The accompanying notes are an integral part of these condensed
interim consolidated financial statements.
The accompanying
notes are an integral part of these condensed interim consolidated financial statements.
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 nine months ended June
30, 2016 and 2015, the Company reported net losses of approximately $3.7 million and $1.3 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 $2.5 million for the nine months ended June 30, 2016 and 2015, respectively. As of June 30,
2016, the Company had an accumulated deficit of approximately $39 million and working capital of approximately $6.9 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.
Reverse Share Split
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.
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 nine months
ended June 30, 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”). 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. Subsequently, the FASB has
issued the following standards related to ASU 2014-09: ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Considerations
(“ASU 2016-08”); ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing
(“ASU 2016-10”); and ASU No. 2016-12,
Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”). The Company must
adopt ASU 2016-08, ASU 2016-10 and ASU 2016-12 with ASU 2014-09 (collectively, the “new revenue standards”).
The
Company has not yet determined the impact of ASU 2014-09 and the new revenue standards 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”)
.
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”). 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
(“ASU 2016-01”), 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)
(“ASU 2016-02”), 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 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
(“ASU 2016-09”), 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
May 2016, the FASB issued ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of
SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 (“ASU 2016-11”)
, which rescinds certain
SEC paragraphs from the FASB Accounting Standards Codification in response to SEC staff announcements at the March 3, 2016 Emerging
Issues Task Force meeting, and which supersedes certain SEC observer comments on the topics of revenue and expense recognition
for freight service in process, accounting for shipping and handling fees and costs, accounting for consideration given by a vendor
to a customer and accounting for gas-balancing arrangements upon the adoption of ASU 2014-09. The effective date for ASU 2016-11
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 2016-11 on its
consolidated
financial statements.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
(“ASU 2016-13”), which includes provisions that require financial assets measured at amortized cost
basis to be presented at the net amount expected to be collected and credit losses relating to available-for-sale debt securities
to be recorded through an allowance for credit losses, which requires recognition of an estimate of all current expected credit
losses. The guidance is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods
within those years, with early adoption permitted for fiscal years beginning after December 15, 2018.
The Company has not
yet determined the impact of
ASU 2016-13 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:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$
|
1,999,081
|
|
|
$
|
-
|
|
Mutual fund debt securities
|
|
|
|
|
|
|
5,015,171
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,999,081
|
|
|
$
|
5,015,171
|
|
U.S. 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 June 30, 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:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
58,724
|
|
|
$
|
42,549
|
|
Work in process
|
|
|
24,276
|
|
|
|
137,021
|
|
Finished goods
|
|
|
485,698
|
|
|
|
377,710
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
568,698
|
|
|
$
|
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:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Aquaculture system
|
|
$
|
126,257
|
|
|
$
|
124,529
|
|
Laboratory facilities
|
|
|
62,033
|
|
|
|
62,033
|
|
Computer and office equipment
|
|
|
100,799
|
|
|
|
78,936
|
|
Tools and equipment
|
|
|
794,434
|
|
|
|
714,764
|
|
Vehicles
|
|
|
10,997
|
|
|
|
10,997
|
|
Leasehold improvements
|
|
|
259,258
|
|
|
|
123,562
|
|
|
|
|
1,353,778
|
|
|
|
1,114,821
|
|
Less: accumulated depreciation
|
|
|
(750,204
|
)
|
|
|
(643,492
|
)
|
|
|
|
|
|
|
|
|
|
Depreciable assets, net
|
|
|
603,574
|
|
|
|
471,329
|
|
Construction in progress
|
|
|
87,980
|
|
|
|
32,079
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
691,554
|
|
|
$
|
503,408
|
|
Depreciation and amortization expense amounted to
$106,712 and $119,410 for the nine months ended June 30, 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 2016, the Company
extended this lease for a two-year term, with three options to renew for successive two-year terms.
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:
|
|
June 30,
|
|
|
|
2016
|
|
For The Year Ending September
30,
|
|
|
|
|
2016
|
|
$
|
44,000
|
|
2017
|
|
|
143,000
|
|
2018
|
|
|
106,000
|
|
2019
|
|
|
106,000
|
|
2020
|
|
|
106,000
|
|
Thereafter
|
|
|
6,000
|
|
|
|
|
|
|
|
|
$
|
511,000
|
|
Rent expense on these lease
agreements amounted to approximately $176,000, and $137,000 for the nine months ended June 30, 2016 and 2015, respectively.
Purchase obligations
The Company has commitments
totaling approximately $340,000 at June 30, 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 June 30, 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 of KLH 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.
Joint venture agreement
In May 2016, the Company entered
into a joint venture agreement with another party for the formation of a joint venture company to manufacture and sell conjugated
therapeutic vaccines. The joint venture is organized as a French simplified corporation.
The Company holds a 30% equity
interest in the joint venture in exchange for an initial capital contribution of €120,000. One-half of the initial contribution,
approximately $67,000, was paid prior to June 30, 2016 with the balance due upon the occurrence of certain defined future events.
The Company will also provide the joint venture additional financing as may be required, on a 30% pro rata basis. If the joint
venture does not achieve certain milestones by December 2017, the joint venture will be dissolved, unless (i) the parties mutually
agree to pursue the joint venture arrangement, or (ii) either party decides to purchase the equity interests of the other party.
