Item 1. Financial Statements.
Stellar Biotechnologies, Inc.
Condensed Interim Consolidated Balance Sheets
(Unaudited)
(Expressed in U.S. Dollars )
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,885,409
|
|
|
$
|
7,416,904
|
|
Accounts receivable
|
|
|
12,929
|
|
|
|
85,813
|
|
Short-term investments
|
|
|
3,993,598
|
|
|
|
3,988,794
|
|
Inventory
|
|
|
329,583
|
|
|
|
249,430
|
|
Prepaid expenses
|
|
|
368,431
|
|
|
|
358,714
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
10,589,950
|
|
|
|
12,099,655
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment in joint venture
|
|
|
66,695
|
|
|
|
66,695
|
|
Property, plant and equipment, net
|
|
|
795,068
|
|
|
|
756,114
|
|
Deposits
|
|
|
15,340
|
|
|
|
15,340
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
877,103
|
|
|
|
838,149
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,467,053
|
|
|
$
|
12,937,804
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
602,123
|
|
|
$
|
623,644
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
602,123
|
|
|
|
623,644
|
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common shares, unlimited common shares authorized, no par value, 10,136,258 issued and
outstanding at December 31, 2016 and
September 30, 2016
|
|
|
47,280,792
|
|
|
|
47,280,792
|
|
Accumulated share-based compensation
|
|
|
5,431,205
|
|
|
|
5,394,763
|
|
Accumulated deficit
|
|
|
(41,847,067
|
)
|
|
|
(40,361,395
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
10,864,930
|
|
|
|
12,314,160
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
11,467,053
|
|
|
$
|
12,937,804
|
|
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
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
141,856
|
|
|
$
|
456,160
|
|
Contract services revenue
|
|
|
-
|
|
|
|
32,000
|
|
|
|
|
141,856
|
|
|
|
488,160
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Costs of sales and contract services
|
|
|
78,565
|
|
|
|
312,063
|
|
Costs of aquaculture
|
|
|
84,835
|
|
|
|
84,913
|
|
Research and development
|
|
|
460,865
|
|
|
|
288,849
|
|
General and administrative
|
|
|
932,067
|
|
|
|
1,109,689
|
|
|
|
|
1,556,332
|
|
|
|
1,795,514
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(1,414,476
|
)
|
|
|
(1,307,354
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
Foreign exchange loss
|
|
|
(77,390
|
)
|
|
|
(109,128
|
)
|
Loss in fair value of warrant liability
|
|
|
-
|
|
|
|
(211,956
|
)
|
Investment income
|
|
|
6,994
|
|
|
|
5,835
|
|
|
|
|
(70,396
|
)
|
|
|
(315,249
|
)
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax
|
|
|
(1,484,872
|
)
|
|
|
(1,622,603
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
800
|
|
|
|
7,200
|
|
Net Loss
|
|
$
|
(1,485,672
|
)
|
|
$
|
(1,629,803
|
)
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,136,258
|
|
|
|
8,373,323
|
|
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 )
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash Flows Used In Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,485,672
|
)
|
|
$
|
(1,629,803
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
45,470
|
|
|
|
32,386
|
|
Share-based compensation
|
|
|
36,442
|
|
|
|
124,496
|
|
Foreign exchange loss
|
|
|
77,390
|
|
|
|
109,128
|
|
Loss in fair value of warrant liability
|
|
|
-
|
|
|
|
211,956
|
|
|
|
|
|
|
|
|
|
|
Changes in working capital items:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
72,666
|
|
|
|
121,945
|
|
Inventory
|
|
|
(80,153
|
)
|
|
|
29,322
|
|
Prepaid expenses
|
|
|
(9,885
|
)
|
|
|
(67,718
|
)
|
Accounts payable and accrued liabilities
|
|
|
(21,292
|
)
|
|
|
67,076
|
|
Deferred revenue
|
|
|
-
|
|
|
|
(173,333
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,365,034
|
)
|
|
|
(1,174,545
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(84,424
|
)
|
|
|
(175,019
|
)
|
Purchase of short-term investments
|
|
|
(4,804
|
)
|
|
|
(1,629
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(89,228
|
)
|
|
|
(176,648
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants and options
|
|
|
-
|
|
|
|
1,368,260
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
1,368,260
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(77,233
|
)
|
|
|
(85,020
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,531,495
|
)
|
|
|
(67,953
|
)
|
Cash and cash equivalents - beginning of period
|
|
|
7,416,904
|
|
|
|
3,955,503
|
|
Cash and cash equivalents - end of period
|
|
$
|
5,885,409
|
|
|
$
|
3,887,550
|
|
|
|
|
|
|
|
|
|
|
Cash (demand deposits)
|
|
$
|
4,549,089
|
|
|
$
|
3,887,550
|
|
Cash equivalents
|
|
|
1,336,320
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,885,409
|
|
|
$
|
3,887,550
|
|
Supplemental disclosure of non-cash transactions
(Note 9)
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)
|
1. Nature of Operations
Stellar Biotechnologies, Inc.
(the “Company”) is organized under the laws of British Columbia, Canada. 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, Asia, and the United States. The Company’s common shares have been listed for trading on The Nasdaq
Capital Market in the United States under the symbol “SBOT” since November 5, 2015. From January 15, 2013 through November
4, 2015, the Company’s common shares were quoted in the United States on the U.S. OTCQB Marketplace Exchange under the symbol
“SBOTF.” From April 19, 2010 to April 8, 2016 the Company’s common shares were listed in Canada on the TSX Venture
Exchange as a Tier 2 issue under the trading symbol “KLH.”
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.
Management Plans
For the three months ended December
31, 2016 and 2015, the Company reported net losses of approximately $1.5 million and $1.6 million, respectively. As of December
31, 2016, the Company had an accumulated deficit of approximately $41.8 million and working capital of approximately $10 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 the Company’s working capital is sufficient to support the Company’s current
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, as well as 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.
2. Basis of Presentation
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, 2016.
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., a California corporation. 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 three months ended December 31, 2016 are not necessarily indicative of the results that may be expected for other interim
periods or the year ending September 30, 2017. The condensed interim consolidated financial data at September 30, 2016 is derived
from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2016,
as filed on December 14, 2016 with the SEC.
The preparation of financial
statements in conformity with U.S. GAAP for interim financial information 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.
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.
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”);
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”);
ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”); and ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers
(“ASU 2016-20”). The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU
2016-20 with ASU 2014-09 (collectively, the “new revenue standards”). Management is in the process of assessing the
impact of ASU 2014-09 and the new revenue standards on the Company’s 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.
Management is in the process of assessing the impact
of ASU 2014-15 on the Company’s consolidated financial statements
.
Stellar Biotechnologies, Inc.
|
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
|
(Expressed in U.S. Dollars)
|
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. Management is in the process of assessing the impact of ASU 2015-11 on the Company’s consolidated financial statements.
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.
Management is in the process of assessing the impact of ASU 2016-01 on the Company’s
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.
Management is in the process of assessing the impact of ASU 2016-02 on
the Company’s 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.
Management is in the process of assessing the impact of ASU 2016-09 on
the Company’s 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.
Management is in the
process of assessing the impact of ASU 2016-13 on the Company’s consolidated financial statements
.
Stellar Biotechnologies, Inc.
|
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
|
(Expressed in U.S. Dollars)
|
4. Investments
Short-term investments consisted of the following:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$
|
3,993,598
|
|
|
$
|
3,988,794
|
|
U.S. Treasury Bills are carried at amortized cost
which approximates fair value and are classified as held-to-maturity investments.
5. Inventory
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 December 31, 2016 and September 30, 2016, 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:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
49,151
|
|
|
$
|
38,764
|
|
Work in process
|
|
|
20,417
|
|
|
|
43,498
|
|
Finished goods
|
|
|
260,015
|
|
|
|
167,168
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,583
|
|
|
$
|
249,430
|
|
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:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Aquaculture system
|
|
$
|
126,257
|
|
|
$
|
126,257
|
|
Laboratory facilities
|
|
|
62,033
|
|
|
|
62,033
|
|
Computer and office equipment
|
|
|
111,695
|
|
|
|
102,030
|
|
Tools and equipment
|
|
|
914,917
|
|
|
|
894,319
|
|
Vehicles
|
|
|
49,347
|
|
|
|
49,347
|
|
Leasehold improvements
|
|
|
293,920
|
|
|
|
282,305
|
|
|
|
|
1,558,169
|
|
|
|
1,516,291
|
|
Less: accumulated depreciation
|
|
|
(838,527
|
)
|
|
|
(793,057
|
)
|
|
|
|
|
|
|
|
|
|
Depreciable assets, net
|
|
|
719,642
|
|
|
|
723,234
|
|
Construction in progress
|
|
|
75,426
|
|
|
|
32,880
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
795,068
|
|
|
$
|
756,114
|
|
Depreciation and amortization
expense amounted to $45,470 and $32,386 for the three months ended December 31, 2016 and 2015, respectively.
7.
Commitments
Operating leases
The Company leases buildings
and facilities used in its operations under three 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 options to renew for three 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.
Stellar Biotechnologies, Inc.
|
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
|
(Expressed in U.S. Dollars)
|
Aggregate future minimum lease
payments at December 31, 2016 are as follows:
For The Year Ending September 30,
|
|
|
|
|
|
2017
|
|
|
$
|
141,000
|
|
|
2018
|
|
|
|
188,000
|
|
|
2019
|
|
|
|
106,000
|
|
|
2020
|
|
|
|
106,000
|
|
|
2021
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
547,000
|
|
Rent expense on these lease
agreements amounted to approximately $59,000, and $55,000 for the three months ended December 31, 2016 and 2015, respectively.
Purchase obligations
The Company has commitments
totaling approximately $253,000 at December 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 $33,000 at December
31, 2016. All purchase obligations are expected to be fulfilled within the next 12 months.
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. The
new 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 during the year ended September 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 pro rata basis in
line with its equity interest. 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 execution of its strategy, the parties intend over time to enter into an exclusive supply agreement
within a limited field of use for Stellar to supply KLH to the joint venture, a supply agreement designating the joint venture
as the exclusive manufacturer and supplier of the other party’s vaccines, and services agreements for the provision of various
knowledge and expertise by each of the parties.
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.
Stellar Biotechnologies, Inc.
|
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
|
(Expressed in U.S. Dollars)
|
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 $12,000 and $11,000 in the three months ended December 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.
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 were met during any other reporting period, and there can
be no assurance that any of the remaining milestones will be met in the future.
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
$18,000 and $14,000 for the three months ended December 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. There was no
royalty expense incurred during the three months ended December 31, 2016 and 2015.
Stellar Biotechnologies, Inc.
|
Notes to Condensed Interim Consolidated Financial Statements (Unaudited)
|
(Expressed in U.S. Dollars)
|
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 (Adagloxad Simolenin) 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.
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)
|
8. Share Capital
The Company
had the following transactions in share capital:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Number of common shares issued
|
|
|
-
|
|
|
|
464,000
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
-
|
|
|
|
1,368,260
|
|
Transfer to common shares on exercise of warrants
|
|
|
-
|
|
|
|
1,853,581
|
|
Share-based compensation
|
|
|
36,442
|
|
|
|
124,496
|
|
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 December 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
|
|
|
$
|
9.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,265,626
|
|
|
|
4.50
|
|
|
|
Granted
|
|
|
40,000
|
|
|
|
4.00
|
|
|
CDN $
|
Exercised
|
|
|
(424,000
|
)
|
|
|
4.00
|
|
|
CDN $
|
Expired
|
|
|
(598,761
|
)
|
|
|
13.33
|
|
|
|
Expired
|
|
|
(40,000
|
)
|
|
|
4.00
|
|
|
CDN $
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2016 and
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
1,265,626
|
|
|
$
|
4.50
|
|
|
|
There were no outstanding warrants
with exercise prices denominated in Canadian dollars at December 31, 2016.
The weighted average contractual
life remaining on the outstanding warrants at December 31, 2016 is 60 months.
The following table summarizes information about
the warrants outstanding at December 31, 2016:
Exercise Price
|
|
Number of
Warrants
|
|
|
Expiry Date
|
|
|
|
|
|
|
$4.50
|
|
|
1,265,626
|
|
|
January 6, 2022 *
|
|
|
|
|
|
|
|
|
|
|
1,265,626
|
|
|
|
* Exercisable beginning January
6, 2017.
Warrant liability
All warrants with exercise prices
denominated in Canadian dollars were exercised or have expired. Therefore, there was no outstanding warrant liability at December
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, those 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. The fair value of those
warrants was determined using the Black-Scholes option valuation model at the end of each reporting period. On the date those warrants
were exercised, the fair value of warrant liability was reclassified to common shares along with the proceeds from the exercise.
If those 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.
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:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
Risk free interest rate
|
|
|
0.48
|
%
|
Expected life (years)
|
|
|
0.04
|
|
Expected share price volatility
|
|
|
92
|
%
|
There were no warrants exercised
during the three months ended December 31, 2016.
The fair value of warrants granted
was determined using the Black-Scholes option valuation model, using the following weighted average assumptions:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
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 three months ended December 31, 2016.
Broker units
The Company granted broker units
as finders’ fees in conjunction with equity offerings in prior years. Broker units were fully vested when granted and allowed
the holders to purchase equity units. A unit consisted of one common share and either one whole warrant or one half warrant.
A summary of broker units activity is as follows:
|
|
Number of
Units
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2015
|
|
|
46,600
|
|
|
|
1.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,000
|
)
|
|
|
2.50
|
|
|
CDN $
|
Expired
|
|
|
(6,600
|
)
|
|
|
2.50
|
|
|
CDN $
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2016 and
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
There were no broker units granted
or exercised during the three months ended December 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 for past service are subject
to the following vesting schedule: (a) one-third shall vest immediately, (b) one-third shall vest at 12 months from the date of
grant and (c) one-third shall vest at 18 months from the date of grant.
Share options granted to directors, officers, employees
and consultants for future service are subject to the following vesting schedule: (x) one-third shall vest at 12 months from the
date of grant, (y) one-third shall vest at 24 months from the date of grant and (z) one-third shall vest at 36 months from the
date of grant.
Share options granted to investor relations consultants are subject to the following vesting schedule: (aa) 25%
shall vest at 3 months from the date of grant, (bb) 25% shall vest at 6 months from the date of grant, (cc) 25% shall vest at 12
months from the date of grant and (dd) 25% shall vest at 15 months from the date of grant.
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
|
|
|
$
|
5.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
56,300
|
|
|
|
6.47
|
|
|
|
Expired
|
|
|
(21,334
|
)
|
|
|
10.70
|
|
|
|
Expired
|
|
|
(53,501
|
)
|
|
|
5.22
|
|
|
CDN $
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2016
|
|
|
539,103
|
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
46,600
|
|
|
|
2.03
|
|
|
|
Expired
|
|
|
(14,499
|
)
|
|
|
7.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
571,204
|
|
|
$
|
4.89
|
|
|
|
The weighted average contractual
life remaining on the outstanding options is 2.51 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 December 31, 2016:
Number of
Options
|
|
|
Exercisable at
December 31, 2016
|
|
|
Range of exercise
prices
|
|
Expiry Dates
|
|
283,610
|
|
|
|
283,610
|
|
|
CDN$0.01 - 5.00
|
|
Apr 2017-Dec 2019
|
|
55,000
|
|
|
|
18,401
|
|
|
$0.01 - 5.00
|
|
Dec 2023
|
|
142,860
|
|
|
|
142,860
|
|
|
CDN$5.01 - 10.00
|
|
Oct 2017-Jun 2022
|
|
18,734
|
|
|
|
13,700
|
|
|
$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
|
|
571,204
|
|
|
|
529,571
|
|
|
|
|
|
The estimated fair value of
the share options granted during the three months ended December 31, 2016 and 2015 was determined using a Black-Scholes option
valuation model with the following weighted average assumptions:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
1.49
|
%
|
|
|
1.05
|
%
|
Expected life (years)
|
|
|
7.00
|
|
|
|
7.00
|
|
Expected share price volatility
|
|
|
166
|
%
|
|
|
108
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average fair value
of share options awarded during the three months ended December 31, 2016 and 2015 was $1.98 and $7.06, respectively.
As of December 31, 2016, the
Company had approximately $88,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period
of 1.5 years.
There were no options exercised
during the three months ended December 31, 2016 and 2015. There was no intrinsic value of the vested options at December 31, 2016.
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:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
800
|
|
|
$
|
7,200
|
|
Supplemental disclosure of noncash
financing and investing activities follows:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Transfer to common shares on exercise of warrants
|
|
$
|
-
|
|
|
$
|
1,853,581
|
|
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, accounts payable, accrued
liabilities, and deferred revenue approximates fair value due to the short-term nature of such instruments. Short-term investments
in U.S. Treasury Bills are recorded at amortized cost, which approximates fair value.
