and contract services were $268,901 and $243,115
for the three months ended March 31, 2016 and 2015, respectively. These costs did not increase as much as revenues because we have
indirect manufacturing costs that are incurred regardless of product sales levels. Our research and development expenses were $309,062
for the three months ended March 31, 2016, as compared to $281,584 for the three months ended March 31, 2015. The increase over
the prior period was a result of increased costs related to our aquaculture feasibility assessment in Baja Mexico and the completion
of contract services under our collaboration agreement, resulting in higher costs incurred by internal research. The increase was
partially offset by the continued reassignment of some staff from internal research and process development to manufacturing in
response to increased customer demand. Our administration expenses were $765,066 for the three months ended March 31, 2016, as
compared to $785,681 for the three months ended March 31, 2015. The decrease over the prior period resulted from decreased corporate
expenses and share based compensation.
Other income (loss) was an overall gain of $234,933 for the three months ended March 31, 2016, as compared
to a gain of $772,470 for the three months ended March 31, 2015. The decrease in overall gain resulted primarily from the noncash
gain/loss in fair value of warrant liability, which had no activity for the three months ended March 31, 2016 from a gain of $1,061,776
in the prior period. These fair value gains and losses occur in inverse relation to changes in our share price that affect the
valuation model. This increase was partially offset by a foreign exchange gain of $226,764 for the three months ended March 31,
2016, as compared to a foreign exchange loss of $307,546 for the three months ended March 31, 2015. The change was due primarily
to favorable exchange rates for our Canadian cash and cash equivalents. The portion of foreign exchange loss realized in cash was
$679 and $6,125 for the three months ended March 31, 2016 and 2015, respectively.
Capital Expenditures
Our capital expenditures, which primarily
consist of scientific, manufacturing, and aquaculture equipment, and facility leasehold improvements for the six months ended March
31, 2016 and 2015 are as follows:
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
Assets Acquired
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
152,170
|
|
|
$
|
57,964
|
|
Construction in progress
|
|
|
111,068
|
|
|
|
-
|
|
Liquidity and Capital Resources
Our working capital position at March 31, 2016 was $8,099,383, including cash and cash equivalents of
$5,961,727 and short-term investments of $1,999,162. Management believes the current working capital is sufficient to meet our
present requirements, including all contractual obligations and anticipated research and development expenditures for at least
the next 12 months. We expect to finance our future expenditures and obligations through revenues from product sales, contract
services income, grant revenues, and sales of common shares. We expect to continue incurring losses for the foreseeable future
and may need to raise additional capital to pursue our business plan and continue as a going concern. We cannot provide any assurances
that we will be able to raise additional capital. Our management believes that we have access to capital resources through possible
public or private equity offerings, debt financings, corporate collaborations or other means, if needed; however, we have not secured
any commitment for new financing at this time, nor can we provide any assurance that new financing will be available on commercially
acceptable terms, if needed.
Six Months Ended March 31, 2016
Our working capital was $8,099,383 as of
March 31, 2016, compared to working capital of $7,485,971 as of September 30, 2015. Working capital was reduced by the noncash
current portion of our warrant liability in the amount of $1,550,630 at September 30, 2015. Because all warrants with Canadian
dollar exercise prices have been exercised or expired, there was no warrant liability at March 31, 2016.
Our cash and cash equivalents totaled $5,961,727
at March 31, 2016, compared to cash and cash equivalents of $3,955,503 at September 30, 2015, which represented an increase of
$2,006,224 over the six month period. Our short-term investments totaled $1,999,162 at March 31, 2016, compared to short-term investments
of $5,015,171 at September 30, 2015, which represented a decrease of $3,016,009 over the six month period.
During the six months ended March 31, 2016,
operating activities used cash of $2,247,526. Items not affecting cash included: depreciation and amortization of $68,732; share-based
compensation related to the issuance and vesting of stock options of $167,329; unrealized foreign exchange gain of $117,636; and
loss in fair value of warrant liability of $211,956 due to the adjustment to the fair value of warrants previously issued. Changes
in noncash working capital items include a decrease in accounts receivable of $147,209; decrease in inventory of $13,817; increase
in prepaid expenses of $34,907; decrease in deposits of $560; and decrease in accounts payable and accrued liabilities of $213,773.
Investing activities provided cash of $2,752,767. The acquisition of property, plant and equipment used
cash of $263,242 related to improvements in manufacturing and aquaculture facilities. Purchase of short-term investments in US
Treasury Bills used cash of $2,005,818. Sales of short-term investments in mutual fund debt securities provided cash of $5,021,827.
The effect of fluctuations in exchange rates on cash and cash equivalents was an increase of $132,723 due to an improvement in
the Canadian dollar relative to the U.S. dollar.