Each of the parties is entitled, upon the occurrence of certain defined events, to acquire the interest of the other party.
In connection with the formation
of the joint venture and the performance of its goals and projects, the parties and the joint venture agreed to enter into (a)
an exclusive supply agreement within a limited field of use for the Company to supply KLH to the joint venture, (b) a supply agreement
designating the joint venture as the exclusive manufacturer and supplier of the other party’s vaccines, and (c) services
agreements for the provision of various knowledge and expertise by each of the parties to the joint venture. The other party will
also license certain of its intellectual property to the joint venture. The supply agreements, service agreement and license have
not yet been executed at June 30, 2016.
The joint venture has an initial
ten-year term, renewable for successive five-year terms. If either party provides notice at least six months prior to the expiration
date of an applicable term that it does not wish to continue the joint venture transaction, the other party will have a right to
acquire all of such terminating party’s equity interests in the joint venture.
The joint venture agreement
contains customary restrictions on transfer of the equity interests, tag-along and drag-along rights, non-competition, non-solicitation,
confidentiality and termination provisions.
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 $50,000 in the nine months ended June 30, 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
$46,000 and $45,000 for the nine months ended June 30, 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 nine months ended June 30, 2016 was approximately $28,000. There was no royalty expense incurred during the
nine months ended June 30, 2015.
Collaboration agreement
In December 2013, the Company
entered into a collaboration agreement with a privately-held Taiwanese biopharmaceuticals manufacturer which expired in accordance
with its terms 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.
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:
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
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
|
|
|
209,781
|
|
|
|
244,781
|
|
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 June 30, 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 - June 30, 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 June 30, 2016.
The weighted average contractual
life remaining on the outstanding warrants at June 30, 2016 is 2.4 months.
The following table summarizes information about
the outstanding warrants at June 30, 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 June 30, 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:
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
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:
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
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 nine months ended June 30, 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 - June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
There were no broker units granted
during the nine months ended June 30, 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
|
|
|
(42,501
|
)
|
|
|
CDN $5.37
|
|
|
|
|
|
|
|
|
|
|
Balance - June 30, 2016
|
|
|
556,170
|
|
|
$
|
5.37
|
|
The weighted average contractual
life remaining on the outstanding options is 2.75 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 June 30, 2016:
Number of Options
|
|
|
Exercisable at
June 30, 2016
|
|
|
Range of exercise prices
|
|
Expiry Dates
|
|
291,610
|
|
|
|
291,610
|
|
|
CDN$0.01 - 5.00
|
|
Apr 2017-Dec 2019
|
|
145,860
|
|
|
|
144,193
|
|
|
CDN$5.01 - 10.00
|
|
Oct 2017-Jun 2022
|
|
47,700
|
|
|
|
15,900
|
|
|
$5.01 - 10.00
|
|
Dec 2022
|
|
21,500
|
|
|
|
21,500
|
|
|
CDN$15.01 - 20.00
|
|
Nov 2018-Nov 2021
|
|
49,500
|
|
|
|
49,500
|
|
|
$15.01 - 20.00
|
|
Nov 2020
|
|
556,170
|
|
|
|
522,703
|
|
|
|
|
|
The estimated fair value of
the share options granted during the nine months ended June 30, 2016 and 2015 was determined using a Black-Scholes option valuation
model with the following weighted average assumptions.
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
1.05
|
%
|
|
|
1.65
|
%
|
Expected life (years)
|
|
|
7.00
|
|
|
|
7.00
|
|
Expected share price volatility
|
|
|
108
|
%
|
|
|
115
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average fair value
of share options awarded during the nine months ended June 30, 2016 and 2015 was $7.08 and $9.76, respectively.
As of June 30, 2016, the Company
had approximately $121,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period of
1 year.
The intrinsic value of the options
exercised during the nine months ended June 30, 2015 was $9.59. There were no options exercised during the nine months ended June
30, 2016. The intrinsic value of the vested options at June 30, 2016 was $0.75.
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:
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
7,200
|
|
|
$
|
27,800
|
|
Supplemental disclosure of
noncash financing and investing activities follows:
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
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 U.S. 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 June 30, 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 U.S. 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 U.S. 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:
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Product sales and contract services revenue
|
|
|
91% from 5 customers
|
|
|
|
67% 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:
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Europe
|
|
|
55
|
%
|
|
|
43
|
%
|
Asia
|
|
|
32
|
%
|
|
|
47
|
%
|
U.S.
|
|
|
13
|
%
|
|
|
10
|
%
|
The Company had the following
concentrations of accounts receivable:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
82% 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.
On June 30, 2016, the Company entered into Securities
Purchase Agreements with certain institutional investors providing for the issuance and sale by the Company of an aggregate
of 1,687,500 of the Company’s common shares, no par value, at a price of $4.00 per share in a registered direct offering. In
a concurrent private placement, the Company agreed to sell to such investors warrants to purchase up to an aggregate of 1,265,625
Common Shares with an exercise price of $4.50 per share. The transaction closed on July 6, 2016 with total gross proceeds of $6,750,000,
placement agent fees of $422,500 and issuance costs of approximately $270,000 for approximate net proceeds of $6,000,000.