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 reports its short-term
investments in U.S. Treasury Bills at fair value using Level 1 inputs in the fair value hierarchy.
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.
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in U.S. Treasury Bills
|
|
$
|
3,993,598
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,993,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in U.S. Treasury Bills
|
|
$
|
3,988,794
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,988,794
|
|
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, U.S Treasury
Bills, 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 or U.S. Treasury Bills with maturities of 90 days or less. The Company limits its exposure to credit loss for
short-term investments by holding U.S. Treasury Bills with maturies of 1 year or less. 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:
|
|
|
Three Months
|
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Product sales and contract services revenue
|
|
|
92% from
1 customer
|
|
|
|
85% 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:
|
|
|
Three Months
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
|
94
|
%
|
|
|
37
|
%
|
|
Asia
|
|
|
|
-
|
|
|
|
61
|
%
|
|
U.S.
|
|
|
|
6
|
%
|
|
|
2
|
%
|
The Company had the following
concentrations of accounts receivable:
|
|
|
December 31,
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
85% from
3 customers
|
|
|
|
100 % from
1 customer
|
|
12. Subsequent Event
On January 9, 2017, the
Company formed a Mexican subsidiary under the name BioEstelar, S.A. de C.V. The Company’s California operating entity,
Stellar Biotechnologies, Inc., has a 99% ownership interest in this subsidiary and the Company owns the remaining interest.
The new operating entity, headquartered in Ensenada, Baja California, will support the Company’s plan to establish a
potential second aquaculture facility, including the development of regional marine resources, aquaculture, and raw material
processing for Stellar KLH products.
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 December
31, 2016 and our audited consolidated financial statements for the year ended September 30, 2016 included in our Annual Report
on Form 10-K, filed with the Securities and Exchange Commission on December 14, 2016.
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, 2016 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 December
31, 2016 and September 30, 2016, and for the three months ended December 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. is a biotechnology
company engaged in the aquaculture, research and development, manufacture and commercialization of Keyhole Limpet Hemocyanin (KLH).
KLH is an immune-stimulating protein with an extensive history of safe and effective use in immunological applications.
KLH can be used as an active pharmaceutical
ingredient and combined with a disease-targeting agent to create immunotherapies for the treatment of a variety of diseases. The
KLH protein can also be used as a finished, injectable product in the immunodiagnostic market for measuring immune response in
patients and research settings. Our KLH products can be used to stimulate the immune system in both applications.
We extract and manufacture KLH from the
hemolymph of a scarce ocean mollusk, the Giant Keyhole Limpet. Based upon our specialized knowledge of aquaculture science and
KLH, we have built unique land-based aquaculture, laboratory and production facilities. We have also developed sustainable and
scalable manufacturing processes to produce KLH using Current Good Manufacturing Practices (GMP).
We market and sell our KLH products to
third parties under the brand Stellar KLH™. Our customers and partners include multinational biotechnology and pharmaceutical
companies, academic institutions, clinical research organizations, and research centers. We believe we are positioning our business
to meet the anticipated long-term demand within the pharmaceutical industry for GMP grade KLH by providing a sustainable source
for its scalable, controlled and traceable production. We believe the versatility of the KLH molecule and the growing need for
commercial-scale GMP grade KLH provide multiple commercial opportunities for us.
Recent Developments
Mexico Subsidiary
In January 2017, we established a wholly
owned Mexican subsidiary under the name BioEstelar, S.A. de C.V. The new operating entity, headquartered in Ensenada, Baja California,
will support our plan to establish a second aquaculture facility, including the development of regional marine resources, aquaculture
and raw material processing for Stellar’s KLH products. In 2015, we entered into collaboration and lease agreements with
Ostiones Guerrero, S.A. de C.V., a privately held commercial fishing corporation in Baja California, Mexico to secure a strategic
site in Baja California, Mexico, and we are currently conducting a multi-year suitability study with Ostiones, which includes our
recently initiated quality studies of the KLH protein produced in Mexico.
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, 2016, as filed with the Securities
and Exchange Commission (SEC) on December 14, 2016. 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, 2016.
Results of Operations
Comparison of Three Months Ended December 31, 2016 and 2015
Our total revenues decreased by $346,304
to $141,856 for fiscal first quarter 2017 compared to $488,160 for the fiscal quarter ended December 31, 2015 due to a decrease
in product sales volumes, which are subject to variability associated with the rate of development and progression of clinical
studies of third-party products that utilize Stellar KLH. Product sales were also impacted by a higher customer concentration over
the comparable period. In December 2015, we successfully completed a collaboration agreement, and there has been no contract services
revenue since then.
Our total expenses decreased by $239,182
to $1,556,332 for fiscal first quarter 2017 compared to $1,795,514 for the same period last year.
Our costs of sales and contract services
decreased by $233,498 to $78,565 for fiscal first quarter 2017 compared to $312,063 for the same period last year primarily due
to decreased product sales.
Our research and development expenses increased
by $172,016 to $460,865 for fiscal first quarter 2017 compared to $288,849 for the same period last year. The increase was primarily
due to research and development activities intended to increase the scalability and throughput capacity of existing manufacturing
systems, including additional research and development in aquaculture, both in the U.S. and for our aquaculture feasibility assessment
in Baja California, Mexico; improvements in analytical, manufacturing, and purification processes; stability studies; and formulation
development.
Our general and administrative expenses
decreased by $177,622 to $932,067 for fiscal first quarter 2017 compared to $1,109,689 for the same period last year primarily
due to reduced legal and professional fees and public company expenses, which were higher in the comparable period due to our Nasdaq
uplisting in November 2015.
Other loss decreased by $244,853 to an
overall loss of $70,396 for fiscal first quarter 2017 compared to an overall loss of $315,249 for the same period last year. The
decrease was primarily due to a noncash change in fair value of warrant liability related to warrants with Canadian dollar exercise
prices. All such warrants were exercised or expired by December 2015 and, consequently, there was no warrant liability and no gain/loss
in fair value of warrant liability for fiscal first quarter 2017 compared to a loss of $211,956 for the same period last year.
Foreign exchange loss decreased by $31,738 to a loss of $77,390 for fiscal first quarter 2017 compared to loss of $109,128 for
the same period last year due to more favorable exchange rates for our Canadian cash and cash equivalents. The portion of foreign
exchange loss realized in cash was $2,682 for fiscal first quarter 2017 and $11,462 for the same period last year.
Our net loss for fiscal first quarter 2017 was $1,485,672, or
$0.15 per basic share, compared to a net loss of $1,629,803, or $0.19 per basic share, for fiscal first quarter 2016.
Capital Expenditures
Our capital expenditures, which primarily
consist of scientific, manufacturing, and aquaculture equipment, and facility leasehold improvements for the three months ended
December 31, 2016 and 2015 are as follows:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
Assets Acquired
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
22,639
|
|
|
$
|
41,185
|
|
Construction in progress
|
|
|
61,785
|
|
|
|
133,834
|
|
Liquidity and Capital Resources
Our working capital position at December
31, 2016 was $9,987,827, including cash and cash equivalents of $5,885,409 and short-term investments of $3,993,598. 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. In July 2016, we closed a registered direct
offering of an aggregate of 1,687,500 of our common shares, and a concurrent private placement of warrants to purchase up to an
aggregate of 1,265,626 common shares with an exercise price of $4.50 per share, resulting in net proceeds of approximately $6 million.
We may pursue opportunities to obtain additional financing in
the future through equity financings. We have filed with the Securities and Exchange Commission, and the Securities and Exchange
Commission declared effective, a universal shelf registration statement of up to $100 million worth of registered equity securities,
of which we utilized approximately $6.75 million in our July 2016 offering. Under this effective registration statement, we may
issue registered securities, from time to time, in one or more separate offerings or other transactions with the size, price and
terms to be determined at the time of issuance. Pursuant to General Instruction I.B.6 of Form S-3, in no event will we sell securities
in a public primary offering with a value of more than one-third of the aggregate market value of our common shares held by nonaffiliates
in any twelve-month period, so long as the aggregate market value of our common shares held by non-affiliates remains below $75
million. Registered securities issued using our existing shelf may be used to raise additional capital to fund our working capital,
R&D and other corporate needs.
We expect to finance our future expenditures and obligations
through revenues from product sales, contract services income, 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.
Three Months Ended December 31, 2016
Our working capital was $9,987,827 as of
December 31, 2016, compared to working capital of $11,476,011 as of September 30, 2016.
Our cash and cash equivalents totaled $5,885,409
at December 31, 2016, compared to cash and cash equivalents of $7,416,904 at September 30, 2016, which represented a decrease of
$1,531,495 over the three-month period. Our short-term investments totaled $3,993,598 at December 31, 2016, compared to short-term
investments of $3,988,794 at September 30, 2016, which represented an increase of $4,804 over the three-month period.
During the three months ended December
31, 2016, operating activities used cash of $1,365,034. Items not affecting cash included: depreciation and amortization of $45,470;
share-based compensation related to the issuance and vesting of stock options of $36,442; and unrealized foreign exchange loss
of $77,390. Changes in non-cash working capital items primarily result from a decrease in accounts receivable of $72,666 and an
increase in inventory of $80,153 primarily due to the timing of manufacturing cycles.
Investing activities used cash of $89,228
primarily for the acquisition of property, plant and equipment, which used cash of $84,424 related to improvements in manufacturing
and aquaculture facilities.
The effect of fluctuations in exchange
rates on cash and cash equivalents was a decrease of $77,233 due to a decline in the Canadian dollar relative to the U.S. dollar.
Three Months Ended December 31, 2015
Our working capital was $8,968,877 as of
December 31, 2015, 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 were exercised or have expired, there was no warrant liability at December 31, 2015.
Our cash and cash equivalents totaled $3,887,550
at December 31, 2015, compared to cash and cash equivalents of $3,955,503 at September 30, 2015, which represented a decrease of
$67,953. Our short-term investments totaled $5,016,800 at December 31, 2015, compared to short-term investments of $5,015,171 at
September 30, 2015, which represented an increase of $1,629 over the three-month period.
During the three months ended December
31, 2015, operating activities used cash of $1,174,545. Items not affecting cash included: depreciation and amortization of $32,386;
share-based compensation related to the issuance and vesting of stock options of $124,496; unrealized foreign exchange loss of
$109,128; 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 $121,945; decrease in inventory of
$29,322; increase in prepaid expenses of $67,718; increase in accounts payable and accrued liabilities of $67,076; and decrease
in deferred revenue of $173,333.
Investing activities used cash of $176,648.
The acquisition of property, plant and equipment used cash of $175,019 related to improvements in manufacturing and aquaculture
facilities. Purchase of short-term investments used cash of $1,629. The effect of fluctuations in exchange rates on cash and cash
equivalents was a reduction of $85,020 due to a decline 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.
Geographic Concentrations
The geographic markets of our customers
are principally Europe, Asia, and the United States. We had the following concentrations of revenues by geographic areas:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Europe
|
|
|
94
|
%
|
|
|
37
|
%
|
Asia
|
|
|
-
|
|
|
|
61
|
%
|
U.S.
|
|
|
6
|
%
|
|
|
2
|
%
|
The geographic concentration of our product
sales fluctuates quarter over quarter, sometimes significantly, depending on the volume of orders from our customers in each of
our principal geographic markets.
Research and Development
Our core business is developing and commercializing
Keyhole Limpet Hemocyanin (KLH) for use in immunotherapy and immunodiagnostic applications. Our internal research includes, among
other activities, continual improvement of methods for the culture and growth of the 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.
In December 2016, we initiated plans
to optimize our protein manufacturing processes at our primary facility in Port Hueneme, California, including the evaluation
and use of new equipment. The launch of our manufacturing processes optimization plans is intended to increase the
scalability and throughput capacity of existing manufacturing systems, which were originally developed to provide clinical
development stage quantities of our Stellar KLH products.
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 three months ended December 31, 2016 and 2015:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
460,865
|
|
|
$
|
288,849
|
|
The increase in the comparable periods was primarily due to
research and development activities intended to increase the scalability and throughput capacity of existing manufacturing systems.
Disclosure of Contractual Obligations
We lease buildings and facilities used
in our operations under three 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 2016, we extended this lease for a
two-year term, which extension includes options to renew this lease for three successive, two-year terms.
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, 2016,
as filed with the SEC on December 14, 2016.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements
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.