Financing activities provided cash of $1,368,260
related to proceeds from the exercise of warrants, broker units and options. As a result of such exercises, 464,000 common shares
were issued during the period.
Six Months Ended March 31, 2015
Our working capital was $8,538,408 as of March 31, 2015, as compared to working capital of $13,751,301
as of September 30, 2014. Working capital was reduced by the noncash current portion of our warrant liability in the amount of
$2,489,934 and $460 at March 31, 2015 and September 30, 2014, respectively.
Our cash and cash equivalents totaled $6,137,022
at March 31, 2015, compared to cash and cash equivalents of $8,768,459 at September 30, 2014, which represented a decrease of $2,631,437.
Our short-term investments totaled $5,008,533 at March 31, 2015, as compared to short-term investments of $5,450,126 at September
30, 2014, which represented a decrease of $441,593 over the six month period.
During the six months ended March 31, 2015,
operating activities used cash of $2,581,458. Items not affecting cash included: depreciation and amortization of $77,602; share-based
compensation related to the issuance and vesting of stock options of $198,927; unrealized foreign exchange loss of $468,658; and
gain in fair value of warrant liability of $1,201,332 due to the adjustment to the fair value of warrants previously issued. Changes
in non-cash working capital items include a decrease in accounts receivable of $26,867; increase in inventory related to custom
manufacturing orders in process of $100,260; increase in prepaid expenses of $27,037; decrease in accounts payable and accrued
liabilities of $168,575; and decrease in deferred revenue of $86,667.
Investing activities provided cash of $360,080.
The acquisition of property, plant and equipment used cash of $57,694. Purchase of short-term investments used cash of $7,039.
Proceeds on maturities of short-term investments provided cash of $424,813. The effect of exchange rate changes on cash and cash
equivalents was a reduction of $438,778 due to a decline in Canadian dollars relative to U.S. dollars.
Financing activities provided cash of $28,719
related to proceeds from the exercise of warrants, broker units and options. As a result of such exercises, 12,680 common shares
were issued during the period.
Geographic Concentrations
The geographic markets of our customers
are principally Europe, the United States and Asia. We had the following concentrations of revenues by geographic areas:
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Europe
|
|
|
45
|
%
|
|
|
33
|
%
|
Asia
|
|
|
39
|
%
|
|
|
55
|
%
|
U.S.
|
|
|
16
|
%
|
|
|
12
|
%
|
Research and Development
Our core business is developing and commercializing
Keyhole Limpet Hemocyanin for use in immunotherapy and immunodiagnostic applications. Our internal research includes, among other
activities, continual improvement of methods for the culture and growth of Giant Keyhole Limpet, innovations in aquaculture systems
and infrastructure, biophysical and biochemical characterization of the KLH molecule, analytical processes to enhance performance
of our products, KLH manufacturing process improvements, new KLH formulations, and early development of potential new KLH-based
immunotherapies. However, from time to time we may engage in non-related research and development activities as opportunities arise.
Research and development costs, including
materials and salaries of employees directly involved in research and development efforts, are expensed as incurred.
The following table includes our research
and development costs for each of the six months ended March 31, 2016 and 2015:
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
597,911
|
|
|
$
|
700,405
|
|
The decrease in research and development expense over the prior
period was a result of the continued realignment of our focus from internal research and process development to manufacturing our
Stellar KLH™ products in response to increased customer demand, and was partially offset by increased costs related to our
aquaculture feasibility assessment in Baja Mexico
Disclosure of Contractual Obligations
We lease three buildings and facilities
used in our operations under sublease agreements with the Oxnard Harbor District. In June 2015, we exercised our option to extend
these sublease agreements for an additional five-year term beginning in October and November 2015. We negotiated an option to extend
the leases for two additional five-year terms.
We lease facilities used for executive
offices and laboratories, and we must pay a portion of the common area maintenance. In July 2014, we exercised our option to extend
this lease for a two-year term.
We lease undeveloped land in Baja California,
Mexico to assess the potential development of an additional aquaculture locale and expansion of production. The lease term is three
years beginning June 2015, with an option to extend for 30 years if we proceed with site development. We may terminate the lease
early upon 30 days’ notice. Under a related collaboration agreement, we are responsible for certain improvements to the leased
undeveloped land, and for reimbursement to the lessor for local operational support. The collaboration agreement expires in June
2018, unless terminated earlier.
We have purchase commitments for contract
research organizations, consultants and contractors.
There have been no material changes in
our contractual obligations previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015,
as filed with the SEC on December 14, 2015.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements,
including unrecorded derivative instruments, that have or are reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources.